A Basic Guide to Cash-Out Refinancing

 Maybe you are familiar with the term “cash-out refinance.” Probably, your neighbor or office colleague used one to pay for their new deck or their kids’ first year of college tuition. Regardless of the reason, you know of the existence of cash-out refinances. You also know that a refinance broker can help you acquire one, but you may not be entirely familiar with the way they work. If that is the case, this write-up should be of use to you.

Understanding Refinances

In simple terms, refinancing means closing out an old loan and replacing it with a new one. It follows the same process you used when you initially purchased your home. You will choose a mortgage firm, fill out paperwork, show the lender your assets and income, and get a new loan, rate, and monthly payment.

What About Cash-Out Refinance?

Now that you have a basic understanding of refinancing, it is time to take a look at cash-out refinancing. It is a type of mortgage refinancing option that allows homeowners to convert a portion of their home equity into cash.

It is an attraction solution for homeowners in need of significant cash for various purposes, such as home improvement, debt consolidation, or investment opportunities.

How it Works

If you want to acquire a cash-out refinance, you need to apply for a new mortgage with your existing mortgage lender or a different lender via a refinance broker. The amount of this new mortgage will be higher than the existing mortgage, and you will receive the difference in cash.

The new mortgage will be subject to new terms and conditions, along with a new interest rate and payment schedule.

Eligibility Requirements

Homeowners must have sufficient equity in their homes if they hope to be eligible for a cash-out refinance. Most lenders expect a minimum of 20% equity in the home to qualify. Apart from that, homeowners need an excellent credit score, a stable source of income, and a low debt-to-income ratio.

Applying for Cash-Out Refinance

The application process for a cash-out refinance is similar to a conventional mortgage application. Homeowners have to submit income and employment documentation, a credit report, and other financial data.

The lender will then appraise the property to determine its current value.

How Much Cash Will You Get?

The amount of cash you can obtain via a cash-out refinance depends on your equity and the lender’s maximum loan-to-value ratio. Most lenders allow homeowners to borrow up to 80% of their property’s value.

So, if a home is worth $500,000, and the homeowner has $300,000 in equity, they can acquire up to $400,000 through a cash-out refinance.

Is it Right for You?

For every homeowner, it is of the utmost importance to do the math before deciding whether to move forward with a refinance. Just like the first mortgage, refinancing through a refinance broker will come with a few costs. Refinance loan closing costs usually range from 3 to 6% of the loan’s total value. This means homeowners have to deal with considerable costs on closing day.

While refinancing at a lower rate may mean lower monthly payments, you may not be able to save enough to make the refinance worthwhile, especially if you only have a few years left on the loan.