A cash-out refinance replaces your existing mortgage with a larger one and pays you the difference in cash at closing. To qualify, most homeowners need to meet a handful of cash-out refinance requirements: enough equity to keep the new loan at or below 80 percent of the home’s appraised value on a conventional loan, a credit score of at least 620, a debt-to-income ratio the lender can live with, and some time already logged as the owner on title. You’ll also pay closing costs of roughly 2 to 6 percent of the new loan amount.1Fannie Mae. Eligibility Matrix
How Much Equity You Need
The loan-to-value ratio (LTV) is the single biggest gatekeeper. It compares your new loan amount to the home’s appraised value, and it decides whether the deal is possible before anything else about your file matters.
- Conventional (Fannie Mae / Freddie Mac): 80 percent LTV on a primary residence. You must retain at least 20 percent equity after the transaction.1Fannie Mae. Eligibility Matrix
- FHA: Also capped at 80 percent LTV, after HUD lowered the limit from 85 percent in 2019.2Department of Housing and Urban Development. Mortgagee Letter 2019-11
- VA: Eligible veterans can borrow up to 100 percent of the home’s value, up to the conforming loan limit in their county.3Veterans Affairs. Cash-Out Refinance Loan
If a conventional refinance somehow exceeds 80 percent LTV, the lender will require private mortgage insurance, which increases your monthly payment until you drop back under the threshold. In practice, most homeowners aim well under the cap to leave a cushion, because the appraisal drives the math and appraisals don’t always come in where you expect.
How Long You Have to Own the Home First
You can’t buy a home and immediately cash out its equity. Conventional loans backed by Fannie Mae require at least one borrower to have been on the property’s title for a minimum of six months before the new loan is disbursed. The existing first mortgage being paid off must also be at least 12 months old, measured from its original note date to the note date of the new loan.4Fannie Mae. Cash-Out Refinance Transactions
FHA rules are stricter. The borrower must have owned and occupied the home as a principal residence for at least 12 months before applying.5Department of Housing and Urban Development. Mortgagee Letter 2009-08 Narrow exceptions to the six-month conventional rule exist for inherited property, property received through a divorce or legal separation, and certain delayed-financing situations.4Fannie Mae. Cash-Out Refinance Transactions
Credit, Income, and Debt
Freddie Mac sets a minimum credit score of 620 for cash-out refinances, and most conventional lenders follow the same floor.6Freddie Mac Single-Family. Cash-out Refinance Higher scores unlock better rates and larger cash-out amounts. A score in the mid-700s will get you meaningfully different terms than one that barely clears 620.
Debt-to-income ratio matters almost as much. Lenders compare your total monthly debt payments to your gross monthly income and generally prefer 36 percent or lower, though many will approve borrowers up to 43 percent when compensating factors like strong reserves or a high credit score are present. Going into a cash-out refinance with a DTI already near the ceiling is risky, because the larger loan payment can push you over the line.
Documentation
Expect to provide two years of W-2 forms with matching federal tax returns, or 1099s if you earn income from contract work.7Fannie Mae. Documents You Need to Apply for a Mortgage You’ll also need a current mortgage statement showing your payoff balance and payment history, plus government-issued photo ID. Self-employed borrowers face a heavier load: personal and business returns, a year-to-date profit and loss statement, a balance sheet, and proof of business ownership.8Fannie Mae. Underwriting Factors and Documentation for a Self-Employed Borrower
On the application itself, list all assets and liabilities and specify the exact cash-out amount you want above your current payoff. The lender cross-references every entry against credit reports and bank statements, so rounding or estimating invites delays.
What the Process Looks Like
After you submit the application, the lender orders a professional appraisal. An appraiser visits the property, assesses its condition, and compares it to recent comparable sales. The resulting value determines how much you can actually borrow. Deals sometimes fall apart here: if the appraisal comes in lower than expected, the LTV math no longer works, and you’ll either reduce your cash-out request or walk away.
The report goes to the underwriter, who reviews it alongside your financial profile. Underwriting typically takes two to four weeks. You’ll likely receive a conditional approval letter listing items still to address, things like an explanation for a large deposit, updated pay stubs, or proof that an old collection account was resolved. Respond quickly, because every back-and-forth adds days.
Once conditions are cleared, the file moves to closing. For cash-out refinances on a primary residence, federal law gives you a three-day right of rescission before funds are disbursed. During those three business days after signing, you can cancel the transaction for any reason. If you’re refinancing with the same lender you already have, rescission applies only to the new cash-out portion, not the existing balance being rolled over.9Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission The rescission right doesn’t apply at all to investment properties or second homes.
What It Costs
Closing costs on a cash-out refinance are similar to what you paid when you first bought the home. Total costs generally run 2 to 6 percent of the new loan amount. On a $300,000 refinance, that’s $6,000 to $18,000. You can pay these out of the cash-out proceeds or roll them into the new balance, but you’re paying them either way.
The main line items:
- Appraisal fee, typically $300 to $600 for a single-family home.
- Origination fee, usually 0.5 to 1 percent of the loan amount.
- Title search and title insurance, which vary widely by location.
- Recording fees charged by your county, typically $25 to $200.
- Prepayment penalty on the existing mortgage, if your original loan documents include one.
These costs are a real drag on smaller cash-out amounts. If you’re pulling $20,000 in equity but paying $8,000 in closing costs, you’ve lost 40 percent of the benefit before spending a dollar. For modest amounts, a home equity loan or line of credit is often cheaper.
Tax Treatment
The cash you receive is not taxable income. The IRS treats it as borrowed money, so you won’t owe federal income tax on the lump sum. Where taxes come in is on the interest you pay going forward.
Mortgage interest on a cash-out refinance is deductible only if you use the borrowed funds to buy, build, or substantially improve the home that secures the loan. Substantial improvement means adding value, extending the home’s useful life, or adapting it to new uses. Routine maintenance like repainting a bedroom doesn’t count on its own, though painting as part of a larger qualifying renovation can be included in the total cost.10Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Use the cash for anything else, whether that’s paying off credit cards, a vacation, or college tuition, and the interest on that portion is personal interest and not deductible. There’s also a cap: for mortgages taken out after December 15, 2017, you can deduct interest only on the first $750,000 of total mortgage debt ($375,000 if married filing separately).10Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Tax legislation enacted in 2025 may have adjusted these limits, so check the latest IRS guidance at irs.gov/Pub936 before filing.
If you plan to use the cash for home improvements, keep detailed records and receipts. If you’re using the cash for anything else, assume the interest is coming entirely out of your pocket with no tax offset.
When a Cash-Out Refinance Isn’t the Right Move
A cash-out refinance replaces your entire mortgage, which means you give up your current interest rate and terms. If you locked in a low rate a few years ago and rates have risen since, refinancing your whole balance at a higher rate can cost you far more in long-term interest than the cash-out is worth.
Two alternatives let you tap equity without touching your existing mortgage. A home equity loan is a second mortgage with a fixed interest rate and fixed monthly payments; you receive a lump sum and repay it over a set term, often up to 20 years, while your first mortgage stays in place. A home equity line of credit (HELOC) is also a second mortgage, structured as a revolving credit line with a draw period of up to 10 years followed by a repayment period of up to 20. HELOC rates are typically variable, so payments can shift, but closing costs are often minimal.
The interest deduction rules are the same across all three options: deductible only when the funds go toward buying, building, or substantially improving the securing home.10Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction If your existing mortgage rate is at or above current market rates, a cash-out refinance lets you consolidate everything into one payment. If your existing rate is well below today’s market, a second mortgage usually protects that advantage while still giving you access to your equity.