Cash-out refinancing can be a great way to tap the equity in your home to pay for a variety of expenses. Typical uses of cash include consolidating high-interest non-mortgage debt, paying for school, home improvement, or even starting a business. If you have owned your home for a while, chances are you have seen refinancing offers in the mail. Have you ever wondered how much money you could receive in a cash-out refinance?
The maximum amount you can borrow with a cash-out refinance will vary on several factors. Although each situation is unique, typically, around 80% of the loan to equity (LTE) is allowed on your personal residence. Some programs, such as FHA or VA loans might allow for a larger LTE on cash-out refinance loans. Other factors, such as the purpose of the loan or if the property is an investment, can affect the allowable LTE. Check with a mortgage professional to get answers about cash-out refinancing.
Loan to equity is calculated by dividing the amount of the loan by the value of the home. It’s important to remember that the value of your home has likely changed since you have originally purchased it. It could be worth more or less today than it was at the time of purchase.
Estimating how much cash you could receive in a cash-out refinance.
Let’s look at an example of calculating LTE and use it to determine how much money can be obtained by a cash-out refinance.
Isabella in Fresno has owned her home for a while and was hoping to do a home refinance with cash-out to pay off some high-interest non-mortgage debt and reduce her monthly payments.
At the time of the refinance, the value of her home was $250,000. She owed $153,732 on her home. Her LTE was calculated as $153,732 / $250,000. This comes out to 61%. Because her LTE was less than 80%, she was potentially eligible for cash-out refinancing.
The maximum loan she could have was 80% LTE. She could calculate this by taking her home’s value, $250,000, times 80%. $250,000 x 80% = $200,000.
Based on the above calculations, Isabella knew how much she could borrow. Of course, the new loan would pay off the original loan and any fees, thereby reducing the cashback. After paying off her existing mortgage, she would be left with $46,268 ($200,000 – $153,732) minus fees to put toward consolidating debt.
Isabella’s example above shows how she was able to consolidate high-interest non-mortgage debt with a cash-out refinance. Contact a mortgage broker today to find out more about cash-out refinancing.
Can a cash-out refinance mortgage reduce monthly payments?
In our example above, Isabella found she could borrow the amount she needed to consolidate her high-interest non-mortgage debt. But what does this mean for her monthly payments?
Isabella has qualified for a cash-out refinance for the amount needed to consolidate her debt. She found that the cash-out refinance increased her mortgage by $320 per month. Fortunately, by using the cashback to consolidate her high-interest debt, she could eliminate $882 in payments each month. This is a net savings of $562* per month that Isabella can put toward her goals.
Additional Considerations
The qualifications for a cash-out refinance are similar to a standard home loan. Among other factors, your income, credit score, and the amount of debt will affect the actual amount you qualify to borrow. Consequently, these factors may limit the amount you can borrow.
Also, remember that the loan is against your house. Ultimately you risk losing it if you are unable to make the payments. For this reason, you need to consider carefully how to use the cash.
Additionally, the cash-out refinance interest rates might be slightly higher than a standard mortgage. However, interest rates are still low by historical standards, and depending on when you bought your house may be lower than on your current home loan.
The most important consideration is how the extra cash will affect your life. Like in our example, Isabella having an additional $562* each month is a substantial amount of money. What could you do with some extra cash?
Cash-Out Refinancing Frequently Asked Questions
Many homeowners choose cash-out refinancing to convert some home equity into cash. With cash-out refinancing your current mortgage is paid off and replaced with a new mortgage. Cash-out refinancing is a great way to unlock the equity you have built in your home.
Before taking the leap and opting for a cash-out refinance, homeowners should ask themselves the following questions.
How does a cash-out refinance work?
Cash-out refinancing replaces your original home loan with a new mortgage with a higher balance. Some of the difference between the original and new mortgage is distributed to the homeowner as cash. With a cash-out refinance, you are taking advantage of the built up home equity. The money you get back with a cash-out refinance is part of the equity you have in your home.
For example, let’s say you own a house appraised at $300,000. You now only owe a $150,000 on the original loan amount of $300,000. That means that you now have a $150,000 of home equity. If you choose to go through with cash-out refinancing, you could take out some of that $150,000 in equity as cash.
Can I cash-out all of the equity?
Most home equity loans have an LTV (Loan To Value) ratio around 80%, as long as the property is your primary residence. Since rental properties are considered riskier, lenders generally allow only about 70% LTV.
You can calculate the LTV of your home by dividing the mortgage amount by the appraised value of the property. For example, if your mortgage amount is $100,000 and the appraised value of your home is $250,000, the LTV ratio is 40%.
Appraised property value = $250,000
Mortgage amount = $100,000
LTV = $100,000 divided by $250,000
LTV = 40%
How much equity can cash-out?
Many factors influence how much of the equity you cash out, including:
- The type of loan: For example, the Federal Housing Administration (FHA) cash-out refinance loans require 15% equity (the same as a 15% down payment). In other words, the maximum loan-to-value for an FHA cash-out loan is 85%. Veteran Affairs (VA) loans may enable homeowners to cash out 100% of their home equity.
- Your credit score: Lenders have their internal credit score requirements. The higher your credit score, the more borrowing options you have.
