There are many homeowners that are refinancing or thinking about it. Many of those are looking at pulling money out of their home – a cash out refinance. With rates where they are, it may be a great time to lower your interest rate and take some of the equity out of your home and turn it into cash! You can refinance with conventional, FHA or VA loans.
There are a things you need to be aware of when it comes to cash out refinances. Cash out refinances are usually a bit higher than a rate/term refinance. Your rate will depend on your credit scores and your loan to value. With conventional and FHA loans, you are limited to a loan amount up to 80% of the appraised loan value. You can use the cash you get from a refinance for anything you want. You may need to write a letter explaining what you plan to use the cash for, the reason behind that is to know if you plan to purchase something like a new home – that would mean we need to verify the taxes and insurance for the new property.
A conventional cash out refinance allows you to take up to 80% of the appraised value. So you will get an appraisal (unless you get a property waiver and don’t need an appraisal – that can save you over $500 in closing costs!), the mortgage can be 80% of the value. For example if your home appraises for $400,000, your maximum mortgage will be $320,000. From that amount, you will need to pay off your current mortgage and your closing costs, you get the remainder as cash to do what you want to!
FHA changed their rules recently and now they only allow 80% of the appraised value, they used to allow up to 85%.
VA allows you to finance up to 100% of the home’s value but many lenders cap it at 90%.
Both VA and FHA have upfront fees (VA funding fee or FHA’s up front mortgage insurance) can be financed into the loan.
What are some thoughts for using the equity in your home for? Maybe debt consolidation, it can be a great time to pay off the home equity loan you have. If you have a HELOC it will have an adjustable rate loan, with rates so low, it could be a great time to pay off that HELOC and get a fixed rate loan. If you are thinking about any home improvements, it may be a great time to refinance to pull cash out to pay for the improvements.
When is a cash out refinance a bad idea? If you are thinking about selling your home, remember a refinance will take up some of the equity you need for the home you plan to buy. You can only pull up to 80% of the value – sometimes people think they can go higher, so keep that in mind.
If you aren’t sure if it’s a good idea for you, talk to your loan officer. There are times I tell people not to refinance – it depends on their situation. Sometimes it is a great idea, other times it may not be. I will let you know what works for you and the reason behind my decision!
Leslie Vanderwerf, NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website
