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Cash-Out Refinance

With cash-out refinance you can turn your home equity into cash to use where you need it most. You can go for a new mortgage with balance more than your previous mortgage. The difference is paid to you in cash. This may be the perfect opportunity to have some home improvements, pay tuition, consolidate debt, or pay off high interest credit card debt.

However, one very important point to keep in mind is that typically you pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same.

How a Cash-Out Refinance Works

To qualify for a cash-out refinance, you typically need more than 20% equity in your home, although this number may vary by lender. How much you get is based on many factors including property’s loan-to-value (LTV) ratio and your credit profile. The process varies a little from lender to lender but once approved, borrower gets a new loan that pays off their previous loan. A new monthly installment plan is formulated. The amount above and beyond the mortgage payoff is then issued in cash.

With cash-out refinace, lender is taking great risk because there is less equity in home. This may result in higher fees, closing costs and/or higher interest rates than a standard refinance. However, borrowers with specialty mortgages like (VA) loans, including cash-out loans, can often be refinanced through more favorable terms with lower fees and rates than non-VA loans.

Typical Requirements Set By Lenders

These vary from lender to lender but in general, this is how they look:

  • Need a good credit score, e.g. a credit score of at least 620.
  • Debt-to-income ratio should be less than 50%
  • At least 30% of the equity in your home.
  • No late payments on your mortgage within the last one year.
  • Available only for the primary residence.

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