What Is a Cash-Out Refinance
A cash-out refinance replaces your current mortgage with a new mortgage for a larger amount. You receive the difference between the new loan and your existing balance as cash at closing. It is not a second loan or a line of credit. It is a single new first mortgage.
The new loan pays off your existing mortgage, and any remaining funds after closing costs are disbursed to you. You then make payments on the new, larger loan at the new rate and terms.
How Cash-Out Works
Current home value: $450,000.
Current mortgage balance: $280,000.
Maximum new loan (80% LTV in Texas): $360,000.
Cash available: $360,000 minus $280,000 = $80,000 (minus closing costs).
Result: One new mortgage at $360,000. You receive approximately $72,000 to $76,000 after closing costs.
How Much Can You Cash Out
Texas has a strict 80% combined loan-to-value (CLTV) maximum for cash-out refinances on homestead properties. This means your new loan cannot exceed 80% of your home's appraised value.
The formula is straightforward. Take your home's current appraised value, multiply by 0.80, and subtract your existing mortgage balance. The result is the maximum cash you can receive before closing costs.
If your home is worth $350,000 and you owe $200,000, your maximum new loan is $280,000 (80% of $350,000). Subtract the $200,000 payoff, and you have $80,000 available minus closing costs.
If your home is worth $500,000 and you owe $150,000, your maximum new loan is $400,000. Subtract the $150,000 payoff, and you have $250,000 available minus closing costs.
The more equity you have, the more cash you can access. But the 80% cap is firm in Texas regardless of your credit score or income.
Texas Cash-Out Rules
Texas has the most restrictive cash-out refinance rules in the country. These rules exist under the Texas Constitution, Section 50(a)(6), and they apply to all homestead properties in the state.
Texas Section 50(a)(6) Requirements
80% maximum CLTV: Your new loan cannot exceed 80% of your home's appraised value. No exceptions.
12-day waiting period: At least 12 days must pass between your loan application and closing. This cannot be waived.
3-day right of rescission: After closing, you have 3 business days to cancel the transaction. Funds are not disbursed until this period expires.
One cash-out per 12 months: You can only do one cash-out refinance per calendar year on the same property.
Homestead property only: Texas cash-out rules apply to your primary residence. Investment properties follow different rules.
Fee cap: Certain lender fees are capped at 3% of the loan amount.
No prepayment penalty: Texas law prohibits prepayment penalties on cash-out refinances of homestead properties.
Common Uses for Cash-Out Funds
Home renovations. Kitchen remodel, bathroom upgrade, roof replacement, room addition, or energy efficiency improvements. Renovations can increase your home's value while improving your living space. For renovation-specific financing, also see: FHA 203k Loan Houston.
Debt consolidation. Pay off high-interest credit cards, auto loans, or personal loans. If you are paying 18% to 24% on credit card debt, rolling it into a 6.5% to 7% mortgage saves significant interest. But be honest about spending habits before using this strategy.
Investment property down payment. Use the cash to fund a down payment on a rental property. Many Houston investors use cash-out refinances on their primary residence to acquire their first or next investment property. See: Investment Property Loans Houston.
Education expenses. Fund college tuition, trade school, or professional development without high-interest student loans.
Business funding. Startup capital or business expansion. Mortgage rates are typically lower than business loan rates or SBA loan rates.
Emergency reserve. Build a cash safety net. Having 6 to 12 months of expenses in savings provides financial security.
Cash-Out Refi vs HELOC vs Home Equity Loan
Three products let you access home equity. Here is how they compare.
Comparison: Cash-Out Refi vs HELOC vs Home Equity Loan
Cash-out refinance. Replaces your first mortgage with a larger loan. Fixed rate. Single monthly payment. Full amount disbursed at closing. Closing costs of 2% to 5%. Best for large, one-time needs when you also want to change your rate or terms.
HELOC (Home Equity Line of Credit). Second lien behind your first mortgage. Variable rate (usually). Draw period of 5 to 10 years, then repayment period. Borrow as needed up to your limit. Lower closing costs. Best for ongoing or unpredictable expenses. Subject to Texas 80% CLTV cap.
Home equity loan. Second lien behind your first mortgage. Fixed rate. Lump sum disbursed at closing. Fixed monthly payment. Moderate closing costs. Best for a one-time need when you want to keep your existing first mortgage rate. Subject to Texas 80% CLTV cap. More details: Home Equity Loan Houston.
If your current mortgage rate is low (below 5%) and you do not want to give it up, a HELOC or home equity loan lets you keep that rate while accessing equity through a second lien. If your current rate is already at or above market rates, a cash-out refinance simplifies everything into one loan.
