Cash Out Refinancing in 2022: The Definitive Guide

Recently, home values have been increasing in most areas across the country, which means many homeowners are experiencing an increase in their home equity.* With a cash-out refinance loan, homeowners can access their home equity and end up with cash in hand. How?

How a Cash-Out Refinance Works

A cash-out refinance is a type of loan where a borrower “cashes in” their home equity for cash in hand. How does it work? When you take out a mortgage to buy your home, a portion of your monthly mortgage payment pays off the principal amount (the amount of money you originally borrowed without interest). With each monthly payment, you increase your home’s equity, which translates to wealth that is built up over time. Once you’ve traded in your home equity for cash, it’s your money to spend, invest, or save however you like – it’s yours!

Popular reasons to cash-out refinance include:

• Consolidating debt
• Paying off student loans
• Home improvements and renovations
• Taking an extended vacation
• Paying for major expenses, like weddings

A cash-out refinance is often compared to (and confused with) a home equity line of credit (HELOC), although the two are not the same. Let’s run through key differences.

In most cases, a HELOC is an additional (second) mortgage, which mean it comes with its own repayment schedule, terms, and conditions, on top of your existing mortgage. A cash-out refinance is a type of loan that replaces your existing mortgage with a new mortgage. They’re often compared to one another because borrowers access cash from both options.

A cash-out refinance gives borrowers a lump sum of cash at closing. A HELOC gives borrowers the option to draw money as needed or desired up to the approved amount for a set period of the loan term, and then the borrower repays the amount in the remaining years of the loan term. For example, a borrower with a 30-year loan term could withdraw money from the line of credit within the first 10 years of the loan term, then repay the amount owed to the lender in the remaining 20 years of the loan term.

Whether a cash-out refinance or HELOC makes sense for you depends on your financial needs and goals.

Is a Cash-Out Refinance Better than a HELOC?

Spoiler: One isn’t better than the other! A HELOC could make more sense if you want to delay payment and simply draw money from the loan amount as needed over the course of ten years, whereas a cash-out refinance could make more sense if you’d rather have immediate access to a larger lump sum of cash at closing. The best option for you is dependent on your current finances and future goals.

Try Our Cash-Out Refinance Calculator

Wondering what a cash-out refinance could look like for you? Plug in numbers specific to your finances (current home value, the amount of cash you prefer to receive, etc.) and compare your current monthly payment to your new monthly payment after taking cash out.

Pros and Cons of a Cash-Out Refinance

Before making a big financial decision, especially a major financial decision like a cash-out refinance, weighing the pros and cons is a helpful factor when determining if it’s the smart move for you.

Pros of a Cash-Out Refi

• Interest rates are typically lower than HELOCs and personal loans.
• There’s a variety of loan types to choose from.
• The mortgage interest may be tax-deductible.
• The cash from your home equity is yours to use how you want.

Cons of a Cash-Out Refi

• A cash-out refinance will likely extend the repayment time of your mortgage.
• There may be additional expenses including closing costs and origination fees.
• If the interest rate on your current mortgage is lower than the interest rate you’ll have on your cash-out refinance, then you could end up having a higher monthly mortgage payment.

Types of Cash-Out Refinances

When you apply for any kind of mortgage with a lender, whether it’s your primary residence, a vacation home, investment property, HELOC, or cash-out refinance, the loan officer should inform you that there are different loan types and financing solutions designed for different types of borrowers. With a cash-out refinance, it’s the same. There are different loan types available for cash-out refinances, including FHA, VA, conventional, and jumbo loans. Each loan type has its own set of requirements, cash-out limits, and guidelines.

For example, Conventional and FHA cash-out refinances require borrowers to leave at least 20% equity in their home after a refinance. This means that a borrower with $100,000 in home equity be able to cash out up to $80,000. On the other hand, VA loans allow borrowers to cash out 100% of their home’s equity. To choose the best financing solution for you and your goals, we recommend discussing your options with a mortgage professional. In the meantime, we’ve laid out highlights of common cash-out types below.

Conventional Cash-Out Refinance

A conventional cash-out refinance is generally easier to secure compared to an FHA or VA cash-out refinance, particularly because it doesn’t have special eligibility guidelines. However, there are still guidelines a borrower must meet to qualify, including requirements for income, loan-to-value (LTV), and credit score requirements.

Unlike FHA and VA cash-out refinance that limit property types, a conventional cash-out refinance may be used for primary residences, second homes, or investment properties.

Jumbo Cash-Out Refinance

Not all lenders offer jumbo cash-out refinances. Compared to other cash-out options, borrowers typically must meet more strict qualifying guidelines. Jumbo cash-outs generally require an excellent credit score and lower loan-to-value ratios. Because jumbo loans are higher loan amounts, borrowers who cash out after years of paying monthly mortgage payments could access a sizeable amount of cash.

FHA Cash-Out Refinance

An FHA cash-out refinance is ideal for a borrower who needs flexibility when it comes to qualifying with their debt-to-income ratio or less-than-perfect credit score or history. Additionally, this cash-out option allows a borrower to refinance up to 80% of the home’s value for cash.

Why Choose an FHA Cash-Out Refi?

