Owning your own home is an important investment — one that helps build equity. Luckily, you don’t have to wait until your mortgage is paid off to access your home’s equity. You can turn the equity you’ve built up into cash with a cash-out refinance loan.
A cash-out refinance loan is a new mortgage that replaces your current mortgage and gives you cash back at closing. This cash can be used for any purpose you choose, such as home repairs, paying off debt, or investing in other property.
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What is a Cash-out Refinance Loan?
A cash-out refinance loan is a type of mortgage that allows homeowners to cash in on the equity they’ve built up in their homes. Essentially, you’re taking out a new mortgage to replace your current one and receiving cash back at closing.
This cash can be used for any purpose you choose, such as home repairs or improvements, paying off debt, or investing in other property. A cash-out refinance loan is a great way to get cash back on your home without having to take out a second mortgage or HELOC (home equity line of credit).
While you may have a handful of options when choosing to finance, whether you’re looking to cover expenses, pay down high-interest debt, pay student loans, or other needs, they may not offer the most affordable terms. This is where cash-out refinance loans come in.
Whether the original loan you bought your house with was conventional, FHA, or VA, you may qualify for a cash-out refinance. The qualification process is similar to qualifying for a conventional purchase loan. You need to meet standards set by government-sponsored Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation). With these standards come flexible refinancing options.
How to Get a Cash-out Refinance Loan
To learn whether a cash-out refinance loan is the best option for reaching your financial goals, connect with us. To get you started, we’ve outlined the steps and documentation needed to help you understand what it takes to get approved for a cash-out refinance loan.
The Refinancing Process
Connect with us, and we’ll help you assess whether you’ll benefit from refinancing your current mortgage. For a cash-out refinance, we’ll consider your current interest rate, credit score, a home appraisal, and the amount of equity you have in the home.
We’re with you through each step leading to closing, where you can begin to make the most of your home’s equity with the cash you receive.
Cash-out Refinance Loan Requirements to Meet
These are the common requirements often needed to qualify for a cash-out refinance loan. If you have questions about these requirements, we’re here to help.
- In most cases, it’s best to have a credit score of 620 or higher. With higher credit scores often comes better interest rates.
- Through underwriting evaluation, you’ll need documentation of consistent income with a Debt-to-Income ratio at or below 43%. This ratio shows how much of your monthly income goes to paying your debt.
- Along with income information you need to share employment verification and history.
- A Loan-to-Value ratio of 80% or less, meaning you’ve paid 20% equity into the home. This is not always required, but it can eliminate Private Mortgage Insurance (PMI) and allow you to borrow the most cash.
- Through underwriting evaluation, you’ll need documentation of your Debt-to-Income (DTI) ratio, which shows how much of your monthly income goes to paying your current debts.
- You may also need to verify your employment history and that you receive consistent, ongoing income.
- Showing proof of reliable payment history on your current or past mortgage is also helpful in qualifying for a home equity loan.
Cash-out Refinance Loan FAQs
Making the most of your home and your financial goals greatly impact your life. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
A cash-out refinance loan is a type of refinancing that allows you to get cash back from your home equity.
Cash-out refinance loans can be a good option if you’re looking to access cash for any purpose, whether it’s to cover expenses, pay down debt, or make home improvements. They often have more affordable terms than other types of financing, making them a great way to save money on interest and get out of debt faster.
With a conventional refinance, you can lower your interest rate or monthly payments, but you won’t receive any cash back. While your monthly costs may be lower, you can’t tackle any debt or make any home improvements.
The cash you receive from a cash-out refinance loan can be used for any purpose you choose.
Some common uses for the cash include paying off high-interest debt, making home improvements or repairs, investing in other property, and covering expenses.
The cash you receive from a cash-out refinance loan is typically available as soon as your loan closes. You’ll usually have to pay the money back over time, though you may be able to choose a repayment schedule that fits your needs. Once you’ve repaid the loan, any remaining equity in your home will belong to you.
To qualify for a cash-out refinance, you’ll need to have at least 20% equity in your home. This means that your home must be worth more than you owe on it. If you have less than 20% equity, you may still be able to qualify for a cash-out refinance, but you’ll likely have to pay for private mortgage insurance.
The interest rate on a cash-out refinance loan is usually lower than the interest rate on other types of financing, like personal loans or credit.
This is because cash-out refinance loans are secured by your home equity, which means the lender is at less risk of not getting their money back if you default on the loan.
A cash-out refinance goes through many of the same steps required to close a conventional purchase loan. Similar to when you purchased your house, you will need another home appraisal for a cash-out refinance so that we can understand the value of the house.
Once the value is determined, we can finalize the details of your loan to determine how much cash you can borrow with a cash-out refinance.
When you close your cash-out refinance, you’ll need to account for several costs. These can include fees for appraisal, origination, and title insurance. These typically range from 2-4% of your total loan amount.
You’ll also need to factor in the cost of any PMI points you choose to pay. All costs will be clearly outlined as your loan is processed and before you close.