Cash-Out Refinance Guide: The 2022 Rates And Requirements

By Alvaro Moreira
13 min read

If you are reading this, then you are searching for information that helps you have a better understanding of cash-out refinancing. We shall start by answering the primary question, “What is cash-out refinance?”

cash-out refinance

What Is A Cash-Out Refinance?

Cash-out refinancing allows you to replace your current mortgage with a newer and larger home loan, and the difference between the two is returned to you as cashback when closing the loan. You can leverage cash-out refinancing by tapping into your home’s equity and using it to meet other financial needs. It can be an ideal way of accessing substantial sums of money at significantly low-interest rates.

So, we shall go through various elements regarding cash-out refinancing to help grasp what it is and more. We shall discuss:

a).    How it works

b).    Possible max cash-back

c).    Cash-out rates

d).    Requirements

e).    Cash-out loan types

f).    Process

g).    Substitute options

A)    How A Cash-Out Refinance Works

Cash-out refinancing lets you access your home’s equity and refinance your home loan simultaneously. You can take out a bigger mortgage loan using a cash-out refinance, use it to settle your current home loan, and get the remaining amount as cash back.

While it is a suitable option when you are in a financial bind, it is essential that you note the following regarding cash-out refinancing: 

•    The rates you get on cash-out refinance loans are slightly higher than conventional mortgage refinance rates.

•    The rates depend on the amount you take out and your credit profile.

•    The new loan exceeds your existing one hence you will have more interest to pay on your mortgage.

•    The cash out is roughly 80% of your home equity.

•    You might fight lower mortgage rates than credit card and personal loan rates, meaning it can be a better option when you have lots of expenses to settle.

•    You have no limitation to how you wish to use the money you get from cash-out refinancing.

You can use the cash from your cash-out refinance to fund your home renovations, perhaps consolidate outstanding debt, or any other purpose. According to Moreira, it is best to consider an investment with significant returns because you will use your home to secure the loan. So, options like consolidating debts with high interest rates or funding home improvement projects will be excellent considerations.

Click here to verify your cash-out refinance eligibility.

When you are going for a cash-out refinance, you will be keen on getting a larger mortgage that can help pay off your current one and be left with some surplus money to cater to other expenses or needs.

You will get that money in the form of a check handed to you at closing, which brings about the “cash-out” aspect of this loan type.

Below is a quick example of how cash-out refinancing works:

Suppose you have a property valued at $350,000 and your outstanding mortgage is $250,000. You could apply for a refinanced load of $280,000 and have a cash-out of $30,000 at closing (minus closing costs). 

Therefore, the refinanced loan will be used to clear the existing mortgage before you can access the money, which will be what remains and it is what you will be cashing out.

You will have closing costs to pay, which typically will be about 3%-5% of your refinanced loan. However, you could roll closing costs into the loan balance when refinancing so that you avoid upfront payments. The thing to note when doing this is that the rolled closing costs into the loan will make them subject to accruing interest over time. Thus, it is best to consider the long-term cost implications of such a move before you decide to roll the closing costs.

B)    What Is The Maximum Cash-Back Amount?

You will be asking yourself how much I can get when I go for a cash-out refinance loan.

A conventional cash-out refinance can see you apply for a new home loan of up to 80% of the property’s value. The percentage is known as an LTV (loan-to-value) ratio. 

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The cashback is the sum that remains after you use the new loan to pay off what you own on your current mortgage.  The following example can paint a better picture of what to expect.

Suppose your home’s market value is at $400,000, then the maximum refinance loan (80% of home value) you can apply for is $320,000. And if your current mortgage balance is $250,000, then the maximum amount you will cash out is $70,000.

In this scenario, you start out with home equity of $150,000 because your home is valued at $400,000 and you have an outstanding mortgage of $250,000.

But with a mandatory 20% of your home equity going untouched, then the maximum cashback you can get is $70,000.

Homeowners with a second mortgage on their home’s equity (such as a home equity line of credit) could have the balance deducted from the available cash-out. Lenders will cap the equity amount a borrower can withdraw as a protective measure against possible losses if the borrower defaults on the loan.

C)    Cash-Out Refinance Rates

Cash-out refinance rates can be anywhere from 0.125% to 0.5% higher than rates for a no-cash-out refinance.

Senior mortgage originator at Hyperion Mortgage, Carol Lynn Upshaw, says borrowers must contend with the LTV (loan-to-value) ratio, the amount they want, and credit profiles. She adds that those with higher credit scores are likely to enjoy the best interest rates of over 740 and lower loan-to-value ratios. 

Carol also points out that the more the equity they cash out of their homes, the higher the interest rate.

Mortgage Network’s sales manager, Ryan Leahy, says that borrowing 70% of your home’s value attracts a 0.125% interest rate or higher, and if you do 80% of your equity, you may pay a quarter percent higher.

