How does a cash-out refinance work? The 80% limit, 8 steps and a $400,000 example
A cash-out refinance replaces your current mortgage with a new, larger one. At closing, the new loan pays off the old loan in full, and you receive the difference in cash, minus closing costs. On a conventional or FHA loan for a one-unit main home, the new loan can be up to 80% of your home’s appraised value; a VA loan can go up to 100%.
You end up with one mortgage, one payment and a new rate and term on the whole balance. Below: how much you can take, the steps, the costs, the taxes and the math on a $400,000 home. Rates and fees differ by lender, so comparing offers from several lenders is the most direct way to see your own numbers.
What happens in a cash-out refinance?
Three things happen at closing:
- A new loan is made for more than you owe today. The lender bases the maximum on the appraised value of your home and the loan type’s limit.
- The old loan is paid off. The settlement agent sends your current servicer the exact payoff amount, including interest up to the payoff date. Regulation Z requires a servicer to provide that payoff statement within seven business days of a written request.
- You get the rest. After the payoff and closing costs, the remaining money is paid to you, usually by wire or check. Fannie Mae’s Selling Guide says the equity taken out “may be used for any purpose.”
If your old loan had an escrow account for taxes and insurance, federal rules require the old servicer to refund what is left in it within 20 business days after payoff. Expect to fund a new escrow account at closing.
Unlike a HELOC or home equity loan, nothing stays behind: the first mortgage, and its rate, are gone. Cash-out refinance vs HELOC compares the two.
How much cash can you get from a cash-out refinance?
The formula is the same for every loan type:
Home value × maximum loan-to-value (LTV) − what you owe − closing costs = cash to you
What changes is the maximum LTV, set by who backs the loan:
| Loan type | Maximum LTV | Notes |
|---|---|---|
| Conventional, one-unit main home | 80% | Freddie Mac’s limit for both automated and manual underwriting |
| Conventional, 2 to 4 unit main home, second home or one-unit rental | 75% | 2 to 4 unit rentals: 70% |
| FHA | 80% | Owner-occupied main homes only; lowered from 85% for case numbers assigned on or after September 1, 2019 |
| VA | 100% | Of the value VA sets through its appraisal, with the funding fee included |
Sources: Freddie Mac maximum LTV requirements; HUD; 38 CFR 36.4306. Lenders may set lower limits.
A few rules travel with these limits. For a conventional loan, Fannie Mae requires at least one borrower to have been on title for six months, and a first mortgage being paid off must be at least 12 months old. FHA and VA set their own waiting periods, covered in how soon you can do a cash-out refinance. A VA cash-out loan must also pass a net tangible benefit test, such as a lower rate or a loan at or below 90% of the home’s value; see VA cash-out refinance requirements.
How a cash-out refinance works: a $400,000 example
Say your home appraises at $400,000. You owe $200,000 at 3.75% with 25 years left, so your principal and interest payment is about $1,028 a month. You refinance into a 30-year fixed loan at 7.32%, Freddie Mac’s weekly average for the week of October 22, 2026. Your own rate depends on your credit, equity and lender.
| Step | Take the maximum | Take $60,000 |
|---|---|---|
| New loan amount | $320,000 (80% of $400,000) | $268,041 |
| Pays off old mortgage | $200,000 | $200,000 |
| Closing costs at 3% | $9,600 | $8,041 |
| Cash to you | $110,400 | $60,000 |
| New monthly principal and interest | $2,198 (up $1,170) | $1,841 (up $813) |
Calculated by LenderMatch. Closing costs use the low end of Freddie Mac’s 3% to 6% range; at 6%, the maximum case leaves $100,800. Excludes taxes, insurance and prepaid items. Illustrations, not quotes.
Notice where the higher payment comes from. Only $60,000 of the second loan is new money, but the $200,000 you already owed moves from 3.75% to 7.32%, and the 25 years left restart at 30. That is why a cash-out refinance tends to fit owners whose current rate is close to today’s, or who would refinance anyway. The cash-out refinance calculator runs these numbers with your own figures, and the blended-rate calculator compares keeping your mortgage and adding a HELOC.
What are the steps for a cash-out refinance?
- Check your equity. Estimate your home’s value and subtract what you owe to see your room under the 80% (or VA 100%) limit. Our equity guide and home equity calculator show the math.
- Compare lenders. Apply with more than one; does rate shopping hurt your credit explains how scoring treats several mortgage inquiries.
- Review your Loan Estimates. Each lender must send one within three business days of your application, on the same standard form.
- Lock a rate and choose a lender.
- Appraisal and underwriting. The lender orders an appraisal, verifies your income, assets and credit, and runs a title search.
- Review the Closing Disclosure. You must receive it at least three business days before closing. Compare it line by line with the Loan Estimate.
- Close. You sign the new note and mortgage.
- Wait out the right to cancel, then get paid. On your main home, Regulation Z gives you until midnight of the third business day after closing to cancel, and the lender can’t release the money until that period ends. The old loan is then paid off and you receive the cash. If you refinance with your current lender, the right to cancel covers only the new money above your old balance and refinancing costs.
How long does a cash-out refinance take?
