Current Mortgage Rates
The following table highlights current refinancing rates in your local market. You can quickly adjust the loan amounts using the menu options. The above calculator tab offers a caulator to quickly figure common Loan-to-Value (LTV) amounts based on the value of your home & how much you owe on the existing loan.
A Homeowner's Guide to Cash-Out Refinance
If you're a property owner with an existing mortgage, the equity you've built up over the years can often be turned to your financial advantage. Most of us are familiar with home equity loans (often referred to as a second mortgage), home equity lines of credit (HELOC), and reverse mortgages; all of which can grant homeowners access to some much needed funds. However, there is a further option that allows you to turn the equity in your home into ready cash. Cash that can then be used in any way that you see fit. If you have built up sufficient equity in your home, Cash-Out Refinancing may provide an opportunity to refinance your existing mortgage and receive a lump sum payout in the bargain.
What is Cash-Out Refinance?
After years of paying off a mortgage, and significantly reducing the principle, you will have built up a certain amount of equity in your home. That equity is the difference between the balance owed on your existing mortgage and the property's estimated market value. With a cash-out refinance you tap into your earned equity by refinancing your current mortgage, and taking out a new loan for more than you still owe on the property. At closing, you receive a lump sum payout (the amount of the loan over and above what was still owed on your original mortgage) which can be used at your discretion to pay down consumer debt, perform some home improvements, or even invest in the stock market or another valuable piece of property.
So, for example, if your home is valued at $200,000 and you owe $100,000 on your mortgage, you have built up $100,000 of equity in the property. Now, let's suppose that you need/want $60,000 to pay off some high interest debts or to help your youngest out with college tuition costs. With a cash-out refinance you would remortgage your home for $160,000, and at closing you would receive a lump sum payout of $60,000. Unlike a second mortgage or a home equity line of credit, this is cash money in your hand, payable when your new mortgage is approved and finalized.
Key Points and Considerations
Of course, as with any financial transaction, things are rarely as simple as they may seem on the surface, and there are a few key points that need to be considered. First, and foremost, is the amount of equity in your property. This will determine how much money you can access in a cash-out refinance, and while there are some generally accepted industry standards the ultimate loan-to-value limit will be set by your lender. Equally important are the rates and terms of your new mortgage. As attractive as cash-out mortgage refinancing may be, it can lead to trouble if your new loan comes with higher interest rates and an unusually restrictive repayment plan. It's also worth remembering that in most cases your new mortgage will be subject to the same vetting as any other loan, and the terms you are offered will be dependent upon your credit history, current employment, and overall financial profile.
If you are considering the possibilities of a cash-out refinance, there are a few important points to review:
- Mortgage Seasoning Requirements – Most lenders will refuse to approve a cash-out refinance on any property with less than 12 months of seasoning. This is to prevent buyers from flipping and/or serially refinancing properties. Ideally, to qualify for a cash-out refinance at acceptable rates and terms, you should have at least 36 to 48 months of seasoning on your existing mortgage.
- Maximum Loan-to-Value (LTV) Limits – Regardless of seasoning, there are strict limits on the amount of money you can receive in any cash-out refinance. Currently, the standard LTV is 85% of your mortgage equity. This is a general industry standard adopted by lenders following the housing crisis of 2008. It's worth noting that maximum LTV limits aren't written in stone, and are ultimately subject to the discretion of the individual lender. Some banks increase LTV limits when the loan is used for home improvement.
- Income Tax Implications – The funds you receive via a cash-out refinance are not considered income, and so are not subject to taxation. In essence, you are merely taking out a new loan (which you will, of course, be required to repay with interest) so there will be no income tax to pay.
- Tax Deductible Allowances – In certain circumstances, portions of the sum you receive from a cash-out refinance can be tax deductible. For example, you may deduct the interest on up to $750,000 in home purchase debt. If you were to take out a new mortgage on your home with a cash-out refinance and use the funds to pay down your outstanding consumer debt, the interest on that amount would be tax deductible. There are also tax deductions for points, which can be spread across the life of your loan to reduce your annual tax liabilities.
- Closing Costs – Naturally, there will be closing costs associated with a cash-out refinancing transaction. Typically, these are deducted from the amount you receive at closing, though in some circumstances lenders will fold any fees and charges into the principle of the new loan. Points are treated as an upfront interest payment. Interest on HELOC and home equity loans is no longer tax deductible.
