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Your Cash-Out Refinance Questions, Answered!

Did you know that paying off your mortgage helps build equity in your home? Home equity can be a powerful tool to help accomplish your goals like paying for home renovations, tackling credit card debt, or covering college tuition. Let’s discuss home equity and how you can access this wealth with a cash-out mortgage refinance.

What Is Home Equity?

Home equity is simply the current market value of your home minus what you owe your mortgage lender. As you make payments on your mortgage, your loan balance decreases, increasing the amount of equity you have in your home.

The current value of your home depends on market conditions in your local housing market. Home prices have continued to rise across the country in 2022, meaning the value of your home could have increased as well. Now, let’s learn how you can take advantage of your home equity by converting it to cash with a cash-out refinance.

What Is a Cash-Out Refinance and How Does It Work?

A cash-out refinance involves using the equity built up in your home to replace your current home loan with a new mortgage and when the new loan closes, you receive the difference back in cash. If you qualify for a cash-out mortgage refinance, you may use the cash however you’d like.

The cash amount you can receive with a cash-out refinance depends on the amount of equity you have built up in your home. Let’s say you owe $100,000 on your mortgage, and your home is currently worth $250,000. This means you have $150,000 in home equity. You could refinance your $100,000 loan balance for a new mortgage loan of $150,000 and receive $50,000 in cash at closing.

When you refinance, you apply for a home loan just like you did when you bought your house. The difference is, you’re taking out a new mortgage loan to replace your current mortgage. It’s important to consider that you’ll be repaying a new mortgage loan with new terms. All these details will be covered by your loan officer when applying for a cash-out refinance.

What Can I Do With a Cash-Out Mortgage Refinance?

A cash-out mortgage refinance can be a smart move towards your personal and financial goals. Cash-out refinancing has helped people cover large expenses like home remodels or pay off burdensome debt. Remember, this is cash you can use however you wish!

• Home improvement projects: Increase your home’s value with a bigger kitchen, a swimming pool, or upgrade your outdoor living spaces
• Pay off high-interest debt: A cash-out refinance is an affordable way to tackle high-interest debt like credit cards
• Pay off your car loan: Wish to own your car sooner and stop making car payments? You can pay off your car loan with a cash-out mortgage refinance
• Cover college tuition: If you have a child attending college, or plan on pursuing a degree yourself, use the cash to cover tuition expenses
• Invest in your future: Use your home equity to buy an investment property or invest in retirement funds
• Switch from an ARM to a fixed-rate mortgage: If you’re currently in an adjustable-rate mortgage, you could get a cash-out refinance and switch to a fixed-rate mortgage

What’s Required for a Cash-Out Refinance?

Each mortgage lender will have different requirements to qualify for a cash-out mortgage refinance. Qualification will also depend on the type of cash-out refinance loan you are looking for. Typically, the following requirements can help you determine if you’ll qualify for a cash-out refinance.

Home equity: Most mortgage lenders require you to have at least 20 percent of equity in your home to qualify for a cash-out refinance. Since the cash amount you can receive with a cash-out refinance depends on your home equity, your mortgage lender will require you to get an appraisal to assess your home’s current value. (Remember: Home Equity = Your Home’s Value - What You Owe on Your Mortgage)

Debt-to-income (DTI) ratio: Your DTI looks at your total debt compared to your monthly gross income. It helps mortgage lenders determine if you’re able to take on more debt. Each mortgage lender will accept a range of DTI ratios, but typically you’ll need a DTI no higher than 45%. You can calculate your DTI by adding your recurring monthly debts and dividing this by your monthly pre-tax income. Monthly debts could include:

• Car loans, student loans, credit cards, medical bills, personal loans, etc.

Credit score: To qualify for a cash-out refinance, most mortgage lenders look for a score of 620 or higher, however, this will vary by mortgage lender.

Are There Different Types of Cash-Out Refinance Loans?

There are three main types of cash-out refinance home loans. The cash-out mortgage refinance that is best for you will depend on your current mortgage and what you may qualify for.

Conventional cash-out refinance loan: Requirements will vary by mortgage lender, but usually for a conventional cash-out refinance loan, you can borrow up to 80% of your home’s value with a minimum credit score of 620.

FHA cash-out refinance loan: An FHA cash-out refinance loan is a mortgage backed by the Federal Housing Administration. FHA cash-out refinances allows for lower credit scores with most lenders accepting a credit score from 580 - 600. Just like a conventional cash-out refinance, an FHA cash-out refinance loan allows you to borrow up to 80% of your home’s value.

VA cash-out refinance loan: A VA cash-out refinance loan is a mortgage backed by the U.S. Department of Veteran Affairs, and is available to active-duty service members, veterans, Reserve and National Guard members, and certain surviving spouses. With a VA cash-out refinance loan, qualified borrowers can borrow up to 100% of their home’s value, though this will vary by mortgage lender.

Improve Your Financial Position With A Cash-Out Refinance

Cash-out refinancing can be a great option for many people. A cash-out mortgage refinance is one of the most affordable ways to borrow money for large expenses and consolidate debt.

If you’re interested in your cash-out mortgage refinance options, call 800-451-1895 to speak with a PHH Loan Officer, or Contact Us Here .