If you’re looking to refinance† your home you have probably come across the term “cash-out refinance.” But what is it? In the simplest terms, cash-out refinance allows the borrower to access a portion of the equity accumulated in the home as cash.
While the concept of a cash-out refi may be simple, there are aspects of the process that require a deeper understanding. To determine if a cash-out refinance is right for you, let’s break down some of our most frequently asked questions.
- 1. How Does a Cash-Out Refinance Work?
A cash-out refinance replaces your existing mortgage with a new loan that has a higher principal balance. The additional amount over your current mortgage balance is paid to you in cash, minus any closing costs. For example, if your home is valued at $250,000 and you owe $150,000, you have $100,000 in equity. If you need $50,000, your new mortgage will be for $200,000, which includes your original loan balance plus the cash you receive.
- 2. How Much Can I Cash Out When I Refinance?
Typically, lenders limit the cash-out refinance amount to 80% of your home's value.1 Using the same example as before, if your home is valued at $250,000 and your current mortgage balance is $150,000, you could cash out up to $50,000. This is because the new loan amount would be $200,000, which is 80% of your home's current value.
- 3. Does My Credit Score Matter?
Yes, your credit score is crucial in determining your eligibility and the interest rate for a cash-out refinance. Even though you already have a mortgage, your credit score impacts the terms of the new loan. To be eligible for a cash-out refi with Newrez, your credit score must meet Newrez’s minimum standards.
- 4. Cash-Out Refinance vs. Home Equity Loan: What’s the Difference?
Both allow you to access your home equity, but they operate differently. A cash-out refinance replaces your original mortgage with a new one. In contrast, a home equity loan†† is an additional loan on top of your existing mortgage, keeping your original mortgage payments unchanged.
- 5. Is a Home Appraisal Required?
Yes, an appraisal is usually required to establish the current market value of your home. This appraisal determines how much equity you have and how much you can borrow through a cash-out refinance.
- 6. How Long Does a Cash-Out Refinance Usually Take?
The process generally takes between 45 and 60 days from the day you apply, depending on the lender.
- 7. Can You Do a Cash-Out Refinance on an FHA or VA Loan?
Yes, both FHA and VA loans offer cash-out refinancing options. FHA loans allow you to cash out up to 85% of the property's value, while VA loans can allow up to 100%, depending on the intended use of the cash.
- 8. Do I Have to Pay Closing Costs?
Yes, closing costs apply to cash-out refinances, just like any other mortgage. The amount varies based on factors such as location, property, and loan type.
- 9. Will I Have a Lower Interest Rate with a Cash-Out Refinance?
It depends on several factors, including your current interest rate, credit score, and loan-to-value ratio. If your primary goal is to lower your interest rate without taking out cash, a rate-and-term refinance might be more suitable.
- 10. Is My Monthly Mortgage Payment Going to Change?
Yes, your monthly payment will likely increase because your new loan amount will include your original balance plus the cash you received.
- 11. Do I Have to Wait 6 Months to Do a Cash-Out Refinance?
Yes, there is typically a six-month waiting period from the date of closing your original mortgage before you can apply for a cash-out refinance.
- 12. Can a Cash-Out Refinance Be Used for Anything?
The cash pulled from a cash-out refinance can be used for anything; from consolidating debt to taking a big vacation, the choice is yours!
- 13. Do I Have to Pay Taxes on a Cash-Out Refinance?
No, the cash received from a cash-out refinance is considered a loan, not income, so it is not taxable.
- 14. Are There Other Options Besides a Cash-Out Refinance to Tap Into Home Equity?
Yes, other options include a home equity loan or a home equity line of credit (HELOC). The Newrez Home Equity Loan†† program, for example, allows you to access your home equity without changing your primary mortgage terms.
- What are more ways I can tap into my home’s equity without refinancing?
For homeowners interested in getting equity out of their home while avoiding refinancing all together, Newrez has options. Happy with the rate on your current mortgage? Newrez Home Equity Loan is our new loan program that preserves the interest rate on your current mortgage while you secure cash in hand. ††
†By refinancing an existing loan, the total finance charges may be higher over the life of the loan. We may transfer the escrow account balance from the current loan to the new loan. If the current escrow amount is insufficient due to changes in taxes or insurance, we may require additional money when closing on the new loan.
1Source: Cash-Out Refinance Guide | Requirements and Rates for 2024 (themortgagereports.com)
††The rate on your existing mortgage will not change. The Newrez Home Equity Loan program requires borrower to obtain a second mortgage at current market rates. Loan amount based on underwriting guidelines. Minimum 660 credit score. Minimum and maximum loan amounts apply. Program financing only available on properties with one existing mortgage lien and subject to maximum loan-to-value ratio. Not available in all states or territories. Other terms and restrictions apply. Please contact us for more information.
