A lot of people choose not to sell their homes. And for those who have not sold their houses by now, for sure they have already earned equity because of the increasing real estate values. And also due to the low mortgage rates, many American homeowners are now considering refinancing their homes. But first, you need to know a little bit more about cash-out refinancing.
Cash-Out Refinance Loans
If you own a home, you are slowly gaining ‘equity.’ This is the term that refers to the property value that you have already paid. There are different ways for you to earn equity for your property. First, when the value of your home increases, and second, when you are paying monthly mortgage payments.
So, what is a cash out refinance? This is basically a kind of mortgage refinance where this gives you cash in exchange for a new and larger mortgage. This is done by taking advantage of the equity that you have already built over time for the property. Cash-out refinance is a way for you to borrow more than your mortgage and then take the rest out as a cash loan.
Cash-Out Refinance vs Second Mortgage
Some people would mistake this as a second mortgage. Remember that when the homeowner takes out a second mortgage, they are taking another monthly payment. But with the cashout refinance, you are simply replacing the new mortgage while paying the remaining mortgage at the same time.
Cash Out Refinance – How Does it Work?
Now that you know what the cashout refinance loan is and you are considering applying for one, then you might be wondering how the process works. The application flow is quite similar to when you purchased your home. You have to meet the necessary requirements, pick a trusted lender, then send out your application. If you are approved then you just have to wait for the check to be sent to you.
So what are the requirements? This will depend usually on the lender. Generally, there are common requirements that you need to comply with. First, your credit score and history. For most lenders, they require the borrower to have at least a credit score of 620. For refinancing your mortgage, have a credit score of at least 580 to be approved for the loan.
The lender might also check your debt/income ratio. The equity you have in your property will also be considered. This will be needed to determine the amount for your cashout refinance loan.
Approved? Here’s Where You Can Use It.
If you choose to get a cash-out refinance loan, you will be taking out a portion of your equity. This amount is added to the principal of your new mortgage. Some people use the cash-out refinance to take care of their debts. Others use this for home improvement projects, investment, or for their child’s education. Remember that the money that you are taking out of your equity is yours, you have already paid for it. So how you use the money from the cashout refinance loan will not really matter for the lender.