Tapping Your Home Equity with a Cash-Out Refinance

Most people understand that a home can be a great investment. What they may not realize is that this investment can pay off while you still own the home! And we’re not talking about renting it out, either.

A cash-out refinance is a great way to tap the equity you’ve accumulated in your home. As the name suggests, it provides cash you can use for anything you like while leaving your bank accounts and investment vehicles intact. The best part (well, two best parts, really) is you can still watch your home appreciate as you live in it—but now you’re doing so with cash on hand!

Here’s a little more about this strategy so you can determine whether a cash-out refinance is right for you.

What Is a Cash-Out Refinance?

A cash-out refinance allows you to turn the equity you’ve built up in your home into cash. It’s that simple. Getting a little more granular, a cash-out refinance will replace your current mortgage with a larger mortgage, and you pocket the difference.  

How Do I Pull Out or Tap Equity from My Home?

Borrowers need to have at least 20% equity built up in their homes to apply for a cash-out refinance. Though each lender is different, most will allow you to pull a maximum of 80% of your home’s value for a cash-out refinance. The exception is if you have a VA loan. In that case, you’re allowed to do a cash-out refinance up to the full value of your home. That value will be determined through another appraisal that will be conducted when you apply for the refinance. 

What Are the Requirements to Qualify for a Cash-Out Refinance?

As with the maximum amount you can cash out, lenders also vary when it comes to the credit score needed to qualify for this type of refinance. Many generally prefer a credit score of 620 or above, but there are tons of options that offer some flexibility. A debt-to-income ratio of less than 50% is also ideal for most lenders—but again, there are flexible options.    

APM is happy to answer any other questions you might have about qualifying for a cash-out refinance. Give us a call anytime. 

Can I Refinance Without Closing Costs?

As with any home loan, you do pay closing costs for a cash-out refinance. This will typically equate to 2% to 5% of the mortgage. There are no-closing-cost refinances available through many lenders, but that doesn’t mean these fees simply vanish. Instead, they’re either rolled into the principal or recouped through a higher interest rate. 

You should determine whether this is right for you or whether you’re better off paying the fees out of the proceeds of the loan; chat with your APM loan officer for advice.

Other Considerations with a Cash-Out Refinance

The biggest thing to consider when deciding whether a cash-out refinance is right for you is what you plan to do with the cash. Though it’s yours to do whatever you like, it does have to be paid back, so you should weigh the pros and cons of tapping your equity for the purpose you have in mind. 

Many people use cash-out refinances to fund home renovations, upgrades, or repairs; pay down high-interest debts; or to have on hand in case of an emergency. A cash-out refinance is a popular solution to all these scenarios because the rate on a refinance is typically better than the rate you can obtain with most other loans or credit cards. 

Here’s another benefit to using the cash from a refinance to pay off other loans or credit card debts: It can have a big impact on your credit score! Less outstanding debt, with a lower overall monthly payment, means you have a better opportunity to make your payments on time.  

If you’re considering home improvements to reinvest in your home, interest paid on the funds you spend may be tax-deductible. APM can tell you more, but as always double-check with your tax professional. 

Since your new mortgage is larger than the old one, your monthly mortgage payment will also increase. You want to make sure you feel confident in your ability to handle this new payment. Run your numbers with your own budget and see what the new payment looks like in your overall financial picture.

As far as interest rates go, depending on the rate you secured when you purchased your home, your new rate could be lower. This may be the case for many borrowers, as current interest rates are still very low—especially if you haven’t refinanced in the past couple of years. Don’t forget to factor in those closing costs, however, in addition to the higher monthly payment and longer repayment schedule. 

Making the Decision

One last thing to keep in mind with a cash-out refinance: It is so fabulous to be able to use the funds for absolutely anything you like, but that can be a tempting proposition. A once-in-a-lifetime trip to the Mediterranean with your aging parents may absolutely be worth it. A spontaneous desire to hang out in Fiji for a month? Maybe not so much. 

This cash will always be yours to deploy it however you see fit, but a home is a long-term asset. If you find yourself debating a cash-out refinance to pay down credit card bills or large purchases that keep accumulating, financial counseling and a budget may be better suited for you. You don’t want to leverage a long-term asset for a short-term gain if you don’t have a solid plan in place.