Cash-out refinances allow homeowners to access cash by tapping into their home’s value.
Benefits of Cash-Out Refinance
- Receive cash using your home equity
- No second mortgage required
- Access funds to renovate your home
- Minimum home equity of 20%
- 30 to 45 Day Closing Period
- Minimum credit score of 620
What is a Cash-Out Refinance?
A cash-out refinance gives you access to cash by utilizing the equity you have already accumulated for your home. Homeowners usually don’t reap the benefits of their home equity until they sell their home and receive the proceeds. With a cash-out refinance, you can take advantage of your equity without needing to sell.
Refinancing your home means that you are exchanging one mortgage for another. During a cash-out refinance, you also receive cash directly into your bank account. The tradeoff for pulling cash out of your home is that you increase the amount that you owe.
Why Would Someone Get a Cash-Out Refinance?
Getting a cash-out refinance can be a smart financial decision for a lot of people. Although you can use the proceeds of a cash-out refinance however you want, popular reasons for a cash-out refinance include paying for home renovations, paying off debt such as student loans, car loans, and credit cards, consolidating your debt by taking advantage of a lower interest rate, paying for unexpected expenses, or covering a down payment on a second home.
During a cash-out refinance, you will be changing the terms of your mortgage and extending the time it takes to repay your loan, so be sure that the extra cash is worth the changes you’ll make to your current mortgage.
How Much Cash Can I Get with a Cash-Out Refinance?
The amount of money you can get out of a cash-out refinance depends on how much equity you have built up in your home.
Equity is the percent of your home’s value that you own. For example, if your home is worth $500,000 and you owe $200,000 on your mortgage, then your equity would be $300,000, or 60%.
There are two ways to increase your home equity:
- By making mortgage payments each month. As your loan balance decreases, your equity increases.
- You gain equity when the value of your home increases. Your home can increase in value when you make upgrades (such as adding a pool or updating fixtures), and it can increase in value naturally over time through a process called appreciation.
When you receive a cash-out refinance, you are effectively decreasing your equity in your home in exchange for cash. After the cash-out refinance is complete, most lenders require you to maintain at least 20% equity in your home.
Using the same example above ($500,000 value and $200,000 owned on your current mortgage), you could access about 40% of your home’s value ($200,000) in the cash-out refinance. This would result in a new mortgage of $400,000.
Keep in mind that an appraisal will be completed to officially determine your home’s current value!
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Requirements for a Cash-Out Refinance
The requirements for a cash-out refinance depend on what type of loan you receive to replace your current mortgage.
Conventional loans are the most popular product for cash-out refinances. The new loan amount must be below your county’s conforming loan limit ($647,000 in Texas and $970,000 in high-cost areas of California), and you will need to maintain at least 20% equity in your home after the cash-out is completed. The minimum credit score is 620.
You will receive a jumbo cash-out refinance if your new mortgage amount is above your county’s conforming loan limit. Specific guidelines for jumbo loans depend on what bank or credit union is going to purchase the loan after closing, but they are typically stricter than conventional loans. For the best-priced products, you will need to have a credit score of 720 and maintain at least 20% equity in your home.
FHA loans are a great option for cash-out refinances due to their lower credit score requirement of 580. FHA loans require you to maintain at least 20% equity in your home to qualify.
VA cash-out refinances are unique in that there is no required equity for the homeowner. You can borrow up to 100% of your home’s value with a VA loan.
Pros & Cons for a Cash-Out Refinance
There are various pros and cons of doing a Cash-Out Refinance, though the pros typically outweigh the cons.
Renovate Your Home
Renovations can be expensive, and homeowners don’t always have extra cash lying around to install the swimming pool they always wanted or finally update their kitchen. Tapping into your home equity can allow you to fund your home renovations and repairs without depleting your savings. Not only are you making your home a better place to live, but any home improvements you make will also increase the value of your home, making the cash-out refinance a worthwhile investment.
Consolidate Debt into a Low-Interest Loan
Compared to consumer debt, mortgages have some of the lowest interest rates available. If you have credit card debt, an auto loan that hasn’t been paid off, or leftover student loans, then you can use the funds from your cash-out refinance to pay off your loans. This will help consolidate your debt into one, larger mortgage loan with a lower interest rate. This will help save you money in the long term!
