Cash-Out Refinance – How it Works
Cash-out refinance is the replacement of your existing debt with a new and larger loan based on your home equity. Cash-out refinancing provides a distinction between the amount of your existing loan and the amount of the new loan. You will be paid cash for that difference at the time of loan closing and you will be able to use that cash for home renovation or at maximum cost. But to enjoy the benefits of cash-out refinance, you need to know how it works.
How Does A Cash-Out Refinance Work?
The cash-out refinancing process is similar to the one you have to follow when buying a new home. Meet the requirements to qualify, then find a lender. After applying, submit the documents for underwriting. Wait for your cash after approval.
1-Check The Requirements
The lender has its own requirements that you must meet to qualify for refinancing. Cash-out refinancing requirements are mentioned:
- Credit card score of at least 620
The minimum score for refinancing must be 580. But if you want cash then the credit score should be 620.
- Debt-to-income ratio (dti) of less than 50%
Your debt to income ratio should be less than 50%. If it is more than 50 percent then you will not be approved for loan.
- Home equity
To qualify for cash-out refinance, you can borrow up to 80% of your home equity. However, your home must have at least 20% equity available.
- Seasoning requirement
To qualify for cash-out refinancing, you must own the home for a minimum of 6 months. However, there are exceptions if you have inherited from others or have legally inherited other laws. You will have to wait 6 months to apply for a VA loan. You must have 12 months of home ownership to qualify for FHA Cash-Out Refinancing.
2-Determine the cash you need
Once you meet the requirements of the lender to qualify, then determine how much loan you need. If you need cash to repair or renovate your home, consult a contractor in your area about how much money will be needed. If you have a cash-out refinance for debt consolidation, calculate your bank statement and credit card debt.
3-Apply through your lender
After applying for a cash-out refinance, you will know if the lender will lend you money. Bank statements and other documents will be required as proof of your DTI ratio. Once you get the approval, you will be one step closer to closing your debt. Wait three to five days after closing the loan for your check.
4-Pros and cons of cash-out refinance
Before applying for cash out refinance, you must consider its advantages and disadvantages.
You can reduce the interest rate: The best advantage of refinancing is that interest rates can be reduced. Since cash-out refinance is one of the largest loans, its interest rate is high. However, you can reduce the interest rate.
Borrowing costs may be lower: It is less expensive to finance because its interest rate is much lower than personal loan or credit loan. Its closing costs can also be lower when you need significant funding.
Credit score improvement: Paying off your existing debt through cash-out refinancing increases your credit score. Credit scores are important if you want to borrow more money from your debts.
Tax deduction benefits: If you use the funds to renovate or repair your home, you will have the benefit of tax deduction.
The risk of losing a home is: If you fail to pay the arrears, you will lose your home through foreclosure. So refrain from taking extra cash you need. Make sure you use cash to improve your finances in bad situations.
Interest rates may rise: The purpose of refinancing is to improve finances with lower interest rates. However, if your interest rate increases on cash-out refinance, it is not the best option at all.
Paying PMI: If you receive cash against 90% equity then you have to pay monthly PMI. When your equity reaches 80 percent or less, you no longer have to pay PMI.