What is a Cash Out Refinance Program?

Cash Out Refinance Program

The cash-out refinance loan is a very popular home refinancing program that enable borrowers to tap their equity to receive money back in their mortgage. Typically, cash-out refinance rates tend to be lower than rates for home equity loans, although they may entail higher closing costs and fees.

Consequently, if you require a relatively modest sum, a home equity loan may be the more suitable choice. For larger sums, a cash-out refinance could be a viable option. The precise decision hinges on your available home equity, the desired loan amount, and your capacity to manage monthly payments.

• FHA refinance with cash out
• Bad credit cash out refinance
• VA refinance for cash out
• Conventional cash-out refinance

What Is a Cash-Out Refinance Mortgage?

A cash-out refinance allows you to tap into your home equity by replacing your existing mortgage with a new one that carries a higher loan amount than your current balance. Upon loan closure, you receive funds that can be utilized for various purposes.

Cash-Out Refinancing enables you to convert a portion, or potentially the entirety, of your home’s equity into readily accessible cash. Your home equity signifies the current market value of your home minus the outstanding balance on your mortgage. This equity value may vary depending on fluctuations in the housing market and the cumulative payments made toward your mortgage.

Is a Cash Out Refinance a Good Choice for You?

While there isn’t a definitive answer, contemplating a cash-out refinance might be prudent if:

You need to cover a significant expense and seek alternatives to higher-interest loans or credit cards. You possess sufficient available equity to facilitate the cash-out option.
When considering a cash-out refinance, it’s crucial to assess the utility of the funds against the time required to repay the loan. Take into account the following aspects:

• Remaining years on your current loan term.
• Duration of the new loan term.
• Current cash out interest rates.
• Required cash amount.
• Monthly payment obligations.
• Total lending costs.
• Break-even point. 

To assist in answering these questions and determining whether a cash-out refinance aligns with your long-term financial objectives, reach out to several mortgage lenders that specialize in cash out refinancing. What is difference between a cash out refinance and HELOC? When you refinance and get cash out you are revising your first mortgage. Whereas a HELOC is a second mortgage lien that is taken out in addition to your first mortgage and the rate on a HELOC is usually higher. There are closing costs on HELOC loans as well.

What Are Cash Out Refinance Requirements?

The Federal Reserve has increased interest rates 11 times between 2022 and the end of 2023 to fight inflation. This made taking out almost any kind of loan more expensive – from mortgages to car loans to credit cards. Higher rates also made it more costly for current homeowners to refinance their mortgages.

For many people, the higher rates discouraged people from refinancing their mortgages; it is estimated that 80% of current homeowners have a rate of 5% or less. So, refinancing and pulling out cash would mean you would have a higher mortgage.

That said, it’s now 2024, and it is possible that rates could start to drop again. If so, more people may consider doing a cash-out refinance. But even if they don’t drop, don’t worry! Another option is to get a home equity line or credit (HELOC), which we describe later in this article.

Why Would You Do a Cash-Out Refinance Loan in 2024?

There are several reasons that homeowners consider doing a cash-out refinance. First, you probably want to get a lower interest rate. If you have an 8% mortgage, it could make sense to get a new first mortgage at 7% and pull out cash. You could use some of your cash equity for paying off high-interest credit cards, home renovations, and more. A cash-out refinance allows you to swap your mortgage for a new one with a lower rate and for a higher amount (you take the additional amount in cash).

As we noted above, if you have a lower mortgage than current rates, you might not want to do a cash-out refinance. But there is a possibility that rates will drop in 2024. The Fed has said that it may reduce rates three times this year, which could lead to 30-year mortgage rates falling to 6% or even less. If you closed your mortgage loan in 2022 or 2023, it may make sense to do a cash-out refinance this year when rates go down.

You also may want to do a cash-out refinance this year if you have an adjustable-rate mortgage. These loans have fixed rates for a few years, then adjust. This can make it harder to follow a budget and may give you financial stress.

