Guide
A cash-out refinance is one of three main ways to tap home equity, but it works differently from a HELOC or home equity loan. Instead of adding a second loan on top of your mortgage, it replaces your existing mortgage entirely with a new, larger one — and you pocket the difference in cash. Whether that's smart depends heavily on the rate you'd be giving up, the closing costs you'll pay, and how long you plan to stay. This guide walks through the mechanics, a full worked example, and the questions homeowners ask most.
Say your home is worth $500,000 and you owe $300,000. You refinance into a new $360,000 mortgage. The new loan pays off the old $300,000 balance, and you receive the remaining $60,000 (minus closing costs) as cash you can use for any purpose. Your entire mortgage — not just the borrowed portion — is now at the new interest rate and reset to a new term, usually 15 or 30 years. That reset is easy to overlook: even at the same rate, stretching your balance back out to 30 years can mean paying more total interest over time.
This is the single most important factor. If your current mortgage rate is higher than today's rates, refinancing could lower your rate on the whole balance and give you cash — a genuine win. But if your current rate is lower than today's rates (very common for anyone who bought or refinanced before rates rose), a cash-out refi forces you to give up that low rate on your entire mortgage just to access equity. In that case, a HELOC or home equity loan — which leaves your original mortgage untouched — is usually far cheaper, because you only pay the higher rate on the smaller amount you actually borrow.
Imagine you owe $300,000 at a 3.25% mortgage rate and want to pull out $60,000. Today's cash-out refi rate is 7.0%.
Flip the example: if your existing mortgage were already at 7.5%, refinancing the whole balance down to 7.0% and getting cash could genuinely save money. That's why the direction of the rate gap matters more than almost anything else.
Because you're originating a full new mortgage, closing costs typically run 2% to 5% of the loan amount — often several thousand dollars for appraisal, origination, title, and related fees. Most lenders also cap cash-out refinances at around 80% loan-to-value, meaning you must keep at least 20% equity in the home. Factor these costs in before assuming the "cash out" figure is what you'll actually receive — the net amount in your pocket is smaller.
There's a subtler risk worth naming. CFPB research on cash-out refinances notes that these loans "typically have higher interest rates, higher monthly payments, and higher balances" than other refinances, and that using them to pay off cards or other bills turns previously unsecured debt into debt secured by your home — which can raise the risk of foreclosure. The Bureau found that paying off other debts was the single most common reason borrowers chose a cash-out refi. You can read the analysis in the CFPB Office of Research blog on cash-out refinances.
The home equity calculator's comparison tab models a cash-out refinance against a HELOC and a home equity loan using your current rate, so you can see in dollars whether giving up your rate is worth it.
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It helps to see all three equity options next to each other. A cash-out refinance replaces your whole mortgage, so it only makes sense when today's rates are at or below your existing rate. A home equity loan leaves your first mortgage alone and adds a fixed-rate second loan — ideal when you have a low existing rate you want to protect and a known amount to borrow. A HELOC also preserves your first mortgage but gives you a flexible, variable-rate line you draw from as needed. In a market where many homeowners locked in low mortgage rates years ago, the two second-lien options frequently win precisely because they don't touch that cheap first mortgage.
There are still situations where a cash-out refinance is the strongest choice. If your current rate is high, refinancing can lower the rate on your entire balance while handing you cash — two wins at once. It can also simplify your finances into a single monthly payment, which some borrowers value even if the math is close. And because a first-mortgage refinance often carries a lower rate than a second lien, a large borrowing need can sometimes be cheaper this way despite the closing costs. The point is not that cash-out refinancing is bad — it's that the answer depends entirely on your rate gap, your borrowing amount, and how long you'll stay. Run your real numbers before deciding.
How is a cash-out refinance different from a home equity loan? A home equity loan is a second loan added on top of your existing mortgage, which stays untouched. A cash-out refinance replaces your existing mortgage with a new, larger one. That's why your original rate is safe with a home equity loan but not with a cash-out refi.
What's a "break-even point"? It's how long it takes for your monthly savings (if any) to cover the closing costs you paid. If closing costs are $9,000 and the refinance saves you $200 a month, you break even in about 45 months. If you might move before then, the refinance may not pay off. The CFPB's one-page "Should I refinance?" worksheet and its broader Owning a Home resources walk through this calculation step by step.
Is the cash I receive taxable? Generally, cash from a refinance is treated as loan proceeds, not income, so it isn't taxed. But tax rules are specific and change over time — confirm with a tax professional. Nothing here is tax advice.
→ Model a cash-out refinance vs. the alternatives