The Quick Read: A lender counts your equity as a capped share of the appraised value, not as the gap between what you think the home is worth and what you owe. The program sets a maximum loan-to-value ratio. The new loan, including every lien that stays, must fit under that cap. Whatever equity sits above the cap stays in the house.
What “Equity” Means to a Lender
A lender does not use the number you carry in your head. It uses a ceiling.
Your version of equity is simple: value minus mortgage balance. The lender’s version starts with the appraised value, multiplies it by the program’s maximum loan-to-value (LTV) ratio, and treats the result as the most the new loan can be. Cash to you is what remains after the new loan pays off what it must pay off.
On a conventional cash-out refinance of a one-unit principal residence, the cap is 80% LTV. On a two- to four-unit principal residence, a second home or an investment property, the cap is 75%. Those are the figures across the wholesale programs Lendmire places files with, and they match the Fannie Mae Eligibility Matrix, which sets caps by occupancy and number of units. All of it is subject to lender guidelines and full file review.
This is why “I have 40% equity, so I can pull out 40%” is wrong. At an 80% cap, you must keep at least 20% of the appraised value as equity. Homeowners with a thin cushion above that line may find little or nothing to take.
Key Terms Defined
Appraised value: The value a licensed appraiser assigns to the home for this loan. It replaces your purchase price, tax assessment or any online estimate.
LTV (loan-to-value): The new loan amount divided by the appraised value, shown as a percentage.
CLTV (combined loan-to-value): The same ratio, but counting every loan secured by the home, including a second mortgage or HELOC that stays in place.
Lien stack: All the mortgages and liens recorded against the home, in order of priority.
Seasoning: The minimum time you have owned the home or held the loan being paid off before a cash-out is allowed.
How the Lender Gets the Value
The appraised value is the denominator in every calculation. It is the single biggest swing factor on the file.
Your own earlier appraisal, a Zestimate or the price you paid years ago does not control. The appraiser compares recent nearby sales and adjusts for condition, size and features. The lender uses that figure.
For VA loans, the measure is “reasonable value,” which the appraiser determines. VA’s Circular 26-19-05 defines LTV as the total loan amount, including any VA funding fee, divided by that reasonable value.
Some streamline refinances skip the appraisal. Those are no-cash-out products, so the home’s current value is not used to count equity at all. That distinction matters later.
What the Lender Subtracts
The lender sizes the loan, then subtracts what the loan must cover. What is left is yours.
Here is the sequence as it runs inside a file:
1. Classify the loan. The lender decides whether the file is a limited cash-out (rate-and-term) refinance or a true cash-out. A free-and-clear home is always cash-out, because every dollar of the new loan is cash.
2. Check the clocks. Seasoning, time on title and occupancy are tested before value matters.
3. Order the appraisal. The result sets the denominator.
4. Apply the cap. Maximum new loan equals appraised value times the program’s maximum LTV. Any lien that stays on the home counts against the cap.
5. Subtract the required payoffs. The new loan pays off the existing first mortgage, any second liens being paid, closing costs, points and prepaids. Fannie Mae’s cash-out guide allows those items to be financed.
6. Underwrite the borrower. Credit, income, debts and reserves are tested against the new, larger payment.
7. Deliver the cash. Whatever is left under the cap after step 5 is the cash to the borrower.
Step 5 is where borrowers get surprised. Every closing cost financed into the loan uses cap room. A dollar financed for costs is a dollar not available as cash.
A Worked Example in Percentages
Take a home appraised at 100% of value, a one-unit principal residence, under an 80% cap. The maximum new loan is 80% of value. Say the existing first mortgage is 55% of value. Financed costs and prepaids run about 3% of value. Cash to the borrower is roughly 22% of value (80 minus 55 minus 3).
Now add a second lien. Same home, but a HELOC at 10% of value stays in place. It counts toward the combined total, so the cap applies to everything. If the new first mortgage and the HELOC together must fit under 80%, the room for new cash shrinks by 10 points. Pay the HELOC off at closing and it becomes part of the payoff in step 5. Either way, a second lien uses room.
