Cash-Out Refinance: What Is It And How Does It Work?
Cash-out refinancing is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process, borrows more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing.
With a cash-out refinance, homeowners can use the cash-out to make home repairs and improvements, pay for college, a wedding, business expenses, and even pay off high interest debt.
Cash-out refinancing means you are borrowing money against the equity in your home and the home will be used as collateral. If the loan is not paid back in on-time monthly payments, the lender can put a lien on the property and foreclose.
Credit Union of Southern California (CU SoCal) offers Home Equity Lines of Credit (HELOCs) and mortgage refinancing.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgage options, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
Read on to learn, what is a cash-out refinance?
Get Started on Refinance Your Mortgage
Understanding Equity
The equity in home is the amount of the home you own. For example, a homeowner who doesn’t have a mortgage has 100% equity (or ownership) in the home. If you have a mortgage you can calculate your equity by subtracting the mortgage amount from the appraised or market value amount.
How A Cash-Out Refinance Works
In a cash-out refi, you borrow more than you owe on your current mortgage, pay off that loan, get a new mortgage, and receive a cash disbursement of the extra funds at closing.
Many homeowners will do a cash-out refi to take advantage of a lower mortgage interest rate and get extra money in the process. There are no restrictions on how the “cash-out” can be used, so it can be a great opportunity to pay down high interest debt, make home improvements, or even put a down payment on an investment property or vacation home.
Is a cash out home refinance a good idea?
With mortgage interest rates very low, refinancing your current mortgage to a new mortgage to a lower interest rate could reduce your monthly payments and save you thousands of dollars a year. The cash-out amount is paid back as part of your monthly mortgage payment.
Cash-Out Refinance Requirements
Homeowners can get a cash-out refinance from a credit union, bank, mortgage company, and some online lenders.
Here are some typical
cash out refinance requirements:
Credit Score. Many lenders will rely on the popular FICO
® Score to assess a borrower’s creditworthiness. FICO uses information in your credit reports and your credit history to generate your credit score. For a mortgage loan to be approved, the borrower must be in good standing with current mortgage lender, be employed with steady income, and have a credit score that meets the lender’s criteria. According to the credit bureau Experian, a credit score of 620 or higher is typically needed for a conventional mortgage refinance. Certain government mortgage programs require a credit score of 580, however, or have no minimum at all.
Debt-to-Income (DTI) Ratio. DTI is your total monthly expenses divided by your total monthly income before taxes. Most lenders will accept a debt-to-income ratio between 35% and sometimes 50%.
Equity. Home equity is the amount of the home you own. If you have a mortgage you can calculate your equity by subtracting the mortgage amount from the appraised or market value amount.
Equity Example: Appraised value $600,000 – Amount owed on mortgage $250,000 = $350,000 Equity. Divide the equity ($350,000) by the home value ($600,000), which is 58% equity. Most lenders require 15-20% equity.
How To Get A Cash-Out Refinance
Reviewing your credit history before you apply for a mortgage refinance can help you prepare to apply and provide insight into the interest rate you may be offered by a lender. The three most popular credit bureaus are Equifax, Experian and TransUnion. To get your free online credit reports and credit score visit
freecreditreport.com.
Credit unions, banks, and online lenders all offer mortgage refinancing. The best place to start shopping for a cash-out refinance is where you currently do your banking. Your credit union or bank may be able to offer you a promotional interest rate, low or no fees, and other benefits. Credit unions tend to offer lower interest rates and lower fees.
Each lender will have unique interest rates, loan terms, and fees, so be sure to shop around and get all the details before you accept the loan.
All lenders will require that you complete a loan application. You will also be asked to provide documentation the same or similar to what you had to provide when you applied for your current mortgage.
Application for a cash-out refinance may require you to provide:
- An appraisal
- Proof of identity
- Proof on employment
- Proof of Income
- W-2s or 1099s
- Most recent bank statements
- Credit report
- Federal tax returns
- List of assets
- List of outstanding debt
Benefits Of A Cash-Out Refinance
Home Improvements And Renovations. One of the best uses of cash out is to reinvest it in your home by making repairs, such as a new roof and windows, or updating the kitchen and bathrooms.
Consolidate Debt. Using the money to pay off high-interest credit card debt or student loans is a financially smart use of cash-out.
Get A Lower Interest Rate. Because the cash-out is part of the new mortgage, there are no separate or unique rates charged on the funds. Therefore, the cash-out will be paid back at the same time as the regular monthly mortgage payments. If the borrower chooses an adjustable rate mortgage or a fixed rate mortgage, the interest paid will reflect the terms of the chosen loan type.
