How to Use a Cash-Out Refinance to Fund Home Improvements

A kitchen remodel, a new roof, or an added bedroom can cost far more than most households keep in savings. A cash-out refinance is one way to pay for it by borrowing against the equity you have built. It is not the right tool for every project or every homeowner, especially when rates are higher than they were a few years ago. This guide explains how it works, what it costs, and how to decide.

How a Cash-Out Refinance Works

According to the Consumer Financial Protection Bureau (CFPB), a cash-out refinance replaces your current mortgage with a larger one, and you receive the difference in cash. You end up with one new mortgage, a new rate, and a new term. The CFPB notes that you often have to pay closing costs and advises weighing the interest rate carefully, especially if it is higher than your current mortgage rate.

Lenders generally limit how much equity you can borrow against, so you will usually need to leave some equity in the home. The limit varies by lender and loan program, and an appraisal is typically part of the process.

Why Homeowners Use It for Improvements

Using the cash for the home itself can make sense for a few reasons:

• One loan, one payment: You replace your existing mortgage instead of adding a second loan.
• Longer repayment: Spreading a large project over a long term can keep the monthly cost manageable.
• A potential tax benefit: Interest may be deductible when proceeds are used to improve the home, as explained below.

The Rate Trade-Off You Cannot Ignore

The biggest question is what happens to your existing rate. A cash-out refinance reprices your whole loan, not just the new cash. Freddie Mac's weekly survey showed the 30-year fixed averaging 7.40% for the week of October 15, 2026, compared with 6.27% a year earlier. That survey reflects borrowers with strong credit and 20% down, so your own quote may differ, and rates change week to week.

Consider a simple illustration. Say you owe $400,000 on a mortgage at 3.5% with 25 years remaining, a payment of about $2,000 a month for principal and interest. You refinance into a $500,000, 30-year loan at 7.40% to take out $100,000 for a remodel. The new payment would be about $3,460, an increase of roughly $1,460 a month. Of the new payment, roughly $690 reflects the additional $100,000 borrowed for the renovation. The rest reflects refinancing your original balance at a higher rate and stretching it from 25 to 30 years. Closing costs, taxes, and insurance are not included. These figures are estimates for illustration only, not a quote.

If you already have a low rate, that math may favor leaving your first mortgage alone and looking at other ways to borrow. If your current rate is close to today's rates, or higher, a cash-out refinance may cost much less in practice.

Compare It With Other Options

A cash-out refinance is only one way to borrow against equity. The CFPB describes two others:

• Home equity loan: A second mortgage that gives you the full amount upfront and is repaid in regular monthly payments.
• Home equity line of credit (HELOC): A line of credit secured by your home's equity, which the CFPB says comes with risks and fees.

Because these are added on top of your existing mortgage, your first mortgage rate stays the same. That can matter if your current rate is well below today's. The trade-offs include a second payment and different pricing, and the right choice depends on the project size, your timeline, and your rate. Compare the total cost of each option, including fees and the rate over the full term, rather than the monthly payment alone.

Understand the Tax Rules

Do not assume the interest is deductible. According to IRS Publication 936, interest on home equity borrowing may be deductible, but only if the funds are used to buy, build, or substantially improve the home that secures the loan, and only if you itemize deductions. Overall limits on qualifying home debt also apply, so how you use the proceeds, how much you owe, and whether you itemize all affect the result. Points paid on a refinance are generally deducted over the life of the loan, with a possible exception for the portion tied to substantially improving your main home. Whether a particular project qualifies depends on the facts, so ask a tax professional.

What Lenders Look At

Approval for a cash-out refinance generally depends on factors similar to any mortgage. Lenders typically review your credit history, income, existing debts, the property's appraised value, and how much equity you would keep after the loan. Requirements differ by lender and loan program, so ask which documents to gather early, such as pay records, tax returns, and statements for your current mortgage.

Costs to Budget For

Beyond the rate, plan for the full cost of refinancing:

• Closing costs: Lender fees, appraisal, title, and escrow charges. Your Loan Estimate itemizes them.
• A longer term: Restarting a 30-year loan can mean paying interest for more years.
• Project overruns: Renovations often cost more than planned, so leave a cushion.
• Your home as collateral: The loan is secured by your home, so the payment must stay affordable.

Steps to Take Before You Decide

1. Get a written project estimate: Know how much you actually need to borrow.
2. Check your equity: Estimate your home's value and your loan balance.
3. Compare Loan Estimates: Request the same loan type from more than one lender and compare the total cost.
4. Run the numbers on alternatives: Compare the new payment with a home equity loan or HELOC.
5. Ask about timing: Ask your loan officer how long the process takes and what documents you need.

Is It Right for You?

A cash-out refinance may suit you if your current rate is near or above today's rates, you want a single payment, and you plan to stay in the home long enough to recover the costs. It may be a poor fit if you would give up a much lower rate or if the project is small.

To explore your options, review our refinance options or our HELOC information. For a personalized comparison, contact our team.

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