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Cash-out refinancing is a great solution for homeowners who qualify for a home refinance mortgage loan and who have built up an ample amount of home equity. If you need to borrow money for other expenses (home improvement investments, paying down higher-interest debts, college costs, medical bills, etc.), you can consider a cash-out refinance loan. It allows you to borrow from your equity and “cash-out” the funds you need while refinancing your original mortgage at the same time.
What are the Benefits of Cash-Out Refinancing?
There are numerous benefits to cash-out refinancing. First, you will be combining your old mortgage principal amount with the cash loan that you take out against your equity. This leaves you with one new mortgage loan and one monthly mortgage payment. Ideally, you will be able to qualify for a lower mortgage rate than you are currently paying.
Having one combined refinanced loan is usually better for your interest rate eligibility compared to a second mortgage, personal loan, home equity loan or home equity line of credit (HELOC) that is separate from your primary mortgage. Of course, the other key benefit of cash-out refinancing is the ability to borrow money that you need for other important expenses. You have the equity built up in your property, so you can tap into some of it for much better leverage as a borrower.
How Much Can I Cash Out?
This will vary from borrower to borrower. The mortgage industry standard is that your new cash-out refinance loan can be up to 80% of your current home’s value. A home appraisal will be performed as part of the loan qualification process. This will determine the current market value of your home. To calculate your home equity, you will subtract your current mortgage principal amount (what you still owe) from the appraised value.
How much cash you can take out will depend on your equity relative to the value. Let’s say your Atlanta house appraises for $500,000, and you still owe $300,000 on your existing mortgage loan. This means you have $200,000 of home equity. If you were to max out your cash-out refinance loan, you’d be able to borrow as much as $400,000 (80% of the $500,000 appraised value). You would refinance your existing $300,000 principal and be able to cash out up to $100,000 of your equity while still retaining an additional $100,000+ of equity in your property!
If you borrowed that full amount in cash, your new mortgage principal total would be $400,000 as you start the new loan term. This is important to understand because you are essentially borrowing from yourself. If you don’t need the cash for anything meaningful, don’t consider cash-out refinancing.
If you only need to borrow $50,000 for your designated expenses, then cash out that amount. In this scenario, your new loan total would be $350,000 and you would still have $150,000 equity in your home. The lower loan amount will potentially allow you to get a lower mortgage rate and will certainly reduce your monthly mortgage payments (compared to a $400,000 loan).
Can I Cash-Out Refinance an FHA Loan?
Yes, you can apply cash-out refinancing with your existing FHA loan. In fact, most FHA loan refinances allow for you to borrow as much as 85% of your current home value. Using the numbers above, this means you could cash out up to $125,000 with a new total loan amount of up to $425,000.
Can I Cash-Out Refinance a VA Loan?
Yes, VA loans will generally allow you to cash-out refinance up to 100% of your current appraised home value. This is great if you really need the cash for something important. Just be careful because you will be cashing out all of your home equity. Again, only cash out what you need. It is always best to keep as much equity in your real estate as you can. This will help you get a lower mortgage rate on this refinance (or future home refinance loans) and will give you more profit potential if and when you ultimately sell your property. Home equity is major leverage for any homeowner. Don’t be too frivolous with it!
If you are a homeowner in the Atlanta area with good home equity and strong financial standards (high credit score, minimal debt and healthy income), see if cash-out refinancing is the right solution for you. Talk with the mortgage experts at Moreira Team today and let us help you make smarter mortgage decisions.