CASH OUT REFINANCE
Take Cash Out by Collateralizing Your Home Equity
What is a
Cash Out Refinance?
A cash-out refinance is a mortgage refinancing option that enables homeowners to leverage the equity they’ve accumulated in their property by borrowing more than what they currently owe on their mortgage. This type of refinancing allows homeowners to receive cash in exchange for taking on a larger mortgage.
Why Choose a
Cash Out Refinance?
Cash out as much as 80% of LTV (home value)
Lower Interest Rates Than Credit Cards
Amortize Payment Period of Cash Out Amount Over 30 Years
More About a Cash Out Refinance
Unlike when you take out a second mortgage, a cash-out refinance doesn’t add another monthly payment to your list of bills – you pay off your old mortgage and replace it with your new mortgage.
For example, let’s say you’ve bought a home for $200,000 and paid off $60,000. This means you still owe $140,000 on your home. Let’s also say you want to make $20,000 worth of renovations.
With a cash-out refinance, you take a portion of your equity and then add what you’ve taken out onto your new mortgage principal. This means your new mortgage would be worth $160,000 – the original $140,000 you owed on the home plus the $20,000 you need for renovations. Your lender gives you the $20,000 in cash a few days after closing.
When you refinance, you can do anything you want with the money you take from your equity. You can repair your property, catch up on your student loan payments, or cover an unexpected medical or auto bill. Cash-out refinances also usually give you access to lower interest rates than credit cards.
How Much Cash Can You Get On A Refinance?
The amount you earn on your refinance typically depends on your home’s value. In general, lenders will let you draw out no more than 80% of your home’s value, but this can vary from lender to lender and may depend on your specific circumstances. Before finding out how much you qualify for, you’ll need to have your home appraised.
One big exception to the 80% rule is VA loans, which let you take out up to the full amount of your existing equity.
How Does A Cash-Out Refinance Work?
The cash-out refinance process is similar to the process you undergo when you buy a home. After you know you meet the requirements, you choose a lender, submit an application and documentation to underwriting, get an approval and wait for your check.
Here are some reasons to consider getting a cash-out to refinance:
Fund Home Improvements And Renovations
Upgrades are often necessary, from questionable design choices to a broken HVAC system. A cash-out refinance allows you to use the equity earned to fund home improvements.
Get A Lower Interest Rate
Mortgage and refi rates are generally lower than credit card interest rates – often significantly lower. If you put an unexpected bill on a variable credit card, you might pay a high amount of interest – the prime rate that’s tied to the federal funds rate set by the Federal Reserve, plus a certain number of percentage points on top of that. If you have enough equity in your home to cover your bill, you may save thousands in interest over time.
Free Up Money To Invest
When you consider the power of compounding interest, it can be an intelligent move to free up money and save toward retirement early rather than keep your funds tied to your home. Cash-out refinances give you access to funds that you can use to boost your retirement savings or build up a college fund.
What You Should Know About Getting A Cash-Out Refinance
You might need to consider a few things before you commit to a cash-out refinance. Here are some important considerations to bear in mind.
You’ll (Probably) Have To Leave Equity In Your Home
Let’s say you’ve paid $20,000 on your mortgage principal. You might assume that you can take up to $20,000 out with a cash-out refinance. However, depending on your loan, this isn’t always possible. Conventional loans require you to leave 20% equity in your home after a refinance, and FHA loans require 20%. The only exception to this rule is with a VA loan refinance, which doesn’t require you to leave any equity after refinance.
You’ll Pay Closing Costs
Like when you buy a home, you’ll pay closing costs when refinancing. Some typical costs to refinance for closing include a credit report, appraisal, and attorney fees, depending on your state. If you only need to take out a small loan, you should consider whether the closing costs would negate anything you save with a lower interest rate.
You Won’t Get Cash Immediately
If you need money immediately, a cash-out refinance may not be the right solution. Similar to when you buy a home, you must submit to underwriting and appraisal processes before your lender approves your refinance. Even after you close, the Truth in Lending Act requires your lender to offer you 3 days to cancel the loan if you have a change of heart, and you won’t get your cash until 3 – 5 days after closing.
Your Loan Terms May Change
When you get a cash-out refinance, you pay off your original mortgage and replace it with a new loan. This means your new loan may take longer to pay off, your monthly payments may differ, or your interest rate may change. Be sure to look at the Closing Disclosure from your lender and analyze your new loan terms.
You’ll Need An Appraisal
Cash-out refinances are contingent upon an appraisal by an independent third party. Appraisals can take time, so factor this into your refinancing timeline.
Have more questions about a Cash Out Refinance?
TALK TO ONE OF OUR MORTGAGE SPECIALISTS