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Cash-Out Refinance: What You Need To Know

Buying a home is probably one of the most important moments in your life. Also, is probably the biggest investments you’ll ever make. But it’s understandable that building up the all savings to complete home repairs and renovations can be tough.

Maybe, a cash-out refinance can be your answer. A cash-out refinance can help you use the money you’ve already paid into your mortgage to do many things. Things like cover repair bills, consolidate to pay off debt or other things.

In this article we’ll explain what you need to know about cash-out refi. That way, you can determine whether it’s right option for you.

What Is A Cash-Out Refinance?

A cash-out refinance is a type of mortgage refinance. The main characteristic is that it takes advantage of the equity you’ve built in your home over time and gives you cash. This is in exchange for taking on a larger mortgage. Basically, with a cash-out refinance you borrow more than you owe on your mortgage and pocket the difference.

A cash-out refinance doesn’t add another monthly payment to your list of bills, unlike when you take a second mortgage. What you do is that you pay off your old mortgage and replace it with a new mortgage.

For instance, let’s say that you purchased a home for $300,000 and you’ve paid off $60,000. This means you still owe $240,000 on your home. In addition, you also want to make $20,000 worth of renovations.

With a cash-out refinance, you take a portion of your existing equity and then add what you’ve taken out onto your new mortgage. In this case, your new mortgage would be worth $260,000. This is the original $240,000 you owed plus the $20,000 you needed for renovations. A few days after closing, your lender gives you the $20,000 in cash.

With a cash-out refinance you can do anything you want with the money. You can decide to make repairs on your house, finish paying your student loans, among other things. You can even cover an unexpected medical or auto bill.

How Does A Cash-Out Refinance Work?

The cash-out refinance process is pretty similar as the one you undergo when buying a house. After meeting the requirements, you choose a lender, submit an application and documentation to underwriting, get approved and wait for your check.

Let’s revise each of these steps:

Check The Requirements

A Credit Score of At Least 620

For a cash-out refinance, typically, your credit score will need to be 620 or higher.

A DTI of Less Than 50%

Your DTI ratio is the amount of your monthly payments and all your debts divided by your total monthly income. As an example, if you have a total monthly income of $4,000, and you pay $1,500 in bills every month, including your mortgage, your DTI is $1,500 divided by $4,000.  About 37.5%. Generally, to refinance your mortgage, lenders require that your current DTI be less than 50%. If you want to know more about your DTI ratio, click here.

Equity In Your House

You’ll need to have a promising amount of equity built in your house in order to secure a cash-out refinance. It’s important to remember that your lender won’t let you cash out 100% of the equity you have. However, this will be possible if you qualify for a VA refinance.

How Much Cash You Need

Once you know you meet all the lender’s requirements for a cash-out refinance, determine how much money you need. If you’re planning to cash out for renovations or repairs, a good idea is to get different estimates from contractors so that you know how much money you’ll need. If you want to refinance to consolidate debt, try to determine exactly how much cash you need to cover your all your debts.

Apply Through Your Lender

After you apply for a cash-out refinance, you’ll receive the decision on whether your lender approves the refinance or not. Your lender may ask you for financial documents, such as bank statements, W-2s or pay stubs.

After closing, all you have to do is wait for your check to arrive. This typically is 3 to 5 days.

How Much Cash Can You Earn On A Refinance?

The amount you earn on your refinance will depend on your home’s value. You’ll need to have your home appraised. Generally, lenders will let you draw out no more than 80% of your home’s value. However, this can vary from lender to lender, and it also may depend on your specific financial situation.

One exception to the 80% rule is VA loans. This type of mortgage lets you take out up to the full amount of your existing equity.

Is A Cash-Out Refinance The Best Option For You?

A cash-out refinance can be a powerful option. Also, it can give you the money you need to complete your goals, whether you want to pay down your debts or renovate your kitchen.

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