How Cash-Out Refinance Affects Debt-to-Income Calculations

How a cash-out refinance changes your DTI (and why it matters)

A cash-out refinance replaces your existing mortgage with a new, larger mortgage and pays you the difference in cash. Because DTI (debt-to-income ratio) is calculated using monthly debt payments divided by gross monthly income, any increase in your mortgage principal — and usually your monthly payment — will increase your DTI. Lenders use DTI as a primary underwriting screen to judge whether you can afford additional credit, so changes to your DTI can affect eligibility for mortgages, auto loans, personal loans, or credit lines.

Key points:

• DTI uses gross (pre-tax) monthly income and monthly debt obligations. For mortgages, lenders typically include PITIA — principal, interest, taxes, insurance, and association dues — and required mortgage insurance.
• Lenders commonly evaluate two ratios: the front-end (housing) ratio and the back-end (total) DTI. The front-end ratio measures housing costs relative to income; the back-end includes all monthly debts.
• Conventional mortgage underwriting (Fannie Mae/Freddie Mac automated models) generally prefers a total DTI at or below about 36%, though lenders can and do allow higher ratios (often up to 43% or more) when there are compensating factors (CFPB, Fannie Mae underwriting guidance). FHA and VA programs have different DTI tolerances and underwriting flexibilities.

(Author note: In my 15+ years advising homeowners, I’ve seen many borrowers assume the cash is ‘free’ and miss how a higher mortgage payment pushes their DTI above acceptable thresholds for other credit needs.)

How lenders calculate DTI when you refinance

A typical DTI calculation looks like this:

• Add up recurring monthly debt payments: mortgage (PITIA), minimum credit card payments, auto loans, student loans, child support, and other contractual debt.
• Divide that total by gross monthly income.

Example:

• Gross monthly income: $6,000
• Old mortgage payment (PITIA): $1,400
• Other monthly debts: $600
• Old DTI: (1,400 + 600) / 6,000 = 33.3%

After cash-out refinance (new mortgage payment $1,900):

• New DTI: (1,900 + 600) / 6,000 = 41.7% — a significant jump that could limit future borrowing.

Note: Some lenders use slightly different definitions of income (overtime, bonuses, rental income), or calculate minimum payments on revolving accounts differently. Always confirm the lender’s DTI rules early in the process.

When cash-out refinance can reduce DTI

A cash-out refinance can lower your DTI in some cases. The typical scenario is when you use the cash to pay off high monthly debt (for example, credit cards or an expensive personal loan). Because credit card minimum payments count toward DTI, eliminating those payments can offset the increase in mortgage payment.

Example:

• Old mortgage (PITIA): $1,200
• Credit card minimum payments: $500
• Gross income: $5,000
• Old DTI: (1,200 + 500) / 5,000 = 34%

If you take $50,000 cash-out and use it to pay off the credit cards, the new mortgage payment might rise to $1,700 but the $500 credit card payment goes away:

• New DTI: (1,700) / 5,000 = 34% — essentially unchanged.

Whether this is a smart move depends on the new mortgage’s interest rate, term, closing costs, and tax treatment. Mortgage interest rates are typically lower than credit card rates, but you are converting unsecured debt into secured, longer-term debt.

Loan limits, LTV, and program rules that affect cash-out

Lenders limit how much equity you can tap on a cash-out refinance. For conventional loans sold to Fannie Mae or Freddie Mac, cash-out refis commonly limit combined loan-to-value (CLTV) to about 80% of the home’s value. FHA, VA, and portfolio lenders have different rules and flexibilities. These LTV and program rules affect whether you can take a given cash amount — and therefore how much your mortgage payment will increase.

Source notes: the Consumer Financial Protection Bureau (CFPB) and loan program guides from Fannie Mae/Freddie Mac and FHA/VA explain typical LTV limits and underwriting practices (cfpb.gov; fhfa.gov).

