Have you watched your home appreciate in value over the years and wondered if you could tap into that equity without having to sell? There is a financial option that allows homeowners to leverage their equity and convert it into cash. Cash out refinancing has become more popular because it provides flexibility in using your home’s value.
Maybe you’ve considered using the equity to finally pay off high-interest credit card balances, renovate your outdated kitchen or bathroom, build a dream patio or pool, or fund college tuition. But is tapping into your home equity the right decision?
This article will explain everything you need to know about cash-out refinancing to determine if it fits your financial objectives.
What is Cash Out Refinancing?
With cash out refinancing, you take out a new mortgage loan that is larger than the remaining balance on your current mortgage. The money from the new loan pays off your existing mortgage, covers closing costs, and provides you with extra cash, the “cash-out” amount.
Unlike a standard refinance where the goal is getting a better interest rate or switching from adjustable to fixed rate, the main reason for a cash-out refinance is to access home equity. It lets you utilize the equity accumulated in the home over time for other uses.
- The new loan amount exceeds the current mortgage balance. This difference is the cash you receive at closing.
- Sufficient equity is required, usually at least 20%. Lenders want to limit risk.
- The new loan will likely have a higher rate than a standard “rate and term” refinance.
- Closing costs are similar to a regular refinance, around 2-5% of the total loan amount.
- Terms can be flexible – 10 to 30 years fixed rate, or adjustable rate.
Cash-out refinancing turns your equity into usable cash, although it does lower the equity stake you have in the home.
Is Cash Out Refinance a Good Idea?
Deciding if cash-out refinancing is right for you requires carefully weighing the pros and cons:
- Access significant funds without selling the home or taking on high-interest debt
- Consolidate higher-rate debts (credit cards) into a lower mortgage rate
- Fund home improvement projects to increase property value
- Pay for a major purchase or expense like college tuition
- Diversify investments outside of real estate
- Closing costs can reach thousands of dollars
- Risk over-leveraging if taking maximum cash out
- Less equity protection – more owed against the home
- Lengthy refinance process of 45-60+ days
- Potential for mortgage rate to increase, raising costs
- Temptation to overspend cash-out funds
Some Key Questions to Ask Yourself Are
- How long do you plan to stay in the home? The longer the better for a cash-out.
- What is your goal for the cash? Paying off higher-rate debt is better than discretionary spending.
- How much equity do you currently have? The more the better.
- Could you qualify for a HELOC instead at a lower cost?
- Are you comfortable with less home equity and increased payments?
Do the math carefully and have a clear purpose for the funds before deciding.
How Do You Get the Cash from a Cash Out Refinance?
Once you’ve been approved for a cash out refinance, you’ll get the proceeds in cash at closing. Here’s an overview of the process:
- After approval, your lender will coordinate the closing date with the title company.
- At closing, the title company will disburse the mortgage payoff amount to your current lender.
- Any leftover proceeds after closing costs are issued to you directly, either in a check or wire transfer.
- For larger cash-outs, you can instruct the title company to disburse some funds to pay off debts like credit cards or student loans.
- Be prepared to pay taxes on the cash if using any for non-mortgage expenses. Consult an accountant.
The amount of cash you can take out depends on factors like the appraised value, your equity stake, and your lender’s guidelines. Most lenders limit the maximum loan-to-value ratio to 80%. So if your home is worth $500k, and you have $200k left on the current mortgage, you could qualify for up to a $400k loan amount. That would provide $200k cash out.
Shop multiple lenders to find the best loan amount, rates, and closing costs. Paying for an appraisal upfront can also give you clarity on how much equity you have available to tap.
How Long Does a Cash Out Refinance Take?
A cash-out refinance usually takes between 45 to 60 days to finalize, sometimes longer if the home needs repairs based on the appraisal.
Here are the key steps in the process:
Step 1. Application
Includes submitting income and asset documentation, credit checks, and employment verification. Can take anywhere from 2 days to 2 weeks.
Step 2. Home Appraisal
An appraiser will assess the current value of the home. Typically takes 1-2 weeks.
Step 3. Underwriting Approval
The lender verifies all information and approves the loan. Usually 1-2 weeks.
Step 4. Loan Documents
You’ll get the final loan terms and closing disclosure. Review carefully before signing.
Step 5. Closing
The legal transfer of the property title and loan funding. Takes 1-2 weeks to schedule after final approval.
Ways to speed up the process:
- Gather all income and asset statements upfront for the application.
- Quickly respond to any additional requests from the lender.
- Have new home insurance lined up and ready to go.
- Communicate proactively with your loan officer about the timeline.
Plan for at least 45 days to ensure enough time, but it can happen faster in some cases with an organized approach.
Other Key Cash-Out Refinancing Tips
If you decide a cash-out refi may be right for you, keep these additional tips in mind:
- Shop multiple lenders and compare interest rates, loan costs, and cash-out amounts. Get offers from both local banks and online lenders.
- Check if you have a prepayment penalty on your current mortgage before applying – this could add costs.
- Understand all closing costs like the loan origination fee, appraisal, title insurance, and more. No surprises!
- Consider the rate term carefully, shorter terms have higher monthly payments but lower rates.
- Consult a tax advisor to understand the deductibility of interest and tax implications if using cash for other purposes.
- Have a solid plan for using the funds so they provide long-term value. Avoid the temptation just to overspend on liabilities.
Cash-out refinancing can provide homeowners with a powerful tool to access their equity for debt consolidation, home improvements, education expenses, or investments.
But make sure to weigh the risks and costs. With prudent planning, it can significantly help you achieve financial goals and build wealth without moving.
Consult experienced loan officers and financial advisors to determine if a cash-out refinancing aligns with your situation.
CHECK THESE OUT:
- How to Apply for Wells Fargo HELOC – Why is Wells Fargo not doing Home Equity Loans
- How to Refinance Your Mortgage with Bad Credit
- Home Refinancing – Factors to Consider Before Refinancing Your Home
- How to Refinance Student Loans
- Mortgage Refinancing: Factors to Consider Before Refinancing a Mortgage