Hi guys! So for the last month or so we’ve been going though the process of a cash out refinance. Today I wanted to share more about how a cash out refinance works and why we decided to move forward with one. Hopefully this information will help you see if it’s something that may be a good fit for you/your home. I should also say, keep in mind I’m no expert when it comes to cash out refinances lol but I figured it would still be helpful to share what I know/learned, even if it is on a higher level. Also, in the next post, I’ll share more about our personal experience regarding out appraisal and what we decided to do with the cash out refinance.
So a cash out refinance essentially lets you take out additional cash on your current home loan/balance. So even though you’re increasing the loan on your current house, you’re getting that amount back in cash in return so you can use it towards something like home updates or improvements. Now you technically don’t have to use it for things like that – meaning, once you get the additional loan no one is checking up on you to see how you used it. But keep in mind, it’s increasing your loan balance so if you take out X amount and go to sell your home at a later date and you didn’t use the money or a large part of it towards your home, that is going to affect how much you can resell if for. For example, if you use the loan to update/renovate a kitchen, then when/if your house goes on the market then in addition to the amount that it’s increased (given the current market), then you can list it for even higher since you’ve also renovated (the kitchen). But if you didn’t choose to renovate or update, your overall home loan has increased even more due to the cash out refinance, but you can’t necessarily add that increase to what you put your house on the market for. So just sharing that for whatever it’s worth because even though most people will do a cash out refinance for home updates, other times people will use it as a personal loan of some sort since it may be a better option (lower interest rate, can take out more, etc) than compared to a traditional personal or business loan, using credit cards, etc.
Getting approved for a cash out refinance depends on a few things (which I’ll share about in a minute) but the biggest thing that determines eligibility up front is how much equity you currently have in your home. This usually comes from you living in your house for a longer period of time and therefore have been able to pay down the mortgage enough so you gain more equity. The other way (which is happening more recently given the current housing market) is that your house value has increased so much in a shorter period of time causing your equity to increase exponentially and therefore give you the ability to take out more cash. Either way, in both scenarios you’ve gained enough home equity that the bank will let you borrow additional money.
The later is what made Stephen and I consider doing a cash out refinance. We’ve only been in our house for a year and a half so clearly we haven’t been in it that long to pay off a significant amount of our loan. However, our house has gone up over $200k from when we initially purchased, so we knew that we had gained enough equity to be eligible for a cash out refinance. We’ve been really wanting to make some home updates so we figured this would be the best way to get the funding.
One thing to keep in mind during this process is that the bank will never let you own less than 20% of your house when it comes to a cash out refinance (at least that is how it was explained to us). Either way, in order to find out the max amount that you could be eligible for/take out during a cash out refinance, you take 80% of what your house currently appraises for minus what you currently still owe and the remainder is the max you could take out. Now this doesn’t mean that you’ll get approved for that full amount, but in general that is the max you could ever take out to begin with. So for easy math, let’s say your home is appraised at 500K. 80% of that is 400K. Let’s say you still owe 300K on the house. So 400K-300K is 100K. So 100K would be the max that you could potentially be approved for.
The other thing that will determine how much you’re approved for are things like your income, your debt to income ratio, etc. So again, just because you could get approved for that 100K in the example, doesn’t mean you necessarily will. These are things your lender will go over with you though!
In Raleigh, we used Fairway (and worked with Patricia who was great!) but you can shop around with lenders to see who can get you the best rate. I will say though, rates are already going up pretty quickly, so if you’ve been thinking of doing a cash out refinance or anything that requires a home loan you will probably want to do so sooner than later. But basically what you’ll do when you apply for a cash out refinance is very similar to when you’re buying a house. They run your credit, you upload all of your documents from your tax returns, your bank statements, your current mortgage information, drivers license, home owners insurance, etc. Once they have all of that information, they will schedule for your house to be appraised. Then once your house appraisal comes back that amount plus everything you’ve submitted, will determine what you’re eligible for with the cash out. Then you have the option to take the full amount or a percentage of it. And before you sign anything, they can tell you if you took out “X” amount this is what your new mortgage would be or if you take out “X” amount this what it will be. Since you’re taking out more money, your mortgage will inevitably go up but how much depends on what the current interest rates are and how much you’re deciding to take out. Naturally, the more you decide to take out, the more your mortgage will increase. Once you decide on the amount you want to move forward with (if any), your lender will submit the new loan to the underwriters and they will go through the approvals. Then later that month you’ll have a closing date to solidify everything.
OKAY. I think that sums up everything! In my next post I’ll share what happened with our home appraisal specifically and why we decided to take out the amount we did plus what we plan to do with it!