Do you have equity in your home and would like to use it to pay off some debt? How about making some improvements while you’re at it? A cash out refinance is a great option. A cash-out refinance will replace what you owe on your current home loan with a new mortgage for a higher amount. The difference between what you currently owe and the larger amount of the new loan is what you can take out in cash from your cash out refinance .

How to Tap Into Your Home’s Equity

So, your home has appreciated over the years and it’s now worth more than what you owe on your mortgage. You can use that extra “home equity” in cash out refi and pull cash out to eliminate high interest rate debt, for home improvement or for personal use. You would get an appraisal to determine your new home equity value and keep a percentage of the difference between what you owe and what it’s worth to use as you see fit. You will have a larger loan amount, but your overall payments will be reduced creating extra cash flow for you each month.

Cash Out Refinance Loan

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The majority of homeowners use their cash out refinancing for the following reasons:

  • Pay off high-interest rate credit cards or personal loans from different lines of credit
  • Pay for your kid’s student loans
  • Home improvements
  • Personal use

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What Can I Use the Cash from a Cash Out Refinancing For?

In most cases, you can use the cash you get from a cash-out refinance on pretty much anything you want, like paying down your debt or personal loans, paying back some taxes or taking a much needed vacation. Like most things, some uses of the money are smarter than others. If you have high interest rate debt such as credit cards, old loan,  debt with higher credit penalties or other installment loans, it may make sense to use a cash-out refinance to pay off this debt, because the interest you pay on these debts likely far exceeds the interest on your new mortgage loan. Plus, you get a tax efficient benefit by writing off the mortgage interest debt by consolidating your “bad debt” into “good debt”. Your credit scores will go up as well as you eliminate your debt and reduce your monthly obligations. The other popular reason why many homeowners choose cash out refinance is to do home improvements, which can increase your home’s value.

Mortgage Guide - 5 Simple Steps to Refinance Your Home

5 Simple Steps to Refinance Your Home

If you are planning to refinance this is a must read guide. It will walk you step-by-step through the process and let you know what to expect along the way.

See Guide

Here is a typical example to make the point:

Let’s say your current home’s value is worth $300,000 and you still have an existing mortgage of $150,000. You have accumulated $150,000 in home equity line of credit.  

There is also a good bit of high-interest rate credit card debt that you’ve accumulated over the years from that kitchen renovation you wanted, the trip to the beach last summer, and life in general. You could choose the cash out refinancing route of taking a new loan in the amount of $225,000 which would give you roughly $75,000 to pay off all your debt and save you around $1,349 a month, even after paying your new mortgage payment. You still own your home and are now debt free (game changer!). Mortgage refinance has essentially leveraged the equity in your home through loans by using a new one to pay off your existing loan and increase your monthly cash flow.

Before you jump right into the cash out refinancing approach there are a few things to consider.

Costs Related to a Cash Out Refinance

This type of refinance works the same way as other mortgage refinancing loans with regards to closing fees. These can add up to thousands in closing costs alone, although there are loan options available to help offset these costs. Be sure to consult with your licensed NMLS ID holder mortgage advisor to come up with a plan that makes sense. You may ask your mortgage advisor about the current prime rate and how it affects your refinancing if done currently.

Cash Out Refinance Restrictions

In some situations, lenders may turn down your request due to a poor credit score, a high debt to income ratio or not having enough home equity to support the amount of money you were hoping to pull out. Normally, a borrower needs a credit score of at least 580 to refinance. Each program has different guidelines and rules so be sure to review each to be able to make the best decision on your refinance options. 

How Does a VA Cash Out Refinance Work?

If you are an eligible active military member, veteran or surviving spouse you may be able to access the equity you’ve built  to do renovations, cover unexpected expenses or pay off some credit card debt. You can cash out 100% of the appraised value for any reason you wish. 

If you are eligible for a VA loan you could convert your conventional loan into a VA cash out loan and get a better deal all without having to pay mortgage insurance. In most cases, with a 620 FICO score, you will be allowed to refinance up to 100% of your home’s value. 

