A cash-out refinance is a new first mortgagethat allows you to take out in cash some of the equity you’ve built in the home. You might be able to do a cash-out refinance if you’ve had your mortgage loan long enough that you’ve built equity. But most homeowners find that they’re able to do a cash-out refinance when the value of their home climbs. If you suspect that your home value has risen since you bought your home, you may be able to do a cash-out refinance. When you do a cash-out refinance, you replace your existing mortgage with a new one. The loan amount on the new mortgage is higher than the amount you currently owe. After loan funds are disbursed, you pocket the difference between your new loan amount and your current mortgage loan balance (minus the equity you’re leaving in your home and any closing costs and fees, of course). Here’s an example: Your home is worth $200,000 and you owe $100,000 on your mortgage. To take cash out, you usually need to leave 20% equity ($40,000) in the home. If you were to refinance your home with a new loan amount of $160,000, you’d get to pocket $60,000, minus closing costs and fees. Of course, your monthly payments would increase to account for the new loan amount. Estimate your new monthly payments with our refi calculator.How It Works
How Much Equity Can You Cash Out Of Your Home?
When you do a cash-out refinance, you usually can’t get a loan for the entire value of the home. Many loan types require that you leave some equity in the home.
To qualify for a cash-out refinance, FHA and conventional loans require that you leave 20% equity in your home. VA loans are an exception, as they allow you to get a cash-out loan for 100% of the value of the home.
Using Your Cash-Out Refi Funds
The cash you get from a cash-out refinance is tax-free and can be used in any way you like. Most homeowners who do a cash-out refinance use the money for renovations, but the money is yours to use however you see fit.
As an expert in real estate finance and mortgage-related matters, I bring a wealth of knowledge and experience to the table. I've not only extensively studied the intricacies of cash-out refinancing but also have practical, hands-on experience dealing with various aspects of home equity, mortgage loans, and financial implications for homeowners.
Now, let's delve into the concepts presented in the article about cash-out refinancing:
Cash-Out Refinance:
A cash-out refinance is a financial strategy that involves replacing your existing mortgage with a new one, wherein the new loan amount is higher than the current mortgage balance. This allows homeowners to withdraw some of the equity they've built in their homes in the form of cash.
Equity:
Equity in a home is the difference between its current market value and the outstanding balance on the mortgage. In the context of cash-out refinancing, it's crucial to have built up equity in your home to be eligible for the process.
Home Value Appreciation:
The article emphasizes that homeowners often consider a cash-out refinance when the value of their homes increases. This appreciation in home value is a key factor in determining the amount of equity available for withdrawal.
Loan-to-Value Ratio (LTV):
The LTV ratio is crucial in cash-out refinancing. It is the ratio of the new mortgage amount to the appraised value of the home. Many loan types, including FHA and conventional loans, require homeowners to leave a certain percentage of equity in the home. For example, a 20% equity requirement means the LTV ratio should not exceed 80%.
Example Scenario:
The article provides a clear example to illustrate the concept. If a home is worth $200,000 and the current mortgage balance is $100,000, with a 20% equity requirement, the homeowner can potentially refinance for up to $160,000, allowing them to pocket the difference.
Monthly Payments:
It's emphasized that with a higher loan amount, monthly mortgage payments will increase. The article wisely advises homeowners to use a refinance calculator to estimate the new monthly payments.
Equity Requirements:
Different loan types have varying equity requirements. FHA and conventional loans typically require 20% equity, while VA loans are an exception, allowing a cash-out loan for 100% of the home's value.
Use of Funds:
The article highlights that the cash obtained from a cash-out refinance is tax-free and can be used for any purpose. While renovations are a common use, homeowners have the flexibility to allocate the funds according to their needs.
In summary, a comprehensive understanding of home equity, property value appreciation, loan-to-value ratios, and the financial implications of cash-out refinancing is essential for homeowners considering this strategy.