- Repaying the Debt – Finally, it is worth noting that by taking advantage of a cash-out refinance you are essentially extending the life of your mortgage. Moreover, you are doing so at new rates and with a new set of repayment conditions. Ideally, these should be an improvement over those associated with your current mortgage (although in some cases it can be beneficial to bump up the interest rates on your mortgage if you will be using the cash-out funds to pay down higher interest consumer debt). Still, it is important to understand that you are effectively taking out a new mortgage, and while you are receiving a cash payout in the bargain you are also taking on a new loan burden. Never forget that you are using your property as collateral, and you always run the risk of losing your home or landing yourself in a negative equity position where you owe more than they house is worth.
Cash-Out Refinance for FHA Mortgages
Homeowners holding an FHA backed mortgage can also benefit from cash-out refinancing, although the rules and regulations are slightly different from conventional refi programs. Overall, the guidelines governing FHA cash-out loans are somewhat more flexible, making them easier to obtain that a standard refi. That being said, there are some restrictions that FHA mortgage holders should be aware of if they are considering a cash-out refinance.
- Ownership and Occupancy – FHA cash-out loans are only available on owner-occupied properties, and can not be used to refinance rental or investment properties. To qualify, you must have lived in the home for at least a year, and the length of occupancy will have a direct impact on the size of the loan itself. For example, if you purchased your home a year ago at $200,000, and it now appraises at $225,000, your LTV limit will be based on the earlier appraisal. In other words, the longer you have owned and occupied the property, the more equity you can tap into.
- LTV Limits – Like conventional cash-out refinance programs, LTV limits for FHA mortgages top out at 85%. However, the final loan amount will be largely determined by a number of mitigating factors, including income and assets, length of ownership and occupancy, and current credit score. It's worth noting that while there are no specific credit score requirements for an FHA refi, most lenders will hesitate to underwrite any cash-out loans for applicants with a score of less than 640.
- Mandatory Appraisals – If you are applying for an FHA cash-out refinance, your lender will demand a new appraisal of the property to establish its current market value. This will be used to determine the final LTV limit of the loan.
- Mortgage Payment History – To qualify for any FHA refinancing, you must demonstrate that your mortgage payments have been made on time, and in full, for at least 12 months.
- Debt to Income Guidelines – To qualify for cash-out refinancing, homeowners must meet the current FHA debt-to-income guidelines. Currently, the FHA allows for a debt-to-income ratio of 29% for housing costs (mortgage, interest, taxes, and insurance) and 41% for total personal debt (housing, credit cards, loans, etc).
- Mortgage Insurance – All FHA loans require the holder to maintain mortgage insurance. This includes both upfront and monthly mortgage insurance premiums. The cost of mortgage insurance will vary depending on loan amount, property value, and location. Bare in mind, that this insurance requirement will add to the overall cost of your cash-out loan, and should be taken into account when determining if a refi is the right financial move.
Cash-Out Refinancing and the VA
Homeowners with an existing VA mortgage can also qualify for cash-out refinancing. However, like FHA refinance programs, lenders handling VA loans have slightly different guidelines when compared to conventional mortgage underwriters. The most significant difference is that homeowners holding a VA guaranteed mortgage are technically eligible to borrow against 100% of their property's equity. That being said, the VA will only guarantee 25% of the refi amount, and most lenders cap the loan-to-value limits on cash-out refinancing at 90%.
Otherwise, the requirements for VA cash-out refinancing are not dissimilar to those governing the FHA's program. Applicants will have to provide proof of income and assets, and the lender will run a full credit history. The property being considered must be owner-occupied, and there is a mandatory appraisal to determine current market value. Mortgage insurance is not required (though it is encouraged) as the VA guarantees a portion of the new loan. Finally, closing costs (including fees, taxes, and surcharges) will be deducted from the cash-out amount upon closing, and can not be folded into the loan's principle.
Rental and Investment Properties
So far we have concentrated primarily on owner-occupied homes, but cash-out refinancing is also an option for rental and investment properties – though, admittedly, it can sometimes be difficult to obtain. Following the housing crisis of 2008, and the ensuing economic downturn, lenders were particularly hesitant to refinance investment properties let alone with a cash-out option. Fortunately, that is beginning to change, and cash-out refinancing for rental and investment properties is once again a viable option for consumers with sufficient equity in their holdings.
As with a conventional cash-out refi everything depends upon the equity you have built up in your property. The greater the equity, the more likely you are to qualify for refinancing and the more you will be able to benefit from the transaction. As a general rule, the loan-to-value limits on non-owner occupied properties is capped at 75%. On rare occasions, some lenders may extend the limit to 80%, depending on the property's equity and the owner's financial profile, but these loans are typically beset with higher interest rates and more restrictive terms.
