What is a Cash Out Refinance?
A cash-out refinance is available for homeowners who want to access equity in the home for repairs and improvements, to consolidate debt, or for investment purposes.
If you are considering a cash out refinance, you must assess your personal situation. First, your current loan balance needs to be significantly less than your home value. Most if not all cash out refinance lenders will not permit you to borrow up to 100% of the home value. So, if you are looking to cash money out of your home, then your current loan to value will most likely need to be less than 80% before you refinance.
We will take you through your cash out refinance options below. Then, contact us to discuss your personal scenario and we can give you an idea as to how much you may be able to cash out and what the interest rate and payment could be.
One of the common mistakes that people make when they finish a cash out refinance is when they use the money for something other than adding value to their homes. Here are some good and bad things to do with the money received from a cash out refinance.
Good Ways to Spend Your Cash Out Refinance Dollars
- Remodel your home
- Make needed repairs on your home
- Add a pool or some other exterior improvement that adds value
- Pay off high interest debt
- Setup a college fund
- Put the money in a retirement fund
- Invest in other real estate projects
Bad Ways to Spend Your Cash Out Refinance Dollars
- Buy a car
- Go on vacation
- Pay for Christmas gifts
- Buy furnishings for the home
- Start a business
- College tuition
You may think it is strange that I am recommending NOT to use cash out refinance funds for starting a business or for college tuition. Unfortunately, most businesses fail and I have seen too often when people leveraged their homes for their businesses and they risk losing their homes when the business fails. This is really a bad idea and there are small business loans available without risking your home
I feel the same way about college tuition. There are student loans and grants that you can apply for. You should not refinance your home loan and then make interest payments on it for the next 30 years.
Pros and Cons of a Cash-Out Refinance
- You can access the equity in your home
- The funds can be used for home repairs or remodeling
- The funds can be used for debt consolidation
- You may get a lower rate
- You may actually keep your payment the same if the rate is lower
- The interest you pay on the dollars you are cashing out will most likely be less expensive than if you got a personal loan
- You could potentially use the funds to build wealth in other investments
- You are taking the equity in your home and possibly using it towards things that do not return value
- Your interest rate may be higher than your current rate
- Your payment may be a lot higher depending upon your personal scenario
- If you cash out equity near your home value, you risk losing ALL of your equity should the real estate market decline.
Cash Out Refinance Qualifications
- First, you need to have enough equity in your home to cash out. The highest LTV you may find will be 90%.
- In many instances, the lender will require that your original loan has been seasoned for a specific period of time. Meaning, you may need to wait a year (for example) from the time you got your current loan until the time when you can get a cash our refinance loan.
- Depending upon the loan program and the lender, you may be limited on the total amount of equity you can cash out of your home.
- You will need to be current on your existing mortgage with no late payments
- If you cash out more than 80% of your home value, you may be looking at also paying mortgage insurance which is a significant additional monthly payment.
- Each loan program and lender will have varying credit score requirements
- Your total financial and credit situation may dictate how much you can cash out, what your rate will be and whether you will be approved for the cash out refinance at all.
Cash Out Refinance Programs
Here is a quick rundown of the various programs where you can get a cash-out refinance:
- Conventional Cash Out Refinance – This is your traditional standard loan and PMI would kick in of you go beyond 80% loan to value. There are creative ways to eliminate PMI so check with our lender.
- Jumbo Cash Out Refinance – For the more expensive homes. Jumbo cash out refinances are common and the limits are usually in the millions. A jumbo loan is any amount over the current conforming loan amount in your state.
- FHA Cash Out Refinance – For homeowners who already have an FHA Loan, you can consider an FHA cash out refinance if you have built up some equity since got your original loan. This may have a lower interest rate than your current FHA loan. You must also have an FHA loan now to refinance into another one.
- VA Cash Out Refinance – For active military or veterans who would like to cash out equity. Your maximum here would be 100% of the home value so you would need to have built that equity since your original loan.
- USDA Cash Out Refinance – For those who live in an approved rural area with a maximum loan to value ratio of 100%, you may qualify for a USDA cash out refinance.
- Stated Income Cash Out Refinance – This is for self employed individuals who cannot document their income. The loan to value ratios may be lower than the other programs referenced above. Your interest rate may also be a bit higher.
- Bank Statement Cash Out Refinance – This is also for self employed individuals who cannot document their income. The lender will qualify you using 12-24 months’ bank statements. The bank statement loan has become the most popular loan for self employed borrowers.
- Home Equity Line of Credit – This is another way to cash out equity in your home. Here, you are not refinancing the entire current loan but instead getting a second loan on the equity that you want to cash out. The benefit if this option is that you only pay interest on the amount that you draw. However, the interest rates typically adjust so there is risk that it could go much higher.
Cash Out Refinance (FAQ) Frequently Asked Questions
What is a cash-out Refinance?
A cash-out refinance is when you refinance your home for more than the current loan balance to take money out for other purposes. It is a great way to access the equity in your home to do repairs and improvements or even to consolidate debt.
Which is better, a cash out refinance or a home equity loan?
Every situation will be different. Your scenario needs to be analyzed by a cash out refinance lender. If you are self employed and cannot document your income, then a home equity product will not be available to you. Complete the form here and someone will contact you to discuss your options.
How much cash can you take out of a cash out refinance?
This will vary based upon your scenario. The amount of equity in your home vs the lender guidelines for the loan program you are interested in. The only way to truly know is to speak with someone. A good rule of thumb is to expect an 85% loan to value on a conventional loan.
What is the minimum credit score needed for a cash out refinance?
For conventional loans, you can expect to see a 660 credit score requirement. However, for some of the other programs like FHA you will be able to get it done with a lower score. There are lenders we work with who can accept scores as low as 500.
Do I have to pay taxes on the money from a cash out refinance?
No, this is your equity and it is not considered to be income so you will not pay taxes. Meanwhile, depending upon the tax laws you may be able to write off the interest that you pay on the loan.
Can you get a cash out refinance with bad credit?
You can but most likely not with a conventional loan and the credit score may limit the amount that you can cash out. Your rate may be a bit higher if you have bad credit also.
What is the maximum you can cash out on an FHA cash out refinance?
You will be able to cash out a maximum of 95% if the home value with an FHA refinance. This means you will have needed to build some equity in your home since you originally purchased it.
How long does a cash out refinance take?
You can expect the entire cash out refinance process to take anywhere from 30-45 days. Some lenders can get it done faster than others.
Are the interest rates higher for a cash out refinance?
The rates may be higher. Lenders typically have a rate add-on for cash out refinances. That being said, depending upon what your current rate is and when you got your loan, your cash out refinance rate could be less than what you have now.
Should I cash out refinance to pay off debt?
If the refinance helps you to pay off high interest debt, then yes this is a good idea. It could save you thousands in interest.
Should I cash out refinance to remodel my home?
Cashing out money to remodel your home is truly what the cash out funds should be used for. Using the money to add value back into the home is the best scenario. Using the money for things that do not add value to your home is a bad idea.
Still have questions? Contact us for a free consultation!
We are able to help you to find a cash-out refinance loan with the best lenders in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.