Cash-out Refinancing: Is it the Right One for Me? You might have heard of cash-out refinancing if you’re looking for ways to fund home repairs, consolidate credit card debt, or pay off medical bills. Marga Jurilla, a licensed loan officer and the national operations manager at Gustan Cho Associates, explains cash-out refinance mortgage loans as follows:
Cash-out refinance mortgage loans allows homeowners to borrow more than their current mortgage and receive the difference in cash.
While cash-out refinance mortgage loans can be an appealing option for some borrowers, it’s essential to take the time to determine if it’s right for your specific financial situation. In this article, we will discuss the basics of cash-out refinancing and provide tips on deciding whether it’s the right financial move for you. The following sections will cover cash-out refinance mortgage loans and how it works.
How Does Cash-Out Refinance Mortgages Work
What are cash-out refinance mortgage loans? Refinancing a mortgage involves getting a new mortgage to replace the existing loan. Cash-out refinance mortgage loans is a variation of refinancing that allows borrowers to convert their home equity into cash. James Abrahan is the business development manager at Gustan Cho Associates. JD Abrahan explains home equity as follows:
Home equity is the portion of a property value that exceeds the outstanding mortgage balance. In simpler terms, it is the difference between the value of the house in the market and the amount owed to the lender. If you have owned the home for a few years, your home equity may have grown due to appreciation or by paying the mortgage.
With cash-out refinance mortgage loans, the homeowner typically obtains a new mortgage for a higher amount than what’s currently owed and receives the difference in cash.
How Does Cash-Out Refinance Mortgage Process Work
For example, if your home is worth $300,000 and you owe $200,000 in the remaining mortgage balance, you have $100,000 in home equity. With cash-out refinancing, you can get a new mortgage for $250,000 and receive $50,000 in cash (minus closing costs). Wendy Lahn, the Chief Legal Officer at Gustan Cho Associates, explains the maximum loan-to-value on cash-out refinance mortgage loans:
The amount of cash-out you can obtain depends on the maximum loan-to-value (LTV) ratio allowed by your lender and your home equity. The LTV ratio is the percentage of your home’s value that your lender is willing to refinance.
Most lenders allow up to an 80% LTV ratio. VA loans allow up to 100% loan-to-value. If your home is worth $300,000, and your lender allows an 80% LTV ratio, you may be able to borrow up to $240,000 ($300,000 x 80%).
How to qualify For Cash-Out Refinance Loans
Qualifying for cash-out refinancing is similar to preparing for regular mortgage refinancing. You’ll need to meet specific criteria, such as having a good credit score and a steady source of income. Here are some factors you should consider if you’re interested in cash-out refinancing:
Credit Score Guidelines For Cash-Out Refinancing
Lenders consider credit scores to determine if you’re a good candidate for refinancing. An excellent credit score can help you qualify for a lower interest rate and better loan terms. Most lenders require a minimum credit score of 620 for cash-out refinancing, but a higher score can lead to better rates and borrowing limits.
Equity Required For Cash-Out Refinancing
The more equity you have in your home, the more cash-out refinancing may be available. As mentioned earlier, most lenders allow up to an 80% LTV ratio, which means you’ll need a minimum of 20% equity in your home to qualify for cash-out refinancing.
Debt-to-income ratio Guidelines on Cash-Out Refinancing
Your monthly debt payments are divided by your gross income to determine your debt-to-income (DTI) ratio. Lenders usually require a DTI ratio of no more than 50% for cash-out refinancing on conventional loans. If your DTI ratio is less than 50%, you might not qualify for cash-out refinancing with an FHA loan. The maximum debt-to-income ratio on FHA loans is 46.9% front-end and 56.9% back-end. VA loans has no maximum debt-to-income ratio cap on cash-out home loans.
Income and Employment History
Lenders will request income and employment history proof. Showing steady employment and income can help you qualify for cash-out refinancing. If lenders see that you’ve been in one job for a long time and receive a regular salary or hourly wage. They will likely consider you a safe investment.
Home Appraisal
Lenders typically require an appraisal of your home to determine its market value. It will help them calculate the LTV ratio and the amount of cash-out refinancing available. An appraisal can also uncover any repairs or issues that must be addressed before refinancing.
