Cash-Out Refinance

Is a Cash-Out Refinance Worth It?

Cash-Out Refinancing your home or property has more benefits than you realize. This type of refinancing is something you will often hear within the field of real estate and is something you should know about when taking out a loan or mortgage. Let’s look into what a Cash-Out Refinance is and if it is really worth doing. 

While paying your mortgage, you increase your equity in the home or property. A Cash-Out Refinance is a great option to reap the benefits of this equity, in a refinancing fashion. 

What is a Cash-Out Refinance? How Does it Work?

A Cash-Out Refinance is a refinancing option that replaces your current loan or mortgage with a larger one. However, the difference between these two amounts is then given to the borrower in cash. The difference that is paid in cash, can be applied to nearly anything: home renovations, college tuition, consolidating debt, etc. 

Cash-Out Refinancing works virtually the same as any other refinancing option, with the exception of a major focus on the equity you hold. Most lenders will lend up to 80% loan-to-value ratio, which is typically lower than the LTV ratio a traditional refinance would offer. 

For example, if you have a mortgage on a property valued at $500,000 and you have a remaining balance on that mortgage of $300,000 – at an 80% LTV rate, the refinanced mortgage would be $400,000. Therefore, the borrower would receive $100,000 in cash, as the $300,000 would be applied to the remaining balance. This scenario disregards additional closing costs, fees, etc.

Requirements to a Cash-Out Refinance

As stated before, a Cash Out Refinance is no different than most refinance options, and this includes the requirements to be approved for one. This being said, requirements can vary from lender to lender and some may have higher or lower expectations. It is found that some lenders look for a minimum of a 620 credit score and offer a lower LTV ratio to ensure the ability of repayment from the borrower. 

An additional piece of information that the lender may require is a letter-of-intent, or a “cash out letter” that provides the lender with your intent and purpose for the cash that you will receive upon approval for this refinance option. 

It is to be noted that Cash Out Refinance lenders will almost never approve an appraisal waiver and favor a low debt-to-income ratio. 

Is a Cash-Out Refinance Worth It?

The best two options for going with a Cash Out Refinance is if interest rates have lowered and if you need the finances to consolidate your debt. 

Interest rates fluctuate, and if they go well below the rate that your loan or mortgage is in term for, then a Cash-Out Refinance may be a great avenue for you to refinance at a lower rate with better terms. Additionally, if using a Cash-Out refinance to assist in paying off large amounts of debt can drastically lower your monthly payments and improve your credit, then, once again, a Cash-Out Refinance is a good option for you. 

Cash-Out Refinances also can be the route you go to get the finances you need for a goal you have in mind. Whether that goal may be major home renovations, paying for education, or further investment, Cash-Out Refinancing can get you there!

On the flip side, going into a Cash-Out Refinance at the wrong time and without proper due diligence, you can unintentionally put yourself in a worse-off situation. If you go into a Cash-Out Refinance when interest rates rise, you may be paying a higher monthly payment and if your home value decreases, then you may end up owing more than your property is actually worth. Lastly, defaulting on a Cash-Out Refinance can put your property at risk. 

Final Thoughts

If used in a purposeful way, with correct research and planning, a Cash-Out Refinance can be a great option. If you are considering a Cash-Out Refinance, click or call today to see if you qualify and to speak with one of our expert loan officers. 

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Ryan Thaler

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