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You may be ready to refinance your home loan at a lower interest rate. You may also be considering the option to cash out some of your home equity to apply toward other important expenses or home improvements. We’re here to help you make smart mortgage borrowing decisions and determine if a cash out refinance is right for you.
Our Cash Out Refinance Calculator Will Help You See If This Is An Option For You
You can utilize our free cash out refinance calculator to figure out what you might be able to qualify for based on your specific factors. Or, you can follow the steps below to get a rough idea of how much equity you’d be able to cash out when refinancing your current mortgage loan at a lower interest rate.
Loan-to-Value Ratio (LTV)
For a conventional cash out refinance, you will be able to take out a new loan for up to 80% of the home’s appraised value. This percentage is known as the loan-to-value ratio (LTV). First, you calculate the total principal loan amount you are borrowing, which is the principal amount you currently owe on your existing mortgage PLUS the amount you wish to cash out.
You would then divide this number by the total appraised value of your property to determine your LTV. Let’s walk through an example calculation:
- Current Loan Principal Owed: $250,000
- Desired Amount to Cash Out: $50,000
- Current Appraised Home Value: $400,000
In this scenario, the new mortgage loan amount would be $300,000 ($250,000 principal owed plus $50,000 cash out). The LTV would be $300,000 divided by $400,000 (current appraised value). This would make the LTV 75%. This is on the high end for an LTV, but would still fall under the 80% threshold most lenders are using.
Maximum Cash Out Amount
The most cash back you would be able to qualify for is $70,000, which would make your new total loan principal amount $320,000 and would still leave 20% of the home’s value in the property. That would give you untouched equity that should continue to grow as long as the property appreciates over time and you gradually pay down your mortgage loan. The 80% threshold is set to protect both the lender and the borrower from risk. There is never complete certainty when it comes to home values. This provides a little wiggle room with the home appraisal while also a “safety net” if the home should depreciate in the future—or if the homeowner defaults on their loan payments.
Interest Rates for Cash-Out Refinance Loans
We will cover this topic in more detail in future blogs, but should understand how interest rates work with cash out refinancing. It may be another factor to help you determine if this is a wise
financial solution for you. Cash out refinance rates are typically 0.125% or even as much as 0.5% higher than conventional refinance rates. You will be paying more interest for the right to cash out some of your home equity. This is because the mortgage lender is taking more risk and you are significantly increasing your loan principal amount with the new loan.
Using the numbers above, you are taking your current $250,000 mortgage and making it a $300,000 mortgage ($250,000 plus the $50,000 being cashed out). Naturally, this higher loan amount will come with a slightly higher mortgage rate. What kind of interest rate you qualify for will depend on the loan amount, your credit score, your debt-to-income ratio (DTI) and a number of other financial factors the lender will review when approving your new home loan.
Are You Interested in a Cash Out Refinance?
Before considering a cash out refinance loan, you should consult with a trusted lender who can walk you through all the details and review your financial situation. To learn more about cash out refinancing and other lending options such as traditional refinancing, second mortgages or home equity lines of credit (HELOC loans), contact Us today.