D)    Cash-Out Refinance Requirements

Borrowers can access a cash-out refinance if they qualify based on their financial history, credit profile, and their property, which are the same requirements homeowners must meet when applying for a new mortgage.

However, the requirements vary from lender to lender and the loan type; nonetheless, you are expected to fulfill the following:

•    20% or more on your home equity

•    A new appraisal verifying your property’s market value

•    At least 620 credit score

•    43% or less on your debt-to-income ratio (including the new loan)

•    Employment and wages verification

•    80% or less on your LTV (loan-to-value) ratio

While these requirements are a standard for most cash-out refinance loans, they differ slightly when it comes to a refinance for VA and FHA cash-out refinances.

E)    Types Of Cash-Out Refinance Loans

Homeowners can consider one of three cash-out refinance loan types. 

i).    Conventional Loans: It allows the borrower to request up to 80% of their home’s value, but they must have a minimum credit score of 620.

ii).    FHA Loans: Borrowers can apply for up to 80% of their property’s value and must pay upfront fees financed into the loan. They also must settle an annual mortgage insurance fee similar to when requesting a traditional FHA mortgage. Furthermore, borrowers must have a credit score of at least 600.

iii).    VA Loans: Those who qualify to apply for the VA cash-out refinance include active-duty service members, veterans, some surviving spouses, and the Reserve and National Guard members. They can apply for 100% of their property’s value. However, most lenders limit the LTV to 90%. These loans have an upfront fee financed into them unless the borrower is a veteran with a service-related disability.

Also, please note that the ideal cash-out refinance to consider is based on your existing mortgage and how much you qualify to request.

F)    The Cash-Out Refinance Closing Process

The cash-out refinancing process is no different from the conventional mortgage refinance. Borrowers should consider the following:

•    Comparing rates from several lenders to find the best cash-out refinance rate and fees.

•    Pick a preferred lender, fill out, and submit the refinance application form.

•    Provide the necessary supporting documents like W-2 and Pay Stubs forms.

•    Get a property appraisal.

•    The loan underwriter shall review the documents and approve or reject the application.

•    After approval, the borrower signs the closing documents and receives the cash-out.

Real estate attorney, Rajeh Saadeh says a cash-out refinance request can be granted and a closing scheduled if the borrower’s home is determined to have sufficient market value for securing the loan, and the payoff for the previous mortgage is less than the new loan.

Please avoid skipping any steps, including the first one of the cash-out refinance loan closing process.

Also, pay extra attention when shopping around to find the best cash-out refinance rates because they are slightly higher than standard mortgage rates and you are applying for a larger loan than before.

G)    Cash-Out Refinance Alternatives

Other options for liquidating your home equity besides relying on a cash-out refinance include a home equity line of credit or a home equity loan (often referred to as second mortgages). You are essentially taking out a second loan while still paying off the primary home loan. The second does not replace the first, which is not the case with a cash-out refinance that leaves you with one mortgage to settle.

•    Cash-Out Refinance Vs. Home Equity Loan

Cash-out refinance and home equity loans share some similarities. The two allow the borrower to leverage their property’s equity.

However, the home equity loan is a second mortgage that does not replace the current home loan. And although the borrower will not struggle with taking out a loan for a higher amount, it is better to leverage your home’s value for a loan that converts into cashback at closing.

If you are keen on maintaining your current mortgage situation, then home equity is the ideal option. It is best to pick this over the cash-out refinancing if you have an ultra-low interest rate on the home loan, or you are nearly paying off the original loan in full.

•    Cash-Out Refinance vs. HELOC

Home equity lines of credit (HELOC) also allow borrowers to leverage their property’s equity. But unlike a cash-out refinance that offers a lump sum, the HELOC option is more of a revolving line of credit. It gives the borrower more flexibility to access (withdraw the money). Furthermore, the home equity line of credit is not a new loan and thus might not include upfront closing costs.

•    Cash-Out Refi vs. Personal Loan

With a personal loan, borrowers get a fixed amount of money to fund any purpose, including making big purchases, covering various expenses, and consolidating higher-interest debt.

Lenders charge various interest rates on these loans depending on the borrower’s credit score. Moreover, qualified applicants are expected to pay off their personal loans in monthly installments, like with a mortgage loan.

On the flip side, the interest rates on personal loans are higher than on home loans, HELOCs, or home equity loans.

•    Cash-Out Refi vs. Reverse Mortgage

Homeowners aged 62 years or older who have significant home equity can apply for a reverse mortgage loan using their property as security. But unlike a standard mortgage, the reverse mortgage does not have monthly payments. Instead, borrowers borrow from their equity and the loan repayment occurs when the owner sells the property or dies.

It is best to consult a HUG-approved counselor if you are considering taking out a reverse mortgage loan.

