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If you have built up enough home equity in your property and you are in need of cash, you may want to consider a cash-out refinance of your mortgage loan. You might be able to qualify for a lower mortgage rate than you are currently paying. At the same time, you will be able to borrow additional cash using your equity as collateral. You can then use that money to pay for other important expenses, such as home improvement investments, medical bills, children’s college costs or other high-interest debts.
You will need to qualify for a new home loan, which will be at a higher amount than your current principal balance. A cash-out refinance will combine your remaining loan amount with the cash you are borrowing from your equity. It will all be put together into one new loan amount with a new 30-year loan term (or a shorter payoff period if possible).
So, how do you qualify for cash-out refinancing and how much cash will you be able to take out? Here are some of the key eligibility standards and details you need to know:
Generally, mortgage lenders will require you to have a minimum of 20% equity in your home. This means the property is appraised for at least 20% more than you currently owe on your existing mortgage loan. For example, a homeowner who still owes $350,000 on their original mortgage owns a house that is worth $500,000 based on a current appraisal. This adds up to an equity of $150,000, which is 30%. They would meet this eligibility standard for a cash-out refinance.
Speaking of the home appraisal, this will be a critical step in the cash-out refinance process. Your lender will hire a third-party licensed home appraiser to research the market, study your property and determine its current market value. The lender is making sure that your house or condo is worth more than you currently owe, and by how much. Then, they can determine if you are eligible for a cash-out refinance of your mortgage loan.
Your mortgage lender will run a hard credit check when you apply for a cash-out refinance. In most cases, a FICO score of at least 620 is required. There may be some flexibility here if your other financial records (high income, low debt, etc.) are strong, but a higher credit score will definitely help your situation and ensure you qualify for the lowest possible mortgage rate on the new loan.
Debt-to-Income Ratio (DTI)
Your mortgage lender will also calculate your current debt-to-income (DTI) ratio, just like they did when you first applied for your original home loan. DTI is calculated by adding up your total monthly debt payments and dividing that by your average monthly pre-tax income. Lenders are looking for a DTI of 43% or less for a borrower to qualify for a cash-out refinance.
Loan-to-Value Ratio (LTV)
Another very important calculation will be your loan-to-value (LTV) ratio. This is the total amount of your new loan (cash being borrowed + existing mortgage principal amount) divided by your current appraised home value. A healthy LTV is generally 80% or less. Some lenders and conventional loans may require an LTV of 75% or less. Some FHA cash-out refinancing programs may allow you to borrow up to 85% of your home value. LTV requirements may vary a little depending on the lender and the type of loan, but you will generally never be able to cash out all of your equity.
Your mortgage lender will also need to verify your current employment and income. Self-employed borrowers may need to provide tax records or other proof of monthly income. The lender needs to see that you have steady income coming in each month to cover your new monthly mortgage payments. A stronger employment/income situation may help you qualify for a lower mortgage interest rate, as well.
How Much Can I Cash Out with My New Mortgage?
Using our example from earlier, let’s say you have a home in Atlanta currently appraised for $500,000 and you still owe $350,000 on your existing mortgage loan. An 80% LTV would equate to $400,000, which is the maximum amount your new total loan can be. This means you can cash-out up to $50,000 ($400,000 total minus the $350,000 you still owe).
Just because you qualify for a cash-out refinance and you can cash out $50,000 of your home equity, it doesn’t mean you should take out the maximum. You should only take out as much as you need for your other expenses. Don’t increase your new loan amount unnecessarily and continue to keep as much equity in your property as you can. Don’t even consider cash-out refinancing at all unless you have a good use for the cash you are borrowing. The key word here is “borrowing.” It is not free money. You are simply borrowing from your own home equity and you don’t want to make your new loan more than it absolutely needs to be.
If you have questions about cash-out refinancing or want to discuss home equity loan options in the Atlanta area, contact Moreira Team today. Let us help you explore your options and find the best home lending solution.