While rental and investment cash-out loans follow most of the guidelines set for conventional refinance programs, there are some specific rules that only apply to the refinancing of non-owner occupied properties.
- The loan-to-value limits for non-owner occupied properties vary depending on the nature of the property itself. The maximum LTV is 75% for single unit properties and 70% for 2 – 4 unit properties. If the property in question has been listed for sale within the last six months the LTV limit will be capped at 70%.
- To qualify for refinancing, the property in question must not be listed for sale at the time of application.
- Investment properties are not eligible for cash-out refinancing if they have been purchased within the last six months. Exceptions to this rule will be made if the property under review meets the Delayed Financing Guidelines set out by Fannie Mae.
Properly leveraged, refinancing rental and other non-owner occupied properties can be a way to reap greater financial benefits from your investments. However, there is always some risk, particularly if property values take a dive. Cash-out refinancing for non-owner occupied properties can be difficult to obtain, and you should expect to undergo a vetting process that is much more rigorous than would be applied to an owner-occupied or no cash-out refi. To qualify for a cash-out loan on any investment property you will need to show proof of an exceptional credit history, and should be prepared for a full review of all of your income, assets, and outstanding debts.
The Pros and Cons of Cash-Out Refinance
If you find you need to access a fairly large sum of money in a hurry, cash-out refinancing may be the answer. Certainly, it offers some advantages over other forms of debt. Still, while the benefits may be clear, there are some very real disadvantages that all property owners should be aware of before they decide to pursue a cash-out loan.
- Money for Major Expenses – Cash-out refinancing allows property owners to access the money need for a variety of personal expenses, with no questions asked. The cash you receive upon closing can be used for home improvements, investments (property, stocks, bonds), college tuition, vacations, and other major purchases.
- Consolidate Debt – One of the major benefits of a cash-out refinance is that the money you receive can be used to pay down high interest consumer debt (credit cards, personal loans, etc) which will naturally improve your financial profile. While it's true that you are technically taking on new debt, the relatively low interest rates associated with cash-out refinancing can ultimately save you money in the long run if you use those funds to clear out existing debts and continue to keep them under control.
- Improved Credit Score – Using the money from your cash-out refi to pay off other outstanding consumer debts will reflect well on your credit history, and will improve your overall score.
- Stable Interest Rates – If you time your refi just right, you may be able to enjoy better rates and terms than with your current mortgage. Cash-out refinancing programs also have an advantage over home equity lines of credit in that they typically come with fixed rates as opposed to the variable interest rates applied to HELOCs.
- Risk of Foreclosure – Because you are using your home or investment property as collateral for your new loan, it will be in jeopardy if you fail to meet the terms and conditions of the refi. This is something that should not be taken lightly. If you default on the loan, you will lose your property.
- Worse Terms – Ideally, your refi will come with better terms than your original mortgage. However, that's not always the case and if you are trying to access money in an emergency you may find that you must accept higher interest rates and more restrictive terms than you might like. As with any loan, think carefully about the terms and conditions of a cash-out refi before signing any loan agreements.
- Lengthy Application Process – Unlike other refinancing programs, a cash-out refi takes time, and you should be prepared to go through an extensive vetting process, just as you would for any new mortgage.
- Closing Costs – Unlike a home equity loan, or second mortgage, you will be expected to pay closing costs on your cash-out refi. Sometimes these can be folded into the new mortgage's principle, but just often they must be paid out of pocket or from the cash-out disbursement. These costs can range from 3% to 6% of the total loan amount, and that can amount to a size a sizable sum. Ultimately, you will have to decide if the fees associated with a cash-out refi are worth it for the access to ready cash.
- Another New Mortgage – Finally, while you may enjoy a quick influx of cash, it is important to remember that you are taking out a new mortgage. In effect, starting from scratch. Even if you qualify for an exceptionally favorable fixed rate, you will be still paying interest for 15 to 30 years. That's a cost that should not be overlooked.
Alternatives to a Cash-Out Refi
The primary reason anyone considers a cash-out refinance is to raise cash relatively quickly. Whether it is for pleasure or investment, a cash-out refi provides an opportunity to access some much needed cash at interest rates that may be more forgiving than a personal loan, credit card advance, or even a home equity line of credit. Of course, there are some alternatives to cash-out refinancing that allow consumers to raise some much needed cash without putting their homes or investment properties at risk. We would be remiss if we didn't spend at least a little time talking about those alternatives, and how they compare to cash-out refinancing.