Increased Spending Power. Having access to cash lets homeowners benefit from their money, by paying off high interest debt or paying for their own or a child’s college tuition. Cash-out can be used to put yourself in a better financial position.
Tax Deduction. According to the
IRS, “for you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.”
In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Check with a tax professional for more details on whether your refinanced mortgage interest is tax deductible.
Before You Sign The Dotted Line
While there are many advantages to getting cash-out, there are also some disadvantages to be aware of: cash-out refinance.
Closing Costs. Refinancing a home comes with closing costs, which can include: government recording costs, an appraisal fee, credit report fee, lender origination fees, lien search and title services, survey fees (if a new survey is needed), etc.
Cash Won't Be Provided Right Away. If you need the money in a hurry a refinance may not be your best option. You will need to go through an approval, processing and closing process, which could take several weeks.
Loan Terms May Change. Entering into a new mortgage loan mean new terms and possibly a new lender with new repayment conditions. And, if you choose an adjustable rate mortgage be aware that the introductory interest rate will change when the loan adjusts.
Appraisal. If your home appraises for less than when you purchased you may not qualify for a refinance or may not be able to take cash out.
Foreclosure Risks. Taking out a larger mortgage to get cash out often means you’ll have a higher monthly mortgage payment, even if you managed to secure a lower interest rate. Should you become unable to pay the loan on-time, the lender can put a lien on your home and potentially foreclose and take possession of the home.
Private Mortgage Insurance (PMI). Most lenders allow financing up to 80% of a home's value. If you borrow more than 80%, the lender will require you to pay PMI. PMI protects the lender in case the home buyer defaults on the loan. PMI may be eliminated in a refinance, only if the home appraises higher than it was when you purchased it and/or you have more equity in the home. PMI payments are typically rolled in your monthly mortgage payment.
Cash-Out vs. No Cash-Out Refinancing
A typical mortgage refinance involves replacing/paying-off the existing mortgage with a new mortgage at what is typically a lower interest rate. Cash-out refinancing is when a homeowner refinances their mortgage to a new mortgage and in the process borrows more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing.
Cash-Out Refinancing vs. Home Equity Loans vs. HELOC
If you need cash but already have a low mortgage rate and prefer not to refinance, you may choose to get a home equity loan or a home equity line of credit (HELOC).
Home Equity Loan.
A
home equity loan provides the loan amount to the borrower in a lump sum, which they then need to pay interest against. Most home equity loans have a fixed interest rate that’s charged on the entire lump sum amount, but home loans are also available with variable interest rates as well.
HELOC.
A
Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender, has a credit limit, a variable interest rate, and is secured by the equity in a home. A HELOC typically has a lower interest rate than credit cards and can be used for any type of purchase. Because HELOCs start with a low variable interest rate, you may benefit from savings on interest. And, you’ll only pay interest on the amount you actually use. Some lenders charge an inactivity fee if you don’t use your HELOC funds, so be sure to understand the terms of the loan. Check out these
HELOC Requirements to help you decide which loan is right for you.
Other Alternatives To Cash-Out Refinancing
If you need cash but are not able to refinance, here are some alternatives to cash-out refinancing:
Personal Loan. A
personal loan is a loan granted to an individual based in their creditworthiness (not collateral), sometimes called an “unsecured loan” (since no collateral is used to secure the debt).
Reverse Mortgage. This special type of home loan only for homeowners who are 62 and older. Like a traditional mortgage, when you take out a
reverse mortgage loan, the title to your home remains in your name. However, unlike a traditional mortgage, with a reverse mortgage loan, borrowers don’t make monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home. With a reverse mortgage loan, the amount the homeowner owes to the lender goes up–not down–over time.
How To Know If A Cash-Out Refinance Is Right For You
A cash-out refi can be ideal for homeowners who are ready to refinance their mortgage anyway to take advantage of a lower interest rate. Getting cash-out at a fixed low rate can save you money in the long run. However, be aware that you’ll pay closing costs, which could from $5,000 to $10,000. And, you’ll pay interest on the entire loan amount for the life of the loan or until you refinance again or sell the home.
Features Of A CU SoCal HELOC And Home Equity Loan
A CU SoCal HELOC or home equity loan allows you to leverage the equity in your home to help you achieve your financial goals. Whether you’re looking to start that big renovation, make emergency repairs, or simply need additional cash-on-hand, we’re here to help make it happen.
- No points.
- No appraisal fees for single unit loans.
- No annual fee.
- No closing costs.
- A generous limit up to $250,000.
- Possible tax deductions on interest payments.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Refinance Your Mortgage with CU SoCal.
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