Your home is your smartest investment, reflecting your commitment to timely mortgage payments and a secure financial future as a homeowner. So, let’s make that equity work for you! With a cash-out refinance from Keller Home Loans, you can leverage your home’s equity to gain access to additional funds for all of life’s surprises!
What is a Cash-Out Refinance?
In a lot of ways, a cash-out refinance is just like a traditional refinance and allows you to alter your loan term, including monthly mortgage payments, interest rates, and term length—allowing you to ensure your loan is meeting your financial needs. The additional benefit to a cash-out refinance is the ability to turn your home equity into extra cash for expenses, including, but not limited to, home renovations, paying off high-interest debts and other, unexpected costs.
When accessing the cash you receive from a cash out refinance, there are several options to choose from to suit your needs, including:
- Lump Sum Payment: The most popular option for cash-out refinance. This allows you to receive access to the total amount immediately following closing.
- Check or Wire Transfer: A check or wire transfer allows flexibility with the funds, depositing the total amount directly into the primary borrower’s bank account.
- Home Equity Line of Credit (HELOC): May require opening a new mortgage on top of the current mortgage. This option allows the primary borrower access to a direct line of credit and further flexibility with their financial needs.
If you intend on using a cash-out refinance to consolidate revolving or outstanding debts, you can also choose to pay off your credit card or personal loan debts directly, as part of your cash out refinancing process. Alternatively, you can choose to allow your lender to pay off your debts directly to the creditors to which you owe using the cash-out proceeds, simplifying the debt consolidation process.
How Can I Qualify?
While there isn’t a hard number that is required to be approved for a cash-out refinance, there are some general guidelines you should aim to meet before applying. These include:
- Home Equity: It is recommended to aim for above 20% equity to eliminate the need for private mortgage insurance (PMI) and increase your chances of being approved. *
- Credit Score: The better your credit score, the better the chances of being approved for a cash-out refinance. You should typically aim for a credit score or 680 or higher.
- Debt-to-Income Ratio (DTI): It is important for loan eligibility to ensure you keep your debt-to-income ratio (DTI) at a reasonable balance. Generally, lenders will look for a DTI around 43% or lower.
- Stable Income Source– Finally, lenders want to ensure you are earning both stable and verifiable income to ensure your eligibility for a cash-out refinance.
For the best chances of approval when applying for a cash-out refinance, it is important to keep all these factors in mind during the loan application process.
*Conventional loans with as little as 5% equity are eligible for refinancing, but will require primate mortgage insurance (PMI), which is an added monthly expense. Borrowers with a conventional mortgage and 20% equity are not required to have PMI.
Property Qualifications
A conventional cash-out refinance can be used on second homes, rentals, and investment properties, but the property typically must be owned for at least six months. Loan limits can vary state-to-state and are often dependent on how many units are in the home that is being refinanced.
If you are refinancing a VA or FHA loan, however, you are only eligible for a cash-out refinance if the property is your primary residence. Under current terms, it is also important to note that USDA loans do not allow borrowers to choose a cash-out refinance.
How to Calculate Your Home Equity
Home equity is the value of your home minus the amount you still owe on your current mortgage. This number is not stagnant and can be affected by different factors, such as market value rising, home improvements or renovations, and paying off your home.
When Should I Refinance?
If you are looking to refinance your loan to lock a better interest rate and could use some extra cash for unexpected expenses, a cash-out refinance might be a great option for you. Additionally, if you plan on using your cash-out refinance for home improvement, you may raise your home’s value and, in turn, your home equity.
Refinancing, even if you don’t need the cash from your home’s equity, is always a great option to consider when rates drop and you’re looking to lower your monthly mortgage payments. Likewise, if you applied for a loan with less than 20% down, you could also use a refinance to eliminate the need for private mortgage insurance (PMI) if you have built enough equity in your home.
Refinancing an FHA Loan
Much like refinancing a conventional loan, refinancing your FHA loan can be used to lower monthly bills or make home renovations. The primary reason homeowners with an FHA loan will refinance, however, is to eliminate the costs of mortgage insurance on their FHA loan. By refinancing into a conventional loan, many individuals can save on their monthly mortgage costs and eliminate FHA-required mortgage insurance. Homeowners with 78% equity built in their home may also lower their PMI payments when refinancing to a conventional loan. Ensure that, if you are considering refinancing your FHA loan, you are prepared for the closing costs associated with a conventional loan, including between 1.5% to 3% of the loan amount.
Your Home is Your Best Investment
As a homeowner, you have the opportunity to capitalize on your home’s equity to enhance your financial future, improve your home, or lower your monthly mortgage payments.
If you’re curious about how much you can get from a cash-out refinance based on your current home equity, Keller Home Loans is happy to offer a free consultation from one of our many mortgage experts. You can give us a call any time at 1-833-398-1731 and we’d love to help answer any questions you may have.
