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Understanding Cash-Out Refinancing

A cash-out refinance essentially replaces your current mortgage with a new, larger loan.

The difference between your new loan amount and what you owed on your old mortgage (minus closing costs) comes to you as cash.

Think of it as converting the equity you've built up from a paper asset into liquid funds.

Here's an example:

You purchased your home five years ago for $300,000  with a $240,000 mortgage.

Today, your home is worth $400,000, and you've paid your loan balance down to $210,000.

With a cash-out refinance up to 80% loan-to-value, you could borrow $320,000.

After paying off your existing $210,000 mortgage and covering roughly $8,000 in closing costs, you'd receive approximately $102,000 in cash.

Texas Cash Out Refinance:

Texas Constitution Article XVI, Section 50(a)(6) governs cash-out refinances, classifying them as home equity loans subject to strict constitutional protections.

These rules emerged from Texas's historical commitment to protecting the family homestead,  a principle dating back to the Republic of Texas era.

While most states  allow lenders and borrowers to negotiate terms freely, Texas  imposes mandatory consumer protections that override standard industry practices.

Hense, in Texas you're better protected against predatory lending, but you also face more restrictions on how and when you can access your equity.

Understanding these trade-offs helps you navigate the process more effectively.

What is the maximum cash-out refinance amount in Texas?

Texas law caps your total loan amount at 80%  of your home's appraised value, also called the loan-to-value ratio or LTV.

This means you must maintain at least 20% equity in your property after the refinance closes.

If your home appraises for $500,000, the maximum you can borrow is $400,000, regardless of how much equity you actually have.

This 80% cap is more conservative than many other states, where lenders might approve cash-out refinances up to 90% or even 95% LTV.

How often can I do a cash-out refinance in Texas?

The Texas Constitution mandates a 12-month waiting period between cash-out refinances on the same property.

If you completed a cash-out refinance on January 15, 2024, you cannot do another one until January 15, 2025 at the earliest.

This waiting period protects homeowners from repeatedly tapping equity and potentially over-leveraging their property.

However, this restriction only applies to cash-out refinances specifically, you can still do a rate-and-term refinance  (one that doesn't give you cash back) without waiting 12 months.

What are the credit requirements for a Texas cash-out refinance?

Most conventional lenders set a minimum credit score of 620  for cash-out refinances, though you'll need a score of 740 or higher  to qualify for the best interest rates.

Borrowers with scores between 620 and 679 will typically pay higher rates, sometimes 0.5% to 1.0% more than those with excellent credit.

Some specialized lenders or government-backed programs may work with scores as low as 580 or even 500, but these options are extremely limited in Texas due to state restrictions on government-backed cash-out refinances.

Can I do an FHA or VA cash-out refinance in Texas?

No. This is one of the most important and frequently misunderstood aspects of Texas cash-out refinancing.

Texas law prohibits cash-out refinances on government-backed loans including FHA, VA, and USDA mortgages.

If you currently have an FHA or VA loan and want to access your equity through a cash-out refinance, you must convert to a conventional loan, which typically requires a higher credit score, larger down payment equity, and private mortgage insurance if you're borrowing more than 80% LTV.

Alternatively, you could consider a traditional home equity loan (second lien) instead, though this means carrying two separate mortgage payments.

What is the 12-day rule for Texas cash-out refinancing?

Texas requires a mandatory 12-day cooling-off period between when you submit your loan application and when you can close on the refinance.

This isn't 12 business days, it's 12 calendar days, including weekends and holidays.

The law requires lenders to provide you with specific disclosures within seven days of application, and you cannot close until at least 12 days have passed from the application date.

This waiting period gives you time to review loan terms, compare offers from other lenders, consult with family or financial advisors, and change your mind without penalty if you decide refinancing isn't right for you.

How much are closing costs on a Texas cash-out refinance?

Closing costs typically range from 2% to 5% of your new loan amount.

On a $300,000 refinance, expect to pay between $6,000 and $15,000 in closing costs.

These expenses include appraisal fees ($400-$600), title insurance and title search ($1,000-$3,000), origination or processing fees (0.5%-1% of loan amount), credit report fees ($25-$50 per borrower), recording fees ($50-$250), survey fees if required ($300-$500), and prepaid items like property taxes and insurance.

Texas law caps certain fees that lenders can charge, providing additional consumer protection beyond federal regulations.

What can I use cash-out refinance money for?

Unlike some financial products with usage restrictions, cash-out refinance proceeds can be used for virtually any legal purpose.

Common uses include home improvements and renovations, high-interest debt consolidation, college tuition or education expenses, medical bills, business startup costs, investment property down payments, building an emergency fund, wedding expenses, or simply having extra liquidity for peace of mind.

