For homeowners looking to convert home equity into cash, a cash out refinance* 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 understand what a cash-out refi is and how the refinancing process works in general.
What is a cash-out refinance?
A cash-out refinance replaces your current mortgage with a new home loan with a higher balance, and the borrower receives some of the difference in cash. With a cash-out refinance, a homeowner is taking advantage of equity they’ve have built in a home, and the money they 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 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 it 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.
How can I use cash from a cash-out refi?
Homeowners can 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 pro about whether it might be a good option for you, get in touch with Mr. Cooper.
*A cash‐out refinance increases your mortgage debt and reduces the equity you may have in your home. Your monthly mortgage payments may be higher. A debt consolidation refinance increases your mortgage debt, reduces equity, and extends the term on shorter‐term debt and secures such debts with your home. The relative benefits you receive from debt consolidation will vary depending on your individual circumstances. You should consider that a debt consolidation loan may increase the total number of monthly payments and the total amount paid over the term of the loan. To enjoy the benefits of a debt consolidation loan, you should not carry new credit card or high interest rate debt.