Today’s Cash-Out Refinancing Rates | Smart Change: Personal Finance

Andrea Riquier – Consultant for Forbes

If you’ve built up some equity in your home, a cash refinance could be an option to access the money when you need it, for example to renovate your home or consolidate debt. This type of refinance pays off and replaces your existing mortgage with a larger loan and you will receive the difference to use as you wish, minus any closing costs or fees.

As with other types of mortgages, interest rates on cash-out refinancing tend to fluctuate on a daily basis. For this reason, it’s a good idea to keep an eye on rates and compare options from as many lenders as possible to find a good deal.

Cash-out refinancing rates today

What is a cash-out refinancing?

If you opt for a cash-out refinance, you will take out a new, larger mortgage to replace the existing one. You will then receive the difference between the two loans as a lump sum (minus any closing costs or fees), which you can use to cover almost any expense. The repayment terms vary up to 30 years.

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Depending on your credit, you may qualify for a lower interest rate through a cash-out refinance. This could be particularly useful as you will increase the loan amount you are paying interest on. You can use our mortgage refinance calculator to estimate what your costs might be with a cash-out refinance.

Keep in mind, however, that cash-out refinances usually have slightly higher rates than standard rate and term refinances as lenders view them as a riskier investment. Additionally, the actual rate you will receive will depend on whether you choose a conventional loan or a loan guaranteed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).

Also remember that, just like with any mortgage product, your home is used as collateral for a cash-out refinance. This means you risk foreclosure if you can’t keep up with your payments.

How to get the best cash refinance rates

Keeping an eye on national averages and advertised rates can help you get an idea of ​​what’s going on in the mortgage market, especially when you consider how rates have fluctuated over time.

To get the best interest rate on a cash-out refinance, be sure to take the time to shop around and compare your options from as many lenders as possible. This can help you not only ensure an optimal rate, but also find the right lender for your needs.

There are also several factors that can influence the rates you are offered:

  • Credit score. For a conventional withdrawal refinance, you will generally need a credit score of at least 620. With an FHA loan, you could get approved with a credit score of up to 500, while VA withdrawal refinances do not have a set minimum: but the exact requirements for either of these options will depend on the lender you work with. To benefit from the lowest interest rates available, you typically need good to excellent credit, which usually means having a credit score of at least 670.
  • Debt / Income Ratio (DTI). Your DTI ratio is the amount you owe on monthly debt payments relative to your income. To get approved for a cash-out refinance, your DTI ratio shouldn’t be more than 50%, although some lenders may require a ratio of up to 40%.

How much money can i get from a cash-out refinance?

With conventional and FHA loans, mortgage lenders will typically allow you to withdraw up to 80% of your home’s equity through a cash-out refinance, which means you need to keep at least 20% of the equity in your home. An exception to this is a VA cash-out refinance, which allows borrowers to access up to 100% of their home’s equity.

For example, suppose your home is worth $ 500,000 and you owe $ 300,000 on an existing conventional mortgage. To calculate your home equity, you subtract the amount you owe in loans secured by your home from its appraised value, then subtract $ 300,000 from $ 500,000, which leaves $ 200,000 of equity.

If the lender allows you to access 80% of this amount, you will be able to access up to $ 160,000 with a cash refinance ($ 200,000 x 0.80 = $ 160,000). This will leave the required 20% equity in your home.

Keep in mind that to calculate exactly what you can borrow, the lender typically requires an appraisal by a trusted third party to determine the home’s value. While the lender orders the appraisal, you as a borrower will have to pay it as part of your closing costs. You can typically expect an appraisal to cost $ 300 to $ 400 for a single family home while multi-family units can cost up to $ 600 or more.

How do i apply for a cash-out refinance?

The application process for a cash-out refinance is very similar to obtaining your first mortgage. If you are ready to apply, follow these steps:

  1. Check your credit. When you apply for a cash refinance, the lender will examine your credit to determine if you are eligible, so it’s a good idea to check your credit ahead of time to see where you are. You can use a site like AnnualCreditReport.com to review your credit reports for free. If you find errors, dispute them with the appropriate credit department to potentially increase your credit score.
  2. Consider other requirements. In addition to your credit, the lender will also review your income and DTI report. You will also typically need at least 20% equity in your home and a loan-to-value ratio (LTV) of no more than 80%, although some lenders may increase. Your LTV ratio compares the value of your home to what you owe on your mortgage and is used by lenders to decide the risk of an investment. You can calculate this by dividing your mortgage balance by the appraised value of your home.
  3. Compare lenders and choose an option. Be sure to shop around and compare your options from as many mortgage lenders as possible, including your current lender, to find the right loan for your needs. Consider not only the interest rates, but also the repayment terms, any fees charged by the lender, and equity requirements. After shopping, choose the lender that works best for you.
  4. Complete the question. Once you have chosen a lender, you will need to complete a complete application and submit all required documentation, such as tax returns and bank statements.
  5. Get your funds. If you are approved, you can expect the entire closing process to take 45 to 60 days. To avoid delays, make sure you fill out the application as accurately as possible and provide the required documentation quickly. After that, you will receive a lump sum payment to use as you wish.

Why use a cash-out refinance instead of a HELOC or equity loan?

In addition to cash-out refinancing, other ways to tap into your real estate assets include a home equity line of credit (HELOC) or home equity loan. There are several differences between these types of loans, so whether a cash-out refinance will be better for you than either of these options will depend on your individual situation and financial goals.

To help you decide, here’s how HELOC and home equity loans compare with cash-out refinancing.

  • HELOC: A HELOC is a type of revolving credit that allows you to draw repeatedly over a certain period of time and then pay off your line of credit. HELOCs generally come with floating rates that can fluctuate with the market and these rates are generally higher than what you would get with a cash-out refinance. Also, unlike a cash-out refinance, a HELOC is technically considered a second mortgage, which means you will need to manage payments for both HELOC and your first mortgage.
  • Home loan: Unlike a HELOC, a home loan is paid as a lump sum to be used as you wish. Home loan rates are fixed, which means they will remain the same throughout the life of the loan. As with HELOC rates, the rate on a home loan will usually be higher than what you would pay on a cash-out refinance. Home loans are also considered second mortgages.

If you’re just looking to borrow a small amount, a HELOC or home equity loan might be a better option than a cash-out refinance. But if you want to take advantage of a better interest rate and prefer to have only one loan to manage, then a cash-out refinance might be the best choice.

Also keep in mind that closing costs for a cash-out refinance tend to be higher than they would be for a HELOC or home loan. This is because a cash-out refinance is essentially a brand new mortgage, which makes processing more expensive. The closing costs for a cash-out refinance are typically 3% to 5% of the loan amount, while for a home loan, these costs can range from 2% to 5%.

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