The Quick Read: It depends on your equity, your plan, and how stable your job is. A cash-out refinance fits a homeowner with real equity who is comfortable carrying a larger mortgage on the home they keep. A 401(k) loan fits a buyer whose plan allows loans and who has no home equity to tap. Each one moves risk to a different place: the first puts your house behind the debt, the second puts your retirement and your paycheck behind it.
Side-by-Side
The table below shows how the two options differ on the points a lender or plan administrator actually checks. Program figures reflect typical wholesale conventional guidelines and are subject to lender guidelines and full file review. This is not a commitment to lend.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.40% as of October 15, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
| Factor | Cash-Out Refinance | 401(k) Loan |
|---|---|---|
| Source of funds | Equity in a home you own | Your own vested plan balance |
| Leverage cap | 80% LTV on a one-unit primary home | Lesser of 50% of vested balance or $50,000 |
| Credit floor | Wholesale conventional starts at a 620 score | Set by the plan; the plan administrator’s terms apply |
| Mortgage insurance | Not applicable at the 80% cap | Not applicable |
| Occupancy | Rules set by the home you refinance | Not tied to any property |
| Documentation | Full income, credit, appraisal, title | Plan loan paperwork and proof of transfer |
| Seasoning | First mortgage 12 months old; 6 months on title | None set by the plan; the plan must offer loans |
| Main risk | Home secures a larger loan | Balance can become taxable if you default |
Mortgage insurance does not come into play at the 80% cap because it applies above 80% LTV. One lane across the wholesale programs reaches 89.99% LTV with no mortgage insurance at a 680 score and a 50% ratio, on a thirty-year fixed primary residence with a conforming balance. That lane carries its own six months of seasoning. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
How a Cash-Out Refinance Funds a Down Payment
A cash-out refinance replaces your current first mortgage with a new, larger one and hands you the difference. The money can go toward a down payment on another property. Under Fannie Mae’s cash-out rules, equity taken out of the subject property may be used for any purpose.
Across the wholesale programs placed through Lendmire, a conventional cash-out on a one-unit primary residence tops out at 80% LTV. Two- to four-unit primary residences, second homes and investment property cap at 75%. The cap applies to the appraised value, not your own estimate. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
Seasoning matters. The first mortgage being paid off must be at least 12 months old, counted note date to note date, which the same Fannie Mae section sets out. A borrower must also have been on title for six months, with exceptions for delayed financing, inheritance and legal awards. In practice, a recent purchase can sometimes use the delayed financing exception. It requires an arm’s-length original purchase and documented sources of funds.
The file runs through full underwriting: income, credit, debt-to-income and an appraisal. Fannie Mae’s eligibility matrix also calls for minimum reserves on cash-out refinances when the ratio exceeds 45% in Desktop Underwriter. Then the new loan pays off the old first lien, any other liens and closing costs. What remains is yours.
Lendmire’s cash-out refinance programs follow this structure through wholesale lenders in the 16 states where Lendmire is licensed for consumer lending. Texas has a wrinkle: a cash-out on a homestead is capped by the state constitution, and the 89.99% wholesale lane is not written there.
How a 401(k) Loan Funds a Down Payment
A 401(k) loan borrows from your own plan balance and you repay it, usually by payroll deduction. The IRS says plans are not required to offer loans, and IRAs and IRA-based plans cannot offer them at all. Check your Summary Plan Description first.
The ceiling is the lesser of 50% of your vested balance or $50,000. If half your vested balance is under $10,000, you may borrow up to $10,000, though plans need not offer that exception. Repayment is generally within five years, paid at least quarterly. The law carves out an exception to the five-year limit for buying a primary residence.
The mortgage lender still has paperwork to collect. Fannie Mae treats borrowed funds secured by an asset as acceptable for a down payment, because they represent a return of equity. The lender must document the loan terms, show that the plan is not a party to the sale, and see evidence the funds reached you.
