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 to have the best chance for loan approval. Applicants are also required to have a DTI 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 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. Remember: it costs less to borrower more and payback any surplus than it does to request another cash-out loan. Check with your lender to ensure your loan does not have a pre-payment penalty of you decide to borrower more as a buffer. After you have decided on the amount of equity you need, all you have to do is complete the online mortgage application. Keep in mind that you are able to modify your loan amount throughout the mortgage loan process if your needs change.
The amount of cash you can receive through this type of refinancing will depend on the overall value of your home. To help pinpoint this number, your mortgage lender will typically require an appraisal of your home. Important: talk to your local mortgage loan officer prior to paying for an appraisal. 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. Check with your local loan officer for guidelines that are specific to your state and your personal mortgage loan qualifications.
Cash-out mortgage refinance loans 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. This federal registry allows consumers to research mortgage loan officers.
It is equally important to choose an experienced loan officer as it is to choose a reputable mortgage company!
Although cash-out refinancing comes with plenty of opportunities, you need to keep certain information such as closing costs, funding date, loan term, and lender overlays in mind before you move forward with the home loan process. Cash-out home loans have slightly different criteria than home purchase loans. Discuss your home loan goals and understand the loan options before completing your online mortgage application. This will ensure that everything goes as smoothly as possible.
Before you refinance, it's essential that you're aware of the mortgage loan’s closing costs. There are three very important things to understand. The first, the fees in Section A of the LE are the fees charged by the mortgage company. The figures in the remaining sections of the LE should be very similar from lender to lender. Variances from lender to lender on the initial LE should align with the final CD. Second, LLPA can affect your closing costs. Ask a loan officer about LLPA if you are concerned with your specific loan qualifications. Schedule an appointment with a local loan officer for more details. Third, escrow deposit, which includes property tax and homeowner insurance, is optional and should not be considered as a closing cost. Remember, if you have an escrow account with your current lender, that amount will be refunded to you after your current mortgage loan is replaced with the new mortgage loan. Most mortgage companies refund escrow balances within 6-8 weeks after your cash-out refinance has funded.
Closing costs vary between lenders, so be sure to shop around for the best mortgage rate available. Avoid mortgage companies that pay loan officer commissions. You will end up paying a higher rate or higher fees when the cost of commission is added to your mortgage loan.
After your mortgage loan is clear-to-close and your CD 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. Once the rescission period has passed and funding has occurred, your previous loan will be queued for payoff, your title work will be recorded with the new mortgage information, and your funds will be released. 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 title's escrow agent for the specific wire instructions. Congratulations, your home equity loan is finalized!
Very Important: always verify the accuracy of the wire instructions along with verifying the person giving you wire instructions prior to sending any funds by wire transfer!
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. For example, you may decide to extend your loan term back to 30-years to get the lowest possible payment. The loan amount will increase when you cash-out of your home’s equity. Similarly, your interest rate may change when you refinance. Discuss your proposed loan terms with a licensed loan officer to understand the benefits of the cash-out equity loan. Avoid any mortgage loan surprises and schedule an appointment with a local loan officer to review your loan options. Otherwise, you might find yourself in a situation where it's difficult for you to accommodate your mortgage loan obligations.
Request a free loan summary prior to allowing a credit report inquiry. It will help you when shopping for the best mortgage loan.
It might sound complicated, but a home equity loan is easier than you think. Your main concern should be finding a local mortgage lender that offers a competitive home loan rate. Remember, avoid retail mortgage rates. A retail mortgage rate can easily nullify the financial benefits that come with a cash out refinance, or can extend the breakeven timeframe. Working with a local mortgage broker can help you to get a below market mortgage rate. Local mortgage brokers can help you avoid underwriter overlays that could affect your loan approval. You will want to review the proposed terms for the loan and make sure that everything is in order prior to committing to a credit inquiry. 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.
Cash Out Home Equity Loan Overview