Cash-Out Refinance in Texas: 2025 Rules & Requirements

A cash-out refinance enables you to take advantage of the equity you’ve built in your home by replacing your current mortgage with a new one for a higher amount and pocketing the difference in cash. It’s a way to turn a portion of your home’s value into money you can use, without taking out a separate loan.

That cash can be used for all kinds of things, such as remodeling a kitchen, paying off credit cards or funding big life changes. But before moving forward, it’s important to understand the Texas cash-out refinance rules, which are a bit stricter than in other states.

There are specific limits on how much you can borrow, when you can refinance again and how the process works. Whether you’re exploring a FHA cash-out refinance in Texas or going the conventional route, having a solid understanding of the basics will help you make a smart financial decision.

Not long ago, cash-out refinances in Texas — also known as Section 50(a)(6) loans — came with some pretty strict limitations. But thanks to Texas Proposition 2, passed in 2017, many of those rules were relaxed, making this option more accessible for homeowners.^[1]

Here’s what you need to know:

• Lenders cannot charge more than 2% of the loan amount in closing costs — excluding third-party expenses such as attorney and appraisal fees.

• You must have at least 20% equity in your home in order to qualify for cash-out refinancing, meaning that the new loan amount cannot exceed 80% of your home’s value.

• Any second mortgages or liens — in addition to your first mortgage — must be paid off using funds from the new loan.

• You cannot apply for cash-out refinancing within the first six months of owning your home, meaning that your mortgage must be more than six months old in order to qualify.

• In the event of a previous foreclosure, bankruptcy or short sale, waiting periods apply. You’ll need to wait seven years after a foreclosure and four years post-bankruptcy or short sale in order to be eligible for a cash-out refinance.

• Cash-out refinances are not backed by the federal government, ruling this option out if you’re seeking financing through the FHA or Department of Veterans Affairs (VA).

• You become ineligible for a home equity loan or home equity line of credit (HELOC) once you have cash-out refinancing in place.

• Neither investment properties nor second homes are subject to these rules, as they only apply to your primary residence.

In addition to these updates, changes to the Texas cash-out refinance rules have also made agricultural homesteads, or farms, eligible for cash-out loans. These types of properties were previously excluded from eligibility because of their agricultural exemptions.

Rule changes have also established that Section 50(a)(6) loans may be refinanced to a rate and term mortgage without taking out any cash.^[2]

Another key difference with cash-out refinancing in Texas is how the state treats second mortgages and HELOCs. Unlike in many other states, Texas considers both to be cash-out refinances. That means if you’re thinking about taking out a second mortgage or HELOC, you’ll need to factor in the combined loan amount — your original mortgage plus the new loan.

Together, they can’t exceed 80% of your home’s value. It’s also worth noting that Texas only allows one cash-out refinance per year, so it’s important to plan ahead.

The main draw of a cash-out refinance is that it gives you access to a lump sum of cash without adding a new loan to your plate.

That said, it’s always smart to look at the big picture before making a significant financial move. A cash-out refinance might be a great fit, but it’s worth comparing it to your other mortgage options to make sure it’s the right choice for your financial goals. Some alternatives to consider include:

Home Equity Loan

This type of home loan (commonly referred to as an HEL) is the most similar to cash-out refinancing, as it also involves borrowing money against the equity you’ve built in your property. However, unlike cash-out refinances, HELs are a type of second mortgage, meaning that you’ll take on an additional monthly payment on top of your original mortgage payment.

Home Equity Line of Credit (HELOC)

A HELOC also enables you to borrow against the equity you have in your home, but the way in which you take out money is reminiscent of using a credit card. With a HELOC, you are approved for a certain amount and given a period of time during which you can withdraw money as needed — as long as you don’t exceed your limit. Once the draw period ends, repayment begins and you must repay the outstanding balance, plus interest. If you can’t make payments, you risk foreclosure because the loan is tied to your home.

Rate and Term

Also known as a no cash-out refinance, rate and term refinancing is an avenue that homeowners pursue when looking to change the interest rate or terms of their existing mortgage. Similar to a cash-out refinance, rate and term loans are not a second mortgage but replace original mortgages. Homeowners will typically consider this type of refinance when they’re seeking a lower interest rate, hoping to get more favorable loan terms (either shorter or longer, depending on financial goals), switching loan types or eliminating mortgage insurance.

Streamline

If your existing mortgage is insured by the FHA, you may qualify for a streamline refinance. This type of refinancing enables you to replace your current FHA home loan with a new one. The process for applying is more straightforward than other refinance options and doesn’t require an appraisal, income verification or full credit inquiry.^[3]

Like most major financial decisions, cash-out refinancing comes with both perks and potential drawbacks. Understanding both sides can help you make a confident, informed choice.