Pay for Unexpected Expenses
Life can throw large expenses at you such as a surprise medical bill, car purchase, or college tuition. Instead of depleting your savings or retirement account to cover large expenses, you can utilize the equity you have built up in your home instead.
Free Up Money To Invest
If you can earn a higher return investing your money outside of your home, then you can use a cash-out refinance to free up funds to invest elsewhere.
Down Payment on Another Home
If you are interested in purchasing another property, such as a rental or vacation home, then a cash-out refinance on your primary residence can help cover the down payment for the new property. You will need to work with your lender to make sure you can qualify for the new home while carrying both mortgages, but this can be a great way to invest in real estate and enjoy the benefits of a second home.
There will be a set of closing costs associated with cash-out refinance, including the appraisal fee, underwriting fee, and title fees. It is important to make sure the money you are getting out of your home is worth the cost of the refinance.
Time to Receive Cash
If you need access to the liquid funds fast, a cash-out refinance may not be right for you. Cash-out refinance closings usually take about 30 to 45 days to complete and there is a thorough approval process. Personal or hard money loans can be completed faster, but they will have a higher interest rate than a mortgage.
Change in Loan Terms
In a cash-out refinance you exchange your old mortgage for a new mortgage. This means that your interest rate and monthly payment will likely change as well.
Longer to Pay-Off home
The time it takes for you to pay off your mortgage may increase after a cash-out refinance. For example, if you have 20 years remaining on your current mortgage and refinance with a 30-year loan, then you will extend the time it takes for you to completely own your home by 10 years.
When you receive a cash-out refinance, you decrease the equity in your home. This means that you will make less money when you sell your home in the future.
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March 29, 2023
View mortgage rates for March 29, 2023
How Does a Cash-Out Refinance Work?
The first step to receiving a cash-out refinance is to determine exactly how much money you want to get out of the refinance. If your goal is to complete specific renovations, then obtain quotes from contractors to determine how much the work will cost. If you are planning to use the proceeds to pay off other debt, then calculate how much you will need.
Now that you know exactly what you want from the cash-out refinance, reach out to one of our JVM Lending loan experts to further discuss your goals. We will help estimate your current equity and how much money you can pull out. After the initial conversation, you will be directed to submit an online loan application on our website. We will help monitor interest rates and lock your rate in once the timing is right.
Once your loan application is completed and submitted to underwriting for approval, we will order an appraisal to determine the current value of your home.
The last step is for you to attend a signing appointment and sign your closing documents, including a Promissory Note with your new mortgage terms. Cash-out refinances have a 3-day waiting period after signing for you to back out of the transaction if you wish. After the 3 days have passed, you will receive your cash!
What Is The Difference Between a Cash-Out Refinance VS. a Home Equity Line of Credit (HELOC)?
Home equity lines of credit (HELOCs) and cash-out refinances both capitalize on your home equity to put extra cash in your pocket, but they have a few key differences.
A home equity line of credit is a second mortgage that is added alongside your original mortgage. When you close on a home equity loan, you receive a line of credit with a maximum credit limit.
You can draw on the line of credit whenever you like. This gives a lot of flexibility for when you want the funds to hit your bank account. It also lets you draw on the credit line in increments instead of receiving one lump sum.
Most home equity loans have a 10-year period where you only need to make monthly payments on interest that have accrued. After the 10-year period, you will start making monthly payments toward the principal balance as well. A disadvantage with home equity loans is that you have a second mortgage payment to make payments on in addition to your first mortgage.
In contrast, a cash-out refinance replaces your original mortgage with a new, larger mortgage. You can access the equity in your home while keeping just one monthly payment. A cash-out refinance gives you one lump sum of money at close; you will not have a credit line that can be drawn on anytime.
Does a cash-out refinance make sense for you?
If you are considering a refinance of your home loan, we recommend utilizing our refinance calculator to run some quick numbers. This useful tool will give you a feel for the different refinance rates available to you.
There is no one-size-fits-all for mortgage financing. The best way to determine whether a cash-out refinance makes the most sense for you is to have one of our mortgage experts at JVM Lending complete a free refinance analysis. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.
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