Cash-out refinances are popular because they allow a homeowner to turn the equity in their mortgage into cash that can then be used however they want – that could involve paying down debts, investing in new properties, making home improvements, or even making a large purchase; there are no rules on the proceeds from a cash-out.
Understanding the Parts of a Cash-Out Refinance
A cash-out comes with standard fees and credit requirements like a refinance, dependent on a customer’s unique qualifications:
- Greater than 620 credit score
- LTV values up to 80%
- Have owned the home for at least 6 months
The type of mortgage being refinanced will also make a difference:
- Conventional and FHA loans will be limited to 80% of the home’s value
- For VA loans, up to 100% can be used
Let’s imagine a scenario:
A homeowner’s initial mortgage was $500,000 – over time from their initial closing until now, they’ve paid the balance down to $200,000.
In a cash-out refinance, the homeowner can take out a new, higher loan – we’ll say at $250,000 – and then pocket the difference in cash – in this case, it would be $50,000.
The Popularity of Cash-Out Refinances is Understandable
There is currently an estimated $21.1 trillion in equity in homes across the U.S.1
Compare that against:
- S. credit card debt is estimated to be $841 billion dollars.2
- Student loans are estimated to be in excess of $1.75 trillion.3
Response to Lack of Inventory
Lack of new housing continues to affect the US economy, and the aftereffects of the COVID pandemic have acted in a multiplier effect with the associated slowdown of the supply chain so important to builders and developers as shown in a report by the Joint Center for Housing Studies of Harvard University, The State of the Nation’s Housing.4
In response, a cash-out refinance can be the perfect solution for homeowners who want a change of scenery but find it impractical to sell in the current environment. For example, the money taken out in a cash-out refinance can be used to make improvements on, add an extension to, or renovate a current home and ultimately add value or turn a property into a dream home designed to better fit their needs and sell for more in the future.
Using Lower Rates to Pay Off Higher Rates
Outside of putting cash directly into their pockets, homeowners also could explore a cash-out refinance to pay down a high-interest mortgage using the lower rate of the cash-out refinance.
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©2022 Newrez LLC, 1100 Virginia Dr., Ste. 125, Fort Washington, PA 19034. 1-888-673-5521. NMLS #3013 (www.nmlsconsumeraccess.org). For real estate and mortgage professionals only and not intended for distribution to consumers or other third parties.
By refinancing an existing loan, the total finance charges may be higher over the life of the loan. We may transfer your escrow account balance from your current loan to your new loan. If your current escrow amount is insufficient due to changes in taxes or insurance, we may require additional money when you close on your new loan.