Cash Out Refinance

A cash out refinance is a powerful financial tool that allows homeowners to refinance their mortgage for more than they owe and take the difference in cash. It essentially replaces the current mortgage with a new one, potentially with different terms, and allows homeowners to access the equity they've built in their property in liquid funds. This type of refinancing can be a strategic financial tool for consolidating debt, making home improvements, or for other investments.

How Does a Cash Out Refinance Work?

The process of a cash-out refinance involves applying for a new mortgage that is larger than the remaining balance of the existing mortgage. Here’s how it typically works:

• Assessment of Home Value:  A home appraisal is conducted to determine the current market value of the property.
• Calculation of Equity:  The equity is calculated by subtracting the outstanding mortgage balance from the appraised value of the home.
• Approval and Closing:  Based on the homeowner's credit profile, debt-to-income ratio, and the amount of equity in the home, the lender will offer terms for the new mortgage. This new mortgage will pay off the previous one, and the excess amount is given to the homeowner in cash. The closing costs are usually deducted from the cash out proceeds.

How Much Can You Get from a Cash Out Refinance?

The maximum amount you can borrower through a cash out refinance is typically around 80% of the value of the home. For example, if your home is valued at $300,000, you might be able to get a new mortgage for $240,000. If you owe $150,000 on your existing mortgage, you could potentially receive $90,000 in cash after closing the new mortgage.

Cash Out Refinance Requirements

The requirements for a cash out refinance are similar to those for a standard mortgage, including:

• Home Equity: Lenders generally require homeowners to have at least 20% equity in their home after the cash out refinance. This means that your new loan amount cannot exceed 80% of your home's current value.
• Credit Score: As with any mortgage product, lenders will review your credit score and history to determine your eligibility. A higher credit score can improve your chances of approval and may lead to more favorable interest rates. The minimum credit score varies depending on the loan program. See below for credit score requirements for each loan program.
• Stable Income: Lenders want to ensure that you have the ability to repay the new loan. Stable employment and a consistent income are important factors in qualifying for a cash out refinance.
• Manageable Debt-to-Income Ratio: Your debt-to-income ratio (DTI) compares your monthly debt obligations to your gross monthly income. A maximum debt-to-income ratio (DTI) of 57% is allowed on FHA loans and 50% for all other programs.

Loan Programs for Cash Out Refinances

Various loan programs are available for those interested in a cash out refinance, each catering to different borrower needs and circumstances. Here's a closer look at some of our most common options:

Conventional Cash Out Refinance

This is a standard cash out refinance that conforms to the loan limits and requirements set by Fannie Mae and Freddie Mac. Borrowers typically need a credit score of at least 620 and must have a debt to income ratio of no more than 50%. Conventional loans allow homeowners to refinance up to 80% of their home's value, which means you need to maintain at least 20% equity in your home after the refinance.

FHA Cash Out Refinance

The Federal Housing Administration (FHA) offers cash out refinancing for those with lower credit scores and less home equity. Borrowers usually need a credit score of 580 and lust have a debt to income ratio of no more than 57%. FHA cash out refinance allows up to 80% loan-to-value ratio in the new mortgage. This option requires mortgage insurance, regardless of the equity stake, which could increase the overall cost of the loan but makes refinancing accessible for those with less than perfect credit.

VA Cash Out Refinance

Available to veterans, active-duty service members, and select military spouses, VA cash-out refinance options are offered through the U.S. Department of Veterans Affairs. This program allows borrowers to refinance up to 100% of their home's value, which is a higher potential cash out than other loan types. A significant benefit of this option is the absence of mortgage insurance and potentially lower interest rates.

Non-QM Cash Out Refinance

Non-Qualified Mortgage loans (Non-QM loans)  are often used by borrowers who have non-traditional income sources or who are investors. These loans can be more flexible in terms of income verification and credit score requirements. Non QM loans usually allow borrowers to refinance up to 80& of their home's value.

Reverse Mortgage Cash Out Refinance

A reverse mortgage cash out refinance is available to homeowners who are 62 years or older. It allows them to convert part of the equity in their homes into cash without having to sell the home or take on additional monthly mortgage payments. Instead, the loan is repaid when the borrower moves out or sells the home. This can be a valuable financial tool for retirees needing to supplement their income.

How to Get Preapproved for a Cash Out Refinance

Getting pre-approved for a cash out refinance is quick and easy with our online Loan Application. After completing the application, you will receive instructions on how to upload your documents. For a list of documents you will need to upload, see our Pre-approval Document Checklist.

Benefits of a Cash Out Refinance

Cash-out refinancing offers several advantages:

• Debt Consolidation:  By using the cash to pay off high-interest debts such as credit cards or personal loans, you can consolidate all your debts into one monthly payment at a lower interest rate.
• Home Improvements:  The funds can be used to make home improvements, which not only enhance your living space but may also increase the property's value.
• Lower Interest Rates:  If interest rates have dropped since you took out your original mortgage or if your credit has improved, refinancing can allow you to reduce your interest rate and monthly payments.
• Investment Opportunities:  The cash obtained can be used to invest in other properties, stocks, or education, potentially yielding returns that exceed the cost of the mortgage interest.

When to Consider a Cash Out Refinance

• Home Improvements: If you're looking to make significant upgrades or repairs to your home, a cash out refinance can provide the necessary funds. Not only can these improvements enhance your quality of life, but they may also increase the value of your property.
• Debt Consolidation: For homeowners struggling with high-interest debt, a cash out refinance can be a smart way to consolidate these obligations into a single, lower-interest loan. This can lead to lower monthly payments and potentially save thousands in interest charges over time.
• Investment Opportunities: Some homeowners use cash out refinances to invest in other opportunities, such as starting a business, purchasing rental properties, or funding education expenses. While this can be a risky move, it can also yield significant returns if done wisely.
• Emergency Funds: Life can be unpredictable, and having access to emergency funds can provide peace of mind. A cash out refinance can help establish a financial safety net for unexpected expenses, such as medical bills or job loss.

Alternatives to a Cash Out Refinance

While a cash out refinance can be a powerful financial tool, it's not the right choice for everyone. Here are some alternatives to consider:

• Home Equity Loan: A home equity loan is a second mortgage that allows you to borrow against your home's equity in a lump sum. This can be a good option if you don't want to refinance your entire mortgage.
• Home Equity Line of Credit (HELOC): A HELOC is a revolving line of credit secured by your home's equity. You can draw on the funds as needed and only pay interest on the amount you borrow.

Cash out refinances offer a unique opportunity for homeowners to leverage their home equity for financial gain. Whether you're looking to make home improvements, consolidate debt, or invest in other opportunities, a cash out refinance can provide the necessary funds to make your goals a reality.

Alpine Mortgage maintains a team of highly skilled industry professionals familiar with the company’s refinance rates and its cash out refinance products. We offer cash out refinances in the following states: California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Texas. 

Call us today at (800) 876-LOAN to speak with one of our cash out refinance specialists or click here to have one of our cash out refinance specialists contact you.

If you are interested in applying for a cash out refinance, you can apply online now.

Cash Out Refinance FAQs