How a Cash Out Refinance Works (and When It’s Worth It)

A cash out refinance lets you tap into your home equity by replacing your current mortgage with a bigger one and pocketing the difference in cash. You can use that money for anything: renovations that increase your home value, wiping out high interest debt, or funding something meaningful in your Rich Life. The catch is you’re taking on a larger mortgage with higher monthly payments.

What Is a Cash Out Refinance (and How Does It Actually Work)?

A cash out refinance means you take out a brand new mortgage that's larger than what you currently owe on your home. The new loan pays off your old mortgage completely, and you receive the extra amount as cash in your bank account.

You're replacing your mortgage with a bigger one and keeping the difference

Let's say you owe $150,000 on your current mortgage. You refinance into a new $200,000 mortgage. The new loan pays off the $150,000 you owe, and the bank hands you $50,000 in cash to use as you see fit.

This is different from a regular refinance, where you're just getting a better interest rate or changing your loan terms. With a cash out refinance, you're specifically borrowing more money than you owe so you can access that cash.

Your home equity is what makes this possible

Home equity is the difference between what your home is worth and what you still owe on your mortgage. If your home is worth $300,000 and you owe $100,000, you have $200,000 in equity.

That equity represents your actual ownership stake in your home. Every mortgage payment you make increases your equity by paying down the principal, and your equity also grows when your home's value increases over time. Think of equity as the portion of your home you truly own outright. The bank owns the rest until you pay off the mortgage completely.

You end up with a new loan with different terms

When you do a cash out refinance, you're getting an entirely new mortgage. That means a new interest rate, a new monthly payment, and potentially a new loan term, such as 15 or 30 years.

Your new interest rate might be higher or lower than your current rate, depending on market conditions and when you got your original mortgage. If you locked in a 3% rate years ago and today's rates are 6.5%, your new rate will be significantly higher.

Your monthly payment will almost certainly increase because you're borrowing more money. You're also resetting the clock on your mortgage. If you have 20 years left on your current loan and refinance into a new 30-year mortgage, you will simply add 10 years of payments.

How Much Cash Can You Actually Get When Doing A Cash Out Refinance?

The amount you can borrow depends on your home's current value and how much equity you've built up. Here's how lenders calculate what they're willing to give you.

Most lenders cap you at 80% of your home's value

Lenders use something called the loan-to-value ratio to determine how much they'll let you borrow. This is a safety measure for them, ensuring you still have skin in the game.

Let's say you own a home worth $300,000 and you still owe $100,000 on your mortgage. That means you have $200,000 in equity built up. Lenders typically let you borrow up to 80% of your home's current value, which in this case equals $240,000.

Here's how the money flows. That new $240,000 loan pays off your existing $100,000 mortgage balance first. The remaining $140,000 is deposited into your account as cash, which you can use as you see fit. The lender isn't handing you all that money upfront and hoping you pay off your old mortgage yourself.

Some lenders will go higher than 80%, sometimes up to 90% for borrowers with excellent credit and stable income. But you'll face stricter requirements, higher interest rates, and bigger monthly payments that could strain your budget. Going above 80% also means you're leaving very little equity cushion in your home, which becomes dangerous if property values drop.

Your equity grows two ways (and most people only think about one)

Most people think about equity as something that grows slowly through their monthly mortgage payments. Paying down your mortgage principal over time gradually builds equity. Every monthly payment you make increases your ownership stake in your home, even if it feels invisible. If you've been paying your mortgage for 10 years, you might have reduced your loan balance by $50,000 or more just through regular payments.

But here's what catches people by surprise. Your home value increases equity much faster, especially if you bought in a hot real estate market. If you purchased your home in 2015 for $250,000 and it's now worth $400,000, you just gained $150,000 in equity without doing anything.

Check your home's current market value before assuming you know the number. Zillow provides a starting estimate that gives you a ballpark figure, but lenders require a professional appraisal that determines the exact value they'll use for your loan. Sometimes that appraisal comes in lower than Zillow's estimate, which can change your borrowing calculations.

Lower loan amounts mean lower risk and easier monthly payments

Just because a lender approves you for $140,000 doesn't mean you should take it all. You could borrow $50,000 instead and keep your monthly payment increase manageable while still getting the cash you need.

Taking out less money means smaller monthly payments, less interest paid over time, and more cushion if your income drops unexpectedly. If you borrow $50,000 instead of $140,000, your monthly payment might only increase by $300 instead of $850. That difference gives you breathing room if your hours get cut or unexpected expenses pop up.

