Cash-Out Refinance In California

A cash-out refinance in California can improve your financial position. Making smart financial decisions to achieve your long-term goals is essential for each and every homeowner. There are various reasons for doing a cash-out refinance which we’ll cover below and when making a decision about moving forward with a cash-out refinance it’s important to consider all the pros and cons.

The best thing you can do before you begin your cash-out refinance is to learn the ins and outs of doing a cash-out refinance, ways you can lower your interest rate, and how to reduce your closings cost. And that’s what we’ll show you in this article.

Ready to learn more about doing a cash-out refinance in California? Let’s get to it!

Reason To Do A Cash-Out Refinance In California

There are many reasons a homeowner may want to consider a cash-out refinance in California and here are just some of the reasons.

  • Payoff high-interest credit card debt and/or personal loans
  • Cash for unexpected expenses
  • Consolidate a 1st and 2nd mortgage (or equity line)
  • The cash-out funds for home improvement purposes
  • To cover education and medical expenses
  • Starting a business
  • Buying an investment property

Whatever your reason is it’s important to make sure the terms of the new cash-out loan make financial sense. Never do a cash-out refinance just to buy clothes, jewelry, or take a vacation.

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Paying Off High-Interest Credit Card Debt And/or Personal Loans:

Many homeowners, especially after they do a major remodel, have significant credit card debt. Many times the credit card companies offer 0% interest for a limited time and then it moves up to 12% or even 16% or possibly higher.

If you have significant credit card debt or a high-rate personal loan, a cash-out refinance in California might be the answer. Using the equity in your home to lower your interest rate significantly could turn out to be a very wise decision.

Not only will your overall monthly debt payment be lower you’ll be paying a lower interest rate on that debt you transferred over to your mortgage. The key thing to remember when paying off your credit card debt is not to charge those cards back up.

Combine a 1st and 2nd Mortgage (or Equity Line):

Combining a 1st and 2nd mortgage makes a lot of sense for some homeowners; especially if it’s an equity line of credit.

Sometimes it makes sense to have a 2nd mortgage and sometimes it doesn’t. If you have a 2nd mortgage with an interest rate that could adjust soon or if it’s significantly higher than what the current market is offering you may want to consider a cash-out refinance to combine the two loans.

And if you don’t want to go back to a 30-year fixed mortgage then look at a 20-year or 15-year fixed mortgage term which will enable you to pay off your home faster.

cash out refinance in California

Cash Out Refinance For Home Improvement Purposes:

For many homeowners in California, there are projects around the house that need to be completed. Upgrading your home (like a kitchen remodel) is a great way to improve the value of the home.

If you have the funds available to do that great, if not why not use the equity in your home? Both Conventional loans and FHA loans offer cash-out refinance options for homeowners to improve their homes. In fact, FHA has a very specific program for this in which a homeowner can borrow up to 110% of the future value of the home. It’s called the FHA 203(k) loan program.

Educational And Medical Expenses:

It’s no secret that the cost of going to college has skyrocketed over the last decade. educational expenses are significant especially if you have more than one person in your family going to college.

What seems to be going higher than education expenses?

Medical expenses! Whether it’s the cost of co-pays and out-of-pocket deductibles to surgery to medical emergencies…it’s getting very expensive to receive medical care.

A cash-out refinance might be the solution for covering educational and/or medical expenses.

Starting A Business:

Do you have a fantastic idea for starting a business but need money to get it off the ground? Then a cash-out refinance might be a great solution for starting a business. It’s important to remember that your plan is to ease your way into the new business and not quit your current job the day after your refinance closes.

Getting approved for a cash-out refinance to help you start a business depends on your ability to show a current income source and the expectation is that you will hold on to your current source of income while the business grows.

Buying An Investment Property:

Do you have a dream to own an investment property? Owning an investment property is a great way to build wealth.

As a homeowner, you can do a cash-out refinance to obtain the necessary funds for a downpayment. The key thing is that a lender will require you have an agreed-upon contract to purchase a home before you can consider closing your cash-out refinance.

Why? Because the monthly expense for the new investment property gets factored into your debt-to-income ratio.

The good news is that lenders typically allow a certain percentage of current market rents to be used as a form of income to help with qualification.

