Cash-out refinance: limits, costs and when it is the wrong tool

A cash-out refinance turns home equity into cash by replacing your whole mortgage with a bigger one. It is the cheapest way to borrow a large sum — and the easiest way to reset a good loan into a worse one.

How much you can take

Conventional: up to 80% of the appraised value for a one-unit primary residence (75% for second homes and investment properties). FHA: up to 80%. VA: up to 90% (100% at some lenders, with the funding fee). Subtract your current balance and closing costs from that maximum to find the cash in hand. Seasoning rules apply: conventional requires six months of ownership for a cash-out (12 months for the full LTV on some programs), and a recent cash-out can restrict the next one.

What it costs

Closing costs of 2% to 5% of the new loan, usually financed. A higher rate than a rate-and-term refinance — cash-out loans carry a pricing adjustment that grows with LTV and falls with credit score. And the subtle cost: if your existing rate is lower than today’s, you give it up on the entire balance, not just the cash you take. Borrowing $50,000 at the cost of repricing $300,000 is often a bad trade; a HELOC or home equity loan on top of the existing mortgage may be far cheaper.

Good uses and bad uses

Defensible: renovations that add value, consolidating expensive debt with a plan not to rebuild it, buying an investment property with a clear return. Dangerous: funding consumption, paying off unsecured debt you may run up again (you convert dischargeable debt into debt secured by your home, and a default now risks the house), or speculative investments.

Cash-out vs HELOC vs home equity loan

	Cash-out refinance	HELOC	Home equity loan
Replaces first mortgage	Yes	No	No
Rate	Fixed (usually), applies to whole balance	Variable, on drawn amount	Fixed, on the lump sum
Closing costs	2%–5%	Low or none	Low to moderate
Best when	Your current rate is at or above market	You need flexible, intermittent draws	You need one lump sum and have a low first-mortgage rate

Texas note

Texas home equity loans (including cash-out refinances) are governed by the state constitution: 80% combined LTV cap, a 12-day waiting period, fee limits, and no personal liability after foreclosure. Rules differ from every other state.

Frequently asked questions

Is cash from a refinance taxable?

No — it is borrowed money. Interest on the cash-out portion is deductible only if the funds are used to buy, build or substantially improve the home securing the loan.

Can I do a cash-out refinance on an investment property?

Yes, typically up to 75% LTV on conventional loans with higher rates and reserve requirements; the BRRRR strategy depends on it. See BRRRR refinance.

How long does it take?

Thirty to forty-five days is typical, plus a three-business-day rescission period after closing on a primary residence before funds are released.