The Low-Appraisal Scenario
A lower appraisal cuts your maximum loan by the cap’s share of the lost value, and the payoffs and costs do not shrink to match. Run the same example with the home appraising 5% below your expectation. At an 80% cap, the maximum loan falls by 4 points of the original value (5% of 80%). The payoffs and costs have not changed, so the cash to you falls by those same 4 points, from about 22% to about 18% of the original value. On a thin file, the same drop can take the cash to zero.
When this happens, the options are practical:
- Ask the lender about an appraisal reconsideration, supplying recent nearby sales the appraiser may not have used.
- Reduce the cash you want, which loosens the loan size.
- Pay down a lien to stay under the cap.
- Wait, and refinance when value or balance moves.
- Restructure the request. A rate-and-term refinance without cash can reach 95% LTV on a one-unit principal residence on the programs Lendmire places, with mortgage insurance above 80%. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
You are also entitled to see the appraisal. Under Regulation B, as described in the CFPB’s appraisal-copy procedures, the lender must give you a copy promptly after the appraisal is completed, and the exact timing varies by file and lender.
Where the General Rule Breaks
The 80% cap is the headline. These cases bend it.
Occupancy and unit count. The cap falls from 80% to 75% for two- to four-unit principal residences and for second homes. Occupancy decides leverage, and that is all this article needs to say about it.
Seasoning. The first mortgage being paid off must be at least 12 months old, measured note date to note date, and the borrower must have been on title six months. Equity-rich borrowers get declined on this clock more often than on value.
Delayed financing. A borrower who bought with cash can sometimes refinance within the six-month window if the file documents it. The settlement statement must show no mortgage financing was used.
Limited cash-out is its own box. A refinance that only pays off the first mortgage, closing costs and a purchase-money second lien, with incidental cash back, is a rate-and-term loan. Pay off a second lien that was not used to buy the home and the loan reclassifies as cash-out, and the lower cap applies.
FHA. FHA cash-out is limited to principal residences and capped at 80% of adjusted value. HUD‘s Mortgagee Letter 2019-11 lowered that cap from an earlier, higher limit. If someone says FHA still allows the older, higher cap, they are quoting old guidance.
VA. VA offers a cash-out refinance for veterans, and it can refinance a non-VA loan into a VA loan. The IRRRL is the opposite: VA to VA, built for rate-and-term changes, with no appraisal and a funding fee unless exempt. It does not count equity at all.
Jumbo. Above the conforming limit, jumbo lanes take over, with their own score and leverage rules. Those are separate programs, not variations on the 80% cap.
Texas homestead. A cash-out on a Texas homestead is capped by the state constitution. The wholesale lane that reaches 89.99% LTV is not written there. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
The 89.99% lane. One wholesale option reaches 89.99% LTV with no mortgage insurance. It requires a 680 score, a 50% ratio and a thirty-year fixed rate on a conforming primary residence, with six months of its own seasoning. It is narrow. Check fit before assuming it applies. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Equity Treatment by Program
| Program | Cash-out cap | Key clock or condition |
|---|---|---|
| Conventional, 1-unit primary | 80% | First mortgage 12 months old |
| Conventional, 2-4 unit primary | 75% | Same seasoning |
| Conventional, second home | 75% | Same seasoning |
| FHA cash-out | 80% of adjusted value | Principal residence only |
| VA cash-out | Total loan incl. Fee, vs. reasonable value | Occupancy by the veteran |
| Wholesale no-MI lane | 89.99% | 680 score, 50% ratio, 30-yr fixed |
Every figure is subject to lender guidelines and full file review. Nothing here is a commitment to lend.
What Else Sits Alongside Equity
Equity gets you into the room. The rest of the file decides the outcome.
