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January 2025

What is a Cash-Out Refinance?

Be careful with this popular option for home improvement financing. It pays off your existing mortgage but carries some risks, too.
Published January 20th, 2025
Reviewed by Corey Sayers

A cash-out refi is a new mortgage that pays off your existing mortgage plus whatever additional cash you want to borrow.

If you’ve been paying your mortgage regularly for a long enough time, chances are you’ve built up equity, which is essentially the percentage of your home’s value you actually own. 

Take your home’s current value and subtract the outstanding debt you still owe. The difference represents the equity you’ve built up, and you may be able to tap into it with a cash-out refinance for a pretty sizable loan.

We spoke to Josh Kahn, founder and president of Reside Home Loans in Northfield, IL, who walked us through what you should consider with a cash-out refi.

Best Home Improvement Loans
$1,000-50,000
Loan Amount
8.49-35.99%
APR
3–7 years
Terms
560
Minimum Credit Score

Disclaimer

Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 8.49%-35.99%. All personal loans have a 1.85% to 9.99% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. Loans feature repayment terms of 24 to 84 months. For example, if you receive a $10,000 loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade's bank partners. Information on Upgrade's bank partners can be found at https://www.upgrade.com/bank-partners/.

How a cash-out refi works

To be eligible for a cash-out refinance, you generally need to own at least 20% worth of equity in your home, and you can usually borrow around 80% of that dollar amount.

As of 2024, U.S. homeowners own an average of $315,000 in equity. With a cash-out refinance, borrowing up to around 80% of that amount would get you up to $252,000.

Of course, you don’t have to borrow the full amount. Let’s say you want to remodel your bathroom. The contractor gives you an estimate of $22,095, but you may want to round up your loan to $25,000 to account for unexpected costs. You know, just to be safe.

Your new loan will be for the remainder of what you owe on your current mortgage, plus that extra $25,000. You’ll continue making monthly payments under the new terms you’ve set for the new mortgage.

The fact that you’re using your equity to get funds means you’re putting your house up as collateral, making this a “secured loan.” On the plus side, this helps keep your interest rate a bit lower than an unsecured loan by a few percentage points (think 7-9% instead of 10-15%), because the lender sees you as a less risky borrower.

On the downside, the reason you are seen as less of a risk is because the lender could repossess your house if you fail to keep up with payments.

How a cash-out refinance differs from a standard refinance

Important Important
With a cash-out refinance, your new loan terms will also be determined by the current interest rate, whether it’s lower or higher than the one you had with your initial mortgage.

A homeowner can use a standard refinance (often called a “rate-and-term refinance”) to take advantage of lower interest rates without any additional cash received. The amount owed on the new, refinanced mortgage would remain the same, but the monthly payments would be lower, reflecting the new interest rate. 

Note that with a cash-out refinance, your new loan terms will also be determined by the current interest rate, whether it’s lower or higher than the one you had with your initial mortgage.

Kahn mentions that the interest rate for a cash-out refinance will usually be a bit higher than a standard, “to the tune of about a quarter percent or so.” That’s because after a cash-out refinance, your loan amount will be larger, and you’ll have less equity (since you’re converting some of it into cash). These factors make you a slightly riskier borrower. 

According to the Consumer Finance Protection Bureau, the median interest rate for cash-out refinances from 2013 to 2023 was 3.62%, compared to standard refinances at 3.36%.

Cash-out refinance requirements

In addition to owning about 20% worth of equity in your home, there are a few other requirements.

Credit score

As usual, a higher credit score will get you better terms, from the interest rate to the amount you can borrow. Kahn tells us that “your credit score can be as low as 620” to qualify, which is lower than the average credit score of 717 (as of late 2024).

Debt-to-income ratio (DTI)

Your DTI is a measure of how much debt you owe vs. how much income you bring in. The lower your DTI, the less risk you are to a lender.

“Cash-out refinancing is going to cap people at around 45 to 50%,” Kahn says, meaning roughly half of your income goes toward paying your debts. This is considered on the verge of risky, and it pushes the limits on what a lender will approve.

Seasoning (aka, how long you’ve owned your home)

“You have to be on title for a year before you complete the cash-out refi,” Kahn tells us. 

This time period is called “seasoning,” and it establishes stability on the part of the borrower, indicating that you’re a responsible, long-term homeowner who’s not trying to recklessly flip your house before it has a chance to increase its value (or using it as a money laundering scheme).

Income

You may have to provide proof of income and employment to qualify for a cash-out refinance. While there isn’t necessarily a minimum required income, it is important to determine your debt-to-income ratio and ability to pay your mortgage.