It depends on the lender, the appraisal and how quickly you send documents. Federal rules set a minimum: a lender can’t close until the seventh business day after it delivers or mails your Loan Estimate, and on a main home the cash can’t go out until three business days after closing. Ask each lender for its current time to close, and keep in mind when your rate lock expires.
How much does a cash-out refinance cost?
Freddie Mac says to expect 3% to 6% of the loan principal. Its list of typical charges: government recording costs, appraisal, credit report, lender origination, title services, tax service, survey, attorney and underwriting fees. Two details make this bigger than it looks:
- The percentage applies to the whole new loan, including the part that pays off your old mortgage. In the example, 3% of $320,000 is $9,600 to get $110,400 out.
- Government loans add a fee. FHA charges an upfront mortgage insurance premium of 1.75% of the base loan, plus annual premiums. VA charges a funding fee on a cash-out refinance of 2.15% the first time you use the benefit and 3.3% after that, unless you are exempt (VA.gov, updated October 5, 2026).
Discount points, if you pay to lower the rate, come on top. Costs can usually be paid from the loan, which shrinks your cash; a “no closing cost” offer typically means a higher rate instead. Home equity closing costs compares these fees with a HELOC’s.
Is cash-out refinance money taxable?
No. Borrowed money isn’t income. IRS Topic 432 says: “When you borrow money, you don’t include the loan proceeds in gross income because you have an obligation to repay the lender later.” Cash-out money is loan proceeds, whatever you spend it on.
The interest is a separate question. Under IRS Publication 936, interest on the refinanced loan can be deductible up to the balance of the old mortgage, plus any new cash you use to buy, build or substantially improve the home. Interest on cash spent on other things, such as credit cards, is not deductible as mortgage interest. Points paid to refinance are generally deducted over the life of the loan. Is HELOC interest tax deductible covers cash-out refinances too, with a worked example. For your own return, ask a tax professional.
Is a cash-out refinance a good idea?
It depends mostly on your current rate against today’s. It tends to make sense when:
- Your current rate is close to or above today’s rates, so resetting the whole balance costs little.
- You want a fixed rate on the full amount, rather than a HELOC’s variable rate.
- You are an eligible veteran and want to borrow above 80% of your home’s value.
If your rate is low and you need a smaller amount, a HELOC or home equity loan keeps that rate and borrows only the new money. When refinancing makes sense has the break-even math, and Freddie Mac’s current averages are on our mortgage rates page.
Frequently asked questions
Is a cash-out refinance a loan?
Yes. It is a new mortgage that replaces your current one. The new loan is larger than what you owe, and you receive the difference in cash at closing, minus closing costs. You repay the whole amount over the new loan’s term.
How much cash can I get from a cash-out refinance?
Up to the loan type’s limit minus what you owe and your closing costs. Conventional and FHA cash-out loans on a one-unit main home top out at 80% of the appraised value. A VA cash-out loan can reach 100% of the value VA sets, funding fee included. Lenders may set lower limits.
How long does a cash-out refinance take?
It varies by lender, appraisal and underwriting. Federal rules set a floor: you can’t close until seven business days after the lender sends your Loan Estimate, and on your main home the money isn’t released until your three-business-day right to cancel has passed.
Do you pay taxes on a cash-out refinance?
Not on the cash itself. The IRS says that when you borrow money, you don’t include the loan proceeds in gross income because you have to repay them. Whether the interest is deductible depends on how you spend the money.
What happens to my escrow account when I refinance?
Your old servicer must refund any money left in your escrow account within 20 business days after the loan is paid off. If the new loan is with the same lender or servicer and you agree, the balance can be moved into the new escrow account instead.
Compare cash-out refinance offers from several lenders →
Sources
- Freddie Mac, Maximum LTV/TLTV/HTLTV ratio requirements for conforming and super conforming mortgages: cash-out refinance limits by property type (accessed October 22, 2026).
- Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions (December 10, 2025): use of proceeds, six-month title and 12-month first-lien rules.
- HUD press release 19-114 (August 1, 2019): FHA cash-out maximum LTV lowered from 85% to 80%.
- HUD, Single Family Housing Policy Handbook 4000.1, Appendix 1.0: upfront mortgage insurance premium of 1.75%.
- 38 CFR 36.4306: VA refinancing loans up to 100% of reasonable value, funding fee, net tangible benefit (eCFR, accessed October 22, 2026).
- U.S. Department of Veterans Affairs, “VA funding fee and loan closing costs” (updated October 5, 2026) and “Cash-out refinance loan” (updated January 7, 2026).
- Regulation Z, 12 CFR 1026.19(e) and (f) (Loan Estimate and Closing Disclosure timing), 1026.23 (right of rescission and delayed disbursement), 1026.36(c)(3) (payoff statements); Regulation X, 12 CFR 1024.34(b) (escrow refunds) (eCFR, accessed October 22, 2026).
- Freddie Mac, “Understanding the costs of refinancing” (accessed October 22, 2026): 3% to 6% of loan principal.
- IRS, Topic no. 432 (last reviewed September 24, 2026): loan proceeds are not gross income.
- IRS, Publication 936 (2025), Home Mortgage Interest Deduction.
- Freddie Mac, Primary Mortgage Market Survey: 30-year fixed 7.32%, week of October 22, 2026.
Last reviewed October 22, 2026.