Cash Out Refinance Information

Loan cash-out refinancing is a type of refinancing in which you borrow against your available home equity to receive the full amount in cash. This allows you to pay for home improvements or other major expenses. Generally, this type of loan makes sense when you can refinance at a lower interest rate than what you are currently paying.

How to Qualify for a Cash Out Refinance
To obtain a cash-out refinance, the balance of your first loan plus the amount to be withdrawn in cash must not exceed 80% of the appraised value of the property. This percentage is called the loan-to-value ratio, and as lenders, they determine if you have enough money in your home to qualify for a refinance. (You can refinance if your loan-to-value ratio is greater than 80%, but you may have to pay for private mortgage insurance at an additional cost.)

For example, let’s say your home is valued at $400,000 and you have a loan balance of $275,000. Subtract 80% of your property’s appraised value and you have $320,000. Then subtract the loan balance of $275,000. The amount of cash available to borrow in a cash-out refinance is $45,000.

However, be careful to only ask for what you need, as it will be paid back with interest. Also remember that if the value of your home decreases, you may end up requesting a loan for a value greater than that of your house.

Another important consideration is when to refinance your new mortgage. For example, if you had a 30-year mortgage and you refinance to five years with another 30 years, your mortgage payments will be extended another five years, paying more interest overall.

How do you refinance with a HELOC cash out?
Another way to apply for a loan using your equity is available with a home equity line of credit (HELOC). Some of the most important differences between a cash-out rollover and a HELOC are:

Term
Cash out to refinance replaces your first mortgage, starting the loan term over, and creates a new amortization payment schedule
A HELOC is basically a second mortgage, plus your first mortgage (if you sell your home, you must pay off your mortgage in full and close your HELOC at the same time, closing)

distribution of funds
Refinancing with a cash outlay will give you the full amount at closing
A HELOC gives you a line of credit to make required withdrawals during retirement (although the total amount of the line of credit may change at the discretion of the lender)

Interest rate
Refinance with a cash outlay to offer a lower interest rate, especially if you refinance an ARM loan with a fixed rate loan
HELOC adjustable rates that change with the index (usually the prime rate)

closing costs
Refinancing with a cash outlay of closing costs is similar to your original home loan
HELOCs generally have no or very low closing costs

For more information on the HELOC, see: A loan application is available on the full value of your home.

Discuss your options with a lender
If taking out a home equity loan is a good financial strategy for you, meet with a bona fide lender to discuss the differences between a cash-out rollover and a HELOC. Based on your personal situation and financial needs, the lender can provide you with all the information you need to choose the best option for your situation.

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