Cash Out Refinance

Unraveling the Cash-Out Refinance Process

Transforming your home’s equity into cash may require a bit more effort than a standard refinance. Here’s a step-by-step guide to navigating a cash-out refinance:

 

  1. Evaluate Your Financial Capacity: Since a cash-out refinance involves a larger loan amount than what you currently owe, lenders will scrutinize your income, assets, and credit score to ensure you can handle the new monthly payments. While a cash-out refi often results in a higher monthly payment, you could end up with lower mortgage payments if interest rates have significantly dipped since your original loan.

  2. Determine Your Home’s Worth: A home appraisal is typically required to ascertain your home’s value. This process involves a real estate appraiser comparing your home to recently sold homes in your area with similar features. However, starting April 15, 2023, alternatives to traditional appraisals are available:


    • Value Acceptance: Formerly known as an “appraisal waiver,” this option allows the lender-provided home value to be accepted without the need for an appraisal.
    • Value Acceptance Plus Property Data: This approach eliminates the need for an appraiser, relying instead on property data collected by a trained professional.
    • Hybrid Appraisal: This method combines the expertise of an appraiser and a property-data collector for property valuation.
  3. Calculate Your Borrowing Limit: Lenders commonly permit you to borrow up to 80% of your home’s value, also known as your maximum loan-to-value (LTV) ratio. However, eligible military borrowers may be able to access up to 90% of their home’s value with a VA cash-out refi.

  4. Choose the Right Lender: Comparing rates from multiple lenders can save you a significant amount over time. Our list of top mortgage refinance companies includes several lenders offering cash-out refinances.

  5. Estimate Your Cash-Out Amount: The lender will finalize your cash-out amount by subtracting your current mortgage balance and any closing costs from the total loan amount.

Cash-Out Refinance Requirements

If you have enough equity to qualify for a cash-out refinance (generally at least 20%), you’ll also need to meet the cash-out refinance requirements for income, credit, and assets set by each program. Here are some general guidelines:

 

  • Minimum Credit Score: Conventional loans require a minimum credit score of 620 for cash-out refinances. However, some lenders may set a higher credit score requirement. If your score is below the threshold, consider an FHA loan, which has more lenient credit requirements.

  • Maximum Debt-to-Income (DTI) Ratio: Your DTI ratio, calculated by dividing your total monthly debt by your pre-tax income, is crucial when borrowing more than you currently owe. The Consumer Financial Protection Bureau (CFPB) advises a maximum 43% DTI ratio, but exceptions may be made for high credit scores or substantial savings.

  • Occupancy: While most borrowers use their primary residence for a cash-out refinance, conventional loans also allow you to borrow against the equity in an investment property or second home. Be prepared for potentially higher interest rates and lower LTV ratio maximums.

  • Number of Units: Single-family homes usually yield the most cash out, with lower LTV limits applicable to multi-unit homes. The qualifying requirements vary depending on the loan type and whether you’re using a single-family primary residence for the cash-out refinance.