What is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the difference in cash. For example, if your property is worth $400,000 and you owe $250,000, a cash-out refinance at 75% LTV gives you a new $300,000 loan and $50,000 in cash (minus closing costs). You now have a higher mortgage but liquid capital to deploy.
Cash-out refinances are distinct from rate-and-term refinances, which only change the rate or term without extracting equity. Lenders treat cash-out refinances differently: they typically require higher credit scores, lower LTV maximums (75% for investment properties vs. 80% for rate-and-term), and charge slightly higher rates.
Cash-out refinance requirements
- Owner-occupied: Up to 80% LTV
- Investment property: Up to 75% LTV (some lenders cap at 70%)
- Credit score: 680+ for investment properties, 620+ for primary residence
- Seasoning: Most lenders require 6-12 months of ownership before allowing cash-out
- Closing costs: 2-5% of the new loan amount
Cash-out refinance vs. HELOC
Both access equity, but differently. A cash-out refinance provides a lump sum at a fixed rate with a single mortgage payment. A HELOC provides a revolving credit line at a variable rate with a separate payment from your first mortgage. Cash-out refinances are better for large, one-time capital needs. HELOCs are better for ongoing, flexible access to smaller amounts.
Cash-out refinance and investors
Cash-out refinances are central to the BRRRR strategy. After buying, rehabbing, and renting a property, the investor refinances to pull out invested capital and redeploy it into the next deal. The key is creating enough value through renovation that the post-rehab appraisal supports a loan large enough to recover your investment. Ideally, the rental income covers the new, larger mortgage payment and still produces positive cash flow.