Cash-Out Refinance For Home Improvement

How Can You Fund Home Improvements With A Cash-Out Refinance?

A cash-out refi is a type of mortgage refinance that allows you to utilize the equity you have in your home to get a new mortgage, that converts some of your equity into cash.

Essentially, you’re borrowing more than you currently owe on your loan and pocketing the difference. To do this, you need to have enough equity in your home to borrow.

Cash-out refinances are different from second mortgages. When you get a cash-out refi, the new mortgage becomes your primary mortgage.

For example, if you bought your home for $200,000 and have paid off $75,000 of the loan, you still owe $125,000 on your original mortgage. Let’s say the value of your home has increased by $100,000 to $300,000. When you subtract the amount you owe from the value of your home ($300,000 – $125,000), you get your home equity. In this case, that would be $175,000.

Keep in mind that when you’re deciding how much money to borrow on a cash-out refinance, lenders usually put a cap on the amount of equity you can withdraw. Generally, lenders cap the amount you can borrow at around 80% of your home’s value. For this example, your lender would allow you to cash out up to $240,000.

Cash-Out Refinance Requirements

When considering your eligibility for a cash-out refinance, lenders will consider a few factors. Let’s take a look at some of the requirements you need to meet to qualify.

• Credit score: Most lenders require a credit score of 620 in order to qualify for a cash-out refinance. Requirements may vary based on the lender and may be as low as 580 for certain types of loans.
• Debt-to-income ratio (DTI): Your debt-to-income ratio is a percentage that represents your gross monthly income compared to your fixed monthly debts. For a cash-out refinance, most lenders require a 43% or lower debt-to-income ratio. Depending on the lender and type of loan, the exact percentage may vary.
• Home equity: You’ll need to have and retain at least 20% equity in your home in order to refinance. If you have a VA Loan, you may be able to withdraw up to 100% of the equity in your home, but exact qualifications may vary from lender to lender.
• Home appraisal: Mortgage lenders will likely require a home appraisal as part of the mortgage application process. Getting a new home appraisal before a cash-out refinance helps determine how much your home is actually worth, which impacts the amount of equity you have in your home.