WHAT IS A CASH-OUT REFINANCE?
A cash-out refinance is a way to get equity out of your property so you can pay off debt, renovate your home, or make other purchases that don’t involve incurring new debt. When you get a cash-out refinance loan, your new loan amount is for more than what you owe on your current mortgage. At closing, you get the difference between the two amounts as cash that you can spend however you wish.
WHY A CASH-OUT REFINANCE?
A cash-out refinance is a great way to leverage your home equity. Using the cash to pay off consumer debt or put towards student loans can improve your debt-to-income ratio and credit score. The money can also be used to invest in home improvements which increases the value of your property. It can also be used to make other investments or to pay for important investments such as college tuition.
A cash-out refinance can have the benefits of a regular mortgage refinance, such as a lower interest rate, tax benefits associated with mortgage interest deductions, and the opportunity to switch from an adjustable to a fixed-rate mortgage.
In most cases, you can only cash out some of your home’s equity—not your entire equity. This helps protect your home by ensuring you don’t owe more than your home’s value.
WHAT ARE THE REQUIREMENTS FOR A CASH-OUT REFINANCE?
To be eligible for a cash-out refinance, owners must make on-time payments on the property for at least 12 months and must have at least 20 percent equity in the property. The maximum loan-to-value ratio for a primary residence is 80 percent, meaning that up to 80 percent of the home’s equity can be taken in cash.
For second homes or investment properties, the maximum loan-to-value rate is 75 percent, meaning borrowers must have 25 percent equity in the property. The minimum credit score required for a cash-out refinance of a conventional mortgage is 620. For FHA-backed loans, the minimum credit score is 580.
Typically, you don’t need to tell your lender how you want to use the cash, but it’s a good idea to plan carefully. Paying off your consumer debts can be a great idea to save interest and consolidate multiple payments into one. However, with a cash-out refinance, you always want to make sure you can afford the new payment, so you don’t default and risk losing your home. On the bright side, a cash-out refinance can help you improve your credit when you use the cash to pay off debts and you could receive a larger tax deduction related to your mortgage interest.
HOW IS A CASH-OUT REFINANCE DIFFERENT FROM A HOME EQUITY LOAN?
A cash-out refinance replaces your existing mortgage with a new mortgage loan. This is different than a home equity loan, which is a separate loan you take out in addition to your existing mortgage. Either option can provide you with access to the equity in your home.
Both of these options are different than home equity lines of credit (HELOC), which give borrowers revolving access to the equity in their property for a certain period. Many homeowners choose cash-out refinances over HELOC because they want access to a lump sum of cash right away, and they want a more stable interest rate than the variable rates offered with HELOC.
WHAT DOES A CASH-OUT REFINANCE LOAN COST?
Just like a traditional refinance loan, there are closing costs associated with taking out a cash-out refinance loan. You will also pay interest on the full amount of the mortgage. It is important to fully understand all of the fees and expenses associated with any type of loan you are considering, so you can make an informed decision that best meets your needs and your budget.
If you would like to explore a cash-out refinance or other mortgage products available from BrightPath, please call us at 888-222-6003, or complete our simple form below. One of our experienced mortgage specialists will contact you.