When a Cash Out Refinance Actually Makes Sense

A cash out refinance can be a powerful financial tool when you use it strategically. These are the situations where borrowing against your home equity actually improves your financial position.

Investing in yourself or your business can pay massive returns

This is where a cash out refinance becomes genuinely powerful instead of just moving money around. You could use $50,000 from a cash out refinance to start a consulting business that generates $80,000 in additional annual income. You're paying 6% interest on that $50,000 while earning an exponentially higher return. That math works beautifully in your favor.

Education is another area where the numbers can work spectacularly well. Education that leads to a $20,000 salary increase pays for itself in under three years, even after accounting for loan interest. If you can earn a degree or certification that meaningfully increases your income, the numbers work beautifully. A $30,000 investment that generates an extra $25,000 per year for the rest of your career is one of the best financial moves you can make.

This is what I call playing offense with your money, rather than playing defense. You're not just treading water or paying off past mistakes. You're actively investing in something that multiplies your earning potential and changes your financial trajectory for decades.

Home improvements that increase your property value

Strategic home improvements can actually make you money while making your life better every single day. Imagine renovating your outdated kitchen for $40,000, which boosts your home's value by $60,000. You've just made money while creating a space you love to cook in every day. That's a win on multiple levels.

Not all renovations deliver the same returns. Strategic renovations like adding a bathroom, finishing a basement, or upgrading to energy efficient windows deliver real returns when you sell. Solar panels can save you $1,500 annually on electricity while increasing your home's value by $20,000 or more. You're getting paid twice: once through lower utility bills and again when you sell.

Cosmetic upgrades like fresh paint and landscaping make your home feel better but rarely increase the value dollar for dollar. They're absolutely worth doing if they make YOU happy, just don't expect to recoup the full cost when you sell.

If you're planning to sell within five years, improvements funded by a cash out refinance can be strategically brilliant. You invest $50,000 now and potentially get back $75,000 at closing. The timing matters because you need enough years to recoup your closing costs and benefit from the improvements.

Crushing high interest debt is one of the best uses

The math here is so obvious it's almost painful. Credit card companies are charging you 20-25% interest while mortgage rates typically sit under 7%. That spread is enormous. If you're carrying $30,000 in credit card debt at 24%, you're throwing away $7,200 per year just in interest. That's $600 every single month going straight to the credit card company before you even touch the principal.

Let's say you consolidate that $30,000 in credit card debt with a cash out refinance at 6%. Your interest cost drops to $1,800 annually. You just saved $5,400 every single year. Over 10 years, that's $54,000 staying in your pocket instead of going to Visa.

A cash out refinance at 6% absolutely destroys paying 24% to Visa. The math isn't even close, and anyone telling you otherwise is selling you something or doesn't understand basic arithmetic.

But here's the hard truth you need to hear, and this is critical. If you pay off those credit cards and then run them back up to $30,000 within two years, you've just made your situation infinitely worse. Now you have credit card debt AND a bigger mortgage. You've taken unsecured debt and turned it into secured debt against your home, then added new unsecured debt on top.

Building an emergency fund when you have zero savings

Living without an emergency fund means you're one unexpected expense away from financial disaster. If you have no emergency fund and your transmission dies, you're one $3,000 repair away from spiraling into credit card debt at 24% interest. A cash out refinance can give you that cushion you desperately need.

Let's say you use $15,000 to create a 6 month emergency fund. Yes, you're paying 6% interest on that money sitting in your savings account, which feels counterintuitive. But when your AC breaks in July, you pay cash instead of putting it on a credit card at 22%. That one repair alone could save you hundreds in interest charges.

When A Cash Out Refinance DOESN’T Make Sense

Now that you know the smart ways to use a cash out refinance, let's be crystal clear about what you should never use it for. These decisions look appealing in the moment but will haunt you for decades.

Here's what absolutely doesn't make the cut:

• Buying a boat, RV, or luxury car with home equity is basically setting money on fire while making payments for 30 years.
• Funding a lavish vacation sounds incredible until you realize you're still making payments on that two-week trip to Europe a decade later.
• Using the money without a specific plan is a recipe for disaster. If you can't clearly articulate exactly how this money improves your financial situation or funds something meaningful in your Rich Life, don't do it.

Vague ideas lead to wasted money and regret. You need a concrete plan before you borrow a single dollar against your home.

