What is Cash-Out Refinancing?
As a homeowner, you know your home isn’t just a house, it’s also one of the most valuable assets you can own. If you have equity in your home and find yourself in need of cash, a Cash-Out Refinance may be the right option for you. As your home’s value has increased over time and you’ve followed through with your monthly mortgage payments, the amount of equity you have in your home has increased.
Cash-Out Refinancing replaces your current mortgage with a new one. This mortgage is for an amount larger than what you currently owe. The excess funds left over after paying off your old loan’s outstanding balance and closing costs is then paid out to you in cash at closing.
Use the New American Funding mortgage calculator to calculate your estimated mortgage costs.
Cash-Out Refinance Overview
How a Cash-Out Refinance Works
Cash-Out Refinancing works by allowing you to turn part (or all, in some instances) of your home’s equity into liquid cash. Your home equity is your home’s current market value minus what you still owe on your mortgage. Home equity can fluctuate based on the housing market and the amount you have paid on your current mortgage.
Cash-Out Refinancing leverages your current equity using a second mortgage that is greater than the first. The borrower uses the new mortgage to pay off the remaining balance of the first mortgage and closing costs. The amount of money leftover is given to them in cash.
Reasons to Consider Cash-Out Refinance
Cash-Out Refinance is particularly beneficial for borrowers who have a specific amount of cash in mind for something they need. It may also be a good option to consider if you intend to use the money for something that will create return value. Some examples of this would be:
- Home Improvements and Renovations – You have specific home improvement projects in mind for your house. These can include renovations to improve accessibility, improvements to add value to your home, and needed repairs.
- Consolidate Debt – You have a specific amount of debt you would like to consolidate such as credit card debt and personal loans.
- Get a Lower Interest Rate – Refinancing your current mortgage can lower your interest rate to give you lower monthly payments.
- Money to Invest – You plan to use the extra cash from refinancing to buy investment properties or stocks and bonds.
Cash-Out Refinance Requirements
The requirements for eligibility for Cash-Out Refinance vary based on your individual lender. Each mortgage lender will have their own requirements for eligibility, so always check with them when you are getting ready to apply for a loan.
Here are some general requirements for Cash-Out Refinance.
Minimum credit score of 580: Some lenders may require a credit score of as high as 620, which is the standard minimum for a Conventional loan. As with all loans, the higher your credit score is the better. A higher credit score may be able to get you more favorable terms and conditions to your loan.
A maximum debt-to-income ratio of 50%: A person’s debt-to-income (DTI) ratio is the percentage of their gross monthly income they spend to cover debts. Debts can include student loans, credit cards, and any type of federal debt. Having a low DTI is also important in finding low mortgage rates. If your DTI exceeds 43%, it could be difficult to qualify for certain types of Cash-Out refinance loans. However, there are exceptions to this, so make sure to check with your lender.
Many lenders will require you to have at least 20% equity in your home: You will need to have enough equity in your home in order to qualify for a Cash-Out Refinance. Ex. If your home is worth $250,000 and you owe $150,000, then you have $100,000 in equity built up in your home. Be aware that normally you will not be able to take out 100% of your home’s equity; instead, you will be limited to between 80-90%. So make sure you have enough equity that a Cash-Out Refi will cover what you need.
A home appraisal: Some lenders may require an appraisal of your home before you can qualify for a Cash-Out Refinance.
Cash-Out Refinance Benefits
Cash-Out Refinancing is usually attractive to homeowners who have a lot of their wealth tied up in their home and would like to have more cash assets to use. The main advantage of a Cash-Out Refi is that it gives you one lump sum to spend however you want. Homeowners also sometimes consider Cash-Out Refinancing when interest rates are low so they can lower their monthly payments.
Here are some of the benefits of Cash-Out Refinancing.
- Eliminate other debt – Use Cash-Out Refi to pay off credit card debt, car notes, or personal loans.
- Debt consolidation – Combine your debt under one single monthly payment.
- Lower, potentially more dependable, interest rates – A Cash-Out Refi may be able to lower your monthly payments by giving you a lower interest rate.
- Potential tax reductions – Tax reductions may be available if you use your Cash-Out Refi for certain home improvement projects. These may include things like installing a security system, improving your roof, or constructing new rooms. Check with your tax professional to see if you’re eligible.
- Home improvements or renovations – Use Cash-Out Refi to improve the condition of your home. Add value by renovating your property or make it more accessible to persons with disabilities.
- Use to purchase investment properties – Use a Cash-Out Refi to purchase rental properties.
- Pay for continuing education – Pay off your student loan or save up for your child’s college tuition.
- Pay off medical bills or another large expense
How Much Cash Can You Get from a Refinance?
How much cash you can get with a Cash-Out Refinance depends on your lender. Your lender will calculate your loan depending on the loan type and how much equity you have in your home. Usually, the limit for the amount of cash you can receive is 80% of the value of your home. However, there are some exceptions. For instance, if you’re a veteran using a VA Cash-Out Refinance you may be eligible to refinance up to 100% of the value of your house.
