What Is a Cash-Out Refinance?

A cash-out refinance replaces an existing mortgage with a new loan with a higher balance, sometimes with more favorable terms than the current loan. The difference between these two loans is distributed to the homeowner as cash.

Common uses of a cash-out refi include paying off credit card debt, financing a business, covering college tuition, managing unexpected expenses, and making improvements to one’s home.

A cash-out refi differs from a traditional mortgage refinancing, which simply replaces your current loan with a new loan that has a new set of terms and, in many cases, a lower interest rate. A cash-out refi also differs from a home equity line of credit (HELOC), which allows you to borrow cash using the home-equity as collateral. HELOCs function as a second mortgage, with the borrower withdrawing and repaying funds on a more flexible schedule, and the government allowing a tax deduction for interest payments.* Unlike traditional first or second mortgages, a HELOC interest rate is not fixed; the rate varies from month to month with the prime rate.

The three most popular cash-out refinance options are:

• Conventional Cash-Out – Cash-out refinancing options are available to qualified homeowners with more than 20% equity in their homes.
• FHA Cash-Out – This cash-out refinancing option is available to homeowners with more than 20% equity in their homes.
• VA Cash-Out – If you are a US veteran or an active servicemember, choosing a VA Cash-Out Refinance often allows you to use even more equity from your loan.