Why This Can Backfire (and Cost You Your Home)

The stakes with a cash out refinance are completely different than other kinds of debt. Unlike credit card debt that ruins your credit score if you can't pay, a cash out refinance puts your actual home at risk. Miss enough payments and the bank will foreclose, take your house, and sell it to recoup their money. You and your family lose your home.

Let's say you use $60,000 to start a business that fails within 18 months. That's not uncommon; most new businesses fail. You still owe that $60,000 plus interest, and now your mortgage payment is $500 higher every month for the next 30 years. That failed business just became a permanent financial burden attached to your housing costs. You're paying for that mistake until 2054.

Your home equity isn't a renewable resource you can tap forever. Every time you pull cash out, you're reducing your ownership stake and increasing your risk. Eventually you run out of equity to access. If you keep refinancing every few years to pull out cash, you could end up owning less of your home at age 55 than you did at age 35.

Shannon and Wilson, a couple from my podcast, showed exactly why having zero savings creates massive vulnerability when you're carrying a big mortgage. They had fixed costs of $8,842 every month but absolutely nothing set aside for emergencies. Think about that for a second. Almost $9,000 in fixed monthly obligations with zero buffer.

When I asked what they'd do if one of them lost their job, Wilson said they'd refinance, sell stock, or cut expenses. That sounds reasonable on the surface. But when I pressed him on where the money would actually come from for that $8,842 monthly bill, the answer got fuzzy real fast. They'd have to trim assets or refinance. That kind of thinking is dangerous when your home is on the line.

You Should Consider a Cash Out Refinance If…

Not everyone is in a good position to take on a larger mortgage. These are the financial markers that indicate you're ready to move forward safely.

You have substantial equity built up in your home

You need at least 20% equity remaining after the cash out to qualify with most lenders. That means if your home is worth $300,000, you need to keep at least $60,000 in equity, so your maximum loan would be $240,000.

If you've owned your home for 10 or more years, you probably have significant equity built up from your monthly payments chipping away at the principal. Add in home price appreciation and you might have $150,000 or more available. Homes purchased before 2020 have seen particularly strong appreciation in most markets, which means homeowners who bought years ago often have much more equity than they realize. That built up equity gives you options, but it also needs protecting.

Your credit score is solid and shows responsible financial behavior

Most lenders want a credit score of 620 minimum just to consider your application, but a score of 700 or higher gets you significantly better interest rates that save you tens of thousands over the life of the loan.

Your credit score affects your interest rate more than almost any other factor. The difference between a 680 score and a 760 score could mean 0.5% to 1% in interest rate, which translates to $30,000 to $60,000 in extra interest on a $250,000 loan. That's real money you're either keeping or giving to the bank. If your score is below 700, spend a few months improving it before you apply by paying down credit card balances and making all payments on time.

You have a crystal clear plan for exactly how you'll use the money

Vague ideas like "we'll use it for home improvements and maybe some other stuff" lead to wasted money and deep regret two years later when you can't remember where $80,000 went.

Write down your exact plan before you apply. Here's what a solid plan looks like:

• Renovate the kitchen with new cabinets, countertops, and appliances for $35,000. This addresses a specific need and adds measurable value to your home.
• Pay off $25,000 in credit card debt, currently costing you $6,000 annually in interest. You'll immediately save money every month.
• Create a $15,000 emergency fund to cover six months of essential expenses. This protects you from future financial emergencies.
• Invest $10,000 in professional certifications that will increase your earning potential by at least $15,000 per year. The return on investment is clear and measurable.

See how specific that is? Each dollar has a purpose and a reason. That's what you need before moving forward.

Your income is stable and you can comfortably afford higher payments

Job security matters enormously here. If your company just announced layoffs or your industry is shaky, this is absolutely not the time to increase your mortgage payment by $600 per month. You need stability before you take on more fixed costs.

Calculate your new payment and look at your Conscious Spending Plan, which is my framework for managing money across four categories: fixed costs, investments, savings, and guilt free spending. Your fixed costs should be 50-60% of your take home pay.

Let's say your current fixed costs are at 55% and this new payment pushes you to 65%. You just eliminate your breathing room and any margin for error if something goes wrong. That extra 10% has to come from somewhere, and it's usually your savings or guilt free spending that takes the hit.

If the higher payment means cutting into your emergency savings or eliminating all guilt free spending, you need to either borrow less or wait until your income increases. A cash out refinance that forces you to live paycheck to paycheck defeats the entire purpose.

Who Should Avoid a Cash Out Refinance If…

Some financial situations make a cash out refinance too risky to attempt. If any of these apply to you, fix these issues first before borrowing against your home.