A cash-out refinance also may have tax-deductible interest, depending on whether you use the money for home renovations. The same is true for HELOCs that we describe below. But if you use the cash equity for anything other than home improvements, the interest is no longer tax deductible.

It may take 30 to 60 days to close a cash-out refinance loan after you apply.

Requirements for Cash-Out Refinancing

If you decide that doing a cash-out refinance is a smart move, you need to understand what the requirements are. The requirements for this loan will vary by lender, but these are the general standards:

• At least 20% equity in your home. If you put down around 20% to buy the property, you may qualify within a few months of buying the home.
• A new home appraisal to verify what your home is worth.
• A credit score of 620 to 640, but higher scores mean a lower rate.
• Debt-to-income of 43% or less.
• LTV ratio of 80% or less.

The requirements above are for conventional cash-out refinances. If you want to do an FHA cash-out refinance, you can borrow up to 80% of the home’s value, and you will need to pay upfront fees that are rolled into the loan. There also is mortgage insurance required regardless of how much equity you have. Most FHA cash-out refinances require a 600 minimum credit score and the cash out refinance rate is competitive with the conventional rate.

Cash-Out Refinance Example

Let’s assume you decide that a cash-out refi works for your finances. Suppose your home is valued at $300,000 and you have a $100,000 loan balance. This means you have $200,000 in equity.

Generally, you can borrow up to 80% of the home’s value. In this example, multiply $300,000 by .80, giving you a maximum loan of $240,000. You would take $240,000 and subtract the $100,000 you owe, giving you a potential of $140,000 in cash. Keep in mind that you would have a higher loan balance, and your payment could increase, even with a lower rate.

Most lenders will not let you take out more than 80% or 85% of your home’s value. This is considered too high of a risk for the lender. Most loan providers want the homeowner to have more skin in the game to reduce the number of defaults.

The Process to Get Approved for Cash-Out Refinance Loans

Determine Your Home Equity: Home equity is the market value of your home minus what you still owe. For example, if your home is worth $400,000 and you owe $250,000, you have $250,000 in home equity.

Calculate the Maximum LTV for Cash Out: Typically, you can borrow up to 80% of your home’s value. Using the previous example, multiply $400,000 by 0.85 to get a maximum of $340,000. Remember, this is based on the current market value, not the original sale price.

Shop Cash Out Refi Rates from Multiple Lenders: Comparing rates from multiple lenders will help you get the best deal.

Weigh Alternatives: After researching available rates, calculate your new monthly mortgage payment to see if it is affordable. If it’s not, consider other loan options.

Submit an Application: Similar to your original mortgage, you’ll need to go through the appraisal and underwriting process before closing the loan and accessing your cash.

Are There Lenders Offering a Cash Out Refinance with Bad Credit?

There are a still a few lenders offering bad credit cash out refinancing opportunities. Are you looking for a cash-out refinance with scores as low as 500? Of course the mortgage companies typically charge higher interest rates to offset the risk that you might not be able to make the payment. 

The Federal Housing Administration is the most popular cash out refinance loan for bad credit. Borrowers with low credit scores should consider the FHA cash out refinance. Talk to lenders about whether you meet the requirements for FHA refinance loans.

If the borrower has a military background, the VA cash out refinance also approves bad credit loans to eligible veterans.  Several government lenders are advertising 500 minimum credit scores on the VA cash out refinance program.

The conventional cash out refinance lenders typically expect a 620 to 640 credit score. Both Fannie Mae and Freddie Mac are publishing low cash out refinance rates for borrowers with average and good credit scores.

The Non QM and hard money lenders continue to offer cash out refinances for poor credit but the cash out refinance rate and closing costs are higher.

How long is the process take for a cash-out mortgage refinance?

Successfully completing a refinance with cash out involves many of the same steps you took to get your original mortgage. It can take 30 to 45 days to complete the underwriting process with most traditional lenders, but it’s not uncommon for a mortgage refinance to take between 45 days and 2 months to close. The Home Equity Mart can help you shop for online lenders that offer quicker closings and competitive cash out refinance rates.

Is the Interest from a Cash-Out Refinance Tax Deductible?

