Cash-Out Refinance

Owning your home is an important investment—one that helps build equity. Fortunately, you don’t have to wait until your mortgage is paid off to access your home’s equity. You can turn the equity you’ve built into cash with a cash out refinance loan.

A cash out refinance loan is a new mortgage that replaces your current mortgage and gives you cash at closing. 

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What is a Cash-Out Refinance Loan?

A cash out refinance loan is a type of mortgage that allows homeowners to cash in on the equity they’ve built in their homes. Essentially, you’re taking out a new mortgage with a higher amount to replace your current one and at closing, you’ll receive  cash for the difference in loan amount. 

This cash can be used for any purpose you choose, such as home repairs or improvements, paying off high-interest debt or investing in other property. A cash out refinance loan is a great way to borrow cash from your home without having to take out a second mortgage or HELOC (home equity line of credit).

While you may have a variety of options when choosing to finance—such as looking to cover expenses, pay down high-interest debt, pay student loans or other needs—the alternative options may not offer the most affordable terms. This is where cash out refinance loans come in. 

Whether the original loan with which you bought your home was conventional, FHA or VA, you may qualify for a cash out refinance. The qualification process is similar to qualifying for a conventional purchase loan. You need to meet standards set by Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), both of which are sponsored and overseen by the federal government. With these standards come flexible refinancing options.

How to Get a Cash-Out Refinance Loan

To learn whether a cash out refinance loan is the best option for reaching your financial goals, connect with us at Compass Mortgage! To get you started, we’ve outlined the steps and documentation needed to help you understand what it takes to get approved for a cash out refinance loan.

The Refinancing Process

  • Get in touch with us!
  • We’ll help you assess benefits from refinancing
  • We’ll take into consideration:  . . .
    • Your current interest rate
    • Your credit score
    • Your home’s current value (via a fresh appraisal)
    • Your equity (in your current home)

 

We’re with you through each step leading to closing, where you can begin to make the most of your home’s equity with the cash you receive.

Cash-Out Refinance Loan Requirements

These are the common requirements often needed to qualify for a cash out refinance loan. If you have questions about these requirements, we’re here to help.

  • Credit Score: 620 or higher. (Higher credit scores often result in better interest rates.)
  • Consistent Income: (You’ll need documentation as part of underwriting.)
  • Employment Verification and History: (Again, for underwriting your loan.)
  • Debt-to-Income Ratio (DTI): At or below 43% (Also part of underwriting. This shows the percentage of your income that  goes toward debt payments .)
  • Loan-to-Value Ratio (LTV): 80% or less. (This means you have at least 20% equity in your home. This is not always required but can eliminate private mortgage insurance—PMI—and maximize the cash you can borrow.)
  • Proof of Reliable Payment History. (Verifiable on-time payments on your current or a past mortgage is helpful to qualify for a cash out refinance loan.)

Cash-Out Refinance Loan FAQs

Making the most of your home in relation to your financial goals greatly impacts your life. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.

A cash out refinance loan is a type of refinancing that allows you to get cash back from your home equity.  

Cash out refinance loans can be a good option if you’re looking to access cash for any purpose, whether it’s to cover expenses, pay down debt or make home improvements. These loans often have more affordable terms than other types of financing, making them a great way to save money on interest and get out of debt faster.

With a conventional refinance, you can lower your interest rate or monthly payments, but you won’t receive any cash back. While your monthly costs may be lower, you won’t have extra funds to tackle any debt or make any home improvements. 

The cash you receive from a cash out refinance loan can be used for any purpose you choose. 

Some common uses for the cash include paying off high-interest debt, making home improvements or repairs, investing in other property and covering extra or unplanned expenses.

The cash you receive from a cash out refinance loan is typically available as soon as your loan closes. You’ll usually have to pay the money back over time, though you may be able to choose a repayment schedule that fits your needs. Once you’ve repaid the loan, any remaining equity in your home will belong to you. 

To qualify for a cash out refinance, you’ll need to have at least 20% equity in your home. This means that your home must be worth more than you owe on it. If you have less than 20% equity, you may still be able to qualify for a cash out refinance; but you’ll likely have to pay for PMI. 

The interest rate on a cash out refinance loan is usually lower than the interest rate on other types of financing such as personal loans or credit. 

This is because cash out refinance loans are secured by your home’s equity, which means the lender is at less risk of not getting their money back if you default on the loan. 

A cash out refinance goes through many of the same steps required to close a conventional purchase loan. As was the case when you purchased your home, you will need another home appraisal for a cash out refinance so that we can establish the value of the home.

Once the value is determined, we can finalize the details of your loan to calculate how much cash you can borrow with a cash out refinance.

When you close your cash out refinance, you’ll need to account for several costs. These can include fees for appraisal, origination and title insurance. These typically range from 2-4% of your total loan amount.

You’ll also need to factor in the cost of any points or up-front PMI costs you choose to pay. All costs will be clearly outlined as your loan is processed and before you close.

Remember: At Compass Mortgage, we’re here to help you with refinancing. Contact us!

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Cash-Out Refinance Loan Benefits
  • Potential to lower your current interest rate
  • Longer terms
  • Use equity to borrow cash
  • No restrictions on how you can use the funds
  • Immediate access to the funds in a lump sum
  • Fixed monthly payments
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