There is a debt-to-income angle. Fannie Mae’s monthly debt rules say a loan secured by a 401(k) creates a contingent liability, and the lender need not count it in monthly debt if it obtains the loan instrument showing the asset as collateral. Whether a given lender takes that route is the lender’s call.
When a Cash-Out Refinance Is the Better Fit
A cash-out refinance fits best when these conditions line up:
- You own a home with meaningful equity and the lender’s LTV cap leaves room after the payoff.
- Your plan does not allow loans, or the plan’s cap is too small for the down payment you need.
- You want to leave retirement savings invested and growing.
- Your credit and debt-to-income sit comfortably inside the program guidelines.
- You expect to keep the home long enough for the larger mortgage to make sense.
Picture a homeowner with a long-held primary residence, a steady salary and a plan that caps loans well below what the next purchase requires. The home’s equity is the larger pool. Pulling from it does not touch the retirement account or create a plan repayment tied to the employer.
The cost side is real. A cash-out refinance carries closing costs on the new loan, and it replaces your whole existing mortgage, not just the cash portion. It also resets your loan to a larger balance. The CFPB notes that paying off non-mortgage debts with mortgage debt secured by the home can raise foreclosure risk if payments become unsustainable.
There is also a timing problem. The refinance has to be done before the money can serve as the down payment, and the new purchase lender will document that source under the asset rules above. Plan the sequence with both loan officers before you sign a purchase contract.
Temporary rate buydowns do not mix with this loan: a loan with a temporary buydown is not eligible as a cash-out refinance. A manufactured home has its own, lower cash-out limits.
When a 401(k) Loan Is the Better Fit
A 401(k) loan fits best when these conditions line up:
- Your plan permits loans and your vested balance supports the amount you need.
- You have little or no home equity, or you rent.
- You do not want to refinance away your current mortgage.
- Your job is stable and you can handle payroll repayment.
- The amount you need is modest relative to the plan’s cap.
Consider a renter with a vested balance, a stable employer and a plan that allows loans. A cash-out refinance is not on the table because there is no home to refinance. The plan loan needs no credit review from the plan itself, and the repayments go back into the buyer’s own account.
The risks sit in the retirement account, not the house. Borrowing from a plan may hurt account earnings and reduce retirement money. If you leave your job, the plan may require full repayment. If you cannot repay, a loan in default is generally treated as a taxable distribution of the entire outstanding balance, reported on Form 1099-R. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any assumption about how a default would be taxed.
The IRS also states that the need for funds to buy a principal residence cannot reasonably be relieved by a plan loan if the loan would disqualify you from other necessary financing. In plain terms, do not borrow so much from the plan that the new mortgage no longer fits.
Why Streamline Refinances Are Not on This List
An FHA Streamline refinances the existing FHA-insured first mortgage and returns no meaningful cash. The VA IRRRL cannot be used to take equity out or pay off other debts, and the general rule is that the borrower cannot receive cash proceeds, per the VA’s refinancing guidance. A rate-and-term refinance, conventional or government, is for restructuring the loan you have. A homeowner with an FHA or VA loan who wants cash needs the separate cash-out program, which has its own rules.
Where Files Get Stuck
Both paths fail for ordinary reasons. Here are the ones that come up most on wholesale files.
On the cash-out side:
1. The existing mortgage is under 12 months old, so seasoning is not met.
2. The appraisal comes in light, and the LTV cap leaves less cash than the buyer planned.
3. Ratios run above the program ceiling, which can also trigger reserve requirements. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
4. The borrower assumes a second home or investment property gets the same 80% cap. It does not. Occupancy and unit count set the cap.
Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
On the 401(k) side:
1. The plan does not offer loans, or the vested balance is smaller than assumed.
2. Funds are unvested or restricted. Fannie Mae’s FAQ treats funds that can be withdrawn only on retirement, termination or death as unacceptable reserves.
3. The same 401(k) is also counted toward reserves after a loan is taken from it. The lender must reduce its value by the loan proceeds and related fees, so the usable reserve balance can come in lower than the buyer expected.
