Cash Out Loans / Refinance
A cash-out loan or cash out refinance is a form of mortgage refinancing that enables you to convert the equity in your home into cash. It involves replacing your current mortgage with a larger loan, and during the closing process, you receive the difference between the new mortgage amount and the outstanding balance on your previous loan.
Let's say you have a remaining balance of $150,000 on your mortgage and your home is valued at $250,000. In this case, you have $100,000 in equity. By refinancing your mortgage for $200,000, you would receive $50,000 in cash at the time of closing. The funds obtained can be utilized for various purposes, such as home renovations, debt repayment, or meeting other financial needs.
There are some important factors to consider when contemplating a cash-out refinance, including your mortgage rate and the amount of home equity you possess.
Your credit score plays a crucial role in determining the interest rate you will be offered. Generally, a higher credit score translates to a more favorable rate. If you are a customer of U.S. Bank, you can access our tool to check your credit score at no cost.
A Guide to accomplishing a Cash-Out Refinance
- Firstly, ascertain the amount of home equity you possess. Home equity is determined by subtracting the remaining loan amount from the market value of your home. For instance, if your home is appraised at $300,000 and you still owe $100,000 on your loan, then your home equity stands at $200,000.
- Calculate the maximum loan that you can borrow, which is generally 80% of your home's value. Using the previous example, you would multiply $300,000 by 0.80 to get a maximum loan amount of $240,000. It's important to note that this figure is not equivalent to 80% of the purchase price, as the value of your home may have changed since the time of purchase.
- Subtract your existing mortgage balance from the loan amount obtained. From the aforementioned $240,000 loan, deduct the $100,000 that you still owe on your home, resulting in a remaining total of $140,000.
- Proceed to estimate the total amount you will receive from the cash-out refinance. This involves subtracting the balance on your previous mortgage from your new, larger mortgage. In this example, you can potentially receive up to $140,000. To ensure you secure the best deal, take the time to compare rates from various lenders.
- Consider alternative options after conducting thorough research on the available rates. Calculate your new monthly mortgage payment and determine its feasibility and affordability. If it doesn't meet your requirements, you may want to explore other types of loans that could be more suitable for your needs.
- Once you've made your decision, submit an application. Similar to your original mortgage, you'll need to go through the appraisal and underwriting process before finalizing the loan and accessing the cash.
Requirements for a Cash-Out Refinance
Debt-to-Income Ratio- Your DTI is determined by dividing your monthly debt payments, including your current mortgage, by your gross monthly income. Typically, for a cash-out refinance, you'll need a DTI of 45% or lower. If your DTI exceeds 45%, you may be asked to have six months' worth of reserves in your bank account.
Credit score- While a credit score of 620 can make you eligible for a cash-out refinance, having a higher credit score will increase your chances of obtaining a more favorable interest rate.
Home Equity- Generally, you'll need to possess at least 20% equity in your home to qualify for a cash-out refinance. Put simply, you should have paid off a minimum of 20% of the current appraised value of your house.
Requirement for seasoning- To qualify for a cash-out refinance with a conventional loan, it is necessary to have owned the house for a minimum of six months, regardless of your equity position. However, there may be exceptions made if the property was inherited or awarded to you through legal means.
In the case of VA loan borrowers, a waiting period of at least 210 days is required before being eligible for an FHA cash-out refinance. Those with a loan backed by the Federal Housing Administration must have resided in the home for at least 12 months before pursuing this option.