If you’re considering a cash-out refinance, you’re likely in need of funds for a specific purpose. If you aren’t sure what that is, it can be helpful to nail that down so you borrow only as much as you need. For instance, if you plan to use the cash to consolidate debt, then gather your personal loan and credit card statements or information about other debt obligations, and add up what you owe. If the cash is to be used for renovations, consult with a few contractors to get estimates for both labor and materials ahead of time.
Once you’ve shopped around for a few lenders to ensure you get the best rate and terms, prepare all of your financial information related to your income, assets and debt for the application. Keep in mind you might need to submit additional documentation as the lender evaluates your application.
Considerations before cash-out refinancing
- You can’t tap 100 percent of your equity: Most lenders require you to maintain at least 20 percent equity in your home in a cash-out refinance. One exception is a VA cash-out refinance, which allows you to withdraw all of your equity.
- You could end up with a very different loan: Since you’re replacing your existing mortgage with a new loan, the terms of the loan could change. For instance, you might have a higher or lower interest rate (and monthly payments), or a longer or payday loans Texas shorter loan term.
- You’ll need to have your home appraised: Lenders typically require an appraisal for conventional cash-out refinances, since the amount you can borrow depends on how much equity you have.
- You’ll pay closing costs: Like with your first mortgage, cash-out refinances come with closing costs, which cover lender fees, the appraisal and other expenses. It’s important to consider what a cash-out refinance could cost you because the fees might not be worth it, especially if you’re not borrowing a large amount.
- The cash won’t land in your bank account right away: Lenders are required to give you three days after closing to back out of the refinance if you want to. For this reason, you’ll need to wait a few days before you receive the funds.
How much money can I get from a cash-out refinance?
While lenders typically allow homeowners to borrow up to 80 percent of the home’s value, the threshold can vary depending on your credit score and type of mortgage, as well as the type of property attached to the loan (for example, a single-family, duplex or three- or four-unit property). Lenders who offer loans insured by the Federal Housing Administration, or FHA, sometimes offer an FHA cash-out refinance that allows you to borrow as much as 85 percent of the value of your home. As noted, cash-out refinance loans guaranteed by the U.S. Department of Veterans Affairs (VA) are available for up to 100 percent of the home’s value.
What are the fees for a cash-out refinance?
Expect to pay about 3 to 5 percent of the new loan amount for closing costs to do a cash-out refinance. These closing costs can include lender origination fees and an appraisal fee to assess the home’s current value. Shop around with multiple lenders to ensure you’re getting the most competitive rates and terms.
You might be able to roll the loan costs into your new mortgage to avoid upfront closing costs, but you’ll likely pay a higher interest rate. Plus, taking out another 30-year loan or refinancing at a higher interest rate might mean you pay more in total interest. Crunch the numbers with Bankrate’s refinance calculator to gauge whether the math works in your favor.