Because of these downsides, taking a cash-out refinance loan is a good idea only if you’re 100% confident you can pay back what you borrow – and, ideally, if you’re not accessing the entirety of the equity you’ve built up in your home.
How Does a Cash-Out Refinance Work?
To obtain a cash-out refinance loan, you’ll need to be able to qualify for a new mortgage for the desired amount. The new mortgage needs to be big enough to pay off your old loan and give you the money you’re looking for to accomplish your other goals, such as making home improvements or paying for college.
You can apply for the new mortgage with your current lender or with a new lender. To qualify, you’ll generally need:
- A credit score of at least 620 to qualify for most mortgages, or at least 580 to qualify for a loan backed by a government program, such as an FHA loan.
- A home that appraises for at least as much as you want to borrow, and preferably 20% more than you hope to borrow.
- Proof of sufficient income to repay your new loan. Most lenders like to see that you’ve had a steady source of income for at least two years.
- A debt-to-income ratio of 43% or less, including your new mortgage payment. Debt-to-income ratio is calculated based on your payday Ohio Medina monthly debt payments (including student loans) relative to your monthly gross income. If you’ll have total debt costs of $2,000 per month after taking out a new mortgage and you have a $4,000 monthly income, you probably won’t qualify.
- A home with no tax liens on it.
You’ll need to shop around to find a lender with the best terms and then submit an application for the desired sum. After you apply:
- The lender will evaluate your credit, income, debts, and other financials.
- Your home will be appraised. The lender may also want an inspection to assess its condition and/or a survey to verify the land boundaries.
- The lender will let you know how much you can borrow and at what interest rate based on the value of your home and your financial situation.
- You’ll need to close on your mortgage loan, after which you will receive your loan proceeds. Your existing mortgage loan will be paid off from the proceeds before you’re given the remainder of the money.
There will likely be fees charged during this process, including an appraisal fee, a mortgage application fee, fees to obtain your credit report, and other miscellaneous closing costs depending on your lender and where you live.
Cash-Out Refinance Rates
The interest rate you’re assigned on a mortgage refinance loan will vary based on your Zip code, the amount you borrow relative to what your home is worth (your loan-to-value ratio), your credit score, and other factors.
Current mortgage rates for a 30-year fixed-rate loan are around 4.207% . For a 15-year fixed-rate loan, rates are around 3.661%. Rates are lower for jumbo loans, which are loans exceeding Fannie Mae and Freddie Mac loan limits for your geographic area.
Once you have an idea of the types of rates you could qualify for, you can use our cash-out refi calculator to estimate how much you could get.
A home equity loan also allows you to access the equity in your home, but these loans work differently. You don’t pay off your existing loan with a home equity loan; instead, you take out a second mortgage that’s secured by some of the equity in your home.
