Homeowners tap into newfound home equity
According to a recent study by the National Association of REALTORS®, home values were up last year, and continue to rise. And, mortgage rates are still low.
Homeowners are eager to put their home’s equity to work via a cash-out refinance.
But cash-out refinances are not “one size fits all.” The equity in your home, your current loan amount, and even your military status will affect the kind of cash-out loan for which you might qualify.
Knowing the benefits and eligibility standards for each one will help you get the best rate and terms when cashing out your home’s equity.
What is a cash-out refinance?
A cash-out refinance is one in which a homeowner replaces their mortgage with a bigger one. The difference between what is owed and what is borrowed goes back to the homeowner in cash.
As an example, a homeowner owes $175,000 on a home, and refinance their mortgage for a new loan amount of $200,000. This would be a cash-out refinance, netting the homeowner $25,000 of their home’s equity, less closing costs.
Generally, homeowners will do a cash-out refinance to tap into home equity without having to sell their home.
They accomplish the same purpose as home equity loans, but cash-out refinances are different.
A home equity loan is separate financing on top of your first mortgage. That’s why these loans are often called second mortgages. A cash-out “refi”, though, replaces your first mortgage entirely.
Cash-out refinances can be used for a variety of purposes:
- Debt consolidation
- Home improvements or renovations
- Vacation or travel
- Education expenses
- Investment purposes or building a nest egg
- Large purchases (i.e. automobile)
Lenders typically have no restrictions on how you can use cash-out funds.
1. FHA cash-out refinance
FHA offers two different types of refinancing options: the FHA streamline refinance and cash-out.
Until 2009, the FHA allowed homeowners to cash-out up to 95% of their home’s value. The housing downturn spurred FHA guideline changes, however. As a result, tighter underwriting requirements and reduced loan-to-values (LTVs) ensued.
As of April 1, 2009, FHA cash-out refinances are limited to 85% of the home’s value.
In order to qualify for an FHA cash-out refinance, your home had to have been your primary residence for the past 12 months.
You can do a cash-out refinance if you’ve occupied your home for less than that, but you will be limited to the lesser of the original purchase price or current appraised value.
The FHA homeowner will also need to have a satisfactory payment history for the most recent 12 months, with no 30-day late payments.
The FHA has maximum loan amounts. These amounts vary by county.
2. VA cash-out refinance ror U.S. military veterans
Just like any other mortgage, an existing VA mortgage can be refinanced.
Similar to its FHA government counterpart, the VA offers two types of refinance programs – a “streamline” and a cash-out refinance.
The VA’s version of a “streamline” is also known as an IRRRL, or an Interest Rate Reduction Refinance Loan.
There are a few major differences between a VA streamline and a VA cash-out:
- A VA streamline allows no cash back, but a VA cash-out does
- A VA streamline does not require an appraisal; VA cash-out loans require a newly established value
- VA streamline loans don’t require income or asset documentation; cash-out loans do
For a VA cash-out refinance, the VA does not have a maximum loan amount. However, the VA does have a maximum amount that they will guarantee. As such, the maximum loan amount that most lenders will approve is equal to the conventional loan limit of $484,350.
There are exceptions to this rule if your home is in a “high cost” area, in which case loan amounts can rise to more than $726,525.
Lenders may allow loan amounts much larger, as long as a portion of equity is retained in the home.
The VA will allow a veteran homeowner to receive a loan up to 100 percent of their home’s value, assuming the loan is within maximum guarantee amounts. The new value is determined by a certified VA appraiser.
Shop around for a VA lender who offers 100% cash-out LTV refinances, as some lenders will limit veteran homeowners to just 90% of their home’s value.
The VA cash-out refinance remains one of the more attractive cash-out refinance options due to the high loan-to-value maximum, lack of monthly mortgage insurance, and lenient FICO score guidelines compared to other cash-out loan programs.
3. Conventional cash-out refinance
The conventional cash-out refinance is best for homeowners with at least 20 percent equity and good credit scores.
Fannie Mae and Freddie Mac set the rules for conventional cash-out refinances, as these are a subset of standard conventional loans.
If you’ve owned your home for a few years, chances are you qualify for the conventional cash-out option.
In addition to low interest rates, unlike government loans, conventional loans at 80% loan-to-value will have no mortgage insurance or funding fees.
Sometimes, a conventional cash-out refinance can be the most advantageous option available.
Not only can homeowners tap into their home’s equity at a low rate, for some, the loan may also rid them of unwanted FHA mortgage insurance.
This strategy has become increasingly popular as home values rise across the U.S.
But the cash-out option isn’t without some drawbacks.
You might pay a higher interest rate, and possibly higher fees. Cash-out refinance loans with high LTVs come with higher rates than no-cash-out loans.
Still, with historically low rates still available, today’s homeowners are getting cash-out rates well below no-cash-out rates of just a few years ago.
The maximum loan amount for a conventional cash-out refinance is currently $484,350, and up to $726,525 in high-cost areas.
4. Jumbo cash-out refinance
A jumbo mortgage is a loan that doesn’t conform to Fannie Mae’s and Freddie Mac’s guidelines. Currently, any loan amount that exceeds Fannie Mae county loan limits is considered jumbo, or a non-conforming mortgage.
Jumbo mortgages became scarce after the housing crisis. Although more difficult to obtain, jumbo loans have begun to resurface.
Credit score requirements for cash-out refinance loans will vary from lender to lender, as will LTV limitations. Generally, you will need excellent credit, and stable employment to qualify for a jumbo loan. This applies even more so with a cash-out refinance on a jumbo.
Many banks will limit you to just 70 percent of your home’s value. There are a number of lenders, however, that now allow an LTV up to 80%.
Alternatively, there are some piggy-back refinance programs that help jumbo homeowners maximum their cash-out options, and obtain the best financing terms.
For example, some lenders are offering a 75/10/15 — the first mortgage is 75% of the home’s value, and a second mortgage is equal to ten percent. Fifteen percent of the home’s equity remains.
Using this scenario, jumbo homeowners could receive cash-out up to 85 percent of their home’s value.
Be sure to shop around and compare your options for jumbo cash-out loans, as these can vary significantly.
What are today’s cash-out refinance rates?
A cash-out refinance can be ideal for homeowners seeking to tap into their home’s equity without selling their home.
With still-low mortgage rates, along with home values on the rise nationwide, now is a great time to consider your cash-out refinance options.