Getting a Cash-Out Refinance
What to Know
- Leaving Equity in Your Home: Many lenders require you to leave equity in your home. Typically, you can access 70-80% of your home’s equity. The exception to this is the VA Refinance, which allows eligible military service members to pull 100%.
- Paying Closing Costs: If you choose to refinance your mortgage you will be required to pay the closing costs of the new loan. These costs can include appraisal fees, attorney fees, and taxes and are usually 2-5% of the loan.
- No Cash Right Away: In order to protect borrowers, the federal government requires that lenders give borrowers three days to change their mind once they qualify for a Cash-Out Refi meaning that the cash from your loan will not be immediately available to you.
- New loan terms: When you refinance an existing mortgage, you are putting a new mortgage on your home. This new mortgage may have different terms and conditions than your original loan.
- You might need an appraisal: Many lenders may require that your property be appraised before you can qualify for a Cash-Out Refi. This is because your equity is partially dependent on the current market value of your house. An appraisal will verify what that value amount is for your lender.
How to Apply for a Cash-Out Refinance
- Estimate how much you want to borrow. Cash-Out Refi is most beneficial when you know the amount of cash you need. Finding out how much you want to borrow helps you determine whether or not a Cash-Out Refi will be right for your circumstances.
- Determine the amount of equity you have in your home.
- Research your lender and find out their individual requirements including credit score, DTI, and how much equity you’ll need in your home.
- Gather the information you will need to provide your lender. This will likely include personal identifying information, information on other debts like a credit card statement, and proof of income.
- Fill out the Cash-Out Refi paperwork.
- Close on your loan.
Cash-Out Refinance Vs. Home Equity Line of Credit (HELOC)
A HELOC works like a credit card in the sense that you have a line of credit that you can access for your financial needs. The amount of credit you are offered is decided by your lender based on the current value of your home and how much you owe on your current mortgage.
The HELOC acts as a revolving line of credit. This means that your lender will establish a credit limit that you will be able to borrow from over and over. You can borrow the whole amount up to the credit limit, or you can borrow various parts of the amount. As you pay off what you have borrowed, that amount continues to be available to you, minus whatever you still owe.
You will have to pay back what you owe with interest, but you can come back and withdraw as much as you need with separate transactions. It is ultimately up to you how much you want to withdraw from your line of credit.
With a HELOC, you can withdraw only the funds you need versus getting one lump sum of cash, which may take longer to pay off with the added funds and additional interest.
A Cash-Out Refinance can have a fixed interest rate, so you could have a fixed mortgage payment for the life of the loan. With a HELOC, you have a line of credit with the ability to make withdrawals and a fluctuating interest rate. Your HELOC payment depends on how much you borrowed and the interest rate at the time you make your HELOC payments.
Pros and Cons of Cash Out-Refinance
Cash-Out Refinance can be a beneficial option for borrowers who want to consolidate their debt, potentially lower their interest rate, or who want to use the money to invest in their future. Getting a Cash-Out Refi may raise your credit score and may help you eliminate your other debts.
You should always consider the applicability of loan products to your individual needs. In addition to the pros of a Cash-Out Refi, you should also consider that a new mortgage will take time. You will have to pay closing costs and may have to pay for private mortgage insurance (PMI) depending on how much you borrow. If you do end up paying PMI, note that it can be canceled after 20% equity is achieved. A borrower must initiate MI termination based on original value of property if that property is their principal residence or second home, and the borrower has an acceptable payment record.
A new mortgage will also have new terms to consider and adjust to. This may include how many years it will take you to pay the new mortgage down.
To learn more about Cash-Out Refinance and get answers to your other questions contact one of the loan officers at the New American Funding website.
Cash-Out Refinance FAQs
What are the fees for a Cash-Out Refinance? If you choose to refinance your mortgage you will be required to pay the closing costs of the new loan. These costs can include appraisal fees, attorney fees, and taxes and are usually 2-5% of the loan.
Do I have to pay taxes on a Cash-Out Refinance? A Cash-Out Refinance is a loan. This means that the cash that you receive when you close on the loan does not count as taxable income. So you do not have to pay taxes on the money you get from a Cash-Out Refi.
Your loan may also be eligible for tax deductions depending on what you use it for. For instance, if you fund home improvement projects or renovate using your Cash-Out Refi, that may qualify your loan for tax deductions.
Is it hard to qualify for a Cash-Out Refinance? Qualifying for a Cash-Out Refi is similar to other loans. You will need to meet the standard credit and DTI requirements as well as whatever applicable qualifications your individual lender requires. How difficult it is to qualify may also depend on the type of Cash-Out Refi loan you are applying for. For instance, an FHA Cash-Out Refinance loan will have different requirements than a VA Cash-Out Refinance loan.
How long does a Cash-Out Refinance take? The process of applying, getting approved, and closing on a Cash-Out Refi can take between 45 and 60 days. You may also have to wait three days after closing to receive your money. This is because borrowers are protected by federal law and are given three days to change their mind about refinancing their mortgage.
What is a Limited Cash-Out Refinance? A Limited Cash-Out Refinance refinances your mortgage to a new one with better terms. Instead of being able to take out thousands of dollars, the cash amount you can receive is limited to around 2% of the balance or $2,000.