Conventional Loan Cash-Out Refinance Guidelines 2024
Falling rates and rising home equity provide the perfect opportunity to realize the benefits of a cash-out refinance.
That is particularly true for anyone who has purchased or refinanced between mid-2023 and early 2024 – when rates were as high as 8% – or has gained substantial equity during the most recent housing boom.
How Does a Conventional Cash-Out Refinance Work?
A conventional cash-out refinance replaces your existing mortgage with a larger one. At the same time, you receive (cash out) the difference between the two loans.
For Example: You have an outstanding mortgage for $200,000 on your $400,000 home and want to cash out $100,000 of your equity. In this situation, you could complete a cash-out refinance for $300,000. The new mortgage ($300,000) would pay off your old mortgage ($200,000) and leave you with $100,000, minus closing costs, to use as you please.
The most common reason people refinance is to obtain a lower interest rate. This could be because of an overall improvement in the mortgage market or even because the borrower's credit profile has improved.
Borrowers with a significant amount of equity they want to cash out may also choose to refinance. In many cases, this may make sense even when refinancing to a less favorable interest rate, especially when paying down other higher-interest debts.
How Much Equity Can I Cash Out of My Home?
Conventional lenders have fixed limits on how much equity borrowers can access during a cash-out refinance. Most borrowers refinancing their primary residence can receive a mortgage for up to 80% of their property's appraised value. This figure is commonly called the maximum loan-to-value (LTV) ratio.
However, conventional LTV limits can vary based on the property type and number of residential units it contains:
Property Type | Maximum LTV |
Primary Residence (1 Unit) | 80% |
Primary Residence (2-4 Units) | 75% |
Second Home | 75% |
Investment Property (1 Unit) | 75% |
Investment Property (2-4 Units) | 70% |
In addition to the maximum loan-to-value, all conventional cash-out refinances must meet conforming loan limits. For 2024, this limit is $766,550 for single-unit properties in most parts of the country. Limits for four-unit homes can be as much as $2,211,600 in some high-cost-of-living areas.
Apart from the benefits of moving to a lower interest rate, most people who opt for a cash-out conventional refinance aim to take out at least $30,000 in equity. This is because it can cost $5,000 to $7,000 in closing costs for the new mortgage. For many, a minimum cash-out of at least $50,000 is a more practical option.
However, it's essential to have a plan for how you will use the equity you're cashing out. It’s not always wise to opt for the maximum amount possible. You could wind up paying interest on a larger balance and lock yourself into a higher interest rate than necessary.
For example, a borrower with a credit score between 680 and 699 may receive an interest rate about 0.25% to 0.50% higher with 80% LTV instead of 75%.
Lender Guidelines for Conventional Cash-Out Refinances
By and large, the lender guidelines for conventional loan cash-out refinances are similar to purchase loans. Apart from having sufficient equity to meet loan-to-value maximums, other requirements include:
Minimum Credit Score: 620 (higher scores generally equate to lower interest rates)
Maximum Debt-to-Income Ratio (DTI): 45%, although some lenders will approve conventional refinances with a DTI up to 50% if you have six months of housing payments in reserve.
If the property you're refinancing is currently listed for sale, you must take it off the market before the loan's funding.
Note: If you’re doing a cash-out refinance on a second home or investment and have multiple financed properties, you may face additional reserve requirements.
How Can I Use Funds From a Cash-Out Refinance?
Funds from a conventional cash-out refinance can be used for nearly any purpose. The most common use is to make home repairs or significant improvements. Using your equity for renovations adds to the home's value. It can also provide tax benefits compared to using the funds for other purposes.
Some other frequent uses for conventional loan cash-out refinances include:
Debt consolidation (including high-interest credit cards, vehicles, and HELOCs)
Second home and investment property purchases
Higher education expenses
Income taxes and other tax-related obligations
Restrictions on Conventional Loan Cash-Out Refinances
While you can broadly use the funds from a cash-out refinance in any way you choose, there are some situations where you may not qualify to cash out your existing equity:
You’ve owned your home for fewer than six months (unless you inherited or were awarded the property via court order or meet the guidelines for delayed financing).
Your current first mortgage is less than 12 months old.
Your current mortgage has a temporary interest rate buydown.
You plan to use the funds to pay off an installment land contract.
Your current mortgage is a HomeStyle Energy loan (unless you plan to use the funds to make energy-related improvements).
You have an outstanding PACE loan and sufficient equity to repay it, but opt not to.
Your property has real estate taxes more than 60 days in arrears, and you don’t have an escrow account established to satisfy the debt.
Alternatives to a Conventional Loan Cash-Out Refinance
Conventional loan cash-out refinances can make sense for anyone who wants to withdraw a sizable amount of equity from their home or is able to refinance down to a lower interest rate. But in certain situations, there are cash-out alternatives that may be more practical.
Home Equity Loan
If you have a low interest rate on your first mortgage, you may be better off with a home equity loan. Unlike a conventional refinance, a home equity loan is a type of second mortgage. It won't impact the rate on your current note.
Home equity loans often come with a higher interest rate than a cash-out refinance, so if you’re planning to take out a large amount of equity relative to your current mortgage balance, a conventional refinance may still make sense.
Home Equity Line of Credit
Like a home equity loan, a home equity line of credit (HELOC) is a type of second mortgage that keeps your current loan rate intact. Unlike a home equity loan, a HELOC allows you to cash out equity as needed over time rather than all upfront. This can be ideal for borrowers cashing out an undecided amount or for those planning renovations which may take time or vary in final cost.
Personal Loan
Personal loans are a more straightforward option if you want to borrow a relatively small amount of money. They can also come in handy if you need access to the funds faster than a conventional cash-out refinance or home equity loan would allow. In most cases, a personal loan can be funded in days, whereas mortgage-related options are likely to take weeks at best.
Cashing Out Your Home’s Equity with a Conventional Refinance
If you're facing a high-interest-rate mortgage and want to take advantage of the current rate drop, consider a conventional loan cash-out refinance. For borrowers with decent rates but substantial equity, a cash-out refinance may still be an intelligent option for paying off other long-term and high-interest debts.
Get in touch with a qualified mortgage professional to find out how much equity you may be eligible to withdraw from your home through a conventional cash-out refinance.
