In this article
- What Is a Cash-Out Refinance and How Does It Work?
- Loan-to-value (LTV) ratio
- Credit score
- Equity in your home
- Debt-to-income (DTI) ratio
- Requirements for a Cash-Out Refinance
- Types of Cash-Out Refinance Loans
- The Cash-Out Refinance Closing Process
- Alternatives to a Cash-Out Refinance
- Why Choose a Cash-Out Refinance and How the Moreira Team Can Help
They say, “Cash is king,” but his highness has left the building for many Americans. It’s harder than ever to save, and many struggle as incomes fail to increase when prices, interest rates, and inflation rise. However, if you’re a homeowner, more options are available. The cost to refinance mortgage rates like yours could pay off in the long term, especially if you opt for a cash-out refinance loan. A cash-out refinance replaces your existing home loan with a larger one, returning the difference in cash. This allows homeowners to access the equity in their homes to accomplish several goals—from repaying student loans to tackling home renovations. So, what exactly is a cash-out refinance? Let’s dive into the definition, uncover how it works, and talk about the various types of cash-out refinance loans so that you’re properly prepared to decide if the cost to refinance mortgage loans like yours is worth it.
What Is a Cash-Out Refinance and How Does It Work?
A cash-out refinance involves taking out a new loan larger than the existing mortgage. The new loan amount pays off the current home loan, with the remainder returned as cash. With a conventional cash-out refinance, you can take out a new loan up to 80% of your home’s value. After subtracting your current mortgage amount, the remainder is your potential cash out. Numbers, not your thing? Don’t worry—the cost to refinance mortgage loans like yours can be easily estimated using Moreira’s refinance affordability calculator.
Rates for cash-out refinance tend to be 0.125% to 0.5% higher compared to no-cash-out refinance. The rate will depend on several factors including your:
Loan-to-value (LTV) ratio
Lenders often have maximum LTV ratios, which is the ratio of the loan amount to the home’s appraised value. For a cash-out refinance, lenders may have specific limits on how much of your home’s value you can borrow.
A good credit score of at least 620 is typically important for mortgage refinancing. Lenders may have minimum credit score requirements, and a higher credit score can improve your chances of qualifying for favorable terms.
Equity in your home
Lenders usually require that you have more than 20% equity in your home. Equity is the difference between the current market value of your home and the remaining balance on your mortgage. The higher the equity, the more likely you are to qualify.
Debt-to-income (DTI) ratio
Lenders assess your ability to repay the loan by looking at your DTI ratio, which compares your monthly debt payments to your gross monthly income. Most require a DTI (including the new loan) of 43% or less.
Other factors like income stability, employment status, and property value could also impact your eligibility. Connect with the experts from Moreira to discuss the cost of refinancing mortgage loans like yours as a cash-out refinance.
Requirements for a Cash-Out Refinance
As you consider the cost to refinance mortgage loans like yours, start looking into why a homeowner might not qualify for a cash-out refinance. Do you have enough equity in your home? Is your credit score going to be an obstacle? Lenders also look for stable and reliable income sources, so frequent job changes or gaps in employment could work against you. Similarly, providing sufficient documentation may be challenging if you’re self-employed or have non-traditional income sources. Lenders typically require proof of stable and verifiable income. If your DTI ratio is too high, it may signal to lenders that you could struggle to handle the increased mortgage payments.
Assess the condition of your home. If it’s in poor condition, chances are lenders won’t want to proceed with a cash-out refinance, given that the property may not have enough value to support the loan. Recent bankruptcies or foreclosures can also hurt your eligibility. If you’ve experienced one of these financial events, you may have to go through a waiting period before applying. The biggest takeaway? Do your research. The requirements and cost to refinance mortgage loans like yours as a cash-out refinance could be prohibitive, so it’s best to get as much information as possible at the start.
Types of Cash-Out Refinance Loans
If you’ve considered the requirements for a cash-out refinance and want to move forward, the next step is exploring your options regarding the types of loans available to you.
With a conventional loan, you can borrow up to 80% of your home’s value with a minimum 620 credit score. They don’t typically require upfront mortgage insurance premiums, which means lower upfront costs for you. They also tend to have higher loan limits than government-backed loans, which is beneficial if you need to access a more significant amount of home equity through the cash-out refinance. Remember the impact of bankruptcies and foreclosures? Conventional loans may have shorter waiting periods after those significant financial events, so keep that in mind if you’ve recently been affected.
The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development, and it provides mortgage insurance on loans made by FHA-approved lenders. FHA cash-outs generally have more lenient credit score requirements than conventional loans—a minimum of 600 compared to 620. FHA loans typically require a lower down payment than conventional loans, and with both fixed-rate and adjustable-rate options, you have more choices based on your preferences and financial goals. You can typically borrow up to 80% of your home’s value with some upfront fees.
A VA (Department of Veterans Affairs) refinance is available to eligible veterans, active-duty service members, and certain National Guard and Reserves members. One of the most significant benefits of VA loans is that they do not require a down payment, which means you can borrow up to 100% of a home’s value with financed upfront fees. The VA also has regulations to limit the closing costs that veterans can be charged, making the overall cost of obtaining a VA loan more predictable and manageable.
Curious to see how a cash-out refinance loan works? Check out our case study to see how a Moreira client used the funds to pay off high-interest credit cards to increase monthly cash flow and pull extra cash for a rainy-day emergency fund.
The Cash-Out Refinance Closing Process
The good news is it’s similar to a traditional mortgage refinance process. You must have rates checked across lenders, choose a lender, complete a refinance application, provide supporting documents, and get a home appraisal. The last action before closing is underwriting where all documents are reviewed and you’re approved for the loan. Any existing mortgage is paid off, and the remaining funds from the cash-out refinance are typically provided to you. You can use these funds however you choose—for home improvements, debt consolidation, education expenses, or other purposes.
Alternatives to a Cash-Out Refinance
If you want to achieve certain financial goals or get a jump start on those renovations, a cash-out refinance loan isn’t your only option for liquidity. A home equity loan isn’t much different than a cash-out refinance, except it doesn’t change the interest rate. You can borrow up to 80% of your home’s value minus what you still owe. A home equity line of credit (HELOC) is an option if you’ve built up a significant amount of home equity, which you use as collateral to take out in the form of cash or credit. Second mortgages, reverse mortgages, or personal loans are all viable solutions. However, these options typically carry higher interest rates or have unique qualifiers.
Why Choose a Cash-Out Refinance and How the Moreira Team Can Help
A cash-out refinance loan could be a fit for you if you’re using it in situations where you’ll receive a reasonable rate on the new loan—and when you’ll have the opportunity to see a good return on your money. Debt consolidation, home renovations, and home remodeling top the list for reasons why. College tuition or repaying student loans are also leading causes of a cash-out refinance. Moreira can help you determine if you can find the right loan and if a cash-out refinancing can provide you with a lower interest rate. Check out our refinance affordability calculator to run the numbers on the cost of refinance mortgage loans like yours.