How a Cash-Out Refinance Works

A cash-out refinance replaces the current first mortgage with a larger new first mortgage. After the existing loan and closing costs are paid, the remaining proceeds go to the homeowner.

A cash-out refinance converts part of a home's equity into cash by replacing the existing first mortgage with a larger loan that has a new rate, term, and payment.

How the proceeds are calculated

The lender starts with the maximum loan amount supported by the appraised value and program LTV limit. From that new loan, the closing agent subtracts the existing mortgage payoff, closing costs, prepaid taxes and insurance, and any other liens or debts required to be paid at closing.

The remainder is the net cash delivered to the homeowner. A higher appraised value may create more borrowing room, but the final amount still has to satisfy credit, income, DTI, title, seasoning, and payment-history requirements.

Scenario

Assume a primary residence appraises for $375,000 and the current first-mortgage payoff is $235,000. At an 80% LTV limit, the largest new loan would be $300,000. After paying off the $235,000 mortgage and $9,000 in closing costs and prepaid items, the homeowner would receive about $56,000: $300,000 minus $235,000 minus $9,000.

Assume the old $235,000 loan has 25 years remaining at 3.50%, with principal and interest of about $1,176 per month. A hypothetical new $300,000 loan at 6.75% for 30 years has principal and interest of about $1,946. The cash-out transaction raises that portion of the payment by about $770 per month and restarts the repayment period at 30 years. Taxes, insurance, mortgage insurance, and association dues are separate from these figures.

What changes at closing

The current first mortgage is paid off rather than preserved.
The new loan receives the rate and pricing available when it is locked.
The repayment term starts over based on the selected new term.
Closing costs and prepaid items reduce the cash received unless they are paid separately.
The new payment is qualified with current income, credit, debts, taxes, insurance, and other housing obligations.

Common eligibility boundaries

A one-unit primary-residence cash-out refinance commonly allows up to 80% LTV under standard conventional or FHA guidelines. Lower limits may apply to multi-unit homes, second homes, investment properties, manufactured homes, or files with additional risk factors.

Conventional programs commonly require at least six months of ownership. FHA cash-out generally requires 12 months of ownership and principal-residence occupancy, current mortgage payments, and additional loan seasoning. The lender also reviews the appraisal, title, credit, income, DTI, reserves, mortgage history, and use of proceeds.

Related lessons

How a Closed-End Second Mortgage Works

Interest Rate vs. APR: What Each Number Means

Lender Credits vs. Financed Costs: What Changes the Real Cash Needed?

Compare the new payment over time

Use the borrower tools to model payment and amortization before weighing cash received against the larger replacement loan.

Open Borrower Tools

Calculate net proceeds and the new payment

Bring the current mortgage statement, estimated property value, requested cash, income, monthly debts, and approximate credit range. DRG Mortgage can calculate the proposed LTV, estimated net cash, and payment change.

Review My Cash-Out Options

Sources

Consumer Financial Protection Bureau: Refinancing a Mortgage

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