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.

Cash Out Refinance Loan

Are You Thinking About Doing a Cash-Out Refinance?

There are two primary advantages to cash-out refinancing. First, you can convert your home equity specifically into cash. Second, you can get a new mortgage with a lower interest rate locked into place. As home values keep going up year after year, and with mortgage rates close to historical lows, now is a good time for many homeowners to think about cashing out any equity that they have.

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.

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Whether you choose an FHA cash-out, VA cash-out, or conventional cash-out refinance, the odds are good that you can make your home equity work hard for you while still landing a good interest rate.

What Is Cash-Out Refinancing?

Cash-out refinance is something you can use to simultaneously refinance your mortgage and access any home equity that you have. Using a cash-out refinance lets you have a loan bigger than what you already owe for your home. Your new loan will pay off any old loan you have while keeping the extra cash that you didn’t need for paying off your old loan. Any lump sum that you keep would be your ‘cash out’, which you can spend on any various financial needs in your life right now.

There are some things you should know about cash-out refinancing:

  • Cash-out refi rates can be a bit higher than rates for traditional mortgage refinancing
  • Your specific rate will depend on both how much actual cash that you take out as well as your credit profile
  • You can usually cash out as much as 80 percent of your overall home equity
  • Your new loan is going to be bigger than the previous one, meaning you’ll eventually pay more in overall mortgage interest
  • Since mortgage rates are usually lower than credit card or personal loan rates, cash-out refi options might make it easier to finance your bigger expenses

There aren’t any rules about what you can and can’t do with your cash-out refinance funds. You can use these extra funds for many different purposes, such as debt consolidation, home improvements, or any other consumer wants or needs that you have in life right now. Since your home secures your loan, you usually should spend your funds on things that have a good return on your investment, such as consolidation of high-interest debt or home improvements.

How Cash-Out Refinancing Works

A cash-out refinance operates by paying off your current home loan with a newer, bigger mortgage loan. The money that remains after your original mortgage is paid off will get paid to you as a check when the closing happens. This part is the actual ‘cash out’ component.

Here’s one example of cash-out refinancing at work:

Consider a home value of $350,000
The example mortgage balance is $250,000
The refinanced loan balance is $280,000
The closing cash-out, minus closing costs, is $30,000

In this instance, the new loan must initially be applied towards paying off the current mortgage.

The rest of the loan amount, which is $30,000, winds up being the cash-out sum you get.

You will also need to pay any closing costs when you do a cash-out refi. These are typically 3% to 5% of the total loan amount. The good news for you is that if you refinance, you can possibly roll the closing costs right into the loan balance, which means that you wouldn’t need to pay them in advance.However, rolling your closing costs into the loan would mean that you need to pay interest on them as time goes on, so think about any potential long-term costs prior to choosing this option.

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.

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How Much Cash Can a Cash-Out Refinance Give You?

For typically cash-out refis, you can take a new loan out for as much as 80-percent of your overall home value. Lenders call this percentage your LTV, which stands for ‘loan-to-value ratio’.Keep in mind that you need to subtract any amount which you owe currently on your mortgage in order to ascertain how much cash you get to withdraw.

The following example shows you how that math can work out:

Consider a home value of $400,000
The maximum refinance loan amount, which would be 80-percent of the home value, is $320,000
The current mortgage balance is $250,000
The maximum possible cash-out would be $70,000

In the above example, a homeowner would start out with $150,000 in actual home equity. This is the home value of $400,000 minus the current loan balance of $250,000.

However, since a homeowner has to leave 20-percent of their home equity untouched, they can only withdraw $70,000 at the maximum.

If a homeowner already had taken out a second mortgage that used the home’s equity, for instance, a home equity-specific line of credit, then the lender would need to subtract that loan amount from the potential cash-out.Lenders limit how much equity you get to withdraw since it gives them protection from losses incurred due to default.

Cash-Out Refi Rates

Interest rates associated with cash-out refinancing range from 0.125- to 0.5-percent higher than no-cash-out refi rates. As with any mortgage loan, the rate you get offered for your own cash-out refinance is going to depend greatly on your situation. The rate you wind up paying will be based on your credit score, your LTV, and possibly even your loan amount.

The best interest rates go to two different groups. The first is anyone with a credit score over 740. The second is anyone with a low LTV rate. Your interest rate will also go up based on much equity you cash out from your home.

What Are Some Cash Out Refinance Options?

VA Cash Out Refinance

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

  • Have your certificate of eligibility (COE)
  • You need at least a 640 FICO score
  • The home you are refinancing must be your primary residence
  • 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

FHA Cash Out Refinance

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. 

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

Jumbo Cash Out Refinance

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 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

Conventional Cash Out Refinance

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%