What Is Cash Out Refinancing?
A cash-out refinance occurs when you have equity in your house and refinance your mortgage with a larger loan to receive the additional amount as cash. The money from cash-out refinancing is usually put back into home improvements, but some people also use them to offset the upfront costs of refinancing and even to consolidate or cover personal expenses.
Key Benefits of a Cash Out Refinance
1. Home improvements to increase your property value
2. Cover unrelated or unexpected expenses like college tuition, high interest debt relief or small business financing.
3. Cover closing costs, points and other upfront expenses of a refinance.
How Does a Cash Out Refinance Work?
Lets say your home is worth $600,000 and you owe $300,000 on your mortgage. That gives you $300,000 in your homes equity or 50% of the homes value.
f you decide to retain at least 20 percent of equity after cash out refinancing, that means on a $600,000 home that is paid off you can take $480,000 as a cash out re-finance.
You are taking the cash from the equity that you have built up in your home, its that easy.
Cash Out Refinancing
When considering mortgage applications, your loan to value ratio (LTV) and debt to income ratio (DTI) are 2 of the factors taken into account. For both conventional mortgages and on owner-occupied residences, Fannie Mae sets specific limits on the ratios allowed for various refinancing scenarios.
LTV is the ratio of your current mortgage balance compared to the current market value of your home, as determined by appraisal. DTI is the percentage of your gross income that goes into repaying any debt, such as monthly mortgage payments, student loans and credit card balances.
The required credit score will change depending on where your DTI falls. Another requirement is that you will also need to show that you’ve owned your home for at least six months. Some variations on this are if you have acquired the property via an inheritance or as an award in a divorce.
Frequently Asked Questions
- How long will it take to do a cash out and refinance?
When refinancing, it will take about as long as a purchase transaction depending on how quickly you can provide the supporting documentation to the lender. It usually takes anywhere from 30 to 60 days factoring in market volumes and appraisal turn times.
Your mortgage broker at CambridgeHomeLoan.com can help both with staying on top of your application and helping to keep the channels of communication open.
- How do I know my cash out amount?
Let’s say your current home value is $300,000 and your remaining loan amount is $150,000. Then your equity is $150,000
Equity = (Home Value) – (Loan Amount)
Mostly, lenders suggest to retain at least 20 percent of the equity in your home. So your available cash out amount would be $120,000.
Is It Time To Refinance?
Some say that the best time to refinance is when interest rates are low.
The right time to refinance is whenever it is right for your situation. If you want a lower interest rate, convert from a variable to a fixed rate or consolidate finances everyones situation is different.
You may want to refinance and take some cash out of the equity in your house to add another room on to your house or payoff bills. Whatever your reason a mortgage consultant can help. Fill out the form to the right for a free consultation today.