Cash-Out Refinance
You bought a home and want to do everything you can to make sure your home is as comfortable and up-to-date as possible. Or you may want to pay off other debts or unexpected costs. A cash-out refinance can help you use the money you have already paid into your mortgage by tapping into the equity you have built up. You can use this cash to do things like cover repair bills, consolidate debts, or even eliminate your outstanding student or medical loans. A cash-out refinance is also an opportunity to adjust your mortgage to more favorable terms. You may want to lower monthly payments and extend the loan life. It can also help you obtain a lower interest rate to save money in the long term.
Overview
A cash-out refinance replaces your current mortgage with a new, larger mortgage. The difference between the two amounts goes to you as cash back at closing, which you can then use for anything you want. As long as you have equity in your home, you may be eligible for a cash-out refinance.
Equity is key to the amount of the home’s value that you have already paid off. A cash out refinance is a type of mortgage refinance that allows you to take advantage of the equity you have built over time and gives a cash exchange on a larger mortgage. It differs from a second mortgage because the existing mortgage will be paid off and replaced by your new mortgage.
Eligibility
- Your credit score— The higher your credit score, the lower your interest rate on your cash-out refi.
- Your home appraisal value— Some lenders require an on-site appraisal of your home’s interior and exterior, while others require only a drive-by.
- Loan-to-value (LTV) ratio— This is the outstanding principal balance of the current mortgage versus the current appraised value of your home.
- The age of your mortgage— Some lenders only allow you to apply for a cash-out refi if your mortgage is at least 12 months old.
Cash-Out Refinance FAQs
Is a cash-out refinance a good thing?
If you are looking to do a cash-out refinance to pay off other debt, you could see a boost in your credit score. By increasing your credit score, you may eventually be able to obtain a much lower interest rate. In addition, you can adjust the terms when you do a cash-out refinance so that you can get a more favorable loan. By lowering interest rates or decreasing the term length, you will be able to save money in the long term.
Do you need income to cash-out refinance?
The lender will typically need to assess your income to find out if you can afford the terms of the loan. You will need to provide W2s or tax returns to show a stable source of income in order to qualify for a cash-out refinance. The specific requirements will vary based on the lender and they may also consider your credit score and the loan-to-value ratio.
How long after closing do you get your money from a cash-out refinance?
This type of loan takes about 45-60 days to close. The lender typically will wait about 3-5 business days after the closing of the loan to send you the funds. This wait is just in case you want to rescind the contract for any reason.
What is a cash-out refinance example?
Let’s say you have a mortgage of $100,000 on a home that is valued at $400,000. You want to access some of the equity you have built up in your home. Since you have $300,000 in equity, you decide to take out $100,000 in cash. This means when you refinance, your new mortgage amount will be for $200,000. You will now be responsible for higher payments unless you lengthen your loan. Your home value remains at $400,000 and now you have $200,000 in equity.