You already have high fixed costs eating up most of your income

If your fixed costs are already above 60% of your take home pay, adding a bigger mortgage payment makes your situation worse, not better.

Fix your Conscious Spending Plan first. The Conscious Spending Plan is my system for dividing your income into four buckets:

• 50-60% for fixed costs like rent, utilities, car payments, and insurance. These are expenses you can't easily change month to month.
• 10% for investments that build your future wealth. This includes retirement accounts and taxable investment accounts.
• 5-10% for savings goals like vacations, upcoming purchases, or building your emergency fund. This is money you'll spend eventually but not this month.
• 20-35% for guilt free spending on things you love without justification. Dining out, hobbies, entertainment, shopping, whatever brings you joy.

Get those percentages right before you even think about borrowing more. A cash out refinance when you're already stretched thin is financial quicksand.

You're planning to move within the next few years

Closing costs on a cash out refinance typically run $8,000-$15,000 for most people. That's real money walking out the door upfront. If you're selling your home in two years, you barely have time to recoup those costs through savings or home value increases.

Think about it this way. You spend $12,000 in closing costs to get a slightly better interest rate or access some cash. Then you sell it two years later. You need at least three to five years of lower payments just to break even on those closing costs, and you're selling before you get there.

Short-term thinking and long-term debt don't mix. You're signing up for a 30-year commitment to save money over a 2-year window. The math doesn't work, and you end up losing money on the transaction.

You have unstable income or serious job insecurity

Your home is your biggest asset and your foundation. Gambling with it when your income is shaky is one of the worst financial decisions you can make. The bank doesn't care if you're going through a rough patch. They want their payment every single month.

If your income fluctuates wildly between $3,000 and $8,000 per month, how do you know you can afford a $2,400 mortgage payment every single month? You can't, and that uncertainty puts your home at risk. With a $3,000 a month mortgage payment, that payment eats up 80% of your income before you pay for food, utilities, or anything else.

Build up a 6-month emergency fund and stabilize your income before you consider borrowing against your home. This isn't the time to play offense. First, solidify your financial foundation, then explore ways to leverage your home equity.

You haven't fixed the spending habits that created your debt

If you're doing a cash out refinance to pay off $35,000 in credit card debt, but you're still spending $3,500 per month on takeout, online shopping, and random purchases you don't even remember, you're doomed to repeat the cycle. The debt isn't the problem. Your spending is the problem.

The cash out refinance isn't the problem or the solution. Your spending habits are the real issue, and no amount of refinancing fixes that. You can move debt around all day long, but if you don't change the behavior, you'll just create more debt.

Get brutally honest about why you accumulated debt in the first place. Was it a one time emergency or lifestyle creep that got out of control? Did you lose your job or were you spending money you didn't have on things you didn't need? The answer determines whether a cash out refinance helps or just delays the inevitable.

How to Actually Do a Cash Out Refinance

Refinancing your mortgage takes several weeks from start to finish. Here's exactly what to expect at each stage.

Step 1: Calculate your home equity and determine your borrowing power

Start by getting your home's current market value. Zillow and Redfin give you a ballpark estimate that's helpful for initial planning, but lenders will require a professional appraisal that gives you the precise number they'll use. Sometimes these numbers differ by $20,000 or more.

Let's say your home is worth $350,000 according to your research. Subtract what you still owe on your mortgage, maybe $180,000. That means you have $170,000 in equity built up. That's the ownership stake you've accumulated through payments and appreciation.

Now here's where the 80% rule comes in. Multiply your home value by 0.80 to find your maximum loan amount at 80% loan to value. In this example, $350,000 x 0.80 = $280,000 maximum loan.

Subtract your current mortgage balance from that maximum loan amount. $280,000 − $180,000 = $100,000 in potential cash you could access. That's the maximum, not what you should necessarily take.

Now decide how much you actually need instead of just taking the maximum. If your plan requires $65,000, borrow $65,000 and leave the rest as equity cushion in your home. That extra cushion protects you if home values drop or you need to tap equity again later.

Step 2: Shop multiple lenders and compare offers

Your current mortgage lender is a natural starting point. They already have your information and sometimes offer existing customer discounts that save you money on fees.

But don't stop there. You'll want quotes from at least two other lenders, including online lenders like Better or Rocket Mortgage, and your local credit union. Each lender has different rates, fees, and approval criteria, so shopping around can save you thousands.

