There are several ways to access the equity in your home, such as home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing. Cash-out refinancing involves taking out a new loan for a larger amount than your current loan, paying off the existing loan, and receiving the difference in cash. This type of loan can provide you with a lump sum of money at closing, as well as a better mortgage rate and terms. A home equity loan is a second loan for your home, which you can take out in a lump sum or on a HELOC.
With a HELOC, you only pay interest for what you borrow and after 10 years you must start repaying principal. However, if you don't want to refinance your current home loan, a cash-out refinance may not be the best option. Alternatively, a reverse mortgage allows homeowners 62 and older to withdraw cash from their homes without having to repay the balance as long as they live in the home and maintain it. This type of refinancing loan may be the best way to borrow the money you need, but it's not always the right choice.
Many homeowners don't have enough equity to pay off their current loan, leave 20% of the home equity, and receive a cash refund. Lenders that offer loans insured by the Federal Housing Administration (FHA) sometimes offer an FHA cash refinance that allows you to borrow up to 85 percent of the value of your home. While lenders generally allow homeowners to borrow up to 80 percent of the home's value, this threshold may vary depending on your credit rating and type of mortgage, as well as the type of property attached to the loan. Mortgage loans use your home as collateral, so mortgage interest rates tend to be lower than other forms of loans.
You can expect to pay 3 to 5 percent of the new loan amount for closing costs when performing a cash-out refinance. Additionally, a cash-out refinance may be eligible for mortgage interest tax deductions if you use the money to improve your property. The result will be a new payment repayment program that shows the monthly payments you must make to pay off mortgage principal and interest at the end of the loan term. The FHA also charges annual mortgage insurance on all cash-out refinancing loans, while a conventional cash-out loan has no PMI.
The rate will be based on the loan-to-value ratio (LTV) along with your credit rating and the value of the loan. Even if you need both features of a cash-out refinance - a new mortgage and cash loan - it may not be your best offer. Underwriting and eligibility guidelines are more stringent for these loans and may take longer to close than short-term financing.
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