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April 22, 2021
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 refi gives you access to the equity in your home. Essentially, you refinance your existing mortgage into a new one with a larger outstanding principal balance and pocket the difference. The amount of cash you receive is generally based on the difference between your home’s current value and the remaining balance on the loan, but other factors – such as occupancy, loan-to-value ratio, amount of loans on the property, etc. – can also come into play.
For example, if your home is valued at $250,000 and you owe $150,000, the amount of equity you’ve built up is $100,000. If you need $50,000, your new mortgage amount will be based on the total amount you owe plus the cash you receive, or $200,000.
2. How much can I cash-out when I refinance?
Typically, a lender will limit cash-out refinance loan amounts to 80% of your home’s value. To use 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—because the new loan totals $200,000, which is 80% of $250,000, your home’s current value.
3. Does my credit score matter?
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. To be eligible, your credit score must meet Newrez’s minimum standards.
4. Cash-out refinance vs. home equity loan: What’s the difference?
While both allow the borrower to take out equity, they are different. With a cash-out, you’re refinancing your original mortgage and replacing it with a new mortgage that starts from scratch. A home equity loan is an additional loan on your home, leaving your original mortgage payment unchanged.
5. Is a home appraisal required?
In most cases, you must go through the appraisal process. This is one of the most crucial steps in the refinancing process, as it establishes the market value of your home, which will determine how much money you’ll be able to cash-out.
6. How long does a cash-out refinance usually take?
It depends on the lender, but it generally takes between 45 and 60 days to close on your loan from the day you apply.
7. Can you do a cash-out refinance on an FHA or VA loan?
Yes! An FHA loan allows you to cash-out up to 85% of the property’s current value and usually requires less documentation than a conventional cash-out refinance. The VA loan process is similar to the FHA, but a VA loan cash-out refinance allows refinances up to 100% of the home’s value, depending upon what cash will be used for.
8. Do I have to pay closing costs?
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.
9. Will I have a lower interest rate with a cash-out refi?
That depends on a few variables, including your current interest rate, your credit score and loan-to-value ratio. If you only want to lower your rate and don’t need cash, a rate-and-term refinance makes more sense.
10. Is my monthly mortgage payment going to change?
Yes, in most cases your payment will increase. Since your new loan will consist of your original balance plus the desired cash amount, you can expect the loan and payment size to go up.
The refinancing process may sound confusing, but a little refi know-how goes a long way. Visit our refinance page to find the refinance option that’s right for you.
11. Do I have to wait 6 months to do a cash-out refinance?
Yes, cash-out refinances do require a 6-month waiting period in addition to other requirements.
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?
You do not need to pay taxes on a cash-out refinance. Since the cash-out refi is considered a loan and not income, the cash isn't taxable.
Disclaimer: by refinancing the existing loan, the total finance charges may be higher over the life of the loan.
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