Do you have high-interest non-mortgage debt, and are you looking for a way to consolidate it?
Do you currently have a mortgage on a home that you have owned for over a year?
If you answered yes to both questions, you might want to consider a cash-out refinance. Here are five critical facts you should know about a cash-out refinance.
Fact 1. Cash-Out Refinancing, or a Cash-Out Mortgage (as it is sometimes called), is a mortgage option for homeowners who have sufficient loan-to-value (LTV) ratio.
Let’s start with:
- How much you owe on your home AND
- The approximate appraised value of your home.
Do you know how to calculate your LTV? Don’t panic! We will go one step at a time! Divide the ‘amount you owe’ by the ‘appraised value’ of your home – simple! If it is less than 80 percent, your loan to value ratio should be strong enough for cash-out refinance consideration.
Below is a handy chart that maps out the LTV ratio requirements for a variety of (non-single family) property types and the associated LTV needed for a Cash-Out Refinance:
| Maximum LTV Ratio Requirements for Cash-Out Refinance Mortgages (Fixed-Rate and ARMs). | |
|---|---|
| Property Type | Maximum LTV Ratio |
| 1-unit Primary Residence | 80% |
| 2-4 unit Primary Residence | 75% |
| Second Home | 75% |
| 1-unit Investment Property | 75% |
| 2-4 unit Investment Property | 70% |
Source: FreddieMac
Fact 2. Cash received from a Cash-Out Refinance can be used for a variety of reasons.
The cash can be used to consolidate debt. You can also use the money for a variety of other reasons. As an example, you could use the cash as a down payment on a second home that you could use as a rental property or even a vacation home. You can use the cash toward college tuition — either for you or your kids. Another option is to use the money for much-needed home improvements that you have been ignoring for way too long.
But, homeowners do need to be very mindful when tapping equity for cash. Any equity you tap is less equity or ownership you have in your house.
Fact 3. There are several important factors for qualifying for a Cash-Out Refinance.
First, homeowners need to have a decent FICO score. Homeowners with better credit scores may receive a lower rate for their new cash-out refinance.
Second, homeowners need to be in their home for at least a year to consider applying for a cash-out mortgage. The home may not be for sale during the time of application for the new loan.
And third, as mentioned earlier, homeowners need to have sufficient loan-to-value ratio.
Fact 4: There are costs associated with a Cash-Out Refinance.
Homeowners may need to pay closing costs for their new cash-out home loan. The closing costs vary by lender. Be sure to check with your lender about the details.
Fact 5: There may be tax benefits and other financial benefits for consolidating non-mortgage debt through a Cash-Out Refinance.
Mortgage debt might be tax-deductible. Credit card debt is not.
Besides tax benefits, cash-out refinance rates may be lower than the rates of some credit cards. This is another reason why some use a cash-out refinance to consolidate debt. By consolidating non-mortgage debt, you could save money every month!
