How Cash Out Refinance Loans Work

Freddie Mac's benchmark 30-year fixed rate stood at 7.40% on October 15, 2026. A cash-out refinance replaces an entire mortgage with a bigger one, and it prices at or above that figure. For a homeowner whose current loan is cheaper, that means paying a higher rate on every dollar already owed in order to borrow a few new ones, which is why the product makes sense in only a narrow set of cases. This page explains how the loan works, how much equity the rules release, and how to run the one calculation that decides whether a cash-out refinance is worth pursuing.

A cash-out refinance pays off the existing first mortgage with a new, larger one and hands the borrower the difference as a lump sum at closing, as Money.com's lender roundup describes it. The difference comes out of equity, the share of the home's value not owed to a lender. How much can come out is governed by loan-to-value (LTV): the new loan divided by the appraised value. For a conventional loan on a one-unit primary residence, the cap is 80%. Fannie Mae publishes the limits in its Eligibility Matrix, and broker summaries of the August 5, 2026 matrix give 80% for one-unit primary residences.

Everything else follows from one feature. Because the new loan replaces the old one, the new rate applies to the whole balance, not just to the cash. A second lien such as a HELOC or a home equity loan leaves the first mortgage untouched and prices only the new money. A cash-out refinance prices all of it.

Take a borrower with $280,000 left at 6.25% who refinances at 7.5% to take out $50,000. Before a dollar of new money is counted, the old $280,000 now costs 1.25 percentage points more. That is about $3,500 of extra interest in the first year, paid on debt the borrower already had. That figure, and not the rate on the cash, is the first thing to know about any cash-out refinance.

The first calculation costs nothing and needs only a few documents already in a drawer. The loan itself comes later, and its main cost is closing costs. Bankrate puts those at 2% to 5% of the loan amount, or $6,000 to $15,000 on a $300,000 loan. Fortune's tracker and Money.com both stretch the range to 6%. Timing varies by lender. Money.com singles out Rocket Mortgage for a 21-day closing, which suggests that three weeks counts as quick.

The first real result is two figures: the most cash the rules allow, and what that cash costs once the repricing of the old balance is counted. Rates come first, because they set the second figure. On October 19, 2026, Fortune's tracker put the conventional 30-year refinance rate at 7.330%, and Bankrate had 7.58% (7.66% APR). Cash-out loans typically run 0.125 to 0.5 percentage points above standard refinances, according to Money.com, which puts a conventional 30-year cash-out somewhere around 7.5% to 7.8% on those figures. Lower prints exist. Navy Federal's rate sheet for the same day showed a conventional 30-year cash-out at 6.875% (7.049% APR), but that rate includes discount points and comes with a 1% origination fee. The worked example below uses 7.5%.

Reverse one input and the answer changes. If the same borrower's existing rate were 8.0%, refinancing to 7.5% would save half a point on $280,000, about $1,400 a year or $117 a month. The $9,900 in fees would then take roughly 85 months, a little over seven years, to recover. After that point, the cash would have come with a lower rate attached. So the only number that decides the question is the gap between the old rate and the new one, and in October 2026 that gap runs the wrong way for most people who bought or refinanced before rates climbed. The Mortgage Bankers Association's Joel Kan put it plainly in the October 7 applications survey: "Very few homeowners have an incentive to refinance at these rates."

The strongest case for the cash-out is that it leaves one fixed payment instead of a first mortgage plus a second lien, and the second lien may carry a variable rate. That is a real advantage. A fixed payment cannot rise, and a single loan means a single servicer and a single closing. But in the example, the price of that certainty is about $3,500 a year in extra interest on the existing balance, before fees. Peace of mind at that price is a luxury purchase, and it should be judged as one.

Quoting the rate on the cash and ignoring the balance. The sign is a calculation that compares 7.5% with a credit card rate and stops there. The fix is step 4: price the whole payoff at the new rate and add that cost to the cost of the cash.

Rolling closing costs in without noticing them. Adding fees to the loan makes them disappear from the closing table, not from the bill. AmeriSave estimates that financing $8,000 of costs at 7% adds about $11,500 of interest over 30 years. The sign is a loan amount on the Loan Estimate larger than payoff plus cash. The fix is to price both versions, paid upfront and financed, before choosing.

Counting on last year's home value. Fox Business reported prices down 1.4% year over year in its October 8 coverage. A lower appraisal lowers the 80% ceiling dollar for dollar. On a $450,000 home, every $10,000 the value falls removes $8,000 of borrowing room. The sign is an appraisal below the estimate. The fix is to run step 1 with a conservative value from the start.

Applying before the loan is old enough. Fannie Mae's Selling Guide requires 12 months between the note date of the existing mortgage and the note date of the new one, plus 6 months on title. The exception is delayed financing for documented all-cash purchases. The sign is a lender declining a file that otherwise qualifies. The fix is to check the note date before paying for an appraisal.

Comparing rates instead of APRs. Navy Federal's lower cash-out rates include discount points, and its 1% origination fee can be waived only by adding 0.25 points to the rate. Bankrate's 30-year average was 7.58% as a rate but 7.66% as an APR. The APR, which counts fees as well as interest, is the figure to compare across lenders.

If the first calculation shows the existing rate is below today's cash-out pricing, the next step is to price the same $50,000 as a second lien that leaves the first mortgage alone. If the existing rate is above today's pricing, the cash-out may be the cheaper route, and the break-even in months is the figure to check. Between a HELOC and a fixed home equity loan, the choice turns on how the money will be drawn and repaid, a question covered in the post on HELOC versus home equity loan pricing. Borrowers with VA or FHA eligibility should run their numbers separately. Fortune's October 19 figures put the VA 30-year refinance at 6.882% and FHA at 6.691%, both below the conventional rate, though USDA loans do not permit cash-out refinancing at all.

Where the math does favor a cash-out, the final input is a real rate rather than a national average. Published rates on the same day ranged from 6.875% to more than 7.5%, depending on lender and fee structure. The useful comparison is several Loan Estimates side by side, judged on APR, fees, and whether closing costs are paid upfront or financed. A spread of half a point on $339,900 is worth about $1,700 a year in interest, which is more than most borrowers would save by shopping for anything else in the house.