So if the new rental property is expected to provide $2,000 in rent then a lender may allow $1,500 to be used as part of your qualifying income. And the market rents for the area are taken from the appraisal of the rental property. Make sure you discuss this with your Loan Officer to ensure you’ll qualify.

cash out refinance in California for home improvement

Loan Programs That Offer Cash-Out

Conventional, FHA, and Jumbo loan programs offer cash-out options. Most homeowners doing a cash-out refinance chose a 30-year fixed rate however some go with a shorter term like a 15-year fixed.

Most of the time the cash-out loan programs do not come with a pre-payment penalty nor do they typically come with a balloon payment. Each loan program offers different benefits so be sure to discuss the different options with your Loan Officer.

Requirements To Do A Cash Out Loan

The requirements for a cash-out refinance in California are similar to a non-cash-out refinance loan. If you have a 620 credit score, your debt-to-income ratio is less than 50% and you have a Loan-To-Value ratio of 80% or less you will most likely meet the basic requirements of a cash-out refinance loan.

Some homeowners will be required to show liquid asset reserves and each loan scenario is different.

Cash-Out Refinance Mortgage Rates

The mortgage rates for a cash-out refinance in California are typically 0.125% to 0.375% higher than non-cash-out loans. The reason is that cash-out loans have a higher default rate than non-cash-out loans. Since they are higher-risk loans, mortgage lenders charge a higher mortgage rate.

Instead of taking a higher rate, you can pay more fees. If you pay more fees make sure you take the take to figure out if buying down the rate makes sense.

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Ways To Lower Your Mortgage Rate

Lowering your mortgage rate on a cash-out refinance is a number one priority for all homeowners during the process. Obtaining a lower rate can potentially save you thousands of dollars a year so it’s understandable why it’s a top priority.

Here are some basic steps to lower your mortgage rate;

  • Work with a top-rated mortgage company. We highly suggest you only work with mortgage companies that have an “A-” rating or higher with the Better Business Bureau.
  • Find an experienced Loan Officer that knows the market. At a minimum, the Loan Officer should have at least five years of experience.
  • Don’t just call your current lender, they generally will charge higher rates knowing most homeowners don’t shop around.
  • Be open to different loan structures, and suggestions from your Loan Officer
  • Consider paying points to lower your mortgage rate. It’s not always beneficial but at times paying points makes a lot of sense.

Reduce Your Cash-Out Refinance Closing Costs

Here’s how you can reduce your cash-out refinance closing costs: ask questions. Yes, it’s almost that simple.

When you have your 2-3 quotes to compare (assuming they are all from top-rated mortgage companies) you need to then start asking questions. What questions should you ask?

What is this fee/cost and why do I need to pay it?

Asking that simple question will give you insight as to what the mortgage company is charging to do the loan and the associated fees that go along with it. FYI – things like “application fees”, “processing fees” etc are ways mortgage companies over charge their clients (generally speaking).

How Long Does It Take To Do A Cash-Out Refinance?

With most reputable mortgage companies the typical time frame for a cash-out refinance transaction is 30 days (if rates are really low the process might take longer due to the high volume of applications). In some cases, it’s as little as 14-21 days. Each lender is different so it’s important to ask the Loan Officer upfront what the expected time frame is for closing.

There are some lenders that take 45 – 60 days to close a cash-out refinance in California.

Do You Need An Appraisal?

Most cash-out refinances in California do require an appraisal. In fact, you should count on doing an appraisal which generally costs $450 to $550  and is paid by the homeowner to the Appraisal Management Company (AMC).

Once ordered the appraiser should call within 48-72 hours to schedule the inspection which usually takes 30-60 minutes. Once the inspection is done the appraiser generally turns in the report within 5 – 7 days.

If you are considering a cash-out refinance in California make sure you work with an experienced and knowledgeable Loan Officer that will take the time to answer questions.

Anyone can quote you a low rate but not everyone can deliver it at closing. That’s why is so important to work with a reputable mortgage company and a Loan Officer with years of experience.

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17+ years of experience as a Mortgage Loan Originator and is licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. CA DRE #01499872 / NMLS #247447

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