4. The loan paperwork and the transfer of funds are not documented cleanly for the purchase lender.
Fannie Mae’s retirement account rule requires the lender to confirm the account is vested and allows withdrawals regardless of employment status. A plan that restricts withdrawals can push a buyer toward a loan instead of a withdrawal.
Key Terms Defined
Cash-out refinance: A new first mortgage, larger than the one it replaces, that pays you the difference in cash.
LTV (loan-to-value): The loan balance divided by the appraised value of the home.
Seasoning: The minimum time you must hold a mortgage or title before a loan program allows cash out.
Vested balance: The part of your 401(k) that belongs to you, even if you leave the employer.
Contingent liability: A debt that may become yours to pay, which a lender may or may not count in your monthly debt.
Deemed distribution: A plan loan in default that the IRS treats as taxable income.
The Balanced Verdict
Neither option wins on its own terms. A cash-out refinance moves the risk onto the house, and it works when equity is deep, credit is solid and the borrower can live with a larger mortgage. A 401(k) loan moves the risk onto retirement savings and employment, and it works when the plan allows it and the amount is small enough to repay without strain.
Three questions sort most buyers. Do you own a home with equity beyond the LTV cap? Does your plan allow loans, and for how much? How secure is your job over the next five years? If the answers are yes, no and very secure, the refinance leads. If they are no, yes and secure, the plan loan leads. If both are available, price the full cost of each: closing costs and a reset loan on one side, lost investment growth and default risk on the other.
Equity is not free money, and a plan loan is not free either. Lenders typically want you to keep a meaningful share of the home’s value as equity, which is why cash-out amounts stop short of full equity.
For a related look at how equity products compare when the next property is a rental, see Lendmire’s piece Rental HELOC vs Cash-Out Refinance for an Investor’s Down Payment.
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.
Frequently Asked Questions
Can I use a 401(k) loan as my down payment on a mortgage?
Yes, in most cases. Fannie Mae treats borrowed funds secured by an asset, including a 401(k), as an acceptable source for a down payment, closing costs and reserves. The lender must document the loan terms and the transfer of funds. Your plan must also allow loans, so check the Summary Plan Description.
Does a 401(k) loan count against my debt-to-income ratio?
Often not, but it depends on the lender. Under Fannie Mae’s rules, a loan secured by a financial asset creates a contingent liability, and the lender need not count it if it obtains the loan instrument showing the asset as collateral. Some lenders may still choose to count it.
How much equity do I need for a cash-out refinance?
Enough to stay under the LTV cap after the new loan pays off the old one. On a one-unit primary residence the conventional cap is 80% LTV. On two- to four-unit primary homes, second homes and investment property it is 75%. The appraised value sets the number, and program figures are subject to lender guidelines and full file review.
What happens to a 401(k) loan if I lose my job?
The plan may require full repayment when employment ends. If you cannot repay, the balance is generally treated as a taxable distribution and reported on Form 1099-R. A tax adviser can explain how that applies to you.
Can an FHA Streamline or VA IRRRL give me cash for a down payment?
No. Both are rate-and-term products for existing government loans. Neither is designed to return equity. Homeowners with FHA or VA loans who want cash need the separate cash-out program.
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.
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References
1. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
2. Fannie Mae Eligibility Matrix
3. IRS, Retirement Topics: Plan Loans
4. Fannie Mae B3-4.3-15 Borrowed Funds Secured by an Asset
5. Fannie Mae B3-6-05 Monthly Debt Obligations
6. CFPB, Cash-Out Refinances and Paydown Behavior of Non-Mortgage Debt Balances
7. IRS Retirement Plans FAQs regarding loans
9. Fannie Mae FAQ on asset assessment
10. Fannie Mae B3-4.3-03 Retirement Accounts
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How the Appraisal Works on a Cash-Out Refinance · How Mortgage Insurance Changes a Cash-Out Refinance Payment · Cash-Out Refinance Max LTV for Homeowners Sizing Their Loan
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
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.