How Soon Can I Take a Cash-Out Refinance?

A cash out refinance loan allows a homeowner to use the difference between the loan amount and the homes accumulated equity. A cash out refinance opportunity exists when the outstanding loan value is less than the home’s equity value. Most lenders will not allow cash out refinances for a minimum of 12 months, according to FNMA and FHLMC guidelines. Lenders want to see that a borrrower has established timely payments on their loan. If the borrower has established credit history and sufficient income and equity, a cash out can be used to pay off debts, repair home or any purpose (such as pay off liens to the IRS or judgments).

Cash Out Refinance Loan Example

The following is an example of how a cash out refinance loan works:

Homeowner has a home worth $500,000. The remaining balance on the 30-year mortgage is $125,000. Therefore, it is said that the home has an equity of $375,000 ($500-$125=$375). 

Refinancing the mortgage and acquiring a new mortgage of $375,000 will net the homeowner $250,000. The monies can then be used  to pay off debt, or any other purpose.

Important Notes

It is important to keep in mind that the mortgage loan amount has been increased from $125,000 to $375,000, therefore the monthly mortgage payment will increase substantially. A borrower should be ready for higher payments.

Additionally, lenders base their loan amount on guidelines. For example, if your home is worth $500,000, a lender may only lend 75 percent of the value, bringing the maximum loan amount down to $375,000. If a borrower should have bad credit, the loan amount value is reduced.