How to prepare for a cashout refinance
Here ’ s how you might prepare for a cashout refinance :
1 . Determine the lender ’ s minimum requirements
What is cashout refinancing ?
Cashout refinancing replaces your current home loan with a bigger mortgage , allowing you to take advantage of the equity you ’ ve built up in your home and access the difference between the two mortgages ( your current one and the new one ) in cash . The cash can go toward virtually any purpose , such as home remodeling , consolidating highinterest debt or other financial goals .
How a cashout refinance works
The process for a
cashout refinance is similar to a rateandterm
refinance of a mortgage , in which you simply replace your existing loan with a new one for the same amount , usually at a lower interest rate or for a shorter loan term , or both . In a cashout refinance , you can do the same , and also withdraw a portion of your home ’ s equity in a lump sum .
“ Cashout refinancing is beneficial if you can reduce the interest rate on your primary mortgage and make good use of the funds you take out ,” says Greg
Photo by RODNAE Productions from Pexels
McBride , CFA , Bankrate chief financial analyst .
For example , say the remaining balance on your current mortgage is $ 100,000 and your home is currently worth $ 300,000 . In this case , you have $ 200,000 in home equity . Let ’ s assume that refinancing your current mortgage means you can get a lower interest rate , and you ’ ll use the cash to renovate your kitchen and bathrooms .
Since lenders generally require you to maintain at least 20 percent equity in your home ( though there are exceptions ) after a cashout refinance , you ’ ll need to have at least $ 60,000 in home equity , or be able to borrow up to $ 140,000 in cash . You ’ ll also need to pay for closing costs like the appraisal fee , so the final amount could be less .
You tend to pay more in interest after completing a cashout refinance because you ’ re increasing the loan amount , and like other loans , you ’ ll have to pay for
closing costs . Otherwise , the steps to do this kind of refinance should be similar to when you first got your mortgage : Submit an application after selecting a lender , provide necessary documentation and wait for an approval , then wait out the closing .
Mortgage lenders have different qualifying requirements for cashout refinancing , and most have a minimum credit score — the higher , the better . The other typical requirements include a debttoincome ratio below a certain percentage and at least 20 percent equity in your home . As you explore your options , take note of the requirements .
2 . Calculate the exact amount you need
If you ’ re considering a cashout refinance , you ’ re likely in need of funds for a specific purpose . If you aren ’ t sure what that is , it can be helpful to nail that down so you borrow only as much as you need . For instance , if you plan to use the cash to consolidate debt , then gather your personal loan and credit card statements or information about other debt obligations , and add up what you owe . If the cash is to be used for renovations , consult with a few contractors to get estimates for both labor and materials ahead of time .
3 . Have your information ready when you apply
Once you ’ ve shopped around for a few lenders to ensure you get the best rate and terms , prepare all of your financial information related to your income , assets and debt for the application . Keep in mind you might need to submit additional documentation as the lender evaluates your application .
90