Applying for a Cash-Out Refinance
Cash-out refinancing is about replacing your existing loan with a larger loan, based on the equity available in your home. You have the freedom to access the differences between the old mortgage and the new mortgage. You can cover the expenses you need, such as repairing and renovating your home, with the difference cash.
How a cash-out refinance works
Cash-out refinace pays cash against your home equity and gives you the opportunity to refinance your existing loan. By using cash-out refinance, you will get the largest loan compared to your existing loan. With the new loan amount repaying your existing loan, the rest of the cash is paid to you.
Cash-out refinancing is beneficial when the interest rate on your initial loan is low and the funds raised will be used for good.
For example, the current value of your home is $ 200,000 and your existing mortgage is $ 100,000. Then the equity available in your home is $ 100,000. Since you can borrow 80% of the available equity, your cash balance will be $ 60,000. The purpose of refinancing an existing mortgage is to lower your interest rates and get cash to renovate your home.
The lender must have 20 percent available on your home after cash-out refinancing as required, or you can take cash against equity up to 80 percent.
Cash-out refinancing has a higher interest rate as the loan amount is higher. This includes closing costs that increase your monthly payments.
How to prepare for a cash-out refinance
Some reuirements for cash-out refinancing
1. Determine lender requirements
Like any other loan, mortgage lenders have specific requirements for cash-out refinancing that will qualify by meeting. However, in most cases, the minimum credit score plays an important role. The better the credit score, the better the benefits of the loan. Another requirement is that your debt to income ratio should be within a certain percentage. You also need to have a minimum of 20% equity available in your home. So take note of these requirements before qualifying for loan.
2. Set the amount
You must have money for a specific purpose, so take out cash-out refinancing against your home equity. However, since you can get money after securing your house, you should borrow as much as you need. If you have funds for debt consolidation, pay off your personal debt, credit card debt or other debt obligations. If you need funds to renovate or improve your home, find out the amount you need with the help of a contractor.
3. Prepare information for the application
Talk to at least 2 to 5 lenders to get the interest rate and terms that suit your situation. Remember that before applying you will need some information like your assets, credit score, income etc. So keep collecting the details. Provide your appropriate information so that the lender can evaluate your application.
Consider cash-out refinancing before applying
- You cannot take a loan against 100% of your equity. You must have 20% equity available in your home for cash-out refinancing. However, VA Cash-out refinances provide eligible military borrowers with loans against 90% of their home equity.
- Terms may change as you are replacing an existing mortgage with your new mortgage. Your interest rate may be higher or lower or the term may be shorter or longer.
- You need to evaluate your home to find out the exact value of your home. This is important since the lender will lend you money based on your home equity.
- Since it is a new loan, you will have to pay the closing costs. However, the amount of closing costs is 2 percent to 6 percent of your loan amount.