Because today’s housing market is so competitive, many homebuyers are waiving inspections to appeal to sellers and expedite the buying process. This means that within a few months of buying their new home, owners might find issues with the property that need to be addressed as soon as possible.
After making a down payment and paying for closing costs, these new homeowners may lack the liquid capital to fund the necessary fixes. However, they may still be able to apply for a cash-out refinance, or cash-out refi, to fund those necessary fixes.
Here’s everything you need to know about how cash-out refinances work and how to determine whether it’s the best option for funding your urgent home improvement projects.
What Is A Cash-Out Refinance?
A cash-out refinance is when a homeowner takes out a loan on their home that’s larger than what they owe on the mortgage. This larger loan replaces the existing mortgage, and at closing, you’ll receive the difference between the two loans — also known as home equity. The final tally ends up putting extra cash in your pocket.
The amount of money you walk away with after a cash-out refinance is dependent upon how much equity your home has accrued. Homeowners may use a cash-out refinance to consolidate debts, pay off student loans, go on vacation or make a large purchase. Another reason to take advantage of a cash-out refi is to make renovations or repairs to the home you’ve bought while enjoying a new, lower-interest mortgage rate.
Before you decide what to do with the money from a cash-out refi, it’s important to understand that some renovations will make a better return on investment than others. For example, while that home movie theater may look like a great option, an even better one might be to turn your attic into a bedroom to add a functional room, thereby increasing the home’s value.
Also, it’s important to note that by refinancing the existing loan, the total finance charges may be higher over the life of the loan. We may transfer your escrow account balance from your current loan to your new loan. If your current escrow amount is insufficient due to changes in taxes or insurance, we may require additional money when you close on your new loan.
How Soon Can I Do A Cash-Out Refi?
Generally, if you have a mortgage, most lenders will advise you to wait at least six months after the first closing to do a cash-out refi. Additionally, if you have a VA (U.S. Department of Veterans Affairs) loan, you’ll need to have made at least six consecutive payments on the home before applying. You also need to ensure you have enough cash to take out on the loan — meaning that your home has accrued enough equity to qualify for a cash-out refi. This will depend on how much you have paid down on the home. You may have enough if you made a large down payment or have owned the home for a significant length of time.
In a less-common scenario, if you paid for your house with cash, you can use delayed financing for a cash-out refi. With delayed financing, there’s no need to wait to put in a request for a cash-out refinance. Homeowners may use delayed financing to get a return on their purchase price immediately after buying a home.
How Much Money Can I Get In A Cash-Out Refi?
How much money homeowners can receive in a cash-out refinance usually depends on a few factors, including credit history, loan type and the lender. In general, however, most lenders require you to keep at least 20 percent equity in the home, meaning you can cash out a maximum of 80 percent equity. If you have a VA mortgage, on the other hand, a VA cash-out refi may allow you to cash out 100 percent of the home’s equity. You can use a handy tool such as Newrez’s mortgage refinance calculator to see what a cash-out refi would entail for your particular situation.
Pros And Cons Of Cash-Out Refinancing
As with any financial decision, there are a variety of advantages and disadvantages to cash-out refinancing. Here are a few pros and cons to consider:
- The cash-out refi process is often cheaper than opening a credit card or taking out a personal loan, helping you pay off costly home repairs faster.
- A cash-out refi streamlines homeowners’ access to more funds to put back into the home for repairs and renovations.
- There are no limitations on how you can use your cash-out refinance. You may take a much-needed vacation, make a dent in student loan debt or pay for your child’s education out of pocket.
- A cash-out refi can even help you build up your credit score, as you’ll have the ability to pay off credit cards or other debts impacting your credit.
- A cash-out refi can improve your interest rates depending on your original mortgage rate.
- As a cash-out refi is a loan, you’ll have to pay for appraisals and closing costs, usually between 2 percent and 5 percent of the money you’ll cash out.
- You face a greater risk of foreclosure if you can’t make your new mortgage payment.
- You won’t have the funds immediately after you apply for the cash-out refi loan. You’ll have to go through the underwriting and approval process, which can take a considerable amount of time.
- Depending on your loan and lender, there’s a chance you could have less advantageous terms from a cash-out refi than you did with your previous mortgage.
If you’re wondering whether a cash-out refi will be beneficial to your financial situation, talk to a Newrez loan adviser for guidance.
How To Prepare For A Cash-Out Refinance
If you decide a cash-out refi is the right choice for your situation, take the following steps to make sure you are prepared for the process.
Ensure You Meet Lender Standards
Every lender may have different expectations; however, most will require that you meet a minimum credit score as well as a maximum debt-to-income (DTI) ratio and a maximum loan-to-value (LTV) ratio. Generally speaking, a higher credit score and lower DTI and LTV ratios indicate a higher chance of approval for your desired cash-out refi.
Calculate The Exact Amount You Need To Cash Out
While it may be tempting to apply for the maximum amount from a cash-out refi, it’s better to examine your situation and determine the exact amount you’ll need for a renovation or debt consolidation.
Gather All Necessary Documentation
Lenders will require certain documents, including supporting financial information related to your income, assets and debts. Once you’ve gathered all the necessary paperwork, the trusted advisers at Newrez can help you apply for a cash-out refinance.
Newrez loan advisers can help you navigate the cash-out refi process and determine if it’s right for you. With step-by-step guidance, you’ll find out exactly what’s required to receive the optimal cash-out refinance loan for your personal situation. Contact a home loan adviser to get started today.
Make a smart move for your future and refinance with Newrez today. Call 844-979-1707 to connect with a Newrez loan adviser.
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