3 Factors that Affect Cash-Out Refinance Rates

A cash-out refinance allows you to pay off your current mortgage with a loan greater than what you owe then pocket the remainder of the loan for other uses. You will want to ensure your new mortgage loan, the refinance loan, has a lower interest rate than the one you are paying off. The goal is to both save money and to find extra liquidity using the equity you have built up in your home. Never refinance at a higher interest rate just to gain the cash-out options. To get the lowest rate possible, consider some of the factors that will be used to determine your new loan rates. 

#1 Equity in Your Home

One of the greatest factors with your new home loan is how much equity you have in your current mortgage. When you have built up equity, you will only have a small portion of the loan remaining. You will also have the additional option to use your home as collateral on your refinancing loan. When you opt for a secured loan using collateral, your rates will drop tremendously. The lender has the guarantee against default by holding on to the title of your home until you pay off the loan. If you have very little equity in your home, you will have to seek a larger loan. You will also not have as much to put down as collateral, which will make your loan riskier for the lender. 

#2 The Amount of Cash-Back

The amount you are looking to receive for your cash-out option will also affect your rate. If you are hoping to secure cash back in excess of 20% of the total loan, your lender will see that as a riskier deal and increase your rate accordingly. For example, you may have $100,000 left to pay off your existing mortgage. You can seek a loan up to $120,000 and determine what interest rates you would be charged. Next, seek a loan for $150,000 or even $170,000. Compare each rate and payment option to best analyze your situation.

#3 Your Credit Score

 Your credit score will always affect your interest rates on any loan you seek. Even if you nearly own your home outright, if you have a low credit score, you will have to pay more for your refinancing loan. The best way to raise your credit score prior to refinancing is consistently making all payments, especially mortgage payments, on time for two years. You should also work to reduce the total amount of debt you owe. Do not close or open new credit lines during this time period unless the loans have matured completely. Instead, fulfill your existing obligations according to the original terms.