Cash-out refinancing converts built-up home equity into cash by replacing your mortgage with a larger loan. It can lower payments or consolidate debt and often offers a fixed rate, but it adds costs, can increase total interest over time, and affects loan-to-value and tax treatment. Run a break-even analysis and consult a mortgage lender and tax advisor before proceeding.

What a cash-out refinance does

A cash-out refinance replaces your existing mortgage with a new, larger loan and returns the difference to you as cash. Homeowners use that equity for home improvements, debt consolidation, emergency funds, or other needs while keeping a single mortgage payment.

Common reasons to choose cash-out

Lower your interest or monthly payment

If current mortgage rates are meaningfully lower than your existing rate, refinancing can reduce your monthly payment. Keep in mind closing costs, fees, and the new loan term when you compare savings.

Access equity without a second loan

A cash-out refinance converts built-up equity into liquid funds in one transaction. Compared with a HELOC or home equity loan, it may offer a fixed rate and a simpler single payment.

Consolidate higher-cost debt

Many people use cash-out proceeds to pay off credit cards or personal loans. Consolidating high-interest debt into a mortgage can lower total interest, but it also converts unsecured consumer debt into secured mortgage debt.

Potential credit and financial planning effects

Paying off revolving balances can improve credit utilization and boost your credit score over time. On the other hand, increasing your mortgage balance raises your loan-to-value (LTV), which can affect future options and costs.

Costs, tax rules, and trade-offs

Cash-out refinances have closing costs and may extend your amortization, which can increase total interest paid even if the rate is lower. Lenders often charge slightly higher rates on cash-out refinances than on rate-and-term refinances .

Private mortgage insurance (PMI) may be required if the new LTV exceeds typical lender thresholds (often 80%), adding to monthly cost.

On taxes: mortgage interest can still be deductible on U.S. federal returns, but rules changed under the 2017 tax law. Interest deduction limits and whether interest is deductible can depend on when the mortgage originated and how the cash was used (for example, to substantially improve the home) 1. Consult a tax advisor for your situation.

When a cash-out refinance makes sense

A cash-out refinance is worth considering when:
  • The new rate and term offset closing costs.
  • You need a lump sum and prefer a single loan rather than a HELOC.
  • You will use the proceeds in ways that justify converting equity into secured debt (home improvement, consolidating very high-cost debt).
Avoid cash-out refinancing if the transaction substantially increases total interest paid, leaves you with little home equity, or if proceeds will be used for short-term consumption without a plan.

Next steps

Run a break-even analysis that includes closing costs, expected time in the home, and the new amortization schedule. Compare offers for rate, fees, and LTV limits. Speak with a mortgage professional and a tax advisor before you refinance.
  1. Confirm current (as of Aug 2025) lender pricing and typical rate spread between cash-out and rate-and-term refinances.
  2. Verify whether federal mortgage interest deduction limits or qualification rules changed after June 2024 and confirm rules for deductibility of interest on cash-out proceeds.
  3. Check state-level tax rules or incentives that might affect deductibility or treatment of refinanced mortgage interest.

FAQs about Cash Out Loans

How is a cash‑out refinance different from a HELOC?
A cash-out refinance replaces your mortgage with a new loan and gives you a lump sum; a HELOC is a separate line of credit secured by your home. Cash-outs often provide a fixed rate and a single payment, while HELOCs typically offer variable rates and flexible draws.
Will a cash‑out refinance improve my credit score?
It can help if you use the proceeds to pay off revolving debts, lowering your credit utilization. However, the new loan increases your mortgage balance and may temporarily lower your score due to the hard credit inquiry and new account.
Are mortgage interest payments still tax‑deductible after a cash‑out refinance?
Mortgage interest may be deductible on federal returns, but rules changed under the 2017 tax law and depend on loan size, origination date, and how you use the proceeds (for example, improvements to the home). Check with a tax advisor for your situation.
When should I not choose a cash‑out refinance?
Avoid it if closing costs and a longer amortization negate savings, if it reduces your equity too far, or if you'll use proceeds for short-term spending without a plan.
Do lenders have LTV limits on cash‑out refinances?
Yes. Lenders set maximum loan-to-value ratios for cash-out deals; many require LTV at or below certain thresholds to avoid PMI or to qualify. Check lender guidelines before applying.