Benefits of Cash-Out Refinance in Texas

• You might qualify for a lower interest rate or reduced monthly payment by replacing your original mortgage.
• The cash you receive is flexible, meaning you can use it for home improvements, debt consolidation, education or any other personal goals.
• A cash-out refinance is a single loan, not a second mortgage, which can simplify your monthly payments.

Downfalls of Cash-Out Refinance in Texas

• You’re resetting the clock on your mortgage, which could mean more time, and more interest, paid over the life of the loan.
• You’ll need to meet stricter qualification standards, especially in Texas, where loan-to-value caps and additional rules apply.
• You’re increasing your overall loan balance, which means tapping into home equity that could otherwise continue growing.
• If home values drop, you could end up owing more than your home is worth.

When weighing your options, be sure to consider your long-term financial goals, risk tolerance and current equity position. A cash-out refinance might be a powerful tool for some, but it’s not the best fit for everyone.

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You’ve weighed your options and determined that a cash-out loan is the refinancing option that makes the most sense for you — now what? As you get ready to apply for your loan, the following four tips will help you stay organized, confident and prepared.

• Allow plenty of time to shop for lenders before you submit an application. Not all financial institutions will offer the same terms and rates, so it’s a good idea to explore your options — from national banks to local credit unions — to find the most favorable offers.

• Check your credit score (and make any necessary improvements) prior to applying. In Texas, you must have a credit score of at least 620 and a debt-to-income ratio of 43% or less in order to qualify for a cash-out loan. If you have less than desirable credit, there are ways you can boost your score, including paying your bills on time and reducing the number of open credit accounts you have.^[4]

• Have all the necessary documents on hand before you apply. There’s nothing more stressful than scrambling to find misplaced documents the day before your loan appointment. Give yourself enough time to round up all the documentation your loan officer requires to process your application. In Texas, this includes tax returns, bank statements, pay stubs and proof of income.

• Be prepared for detailed questions about your financial history. Lenders will want to be sure that you can repay your loan before approving your application, so it’s important to have answers to their questions about your finances. Above all, it’s crucial to remain honest in your answers — falsifying information on a loan application is considered fraud and can result in loss of the loan, trouble securing financing in the future or imprisonment.

Q: What is cash-out refinancing?

A: A cash-out refinance is a type of mortgage that allows Texas homeowners to replace their existing home loan with a new one — while tapping into the equity they’ve built to receive a lump sum of cash. The new mortgage typically has a higher balance to account for the money you’re pulling out, and you’ll repay it over time just like a regular mortgage.

In short, it’s a way to access funds without taking out a separate loan, using your home’s equity to cover big expenses such as renovations, debt consolidation or major life events.

Q: Does Texas allow cash-out refinance?

A: Yes. However, cash-out refinances work differently than they do in other states. In Texas, these types of home loans are subject to a stricter set of rules, though they have been relaxed in recent years.

Q: How does cash-out refinance work in Texas?

A: State-specific rules surrounding cash-out refinancing:

• Limit the amount that lenders can charge in closing costs to 2%
• Establish that homeowners must have at least 20% equity in their homes in order to qualify
• Require that all second mortgages or liens must be paid off
• Dictate that a mortgage must be at least six months old to be eligible
• Exclude FHA and VA loans from eligibility
• Set a waiting period for those who have experienced foreclosure, bankruptcy or short sale
• Render homeowners ineligible for a HEL or HELOC once cash-out financing is in place
• Do not apply to investment properties and second homes

Q: What makes cash-out refinancing different in Texas?

A: In Texas, both second mortgages and HELOCs count as cash-out refinance loans. Additionally, borrowers are only permitted one cash-out refinance annually.

Q: Do I qualify for a Texas cash-out refinance loan?

A: Eligibility requirements include a credit score of at least 620, a debt-to-income ratio of 43% or less and at least 20% of equity in your property.

Q: Are there restrictions on how I can use the cash from a cash-out loan?

A: No, you can use the cash however you’d like. Many homeowners choose to use the money for home improvement projects, paying off credit card debts or to take care of any significant, upcoming expenses (such as college tuition or a down payment on an investment property).

At Blue Water Mortgage, our experienced team has the knowledge and ability to help you navigate the refinancing process. We utilize a transparent approach to assess your current financial status, understand your goals and identify the right refinancing option for your unique needs.

As independent mortgage brokers, we have the advantage of working with multiple different lenders to shop around and find you the most competitive rates. You will benefit from our expertise and advocacy on your behalf, as well as our thorough understanding of the refinancing process. Plus, you’ll have peace of mind knowing that we are available 24/7 via phone to address any concerns or questions you might have.

To speak with one of our mortgage specialists today, contact us here. We are excited to start a conversation about how we can offer a solution to meet your goals!

Or, download a copy of our free eBook, 105 Mortgage FAQs: A Guide for First Time Buyers & Experienced Investors, to get the answers to all your mortgage questions.