Cash-Out Refinance
Owning your own home is an important investment — one that helps build equity. Luckily, you don’t have to wait until your mortgage is paid off to access your home’s equity. You can turn the equity you’ve built into cash with a cash-out refinance loan.
A cash-out refinance loan is a new mortgage that replaces your current mortgage and gives you cash at closing. This cash can be used for any purpose you choose, such as home repairs, paying off high-interest debt, or investing in other property.
What is a Cash-Out Refinance Loan?
A cash-out refinance loan is a type of mortgage that allows homeowners to cash in on the equity they’ve built in their homes. Essentially, you’re taking out a new mortgage with a higher amount to replace your current one and receiving cash for the difference at closing.
This cash can be used for any purpose you choose, such as home repairs or improvements, paying off high-interest debt, or investing in other property. A cash-out refinance loan is a great way to borrow cash from your home without taking out a second mortgage or HELOC (home equity line of credit).
There are a handful of options when choosing to finance, whether you’re looking to cover expenses, pay down high-interest debt, pay student loans, or other needs. However, personal loans may not offer the most affordable terms. Cash-out refinance loans have better terms because they’re secured by the value of your home.
Whether the original loan you bought your house with is conventional, FHA, or VA, you may qualify for a cash-out refinance.
The qualification process is similar to qualifying for a conventional purchase loan. You need to meet standards set by government-sponsored Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation). With these standards come flexible refinancing options.
Home Equity Loan vs. HELOC vs. Cash-Out Refinance
If you’re considering using the equity in your Texas home, a home equity loan and a home equity line of credit (HELOC) are two different options to compare with a cash-out refinance. If you have an existing first mortgage, a home equity loan or HELOC generally adds a separate lien or credit line, while a cash-out refinance replaces your existing mortgage. The right option depends on how much you need, when you need it, and whether you prefer a lump sum or ongoing access to funds.
Home Equity Loan
A home equity loan generally provides a lump sum that you repay over a set schedule. It may fit a homeowner with a defined, one-time expense who values a predictable payment. Your home secures the loan, and approval, terms, fees, and available amount depend on your application and property.
HELOC
A HELOC generally provides a revolving line of credit that lets you draw funds as needed, up to an approved limit, during the applicable access period. It may fit a homeowner whose expenses will occur over time. Payments and rates can vary by program, and the line is secured by your home.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new mortgage and may provide cash from available equity at closing. It may be worth comparing when you want to review your overall mortgage structure, not just add a separate line of credit. Replacing an existing loan can change your interest rate, payment, term, and closing costs.
At a glance:
- Home equity loan: typically a lump sum for a defined need, repaid on a set schedule.
- HELOC: typically ongoing access to funds up to an approved limit, with payments and rates that can vary by program.
- Cash-out refinance: a new mortgage that replaces the current mortgage and may provide cash at closing.
Texas home equity rules and product requirements can affect eligibility, costs, timing, and available options. Because these options use your home as collateral, failing to repay the loan or line of credit could result in foreclosure. We can help you compare a home equity loan, HELOC, or cash-out refinance based on your goals. Connect with us to discuss your situation. This information is for general education and is not a commitment to lend; all loans are subject to credit approval, property review, and applicable program requirements.
How to Get a Cash-Out Refinance Loan
To learn whether a cash-out refinance loan is the best option for reaching your financial goals, connect with us. To get you started, we’ve outlined the steps and documentation needed to help you understand what it takes to get approved for a cash-out refinance loan.
The Refinancing Process
Connect with us, and we’ll help you assess whether you’ll benefit from refinancing your current mortgage. For a cash-out refinance, we’ll consider your current interest rate, credit score, a home appraisal, and the amount of equity you have in the home.
We’re with you through each step leading to closing, where you can begin to make the most of your home’s equity with the cash you receive.
Cash-Out Refinance Loan Requirements to Meet
These are the common requirements often needed to qualify for a cash-out refinance loan. If you have questions about these requirements, we’re here to help.
- In most cases, it’s best to have a credit score of 620 or higher. With higher credit scores often comes better interest rates.
- Through underwriting evaluation, you’ll need documentation of consistent income with a Debt-to-Income ratio at or below 50%. This ratio shows how much of your monthly income goes to paying your debt.
- Along with income information you need to share employment verification and history.
- It helps to have a Loan-to-Value ratio of 80% or less, meaning you’ve paid 20% equity into the home. This is not always required, but it can eliminate Private Mortgage Insurance (PMI) and allow you to borrow the most cash.
Cash-Out Refinance Loan FAQs
Making the most of your home and your financial goals can greatly impact your life. It’s okay to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
A cash-out refinance loan is a type of refinancing that allows you to get cash back from your home equity.
Cash-out refinance loans can be a good option if you’re looking to access cash for any purpose, whether it’s to cover expenses, pay down debt, or make home improvements. They often have more affordable terms than other types of personal financing, making them a great way to save money on interest and cover other expenses.
With a rate-and-term refinance, you can potentially lower your interest rate or monthly payments, but you won’t receive any cash back. This may lower your monthly costs or allow you to pay off your mortgage faster, but you can’t use it to tackle any debt or borrow cash for other expenses.
The cash you receive from a cash-out refinance loan can be used for any purpose you choose.
Some common uses for the cash include paying off high-interest debt, making home improvements or repairs, investing in other property, and covering expenses like student loans or medical bills.
The cash you receive from a cash-out refinance loan is typically available in a lump sum as soon as your loan closes.
You’ll pay the money back over time through your new mortgage. You may be able to choose a repayment schedule that fits your needs, including choosing a longer-term length. As you repay the loan, you will rebuild equity in your home.
To qualify for a cash-out refinance, you’ll need to have at least 20% equity in your home.
This means that your home must be worth more than you owe on it. If you have less than 20% equity, you may still be able to qualify for a cash-out refinance, but you’ll likely have to pay for PMI (private mortgage insurance) with your new mortgage.
The interest rate on a cash-out refinance loan is usually lower than the interest rate on other types of financing, like personal loans or credit.
This is because cash-out refinance loans are secured by your home, which means there is less risk for the lender if you default on the loan.
A cash-out refinance goes through many of the same steps required to close a purchase loan. Similar to when you purchased your house, you will need another home appraisal for a cash-out refinance so that we can understand the current value of the house.
Once the value is determined, we can finalize the details of your loan to determine how much cash you can borrow with a cash-out refinance.
When you close your cash-out refinance, you’ll need to account for several costs. These can include fees for appraisal, origination, and title insurance. These typically range from 2-4% of your total loan amount.
You’ll also need to factor in the cost of any PMI points you choose to pay. All costs will be clearly outlined as your loan is processed and before you close.