Cash-out refinance: how much can you take out and what it costs

The short answer

A cash-out refinance replaces your mortgage with a bigger one and pays you the difference in cash. How much you can take out depends on three things: what your home appraises for, the loan-to-value limit for your loan program (loan-to-value, or LTV, is your loan amount divided by your home's value), and how much you owe today.

For a conventional loan on a one-unit home you live in, Fannie Mae caps a cash-out refinance at 80% of the value. FHA also caps it at 80%. A VA cash-out refinance can go up to 100% of the value VA sets for your home. Second homes, rentals and two to four unit homes have lower caps, shown in the table below.

The cash you actually receive is that cap, minus every loan being paid off, minus any closing costs you choose to roll into the new loan. A cash-out refinance is not the only way to use equity. Our cash-out refinance page at https://rateverdict.com/cash-out-refinance walks through common uses, and our comparison of a cash-out refinance and a HELOC is at https://rateverdict.com/learn/cash-out-refinance-vs-heloc.

Cash-out limits by loan type and property

These limits come from the agencies that set the rules for most U.S. mortgages. They are maximums. A lender can set a lower limit, and your own file (credit, income and debts) still has to qualify. For the credit score rules by loan type, see https://rateverdict.com/blog/credit-score-needed-for-mortgage.

For conventional loans the cap applies to every loan on the home, not just the new first mortgage. Fannie Mae measures it three ways: LTV, CLTV (combined loan-to-value, which adds any second mortgage you keep) and HCLTV (which counts the full line amount of a home equity line of credit you keep). If you keep a home equity line, it uses up part of that cap.

How to work out your own number

1. Start with a realistic value. The lender will order an appraisal, and the limit is based on that value, not on an online estimate. Example numbers, for illustration only: a home that appraises at $350,000.
2. Multiply by your program's limit. At 80%, $350,000 times 0.80 is $280,000. That is the largest total loan amount allowed against the home.
3. Subtract every lien that has to be paid off or that stays in place. If you owe $200,000 on your first mortgage and nothing else, $280,000 minus $200,000 leaves $80,000.
4. Subtract closing costs you plan to roll in. If you finance your closing costs, they come out of that $80,000 room. If you pay them in cash, your loan room stays the same but your pocket does not.
5. Ask yourself how much you actually need. The maximum is a ceiling, not a target. Every dollar you take out is a dollar you pay interest on for as long as the loan lasts.

Timing rules that can stop a cash-out refinance

• Conventional (Fannie Mae): at least one borrower must have been on title for six months before the new loan funds, and a first mortgage being paid off must be at least 12 months old, measured note date to note date. There are exceptions for inherited property, a home awarded in a divorce, and "delayed financing" for a home you bought with cash.
• Conventional reserves: for loans run through Fannie Mae's automated system, if your debt-to-income ratio (your monthly debts divided by your monthly income) is over 45%, you need six months of reserves, meaning savings left over after closing.
• FHA: at least one borrower must have owned and lived in the home as their principal residence for the 12 months before the FHA case number is assigned. You must have made every mortgage payment within the month due for the past 12 months (or since you got the loans, if shorter), and the current loan needs at least six months of payments. Income from a co-borrower who will not live in the home cannot be used to qualify.
• VA: you must live in the home you are refinancing. If the loan you are paying off is already a VA loan, the new loan may not be guaranteed until the later of 210 days after your first payment or the date your sixth payment is made.
• Listed for sale: Fannie Mae requires the home to be off the market by the day the new loan funds.

What a cash-out refinance costs

A cash-out refinance has the same closing cost sections as any refinance, laid out on the Loan Estimate, the standard form every lender must give you after you apply. Our guide to the cost to refinance in Michigan at https://rateverdict.com/blog/cost-to-refinance-in-michigan walks through each section. On top of those, a few costs are specific to taking cash out.

Pricing. Fannie Mae applies a loan-level price adjustment (an extra pricing charge set by Fannie Mae, based on your LTV and credit score) to many cash-out refinances, on top of any other adjustments. You see it as either a higher rate or a larger cost for the same rate, so compare a cash-out quote to other cash-out quotes, not to a plain refinance.

VA funding fee. VA charges a one-time funding fee on a cash-out refinance, figured as a percentage of the loan amount. The percentage is set in VA's published chart and is higher if you have used your VA home loan benefit before. You do not pay it if you receive VA compensation for a service-connected disability, among other exemptions. The fee can be financed, but any part that would push the loan above 100% of the reasonable value must be paid in cash.

FHA mortgage insurance. An FHA cash-out loan carries FHA mortgage insurance premiums set by HUD, both up front and yearly. Your Loan Estimate shows the amounts for your loan.

Interest on a bigger balance. The largest long-term cost is not on the closing statement. You pay interest on the cash you take out, and on any costs you roll in, for as long as you keep the loan. The Loan Estimate's page 3 shows the Total Interest Percentage and the APR (annual percentage rate, the yearly cost of the loan including certain fees) so you can compare offers.

Michigan and Texas rules worth knowing

Michigan. A refinance mortgage, cash-out or not, is exempt from Michigan state and county transfer tax because it is a written instrument given as security (MCL 207.526(d) and MCL 207.505). Recording the new mortgage is a flat $30 per document at the register of deeds (MCL 600.2567), though a charter county may set its own schedule. Taking cash out also does not uncap your property taxes: taxable value resets on a transfer of ownership, and a mortgage is excluded (MCL 211.27a). Our guide to Michigan property tax uncapping is at https://rateverdict.com/blog/michigan-property-tax-uncapping.

Texas. Cash-out loans on a Texas homestead follow Section 50(a)(6) of Article XVI of the Texas Constitution. The new loan plus every other lien on the home cannot exceed 80% of fair market value, the loan cannot close before the 12th day after the later of your application or the required notice, and you generally cannot close another 50(a)(6) loan within one year of the last one.

Every state. For a refinance of your principal home that adds new money, federal law gives you a right to cancel until midnight of the third business day after closing (12 CFR 1026.23), and the lender may not release the loan money, other than into escrow, until that window ends. Plan on the cash arriving a few business days after you sign.

See today's rate for your scenario

The cash you can take out is half the decision. The other half is the rate and cost of the new loan. The live table at https://rateverdict.com/rates prices a cash-out refinance for your own scenario, with the APR and the dollar cost or credit beside every rate, priced against dozens of lenders with no sign up. For Michigan, today's table is at https://rateverdict.com/mortgage-rates/michigan.