The Quick Read: A conventional cash-out refinance replaces your current first mortgage with a new, larger one and pays you the difference. On a one-unit primary residence, the new loan generally tops out at 80% of the home’s value, subject to lender guidelines and full file review. The cash is yours to use as you see fit, but the whole balance resets to new terms.
Key Takeaways
- The new loan pays off your old first mortgage, then hands you what is left after costs.
- On a one-unit primary home, the cap is typically 80% of value. On two- to four-unit homes and second homes, it is 75%.
- The mortgage being paid off generally needs to be at least 12 months old, and you need to have been on title for 6 months.
- Credit, debt-to-income ratio, and the appraisal all shape the outcome.
- Cash-out is not a HELOC. It replaces your first mortgage rather than sitting behind it.
What Is a Conventional Cash-Out Refinance?
It is a new first mortgage that pays off your existing one and returns the leftover equity as cash. “Conventional” means the loan follows Fannie Mae or Freddie Mac guidelines rather than FHA or VA rules. Lendmire is a mortgage broker, so it arranges these loans through wholesale lenders rather than lending directly.
Fannie Mae’s Selling Guide lists the acceptable uses: paying off the existing first mortgage, paying off other liens, financing closing costs and prepaids, and taking equity out for any purpose. That last phrase matters. The agencies don’t ask you to justify the spending. The lender does look hard at the rest of your file, though.
Key Terms Defined
Equity: The home’s value minus what you owe on it.
LTV (loan-to-value): The new loan balance divided by the home’s appraised value, shown as a percentage.
Seasoning: How long you have owned the home or held the loan you are paying off.
DTI (debt-to-income): Your monthly debts, including the new mortgage payment, divided by your monthly gross income.
Lien: A legal claim on your home that secures a debt.
Rate-and-term refinance: A refinance that pays off the old loan and costs, with only incidental cash back.
Appraisal: A professional opinion of the home’s value, used to set the LTV.
How Is a Cash-Out Refinance Underwritten, Step by Step?
Underwriting follows a predictable sequence: an equity check, an application run through automated underwriting, an appraisal, title work, and closing. Each step answers a different question about the home or the borrower.
Step 1: The equity check. Take the appraised value and multiply by the LTV cap for your occupancy and unit count. From that ceiling, subtract the payoff on your first mortgage, any other liens being paid off, and any costs you roll in. What remains is the most cash you could receive. It is almost always less than people expect.
Step 2: Application and automated underwriting. The lender runs your file through Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Product Advisor. Both weigh credit score, LTV, DTI, reserves, property type, and loan type. Across the wholesale programs Lendmire places files with, the conventional lanes generally start at a 620 decision score, and the automated finding governs most files. The total ratio ceiling is 50%. A manually underwritten loan runs tighter, at 36% or 45% depending on reserves and score.
Step 3: Disclosures. You receive a Loan Estimate early on and a Closing Disclosure before closing. Compare the two line by line. The CFPB’s Your Home Loan Toolkit notes that charges for services you can shop for generally cannot rise by more than 10% over the final Loan Estimate.
Step 4: Appraisal. A full appraisal is the usual path. Fannie Mae’s “value acceptance” lets some lenders skip it when the automated system offers that option, but whether it applies to a cash-out file is the lender’s call. Plan on an appraisal.
Step 5: Title and payoff. Title work confirms who owns the home and what liens exist. The payoff history shows your existing loan’s note date, which proves the seasoning requirement.
Step 6: Closing and the waiting window. On a primary residence, federal rules give you three business days to cancel after closing. Funds are normally released after that window ends. More on this below.
How Much Can You Actually Borrow?
On a one-unit primary residence, the conventional cash-out cap is 80% of the home’s value. On two- to four-unit primary residences, second homes, and investment property, it is 75%. Fannie Mae’s Eligibility Matrix and Freddie Mac’s Guide section 4203.1 both show the 80% figure for a one-unit primary home. Compare that with a plain purchase or no-cash-out refinance, where Freddie Mac allows up to 95% on the same property.
That gap is the cost of taking cash. The agencies leave a cushion of equity untouched.
Here is the arithmetic in words. Say your home is worth a round number and you owe about half of it. At an 80% cap, the new loan can cover your payoff plus roughly another 30% of the home’s value, before costs. Subtract financed closing costs and any liens you pay off, and the cash in hand shrinks further. The CFPB’s guide on using home equity says plainly that none of the home-equity options lets you convert 100% of your equity to cash.
