What is an Cash Out Refinance?
A cash-out refinance occurs when you refinance your mortgage with a larger loan and receive the extra amount as cash. In theory, this is a way to draw on the equity you've built up in your home. The money from cash-out refinancing is usually put back into home improvements, but some people also use them to offset the upfront costs of refinancing or cover personal expenses.
Key Benefits of an Cash Out Refinance
Home improvements to increase your property value
Closing costs, points and other upfront expenses of the refinance
Unrelated expenses like college tuition, high interest debt relief or small business financing
How does a Cash Out Refinance work?
Let's say your home is worth $500,000 and you owe $300,000 on your mortgage. That gives you $200,000 in home equity, or 40 percent of the home's value.
If you decide to retain at least 20 percent of equity after cash out refinancing, that means you can take $100,000 of cash from your equity.
Take your cash from your equity. It's that easy.
When considering mortgage applications, your loan to value ratio (LTV) and debt to income ratio (DTI) are two of the major factors taken into account. For conventional mortgages on an owner-occupied residence, Fannie Mae sets specific limits on the ratios allowed for various refinancing scenarios.
LTV is the ratio of your current mortgage balance compared to the market value of your home, as determined by appraisal. DTI is the percentage of your gross income that goes into repaying any debt, such as monthly mortgage payments, student loans and credit card balances.
The required credit score will change depending on where your DTI falls. You'll also need to show that you've owned your home for at least six months —unless you acquired the property via inheritance or as an award in a divorce.
Frequently Asked Questions
- How long does it take to do a cash out refi?
- How do I know my cash out amount?
A refinance takes about as long as a purchase transaction depending on how quickly you can provide supporting documentation to the lender. It can take anywhere from 30 – 60 days factoring in market volumes and appraisal turn times.
Let's say your current home value is $100,000 and your remaining loan amount is $50,000. Then your equity is $50,000
Equity = (Home Value) - (Loan Amount)
Mostly, lenders suggest to retain at leat 20 percent of equity. So your available cash out amount would be $30,000.
Cash Out Amount = Equity - (Home Value X 3/5)
the right loan for you.
online or with our loan specialist.
and carefully with our steamline process.