Have you ever found yourself a little deeper in debt than you had planned? Over-extended on your line of credit? Did some recent, unexpected bills pop up and knock you for a financial loop?
These problems are more common than any of us want to admit. But, what if there was a way you could remedy those situations? With a cash-out refinance loan you can turn your home equity into cash and get your budget back on track
what a cash-out refi is
In simple terms, a cash-out refinance is a lending option when your home is worth more than what you owe on your mortgage. Unlike a second mortgage, you are not adding another monthly payment, rather, you are trading your old mortgage for a new, higher loan and you get back the difference between the two in cash.
When a borrower gets a cash-out refinance, they get a new mortgage for more than what they owe on their current mortgage. How much a borrower gets back in a cash-out refinance depends on the amount of home equity they have, or what the house is worth compared to how much is owed on the current mortgage.
how a cash-out refinance works
Like any other mortgage loan, a borrower needs to meet certain criteria set by their lender to qualify for a cash-out refinance. Lenders set a home equity minimum, creating a baseline for home market value they will accept during the cash-out refi application process.
Along with the home equity minimum, a lender will evaluate the borrower’s debt-to-income ratio (DTI) to determine if the borrower can afford the new monthly mortgage amount. Then, the lender verifies the borrower’s cash-out refi eligibility by assessing their loan-to-value ratio.
Here’s a scenario to give you a hypothetical glimpse at how a cash-out refinance can work.
Several years ago, John secured a home loan for $200,000 on a $300,000 house. Now, after making regular loan payments, John still owes $100,000 on the mortgage. But here’s the even better news, thanks to real estate home value increases, his home is now worth $350,000.
Through the combination of paying down his mortgage and his home increasing in value, he has built up $250,000 in home equity which he would like to tap into. If John gets a $150,000 cash-out refinance, John replaces his current mortgage with a new $250,000 one and receives $150,000 back in cash to use however he wants.
what you can use your cash-out for
A cash-out refinance gives you the freedom to spend your home equity however you want. Some popular options include:
- Paying for education or tuition costs
- Covering medical bills
- Renovating your home
- Going on a vacation
- Paying down debt and other loans
Connect with your PrimeLending loan officer to learn how a cash-out refinance could help you.