You can use a cash-out refinance to buy another property, and lenders place no restriction on how you spend the proceeds. The mechanics are straightforward: you replace your current mortgage with a larger one based on your home’s current appraised value, the lender pays off your old balance, and you receive the difference as a lump sum you can direct toward a down payment or the full purchase price of a second home. The strategy is legitimate and common, but it carries stricter qualification rules, a rate premium, tax consequences that catch borrowers off guard, and the fact that your primary residence now secures a bigger debt.
How Much Cash You Can Actually Pull Out
For a single-unit primary residence, Fannie Mae caps a cash-out refinance at 80% loan-to-value, meaning at least 20% equity has to remain in the home after the new loan funds.1Fannie Mae. Eligibility Matrix On a two- to four-unit property, the ceiling drops to 75%.
The math is easy to run. If your home appraises at $400,000 and you owe $200,000, the maximum new loan is $320,000. After paying off the existing $200,000, you’d walk away with roughly $120,000 before closing costs. That number is your working budget for the second property, not the full amount available to spend on it, because the refinance itself costs money.
What You Need to Qualify
Lenders underwrite cash-out refinances more conservatively than standard refinances. A minimum credit score of 620 is required for a conventional cash-out loan, though scores above 740 buy meaningfully better pricing. Your debt-to-income ratio typically has to stay at or below 45% on manually underwritten files, with some room above that on automated approvals if you have strong reserves.1Fannie Mae. Eligibility Matrix
Two seasoning rules matter. At least one borrower has to have been on the property’s title for a minimum of six months before the new loan funds. If the refinance is paying off an existing first mortgage, that mortgage must be at least 12 months old, measured note date to note date.2Fannie Mae. Cash-Out Refinance Transactions The six-month title requirement is waived if you inherited the property or received it through a divorce or legal separation.
How the Second Property Gets Financed
The cash-out proceeds only cover the down payment side of the purchase unless you’re paying all cash. For the mortgage on the second property, lenders classify it as either a second home or an investment property, and the classification drives the down payment, rate, and reserve requirements.
Second Homes
A second home is a property you occupy part of the year but don’t rent out full-time. Fannie Mae allows financing up to 90% LTV on a second home purchase, so a 10% down payment is workable.1Fannie Mae. Eligibility Matrix Rates run slightly above primary-residence pricing, but the premium is modest.
Investment Properties
Rentals face tougher terms. A single-unit investment property tops out at 85% LTV, and two- to four-unit investment properties require 25% down.1Fannie Mae. Eligibility Matrix
The bigger hit is on rate. Fannie Mae imposes loan-level price adjustments on investment properties ranging from 1.125% to over 4% of the loan amount depending on LTV, and those charges get built into your interest rate.3Fannie Mae. LLPA Matrix At 75% LTV, the adjustment is 2.125%. That’s substantially higher than the figures older guides cite.
Lenders also require six months of reserves on an investment property purchase, meaning liquid assets equal to six months of principal, interest, taxes, insurance, and any HOA dues have to remain in a verifiable account after closing.4Fannie Mae. Minimum Reserve Requirements Projected rent can offset the new mortgage payment in your DTI calculation with documentation such as existing leases or a market rent analysis from the appraiser.5Fannie Mae. Rental Income
What the Refinance Itself Costs
Closing costs on a cash-out refinance typically run 3% to 6% of the new loan balance, covering origination, appraisal, title search, title insurance, recording fees, and other settlement charges.6Freddie Mac. Understanding the Costs of Refinancing On a $320,000 loan, that’s $9,600 to $19,200, and it either comes out of your cash proceeds or gets rolled into the loan balance. Lenders who advertise “no-cost” refinances recover the money through a higher rate.
On top of that, the cash-out feature itself adds a rate premium. Fannie Mae’s LLPA for a cash-out refinance ranges from 0.375% to 4.125% depending on credit score and LTV, applied to the entire new loan, not just the cash-out portion.3Fannie Mae. LLPA Matrix Bake that into your comparison before assuming the borrowed money is cheap.
Timeline and When You Get the Money
From application to funding, plan on 30 to 60 days. Complex files or appraisal delays can stretch that further. After you sign the final loan documents, federal law gives you a three-business-day right of rescission on a refinance secured by your primary residence. You can cancel for any reason within that window, and the lender cannot release funds or record the new mortgage until it expires.7Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions Once the period closes, proceeds are wired to your bank or a designated closing agent, and you can move on the second property.
Tax Rules Most Borrowers Get Wrong
Cash-out proceeds are borrowed money, not income. The IRS doesn’t tax them, no matter how you spend them.
The harder question is whether the interest on the new, larger mortgage is deductible. Under the rules made permanent by the One Big Beautiful Bill Act in 2025, interest on home equity debt is deductible only if the borrowed funds were used to buy, build, or substantially improve the home that secures the loan.8Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction The key phrase is “the home that secures the loan.” When you cash out your primary residence and use the money to buy a different property, that debt is secured by your primary home but wasn’t used to improve it. Interest on the cash-out portion doesn’t qualify for the standard home mortgage interest deduction on Schedule A.
Investment property is the meaningful exception. If you use the proceeds to buy a rental, the interest attributable to those proceeds may be deductible as a rental or business expense on Schedule E instead. Publication 936 notes that mortgage interest limited under the home acquisition debt rules may still be deductible if the proceeds were used for business, investment, or other deductible purposes.8Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction The deduction follows the money, not the collateral. The IRS calls this interest tracing.
If you use the cash-out to buy a personal vacation home you don’t rent out, the interest on the cash-out portion is not deductible at all. It’s personal interest.
For any interest that does qualify, the combined acquisition debt on your main home and second home is capped at $750,000 ($375,000 if married filing separately) for mortgages taken out after December 15, 2017. Older mortgages fall under the $1 million limit. The cap covers combined debt, not each property separately. Points paid on a cash-out refinance generally cannot be deducted in the year paid; they’re amortized over the loan’s life, so hold onto your closing disclosure.8Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Risks Worth Stress-Testing
The strategy stacks risk onto the home you live in. If the second property underperforms — a rental sits empty, a flip goes sideways, the market softens — you still owe the enlarged mortgage on your primary residence. Default puts the home your family lives in at risk of foreclosure, not the investment that didn’t pan out. Borrowers tend to mentally separate the two properties. The lender doesn’t.
Resetting the term is the cost most people underestimate. Refinance ten years into a 30-year loan back to a new 30-year term and you’ve added a decade of interest, even at a comparable rate. Run the total interest paid over the remaining original term against the full new term before you commit.
Pulling equity out also shrinks the cushion that protects you if values drop. A borrower who refinances to 80% LTV and then sees a 15% correction is underwater. Selling gets hard, refinancing again gets harder, and a forced move can mean bringing cash to closing.
None of this makes cash-out refinancing a bad strategy in the right circumstances. The borrowers who do well with it stress-test the math against realistic setbacks: a rental vacant for three months, rates a point higher when it comes time to sell, an unbudgeted $20,000 in repairs. If the plan still works under those conditions, it’s defensible. If it only works in the best case, that’s worth knowing before you sign.