The wholesale conventional programs start at a 620 decision score, with the automated finding governing most files and a total ratio ceiling of 50%. Reserves matter too, and Lendmire’s explanation of how a cash-out lender counts reserves against the new payment walks through that step. Fannie Mae’s matrix also applies minimum reserves to cash-out files with a debt ratio above 45%.
Mortgage insurance enters if leverage goes above 80%. It cancels on request at 80% of the original value with good payment history, and ends automatically at 78%. Published typical annual premiums run 0.58% to 1.86% of the balance. That is a range, not a quote.
Also note the payment side. The CFPB’s guide on using home equity notes that the monthly payment may rise because a larger loan replaces the current mortgage, the term may lengthen, and your rate and terms change. The old rate does not carry over.
How to Check Your Equity Before You Apply
Do this on paper first.
- Estimate value from recent nearby sales, and then shave it. Appraisers rarely come in high.
- Write down the first mortgage payoff and any second liens, including HELOCs.
- Multiply value by the cap for your occupancy and program.
- Subtract the payoffs.
- Subtract about 2-3% of value for financed costs, as a planning guess only.
- What is left is a rough cash ceiling. If it is small or negative, you are short.
Then run the clocks: first mortgage age, time on title, occupancy and whether the home was recently listed for sale.
If You Come Up Short
You have a few paths. Pay down the balance or a lien. Wait for appreciation or more paydown. Take less cash. Change the structure to a refinance, which can go to 95% LTV on a one-unit primary. Or keep your existing loan and skip the refinance. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
The CFPB notes that none of the home-equity options lets you convert 100% of your equity to cash. A HELOC or second mortgage also uses room under the same combined cap. Keep that in mind before stacking products.
The Decision in Practice
Most borrowers who refinance this way use the money to pay off other debts. CFPB survey data found that more than half of cash-out borrowers each year from 2014 to 2019 cited paying other bills or debts. That has a catch. The CFPB warns that turning non-mortgage debt into mortgage debt puts the home at risk if payments become unsustainable.
Ask four questions. How much equity will remain after closing? What happens to the payment and term? Does the cash build value or permanently retire costlier debt? And does the file still clear the credit and ratio tests on the larger payment?
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. Details on the cash-out refinance programs arranged through wholesale lenders are available, and a loan officer can walk through your numbers.
Frequently Asked Questions
How much equity do I need to do a cash-out refinance?
More than the cushion the program makes you keep. On a conventional one-unit primary residence, the new loan cannot exceed 80% of appraised value, so you need to start above 20% equity to take anything out. Closing costs financed into the loan use up part of the remaining room.
Does my purchase price or an online estimate set my equity?
No. The appraisal sets it. The lender orders a new valuation, and that figure is the denominator in the LTV test. Your purchase price, tax assessment and online estimates do not control the result.
Does a HELOC or second mortgage change how equity is counted?
Yes. A second lien that stays in place counts toward combined LTV, so the cap applies to the total. Paying off a second that was not used to buy the home also converts a limited cash-out into a true cash-out. Either way it uses cap room.
Is a paid-off home still a cash-out refinance?
Yes. A new mortgage on a home with no lien is treated as cash-out, and every dollar of the new loan is cash. The same cap and seasoning rules apply, subject to lender guidelines.
Do I get to see the appraisal?
Yes. On a first-lien mortgage the lender must give you a copy of the appraisal and any written valuations. The lender may ask you to waive the three-business-day timing, and may charge a reasonable fee for the valuation cost.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Eligibility Matrix
3. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
4. CFPB Regulation B appraisal copies procedures
5. HUD
6. CFPB Older Americans housing guide
7. CFPB: CFPB Report Finds Cash Out Mortgage Refinance Borrowers Improve Credit Scores
8. CFPB: CFPB Cash Out Refinances and Paydown Behavior of Non Mortgage Debt Balances
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: Cash-Out Refinance Documentation for Overtime With Strong Equity · How Much Equity a Cash-Out Refinance Lets You Take From a Primary Home · Can You Get a Cash-Out Refinance With High Equity and Low Income?
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
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.