One wholesale lane goes further. On a thirty-year fixed rate, primary residence, conforming balance, a score of 680, and a 50% ratio, there is a path reaching 89.99% LTV with no mortgage insurance. It carries its own six months of seasoning, and it is not written in Texas, where state law caps homestead cash-out at the agency figure. Whether you fit it depends on the full file. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
What Is the Seasoning Rule?
Seasoning is a waiting period. Under the conventional programs, the first mortgage being paid off must be at least 12 months old, measured note date to note date, and you must have been on title for 6 months. Exceptions exist.
- Delayed financing: A borrower who bought with cash may refinance without waiting out the full period, if the original purchase was arm’s-length and documented.
- Inheritance and legal award: Title acquired this way can qualify without the six-month wait.
- Entity ownership: Freddie Mac counts time held in an LLC or partnership in limited situations, if the borrower controlled it and title moves to the borrower by the note date.
Fannie Mae’s cash-out guidelines also allow paying off subordinate liens of any age. So a second mortgage you took out last month can be paid off in the same transaction.
Who Qualifies?
Qualifying comes down to five things: equity, credit, DTI, seasoning, and the property itself. No single number settles it.
| Factor | What the lender looks at |
|---|---|
| Equity | Value minus payoff, held to the LTV cap |
| Credit | Decision score; pricing and available terms vary by lender, borrower profile, property type, and full underwriting review |
| DTI | Total monthly debts including the new payment; 50% automated ceiling |
| Seasoning | 12 months on the loan, 6 months on title |
| Property | Unit count, occupancy, and condition |
Higher scores and larger equity cushions tend to widen your options and affect pricing. Fannie Mae applies loan-level price adjustments to certain cash-out loans based on LTV and credit score. These are priced into the loan terms rather than shown as a separate line, which is why two borrowers with the same balance can see different costs. Lendmire can’t quote that pricing here, and it shifts, so ask for a Loan Estimate.
Reserves matter too. The Eligibility Matrix ties reserve and score factors together, particularly on manually underwritten files. A mortgage broker can walk through that grid with your numbers.
Cash-Out vs. Rate-and-Term vs. a HELOC
These products get confused constantly. They solve different problems.
| Feature | Cash-out refinance | Rate-and-term refinance | HELOC or home equity loan |
|---|---|---|---|
| What happens to your first mortgage | Replaced | Replaced | Stays in place |
| Cash at closing | Yes | Incidental only | Yes (loan) or draw (line) |
| Typical LTV cap, one-unit primary | 80% | 95% | Varies by lender |
| Mortgage insurance above 80% | Not applicable at the cap | Required | Not applicable |
| Impact on existing rate | Whole balance resets | Whole balance resets | None on the first loan |
The rate-and-term lane pays off your first mortgage, closing costs, and a purchase-money second lien. If you only want a different term or monthly structure, it reaches higher leverage. If you want cash, cash-out is the tool. If your current first mortgage is one you want to keep, a second-lien product leaves it alone. The CFPB home equity guide compares these side by side.
Where the General Rule Breaks
The 80% rule and the seasoning rules cover most files. A few situations behave differently.
Free-and-clear homes. If you own the home with no mortgage, a new first mortgage is treated as cash-out. The loan still follows the cash-out limits.
Buying out a co-owner. Freddie Mac handles a buyout, such as in a divorce, as a special-purpose cash-out under its own guide section.
Student loans. Fannie Mae waives the cash-out price adjustment when the transaction meets its student-loan cash-out requirements. Check the current guide before counting on it.
Ineligible features. Fannie Mae’s older guide lists several: temporary interest-rate buydowns, HomeStyle Energy loans, paying off an installment land contract, and cases where a borrower with enough equity chooses not to pay off a PACE loan. If your home has a PACE lien, say so early. Guides change, so confirm the current version.
Occupancy. Second homes and investment properties carry the 75% cap rather than 80%. That is the one-sentence answer for anyone asking about a property they don’t live in.
Texas. Texas has its own constitutional rules for cash-out on a homestead, and the wholesale 89.99% lane is not written there.
Credit events. After a chapter 7 discharge the agencies set a four-year wait. After a foreclosure it is seven years, and after a short sale or deed-in-lieu it is four. Documented extenuating circumstances can shorten these.
What Does Cash-Out Do to Your Monthly Budget?
It usually raises your loan balance and resets your term, which can raise the payment and lengthen the payoff. The CFPB’s home equity guide notes that a cash-out refinance may extend the time it takes to pay off your home, and that loans commonly run 30 years.
Think of it this way. If you refinance a loan you were five years into, you are starting the amortization clock over. Even if the new payment feels similar, you may pay interest for longer. And you are replacing your whole existing balance, not just the cash portion, so if you hold a low-rate first mortgage, the new terms apply to every dollar.