When you're comparing offers, focus on three key numbers: the interest rate, the total closing costs, and any prepayment penalties if you pay off the loan early. A slightly lower rate with massive closing costs might actually cost you more in the first few years.

Step 3: Gather every piece of financial documentation they'll request

Lenders typically require two years of tax returns, your most recent two pay stubs, and bank statements from the last two to three months. Having all of this organized before you even apply speeds up the entire process and prevents frustrating delays.

They'll also check your credit score and pull a full credit report to see your payment history and existing debts. This is standard for everyone. If you're self-employed, expect extra scrutiny and be prepared to provide profit and loss statements that show your business income.

Step 4: Get your home professionally appraised

The lender orders an appraisal to confirm the actual value of your home, which determines your maximum loan amount. This isn't optional and typically costs $400-$600 which you pay upfront. The lender wants an unbiased professional opinion, not just your estimate or what Zillow says.

The appraiser visits your home, measures rooms, takes photos, and compares your property to recent sales of similar homes in your neighborhood. They're looking at square footage, condition, upgrades, and what comparable homes have sold for recently.

If the appraisal comes in lower than you expected, your maximum loan amount drops accordingly. Let's say you thought your home was worth $350,000 but the appraisal says $320,000. That $30,000 difference means you can borrow roughly $24,000 less than you planned.

Step 5: Navigate underwriting and respond quickly to requests

The underwriter reviews your entire application, including your income, debts, credit history, and the appraisal, to determine if you're a good risk. This is where the lender makes their final decision.

This process takes anywhere from a few days to three weeks depending on the lender's workload and how complicated your financial situation is. If they ask for additional documents, respond as quickly as possible. Every delay on your end extends the timeline.

Step 6: Close on the loan and receive your cash

Closing takes about an hour at a title company or attorney's office. You'll sign what feels like 100 pages of documents, though it's really more like 30-40. Bring a pen and be ready to sign your name repeatedly.

Your old mortgage gets paid off automatically from the loan proceeds. The remaining cash is yours, typically deposited directly into your bank account within one to three business days.

Before you show up to closing, review the closing disclosure document at least three days beforehand. Make sure the interest rate, loan amount, and closing costs match exactly what you were quoted. If something looks wrong, speak up immediately rather than discovering the issue after you've signed everything.

Making It Work With Your Conscious Spending Plan

A bigger mortgage payment goes straight into your fixed costs bucket of your Conscious Spending Plan, which should stay between 50-60% of your take home pay.

Let's say your take home pay is $6,000 per month and your current fixed costs are $3,300, which is 55%. Your new mortgage payment increases by $500, pushing fixed costs to $3,800 or 63%. That might not sound like a huge jump, but you've just eliminated your financial breathing room.

If this cash out refinance pushes your fixed costs above 60%, one unexpected expense or income dip puts you in trouble. You need that cushion for the inevitable surprises life throws at you.

This can actually free up money for guilt free spending if done right

Guilt free spending is 20-35% of your take home pay and covers everything you love: dining out, hobbies, entertainment, shopping, and anything that brings you joy without guilt or justification needed. This is the money that makes life actually enjoyable.

Imagine you're currently spending $900 per month making minimum payments on credit cards and personal loans. You use a cash out refinance to pay off all that debt, and your mortgage only increases by $450. You just freed up $450 per month that was going to debt payments.

That extra $450 can go straight into your guilt free spending bucket. Maybe that's $200 more per month for amazing dinners, $150 for a vacation fund, and $100 for hobbies you've been ignoring. You're improving your quality of life while also simplifying your finances.

Think long term about how this supports your Rich Life vision

Your Rich Life is your ideal life where you look at your finances, relationships, and daily experiences and think, "this is exactly what I want." It's completely personal and different for everyone.

Consider whether this decision brings you closer to your Rich Life in five years, or if you'll barely remember what you spent the money on. Here's what using a cash out refinance strategically looks like:

• Using the cash to eliminate high-interest debt creates breathing room in your budget and reduces financial stress every single month.
• Funding education or business ventures that increase your earning potential pays dividends for decades, not just years.
• Making strategic home improvements not only adds value to your property but also creates a space you genuinely love living in every day.
• Building an emergency fund protects you from spiraling into expensive debt when life throws inevitable curveballs your way.

If you're using it to fund a business that could change your career trajectory, that's moving toward something meaningful. But if you're borrowing money without a clear picture of how it improves your life in tangible ways, you're just moving numbers around. A cash out refinance is a powerful tool when used deliberately, and a dangerous trap when used carelessly.