Cash Out Refinance to Use Your Home Like A Bank

Everything You Should Know About Cash-out Refinance

Cash-Out refinancing loan differs from a home equity loan though. You can join the 8.2 million homeowners already benefitting from a cash-out refinance mortgage as of June 2019.

You will pay a slightly higher interest rate and the cash-out limit will range between 80 to 90 percent of your home’s equity. While you may wish you could get all the home’s equity, this does mean you can borrow against it without depleting it. That also means you still have a bit of equity for a rainy day. Do not laugh. You will have at least 10 percent left meaning that if you need to access a few thousand dollars quickly, you will still have that money to access via a home equity line of credit. It is like keeping a few thousand dollars in your back pocket. Still, if you really want the full 100 percent of your equity right away, if you obtain a cash-out refinance loan guaranteed by the US Department of Veterans Affairs.

You can add the costs of a new mortgage to the amount refinanced so you do not have to pay anything out of pocket at closing. You can end up with a higher interest rate or longer loan term though. Also, you could end up paying more in interest through the life of the loan.

Now, do not get too excited. You won’t get cash right away. You still have to go through an underwriting process, the appraisal and your lender has to approve refinancing. Once you close, you get three days to cancel the loan in case you decide you have changed your mind – guaranteed by the Truth in Lending Act. Three to five days after your closing, you get your cash.

Reasons You Might Need a Cash-Out Refinance Mortgage

While the most common expense for these cash-out refinance loans is home renovations or improvements, you can also use the money for many other reasons.

An Example of How a Cash-Out Refinance Mortgage Works

In this example scenario, your home has a value of $300,000, but you still owe $100,000. Your lender requires you to leave 20 percent equity, so you can only get a loan for $160,000 or 80 percent of $200,000 of your equity. You can typically obtain a lower interest rate on your mortgage.

Difference Between a Reverse Mortgage and Cash-Out Refinancing

A reverse mortgage lets you borrow against your home’s equity without mortgage payments. You accumulate the interest on a reverse mortgage and pay the full balance when you sell your home or move out. Your heirs must pay it when you die if you die before you have paid it off. That may sound morbid, but you must be aged 62 or older to qualify for a reverse mortgage and the home must be your primary residence. You also must have substantial equity in it or own it outright.

Difference Between a Home Equity Line of Credit and Cash-Out Refinancing

A Home Equity Line of Credit (HELOC) looks like a second mortgage on paper but works like a credit card. You can draw from your HELOC funds when you want to take money out instead of a mortgage that requires you to take funds out in a lump sum. For example, you can purchase the items for your wedding and use it again six months later to purchase a car. Unlike a credit card, you do not pay it back and re-obtain the credit. Once you use your credit limit, your HELOC closes. Until you pay it all back, your house is your collateral.

Remember Your Credit Score Still Matters

While your equity helps you qualify, you still need to know your credit score and it still needs to be about a 620. You can do a few things to raise your score if it is not quite up to par.

Pay your bills early or on time six months in a row. This increases your score by about 20 points.

Check your credit report for errors. Correct the errors by filing a correction request or requesting an investigation of any piece of data that looks questionable. If you do not recognize a credit line or show that the debt was paid, then you need to file a request with the credit bureau through which you obtained the credit report. Each credit bureau provides its own copy of your credit report. Different creditors report to different bureaus so they do not all have the same information.

Pay off your largest credit card debt, if possible. Make a lump-sum payment. This instantly reduces your debt-to-income ratio.

Your credit score is one of the biggest influencing factors that determine the interest rate you obtain. The higher you can get your credit score, the more easily you can obtain a lower interest rate. So, you need a high credit score to save money in the long run.

Specific Requirements for a Cash-out Refinance Loan

Each and every financial lender sets its requirements for refinancing qualifications. Most banks do have some typical requirements though. These include credit scores, debt-to-income ratio minimums, and required equity level.

Getting Your Loan Approval

By now, you have probably prepped yourself rather fully. You complete your application for a cash-out refinance. It could take a few days before your lender decides whether to approve the refinance loan. It could take a few weeks. You may have to provide additional paperwork including bank statements, pay stubs and/or W-2s to prove your DTI ratio.

Once you are approved, you head toward your closing. A few days after it, you get the loan monies. Remember, you will still have closing costs, just as if you were purchasing a house again. Your loan check goes directly to the bank first since you have to pay off your original mortgage amount first. That includes the closing costs, real estate taxes, homeowner’s insurance and other items you may have bundled into the loan request. After that, the remaining funds belong to you.

Interest Rates

You can get a cash-out refinance with a fixed-rate mortgage or an adjustable-rate mortgage. Which one you choose depends on your financial situation. With respect to HELOCs, you will get a variable interest rate that changes in tandem with the U.S. Prime Rate. You can learn this rate before applying by checking The Wall Street Journal. As the index decreases or increases, so will your interest rate.

If that option does not sound attractive, you can also obtain a fixed-rate loan so that throughout the life of the loan, you will have one interest rate that will never vary.

In Conclusion

You have a number of options when it comes to refinancing your house mortgage. You might just adjust your interest rate and terms, or obtain a cash-out refinancing mortgage or take out a HELOC.  And you have a number of ways to fund household renovations, a new car or numerous other large financial needs. Start researching today at Loanry.