It's not uncommon for homeowners to seek a home equity loan in order to make home improvements. However, the equity from a cash-out home loan can be used for more than just home improvements. The home's equity can be used to consolidate debt, as investment capital, for personal or family recreation, or just to have more liquid assets available while capitalizing on low mortgage rates. Here are a few things you need to know about cash-out mortgage refinancing.
The home equity loan process is relatively straightforward. But, there are certain criteria that you'll need to satisfy before you start the home loan. For example, you'll typically need a credit score that is at least 620 or higher. Otherwise, it's highly likely that your application will not be approved. Applicants are also required to have a debt-to-income ratio of less than 50%. In order to calculate this value, you will simply add up all of your monthly financial obligations and divide this number by your monthly income. The lower this percentage is, the better chance you have of securing financing. Finally, it's recommended that you have a significant amount of equity in your home. If you satisfy all of the above criteria, you will then simply need to determine how much cash you need.
The best way to do so is to get a handful of estimates from the contractors you plan on hiring for your renovations or repairs. If you're refinancing for another reason, do your best to calculate the amount that would satisfy your financial needs. Afterward, all you have to do is apply. Keep in mind that your lender will likely ask for certain documents, such as proof of income.
The amount of cash you can receive through this type of refinancing will typically depend on the overall value of your home. To help pinpoint this number, you'll need to have your home appraised by a professional.
Additionally, most lenders won't let you borrow more than 80% of your home's total value. An exception to this rule is if you qualify for a VA loan, at which you can finance 100% of your home's value.
Like you might guess, cash-out mortgage refinances can provide a handful of notable benefits. As previously mentioned, many homeowners pursue this financing option in order to fund improvements or repairs. Your options don't end here, though — debt consolidation is another popular option. It allows homeowners to pay off any outstanding debt that they have and instead focus on a single payment. There's a strong chance the interest rate of your cash out home loan will be lower than that of your other debt, as well. Of course, this type of refinancing can also be used to give you a bit more financial freedom. In this scenario, many people choose to prioritize investing so that they can plan for their retirement. Regardless of why you choose to refinance your home, it will likely be a highly beneficial experience as long as you work with a reputable lender.
Although cash-out refinancing comes with plenty of opportunities, you need to keep certain information in mind before you move forward with the home loan process. This will ensure that everything goes as smoothly as possible.
Before you refinance, it's essential that you're aware of the closing costs. As a homeowner, you should already be familiar with these. For this reason, it's not recommended to refinance for a small amount. Otherwise, the closing costs will likely outweigh any financial benefits you would experience. Closing costs also typically vary between lenders, so be sure to shop around for the best mortgage rate available.
Your lender will usually require a property appraisal to determine your property's value and calculate your Loan-to-Value ratio (LTV). This occurs during the loan processing and underwriting period. After your mortgage loan is clear-to-close and your Closing Disclsoure is balanced, you are able to sign your final loan documents with your title company's escrow agent. As a result of the Truth in Lending Act, the lender you work with is legally required to allow 72 hours after closing for you to decide whether or not you want to cancel the loan. Afterward, your title company will either overnight a check in the amount of the equity requested, or you can request a direct wire transfer into your account. Be sure to check your your title's escrow agent for the specific instructions.
When you refinance, you pay off your existing home loan and replace it with a new mortgage loan entirely. So, there's a strong chance that the terms of the new loan will differ from the terms of your current loan. In many cases, this doesn't prove to be an issue. But, you could experience discrepancies in things like your monthly payment and repayment duration. Similarly, your interest rate may change when you refinance. To avoid any surprises, it's best to thoroughly review your loan terms with your licensed loan officer. Otherwise, you might find yourself in a situation where it's difficult for you to accommodate your loan obligations.
It might sound complicated, but it's likely easier than you anticipate. Your main concern should be finding a lender that offers an interest rate you can handle. A high retail mortgage rate can easily nullify the financial benefits that come with a cash-out refinance. Working with a local mortgage broker can help you to get below market mortgage rates. Some lenders have added overlays that can impact your loan qualification, and can even reduce your chance of loan approval. Be sure to ask your lender what overlays will apply to your loan scenario. You'll want to review the proposed terms for the loan and make sure that everything is in order. Even if your interest rate and repayment plan look solid, it's recommended that you work with the lender you're comfortable communicating with. If they tend to avoid certain questions or don't prioritize getting in touch with you, it's best to look elsewhere.
So, it's important to keep the above utility in mind. From here, you'll be able to take full advantage of cash-out mortgage refinancing and invest in the overall value of your home (and future).
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