Cash-out refinance explained: how it works, limits, and when to avoid it
The short answer
A cash-out refinance replaces your mortgage with a larger new loan and pays you the difference in cash. Conventional and FHA cash-out refinances usually cap the new loan at 80% of your home's value, and VA cash-out loans often allow up to 90% or more. Because it replaces your whole loan at today's rate, a cash-out refinance makes the most sense when current rates are at or below your existing rate.
How the math works
Home value $500,000. Owe $250,000. At an 80% limit, the new loan can be up to $400,000. After paying off the old loan, you receive up to $150,000, minus closing costs.
Typical limits
| Loan type | Typical max loan-to-value | Notes |
|---|---|---|
| Conventional | 80% (1-unit primary home) | Usually about 12 months of ownership or seasoning |
| FHA | 80% | Owner-occupied; payment history required |
| VA | Often 90%, sometimes higher | Eligible veterans; funding fee unless exempt |
Good reasons
- Your current rate is about the same as or higher than today's rates.
- Paying off much higher-rate debt, with a plan to avoid running it up again.
- Major renovations that add value.
Reasons to pause
- You would give up a much lower rate. In 2026, many owners have rates in the 3% to 5% range. A HELOC or home equity loan often costs less.
- You would restart a 30-year term late in your current loan.
- The cash is for spending that does not build value.
Common questions
Is cash from a cash-out refinance taxable?
Generally no. It is loan proceeds, not income. Deductibility of the interest depends on how you use the money.
How long does a cash-out refinance take?
Often 30 to 45 days, similar to a purchase, since it usually requires an appraisal and full underwriting.