• Your mortgage rate is higher than today’s rate
• Compared to other cash-out refi options, FHA may offer lower rates
• No income limits
• You have a perfect 3-month payment history
• You could qualify if your current loan is not an FHA loan

To qualify for an FHA cash-out refinance, prepare to have employment history and documentation ready to submit to the lender as proof that you’ve owned your home (as a primary residence) for at least a year prior to applying. Utility bills from the last 12 months may also be sufficient proof.

It’s important to note that FHA loans typically require a borrower to purchase mortgage insurance. If you already have an FHA loan, you’re familiar with this. If you currently have a different loan type, know that mortgage insurance may be an additional cost to consider with a cash-out refi.

VA Cash-Out Refinance

A VA cash-out refinance is an option available to military homeowners. Like other cash-out refinance options, this loan lets you take cash out of your home equity to use as you wish, whether it’s to pay off debt, make home improvements, or spend as you see fit.

Just like qualifying for a VA loan for a primary home purchase, the lenders require borrowers to provide a Certificate of Eligibility (COE) for cash-out refinances.

Why Choose a VA Cash-Out Refi?

• Closing costs may be financed
• VA Funding Fee may be financed
• Your current mortgage rate is higher than today’s rate
• Compared to other cash-out refi options, VA loans may offer lower rates

Additionally, homeowners aren’t required to take out cash with VA refinance loans. That means qualified veterans with non-VA loans can use this benefit to simply take advantage of lower rates, to get out of an adjustable-rate loan, or to eliminate costly mortgage insurance with other loan types. Some borrowers choose to refinance to a shorter loan term to finish paying off their mortgage earlier.

Cash-Out Refinance FAQs

What is a Cash-Out Refinance?

A cash-out refinance lets you turn your home’s equity into – you guessed it – cash. Simply put, it’s a loan that replaces your current loan in an amount that includes what you still owe, plus the cash from your home equity that you want to take out.

Is a Cash-Out Refinance Taxable?

When tax season rolls around, many borrowers have questions surrounding possible deductions from their mortgages. In instances where a borrower experiences mortgage interest tax deductions from a cash-out refinance, generally, it’s because the cash was used on home improvement projects, thus adding value to the property. Many borrowers choose to spend the cash on replacing an old roof, installing home security, a home addition, a kitchen remodel, and more. A tax professional can help you determine any possible tax deductions.

Are Closing Costs Mandatory?

Yes, with a cash-out refinance, you are still responsible for closing costs. The amount will vary based on where you live, the property you’re refinancing, and the type of loan you choose.

How Long Does a Cash-Out Refinance Take?

Generally, it takes between 45 and 60 days to complete a cash-out refinance. This amount of time can vary by lender and market.

Does My Credit Score Matter During a Cash-Out Refinance?

Yes! Even though you already have a mortgage, your credit score still plays a part in determining your interest rate for a cash-out refi. Check out our tips on how to get the best mortgage rate here.

Is a Home Appraisal Required For a Cash-Out Refinance?

Yes, in most cases you must get a home appraisal for a cash-out refinance. The appraisal gives an official measurement of your home's value, which will determine how much money you can cash-out. Use our home search tool, Xome, to get an estimate of your home's market value.

How Much Can I Cash-Out?

Say you have a $400,000 mortgage and so far, you’ve paid off $250,000, leaving an unpaid balance of $150,000. If you are wanting to access $100,000, your new mortgage loan amount will be $250,000. That’s $150,000 for the remaining balance, and $100,000 for the equity you’re accessing. Keep in mind that you most likely won’t be able to take out 100% of your home’s equity – the max LTV (loan-to-value ratio) is usually 80%.

What Can I Use a Cash-Out Refinance For?

Anything! It’s yours. However, since you’re going to be paying the money back, it’s wise to use it for worthwhile investments, such as home improvements. This adds value to your home, so you may be able to get more for it when it comes time to sell. As the saying goes, “You have to spend money to make money.”

Other common practical uses for this money include consolidating high-interest credit card debt, which could help boost your credit score. You could also invest in your child or grandchild’s future by using it for college tuition. However, you can use it any way you like! Just make sure that you can keep up with your new payments.

When I Do a Cash-Out Refinance, When and How Do I Receive the Funds?

Typically, you’ll receive the funds in a lump sum at closing. However, if you have a rescission period, which gives you time after closing to rescind the loan, you’ll wait until the end of that period to get your cash.

What Do I Need For a Cash-Out Refinance?

Just like a regular purchase/refinance, you’ll most likely need to provide the following paperwork:

·         W-2s/Tax Returns

·         Pay Stubs

·         Bank Statements

·         Credit Report (usually a credit score of at least 580)

You may also need other paperwork, depending on your situation and lender. Additionally, it’s important to note that you’ll be responsible for closing costs, and any other type of fees you incur.

Getting cash-out home refinance can be a smart move if you need cash and have built some equity. Plus, now could be an opportunistic time to refinance! If you’re ready to access your home’s equity with a cash-out refinance, you can apply for a mortgage online today.

Are you considering a cash-out refinance? Connect with a loan officer to learn about the most fitting mortgage path for you! Call today at 888-673-5521!

*https://www.corelogic.com/intelligence/home-equity-gains-reached-new-highs-in-2021/

Disclaimer: by refinancing the existing loan, the total finance charges may be higher over the life of the loan.