If you’re looking to cash out some equity from your home or refinance at a lower rate, start by comparing the top cash-out refinance lenders that offer competitive rates and fast approval.
What are the requirements for cash-out refinancing?
There are different requirements from lenders. However, the basic requirements include:
- Proof of maintaining your original mortgage: If you are using the same lender for refinancing, you may not need to obtain these documents. However, if you are using a new lender, you will be required to provide evidence that you will continue to pay the mortgage, such as submitting bank statements that you have been servicing your loan faithfully. Also, the lender may want to look at your repayment history for the last three months.
- Equity: You need to prove that you own equity in your home. The minimum requirement for cashing out is usually 20%.
- Income: Lenders want to look at your financial status and be sure that you have consistent income. Borrowers with a stable income enjoy lower rates than those with an unstable income. The lender will look at your debt to income ratio to determine your ability to repay the loan as well as your existing monthly bills and debts. The average maximum debt to income ratio is 36%.
- Credit status: The average minimum credit score ranges between 580 to 620. Borrowers looking to refinance only may have a credit score as low as 580. On the other hand, individuals looking for cash out require a minimum credit score of 600+.
- Cash-out refinance wait period: The waiting period varies among lenders and also depends on the type of loan you’re looking to take out. If you are looking to cash out on a conventional mortgage, the average waiting period is six months from the closing date of your original loan. For government-backed mortgages, such as VA loans, you need to make at least six consecutive payments before applying for a cash-out refinance.
How does cash-out refinancing work?
Borrowers refinance the mortgage to a larger mortgage based on the home value. After paying off your existing loan with the refinance mortgage, the remaining funds are issued to you as a cheque. For example:
- Home value: $500,000
- Current mortgage balance: $300,000
- Cash out refinance loan: $400,000
- Maximum cash out: $400,000 – $300,000 = $100,000
In this example, the borrower has built home equity of $200,000 ($500,000 – $300,000). Borrowers need to retain at least 20% of their home equity, so the maximum cash out is $100,000. However, cash-out limits and minimum equity vary by lender.
How much does cash-out refinancing cost?
The costs for refinancing your mortgage depend on your lender, loan amount, loan to value (LTV) amount, and location. The average costs to cash out range between 3% to 5% of the total principal amount. If your lender charges a 4% fee on a loan amount of $100, 000, you will be required to pay $4,000 in refinancing costs. However, these costs can be added to the loan amount instead of paying up front.
Refinance costs do not include mortgage insurance, house insurance, and property taxes, as they are usually set up during your original loan application.
Some of the costs incurred include:
- Home appraisal fee: The lender sends an appraiser to determine your home value.
- Origination fee: Some lenders charge this fee to originate the loan.
- Refinance application fee: The fee varies by lender and location.
- Title search fee: Title search protects both the lender and borrower from fraudulent home sellers.
- Mortgage points fee: You can buy mortgage points to lower your interest rates. One mortgage point is equal to one percent of the loan amount.
- Lender’s attorney review fee: They depend on the lender and location.
Choosing the best cash-out refinance lender
Some of the factors to consider when choosing the best cash-out refinance lender include:
- Interest rates: Rates vary by lender, and it’s important to compare rates from at least three lenders. Lower interest rates can save you thousands of dollars.
- Closing costs: Although a lender may offer you a lower mortgage interest rate, you need to look at the total closing costs as this could cost you more than the lower rate in the long run. It would help if you ask your mortgage advisor about any hidden costs before proceeding with the application. Some lenders charge an origination fee that sometimes must be paid up front.
- Loan terms: Some lenders offer a variety of loan terms ranging between 10 to 30 years. A longer loan term have lower monthly payments but a higher accumulated interest. On the other hand, shorter loan terms have higher monthly payments and little accumulated interest rates.
- Lender qualifying requirements: Different lenders have specific requirements on credit scores and debt to income ratio. Some lenders require you to sign up or open a checking account before you apply for the loan.
- Application process: Although most lenders offer digital platforms to complete your application, some require you to visit in-person when submitting documents. Also, you need to consider the number of waiting days on prequalification, pre-approvals, and closing the loan.