There are no restrictions, and your lender cannot dictate how you use the funds.

However, keep in mind that using the money for home improvements may qualify you for mortgage interest tax deductions, while other uses may not.

Texas Cash-Out Refinance vs. Home Equity Loan: Which Is Right for You?

Many Texas homeowners get confused about the difference between a cash-out refinance and a home equity loan.

Both allow you to access your equity, but they work very differently and make sense in different situations.

Cash-Out Refinance replaces your entire existing mortgage with a new, larger loan.

• You get one monthly payment that combines principal, interest, taxes, and insurance.

• Interest rates typically run 0.25% to 0.50% higher than standard rate-and-term refinances.

• Closing costs range from 2% to 5% of the loan amount. Expect $6,000 to $15,000 on a $300,000 refinance.

• You can borrow up to 80% of your home's value and choose between fixed or adjustable rates.

• There are no prepayment penalties in Texas.

Home Equity Loan creates a second lien on your property while keeping your original mortgage intact.

• You'll make two separate monthly payments, one for your first mortgage and one for the home equity loan.

• Interest rates are usually 1% to 2% higher than first mortgage rates.

• Closing costs are lower, typically 1% to 3% of the loan amount, around $3,000 to $9,000 on a $100,000 loan.

• You can borrow up to 80% combined loan-to-value (meaning your first mortgage plus the home equity loan can't exceed 80% of your home's value).

• These are almost always fixed-rate loans with no prepayment penalties in Texas.

Both options offer the same tax treatment, mortgage interest may be deductible if you use the funds for substantial home improvements, though this depends on your individual tax situation.

When a Cash-Out Refinance Makes More Sense?

Choose a cash-out refinance if:

• your current mortgage rate is higher than prevailing market rates (you'll save money while accessing cash),
  
  
• you want the simplicity of a single monthly payment instead of juggling two,
  
  
• you're planning to use the funds for a major expense like a full home renovation,
  
  
• you have excellent credit and can qualify for competitive rates,
  
  
• or you want to extend your loan term to lower your monthly payment even though you'll pay more interest long-term.

When a Home Equity Loan Is Better?

Consider a home equity loan instead if:

• your current mortgage has an excellent interest rate that you don't want to give up,
  
• you only need a relatively small amount of cash,
  
  
• you want to avoid the higher closing costs of a full refinance,
  
  
• you prefer to keep your first mortgage separate from your equity borrowing,
  
  
• or you plan to pay off the loan quickly and want a shorter term option.

Eligibility Requirements for Texas Cash-Out Refinance 2025

Not every homeowner qualifies for a Texas 50(a)(6) cash-out refinance. Here's exactly what lenders require:

Property Requirements

Your property must be your primary residence, the home where you actually live for the majority of the year.

Investment properties, rental homes, and second homes do not qualify for Texas constitutional cash-out refinances.

The property must be located in Texas and classified as a homestead for property tax purposes.

Ownership and Timing Requirements

If you've previously done a cash-out refinance on the property, you must wait a full 12 months before doing another one.

There's no waiting period if this is your first cash-out refinance or if your previous refinance was a rate-and-term refi without cash back.

All owners listed on the property title must consent to and sign the loan documents.

Equity Requirements

You must have at least 20% equity remaining after the refinance closes.

This means your new loan cannot exceed 80% of the home's current appraised value.

If you owe $250,000 and your home appraises for $300,000, you only have $50,000 in equity (17%), which isn't enough to do a cash-out refinance under Texas law.

Credit Requirements

Minimum credit score of 620 for most conventional lenders, though 680+ is preferred and 740+ gets you the best rates.

Clean payment history on your current mortgage, preferably with no late payments in the past 12 months.

Limited recent delinquencies on other credit accounts.

Resolved or explained any bankruptcies, foreclosures, or short sales per lender waiting period requirements.

Income and Debt Requirements

Debt-to-income ratio typically must be 43% or lower, though some lenders allow up to 50% with compensating factors like excellent credit or significant reserves.

Stable, verifiable income for at least two years in the same field or industry.

Sufficient income to cover the new mortgage payment plus all other monthly obligations.

Documentation includes recent pay stubs, W-2s or 1099s, two years of tax returns, and bank statements showing reserves.

Documentation Checklist

Before you apply, gather these documents to speed up the process:

government-issued photo ID, Social Security card or verification, two most recent pay stubs,

two years of W-2s or 1099s, two years of complete tax returns with all schedules, two months of bank statements for all accounts,

current mortgage statement,

homeowners insurance declaration page, HOA information if applicable,

and explanation letters for any credit issues, employment gaps, or large deposits.