If you have built up equity in your home, you can get a loan using your equity as collateral with cash-out refinancing or home equity loans.
But when is a cash-out refinance a good idea? And who’s eligible?
This article will take an in-depth look at cash-out refinancing, loan requirements, and guidelines.
Cash-Out Refinance Rates (October 2020)
30-year fixed-rate mortgage
15-year fixed-rate mortgage
5/1 adjustable-rate mortgage
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What is a Cash-Out Refinance?
A cash-out refinance replaces your current mortgage with a new loan up to 80% of the loan-to-value ratio (LTV). The difference in the existing principal balance and the new loan amount will be given to the borrower as cash.
How to Calculate the Max Loan Amount
Example: If your home’s market value is $200,000, and your current mortgage balance is $100,000 (50% LTV ratio). The maximum cash-out loan amount is $160,000 (80% LTV) $100,000 to pay off your current mortgage, allowing you to borrow up to $60,000.
Current Home Value
Current Loan Principle Balance
New Loan (max 80% market value)
Payoff Current Loan
Subtract Closing Costs
Max Cash-Out Amount
Cash-Out Refinance Requirements & Guidelines
Lenders consider your loan-to-value ratio, credit score, and the appraised value of the home when determining your loan eligibility. To be eligible, you need to have at least a 70% equity stake in your home, have no mortgage late payments in the past 12 months, and meet the minimum credit score requirement.
2020 Cash-Out Refinance Requirements
• 620 credit score
• No mortgage late payments in past 12 months
• At least 30% equity in the home
• 50% debt-to-income ratio
• Available for primary residence only
• Borrow up to 80% LTV ratio
- 620-640 minimum credit score
- No late mortgage payments in the past 12 months
- 36 month waiting period after a bankruptcy
A 620-640 score is the typical minimum credit score needed for a cash-out refinance. But your credit rating is not the only thing mortgage lenders look at when determining if you’re eligible.
Your entire credit history plays a role in qualifying for a loan. Negative accounts such as late payments or collection accounts could affect your ability to qualify even if you meet the minimum credit score requirement.
- Up to 50% DTI ratio
Your debt-to-income ratio (DTI ratio) is the percentage of your monthly income that goes towards your monthly debt obligations. It plays a big role in your eligibility and the loan amount you’re approved for.
- Borrow up to 80% LTV
You must have at least 30% equity in your home to be eligible for a cash-out refinance. You can borrow up to 80% of the home’s market value.
- Conventional loans
- FHA, VA, USDA loans
Using a cash-out refinance to tap into your home equity is not just for conventional loans. Government-backed mortgage programs such as FHA loans offer cash-out refinancing options.
Cash-out Refinance vs. Home Equity Loan
Cash-Out Refinance vs. Home Equity Loans vs. HELOC
Min Credit Score
Fixed-rate. Rates range from 3.75% to 4.95%.
Lump sum payment is provided at closing
Home Equity Loan
Fixed or adjustable interest rates. Rates range from 4% to 6.47%.
Lump sum payment is provided at closing
HELOC interest rates are variable, currently ranging from 4% to 6.50%.
A line of credit is provided at closing that can borrowed as needed.
A home equity line of credit (HELOC) and home equity loans are a second mortgage. on a home in addition to the original mortgage. The second lender wives you a loan and secures that loan with the equity you have in the home.
A HELOC works like a credit card, giving you an account you can withdraw money from whenever you need it. You pay back the loan monthly and pay interest only on the amount of money you withdraw.
With a cash-out refinance, the lender writes a new mortgage to pay off the original loan plus gives you cash up to 80% LTV. Instead of having two mortgage payments each money, you have just one.
The cash is given upfront and usually has a better rate than a HELOC.
Cash-out Refinance Pros and Cons
Cash-out Refinance Pros and Cons
• Get cash at a lower rate than other types of loans
• Closing costs are as much as a regular mortgage
• Pay off student loans or other types of debts
• Reduces the amount of equity your have in your home
• Pay off high-interest credit cards
• Home at risk of foreclosure if you can't make the monthly payments
• Renovate and make home repairs
• May increase your mortgage payments
• Payments are tax-deductible
• Spend cash as you please
• One mortgage payment
• Take advantage of lower interest rates that occur in the housing market
When to Get a Cash-Out Refinance
Reasons borrowers use cash-out refinancing
• Make upgrades or repairs that can increase the value of your home
• Pay off high-interest credit card debt or consolidate debt
• Re-invest the funds into the stock market or real estate
• Make necessary purchases like a car or other large expense
• Lower interest rate and mortgage payment by resetting the loan term
• Lower credit score requirement than home equity loans
Since you now owe less on your home, the new mortgage payment may be considerably less than the one you are paying now.
As a bonus, you get additional money on top of repaying the first loan. You can use this money any way you choose, whether to remodel, pay off credit card debt, or even take a vacation.
Cash-out refinancing allows you to access the equity in your home by refinancing the entire loan.
This is different from a home equity loan, which is another loan in addition to your first mortgage.
One of the benefits of a mortgage is that the interest is tax-deductible. When you choose to do a cash-out refinance, the same applies.
The interest paid on the cash received is also tax-deductible. You’ll have only one monthly mortgage payment to make.
Lower your interest rate
There are times when cash-out loans can help you get the cash you need while reducing your monthly payments.
For example, if your first mortgage was made at a high-interest rate, a new loan with a lower interest rate can cut the cost enough that even taking out cash, the overall amount owed can decrease.
With interest rates still at all-time lows, now is a great time to refinance your home and lock in a new low rate.
Be Careful Using the Funds to Pay off Unsecured Debt
If you pay off credit card debt with the funds from a cash-out refinance, you are turning that unsecured debt into debt that is now secured by your home.
Usually, your monthly mortgage payment will increase when you refinance your mortgage. If you were to face financial hardship and cannot make the monthly payments, you could lose your home to foreclosure.
Using the funds for anything except making repairs or upgrades to the home is very risky and not recommended.
The Bottom Line
Cash-out refinances are a great way to get cashback using the built-up equity in your home. You can use this cash for anything you like. But be careful with what you spend the money on.
Paying off debt turns unsecured debts like credit cards and student loans into secured debt with your home as collateral.
Using cash-out refi to make home improvements or repairs that will increase your property’s value is recommended. Whatever you decide to do, make sure you are fully informed of the costs and options available to you.
Speaking to an experienced loan officer who can help guide you through the process is always recommended. Like with any loan, you should compare multiple lenders.
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