- Your Debt-to-Income (DTI) ratio: Your debt-to-income ratio is the sum of your debt payments divided by your gross income. The maximum DTI will vary by lender and loan program, but the number generally ranges between 40-50%.
- Your payment history: Lenders are looking for borrowers with good payment history. If you want to qualify for a cash-out refinance, it is crucial that your present home loan is current and that you have no late payments for at least the last 12-month period.
What is a home appraisal?
A home appraisal is an expert’s best estimation of what your home is worth. An independent third party handles the home appraisal. The appraiser considers the location, square footage, condition of the property, and recent sales in the neighborhood. These, along with other factors, determine the house’s value. Check with your lender about which appraisal company they want you to hire for the refinance.
Are there limits on how I use the money I cash-out?
Homeowners use the money in a variety of ways. Some people use cash for home renovations or repairs. Others use it to pay for college tuition. One of the common ways homeowners use their home equity is to consolidate their high-interest non-mortgage debt.
For example, a mortgage lender has assisted Grace from El Cajon with her debt-consolidation strategy using a cash-out mortgage refinance. Grace had $20,151 in non-mortgage debt at an interest rate of about 16%. Her home was appraised at $360,000 when she refinanced. Grace had $194,462 in home equity. She qualified for a cash-out loan refinance. After the refinance, her mortgage payment only increased by $106 a month, but her non-mortgage debt payment dropped by $622. Grace saved $516* a month by cashing-out out equity with a refinance.
For more information on cash-out refinancing, contact your mortgage broker.
What are the advantages of a cash-out refinance?
There are several advantages of a cash-out refinance. One of the most significant advantages is that you have access to your home’s equity when you need an influx of cash. There might also be some tax advantages. The interest you pay on the mortgage is tax-deductible up to $750,000. Sometimes, the interest you pay on the cash you take out is tax-deductible. Consult your tax advisor for details.
What Are the Do’s and Don’ts of Cash-Out Refinancing?
Do you own a house with significant equity? Do you need extra cash? Perhaps it’s time to consider cash-out refinancing.
Cash-out refinancing is a way for property owners to take some of the equity out as cash. One of the biggest advantages of this option is that homeowners can take cash out of their home without having to sell. Homeowners use the money from cash-out refinancing many unique ways such as financing home improvements, consolidating high-interest debt, or pay for college tuition.
Before you sign the paperwork, consider the following cash-out refinancing do’s and don’ts.
Do: Plan for how you want to use the cash.
It’s great to be able to take cash out of your home. But it is important to have a plan for how you are going to use the cash. Without a plan, it’s easy to spend the money on frivolous purchases. A great way to use the money from a cash-out refinance is to consolidate high-interest debt.
A mortgage broker has helped Paula from San Marcos eliminate high-interest non-mortgage debt the following way. Paula had $20,151 in high-interest non-mortgage debt that carried a $622 monthly payment. To consolidate this debt, she applied for a home loan refinance with cash-out.
At the time of the refinance, Paula’s home had an appraised value of $360,000. She also had $194,462 in home equity. The refinanced loan increased Paula’s mortgage payment by $106 per month. However, she was able to eliminate $622 in non-mortgage debt payments. This netted her a savings of $516* per month.
Paula had a plan to use the money from the cash-back refinance to eliminate high-interest debt. Following thru with her plan enabled her to save money each month.
For more information on cash-out refinancing, contact your mortgage broker today.
Do: Get your financial house in order.
Cash-out refinancing is a great way to consolidate debt. It is also important to reflect on how you built up high-interest debt. Think about ways to reduce your debt as you go through this process.
Cash-out refinancing might increase your monthly mortgage payment. For this reason, you need a firm understanding of how this could impact your monthly spending.
Do: Take time to understand the loan terms.
Just like your current home loan, cash-out refinancing is also a long term commitment. It’s important to ensure you understand all the terms and conditions of the loan before signing. Work with your lender to understand everything from interest rates and monthly payments to fees and costs. Ask your lender questions to make sure you have a full understanding of the terms of the loan.
Don’t: Take out more money than you really need.
It can be tempting to take out more cash than you really need. However, remember that you will need to repay everything you have borrowed plus interest. Calculate the amount of cash you need and resist the temptation to borrow more.
Don’t: Jump at the first offer without shopping around.
It might not be the best option to refinance your mortgage with your current lender. Chances are, they know you and might even be sending you information on cash-out mortgages. But this doesn’t mean they are guaranteed to give you the best rates and terms.
Just like with your original mortgage, you should shop around for the best deal on your cash-out refinance. Also, check to make sure that the lender offers competitive closing fees.
Don’t: Sign the paperwork until you are ready.
It’s a big decision to refinance your house. When you refinance, you are resetting the clock on paying off your home or changing your monthly payment terms.
The terms and conditions of the cash-out mortgage will be set for the term of the loan. It is critical to know the details of the terms. For this reason, you should discuss the terms with your lender to gain a solid understanding.
In addition, you need to be certain that cash-out refinancing is the right option for you. Ask the lender questions about your loan. Make sure that you don’t sign the paperwork until you are ready. You can always walk away and rethink the decision, right up until you sign the paperwork.
Contact your mortgage lender about cash-out refinancing.
