- Substantial home equity requirement
To get a cash out refinance, you need a substantial amount of home equity. You typically build equity in your home by paying down your mortgage principal or when the value of your home increases. To estimate your home’s equity, take the current value of your home and subtract from it the amount of your mortgage principal. For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.
- An acceptable loan-to-value ratio (LTV) requirement
Your loan-to-value ratio plays an important role in determining how much money you can borrow with a cash out refinance. Loan-to-value ratio is the percentage you get when you divide your mortgage amount by the value of your home. For example, if your home is currently worth $250,000 and you owe $150,000 on your mortgage then your LTV is 60%. ($150,000 ÷ $250,000 = 0.6 or 60%.) You typically can’t borrow the full amount of the equity in your home with conventional cash out refinances. You can only borrow a portion of it depending on the maximum loan-to-value ratio, which is often 80%. Look at this sample calculation.
|Current mortgage balance
|Sample maximum LTV
||0.8 or 80%
|Maximum new mortgage balance
||$220,000 ($275,000 x 0.8)
|Maximum cash available
||$95,000 ($220,000 - $125,000)
Remember you typically have to pay closing costs when you refinance. If you add these costs to your loan amount, they will reduce the amount you will be able to borrow. For example, pretend the loan calculation above comes with $6,000 in closing costs which you add to your mortgage principal. These costs will reduce the maximum cash available to $44,000.
- Good credit and finances requirement
You typically need a good credit score, income, and finances to get your application for a cash out refinance approved. Having a lower loan-to-value ratio can also help you get approved, because lenders often see homeowners with lower LTVs as desirable customers. Good credit, income, and finances might help you earn a lower interest rate too.
- Closing costs requirement
You will most likely need to pay closing costs when you get a cash out refinance. These can average between 2% and 6% of the full loan amount according to Forbes. This means you might pay between $4,000 and $12,000 in closing costs if your new loan amount is $200,000.
- Different requirements for investment houses
It’s possible to get cash from the equity in an investment or rental house. However, the requirements for these types of houses are different than the requirements for a house in which you live. Learn more about cash out refinances for investment and rental properties.