Cash Out Refinance
Homeownership has many benefits, but one of the most essential advantages is using equity in your home. Instead of rental payments disappearing into the landlord’s pockets, your monthly payments reduce the principal balance on the mortgage, increasing your ownership stake in the property. The longer you own the home, the more equity you have as long as the property value is steady or rising.
There are several ways to use your home's equity for financial flexibility. One strategy is a cash-out refinance. Refinancing is adjusting an existing mortgage to change the monthly payments, modify the loan terms, or receive a cash lump sum payment. A cash-out refinance lets you create a new mortgage and receive money based on your home's equity.
TrueWay Mortgage is an experienced lending partner that can help you understand your refinancing options, including a cash-out refinance. Our professional agents can review closing costs, the impact of your credit utilization ratio, how much cash you can receive, and more with you.
What is a Cash-Out Refinance?
A cash-out refinance is not the same as a home equity loan. With a home equity loan or home equity line of credit, you borrow money against the equity in your home. When you pursue a cash-out refinance, you create a new mortgage to replace the original mortgage.
Since you have already spent money reducing the principal balance on the first loan, you will borrow an amount greater than the remaining loan balance, up to 80% of the home’s value. The difference between the new loan and the balance of the previous mortgage can be received as a cash payment.
A cash-out refinance can benefit homeowners financially. You could use the money to fund home improvement projects, pay off other debts, or build up your emergency fund. Some homeowners use it to pay expenses for the purchase of a new home, such as closing costs, or college tuition.
How Does Cash Out Refinancing Work?
Before you take out a new mortgage loan on your home for a cash-out refinance, you must understand the mechanics of this process. The two most important numbers are the original loan's current principal balance and your home's market value. The more significant the difference between these two numbers, the more money you could receive from the cash-out refinance.
Let’s look at an example. Perhaps your home is worth $400,000, but you owe $250,000 on the balance of the original loan (this does not include interest). First, you multiply the home's value by the loan-to-value limit for the refinancing, typically 80%.
This gives you $320,000. Then, subtract the remaining balance from this number, giving you $70,000. This is the maximum amount of cash you could borrow if you take out a new loan, which would be added to the principal of the second mortgage.
TrueWay Mortgage will guide you through this calculation to ensure you understand the finances when a cash-out refinance replaces the primary mortgage. Knowing how much you can receive is crucial to ensure you have financing for things like college tuition or home improvements.
Most loans qualify for a cash out refinance, including an FHA loan. You can also refinance your existing conventional loan into an FHA loan. Working with an experienced mortgage lender to guide you through changing your current mortgage and possibly mortgage insurance will make the process seamless.
Key Benefits of Cash-Out Refinancing
A cash-out refinance is a wise financial move if you have built up equity in your home. For example, if you have lived in the house for many years, your significant equity should allow you to receive more cash for home improvements.
If your home has increased in value dramatically in just a few years, this could also be a great time to replace the existing mortgage with a loan balance with better interest rates. The primary benefits of a cash-out refinance are access to home equity, debt consolidation, and more competitive interest rates. Loan proceeds can be used to pay off the mortgage balance on another home or for repairs your homeowners insurance doesn’t cover.
An experienced lender can help you explore the benefits to determine if this is the best course of action for your situation. Lenders know about things like the Servicemembers Civil Relief Act, and you may qualify for those benefits if you’re an active duty member.
Debt Consolidation Opportunities
Debt consolidation is another excellent reason for a cash-out refinance. Using your home’s equity, you can take a cash payment with a second mortgage to pay off other debts, such as credit cards, car loans, student loans, or other loans. The remaining funds can be used however you like, such as saving them to better your financial situation.
Since your new mortgage will likely have a lower interest rate, you can use this cash to pay off high-interest debts and remove some monthly debt payments. When you consolidate debt, it can improve long-term savings and your credit score.
Lower Interest Rates Compared to Personal Loans
If you replace your existing mortgage with a cash-out refinance, you will likely see competitive interest rates than most personal loans. A personal loan can be tempting if you need money quickly. However, personal loans often have a higher interest rate and less cash than a refinance mortgage with a new loan balance.
Cash-out refinancing typically lets you access better interest rates, reducing the ongoing borrowing costs. Plus, you can access more money if you have lived in the home for many years and its value has increased. Refinancing is more cost-effective when you compare the interest rate of a cash-out refinance with credit cards or personal loans.
Access to Home Equity
Life can be unpredictable, and access to quick cash may be necessary for numerous reasons. As a homeowner, you have access to a source of money due to your investment in the value of your home. This is similar to how a reverse mortgage is based on the value of your home, but you pay the cash back in monthly payments with a refinance.
While renters must come up with cash another way, you can replace your current mortgage with a new loan and accept the difference as cash. Homeowners can use their equity in several other ways, such as equity lines of credit or equity loans.
The advantage of a cash-out refinance is not having multiple loans or credit lines to worry about. Instead, you have one new loan term to worry about and a cash payment to use however you want. However, a cash out refinance may result in a larger loan.
TrueWay Mortgage has helped many property owners maximize their equity value. Let’s discuss your financial goals to find the best solution. We can help you determine if a cash out refinance may be best for you, how much equity you have, mortgage rates, and more.
