The Quick Read: A cash-out refinance does not create a down payment. It replaces your current mortgage with a larger one and hands you the difference as cash. The cash you can walk away with is the new loan, minus the payoff and the closing costs. Conventional programs cap the new loan at 80% of the home’s value on a one-unit primary residence, so at least 20% of the value stays in the home. Whether that cash works as a down payment on something else depends on timing, occupancy, and the next loan’s rules. All figures are subject to lender guidelines and full file review.
Key Takeaways
- A refinance has no down payment. It resets your loan balance and your equity cushion.
- Conventional cash-out on a one-unit primary home reaches 80% LTV. That is the loan-to-value ratio, the new loan divided by the home’s appraised value.
- Two-to-four-unit primary homes cap at 75%.
- Closing costs can be rolled into the loan, but they shrink your net cash.
- Two clocks apply: the loan you are paying off must be at least 12 months old, and you must have been on title for 6 months, with named exceptions.
- Cash from the refinance can be used for any purpose under agency rules, but the next lender will ask where your down payment came from.
What Does “Down Payment Created” Actually Mean?
The phrase points at one of three questions. The first is how much equity must stay in the home. The second is whether the cash can fund a down payment on a different purchase. The third is whether you can get back cash you put into a recent all-cash purchase.
Each has a different answer, and they are easy to blur together.
A cash-out refinance pays off your existing first mortgage with a new first mortgage on the same property. You keep what is left. Fannie Mae’s cash-out refinance rules allow the proceeds to be used for any purpose. That includes paying off other liens, financing closing costs, and taking equity out as cash.
So “down payment created” is shorthand. Here it means net cash in hand after the old loan and the costs are paid. Lendmire’s cash-out refinance programs are built around this same equation. Wholesale lenders differ on the details, but the arithmetic is the same.
The Formula, Step by Step
The cash you receive comes from three numbers. Write them down in this order.
1. Maximum new loan. Take the home’s appraised value and multiply by the LTV cap for your occupancy and unit count.
2. Subtract the payoff. That means your current first mortgage, plus any second lien the new loan must clear.
3. Subtract the costs you finance. Closing costs, points and prepaids can be rolled in. Every dollar rolled in comes out of your net cash.
What is left is your net cash. It is an upper limit. A low appraisal, a smaller loan request, or a lender’s extra rules can only lower it.
Here is how the formula behaves on a one-unit primary home. These are modeled assumptions, expressed as a percentage of the home’s value, and not market data. The table ignores closing costs, so subtract those from every row.
| Existing loan balance | Cash before costs at 80% cap | Equity left in home |
|---|---|---|
| 40% of value | 40% of value | 20% |
| 60% of value | 20% of value | 20% |
| 75% of value | 5% of value | 20% |
| 80% or more of value | None | Cap already reached |
Notice the last column. Equity left in the home stays at 20% in every row, because the cap sets the cushion. Your balance only decides how much cash sits above it.
On a two-to-four-unit primary residence, the cap drops to 75%. The same table would show 25% of value as the cushion. A 75% balance there produces no cash at all.
Working Backward From Your Target
Most readers start with a goal, not a balance. They want a specific amount in hand. So run the math in reverse.
First, decide what the cash must cover. If it is a down payment on another home, occupancy sets the percentage. Across the programs these files go to, a primary residence purchase reaches 95% LTV, so 5% down. The first-time-buyer programs reach 97%. A second home reaches 90%, so 10% down. In one sentence: occupancy decides leverage, and less leverage means more cash needed. Lendmire’s piece Cash-Out Refinance to Buy a Second Home: Using Your Primary Residence’s Value for the Down Payment takes that route in full. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Second, add the closing costs on the purchase. Down payment alone is not the target.
Third, add the closing costs on the refinance. They reduce what the refinance hands you.
Fourth, add your payoff. Your new loan must be at least the payoff plus the cash you need plus the refinance costs. Then divide that new loan by your home’s value. If the answer is above the cap, the plan does not fit. You need a smaller cash target, a cheaper purchase, or a different source.
That last test is the useful one. It tells you before you apply whether the numbers can work.
What Limits Your Cash
Four things decide the ceiling.
The leverage cap. One-unit primary homes reach 80% LTV on conventional cash-out. The Fannie Mae Eligibility Matrix lays out the cap by occupancy, unit count and transaction type. Second homes and multi-unit properties sit at 75% on the programs these files use. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
The appraisal. Value drives everything. A cash-out loan uses a full valuation. If the appraised value comes in lower than you hoped, the loan cap shrinks with it. Your cash shrinks twice: once from the lower cap, and again because your payoff does not change.
