Cash-Out Refinance Options for Homeowners
A cash-out refinance loan may be on your radar if you’re thinking about a big home improvement project, paying off college tuition or medical bills, or going on a well-deserved vacation. What exactly is a cash-out refinance loan? Simply put, when you owe less on your home than what it’s worth, you can borrow that equity in the form of cash. The amount you borrow gets rolled into your current loan with new terms. There are three options when it comes to cash-out refinance loans: Conventional, FHA, and VA cash-out refinance.
Conventional Cash-Out Refinance
A conventional cash-out refinance loan is ideal if you want to refinance out of an existing FHA loan, and pay a monthly mortgage insurance premium (MIP). If you have at least 20% equity in your home, you don’t pay private mortgage insurance (PMI). This type of loan is on par with FHA and VA loans, however, a high loan-to-value (LTV) ratio can effect your mortgage rate. That is, your mortgage rate may go up if you have a high LTV and a lower credit score.
FHA Cash-Out Refinance
There are two choices with an FHA cash-out refi: a standard cash out or an FHA Streamline cash out.
- Standard cash-out refi: Limits LTV to 85%. Additional guidelines include living in your house for 12 months and considering the home your main residence. Additionally, your account must be in good standing, with no 30-day late payments on record.
- FHA Streamline: Allows for 95% LTV, however, what you can use the money for may be limited.
VA Cash-Out Refinance
Like the two FHA cash-out refi options, the VA cash-out refinance offers something similar. While there are standard cash-out and Streamline options, the Streamline option doesn’t allow for cash withdrawal. The Streamline loan has minimal documentation for VA cash-out refis, which makes processing easier with less hoops to jump through. With the VA standard cash-out refi, there’s no limit on loan size, however homeowners may be subject to Conventional loan limits for VA loans. With a VA cash-out refi, it is possible to obtain 100% of your home’s value.
While there are a variety of options for cash-out refinance loans, it’s best to do your research before applying for one. Take a look at your finances first, and ensure your new monthly payment is affordable. A mortgage calculator is a great tool to help you in that regard. If your new monthly payment is too much of a stretch, look at other options, as failure to make payments can have a negative impact. You can also read, Is a Cash Out Refi Right For You? for more information. If you’re still unsure, talk to a mortgage broker like the ones at Market Place Mortgage Corp., who can help you sort through all the details.