When Is A Cash-Out Refinance The Right Choice?

Saadeh says that cash-out refinancing is an excellent idea if you qualify for it and can bag a lower interest rate on the loan. It gives you an opportunity to replace your adjustable-rate loan with a fixed-rate one or to pick a shorter loan term that helps reduce the interest payments over time.

You will also have the cash-out at closing which could be money you can use to settle other financial needs. A homeowner can use the cash-out amount for the following purposes:

i).    Home improvement projects

ii).    Debt consolidation

iii).    Paying income taxes

iv).    Settling an existing HELOC (home equity line of credit)

v).    Paying for college education

There are other smart uses for a cash-out refinance, too, like paying for a college education.

While the avenues for using the money you get from cash-out refinancing are many, it is prudent to remember you are taking out a new, long-term loan with roughly 15 or 30 years of monthly payments, even if it is a low-interest rate.

Hence, most experts recommend cashing out your home’s equity if you are faced with pressing financial needs or want to support a lucrative long-term investment. It is not ideal to take out loans to finance low-returns-ventures like buying a new car or funding a vacation.

What About Debt Consolidation Loans?

Debt consolidation is ideal if you want to reduce monthly debt payments and save on interest, but it is not a strategy that everyone finds convenient.

For instance, settling federal student loans with home equity is not the best move because you risk losing the repayment flexibility you built into the student loans.

Conversely, paying off your auto loans is not recommended. You probably would be making monthly payments over three decades for your cash-out refinance loan, which means you could be paying off the auto loan when the vehicle in question is nothing but a faded memory.

Take the time to speak to an experienced and reputable mortgage lender or financial advisor if you are not sure if a cash-out refinance is right for you. They will help determine which other options are most suitable for you.

How A Cash-Out Refinance Affects Your Taxes

Homeowners can qualify for home loan interest tax deductions if the funds from the cash-out refi go into property improvements like:

1).    HVAC upgrades

2).    A new addition to the home

3).    Roofing repairs or replacement

4).    Decking and fencing installation

5).    Home security upgrade or installation

The Mortgage Reports are not tax advice. Consider consulting a tax advisor about this before making any decisions regarding how cash-out refinancing impacts your taxes.

Cash-Out Refinance FAQ

Q:    Is a cash-out refinance ideal?

A:  Yes, it is an excellent option if you meet the basic criteria. For starters, you must have sufficient equity in your home, you plan to reside in your house for no less than three to five years, qualify for a low-interest rate, and need the cash for worthwhile reasons like funding a remodeling project or consolidating a high-interest loan.

Q:    When is cash-out refinancing a bad idea?

A:    Cash-out refinancing is not the best strategy if you do not have solid plans to ensure that you do not run up new debt after consolidating the existing ones. It would be better to go for a HELOC instead of a cash-out refi if you want an open line of credit for short-term expenses, emergencies, or home improvements you can pay off within a short period.

Q:    How long does it take to get money from a cash-out refinance?

A:    The process can take roughly 30 days to close but is subject to prevailing market trends. For instance, the low rates and increased refinance volume are factors that are pushing this period to nearly 45 to 60 days before applicants get the money.

Q:    How much equity do you need for cash-out refinancing?

A: Before meeting the majority of the other requirements, borrowers must have more than 20% equity in their home.However, you might qualify for a VA cash-out refinance if you have less.

Q:    Should I consider a cash-out refinance to pay off my debt?

A:    Yes, you can go for a refi if you have outstanding debts with higher interest rates than what you have on the cash-out refinance loan.

Q:    What’s better: a cash-out refinance or a home equity loan?

A: If you need a small amount of cash and have a low interest rate on your current mortgage, a home equity loan is an excellent option.Unlike the cash-out refinance loan, home equity loans have lower closing costs and incentives.

Q:    How hard is it to get a cash-out refinance?

A:     Having good credit history and a score above 620, a stable income, sufficient equity on your property, and job security can help you qualify for a cash-out refinance loan with relative ease.

Q:    What credit score do you need for a cash-out refi?

A:    You need a 620 minimum credit score to qualify for cash-out refinancing. Borrowers with slightly lower credit scores can qualify for VA and FHA cash-out refinance loans. But lenders determine the minimums; hence, the credit requirements will vary.

Q:    Does cash-out refinancing affect your credit score?

A:    You will incur a small fee for having your credit history pulled, but this does not have any significant impact on your score when going for a cash-out refinance loan. Still, if the money goes towards paying off debts, it could improve your credit score. 

Q:    What banks provide cash-out refinance loans?

A:    Most brick-and-mortar financial institutions, online lenders, and banks offer cash-out refinance loans, including conventional, VA, and FHA cash-out refinance loans. It is best to take your time shopping around and compare rates and loan terms from several creditors to find the best deals.