Cash in on your home’s equity

The amount of cash you can get from a cash out refinance depends on the value of your home’s equity and the refinance’s loan-to-value ratio (which is often 80%). Take a look at this sample calculation:

In this example, the maximum LTV is 80%. This means the new mortgage balance can be no more than 80% of the value of the home which in this case is $220,000. Because the homeowner in this example has a large amount of home equity, they may be able to refinance and get up to $95,000 in cash.

You can use the cash out refinance calculator on this page to estimate the amount of cash you might be able to get from your home’s equity.

Since the money from a cash out refinance is a loan, you do not have to pay income taxes on it. Getting a cash out refinance may benefit your tax deductions at the end of the year. Consult a tax advisor about the deductibility of mortgage interest. Learn more about the tax implications of cash out refinances.

Rates for cash out refinances can be higher than the rates for refinances where you don’t borrow cash from the value of your home’s equity. The cash out refinance mortgage rate you may be offered can be higher or lower than rates you see advertised. Your credit score, income, finances, mortgage terms, and other factors affect the rate lenders may offer you.

At Freedom Mortgage, cash out refinances take 60 days on average from application to closing. You generally receive your cash within 5 days of closing.

• 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.

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 $89,000.

• 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.

Lenders typically want you to keep at least 20% equity in your home after a cash out refinance. As a result, the amount of your home equity should be significantly higher than 20% to make a cash out refinance worthwhile.

Yes, you can get a cash out refinance with bad credit. At Freedom Mortgage we can accept a minimum credit score of 550 for VA and FHA cash out refinances and 620 for conventional cash out refinances. Learn more about cash out refinance credit scores and our tips for improving your credit.

Yes, you can get a cash out refinance after forbearance if you’ve completed your forbearance plan and then meet other criteria. For FHA cash out refinancing you will need to make at least 12 consecutive on-time payments after completing the forbearance plan to qualify for cash out refinancing. For other types of loans, it is often after making 3 to 6 consecutive payments.

Yes, a cash out refinance typically requires a title search. Title searches check if there are liens against the home (like from a home equity loan). A lender might be less likely to approve a cash out refinance on a home if there are liens present. Liens may also reduce the amount of home equity you can borrow against.

Yes, cash out refinance requirements are different in Texas. For example, you must keep at least 20% equity in your home after you’ve closed your cash out refinance. You should also have owned the property for at least six months.

A cash out refinance purpose letter is also called a letter of explanation and can help your lender better understand why you want a cash out refinance and explain what you’ll do with the money you receive. A purpose letter may also go into more detail about information a lender could miss by just looking at your application, like gaps in employment or credit score fluctuations.