- Early Withdrawal from an IRA – For smaller amounts of money, it may be be possible to tap into the equity in an IRA. However, there are some drawbacks to consider. First, if you are under the age of 60 you will be paying penalties right out of the gate. To the tune of 10% of the total amount withdrawn. Second, any money received will be considered taxable income except under some very strictly defined conditions (purchase of first home, college tuition costs). Between penalties and taxes, the cost of tapping into your IRA can be significant.
- Borrowing from Your 401k – Many companies allow their employees to borrow from against their 401k retirement plans. This has some advantages, as the application and approval process is relatively simple so cash can usually be accessed fairly quickly. However, there is a downside to consider. Loans against your 401k are subject to interest, typically calculated at 1 to 3 points above prime. Moreover, when you take money out of your retirement savings you are sacrificing any earned interest on that amount, which will inevitably slow the rate of growth of your 401k. Finally, should you leave your job you will face a repayment deadline on your loan (typically 60 days), and that can cause unwanted financial hardship.
- Borrowing Against an Annuity – If you are purchasing an annuity to supplement your retirement earnings, you may be able to borrow against its cash value. While the terms of annuity loans vary according to the provider, most will approve loans up to 50% of the current cash value. These loans can be beneficial in an emergency, and if you repay the loan in a timely manner can be an affordable way to raise some quick cash. However, if you fail to repay the loan on time, or default on the loan, you will be forced to pay surrender fees, distribution charges (usually 10% of the total amount), and taxes on all money received. Moreover, by taking money from the annuity you are sacrificing any potential earnings from the initial investment.
- Borrowing from Your Life Insurance – If you need to access some ready cash in an emergency you might choose to borrow against your life insurance, assuming you are holding a ‘whole life' or ‘permanent life' policy. If you have built up enough cash value in the policy, most insurance companies will allow you to tap into that amount. This can be a viable option if you find it difficult to qualify for a conventional loan, or the rates and terms you are being offered are too draconian. There is a danger here, however, and you should think carefully before borrowing against a life insurance policy. While the interest rates may be better, they do eat into the value of the policy itself and if you fail to pay the loan back in a timely manner (or at all) your beneficiaries will ultimately be the ones that suffer.
- Credit Card Debt – Credit cards have become the go to solution for many people under financial stress. This is understandable, as credit cards are nothing if not convenient. But keep in mind the high interest rates associated with unsecured debt. A major purchase or a cash advance using your credit card will ultimately cost you more in the long run than a small personal loan, HELOC, or cash-out refi.
- Home Equity Line of Credit (HELOC) – One of the more attractive features of cash-out refinancing (aside from the money in hand) is the low fixed interest rate. That being said, in some instances a home equity line of credit might be the better option (depending on your situation). While you will be paying a higher interest rate, it can often be offset by the shorter loan term. Remember, when you choose a cash-out refi you are taking on a complete new mortgage and you will be paying fees and interest on that mortgage until it is completely paid off. With a HELOC, you only pay interest on the amount you borrow. While your debt may be subject to variable rates, the term of the loan itself is shorter and more easy to manage.
- Borrowing Against a Structured Settlement Investment – The pros and cons of structured settlement investing are a hotly debated topic, and beyond the scope of this article. However, as a source for ready cash it is important to understand that structure settlements, while a real asset, are by their very nature illiquid. Holders may not borrow against them to raise money. However, under certain circumstances it may be possible to sell your holdings at a discount rate. This will allow you to raise some much needed cash, but the losses can be substantial. This method of accessing ready cash only recommended in the most dire financial circumstances.
- Automobile Refinancing – Cash-out refinancing doesn't only apply to homes and investment properties. Many banks also market cash-out refi options for automobile loans. It's a growing market, but frankly the programs only really benefit the lenders. Because automobiles depreciate in value at such a fast rate, cash-out refinancing tends to lead to upside-down loans. Ultimately, you will owe more to the lender than your car or bike is worth. The only time a cash-out auto refi makes sense, is if the automobile in question is a collectors piece that is expected to appreciate in value over time, and even then it is a high risk venture. Higher level of risks also come with higher rates of interest.
The equity you have built up in your home or investment property is a very real asset that can be tapped to provide access to ready cash when you need it. However, like any financial venture, borrowing against that equity comes with certain risks, chief among them a long term mortgage and the possible forfeiture of your collateral (ie your home). While cash-out refinancing does offer quick access to cash, it is important to weigh all of the pros and cons before opting for a new loan. Consider the total cost of the loan (fees, surcharges, and interest payments) and the potential long term effects it may have on your overall financial profile. Fully investigate all other avenues that may allow you to access ready cash that may offer a greater return with less risk. If you decide that cash-out refinancing is right for you, treat the process as you would any other major loan transaction and take the time to find the best deal at the best possible rates and terms.