If you’re a Texas homeowner, and you’ve seen your home’s property value go up in recent years, you might be looking at ways to borrow from the equity in your home. In recent years, the state of Texas has seen its home sales rise over the last several years, yet there us still plenty of room for housing prices to go up. In the meantime, mortgage interest rates have been at an all-time low, and for those who previously locked in higher interest rates, refinancing has become a popular option so they can pay off their debt sooner, or simply lower their monthly payments. And with those options, a cash-out refinance mortgage has also emerged as an option. Cash-out refinancing has it’s benefits, though it does have a few risks that may make other financing options more favorable for some borrowers. Here are a few things to know about cash-out refinancing.
What Is A Cash-out Refinanced Mortgage
Defining cash-out refinancing can get a little confusing at first, but the essence of it is that like other loan refinancing options, it will replace your existing mortgage. The difference is that it will be for a higher amount than what you owe on your current mortgage because along with replacing your current mortgage, the extra amount is an amount of cash that you can spend how you wish. So if you currently owed $100,000 on your mortgage and did a cash-out refinance for $140,000, the first $100,000 of your new mortgage would replace your previous mortgage, and the rest of the $40,000 would be the cash-out amount that you can pocket.
Now, here are the kickers you need to be aware of. You need to have a substantial amount of equity in your home in order to get a cash-out refinanced loan, and the cash-out amount usually can’t be any more than 80-90℅ of that equity. Of course, it all depends on the lender’s requirements, and also the type of mortgage you have. But a case in point would be if your home was valued at $300,000 and you owned $100,000 in equity while still paying $200,000 on your mortgage. The most you could probably qualify for is a $285,000 cash-out refinanced loan, though some mortgages like FHA mortgages may drop to an even lower amount so that more equity is left in your home. That’s because these loans are secured loans, and just in case you defaulted and had to foreclose on your home, the lender would want enough equity in it to cover extra costs. However, there are some VA loans that do allow for borrowers to use up to 100℅ of their equity.
Why Use A Cash-out Refinanced Loan And For What?
A cash-out mortgage refinancing option can be more simple and work better than a second mortgage. That’s because you’ll only need to pay off one mortgage as opposed to paying off both a mortgage and a home equity loan or line of credit. Plus if your interest rates are lower on your cash-out refinanced loan, paying it off could be easier and take less time.
A common use for a cash-out refinance mortgage is using the proceeds to cover home improvement or remodeling costs. That’s one way to boost your home’s value and get a return on investment from borrowing against your equity. But you might also want to use it to pay off credit card debt or other outstanding high interest loans. But the bottom line is that money is yours to spend how you wish, though you should use it wisely so you don’t add more unnecessary debt.
Drawbacks To Cash-out Refinanced Loans
You do need to consider some of the costs that using a cash-out refinanced loan could entail including closing costs for starters. Those may make it not ideal if you’re not planning to borrow much. Secondly, your home will need to be appraised in order to qualify for a cash-out refinanced mortgage. Appraising a home could take a little time, so try to leave yourself some leeway in your application timeframe. Thirdly, you’ll need to watch out for any new terms in the new refinanced mortgage that may affect your payments and the timeliness of them.
What Else You Need To Qualify For A Cash-out Refinanced Loan
Like your original mortgage and most other personal loans, you’ll need to have a good enough credit score of usually at least 620 in order to qualify for this type of loan. The requirement is usually higher for a cash-out refinance than it is for a regular refinance since you’ll be borrowing more money. You’ll also need to make sure your monthly debt-to-income ratio (DTI) meets the lender’s requirements. Usually the DTI cannot exceed 50%, but some lenders may ask that it be lower. Your mortgage lender will probably ask to see bank statements and other financial documents going back a couple of years to determine if your income and DTI ratio meets their requirements.
Receiving Your Cash Amount And Repaying The Loan
Once the approval and appraisal process is complete, it will still usually take a few days for you to get your cash. It’s a good idea to have a set amount that you know you need to borrow so that you aren’t paying off a larger loan than you need to. You also may want to know whether or not your new mortgage has prepayment penalties in case you want to try to pay it off early.
Other Options To Consider
If you’re looking to borrow more than $10,000 and plan to use it for long-term purposes, then a cash-out refinance mortgage could be ideal. Otherwise, you may want to consider another option like a line of credit where you only have to repay the amount of your funds that you actually use. If you’re planning on consolidating debt, you should make sure you’re going to change your spending habits in the future so that you don’t run up debt again and use a cash-out refinanced loan as a band aid.