Closing costs. These can be financed, which raises the loan balance and the LTV. Since the cap is fixed, every closing-cost dollar financed in is a dollar less in your pocket.
Your file. Credit score, income, and debt ratios still apply. The wholesale conventional programs generally start at a 620 decision score, and the automated finding governs most files. Total ratios top out at 50% under automated underwriting. Manual underwriting is tighter. Some lenders set higher floors than these.
Mortgage insurance matters at higher leverage. It is required above 80% LTV. You can ask to cancel it at 80% of the original value with good payment history, and the servicer must end it automatically at 78%. One wholesale lane reaches 89.99% LTV with no mortgage insurance. It requires a 680 score, a 50% ratio ceiling, a thirty-year fixed rate, a primary residence and a conforming balance. It carries its own six months of seasoning. It is not written in Texas, where a cash-out on the homestead is capped by the state constitution at the agency figure. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
The Timing Rules
Seasoning is the waiting period a lender requires before a refinance. For a conventional cash-out, two clocks run at once.
The first is the age of the loan being paid off. It must be at least 12 months old, measured from the old note date to the new note date. Fannie Mae set this in Selling Guide Announcement SEL-2023-01.
The second is title. At least one borrower must have been on title for 6 months before the loan funds. The archived Fannie Mae version of the cash-out rule describes this and its exceptions. Confirm the current guide, since archived pages can be superseded.
Equity alone does not clear either clock. A recent loan note date can block a cash-out refinance even when the home has plenty of equity.
Named exceptions exist. Delayed financing, inheritance and legal-award situations are exempt from the title clock. A co-owner buyout under a legal agreement is exempt from the 12-month loan age. Paying off a second lien of any age is allowed inside a cash-out refinance.
Then there is the sequencing problem. Suppose you sign a purchase contract before the refinance closes. The cash is not in your account yet, and a purchase closing date does not wait on a refinance. Plan the refinance to fund first, with enough room for delays, or choose a different source for the gap.
Where the General Rule Breaks
The 80% rule is a conventional rule. Many edge cases change it.
Delayed financing. This is the closest thing to getting your down payment back. If you bought with cash within the last six months, an arm’s-length purchase with documented source of funds, such as bank statements, can still qualify for cash-out. If the purchase was funded with a loan not secured by the home itself, such as a HELOC on another property, the proceeds must go toward paying that debt.
Free and clear homes. A home with no mortgage still counts as cash-out. Any new first mortgage on a debt-free home is cash-out under Fannie Mae’s rules, whatever you plan to do with the money.
Limited cash-out. A rate-and-term refinance, also called limited cash-out, pays off the existing first mortgage, the closing costs and a purchase-money second lien. Only incidental cash comes back. Leverage reaches 95% LTV on a one-unit primary residence, and 97% where the existing loan is agency-owned and the first-time-buyer program allows. It does not create a down payment. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Government loans. The FHA Streamline and the VA IRRRL are no-cash products for loans you already have. The VA says on its IRRRL page that the borrower may not receive any cash from the proceeds. FHA and VA cash-out loans exist too, and each sets its own leverage limit. HUD Mortgagee Letter 2019-11 reduced FHA’s cash-out ceiling, so FHA cash-out sits lower than FHA’s other refinance lanes.
Temporary buydowns. A loan with a temporary interest-rate buydown is ineligible as a cash-out.
Manufactured homes. These carry different leverage and eligibility, and some single-width homes fall outside standard cash-out. Check the matrix for the specific home.
Homes listed for sale. Agency rules have excluded properties still listed at funding. Confirm the current rule before you plan around it.
Occupancy. Buying a new home and moving in right after cashing out of the old one can breach the owner-occupancy terms of the refinance. Many borrowers miss this. The old home must be your residence when you close. If you plan to move out and rent it, talk through that before applying.
How the New Payment Affects Your Next Loan
The refinance does not end at the closing table. It feeds the next application.
The new, larger mortgage payment on your primary home counts in your debt-to-income ratio, the share of your monthly income that goes to debts. The next lender adds that payment to everything else you owe. A bigger refinance leaves less room for the new purchase loan.
The paper trail matters too. A lender reviewing the purchase will ask where your down payment came from. Cash drawn from a refinance is documented by the closing disclosure and the deposit into your account. Save both.
