Do you have equity in your home and would like to use to payoff 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.
How to Tap Into Your Home’s Equity
So, your home has appreciated over the years and its now worth more than what you owe on your mortgage. You can use that extra “equity” to refinance and pull cash out to eliminate high interest debt, for home improvement or for personal use. You would get an appraisal to determine your new 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.
The majority of homeowners use their refinancing for the following reasons:
Pay off high-interest credit cards
Pay for your kid’s student loan
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What Can I Use the Cash 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, 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 debt such as credit cards 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 may homeowners refinance is to do home improvements, which can increase your home’s value.
Here is a typical example to make the point:
Let’s say your current home is worth $300,000 and you still owe $150,000 on the mortgage. You have accumulated $150,000 in equity in your home.
There is also a good bit of high-interest 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 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!). You have essentially leveraged the equity in your home and used one loan to pay off your debt and increase your monthly cash flow.
Before you jump right into this 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 loans with regards to closing fees. These can add up to thousands in closing fees alone, although there are loan options available to help offset these costs. Be sure to consult with your licensed mortgage advisor to come up with a plan that makes financial sense.
Cash Out Refinance Loan 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 equity in your home to support the amount of money you were hoping to pull out. 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 in your home to do renovations, cover unexpected expenses or pay off some credit card debt. You can cash out up 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 the value of the home.
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 620 FICO score
You can cash out up to 100% of the appraised value
Your debt to income ratio cannot exceed 48%
No monthly mortgage insurance is required
How Does an FHA Cash Out Refinance 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 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 the value of your home and get paid a lump sum at closing which is called cash-out.
FHA Cash Out Refinance Guidelines
The requirements for an FHA cashout loan are very similar to a FHA purchase loan.
You need at least a 620 FICO score
You can cash out up to 80% of the appraised value
Your debt to income ratio cannot exceed 57%
Monthly mortgage insurance is required
How Does a Jumbo Cash Out Refinance Work?
Looking to get some cash out from your existing Jumbo Loan? If you are in a position of having high equity in your home, a jumbo cash-out refinance loan can provide you with a large source of funds that 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 Guidelines
85% LTV (Loan to Value) cashout available
2nd mortgage or HELOC combo loan available
No Mortgage insurance 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 cash-out refinance whenever they wish to tap into the equity of their home. Fannie Mae and Freddie Mac both allow for cash-out refinance loans. 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 Loan
Lenders look at a cash out refinance mortgage as a new loan with new terms. As such applicants will have to go through 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.
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