In this article
- How Does a Cash-Out Refinance Work?
- How Much Can I Cash Out?
- What are the Differences Between Cash-Out Refinancing vs. Home Equity Loans?
- Do I Need a Home Appraisal?
- Will There be a Credit Check?
- Will There be Closing Costs?
- How Long is the Cash-Out Refinancing Process?
- How Can I Use the Cash?
- Can Cash-Out Refinancing Be Done for an FHA or VA Loan?
- Will I Have a Lower Mortgage Rate and Monthly Payment?
- How Soon Can I Get Cash-Out Refinancing?
- Is Cash-Out Refinancing Taxed?
- How Do I Get Started?
If you are a homeowner with ample home equity and good financial standing, cash-out refinancing may be a great option to consider. You can refinance your existing mortgage at a lower rate while taking out cash (borrowing on your equity) that you can use for other important purposes. You may be able to pay down other important expenses and high-interest debts. Or, you can utilize the money to reinvest in your home with improvements and upgrades that could boost its value (and your equity) even more.
In this article, we will cover some of the most frequently asked questions (FAQs) about cash-out refinancing. This information should help you decide if a cash-out refinance loan is the best solution for you as a homeowner.
How Does a Cash-Out Refinance Work?
This loan program essentially gives you access to your home equity. If your property is worth significantly more than what you currently owe on your mortgage, that positive difference is your equity. A cash-out refinance allows you to refinance your current mortgage loan while borrowing extra from your earned equity. It will all be rolled into one new loan with a fixed rate (ideally lower than what you are paying now). You can cash-out some of your equity while continuing with one monthly mortgage payment.
How Much Can I Cash Out?
In general, the maximum total amount of a cash-out refinance loan is 80% of your home’s value. This total will include the amount of principal you currently owe on your existing mortgage plus the amount of cash you are taking out from your equity.
What are the Differences Between Cash-Out Refinancing vs. Home Equity Loans?
The main difference is that you are refinancing your existing mortgage loan and adding the cash you are withdrawing to the new principal total. It all stays as one new loan. Traditional home equity loans allow you to borrow from your equity, but it will be a separate second loan from your original mortgage. A home equity line of credit (HELOC) allows you to take out a line of credit using your home equity, but again it will be separate from your primary mortgage. Cash-out refinancing generally allows for better overall mortgage rates with one combined loan instead of two separate loans.
Do I Need a Home Appraisal?
Yes, a home appraisal will generally be required by your mortgage lender. They will hire a third-party licensed home appraiser to determine the current market value of your property. This then allows them to determine the actual equity and how much you are able to borrow.
Will There be a Credit Check?
Yes, the mortgage lender will generally require a hard credit check when determining your cash-out refinancing eligibility. They will review your FICO score and other current financial factors. Odds are, your financial situation is much different now than when you originally applied for your mortgage loan. They will review all your current financial details to determine your loan eligibility and help you lock in the lowest possible mortgage rate. If your financial situation is better than it was before, this will work in your favor as you may be able to get much more attractive loan terms—while also being able to cash out equity!
Will There be Closing Costs?
As with any new mortgage loan, the borrower will be responsible for closing costs. The fees and amounts may vary by location and loan type, but there will be some out-of-pocket expenses or closing costs some lenders may let you roll into your new loan amount.
How Long is the Cash-Out Refinancing Process?
This will depend on the lender and the complexity of your financial situation. Most cash-out refinance loans can be closed in 45-60 days from application. Some may be faster and some may take longer. It varies from borrower to borrower.
How Can I Use the Cash?
This is completely up to you. Your mortgage lender has no say in how you utilize the cash you borrow from a cash-out refinance loan. You really should not take out any cash if you don’t need it and you shouldn’t borrow more than you actually need. It’s not free money. You are simply borrowing from your equity. If you don’t need the money, you are better off with a standard mortgage refinance and keeping the equity in the property.
Can Cash-Out Refinancing Be Done for an FHA or VA Loan?
Yes, FHA loans and VA loans allow for cash-out refinancing. In fact, an FHA cash-out refinance loan allows for up to 85% of the home’s current value and requires less financial documentation to qualify. A VA cash-out refinance can allow for up to 100% of the home’s value. However, the amount and the borrower qualification, in general, may depend on how the cash is being used.
Will I Have a Lower Mortgage Rate and Monthly Payment?
The mortgage rate you get with cash-out refinancing may depend on a number of different factors. It may be lower or it could be higher. You will want to ask your lender if cash-out refinancing is a viable option and if you can qualify for a lower mortgage rate. The only time you may consider accepting a higher rate is if you really need the cash. In most cases, your monthly mortgage payment will increase because your loan principal amount is going up. Again, this may vary based on the length of the new loan, how much you are cashing out and a number of other factors.
How Soon Can I Get Cash-Out Refinancing?
There is always a six-month waiting period between your original mortgage loan funding and when you can apply for a cash-out refinance. How much equity you have gained will not matter until you have surpassed at least six months of homeownership.
Is Cash-Out Refinancing Taxed?
No, the cash you take out will not be taxed as income. It is considered a loan and is therefore not taxable. You will still be able to write off the interest on your new mortgage loan and take advantage of other tax benefits of homeownership while using the cash for whatever important needs you have.
How Do I Get Started?
Contact your mortgage lender to learn more about cash-out refinancing and to see if it’s a smart solution for you. If you are a homeowner, contact Moreira Team | MortgageRight to get started. Even if your original loan is with someone else, we can help you explore your cash-out refi options and lock in the best mortgage rate.