If you’ve lived in your home for some time or the value has appreciated recently due to market conditions, chances are you’ve built up a sizable amount of equity. In case you’re unfamiliar with equity and how it works, it’s the difference between what your home is worth and the remaining balance on the mortgage.
Some homeowners opt to convert equity into cash through a cash-out refinance to make home improvements, consolidate high-interest debt, or meet other financial goals. In this guide, you’ll learn how cash-out home refinances work and if it’s a loan product worth considering.
Home Loans and Mortgage Refinancing
What Is A Cash-Out Home Refinance?
A cash-out refinance is a mortgage product that lets you pull the equity out of your home. You’ll get a new loan for the amount you currently owe on your mortgage plus the sum of equity you borrow.
To illustrate, assume you took out a loan for $250,000 to buy your dream home. You’ve paid down $50,000 of the principal and currently owe $200,000. The lender has agreed to let you take out $25,000 in equity through a cash-out refinance.
You’ll get a new mortgage for $225,000 – $200,000 will be used to pay off your old home loan, and you’ll pocket the additional $25,000 in cash at or shortly after closing. The funds are yours to keep, and you can use them however you like.
Reasons For Getting Cash-Out Home Refinance
Lower Your Interest Rate
You could qualify for a lower interest rate if your credit has improved since you applied for your home loan. Depending on how much cash you pull out, you could save a fortune in interest over the life of the loan.
Interest rates on credit cards and some personal loans are steep compared to what you’ll find with cash-out refinance loans. So, you can use the funds to consolidate and consolidate high-interest debt to free up room in your budget and start working towards other significant financial milestones.
Get Cash For Large Expenses
If you need to make a big-ticket purchase but prefer not to take out a personal loan, a cash-out refinance could work. You’ll get the funds you need without settling for an exorbitant interest rate.
Finance Home Remodeling Projects
Home repairs and upgrades are costly and using your credit card to cover expenses could put you in a mountain of debt. Or you can borrow against the equity you’ve built up in your home to finance these projects.
Invest Money Into A Business
If you haven’t had much luck securing funding for your business, don’t close the book on your dreams just yet. A cash-out refinance could be the funding source you need to bring your business idea to life or expand your current operations.
Home Loans and Mortgage Refinancing
How Does the Cash-Out Refinance Process Work?
Determine How Much Equity You Have In Your Home
Most lenders require you to have at least 20 percent equity to qualify for a cash-out refinance.
The eligibility requirements vary by lender, but here are some general guidelines to keep in mind:
- Credit Score: 620 or higher
- Loan To Value Ratio: it is the amount you owe on your mortgage compared to your property value and should not exceed 80 percent
- Debt-To-Income (DTI) Ratio: it is the total amount of your monthly debt payments compared to your monthly income and should not exceed 50 percent
Find The Right Lender
Don’t settle for the first lender you find. Do your homework to find a reputable lender, like loanDepot, that offers competitive interest rates and a streamlined application process.
Apply For A Loan
Once you’ve selected a lender, reach out to learn more about the application process. Most allow you to apply online or by phone directly with a loan officer. You’ll also want to ask about the required documentation to avoid hiccups when it’s time for your application to go through underwriting.
Pros And Cons Of Cash-Out Home Refinance
Pros Of a Cash-Out Refi
- You can get cash to fund home improvements, consolidate high-interest debt or make a big-ticket purchase.
- If you consolidate and eliminate credit card debt, you may be able to improve your credit score.
- You can tap into your equity without taking out a second mortgage.
- You could reduce your interest rate if your credit score has improved or market conditions have changed.
Cons Of a Cash-Out Refi
- You could lose your home if you fall behind on mortgage payments since it’s used as collateral.
- You could spend several thousand on closing costs.
- You could get a higher interest rate than you originally had with your first mortgage.
- Some lenders charge private mortgage insurance if you borrow more than 80 percent of your home’s value.
Cash-Out Home Refinance FAQs
A mortgage cash-out refinance could be a smart financial move if you need cash, as their rates are generally lower than what you’ll get with a credit card or personal loan. Use loanDepot’s refinance calculator to gauge if this loan option is suitable for your financial situation.
Most lenders let you borrow up to 80 percent of your home value, minus the amount of your current mortgage balance. So, if your home is worth $375,000 and you owe $225,000, you could be eligible for a cash-out refinance loan of up to $300,000. Here’s why: you can pull out up to $75,000 in equity ($375,000 * .80 – $225,000). The lender will take this amount and add it to what you currently owe to determine how much you’re eligible for. In this case, it’s a new loan for $300,000 ($225,000 + $75,000).
The funds you receive from a cash-out refinance are not taxable as they’re classified as a loan per the IRS. If you use some or all of the loan proceeds to pay for home improvements, you can possibly deduct a portion of the interest on the loan.
Should You Use a Cash-Out Refinance?
Ultimately, deciding if a cash-out refinance is a good fit is a personal decision. If you haven’t yet used loanDepot’s refinance calculator, take a second to crunch the numbers to gauge if you should apply.
You can also reach out to loanDepot by submitting an online inquiry to contact a loan officer to get a rate quote for a cash-out refinance loan. You’re not obligated to move forward with the application process if you determine that another refinance option could be a better fit.