Cash-Out Refinance: Rates And Guide For Homeowners

Buying a home is probably one of the biggest investments you’ll ever make, and you likely want to do everything you can to make sure your home is as comfortable and as up to date as possible. But it can be tough to build up the necessary savings to complete home renovations and repairs.

A cash-out refinance may be your answer. It can help you accomplish your home improvement goals, so you don’t have to rely on credit cards, a personal loan or a second mortgage. A cash-out refinance can also help you use the money you’ve already paid into your mortgage to do things like cover repair bills, consolidate or pay off debt or even eliminate your outstanding student loans.

This article will walk you through the ins and outs of a cash-out refi so you can determine whether it’s right for you before you apply.

What Is A Cash-Out Refinance?

As your mortgage matures, you gain equity in your home. Equity refers to the amount of a home’s value that you’ve actually paid off or gained. You can gain equity in two ways:

1. Your home increases in value.
2. You pay down your mortgage principal through your monthly mortgage payments. Every time you make a monthly payment on your loan, you gain a bit more equity in your home.

A cash-out refinance is a type of mortgage refinance that takes advantage of the equity you’ve built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference.

Unlike when you take out a second mortgage, a cash-out refinance doesn’t add another monthly payment to your list of bills – you pay off your old mortgage and replace it with the new mortgage.

When you refinance, you can do anything you want with the money you take from your equity. You can make repairs on your property, catch up on your student loan payments or cover an unexpected medical or auto repair bill. Cash-out refinances give you access to lower interest rates than most other lending options, including credit cards. If you need extra cash to cover expenses, a cash-out refinance could be a great option.

Cash-Out Refinance Example

Let’s say that you’ve bought a home for $200,000 and you’ve paid off $60,000. This means you still owe $140,000 on your home. Let’s also say that you want to make $20,000 worth of renovations.

With a cash-out refinance, you take a portion of your equity and then add what you’ve taken out onto your new mortgage principal. This means your new mortgage would be worth $160,000 – the original $140,000 you owed on the home plus the $20,000 you need for renovations. Your mortgage lender will give you the $20,000 in cash a few days after closing.

How Much Cash Can You Get On A Refinance?

The amount you’re able to borrow on your refinance typically depends on your home's value. Before finding out how much you qualify for, you'll need to have your home appraised. In general, lenders will let you draw out no more than 80% of your home's value, but this can vary from lender to lender and may depend on your specific circumstances.

One big exception to the 80% rule are VA cash-out refinances, which let you take out 100% of your existing equity.

Use A Refinance Calculator

If you’re looking to see how a cash-out refi will affect your mortgage rates, a refinance calculator is a quick and easy way to get an estimate. A calculator can also help you figure out how much money you could save each month with a rate and term refinance. Based on the goals you choose and the numbers you plug in, our calculator will tailor loan-type recommendations just for you.

How Does A Cash-Out Refinance Work?

The cash-out refinance process is similar to the process you undergo when you buy a home. After you know you meet the qualifying requirements, you choose a lender, submit an application and documentation to underwriting, get approved and wait for your check.
Let’s take a closer look at each of these steps.

1. Check The Requirements

Each lender sets its own requirements when it comes to deciding who qualifies for a refinance. Here are some of the most common cash-out refinancing requirements:

A Credit Score Of At Least 580

Depending on your mortgage loan type, you’ll usually need a credit score of at least 580 to refinance. Many lenders require higher credit scores for cash-out refinances. However, there are exceptions.

• Refinancing VA loans: If you’re eligible for a VA loan, you can take cash out with a median FICO® Score of 580 or higher as long as there is at least 10% equity left in the home after you complete the refinance. You can take out up to the full amount of your equity with a 620 qualifying credit score using a VA loan.
• Refinancing FHA loans: An FHA cash-out refinance loan may be used to pay off debt if you’re an existing client of ours with a median 580 credit score. Otherwise, all other purposes for taking cash out require a 620 credit score.
• Refinancing conventional loans: Conventional loans always require a 620 qualifying credit score regardless of how much equity you’re borrowing.

A Debt-To-Income Ratio (DTI) Of Less Than 50%

Your DTI ratio is the amount of your monthly debts and payments divided by your total monthly income. For example, if you pay $1,500 in bills every month, including your mortgage, and you have a total monthly household income of $4,000, your DTI is $1,500 divided by $4,000, or about 37.5%. Most lenders prefer borrowers interested in refinancing their home loans to have a DTI of 50% or lower. However, it's possible to qualify with higher debt loads using FHA or VA loans.

Equity In Your Home

You’ll need to already have a sizable amount of equity built in your home if you want to secure a cash-out refinance. Remember that your lender won’t let you cash out 100% of the equity you have unless you qualify for a VA loan refinance. Take a careful look at your current equity before you commit. Make sure that you can convert enough equity to accomplish your goals.

2. Determine How Much Cash You Need

Once you know that you meet the requirements for a cash-out refinance, determine how much money you need. If you’re planning to use the funds for repairs or renovations, it’s a good idea to get a few estimates from contractors in your area so you know how much you’ll need.

If you want to refinance to consolidate debt, sit down with your credit card and bank statements and determine exactly how much cash you need to cover your debts.

3. Apply Through Your Lender

After you apply for a cash-out refinance, you receive a decision on whether your lender approves it  . Your lender might ask you for financial documents like bank statements, W-2s or pay stubs to prove your debt-to-income ratio. After you get approved, your lender will walk you through the next steps toward closing.

After closing, all that’s left to do is wait a few days for your check to arrive. The entire cash-out refinancing process can take 30 – 60 days from start to finish.