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What is a Cash-out refinance?
A cash-out refinance is a refinancing of an existing mortgage loan, where the new mortgage loan is for a larger amount than the existing mortgage loan, and you get the difference between the two loans in cash.
For instance, if your home is worth $300,000 and you owe $200,000, you have built up $100,000 in equity. With cash-out refinancing you can receive a portion of this equity in cash. If you want to take out $40,000 in cash, this amount would be added to the principal of your new home loan. In this example, you’d get a new loan worth a total of $240,000.
Next: Know how much cash you can take out of your home.The pros of Cash-Out refinance
- Because it’s secured by real estate, the interest rate is lower than rates for unsecured financing.
- Because it’s a first mortgage, the interest rate is lower than rates for home equity loans, which are usually second mortgages.
- The interest may be tax-deductible. Check with a tax pro.
The cons of Cash-Out refinance
- Underwriting guidelines are stricter than for rate and term refinancing.
- Costs are higher because surcharges are assessed against the entire refinance, not just the amount of cash-out.
- Cash-out refinancing takes longer than setting up a home equity loan or personal (unsecured) loan.
- Increasing the loan-to-value to over 80 percent requires mortgage insurance.
Cash-out refinance requirements
Here are the requirements that you have to meet:
- Loan-to-value: You must have equity built up in your house to use a Cash-Out refinance. For home loans up to $500,000, the maximum LTV generally is 80%. Above a half-million dollars it drops to 70%. To calculate your LTV divide your current loan balance by the current appraised value of the home or use LTV calculator.
- Credit score: Most borrowers with a credit score between 640 and 680 will qualify, though the best rates are generally available to homeowners with credit scores of 700 and higher. For a Cash-Out refinance on a home the borrower lives in, generally, the lowest credit score is 640, according to Fannie Mae's standards.
- Appraisal: If your home needs repairs or maintenance jobs do it before a home appraisal to get the best appraisal.
How to get started
If you qualify for get Cash-Out refinance, you’ll go through an application, approval and closing process (similar to when you got your original mortgage). Outlined below are the steps to get started.
Step 1.
Know how much equity you can take out of your home.
Use the Cash-out Refinance Calculator to get an idea of how much cash you might have available.
Step 2.
Find the best offer.
Compare Cash-out Refinance quotes at least from 3 lenders before to make any decision to refinance. Compare closing cost, interest rates, new monthly payment and other lenders fees.
Step 3.
Gather your financial information.
Make sure you have your basic financial and loan information on hand when you call your mortgage company. You’ll need:
- Your mortgage statements, including information on a second mortgage (if applicable).
- Your income details (paystub or income tax return).
Step 4.
Go through the application, approval and closing process.
If your lender determines that you do qualify for Cash-Out, they will guide you through the application, approval and closing process.
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