For many homeowners, home equity is their most valuable asset.
If you’ve owned a home these past few years, you’ve seen your equity grow substantially. According to a recent CoreLogic Homeowner Equity Insights report, homeowners with mortgages have seen their equity increase by $3.6 trillion since the second quarter of 2021. That gives the average borrower almost $300,000 in equity reserves.
If you’re cash-strapped and looking for ways to gain money, tapping into this reserve and unlocking the cash you need can be possible with a home refinance with cash out. It gives you a chance to get the funds you need without having to sell your home.
What Is a Home Refinance With Cash Out?
Homeowners refinance their homes for a variety of reasons:
- Lower the monthly payment
- Lower the interest rate
- Change the terms of the loan
- Pay off the loan faster
But sometimes, it’s not just about the loan. With a cash-out refinance, you refinance your primary mortgage with the intent of removing some of the built-up equity and pocketing the cash.
Common Uses for a Home Refinance With Cash Out
When you’ve built up enough equity in your home, a cash-out refinance can give you access to funds if and when you need them. It’s essential that you put these funds to good use. The most common reasons people initiate a cash-out refinance are to:
- Pay for a home remodel: Major home improvement projects can require a substantial investment, money you might not have lying around. Cashing out built-up equity helps you invest back into your home. Average kitchen renovations can start at $10,000; increase it to high-end gourmet kitchens, and it can easily top $60,000. By utilizing your equity for an upgrade, you’re maintaining the quality of your home.
- Consolidate high-interest debt: Debt consolidation can give you a fresh start. In this case, you use the equity you’ve built up in your home to pay off high credit card balances or other high-interest debt. Provided you don’t run up the debt again, it gives you an easy way to bring everything under one payment and gives you a way to start rebuilding your credit history.
- Restructure your financial goals: Depending on when you first purchased your home, your lifestyle and plans may have changed. Cash-out refinancing gives you a chance to create a new home loan that better suits your needs. Restructure your financial situation. Switch from an FHA loan to a conventional one. Change an adjustable-interest loan to one with fixed rates. If you initially took out a conventional loan with private mortgage insurance (PMI) attached, refinancing can restructure the loan into one without, providing you have 20 percent equity in place.
Are You Eligible for a Home Refinance With Cash Out?
If you have built up enough equity in your property and are in need of cash, you may be eligible for a cash-out refinance.
- Do you qualify: You will need to qualify for a new home loan. Because the amount will be higher than your current principal balance, you’ll have to qualify under current guidelines. A cash-out refinance combines your existing balance with the amount you’re borrowing from your equity and uses that as your new loan amount.
- Amount of home equity: Generally, a mortgage lender will require you to leave 20 percent equity in your home after a cash-out refinance. This means when the property is appraised, it will be valued at least 20 percent more than what you owe.
- Credit score: You’ll go through many of the same steps as when you first applied for a home loan. That includes a credit check, which ensures your FICO score is at least 620. There may be some flexibility here depending on the strength of your financial records. However, a higher credit score will help your situation and provide you with the lowest interest rate, so it’s something to strive for before you apply.
- Loan-to-value ratio: Lenders also look carefully at your loan-to-value ratio. This is your new loan amount divided by the current appraised home value. The new loan is calculated by adding your current mortgage amount plus the cash-out payment you’re asking for. Most lenders want this ratio to be at least 80 percent, though some will require 75 percent or less. You’ll never be able to cash out the entire value of your home.
- Income verification: Your lender will also need proof of employment and income. You’ll need a steady income to cover your new monthly mortgage. Stable employment situations can impact your mortgage interest rate as well.
Benefits of a Home Refinance With Cash Out
A cash-out refinance is a good strategy if you need cash and can benefit from new mortgage terms. If you gain a better interest rate, it stays similar to your current rate, or your loan payment changes significantly, it’s worth considering.
Homeowners often look to cash-out refinances because they can use the funds for any reason. Though debt consolidation and home improvement projects top the list, they aren’t required. Some find they want to use the funds for things like setting up an emergency fund, paying for education expenses, or even investing in other opportunities.
Want to shorten the term of your loan? This may be a retirement strategy. Move from a 30-year to a 15-year to pay off the loan faster. And with substantial equity already in place, you can further benefit from cashing out and using the money for other purposes.
While cash-out refinances are great when interest rates are similar to what you have in place, you may benefit from other refinancing options, such as a home equity loan or HELOC, if they are substantially higher.
The most efficient way to determine what best suits your needs is to start a conversation with a lender. They can help you assess your situation and make your best choice. Located in Washington State? Reach out to the home loan experts at Solarity Credit Union today to discuss a home refinance with cash out.