Tax considerations (short summary)

Mortgage interest on cash-out refinances is potentially tax-deductible only when the funds are used to buy, build, or substantially improve the residence that secures the loan, according to IRS rules on home mortgage interest. Using cash-out proceeds to pay off credit cards or for general living expenses generally does not meet that standard for deduction. Check with a tax professional or the IRS for details and current rules (irs.gov).

Real-world examples (three scenarios)

1) Higher DTI, worse eligibility

• Old mortgage: $200,000, payment $1,300
• New mortgage (cash-out): $250,000, payment $1,800
• Gross income: $5,000
• DTI rises from 26% to 36% — may push a borrower from ‘preferred’ into a marginal DTI band, reducing options and increasing pricing.

2) Net neutral DTI (paying off other debt)

• Old mortgage payment: $1,200
• Credit card payments: $500
• New mortgage payment after cash-out: $1,700 (credit cards paid off)
• DTI remains roughly the same, but high-interest revolving debt moves to a lower-rate secured position with longer amortization.

3) Lower monthly cash flow but higher long-term cost

• Sometimes borrowers lower monthly payments by lengthening the term or taking a lower rate; monthly DTI may fall, but total interest paid over the life of the loan rises. Consider amortization and total interest cost — not just monthly DTI.

Practical strategies to manage DTI before and after a cash-out refinance

1. Run the numbers first: Use a detailed worksheet or the Debt-to-Income Ratio Calculation Sheet to model different cash-out amounts, rates, and terms.
2. Consider paying down revolving balances before applying. Small reductions in minimum payments can materially reduce back-end DTI.
3. Compare alternatives: a home equity line of credit (HELOC) or home equity loan may give flexibility with different DTI impacts. A personal loan might make more sense for small, short-term needs.
4. Talk to a mortgage adviser early: Confirm the lender’s DTI policies, acceptable compensating factors, and documentation requirements. Automated underwriting systems (e.g., Desktop Underwriter) use different overlays than manual underwriting.
5. Watch reserves: Some lenders require cash reserves after closing if your DTI is high. That reserve requirement can affect your ability to qualify.
6. Plan tax treatment: If your goal is tax-deductible improvements, document the use of proceeds and save receipts — it matters for tax reporting.

Documentation lenders will want

• Recent pay stubs, W-2s, or tax returns (self-employed borrowers usually need 2 years of tax returns and profit-and-loss statements).
• Current mortgage statement, proof of other monthly debts, and bank statements for reserves.
• A title search and updated appraisal or automated valuation to confirm current value and CLTV.

Common mistakes to avoid

• Treating the cash as ‘free’ without modeling long-term cost.
• Ignoring how higher DTI affects future lending or refinancing options.
• Failing to document how cash was used (important for tax and future lending questions).
• Forgetting closing costs and prepayment penalties — they can offset the perceived benefit.

Where to learn more on DTI and acceptable ratios

• Read our core explainer on the Debt-To-Income Ratio for definitions and examples.
• Review lender-friendly guidance in What is a Good Debt-to-Income Ratio?.

Bottom line

A cash-out refinance is powerful but double-edged. It can consolidate high-interest debt, fund important home improvements, or provide cash for other goals — but it commonly increases your mortgage balance and monthly housing payment, which raises your DTI. Sometimes that increase is offset by paying off other debts, but the net effect depends on the amount, use of proceeds, interest rate, remaining term, and lender rules.

Before you act, run detailed scenarios, confirm program limits and LTV rules with lenders, and consult a tax advisor about deductibility. If you want a clear next step, start by modeling three scenarios (no cash-out, partial cash-out, full cash-out) using the Debt-to-Income Ratio Calculation Sheet and discuss results with a licensed mortgage professional.

Professional disclaimer: This article is educational and does not constitute personalized financial or tax advice. Laws and loan program rules change — consult a qualified mortgage advisor, tax professional, or financial planner for recommendations tailored to your situation.

Author credentials: I have 15+ years advising borrowers on mortgage strategy and underwriting. My guidance reflects industry underwriting norms and consumer protection standards as of 2025 (CFPB, FHFA, IRS references used for factual background).