Being a homeowner comes with a lot of perks. One of the biggest perks is the ability to build equity in your home. Home equity is the amount of value that you own in your home after subtracting what you still owe to your financial institution. Over time, this amount will grow and allow you to make the most of a cash-out refinance.
Cash-out refinances are becoming more and more popular among homeowners who could use some extra money as soon as possible. With that quick influx of cash, you can pay off other existing debt or make much-needed renovations and improvements to your home. If you’ve been considering going through this process, you may have wondered about the max cash-out refinance amount that you can receive.
What Is a Cash-Out Refinance?
Let’s start with the basics. A cash-out refinance is a refinancing option that allows you to both refinance your home and access your home equity to receive cash. The amount of home equity is determined by deducting the amount that you currently owe on your home from what it’s currently worth. If the value of your house increases or you make payments against the loan principal, the equity will go up.
The refinance will replace your current mortgage with a new, larger loan. The amount over and above your original loan is borrowed from your equity and paid to you in cash.
What Is the Max Cash-Out Refinance Available?
Homeowners may be impressed with the amount of equity they’ve acquired over the years and excited to receive some of it in cash, but it’s important to know that you most likely won’t get all your home’s equity in cash. Many loan options will allow you to only take 80 percent.
For example, if you have a home that’s worth $300,000 and you currently owe $200,000 on it, then you have built up $100,000 in equity. Through a new cash-out refinance, you’d be able to receive up to $80,000 of your home’s $100,000 equity.
While each lender has its own terms, 80 percent of your equity is what lenders usually allow you to take out in cash. This is true for both conventional and FHA loans, but you might find a max cash-out refinance of up to 85 percent equity, so do some shopping around. The cash-out refinance option with VA loans gives borrowers the possibility of taking out up to 100 percent of their home’s equity if they meet certain requirements.
The max cash-out refinance amount may also depend on your financial situation. A higher credit score and good credit history make you a less risky borrower and could lead to a better deal from a particular lender.
What Are the Pros?
There are many benefits that come with doing a cash-out refinance at the right time. Along with receiving cash upfront, you can also make changes that shorten your repayment time and decrease your monthly costs.
You Can Renegotiate Your Loan Terms
When you decide to do a cash-out refinance, you’ll be able to renegotiate the terms of your home loan. This can mean that you may be eligible to receive a lower interest rate, which will save you money over the life of the loan. You can also choose to increase or decrease the length of your loan. This flexibility can allow you to pay your home off more quickly or lower your monthly payments.
You Can Stop Paying Private Mortgage Insurance
Private mortgage insurance is often required when you’re borrowing more than 80 percent of the home’s total value. When you do a refinance, you have the option to renegotiate whether PMI is required. Usually, if you have at least 20 percent home equity, you should be able to cancel your PMI.
You’re in Charge of the Cash
The way that you use the cash received from a cash-out refinance is completely up to you. While most people choose to do home renovations or repairs and further increase home values, others choose to use the cash to pay off outstanding debts or cover other large expenses.
Credit card debt and student loans often carry higher interest rates than home loans, making them more costly debts to hold on to. Using the cash you receive from a cash-out refinance can allow you to transfer that debt to a loan with a more competitive interest rate.
What Are the Cons of a Cash-Out Refinance?
While there are plenty of benefits that come with choosing a cash-out refinance, there are also a few cons that should be considered as well. A cash-out refinance could put you in a difficult situation if your home hasn’t grown in value or if you are unable to pay back the loan in the future. Consider these cons before deciding whether a cash-out refinance is right for you.
You’ll Need Some Equity To Be Eligible
This option is not worthwhile unless you have at least 20 percent equity in your home currently. Despite paying off your loan in the past, your home’s current value will determine how much equity you have. If the home prices in your community have taken a tumble recently, you may have less equity than you think, and less than 20 percent would make you ineligible for this refinance option.
Your Monthly Payment Will Increase
Because your overall loan amount will have increased to include the equity you’ve built up, your monthly payment will be bigger than before. The cash you receive now will have to be paid back over time, so you’ll want to make sure you’re prepared for the higher monthly payments.
You’ll Have to Pay Closing Costs
Just like when you first bought your home, you’ll have to pay closing costs on your refinance as well. These include things like loan origination fees, appraisal fees, discount points, taxes, surveys, and more. You’ll want to make sure that refinancing will be worth it to have to pay these fees again.
Should You Take Out the Max Cash-Out Refinance Amount?
Just because the money is available to you doesn’t mean you should access the maximum amount of equity allowed. As is the case with any home loan, your house is the collateral for your refinance loan. If you are unable to make your monthly payments, you could risk losing your home. And if your home’s value drops, you could end up owing more than your property is worth. A lender such as Solarity Credit Union can help you weigh the benefits of taking out a max cash-out refinance against the risks so you can decide if it’s the right financial decision for you.
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