When is a Cash-out Refinance a Good Option?
6 minute read
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September 17, 2022

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If you already have a home mortgage and are looking to either get cash or make a change to your mortgage, then a cash-out refinance may be exactly what you’re looking for.

There are many ways to use a cash-out refinance, but it’s not always the best option for everyone.

Keep reading to learn more about cash-out refinance mortgages, the requirements to apply, and the three top reasons to apply for these loans.

What is a cash-out refinance?

A cash-out refinance is a loan that uses leverages your home equity to pay off your existing mortgage and replaces it with a new mortgage loan for a larger amount. This new loan leaves you with just one monthly mortgage payment. 

The difference between your existing mortgage balance and your home’s current value is paid to you in a lump sum payment. 

The best part about how cash-out refinance works is that you can use that money however you see fit—there are no specifications or requirements.

While not always required, it’s recommended to have at least 20% of equity available in your home before you apply for this loan.

The good news is that your equity grows with every mortgage payment you make and you can also gain equity if the value of your home increases.

These types of loans are a safe way to capitalize on your home’s value and in turn, use that money for whatever you want.

Cash-out refinancing requirements

A cash-out refinance works similarly to traditional mortgages in regards to their requirements. 

The main requirements for a cash-out refinance loan include:

  • Low debt to income ratio
  • Good credit score
  • Clean credit history
  • Established home equity

A low debt to income ratio means your debt doesn’t exceed your income. This is important for lenders to know as they want to see that your income covers your debt and your debt is contained. 

The credit score requirement will vary on which lender you work with, with some requirements ranging as low as 580-650. 

You’ll want to make sure you meet the minimum requirements before you move forward with the process, otherwise, you may be at risk of denial. It’s sometimes a good idea to pay off your credit card debt before you apply for a mortgage loan. 

A good credit history shows that you have established credit and that you take care of your debt and accounts. Any discrepancies or delinquent accounts may also put you at risk to be denied the loan. Or if you’re approved but have a rocky credit history, you won’t get favorable interest rates. 

Home equity is detrimental to cash-out refinance loans. You must have a good amount of equity in your home to be able to apply. 

You also want to make sure that what you’ll be getting back is going to be enough to cover the expenses you’re expecting to use the cash for.

Depending on your lender and mortgage loan type, you may have different requirements, such as a time limit for living in your home before you can refinance.

Make sure when you meet with your lender to come up with a list of questions regarding their requirements, their program, and their success to determine if they’ll be a good fit to work with. 

4 reasons to complete a cash-out refinance

Since you are refinancing your mortgage, you can use the cash you get however you’d like. 

A traditional mortgage refinance may require borrowers to put the money back into the home or to be only used on projects within a certain cost bracket, but that’s not the case with a cash-out refinance.

If you’re still confused about how you can use the money, let’s look at four of the most common reasons borrowers apply for a cash-out mortgage.

Home renovations

If you’d like to make improvements to your home then a cash-out refinance mortgage would be a great way to come up with the funds. 

A full kitchen renovation could easily leave you with a bill upwards of $30,000. 

Since those projects add value to your home, this will help protect your home if the value were to depreciate based on the market. 

Consolidate debt

Debt consolidation is another great use for cash-out refinancing. 

In other words, if you have a large amount of debt, student loans for example, with high-interest rates or poor pay-back terms, mortgage refinancing could be the perfect way to consolidate debt payments into one.

Typically, what you’ll receive will enable you to bring down your debt by a substantial amount, or even completely pay it off. 

A cash-out refinance loan typically has a low-interest rate, which makes this an efficient way o pay off other debt.

Emergency savings

If you owe on medical bills or know you will have upcoming medical expenses, then a cash-out refinance may be a good way to get cash, rather than taking out personal loans or adding to monthly payments.

A common knee replacement, for example, can cost around $50,000 without insurance. That’s not including the follow-ups and post-treatment expenditures. 

A cash-out refinance would be a beneficial way to improve your quality of life without suffering financially.

Investment projects

Finally, refinancing might be a good start if you’re looking to invest in other properties. 

The cash you receive could surely be enough to put money down on another property that will generate income.

Adding real estate to your financial portfolio can create monumental wealth in the long run. 

For example, if you’re looking at another property listed for $400,000 with a 10% downpayment, that would only cost you $40,000 down.

If this new property returns even 5% of its cost, you’re looking at a profit of $25,000. This is an extremely advantageous move for investing.

Go Mortgage can meet your needs

Whatever your needs are or if you’re simply looking for other ways to add value to your home or wealth portfolio, a cash-out refinance mortgage is a favorable avenue for many homeowners.

Go Mortgage is a leader in providing borrower satisfaction. They offer incredible cash-out refinancing programs that help meet your needs. 

Fill out our questionnaire to get in touch with one of our qualified professionals. We’ll review what we can offer and get you started in the right direction.

Photo by Tima Miroshnichenko

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