A growing number of homeowners are tapping into new found home equity. A recent study conducted by the National Association of Realtors showed that home values increased last year and are continuing to rise. Meanwhile, mortgage rates have remained low. Several homeowners are also eager to place their home’s equity to work through a cash-out refinance. However, people should keep in mind that cash-out refinances are never a “one size fits all” solution. Your home’s equity, existing mortgage loan amount, as well as your military status will have an impact on the type of cash out loan that you may qualify for. Understanding the benefits as well as the eligibility standards for each option will help you obtain the best terms and rate when you cash out your home’s equity.
Understanding The Basics Of Cash-Out Refinancing and Mortgage Loans
A cash out refinance is an option wherein the homeowner gets a larger mortgage loan that their existing one. The difference between what is borrowed and what is owed is returned to the homeowner in cash. For instance, you owe $175,000 on a home and refinance your mortgage for a new loan that is worth $200,000. It is going to be a cash out refinance, wherein you will get the net $25,000 of your home’s equity, less the closing costs.
Generally speaking, homeowners resort to a cash out refinance if they want to tap into their home equity without having to put their home up for sale. Although it has a similar purpose with home equity loans, a cash out refinance is different. A home equity loan is a different financing on top of the first mortgage loan. That is why such loans are commonly referred to as second mortgages. On the other hand, a cash out refinance will replace your first mortgage loan entirely.
Cash-Out Refinances Serve These Purposes:
- Debt consolidation
- Home renovations or improvements
- Travel or vacation
- Education expenses
- Building a nest egg or for investment purposes
- Major purchases
In most cases, lenders do not have any restrictions in terms of how borrowers can use their cash out funds.
FHA Cash-Out Refinance
FHA has two kinds of refinancing options. These are the FHA streamline refinance and the cash-out. The FHA permitted homeowners to cash-out as much as 95% of the value of their home until 2009. The downturn in the housing market forced FHA to change its guidelines. Consequently, tighter underwriting requirements as well as lower loan to values were enforced.
For homeowners to qualify for an FHA cash out refinance, your current home should be your primary residence for the past twelve months. You can still do a cash out refinance if you have resided in your home for much less than that. However, you will be limited to the lesser of the current appraised value or the original purchase price. You also have to present a satisfactory payment history for the past twelve months, which means there should never be any 30-day late payments. The FHA also has maximum loan amounts, which vary in different countries.
VA Cash-Out Refinance ROR U.S. Military Veterans
Just like all the other kinds of mortgages, an existing VA mortgage could be refinanced. Much like its FHA government counterpart, the VA provides two kinds of refinance programs, the streamline and the cash-out refinance. The IRRRL or Interest Rate Reduction Refinance Loan is the VA’s version of the streamline option. There are some main differences between a VA cash-out and a VA streamline.
- A VA streamline permits no cash back unlike a VA cash-out
- A VA streamline don’t need an appraisal; VA cash-out loans need a recently established value
- A VA streamline loans do not need asset or income documentation while cash-out loans do
For a VA cash-out refinance, the VA doesn’t have a maximum loan amount. But, there is a maximum amount that needs to be guaranteed. Because of that, the maximum loan amount that the majority of lenders will most likely approve is equal to the limit of a conventional loan which is $484,350. However, there are certain exceptions to the rule especially if your house is located in a high cost place, wherein the case loan amounts can increase to over $726,525.
Lenders could approve larger loan amounts provided that a part of the equity is kept in the house. The VA will permit a veteran homeowner to get a loan of up to 100% of the value of their home, as long as the loan is within the maximum guarantee amounts. A certified and professional VA appraiser will be responsible for determining the new value. Look for a VA lender who provides 100% cash out LTV refinances, because there are lenders who set a limit to only 90% of the value of their homes. The VA cash out refinance will remain as among the most well-known cash out refinance options because of its high loan to value maximum, insufficient monthly mortgage insurance, as well as its tolerant FICO score guidelines compared to other cash out loan programs.
Conventional Cash-Out Refinance
Homeowners who have at least 20% equity as well as good credit scores are good candidates for cash-out refinance. Fannie Mae and Freddie Mac set the guidelines for conventional cash-out refinances, because these are a subset of the regular conventional loans. If you have already owned your house for a few years, then you may qualify for the conventional cash out option. Unlike government loans and apart from low interest rates, conventional loans at 80% loan to value won’t have funding fees or mortgage insurance. There are instances when a conventional cash out refinance could turn out to be the most beneficial option. Homeowners will not only be able to tap into the equity of their home at a lower rate, for others, the loan might also get rid of undesired FHA mortgage insurance. This method is growing in popularity as home values increase across the United States.
Just like everything else, the cash out option has its own set of drawbacks. You may be asked to pay higher interest rates and even higher fees. Cash out refinance loans that have high LTVs usually have higher rates compared to no cash out loans. But with the availability of low rates today, homeowners can get cash out rates that are lower than no cash out rates from previous years. A conventional cash out refinance’s maximum loan amount is at $484, 350 and may even reach as much as $726,525 in high-cost locations.
Jumbo Cash-Out Refinance
A jumbo mortgage is a type of loan that does not adhere to Fannie Mae and Freddie Mac’s rules. Today, any amount of loan that goes beyond the limits set by Fannie May is referred to as jumbo or also called non-conforming mortgage. Jumbo mortgages started to become scarce following the housing crisis. Even though much harder to get, jumbo loans have started to resurface. The credit score requires for the cash out refinance loans differ from one lender to another, as will LTV restrictions. Generally speaking, you should have excellent credit as well as a stable job if you wish to qualify for a jumbo loan. This also applies to a jumbo cash out refinance.
Several banks will restrict you to about 70% of the value of your home. However, many lenders now permit an LTV of as much as 80%. On the other hand, there are a few piggy back refinance programs that can assist jumbo homeowners maximize their cash out options and get the best financing terms.
For instance, a few lenders provide a 75/10/15 scheme wherein the first mortgage is 75% of the value of your home, the second one is 10%, and the third one is 15% of the home equity. In this particular scenario, jumbo homeowners can get as much as 85% of the value of their home. Just be sure to do your research and do comparison shopping for jumbo cash out loans.
Call MB Mortgage Pros if you want more information about cash-out refinancing.
MB Mortgage Pros
630 Chestnut Road
Myrtle Beach, SC 29572