Finally, the cash must clear your account in time. Cash that moves through several accounts creates more questions. Keep it simple and traceable.
Cash-Out Refinance vs. the Alternatives
Cash-out is one of several ways to reach equity. The table compares them side by side.
| Option | How it works | Best when |
|---|---|---|
| Cash-out refinance | Replaces your first mortgage with a larger one | You need a large lump sum |
| HELOC | A second lien with a revolving credit line | You need flexible, as-needed funds |
| Home equity loan | A second lien paid out as one lump sum | You want to keep your first mortgage as is |
| Savings | Cash you already hold | You have enough on hand |
| Waiting | Delay the purchase | Eligibility clocks or equity are short |
A cash-out refinance resets your whole loan. The rate and terms change on the entire balance, not only the new cash. A second lien leaves the first mortgage untouched. Lendmire’s comparison of a smaller HELOC against a larger cash-out refinance walks through that tradeoff.
The CFPB’s guide to using home equity points out that the payment may rise and the payoff period may lengthen. It also says lenders typically require you to keep some equity in the home. That matches what you see on every cash-out file.
What Does the Borrower’s Decision Look Like?
Picture a homeowner with a primary residence, a balance well under the cap, and a purchase in mind. The decision runs through a short list of questions.
- Do both seasoning clocks clear?
- Does the formula produce enough net cash after costs?
- Will the larger payment still leave room for the next loan’s debt ratio?
- Is the cash needed once, or on and off over time?
- Does the old home stay your residence?
If the answers are yes, yes, yes, one lump sum, and yes, a cash-out refinance fits. If the cash is needed in pieces, a HELOC may suit better. If the clocks are not met, waiting or using savings may be the answer.
Risk deserves a plain sentence. Your home secures the new loan. A bigger balance means a bigger loss if payments become hard to make. The CFPB has warned that turning other debts into mortgage debt can put the home at risk if payments become unsustainable. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Cash-out refinance: a new, larger first mortgage that pays off the old one and gives you the difference as cash.
LTV (loan-to-value): the loan amount divided by the home’s appraised value.
Seasoning: the waiting period a lender requires on a loan or on your ownership before a refinance.
Limited cash-out refinance: a refinance that pays off the loan and costs and returns only a small amount of cash.
Net proceeds: the cash left after the payoff and closing costs.
Delayed financing: an exception that lets you take cash out soon after an all-cash purchase.
Frequently Asked Questions
Can I use cash-out proceeds as a down payment on another home?
Yes, agency rules allow cash-out proceeds for any purpose. The next lender will still check your debt ratios and ask for a paper trail. If the home is a second home, the purchase reaches 90% LTV, so the cash must cover 10% plus costs. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
What happens if the appraisal comes in low?
Your cash drops. The loan cap is a percentage of appraised value, so a lower value lowers the maximum loan. Your payoff does not change, so the shortfall comes straight out of your net proceeds.
Does a paid-off home count as cash-out?
Yes. Any new first mortgage on a home with no existing mortgage is classified as cash-out, even if you take no cash. The 80% leverage cap on a one-unit primary home applies. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
Can I use a VA or FHA loan to pull cash?
The VA IRRRL and FHA Streamline cannot pay you cash. They exist to refinance an existing government loan. VA and FHA also have their own cash-out loans with separate rules, and VA cash-out loans must pass a net tangible benefit test.
Will a cash-out refinance help me avoid mortgage insurance on the next purchase?
It can help, since a larger down payment lowers the next loan’s LTV. Mortgage insurance is required above 80% LTV on conventional purchases. A bigger down payment from the refinance cash may bring the purchase under that line. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Next Step
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Lendmire is a mortgage broker, not a lender. Nothing here is a commitment to lend, and every program figure is subject to lender guidelines and full file review.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Get Started
Ready to find the right loan for you?
In about 30 seconds you can review financing options available for your home or investment property. No commitment required.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Fannie Mae Selling Guide B2-1.3-03 Cash-Out Refinance Transactions
2. Fannie Mae Eligibility Matrix
4. Fannie Mae Selling Guide B2-1.3-03 (archived version)
5. VA: IRRRL
6. HUD Mortgagee Letter 2019-11
7. CFPB guide to using home equity
This article is part of Lendmire’s Refinance series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Should a Homeowner With a Low First Mortgage Skip the Cash-Out Refinance? · Can a Builder Use Mixed Deposits to Cash Out a Paid-Off Home? · How to Cash-Out Refinance a Luxury Home After a Company Sale
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.