If the cash obtained from your cash-out refinance is invested in home improvements, such as adding a room or similar upgrades, the entire amount remains classified as mortgage debt, and the interest on the cash-out portion qualifies as tax deductible. However, if the cash is utilized for purposes like a vacation or college loan, the interest cannot be categorized as mortgage debt and is not eligible for tax deductions. It is essential to consult with a tax accountant to understand these nuances clearly.

Before signing loan documents, let’s clarify some other alternatives to cash-out refinancing:

• A fixed home equity loan features a fixed interest rate and fixed payments, utilizing your home as collateral.
• A home equity line of credit or HELOC is a variable-rate line of credit secured by your home that functions a lot like a credit card because it allows you to borrow and reborrow funds as needed.

If you’re aiming to eliminate high-interest credit card debt, contribute towards your child’s education, or undertake significant home improvement projects, a cash-out refinance could be the solution. By refinancing for an amount exceeding your current mortgage balance, you unlock the equity tied up in your home, providing access to funds for various purposes.

Should You Do a Cash-Out Refinance Or HELOC?

Another option to consider this year is a home equity line of credit or HELOC. A cash-out refinance is for your first mortgage and it replaces your current mortgage with a new one. A HELOC is a type of home equity loan, meaning it leaves the first loan in place and borrows from your equity.

With a HELOC, your existing equity is leveraged through a second mortgage that exceeds the balance of the original one. The borrower utilizes this subordinate mortgage to receive cash out for debt consolidation, home remodeling and more. The surplus amount is then disbursed to them in cash. Many borrowers that already have a great interest rate on their first mortgage choose the home equity loan for cash out because it allows them to get money and keep their low interest rate mortgage. The fixed home equity loan is another popular alternative to the cash out refinances. The Home Equity Mart will help you compare the cash out refinance vs home equity loan.

Why would you consider a HELOC instead of a cash-out refinance in 2024? After all, a cash-out refinance usually offers a lower rate than a a second mortgage loan. The reason is that most people who have first mortgages today have lower rates than current ones. If you got a first mortgage in 2020 or 2021, your rate is probably much lower than current rates. Rates in 2020 were 3% or lower, and current rates in 2024 are around 7%. There is little reason to do a cash-out refinance if you will have a much higher interest rate. Take a minute and compare the cash-out refinance vs HELOC.

A better option in this case is to get a HELOC that leaves the first mortgage alone. A HELOC is a cash out equity loan that has a higher rate than a first mortgage, but it’s still much lower than credit cards and other unsecured debt. A line of credit has a draw period of 10 years usually where you pay interest only on a HELOC. Then, you start to pay back principal, too. Many people prefer to do debt consolidation with a HELOC.

A HELOC does not give you a lump of cash as a cash-out refinance does. You get a line of credit that is similar to a credit card. You can draw as much money as you want, up to your credit line. You only pay interest on money you have withdrawn.

Another factor with a HELOC is the rate is variable. This is important because in recent months, the Federal Reserve has indicated that it may not hike interest rates further to fight inflation. There even could be rate cuts in 2024 and beyond, so there’s a chance the HELOC rate could go down in future years.

A home equity credit line may take less time to close than a cash-out refinance, but it depends on the lender and your credit profile.

Last, a home equity line has a shorter term than cash out refinances, so the payments may be higher, depending on how much money you borrow.

A cash-out refinance is a smart way to get a lower rate and the cash you need in certain situations. If your new interest rate will be 1% or more less than your current rate, doing a cash-out refinance may be the right move. The qualifications for a cash-out refinance vary according to how much you take out and your credit profile.

If you won’t get a lower interest rate with a cash-out refinance, the other option is to do a HELOC. Both will get you the cash you need to pay off credit cards, pay for college, or renovate your home.

The only way to know if a cash-out refinance or HELOC is better for you is to go over the options with a loan adviser. Don’t forget to ask about the hot new product, the home equity investing program that has no monthly payment or down payment requirements. For information about your loan options, please contact us today.