Cash-Out Refinance

A cash-out refinance is an option if your home is worth over 10 percent more than what you owe on the mortgage. The difference between your outstanding mortgage balance and the value of the home is called home equity. You can refinance to take some of the cash from equity. People do this typically when they need to pay for college, or pay off student debt, medical bills, or perhaps pay for a home renovation. A cash-out refinance may lower your mortgage rate, but it will extend the life of your loan because it will increase the outstanding balance or amount you owe.

Loan-to-Value

The lender will let you know how much money you can access by calculating your loan-to-value ratio or LTV. This is the difference between your mortgage amount and the appraised value of your home calculated as a percentage. If you owe $125,000 on a home that is currently worth $250,000, your LTV is 50 percent. In a cash-out refinance, you can take up to 80 percent of the home value minus the amount of money needed to pay off the old mortgage. Remember, you are getting a new mortgage with any refinance.

In the above example, you could borrow up to $75,000 in equity. In a cash-out refinance the money is paid to you at closing.

Consider Switching Loan Type

Your monthly mortgage payment will likely increase since you are borrowing more money, but it depends on your choices. A cash-out refinance pays off your old mortgage and gets you a new one, so you may want to switch to a different type of loan,

The rates for a cash-out refinance are a little higher than rates for a refinance with no cash out, but mortgage rates are typically lower than rates for other loans, so it can be a great way to finance a large expense.

Make Application

Applying for a cash-out refinance involves the same steps as applying for your initial mortgage EXCEPT the need to make a down payment. The lender will review

1. Your income, including your work history.
2. Your credit scores.
3. Your monthly debt-to-income ratio (including credit cards, car loans, student loans, child support), and,
4. Your total house payment which includes principal, interest, taxes, and insurance. If required, your total house payment would also include monthly mortgage insurance (PMI). More on your total house payment will follow.