There’s a lot to understand when it comes to mortgages, and even more with mortgage refinancing. At times, it may feel overwhelming.
But you’ll be in good hands if you find the right mortgage partner, and ultimately, refinancing should help your financial situation and allows you to take advantage of the equity in your home.
We’re going to break down what cash-out refinancing is, how long it takes, and why they’re beneficial.
We’ll also touch on the typical requirements and when a cash-out refinance would be the right choice.
When it comes to loans—you want to be confident and at peace with your decision.
An experienced home loan advisor can help answer any leftover questions you may have after reading this article.Start your cash-out refi here
How cash-out refinance works
A cash-out refinance loan is a way to convert your home’s equity into cash.
The process of a cash-out refinance is similar to a rate-and-term refinance in that you replace your existing loan with a new one.
In this scenario, you’ll replace your existing loan amount with a higher mortgage, based on how much you’ve paid into your home and what the house is now worth. The difference between your existing mortgage and what your home is now worth is paid to you in cash.
You’re left over with a new loan and different monthly payments. Your outstanding mortgage balance may grow but a change in terms and rates could save you money.
But exactly how much cash can you get? If you have a remaining mortgage balance of $100,000, for example, and your home is currently worth $200,000, then you would have $100,000 in home equity (the cash paid out to you).
Steps to a cash-out refinance mortgage:
- Find a lender that can provide cash-out refinancing
- Talk to the lender about refinancing requirements
- Determine how much cash you need
- The lender will review your existing mortgage. This typically includes assessing the mortgage terms, remaining balance, and your credit profile.
- Decide on new mortgage terms and discuss interest rates
- Schedule a home appraisal
- If you agree, you’ll close on the refinance loan (which includes paying closing costs)
- After a few days’ grace period, funds will hit your account
Because the process involves an assessment and an underwriting analysis, the process can take anywhere between 45 – 60 days.
However, this also depends on how quickly you can provide the necessary documentation. The sooner you can provide the information needed, the sooner your lending team can start the process.
When is cash-out refinancing the right choice?
A cash-out refinance mortgage might not fit every situation. So you’ll want to make sure you’re selecting the right loan and amount for your needs.
Essentially cash-out refinancing offers an easy way to access your equity and pay for large expenses. There are many times when a cash-out refinance would be the best solution for your needs.
- Home improvement projects
- Emergency situations
- Debt consolidation
- Funding education
- Medical expenses
There aren’t any set rules on how you have to utilize your money.
However, if you decide to use the cash for home improvements, you may be eligible for mortgage interest tax deductions.
Projects such as adding a swimming pool, building a new bedroom, upgrading your roof, or installing a central air conditioner or heating system are just a few common projects that may be eligible.
Cash-out refinance loan requirements
Not every lender’s requirements for a cash-out refinance will be the same. However, there are a few typical requirements that you can prepare yourself for.
This includes, but is not limited to,
- Credit score: Most lenders have a typical minimum, so the higher your score, the better deal you’ll get.
- Credit history: You’ll have to show you have a solid credit history and will be able to make your monthly mortgage payments.
- Debt-to-income ratio: Your DTI is your monthly debt payments divided by your gross monthly income. Generally, you want to stay below 45%
- Home equity: Essentially, you’ll need to have paid off at least 20% of the current appraised value of your home.
- Seasoning: AKA how long you’ve owned your home. Be sure to ask your lender what their requirements are in regards to how long you’ve owned your home and how that would affect your new loan.
It’s best to speak with a professional with years of experience in cash-out refinancing so they can explain their specific requirements.
Is a cash-out refinance worth it?
Cash-out refinance loans are popular for a reason, as many borrowers find the pros outweigh the cons. But be sure to discuss all requirements and drawbacks with your lender to decide if it’s worth it for you.
- The chance to lower your mortgage interest rate
- Loan consolidation (so you’ll only have to close once)
- You could use the cash to consolidate high interest debt
- The opportunity for new loan terms
- Add or remove borrowers to your loan
- Access cash from the equity in your home
- Risk of foreclosure: Your home is collateral, so if you miss payments, you’re at risk for losing it.
- New terms: This can be a double-edge sword. While different terms can work in your favor, they can just as easily be worse. Make sure you agree to the new interest rate and fees before you sign.
- Time-consuming: Although you’re not going through the entire home-buying process again, the underwriting for your loan can take some time. You should ask your lender to provide a turn-around time so that you have a better understanding of what to expect.
- Closing costs: Closing costs in general can be hefty, but with a cash-out refinance loan, the closing costs range from 2-5% of the entire loan and that’s taken from the cash you receive.
There are cons but many borrowers use a cash-out refinance to save money in the long run. It’s just about deciding whether it’s the right time for your situation.
Are you ready to refinance your existing mortgage?
If you’re ready to take the next step, reach out to an experienced home loan advisor.
A dedicated advisor wil assist you in planning your mortgage based on your specific financial data and needs. They’re with you for the entire process from application to closing.Get in touch with us today!