Your DTI includes the new payment. Using proceeds to pay off other debts can lower your ratio, which is one reason some borrowers choose this route.
Costs: Pay Now or Roll Them In?
You can pay closing costs at closing or finance them into the loan. Fannie Mae lists financed closing costs, points, and prepaids as acceptable uses of a cash-out. Financing keeps cash in your pocket today but increases the balance, and your LTV rises with it.
A word on marketing language: offers that advertise “no closing costs” typically build those costs into the loan balance or the pricing rather than eliminating them. Read the Loan Estimate to see where they landed.
How Much Should You Take?
Take what you need, not what the cap allows. Work backward from the purpose: a specific repair bill, a debt payoff, a down payment on another home. Then add costs.
The CFPB’s research on cash-out borrowers found the most common reason was paying off other bills or debts, chosen by more than half of respondents each year from 2014 to 2019 and more than 40% in 2020 and 2021. Home repairs came second. The same report cautions that paying non-mortgage debts with mortgage debt can increase foreclosure risk, since unsecured balances become secured by your home. It also found credit scores improved sharply after refinancing, then gradually slipped while staying above pre-refinance levels.
That pattern deserves respect. Clearing cards helps only if the balances don’t return.
| Fits well | Think twice |
|---|---|
| Funding repairs that protect the home’s value | Covering discretionary spending |
| Consolidating debt with a plan to avoid new balances | Short time in the home before a planned move |
| Paying off a costly second lien | Giving up a first mortgage you value |
| Buying out a co-owner | Borrowing the maximum without a use for it |
Common Myths
“It’s a second mortgage.” It replaces your first mortgage. A second lien is a different product.
“I can borrow all my equity.” The LTV cap exists to prevent that.
“A lower rate means a lower payment.” A bigger balance and a reset term can push the payment up even when the rate falls.
“Getting a Loan Estimate means I’m approved.” It doesn’t. Approval comes from the lender’s review of the whole file.
“Rescission undoes everything.” The right of rescission cancels the new loan and leaves your original debt in place. The CFPB explains that waiving it is allowed only in a bona fide personal financial emergency.
“Because I can spend it on anything, qualifying is easy.” The use is unrestricted. The lender’s file review is not.
Pre-Application Checklist
Gather these before you talk to a broker:
- Your current mortgage statement and the note date
- A rough sense of your home’s value and any other liens
- Recent pay documentation and a list of monthly debts
- A clear figure for how much cash you need and why
- Any PACE, solar, or land-contract obligations tied to the home
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
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. Reach the team at 828-256-2183, or read Lendmire’s piece Conventional Cash-Out Refinance for Homeowners Who Compare Program Terms, which goes deeper on the comparison. Program details on cash-out refinance programs are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Frequently Asked Questions
Can I do a cash-out refinance on a home I own outright?
Yes. A new first mortgage on a home with no existing loan is treated as a cash-out refinance, so the cash-out leverage cap applies. On a one-unit primary residence that is typically 80% of value. Title work still confirms ownership, and the six-month title requirement and the lender’s file review still apply.
Is the money taxable or restricted in how I use it?
Conventional cash-out proceeds carry no restriction on use under the agency guides. Tax treatment can depend on your situation, so speak with a qualified tax professional. The lender’s concern is your ability to repay, not how you spend the cash.
Do I always need an appraisal?
A full appraisal is the usual path for a cash-out. Fannie Mae’s value acceptance can remove it in some cases when the automated system offers it, but the lender decides whether that applies. Don’t count on a waiver.
When can I actually use the money?
On a primary residence, federal rules give you three business days to cancel after closing, and the funds are normally disbursed after that window. If the lender never starts the clock correctly, the right can last up to three years. Second homes and investment properties are generally outside that rescission rule.
What happens if my existing loan is under 12 months old?
Generally you would need to wait, because the first mortgage being paid off must be at least 12 months old. Subordinate liens can be paid off at any age. If you bought with cash, the delayed-financing exception may let you refinance sooner.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For the program’s current guidelines, see conventional loan programs.
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References
1. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
2. CFPB’s Your Home Loan Toolkit
3. Fannie Mae Eligibility Matrix
5. CFPB: Using Home Equity guide
6. CFPB’s research on cash-out borrowers
7. CFPB: Can I waive my right to rescind?
This article is part of Lendmire’s Conventional Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: How to Apply for a Conventional Cash-Out Refinance Step by Step · Can You Cash Out Refinance a Vacation Home Under Conventional Rules? · Bank vs Wholesale Lender for a Conventional Cash-Out Refinance
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.