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5 Cash-Out Refinance FAQs

5 Cash-Out Refinance FAQs

For homeowners looking to convert home equity into cash, a cash out refinance with a current mortgage can be a great option — and a helpful way to unlock the equity you’ve built in your home since you bought it. But before you decide whether a cash-out refi is right for you, make sure you know the answers to the following questions.

What is a cash-out refinance?

A cash-out refinance replaces a current mortgage with a new home loan with a higher balance, and the borrow receives some of the difference in cash. With a cash-out refinance, you are taking advantage of equity you have built in your home, and the money you get back in cash is part of that equity.

For example, let’s say you own a house that recently appraised at $300,000. You have paid down the mortgage to $150,000, which means you have $150,000 in equity in the house. If you were to opt for a cash-out refinance, you could take out some of that $150,000 in equity as cash.

How does refinancing work?

Most home equity loans have an LTV (loan to value) ratio of around 80%, as long as the property is your primary residence. Since rental properties are generally considered riskier, lenders tend only to allow about 70% LTV.

Calculate the LTV of your home by dividing the mortgage amount by its appraised value. For example, if your mortgage amount is $100,000 and the appraised value of your home is $250,000, your LTV ratio is 0.40 — or 40%.

How much equity can I cash-out?

Many factors go into how much of the equity you can take, including:

  • The type of loan: Federal Housing Administration (FHA) cash-out refinance loans require 15% equity (the same as a 15% down payment). In other words, the maximum LTV for an FHA cash-out loan is 85%. Veteran Affairs (VA) loans might allow homeowners to take out 100% of their equity.
  • Your credit score: Lenders typically have their own internal credit score Generally, the higher your score, the more financing options you tend to have as a borrower.
  • Your Debt-to-Income (DTI) ratio: Your debt-to-income ratio is the sum of your monthly debt payments divided by your monthly gross income. Maximum DTI will vary by lender and loan program, but generally ranges between 40% and 50%.
  • Your payment history: Lenders typically look for borrowers with good payment histories. If you want to qualify for a cash-out refinance, it’s important that your present home loan is current and that you have no late payments for the last 12-month period.

What is a home appraisal?

A home appraisal is a professional’s best estimate of your home’s value. An independent third party handles the home appraisal, during which an appraiser considers the location, square footage, recent sales in the neighborhood, and condition of the property. These factors, among others, help determine a property’s value.

How can I use cash from a cash-out refi?

Homeowners use the money from a cash-out refinance in a variety of ways; some people use the cash for home renovations or repairs, while others use it to pay for student loans or college tuition. Another common way that homeowners use their home equity is to consolidate high-interest non-mortgage debt.

To find out more about cash-out refinancing and speak to a mortgage professional about whether it might be a good option for you, get in touch with Mr. Cooper.

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