Cash-out refi replaces your current mortgage with a bigger one and gives you the difference in cash. Straightforward — but dangerous if you currently have a low-rate mortgage. The true cost of the cash includes not just the new loan's rate, but the rate premium you pay on the entire balance versus what you would have kept with a HELOC.
Worked example: $320,000 balance at 3.5%. You want $75,000 cash. Cash-out refi to $395,000 at 7.125% = new P&I $2,663/mo (vs old $1,437). Extra monthly cost: $1,226. Attributing that to the $75K cash-out = 19.6% effective rate on the borrowed money. A HELOC at 8.5% would be a much better choice.
The 'rate surrender' trap
In 2024-2026, half of all U.S. mortgages are at rates below 4.5%. For those homeowners, cash-out refi is financial self-harm. You are giving up a 3.5% rate on $320K to get $75K cash — the rate premium on the old $320K alone is $11,600 per year, forever. A HELOC or home equity loan on just the $75K preserves the low first mortgage rate and costs far less.
When cash-out refi makes sense
- Your current rate is close to or above market (no rate surrender)
- You need a large amount ($100K+) and a fixed rate for 15-30 years
- You are consolidating out of much higher-rate debt (credit cards, personal loans)
- You would need a jumbo second mortgage anyway (thin market)
Cash-out LTV limits
- Conventional primary residence: 80% CLTV max
- Conventional investment property: 75%
- FHA cash-out: 80%
- VA cash-out: 90%