VA Cash Out Refinance Guidelines

You must have your certificate of eligibility (COE) and the home you are refinancing must be your primary residence.

The requirements for a VA cash out loan are very similar to a VA purchase loan.

  • You need at least a 640 FICO score
  • You can cash out up to 100% of the appraised value
  • Your debt to income ratio cannot exceed 45%
  • No monthly payments for mortgage insurance is required

How Does an FHA Cash Out Refi Work?

You have been investing years into your home mortgage and built up some home equity. If you’re considering ways to leverage that equity and turn some of it into cash, then an FHA cash-out refinance home equity loan might be a great way to lower your payments and pocket some extra cash. In most cases, you can refinance up to 80% of your home value and get paid a lump sum at closing which is called cash-out. 

Cash out refinance rates are 2.306% (2.403% APR) fixed-rate for 15-year term and 2.072% (2.186% APR) interest rates for 30-year term.

FHA Cash Out Refinance Guidelines

  • The requirements for an FHA cash out loan are very similar to a FHA purchase loan.
  • You need at least a 640 FICO or credit score
  • You can cash out up to 80% of the appraised value
  • Your debt to income ratio cannot exceed 55%
  • Monthly payment for mortgage insurance is required

How Does a Jumbo Cash Out Refinance Works?

Looking to get cash out from your existing Jumbo Loan? If you are in a position of having a high equity  loan in your home, a jumbo cash-out refinancing can provide you with a large source of funds. That much cash gets paid your existing mortgage and can be used to pay off consumer debts, credit cards, make home improvements or help finance your child’s college expenses.

Jumbo cash out refinance rates are 2.620% (2.670% APR) fixed-rate for a 15-year loan term and 3.330% (3.380% APR) interest rates for 30-year loan terms.

Jumbo Cash Out Refinance Guidelines

  • 80% LTV cash out available
  • 2nd mortgage or HELOC combo loan available
  • No Monthly Payments for Mortgage insurance is required
  • Up to 43% Debt to Income Ratio
  • Self-employment okay with financial history
  • Income from W-2’s required
  • Liquid Assets are required to secure loan
  • No Prepayment penalties
  • Up to $3 million loan amount limits

How Does a Conventional Cash Out Refinance Work?

Homeowners can refinance a cash-out whenever they wish to tap into the equity of their home. A borrower can refinance a cash-out loan in Fannie Mae and Freddie Mac. These loans can be used to access much needed cash for any reason listed throughout this article. 

Conventional Cash-Out Guidelines

  • Up to 80% of the loan to value (LTV) amount of your primary residence
  • Up to 75% of the loan to value (LTV) amount of your vacation home
  • You need at least a 640 FICO score
  • Your debt to income ratio cannot exceed 45%

Mortgage Approval for a Cash Out Refinance

Lenders look at a cash out refinance mortgage as a new loan with new terms. As such applicants will have to go through a similar approval process as their original home purchase.

In a refinance scenario there are four primary areas that get reviewed:

  • FICO credit score
  • Income and financial history
  • Liquid assets and debt to income ratio
  • Home appraised value

However, there is an upside to refinancing. It requires less upfront cost compared to a purchase mortgage loan. In all cases, you will have to provide W-2’s, pay stubs, assets via bank statements and employment history. 

Cash Out Refinance Vs Home Equity Loans

Cash out Refinance replaces an existing mortgage or your first mortgage and the borrower will get a lower interest rate than home equity loans. But the borrower will take longer to compensate for the closing costs he will pay upfront.

Home equity loans are separate loans or a second mortgage from the borrower’s mortgage. In home equity loans, the borrower won’t pay large refinancing closing costs, but has higher interest rates. A home equity loan like a 20-equity loan might not have a lower rate like cash out refinancing, but it has fixed rates lower than credit cards or other unsecured loans. It is best to refinance home equity loans if you have appraised significant equity or obtained original mortgage when rates were higher.