Closing Costs on Refinance Mortgage
Like regular refinancing, cash-out refinancing comes with closing costs, which are the fees associated with obtaining a new mortgage. Closing costs can include appraisal fees, credit report fees, title search fees, and other expenses. Invest in these costs when deciding if cash-out refinancing is right for you.
10 Ways to Know if Cash-out Refinance is Right for You
The housing market is booming. Many homeowners who purchased their homes a few years ago have substantial equity where they can tap into their home equity to get cash. John Strange of Gustan Cho Associates is an expert loan officer who has helped thousands of homeowners get a cash-out refinance loan. Here is what John says about cash-out refinance mortgage loans:
Proceeds from cash-out refinancing is tax-free. You do not have to pay any taxes on the cash proceeds from the cash-out refinancing. You can use the proceeds on anything you seem fit.
Many homeowners with equity can use the proceeds of their cash-out refinance to do repairs, pay outstanding high-interest credit card debt, pay off their auto, pay outstanding student loan debt, take a vacation, take time off work to go to school, make investments, healthcare, or anything they want with the cash. Here is how to determine if cash-out refinancing is right for you:
Assess the reason for considering cash-out refinancing
Ask yourself why you want to refinance your mortgage and your intentions for the funds you will receive. Are you seeking to pay off high-interest debt or make home improvements? Make sure the benefit of the cash you receive outweighs the potential risks and costs of the new mortgage.
Evaluate the current financial situation
It would be best to understand your debts, income, and expenses. What else could you do with the extra money after the cash-out refinancing? It’s essential to gauge your effectiveness in managing your finances before you burden yourself with new significant expenses.
Determine equity in Home
You can determine your home equity by checking your current home value and comparing it to your outstanding mortgage balance. If your home value has increased since your last appraisal, you may have more equity than you thought. Check your credit score and debt-to-income ratio to see if you qualify for cash-out refinancing. You can also ask a mortgage lender to evaluate your qualifications and assist you.
Calculate Your Savings
Since the new mortgage’s interest rate may differ from your current mortgage, it’s crucial to calculate potential savings before refinancing and check any prepayment penalties or other closing expenses.
Consider the Potential Risks of Refinancing
Consider the risks of refinancing your mortgages, such as paying for closing costs again, a higher interest rate, and a longer repayment term. Also, consider whether receiving the cash would make you comfortable with the increased mortgage burden and risk of losing your property when a foreclosure occurs.
Compare cash-out refinancing to other sources of cash
It’s essential to compare the cost of the refinance to get money in different ways. For example, a home equity line of credit (HELOC) may be less costly than refinancing your mortgage, but again, it’s essential to compare the potential costs and risks.
Talk to a Mortgage Professional
Mortgage experts can provide personalized advice on whether cash-out refinancing suits your financial circumstances. They can also model the potential savings vs. costs of the refinance for you and thoroughly explain
the process.
Analyzing long-term goals
Cash-out refinancing may extend the term of your mortgage, meaning a longer time to repay your loan and higher interest costs in total. Determine how refinancing fits into your long-term financial goals and whether it’s worth the risks and costs.
Assessing the Ability to Pay Back
Cash-out refinancing may increase the amount of the principal and interest on your monthly mortgage payments. Determine if you can comfortably take on the increased monthly payments and if you are ready for the long-term commitment of adding more debt to your existing loans.
Review the Cash-Out Refinance loan terms and agreements
Be sure to read and understand the terms and agreements of your new loan entirely with your underwriter. Refinancing your loan
requires careful attention and understanding, so take the time to read over all the legal documents and perform your due diligence.
Cash-out refinancing may provide homeowners with much-needed funds, but weighing the potential costs and risks before applying is essential. With careful consideration of your financial situation, goals, and available options, you can determine whether cash-out refinancing is right for you.
We at Gustan Cho Associates understand that deciding to refinance your mortgage can be overwhelming. Our experts help guide you throughout the process and answer any questions. Contact us today to learn more about cash-out refinancing and explore your options.