Costs

Like with any mortgage, a cash-out refinance will cost money, but it’s significantly less than your initial mortgage.

Kahn explains: “When you purchase a home, you’re going to pay a decent amount of closing costs. But the costs for a refinance will be significantly lower, by two to three thousand dollars, give or take.”

For a cash-out refinance, “you’re just paying for an underwriting fee from the bank, updated title work, and potentially an appraisal depending on your situation,” Khan says. “That’s really it, compared to all of the transfer taxes and all the things you pay for upfront when you initially buy.” 

All in all, you should expect to pay about 3%-6% of the loan amount in fees for a refinance.

Tip Tip
In addition to owning about 20% worth of equity in your home, there are a few other requirements: credit score, debt-to-income ratio (DTI), seasoning, income, and costs.

Government-backed refinance options

Some home loans, including cash-out refinances, are insured by government agencies. This means the federal government takes on some of the risk, which makes funds more available to borrowers with weaker credit or less wealth.

Two such options are from the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).

FHA-insured 203(k) loan

203(k) loans are meant to cover the cost of purchasing a home as well as the cost of necessary renovations. If you already own the home, this loan takes the form of a cash-out refinance, covering the remainder of your mortgage and putting extra cash in escrow for use toward improvements.

Those improvements must cost at least $5,000 to qualify, and they must be utilitarian in nature, like repairs, upgrades, and accessibility adaptations. 

While a typical cash-out refinance might require a credit score of 620, “FHA will let you go down as low as 580,” Kahn explains.

VA cash-out refinance

These loans through the Department of Veterans Affairs are available exclusively to veterans who can establish their service history with a Certificate of Eligibility.

Another requirement is an appraisal from a VA-registered home appraiser and the use of VA-approved contractors for the home project.

Like the FHA loan, a minimum credit score of 580 is required.

Your existing loan doesn’t have to be an FHA 203(k) loan or a VA loan to qualify for those government-backed refinances. You can take the refinancing opportunity to switch into (or out of) a government-backed loan.

Alternatives to a cash-out refinance

You have many options to get funds for your home improvement. Some are secured loans that tap into your equity, like home equity loans and home equity lines of credit. Others are unsecured, like personal loans.

How do they compare?

Home equity loan and home equity line of credit (HELOC)

These two secured loans are very similar to a cash-out refinance. They use your house as collateral. They have the same requirements for credit score and equity ownership. They let you borrow the same amount of cash.

The main difference is in how you get the money.

A home equity loan and a HELOC are both “second mortgages,” so instead of replacing your current mortgage, they exist alongside it. You’ll be paying two mortgages simultaneously.

A home equity loan arrives in one lump sum. A HELOC allows you to borrow as much or as little as you need, and you only pay back what you’ve borrowed. (This is useful if your home improvement project turns out to be more expensive than you planned; you can take out more money without having to create a new loan.)

Benefits of equity-based options

You can get more money. “You’ll be able to access a lot more cash with the cash-out refi” than with a personal loan, Kahn says. Lenders of unsecured personal loans generally have an upper limit of $50,000 to $100,000, much lower than the hundreds of thousands you could conceivably get by tapping into your equity.

Lower interest rates. As mentioned earlier, a secured loan can shave a few percentage points off the interest rate you’d get with an unsecured one.

Personal loans

Personal loans are available through banks, credit unions, and sites like Acorn Finance. They’re unsecured loans, so you won’t lose your home if you fall short on repayments.

Benefits of personal loans

Speed. You can get pre-approved almost immediately with a personal loan and get your cash within days. On the other hand, equity-based loans are mortgages, and they can take “about 30 days” from the day you start the process, Kahn says. If your kitchen project is an emergency response to a tree falling through your roof, you don’t have that kind of time.

Costs. The fees Kahn mentioned that come with equity options don’t apply to personal loans. Just get your hands on your cash and start paying it back according to the terms and timeline you’ve negotiated.

You won’t lose your house. The few percentage points added to the interest rate of an unsecured loan might be a small price to pay for this peace of mind.

How Acorn Finance can help

If you need a quick and simple way to get cash for a home improvement, a cash-out refit might not be the right fit. 

But a personal loan through Acorn Finance might be just what you’re looking for. There’s no need to get bogged down in the fees and processes of starting a new mortgage; just enter your funding needs online and find a list of loans you’re already pre-qualified for. Select the one that best suits your needs, and upon approval, you could have that cash within days.

Comparing options on Acorn Finance? See if you prequalify for a personal loan without impacting your credit score.

Just answer a few questions to get personalized rate estimates from multiple lenders.

Learn more about prequalifying

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