Cash-Out Refinance Qualifications and Requirements
With a cash-out refinance loan on your home you may be able to reduce your monthly payments and come away with cash in hand. The following information will help you know if you qualify for a cash-out refinance loan and if it will be beneficial to you.
How It Works
In a traditional mortgage refinance, you take out a loan to pay off the current loan on your home. People do this for a variety of reason.
- Lower interest rate and lower monthly payments
- Get out of an Adjustable Rate Mortgage
- Pay off a balloon payment on a short-term mortgage
With a cash-out refinance loan, the initial goal is the same, to replace an existing mortgage with one that creates a lower monthly payment. However, in addition, you will borrow more than the amount owed on the original loan and pocket the difference, less fees.
As an example, assume you bought a home for $200,000 with a $180,000 loan and have paid it down to $120,000. With a cash-out refinance loan, you would borrow $150,000, pay off the $120,000 balance on the original loan and keep $30,000, less fees.
Loan to Value
For most lenders, the maximum loan to value ratio available for a cash-out refinance loan is 75 percent. Than means they will only loan you 75 percent of the current market value of your home. So you must have equity in your home of more than 25 percent. In the example above, the home equity is $80,000 or 40 percent.
This does not mean you must have paid off a given percent of your loan because your home could have increased in market value. Again, in the example above, if you had only paid the loan down to $150,000, but the market value of the home had increased to $240,000, you could still qualify for a home equity refinance loan.
Getting cash-out of your house might be a good way to handle financial problems, such as paying off other debt or accumulated bills. But just because you need it doesn’t mean you’ll qualify for a cash-out refinance loan. Even if your home meets the loan to value threshold, if your credit history is poor you will either be denied the loan or face higher interest rates.
Consider repairing your credit report before applying for a cash-out refinance loan. If you do apply for the loan with poor credit, be certain the higher interest rate doesn’t put you in a payment arrangement that will be difficult for you to support.
Time in Residence
Most cash-out lenders will require that you make payments on the original home mortgage for at least 12 months before allowing you to apply for a cash-out refinance loan.
Watch Your Total Costs
Lenders will sometimes charge higher interest rates for cash-out refinance loans than for traditional mortgage refinancing. In addition, there are loan origination and closing fees. Be certain that the monthly payment you end up with is your financial comfort zone. Also, be aware of how much the fees will cut into the money you take out of your home, particularly if you are committing it to a specific purpose and need a specific amount.