If you have equity in your home, you might be able to use it while you still own the home. For example, a cash-out refinance provides access to your home equity while allowing you to stay in your home.
This mortgage refinancing program can help you reach your financial goals or take care of the financial issues you’re experiencing.
Here’s how it works.
What Is Cash-Out Refinancing?
As the name suggests, cash-out refinancing takes cash out of your home equity. You can leverage the investment in your home, taking the money out to use for other purposes. Lenders don’t require you to use the funds a certain way – you can use them for any purpose, such as debt consolidation, paying for college, paying for a wedding, setting up an emergency fund, or home improvements.
How does Cash-Out Refinancing Work?
A cash-out refinance is a refinance of your first mortgage; it’s not a home equity loan. Instead, it replaces your first mortgage with a mortgage with a higher loan amount. Most borrowers take out a 30-year loan, but you may also borrow a 15 or 20-year loan.
Most borrowers can borrow up to 80% of their home’s equity in a cash-out refinance. For example, if your home is worth $250,000, you can borrow up to $200,000. However, it depends on how much you already have outstanding.
Let’s say your first mortgage had a balance of $150,000; that leaves $50,000 you can withdraw for cash out and use how you want.
What Are Some Cash Out Refinance Options?
Most traditional loan programs have a cash-out refinance option. Each mortgage refinancing program, however, works differently.
VA Cash Out Refinance
The VA cash-out refinance is for veterans of the military. If you have VA loan entitlement, you can borrow up to 100% of the home’s current value if you can afford the payment.
Veterans can use the VA cash-out refinance to tap into their home’s equity or to take advantage of a VA loan for the first time. For example, if you used FHA financing to buy your home but want to take advantage of your VA home loan benefits, you’d use the cash-out program.
To qualify for the VA program, you must:
- Have at least 181 days served during peacetime or 90 days during wartime
- Have an honorable discharge
Surviving spouses of veterans who lost their lives during service may also be eligible.
You must also have good credit (usually a 680 or higher), a debt-to-income ratio of 43% or less, and a stable income.
The VA cash-out program has a funding fee to pay upfront or wrap into your loan. The fee is equal to 2.3% of the loan amount.
FHA Cash Out Refinance
Anyone can qualify for an FHA cash-out refinance. You just need to meet the basic qualifying requirements, which are more relaxed than conventional loan guidelines.
The FHA program allows borrowers to take out up to 80% of the home’s value minus any existing loans. The FHA doesn’t say how you must use the funds, but you’ll pay mortgage insurance for the life of the loan. All FHA loans have an upfront mortgage insurance fee of 1.75% of the loan amount and an annual mortgage insurance fee paid monthly, which is 0.85% of the loan amount.
To qualify for an FHA refinance, you must:
- Have a 580+ credit score
- Have a debt-to-income ratio no higher than 43%
- Prove you have a stable income and employment
- Prove you live in the property as your primary residence
Jumbo Cash Out Refinance
A jumbo cash-out refinance refers to any mortgage over the conventional loan guidelines of $647,200. Any loan beyond this amount is a jumbo loan and isn’t backed by government entities.
Each lender has guidelines for a jumbo cash-out refinance, but typically, lenders require:
- Minimum 700 credit score
- A maximum debt-to-income ratio of 43%
- Stable income and employment
- At least 80% equity in the home
Each lender determines how much you can borrow with a jumbo cash-out refinance. Most allow you to borrow up to 80% of the home’s value, but some require more equity because of the higher risk of jumbo loans.
Conventional Cash Out Refinance
The conventional cash-out refinance is a traditional loan. Unlike government-backed loans, it doesn’t require mortgage insurance because you can only borrow up to 80% of the home’s value. Conventional loans only charge PMI on loans with a loan-to-value ratio higher than 80%.
Anyone is eligible for a conventional loan, but you must meet the guidelines, including:
- A minimum credit score of 660 or higher
- A maximum debt-to-income ratio of 43%
- Stable income and employment
Is a Cash-out Refinance a Good Idea?
You might wonder if the advantages of cash-out refinancing are worth it. Is a cash-out refinance a good idea?
Typically, it is an excellent alternative to high-interest consumer debt. As long as you can afford the payments, it’s a great way to save money. Consumer debt typically has interest rates of 20% or higher, but mortgage loans have much lower interest rates, saving you money.
Remember, though, that you’re putting your house up as collateral. Don’t borrow money you can’t afford to pay back so you don’t put your home at risk.
Closing Summary
If you have home equity, you can put it to good use with a cash-out refinance. You can use the money for any purpose, such as renovating your home, paying for college or a wedding, or paying off consumer debt.
Using the equity in your home and refinancing your first mortgage can save you money and help you reach your financial goals. Ensure you understand the terms of the loan and what’s at stake, ensuring you can afford the loan without issue so you don’t put your home at risk.
Contact us today if you’d like to learn more about your options for cash-out refinancing options.
