A cash-out refinance pays off your current mortgage with a new mortgage that has a higher loan balance. The cash-out you receive after closing can be used for home improvement projects, debt consolidation, and education expenses.
Below you’ll discover the current cash-out loan requirements, why a California homeowner might want to do a cash-out loan, the various loan programs available, ways to lower your interest rate, and more.
Cash-Out Refinance Requirements
Here are the current cash-out refinance requirements underwriting will use when evaluating your loan application. It’s important to know that these requirements are the minimum standards.
- 620 credit score
- Loan amount up to $2,500,000
- Timeline to closing; three to four weeks
- A debt-to-income ratio of 45% or less (ideally below 40%)
- Primary residence, secondary residence, and investment properties
- Single Family Residence, Condominiums, and Multi-unit properties (up to four units) are allowed
- Loan To Value Ratio of 80% or less
- Documentation – one or two years of income documentation, two most recent bank statements, a copy of your current mortgage statement, and a copy of your homeowner’s insurance declarations page (or contact information for your homeowner’s insurance agent).
- Conventional home loan, FHA home loan, and VA home loan options. We also offer a bank statement home mortgage option.
- Previous Bankruptcy and/or Foreclosure are allowed under certain circumstances.
The requirements are subject to change without notice. For the most up-to-date list of requirements, please get in touch with Loan Officer Kevin O’Connor at 1-800-550-538 or complete the form below.
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Reasons To Do A Cash-Out Refinance
There are many reasons a homeowner may want to consider a cash-out refinance, and here are some of those 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, making sure the new loan terms make financial sense is essential. Never do a cash-out refinance to buy clothes, jewelry, or take a vacation.
Paying off High-Interest Credit Card Debt or Personal Loans
Many homeowners have significant credit card debt, especially after a major remodel. Credit card companies often offer 0% interest for a limited time, and then it moves up to 12% or even 16% or possibly higher.
A cash-out refinance in California might be the answer if you have significant credit card debt or a high-rate personal loan. Using the equity in your home to lower your interest rate could be a wise decision.
Not only will your overall monthly debt payment be lower, but you’ll also be paying a lower interest rate on that debt you transferred over to your mortgage. The critical 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 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 home’s value.
If you have the funds available to do that, great; if not, why not use the equity in your home? Most loan programs offer a cash-out refinance option for homeowners to improve their homes. In fact, FHA has a specific program for this in which a homeowner can borrow up to 110% of the home’s future value. 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 family member attending 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 costly 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 an excellent 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.
And on your next mortgage transaction, you’ll want to look into your self-employed mortgage options.
Buying an Investment Property
Do you have a dream of owning 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 critical thing is this; a lender will require you to have an agreed-upon contract to purchase a home before you 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.
Additional Cash-Out Refinance Details
Here are the home loan programs that offer a cash-out refinance option;
By far, the most popular program is the Conforming home loan program. Usually, a cash-out loan program does not have a pre-payment penalty, nor does it typically come with a balloon payment. Each home loan program offers different benefits, so be sure to discuss the various options with your Loan Officer.
If you have less-than-perfect credit, your best cash-out refinance loan program option might be an FHA home loan. Even with a low credit score, you’ll still get a great home loan interest rate with the FHA home loan program.
Cash-Out Refinance Home Loan Rates
Interest rates for a cash-out refinance in California are typically 0.125% to 0.50% higher than non-cash-out loans (except under the FHA and VA home loan programs). 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 interest rate.
Instead of taking a higher interest rate, you can pay more fees. If you pay more fees, make sure you figure out if buying down the rate makes sense.
Ways To Lower Your Home Loan Rate
Lowering your home loan interest rate on a cash-out refinance is a top priority for all homeowners in California. Obtaining a lower rate can 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 home loan interest rate;
- Work with a top-rated mortgage company. We highly suggest you only work with mortgage companies with 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 you a higher home loan interest rate knowing most homeowners don’t shop around.
- Be open to different loan structures and suggestions from your Loan Officer, as this might open you to a lower home loan interest.
- Consider paying points to lower your home loan interest rate. It’s not always beneficial, but paying points sometimes makes sense.
Reduce Your Cash-Out Refinance Closing Costs
Here’s a straightforward way can reduce your cash-out refinance closing costs; obtain two or three quotes and ask this simple question;
What are the total fees for everything, including all possible lender fees, points, origination fees and 3rd party fees?
This simple question will give you insight into what the mortgage company charges to close your loan. FYI – things like “application fees,” “processing fees,” etc. are ways mortgage companies overcharge their clients, and many mortgage companies do not disclose (upfront) Loan Origination fees.
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 essential to ask the Loan Officer upfront what the expected time frame is for closing.
Some lenders 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. You should count on doing an appraisal which generally costs $450 to $750 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.
Is a Cash-Out Refinance For You?
The best way to determine if a cash-out refinance is for you is to make a pros and cons list. List all the benefits of doing a cash-out refinance in one column, and in the second column, list all the negatives associated with a cash-out refinance.
If you are having trouble making the final decision, it might be a good idea to include your Loan Officer in the decision process. At the end of the day, if the benefits outweigh the negatives, then a cash-out refinance should be something you consider.