Cash-out refinance: Everything you should know

Cash-out refinancing is a great option if you’re in need of emergency cash or are ready to make improvements on your home without taking a completely new loan.

You’re able to replace your current mortgage with a new, larger mortgage and receive the difference in cash as the result.

Cash-out refinancing is a standard and safe way to use your home’s equity to get a substantial amount of cash on hand.

Let’s break down what cash-out refinancing is, how to qualify, and most importantly—how much money you can receive. We’ll also go over the closing process and when cash-out refinancing is a good idea. 

What is cash-out refinancing?

As mentioned, cash-out refinancing is when you replace your current mortgage with a new mortgage and receive cash at the end of the process. 

The cash amount is the difference between the equity you currently have in your home and the home’s current value. 

For example, you have a remaining balance on your mortgage of $100,000 but your home is currently worth $170,000. That means you have $70,000 available in home equity. 

Most lenders allow you to cash out up to 80% of your equity. 

The process works as follows: 

1. You meet with a mortgage lender and apply for a cash-out refinance for a larger amount than your current mortgage, depending on how much equity you already have.
2. You use the loan from your new, larger mortgage to pay off the balance on your current mortgage. 
3. After you close on your new mortgage with your lender, you receive the difference between your old mortgage loan and the new one in cash.
4. In the end, you get a cash payout and still only have one monthly mortgage payment. 

Seems easy enough, right?

A huge benefit of these loans is that there are no requirements for what you do with the cash you receive.

Another plus is that these loans typically have a low-interest rate over a longer loan term, which reduces the risk for borrowers. 

How do I qualify for cash-out refinancing?

Qualifying for this type of loan will be similar to when you applied and qualified for your first mortgage. 

However, every lender will have different requirements for their cash-out refinance loan.

Typically, the requirements are as follows:

• Provide and meet income requirements
• Provide tax returns
• Credit score around 580 or higher
• Low debt-to-income ratio
• Good credit history
• Home equity

Most of these requirements are straightforward. You must have a stable income and provide proof of such; along with tax returns showing you have made what you claim.

Your required credit score can vary depending on your lender, but most cash-out refinances mortgages require at least a 580 credit score, or higher.

A low debt-to-income ratio means that you have more income than debt. Consider this like a safety net for lenders to know that you take care of your debt and are secure in your income.

You want to show your lender you have a good credit history, meaning you have a history of making payments on time and keeping your accounts active and in good standing. 

How much money can I get from a cash-out refinance?

Your home equity is important with a cash-out refinance. 

While some lenders don’t require a specific amount of equity in your home before you apply for refinancing, it’s typically recommended that you wait until you have at least 20% built up.

Before you move forward, make sure the amount of home equity you have will be enough to cover whatever your goals are with the cash you’re applying for. It’s best to figure out how much you need prior to applying for refinancing.

Typically, most mortgage lenders let you take out up to 80% of your home equity.

For example, if your home is valued at $200,000 and your mortgage has a balance of $100,000, you have $100,000 available in equity. However, since you’ll usually have to keep 20% equity in your home after you refinance, you’ll get $80,000 back in cash.  

If you’re mortgage shopping and want to compare, you can get this value by multiplying your home’s value by the percentage rate offered, and then subtracting the balance of your old mortgage from the total. 

However, there are tools available to help estimate your new monthly payments based on various factors. 

What is the closing process like for a cash-out refinance?

The closing process is similar to a traditional mortgage closing process. 

You’ll get a home appraisal and then the loan underwriter will review the documents you provided to determine if you’re approved.

You then complete the process by signing the closing documents. From there, it’s required that lenders give you three days to back out of the refinance if need be before you get your cash.  

It’s also important to remember that the appraisal and underwriting can take a substantial amount of time depending on a few factors, such as the current market trends, and how quickly you can provide all required documents.

When you meet with your lender to apply, feel free to ask them what their typical turn-around time is and when you can expect to close.

Is a cash-out refinance ever a good idea?

The main benefit of a cash-out refinance mortgage is receiving a large amount of cash at the end of the process.

Especially since these types of loans have a lower interest rate, it’s a safe strategy for homeowners in need of cash.

However, there are some risks to consider, the biggest being if you can’t make your monthly payments then your home could be at risk of foreclosure. 

You want to make sure you’re comfortable with the new monthly payments and ensure that you have the financials before you proceed.

Since this mortgage is based on your home value, you should also be mindful of how much you are taking out. If the value of your home falls, then you might end up owing more than your home is worth.

Of course, if either of these situations happens you have options so make sure to ask your mortgage lender about the risks involved.

This is why it’s critical you choose a qualified lender with experience.

The lending professionals at Go-Mortgage will listen to your buying needs and prepare the pathway for your dream home.

Photo by Joslyn Pickens