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
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 .
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