A cash-out refinance replaces an existing mortgage with a new loan with a higher balance, sometimes with more favorable terms than the current loan. The difference between these two loans is distributed to the homeowner as cash.

Common uses of a cash-out refinance include paying off credit card debt, financing a business, covering college tuition, managing unexpected expenses, and making improvements to one’s home.

A cash-out refinance differs from a traditional mortgage refinancing, which simply replaces your current loan with a new loan that has a new set of terms and, in many cases, a lower interest rate. A cash-out refinance also differs from a home equity line of credit (HELOC), which allows you to borrow cash using the home-equity as collateral. HELOCs function as a second mortgage, with the borrower withdrawing and repaying funds on a more flexible schedule, and the government allowing a tax deduction for interest payments.* Unlike traditional first or second mortgages, a HELOC interest rate is not fixed; the rate varies from month to month with the prime rate.

The three most popular cash-out refinance options are:

• • • Conventional Cash-Out – Cash-out refinancing options are available to qualified homeowners with more than 20% equity in their homes.
    • FHA Cash-Out – This cash-out refinancing option is available to homeowners with more than 20% equity in their homes.
    • VA Cash-Out – If you are a US veteran or an active servicemember, choosing a VA Cash-Out Refinance often allows you to use even more equity from your loan.

Reasons to Take Cash Out of Your Home

There are a number of common reasons homeowners choose cash-out refinancing over other options. Here are some scenarios in which it may be worth considering a cash-out refinance:

• • • You would like to use your home equity to pay for improvements that will increase the property value of your home
    • You want to take advantage of the potential tax-deduction benefit associated with the interest paid on a mortgage loan*
    • You wish to pay off high-interest and/or high-balance credit cards or eliminate other high interest debts to save money
    • You run into unforeseen expenses, such as emergency medical bills or urgent and costly car repairs
    • You need extra assistance paying for your child’s college education

Even if you find yourself in a situation like the above, you should carefully consider your decision and be sure a cash-out refinance makes sense.

*Consult a tax adviser for further information regarding the deductibility of interest and charges.

Is Cash-Out Refinancing Right for Me?

Using the equity in your home is a great way to get quick access to cash, but it’s also important to decide whether a cash-out refinance makes sense for you overall. The most important question to ask is, “What are my goals?”

If you’re looking to use cash to fund an exotic vacation, cash-out refinancing may not be worth the potential long-term cost. However, if you’re planning to use the money to pay off high-interest debt or renovate your home, the monthly payment savings or home value might make long-term financial sense.

Beyond your personal goals, there are other factors you should take into consideration. Here are some additional questions you should ask yourself before applying:

• • • Do I have enough equity in my home? – The maximum loan-to-value (LTV) ratio for a cash-out mortgage varies based on many factors, including; the occupancy status of your property (owner-occupied or rental), your credit status, and the loan product you choose (conventional, FHA or VA). Maximum LTV for Conventional and FHA products range from 70%-80%, whereas the VA cash-out program allows you to increase your LTV up-to a maximum of 90%. This means you will need more equity in your home to make your cash-out refinance worthwhile if you plan to choose a conventional or FHA product.
    • How will Cash-Out Refinancing affect my monthly payments? – A cash-out refinance increases the total loan amount so your monthly payments will often increase as well. Your mortgage payment may be lowered by extending the term of the cash-out refinance.**Additionally, if you are using the cash to pay-off a high-balance credit card, the monthly payment savings from paying off your credit card may help offset a higher cash-out mortgage payment. South Main can discuss the best options for your individual situation.
    • Will I pay more money over the entire length of the loan? – In most cases you will pay more money over the life of the loan when you reset the term on a cash-out loan. For example, if you’re five years into your current 30 year loan, and take out a cash-out loan with a 30 year term, then you will most likely pay more over the life of the cash-out loan. However, South Main provides you the flexibility to set the loan term on a cash-out loan, which can help offset the total amount paid over the life of the cash-out loan. We can discuss the best options for your individual situation.
    • Is my FHA loan eligible for cash-out refinancing? – If you have an FHA-insured mortgage you may qualify for an FHA Cash-Out Refinance. However you may be better off refinancing into a conventional loan as it does not require mortgage insurance.
    • As a US veteran, what are my cash-out options? – Mortgages backed by the Department of Veterans Affairs may be eligible for a cash-out refinance, and they usually come with great rates and the flexibility to borrow up to 90% of the home’s value. Even if your original mortgage is not a VA loan, your veteran, service member, or military family status may make you eligible for VA Cash-Out Refinancing. Even if a VA Cash-Out is not an option for you, you still may be able to qualify for FHA or Conventional cash-out refinancing.

**By refinancing your existing loan, your total finance charges may be higher over the life of the loan.

Requirements for Cash-Out Refinancing

Similar to when you applied for your original mortgage, you will be required to provide all of the necessary documents to prove your borrowing worthiness and you will be responsible for closing costs, though you may have the option to roll some costs into your loan amount.

Some of the documentation required may include:

• Pay stubs
• Tax returns and W-2′s and/or 1099′s
• A credit report
• Bank statements