Requirements for Cash-Out Refinance
Qualification Requirements
Credit score: 620 minimum for conventional. 580 minimum for FHA cash-out.
Maximum LTV: 80% in Texas (constitutional requirement).
Income verification: Standard documentation including pay stubs, W-2s, or tax returns. Self-employed borrowers may use bank statements through bank statement programs.
Property appraisal: Required to determine current home value and calculate maximum loan amount.
Ownership period: 6 months minimum for conventional cash-out. 12 months minimum for FHA cash-out.
Debt-to-income ratio: Generally 43% to 50% maximum depending on the program and compensating factors.
Current Rates for Cash-Out Refinance
Cash-out refinance rates are typically 0.125% to 0.375% higher than rate-and-term refinance rates. The premium reflects the additional risk lenders take when you borrow more than your current balance.
Several factors affect your specific rate.
Credit score. Higher scores get lower rates. A 760 score will get a better rate than a 660 score.
Loan-to-value ratio. Lower LTV means lower risk for the lender. If you are borrowing 60% of your home's value, expect a better rate than at 80% LTV.
Property type. Single-family homes get the best rates. Condos and multi-unit properties carry rate premiums.
Loan amount. Jumbo cash-out loans (above conforming limits) have different pricing than conforming loans. See: Jumbo Loans Houston.
For current rate estimates: Houston Mortgage Rates. For general refinance information: Refinance Houston.
When Cash-Out Does NOT Make Sense
Cash-out refinancing is a tool, not a universal solution. Here are situations where it may not be the right choice.
You have a low rate you do not want to lose. If your current mortgage is at 3% and today's cash-out rates are 7%, you would be giving up a rate that may never come back. A HELOC or home equity loan lets you access equity without touching your first mortgage rate.
The cash need is small. If you need $10,000, the closing costs on a cash-out refinance ($7,000 to $15,000) may not make sense. A personal loan, HELOC, or home equity loan could be more cost-effective for smaller amounts.
You plan to sell within 2 years. Closing costs on a cash-out refi take 2 to 3 years to recoup through savings. If you are selling soon, you may not break even on the transaction costs.
Debt consolidation without behavior change. If you consolidate $40,000 in credit card debt into your mortgage but continue spending on credit, you will end up with a larger mortgage and new credit card balances. Cash-out for debt consolidation only works if the spending habits change.
Stretching to the 80% limit. Just because you can borrow up to 80% does not mean you should. Leaving a larger equity cushion protects you if home values decline.
Frequently Asked Questions
How long does a cash-out refinance take in Texas?
Typically 30 to 45 days from application to closing. Texas requires a 12-day waiting period between application and closing, plus a 3-day right of rescission after closing before funds are disbursed. These cannot be waived.
What are the closing costs?
Closing costs run 2% to 5% of the new loan amount. On a $360,000 loan, expect $7,200 to $18,000. Costs can be rolled into the loan or paid from cash proceeds. Texas caps certain lender fees at 3% of the loan amount.
Can I cash out on an investment property in Texas?
Texas Section 50(a)(6) rules apply to homestead properties. Investment properties follow standard non-Texas-specific rules, which may allow different LTV ratios. Investment property cash-out rates are higher and requirements are stricter.
Is the cash from a cash-out refinance taxable?
No. Cash from a refinance is loan proceeds, not income. You are borrowing against equity. However, the interest deductibility depends on how you use the funds. Interest on home improvement funds is generally deductible. Consult a tax professional.
Can I do an FHA cash-out refinance?
Yes. FHA cash-out allows up to 80% LTV (matching the Texas cap), requires a 580 minimum credit score, 12 months of ownership, and the property must be your primary residence. FHA cash-out includes mortgage insurance. See: FHA Loans Houston.
What if I owe more than my home is worth?
You cannot do a cash-out refinance without equity. You need at least 20% equity in Texas due to the 80% LTV cap. If you have limited equity, a rate-and-term refinance to lower your rate may still be possible.
Free Equity Analysis and Cash-Out Quote
Brandon runs the numbers for your specific situation. He calculates your available equity based on current home values in your neighborhood, estimates the cash you can access after closing costs, and compares cash-out refinance to HELOC and home equity loan options so you can choose the best path.
Related Resources
- Refinance Houston - Rate-and-term and cash-out options
- Home Equity Loan Houston - Second lien alternative to cash-out
- Houston Mortgage Rates - Current rate environment
- Investment Property Loans Houston - Use cash-out for investment down payment
- FHA 203k Loan Houston - Renovation-specific financing
- Conventional Loans Houston - Standard refinance programs
Find Out How Much Equity You Can Access
Brandon calculates your available cash, compares your options, and walks you through Texas cash-out rules so you make the right decision. Free equity analysis, no obligation.
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