Historic low rates
With rates at historic lows, refinancing home mortgages is proving to be beneficial to homeowners by saving them money on their mortgage payment. Many are also enjoying the benefits of a cash-out refinance. A cash-out refinance is a mortgage loan that gives cash to the borrower from equity in his or her home.
Cash-out refinance proceeds can be used for a variety of purposes. Including paying off one of two mortgages on a property, paying off any other junior liens, or disbursing cash to the borrower. It is very common for cash-out proceeds to be used for home improvement or paying off debt.
Two special conditions
In general, there are two special conditions for a cash-out refinance. First, the loan-to-value ratio needs to be at or below 80%. Second, you need to have held title to the property for at least six months. The loan-to-value ratio is a comparison of the amount of money financed (borrowed) on a property, compared to the appraised value of the property. The equity you have in your home is the difference between the home’s value and the total balance of all loans on the home. Thus, to qualify for a cash-out refinance, you must have at least 20% equity in your home. For example, if you had a mortgage in the amount of $50,000 and your home was worth $100,000, your loan-to-value ratio would be 50% (and so would your equity).
This means you could potentially get $30,000 cash from a cash-out refinance. Since your new financed amount would be $80,000 and the value would be $100,000. If you haven’t been on title for six months, you can talk with your loan officer about other possible options. If you purchased the property without any financing, you may still be able to proceed.
You will also need to provide your lender with a letter of explanation regarding what you intend to do with the cash-out proceeds. This is required to verify whether new debt will be incurred using the proceeds. For example, lets say you use the cash-out proceeds to put a down-payment on a new car. The new loan liability must be included in your debt ratios. Any new debt must be included in these ratios for underwriting.
If you have any questions regarding a possible cash-out refinance, don’t hesitate to talk with your loan officer.