Cash-out refinance from mortgage lenders enables you to take a new mortgage for more than what you owe on your current one. You can keep the difference in cash. However, the amount that you qualify on depends on several actors and parts of the equity you have in your home. You can use this money for home improvements r consolidate the high-interest debts and pay for other needs. However, in certain cases, cash-out refinance may not always be the best option.
In this article, you will get all the information you need about cash-out refinance, how it works when you must consider getting one, and so on. Keep reading till the end to find out.
What is Cash-Out Refinance?
A cash-out refinance from Texas Mortgage Lenders is a way to replace the current mortgage with a new one with new rates and terms. You can also get an additional lump sum of money in the process. Essentially, it means taking out a new loan for more than the current mortgage balance. With this new loan, you can replace your existing one and receive the difference between the old and the new one in cash.
With conventional or FHA loans, you can get a mortgage to refinance of up to 80% of the home’s value and for VA Loans, it can be 100%
How does Cash-Out Refinance Work?
A traditional mortgage refinances and cash-out refinance, both involve taking a new loan to pay off an existing one. When you take a traditional refinance, you generally borrow the same amount of money as the current loan and get it for a lower interest rate and different terms.
The interest rate and term can also change with a cash-out refinance. However, the idea here is to borrow more sum of money than what you owe currently and use the extra cash for other things. If you are looking to lower the interest rate, a traditional mortgage refinance from local mortgage lenders can be a better option as it has lower interest rates than a cash-out refinance.
Cash-out refinances can be a great option if you have already built up the equity in your home and are already planning to refinance your home loans. It simply means taking another larger loan to pay off your existing one and using the extra money borrowed in cash. The maximum you can get is 80% of the loan to value ratio. So, let’s say that your home costs $100,000 and so you can borrow $80,000.
In order to qualify for a cash-out refinance, you need to get your home appraised. This appraisal value will impact how much money you can borrow as it will determine the home’s value for the loan to value ratio.
What do I Need to Qualify for Cash-Out Refinance?
Every lender in Texas has its own requirements for qualifying for a mortgage refinance. However, some common criteria for conventional cash-out refinances are as follows -
- 620 credit score (you may get a better rate with a higher credit score)
- A debt to income ratio or DTI of 50% or less
- A maximum LTV or Loan to value ratio of 80% means 20% home equity after taking out cash
- Lenders will also need payment documentation, income evidence, and recent home appraisal that should be within the last 90 days
Before you consider a mortgage refinance of any kind, the homeowner must make 6 consecutive payments to their original loan. For a cash-out refinance on FHA Loans, you need to live in the house for a minimum of one year.
Pros of Cash-Out Refinance
If you have successfully accumulated your home equity, then cash-out refinance can be a better option for you. Here are some scenarios when cash-out refinance can be a good option for you -
Pay for higher education
If you have a child who will be going to college soon, using a cash-out refinance can be a great way to fund their education instead of taking student loans that have higher interest rates.
Consolidate higher-interest debts
Potential good use of the cash-out refinance can be to consolidate the high-interest debts like personal loans or credit card loans. There is also a potential tax benefit because mortgage interest can be tax-deductible while the interest on personal loans and credit cards and auto loans is generally not. However, it is important to look at the financing costs and not just the interest rates. Cash-out refinances may not make sense for longer-term or closing costs.
Make home improvements or repairs
Using the cash money to remodel or renovate a part of your house can significantly increase its value. However, relying on cash-out refinance as a quick fix during a home emergency is not ideal as home renovations or home improvements can take months to complete.
Cons of a Cash-Out Refinance
While there can be several reasons for you to go for a cash-out refinance, it may not always be the right choice for you. Here’s why
You will have to pay the closing costs
Just like other types of mortgage refinances, cash-out refinances will require you to pay for the closing costs. These can vary and depend on the new loan’s balance and can add up to 100s or even 1000s of dollars.
Your monthly payment will be higher
Based on the term you choose and the rate you qualify for, your monthly payment will be higher as you will be taking out a new mortgage for a larger sum than your existing one. However, you need to make sure that these payments fit in your budget so that you do not face a situation of missed mortgage payments.
You may end up with a higher interest rate
Refinancing can change your mortgage terms and that includes your interest rates. Thus, you may end up having a higher mortgage rate. It is important to ask yourself if it is worth the access to cash and lose out on the low rate.
The Bottom Line
Whether you wish to pay off your debt or renovate your kitchen, cash-out refinance serves as a powerful tool and can give you the finance that you need to achieve your goals. If you have certain doubts about whether or not cash-out refinance is right for you, you can get in touch with Mortgage Lenders in Texas and explore your options!