When to Consider a Cash-Out Refinance
You must assess your situation to determine how a cash-out refinance increases financial stability. First, you should only consider this path if you are years into your mortgage loan or the home’s value has increased.
It only makes sense to pursue a cash-out refinance if you have a reason for needing cash. That reason could be home renovations, debt consolidation, building an emergency fund, or paying for other significant expenses.
You should also consider current refinance rates. If you can access lower rates with a refinance compared to your current loan, it’s worth considering. Look at the rate and term for your mortgage before taking out a larger mortgage.
TrueWay Mortgage takes a personalized approach to refinancing, ensuring you evaluate your needs before committing to a second mortgage loan in exchange for cash. We’ll compare the current and future loan amount to ensure you don’t risk losing your house with a larger mortgage.
Eligibility Requirements for Cash Out Refinancing
Cash-out refinance requirements will vary from lender to lender. Your eligibility will depend on your ability to meet these standards and on the lender you choose. Some basic requirements include minimum credit scores, home equity, and loan-to-value ratios. Let’s discuss these criteria in greater detail so you know how TrueWay Mortgage can help you meet the standards for a cash-out refinance.
Minimum Credit Score
If you have a higher credit score, you are more likely to qualify for refinancing. Lenders use a credit score to assess risk and your ability to cover monthly payments. Many firms will accept a minimum credit score of 620, but some could demand scores as high as 700 to allow refinancing.
TrueWay Mortgage will provide guidance to give you a better chance to make your cash-out refinance work. We’ll discuss the new rate and term for the loan amount, monthly payments, and everything else about how a cash out refinance can help you.
Home Equity and Loan-to-Value Ratio
You must have enough equity in your home to qualify for a cash-out refinance. Typically, lenders will not allow refinancing for equity below 20%. The loan-to-value ratio must be below 80% to take out cash and a new home loan. TrueWay Mortgage will ensure you accurately assess your property’s value to qualify for refinancing.
Income and Debt-to-Income Ratio
As they did with the first loan, your lender must confirm you can afford the new monthly payments and closing costs for a cash-out refinance. This will depend heavily on your debt-to-income ratio. The ratio can be calculated by dividing your monthly debt by your gross monthly income and multiplying by 100. You can meet the lender's income requirements if the ratio is 43% or lower.
The Cash Out Refinance Process
If you want to replace your mortgage loan with a new one, you must understand the steps involved in the application process. At TrueWay Mortgage, we make this process seamless so you can enjoy a stress-free experience. Let’s look at the major phases of your cash-out refinance.
Application and Documentation
When you apply for this type of loan, you must provide documentation of your financial background. Your lender will require proof of income, so W-2s, paychecks, pay stubs, and bank statements will likely be necessary. There will also be a property appraisal to confirm the property’s value and LTV ratio.
Property Appraisal
The property appraisal is essential for refinancing. The lender should confirm the property is worth enough to make refinancing worth it. A professional appraiser will look at the property’s condition and estimate its current value to provide a guideline for the LTV ratio and equity. Since these numbers directly impact the size of your next loan and the cash you will receive, expect a thorough appraisal when your application is processed.
Loan Approval and Closing
The final steps will involve the approval of your loan and the disbursement of funds. If your loan is created with an escrow account, the escrow officer will handle all the disbursements. Just as you sign closing documents for the first mortgage loan, you must sign legal documents to close the initial loan and open another one. TrueWay Mortgage is committed to efficiency when closing on home loans.
Costs to Consider with Cash Out Refinancing
A cash-out refinance costs money. There are some upfront closing costs that you should consider, which usually cost between 2% and 5% of the loan amount. Additionally, you must compare the interest rates of the two loans to see how they will affect your monthly payments. At TrueWay Mortgage, we promise transparency so you understand the costs of applying for a cash-out refinance.
Cash Out Refinance vs. HELOC
Cash-out refinancing is not the only way to take advantage of home equity. A home equity line of credit (HELOC) is another way to access your equity. A HELOC lets you borrow money against equity based on a maximum limit during the borrowing period. Then, a repayment period begins. You can borrow any amount if you repay it during the borrowing period.
HELOCs are a great option if you want to access cash numerous times. However, you must be prepared for variable interest rates and the repayment period. A cash-out refinance makes more sense when you need a large lump sum immediately for a significant expense. Refinancing typically comes with lower interest rates so that you will have lower monthly payments.
Why Choose TrueWay Mortgage for Cash Out Refinancing?
The right lending partner is key to finding competitive rates for a cash-out refinance. Our team at TrueWay Mortgage is filled with expertise in the mortgage industry. We take a client-first approach to ensure we understand your needs before deciding on mortgage products. You can also find a competitive interest rate when you pursue cash-out refinancing with TrueWay Mortgage
Contact Sam and Anisha Mauldin
TrueWay Mortgage
Start Your Cash Out Refinance Journey Today
A cash-out refinance results in money in your pocket and a new home loan on your house. This cash can consolidate debt, pay for renovations, or cover other major expenses, using your home equity as leverage. TrueWay Mortgage will help you find the perfect cash-out refinance product to meet your needs.
Look at our quick quote tool to view current interest rates on refinance loans. If you are ready for a consultation with our team, call us at 404-962-0032 to start your refinancing journey today.