How to tap into your home’s equity by doing a cash out refinance
What refinancing with Cash-Out means is that you are taking out a loan for a larger amount than your current mortgage loan amount. This means you get to keep the difference between what you owe and what the home appraises for. The majority of homeowners use their cash out refinance for the following reasons:
- Pay off high-interest credit cards
- Pay for their kid’s student loan
- Home improvement
- Personal use like a vacation
Here is a typical example to make the point: Let’s say your current home is worth $300,000 and you still owe $150,000 on the mortgage. You have accumulated $150,000 in equity in your home.
You also have a good bit of high-interest credit card debt that you’ve accumulated over the years from that kitchen renovation your wife wanted, a trip to the beach last summer, and life in general. You could choose the cash out refinance route of taking a new loan in the amount of $225,000 which would give you roughly $75,000 to pay off all your debt and save you around $1450 a month net even after paying your new mortgage payment. You still own your home and are now debt free. You have essentially leveraged the equity in your home and used one loan to pay off higher debt. There also may be some tax advantages to doing this so be sure to check with your certified public accountant.
Before you jump on the cash out refinance approach here are a few things to consider:
A Cash-out refinance works the same way as other mortgage loans with regards to closing fees. These can add up to thousands in closings fees although there are loan options available to help offset these costs. Be sure to consult with your licensed mortgage advisor to come up with a plan that makes financial sense.
In some situations lenders may turn down your request down due to a poor credit score, a high debt to income ratio or not having enough equity in your home to support the amount of money you were hoping to pull out. Each program has different guidelines and rules so be sure to review each to be able to make the best decision on your cash out refinance.
How Does Va Cash Out Refinance Work?
If you are an eligible active military member, veteran or surviving spouse you may be able to access the equity in your home to do renovations, cover unexpected expenses or pay off some credit card debt.
You have two main options available with VA cash-out refinance loan:
- You can pay off a 1st and 2nd mortgage to consolidate to a lower fixed payment. (Please note – the total finance charges may be higher over the life of your loan).
- You can cash out up 100% of the appraised value for any reason you wish.
Perhaps you have a conventional home loan, but don’t have enough equity to refinance with the terms you need to accomplish all your goals. If you are eligible for a VA loan you could convert your conventional loan into a VA Cash-Out Loan and get a better deal all without having to pay mortgage insurance. In most cases, with a 620 FICO score, you will be allowed to refinance up to 100% of the value of the home.
VA Cash Out Refinance Guidelines
You must have your certificate of eligibility (COE) and the home you are refinancing must be your primary residence.
- The requirements for a VA cash out loan are very similar to a VA purchase loan.
- You need at least a 620 FICO score
- You can cashout up to 100% of the appraised value
- Your debt to income ratio cannot exceed 48%
- No monthly mortgage insurance is required
For more information on the VA cash out approval process and what you will need to get this done have a look at the “Simple Steps to a VA Loan” Guide book.
How Does FHA Cash-Out Refinance Work?
You have been investing years into your home mortgage and built up significant home equity. If you’re considering ways to leverage that equity and turn some of it into cash then an FHA cash-out refinance loan might be a great way to lower your payments and pocket some extra cash. In most cases, you can refinance up to 85% of the value of your home and get paid a lump sum at closing which is called cash-out. (Please note – the total finance charges may be higher over the life of your loan).
FHA Cash Out Refinance Guidelines
- The requirements for an FHA cashout loan are very similar to a FHA purchase loan.
- You need at least a 620 FICO score
- You can cashout up to 85% of the appraised value
- Your debt to income ratio cannot exceed 55%
- Monthly mortgage insurance is required
For more information on the FHA cash out approval process and what you will need to get this done have a look at the “Simple Steps to an FHA Loan” Guide book.
How Does Jumbo Cash Out Refinance Work?
Looking to get some cash out from your existing Jumbo Loan? If you are in a position of having high equity in your home, a jumbo cash-out refinance loan can provide you with a large source of funds that can be used to pay off consumer debts, credit cards, make home improvements or help finance your child’s college expenses.
The Moreira Team has access to low jumbo refinance rates and we can help you through the jumbo cash out process quickly and efficiently without hassles.
Jumbo Cash-Out Guidelines
- 85% LTV (Loan To Value) cashout available
- 2nd mortgage or HELOC combo loan available
- No Mortgage insurance required
- Up to 43% Debt to Income Ratio
- Self-employment okay with financial history
- Income from W-2’s required
- Liquid Assets are required to secure loan
- No Prepayment penalties
- Up to $3 million loan amount limits
For more information on the Jumbo cash out approval process and what you will need to get this done have a look at the “Simple Steps to a Jumbo Home Loan” Guide book.
How Does Conventional Cash Out Refinance Work?
Homeowners can cash-out refinance whenever they wish to tap into the equity of their home. Fannie Mae and Freddie Mac both allow for cash-out refinance loans. These loans can be used to access much needed cash for any reason listed throughout this article.
Conventional Cash-Out Guidelines
- Up to 80% of the loan to value (LTV) amount of your primary residence
- Up to 75% of the loan to value (LTV) amount of your vacation home
- You need at least a 640 FICO score
- Your debt to income ratio cannot exceed 45%
For more information on the Conventional cash out approval process and what you will need to get this done have a look at the “Simple Steps to a Conventional Home Loan” Guide book.
Lenders look at a cashout refinance mortgage as a new loan with new terms. As such applicants will have to go through similar approval process as their original home purchase.
In a refinance scenario there are four primary areas that get reviewed:
- FICO credit score
- Income and financial history
- Liquid assets and debt to income ratio
- Home appraised value
However there is an upside to refinancing. It requires less upfront cost compared to a purchase mortgage loan. In all cases, you will have to provide W-2’s, Pay stubs, assets via bank statements and employment history.
- Self-employed homeowners will have to provide two years of prior income.
- You can expect these types of cash out refinance loans to be processed in less than 30 days
Disclosure: Even though a lower interest rate can have a profound effect on monthly payments and potentially save you thousands of dollars per year, the results of such refinancing may result in higher total finance charges over the life of the loan.