The Complete Guide to the Cash-Out Refinance

The Ins and Outs of the Cash-Out Refinance in 2022

Imagine your dream kitchen, spa-like bathroom oasis, or perfect backyard. Or envision paying off debt, sending your kids to college free of student loan debt, finally taking that vacation, or having money to invest and build wealth. Now, picture having available funds to transform your vision into reality – without having to dip into your hard-earned savings. And no, you don’t have to win the lottery to access cash to lead the life you’ve always wanted… A cash-out refinance may be the solution you’ve been waiting for!

How a Cash-Out Refinance Works

A cash-out refinance is a loan type where you essentially “cash in” your home equity for cash in your pocket. Generally, this loan type replaces an existing mortgage with a loan amount that’s more than the current mortgage loan. You receive the difference between the two loans (i.e., home equity) in cash at closing.

Types of Cash-Out Refinances

Just like a mortgage for a home purchase, there are many different loan types to choose for a cash-out refinance, including FHA, VA, conventional, and jumbo loans. With both conventional and FHA loans, you are required to leave at least 20% equity in your home after a refinance. With a VA loan refinance, you can cash out all the home equity.

Additionally, and again, like a mortgage intended for a home purchase, there’s a process from the time of application to closing, including underwriting, processing, and approvals. Keep in mind that closings costs, other fees, and appraisals are all a part of cash-out refinance loans as well.

FHA Cash-Out Refinance

An FHA cash-out refinance is ideal for borrowers who need flexibility qualifying with their debt-to-income ratio or less-than-perfect credit. Additionally, it allows you to refinance up to 80 percent of your home’s value for cash. So, how does it work? With this loan, you get a new loan for an amount larger than the amount you currently owe. The new loan is used to pay off the existing loan. The difference between the two is yours to keep – as cash!

There are many reasons you may choose an FHA cash-out refinance, including:

  • Your mortgage rate is higher than today’s rate
  • Lower mortgages rates, compared to other cash-out refi options
  • No income limits
  • You have a perfect 3-month payment history
  • You may still qualify even if you currently have a different loan type

To qualify for an FHA cash-out refinance, prepare to have employment history and documentation to submit to the lender as proof that you’ve owned your home (as a primary residence) for at least a year prior to applying. Utility bills from the last 12 months may also be sufficient proof.

It’s important to note that FHA loans typically require a borrower to purchase mortgage insurance. If you already have an FHA loan, you’re familiar with this. If you currently have a different loan type, know that mortgage insurance is typically required with an FHA loan.

VA Cash-Out Refinance

A VA cash-out refinance is an option available to military homeowners. Like other cash-out refinance options, this loan lets you take cash out of your home equity to use as you wish, whether it’s to pay off debt, make home improvements, or spend as you see fit. A VA cash-out refinance simply replaces your current mortgage rather than taking on an additional loan. Just like qualifying for a VA loan for a home purchase, the VA cash-out refinance requires you provide your Certificate of Eligibility (COE) to show the lender that you qualify for VA loans.