The Complete Guide to the Cash-Out Refinance

The Ins and Outs of the Cash-Out Refinance in 2022

Read Time: 9 Minutes

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Couple making home improvements after doing a cash-out refinance

Imagine your dream kitchen, spa-like bathroom oasis, or perfect backyard. Or envision paying off debt, sending your kids to college free of student loan debt, finally taking that vacation, or having money to invest and build wealth. Now, picture having available funds to transform your vision into reality – without having to dip into your hard-earned savings. And no, you don’t have to win the lottery to access cash to lead the life you’ve always wanted… A cash-out refinance may be the solution you’ve been waiting for!

How a Cash-Out Refinance Works

A cash-out refinance is a loan type where you essentially “cash in” your home equity for cash in your pocket. Generally, this loan type replaces an existing mortgage with a loan amount that’s more than the current mortgage loan. You receive the difference between the two loans (i.e., home equity) in cash at closing.

 

Types of Cash-Out Refinances

Just like a mortgage for a home purchase, there are many different loan types to choose for a cash-out refinance, including FHA, VA, conventional, and jumbo loans. With both conventional and FHA loans, you are required to leave at least 20% equity in your home after a refinance. With a VA loan refinance, you can cash out all the home equity.

Additionally, and again, like a mortgage intended for a home purchase, there’s a process from the time of application to closing, including underwriting, processing, and approvals. Keep in mind that closings costs, other fees, and appraisals are all a part of cash-out refinance loans as well.

 

FHA Cash-Out Refinance

An FHA cash-out refinance is ideal for borrowers who need flexibility qualifying with their debt-to-income ratio or less-than-perfect credit. Additionally, it allows you to refinance up to 80 percent of your home’s value for cash. So, how does it work? With this loan, you get a new loan for an amount larger than the amount you currently owe. The new loan is used to pay off the existing loan. The difference between the two is yours to keep – as cash!

There are many reasons you may choose an FHA cash-out refinance, including:

  • Your mortgage rate is higher than today’s rate
  • Lower mortgages rates, compared to other cash-out refi options
  • No income limits
  • You have a perfect 3-month payment history
  • You may still qualify even if you currently have a different loan type

To qualify for an FHA cash-out refinance, prepare to have employment history and documentation 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 is typically required with an FHA loan.

 

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. A VA cash-out refinance simply replaces your current mortgage rather than taking on an additional loan. Just like qualifying for a VA loan for a home purchase, the VA cash-out refinance requires you provide your Certificate of Eligibility (COE) to show the lender that you qualify for VA loans.

There are other reasons borrowers choose a VA cash-out refi, including:

  • You can finance closing costs if you meet loan-to-value guidelines
  • You can finance the VA Funding Fee if you meet loan-to-value guidelines
  • Your mortgage rate is higher than today’s rate
  • Lower mortgages rates, compared to other cash-out refi options

 

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

 

Conventional Cash-Out Refinance

A conventional cash-out refinance is generally easier to secure when 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 income, loan-to-value, and credit score requirements.

Unlike FHA and VA cash-out refinance, a conventional cash-out refinance may be used for primary residences, second homes, or investment properties. Many experienced real estate investors use this loan option to take cash out of a rental property to purchase more.

Jumbo Cash-Out Refinance

Not all lenders offer jumbo cash-out refinances, mainly because they’re higher loan amounts and, consequently, assume more risk. However, there are plenty of lenders who do offer jumbo cash-out refinancing; typically, borrowers must meet more strict qualifying guidelines, compared to other loan types. Usually, there are loan-to-value limitations and excellent credit requirements. Seeking a loan officer for professional insight is a smart move.

 

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.

 

Pros and Cons of a Cash-Out Refinance

As with any decision, especially a major financial decision like a cash-out refinance, weighing the pros and cons helps you understand if it’s a good fit for you.

Pros to Consider

    • 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 can be used for nearly anything you want

 

Cons to Consider

    • A cash-out refinance will likely extend the repayment time of your mortgage
    • Closing costs and origination fees are expenses to consider
    • If your interest rate on your current mortgage is lower than what you could qualify for with a cash-out refinance, you could have a higher interest rate loan, paying more every month

 

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 you want to take out.

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?

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?

  • For example, 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 need $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 however 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, rates are currently near historic lows, but could be rising soon, making it 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.


Cash-Out vs HELOC: What’s the difference?

A cash-out refinance is often compared to a home equity line of credit (HELOC), although the two are not the same. In most cases, a HELOC is an additional (second) mortgage, with its own repayment schedule, terms, and conditions.

As you know by now, a cash-out refinance results in a lump sum of cash at closing. In comparison, a HELOC has a draw period (generally 10 years) where you can withdraw an approved amount of money as needed – from the line of credit. The draw period ends, and the repayment period begins (typically 20 years). Additionally, HELOCs generally have a variable interest rate, meaning it can change based on the market.

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


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!


 

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