Cash-out refinance is one of the benefits of building home equity. A home can be considered an investment in different ways. It’s not only a safe haven but some of its components, such as equity, can be used to settle various financial goals. A cash-out refinance can be the solution to paying for tuition, home remodeling projects, and even debt consolidation. It’s a much better alternative to personal loans or credit cards.
An Overview of Cash-out Refinance
This type of mortgage replaces the current home loan with a more significant one. And here is the catch; the difference between the old loan and the new one is paid to the homeowner in cash. The homeowner can then use these funds for a wide range of expenses. The more a mortgage matures, the more equity a homeowner builds. Equity can be defined as the amount of your home you truly own (the amount you have already paid off). Equity is built through the monthly payments you make on your loan and an increase in the value of your home. Cash-out refinance leverages this equity you have accumulated through the provision of a larger mortgage. In short, if you opt for cash-out refinance, you will borrow more than you owe on your mortgage and pocket the excess funds in cash. One of the perks of a cash-out refinance is that it doesn’t add an extra monthly payment. It is more of a replacement of the old mortgage, which comes with an additional lump sum of money you can use for home renovations or other projects you have been planning on. Let’s use this example; you bought your home for $200,000, and so far, you have managed to pay $80,000. That means you still owe $120,000. With cash-out refinance, you can get a bigger loan of $150,000. From this amount, the $120,000 will refinance the mortgage, and you will get $30,000 in cash after closing. You can get a cash-out to refinance of up to $200,000 for the same home or even more if the property values have increased. However, mortgage lenders often require you to put up some equity, and therefore, you may not get to cash out the entire equity.The Requirements for Cash-out Refinance
Even though these requirements vary from one lender to another, there are certain aspects that you have to meet to qualify for a cash-out refinance. They include;- Debt-To-Income Ratio – This is what lenders use to determine risk. A DTI is the percentage of your income used to pay off debts. Low DTIs are more attractive to mortgage lenders. The highest DTI for cash-out refinances usually doesn’t exceed 45%.
- Credit Score – Having a good credit score will always open your doors to more financial opportunities. In this case, a good credit score will qualify you for a cash-out refinance.
- Home Equity – This is a must-have requirement. When it comes to cash-out refinances, homeowners often borrow from their equity. Therefore, the more equity you build, the more funds you can access through this type of mortgage.
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