How To Use a Cash-Out Refinance In Your Search For Another House

Are you thinking of buying a second home? A cash-out refinance may be able to help you. A cash-out refinance allows you to take out your equity by getting a new mortgage with a higher loan amount. You replace your current mortgage with a bigger one and get the difference in cash. Like with any refinance, your new mortgage pays off your old one, so you just have one monthly mortgage payment. When you do a cash-out refinance, you usually need to leave some equity in the home. The amount you’ll have to leave in depends on the type of loan, but you should expect to leave about 20 percent equity in the home, according to Rocket Mortgage.

You will also want to remember that your lender won’t let you cash out 100 percent of the equity (you can usually take out up to 80 percent of your equity and use the funds to purchase a new house) you have unless you qualify for a VA refinance, so take a thorough look at your current equity before you commit to a cash-out refinance and make sure you can convert enough equity to accomplish your goals. But before you do any of that, there a few things you should know first.

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How it works

Cash-out refinances replace your primary mortgage so instead of obtaining a separate loan, the remaining balance of your primary mortgage is paid off and rolled into a new mortgage that has a new term and interest rate. To obtain a cash-out refinance, the process is actually pretty simple and very similar to buying a home. All you need to do is make sure you meet the necessary requirements (a credit score of at least 620, a debt-to-income ratio of at least 50 percent and equity in your home). Once you check off the requirements, you choose a lender and then submit an application. After you apply, you receive a decision on whether your lender approves the refinance. Your lender might ask you for financial documents like bank statements, W-2s or pay stubs to prove your DTI ratio. Once approved, the money is tax-free and there are no restrictions on how you can use it, so it would be a great time to use that money for a down payment on a second or investment property.

How much cash can you get on a refinance?

The amount you earn on your refinance typically depends on your home’s value, according to Rocket Mortgage. But before you find out how much you qualify for, you’ll need to have your home appraised. As a rule of thumb, lenders will let you draw out no more than 80 percent of your home’s value, but this can vary depending on your lender or circumstance. One big exception to the 80 percent rule is VA loans, which let you take out up to the full amount of your existing equity. Rocket Mortgage allows you to take out the full amount if you have a median FICO® Score of 680 or higher.

What to know before deciding on a cash-out refinance

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A cash-out refinance can provide a number of financial benefits such as the rate being lower than a home equity loan or home equity line of credit (HELOC) because it’s based on the primary lien, and giving you access to funds that you can use for another house, retirement savings or a college fund. It can also help you pay down your debts and transfer what you owe to one, convenient, lower-interest payment. But before you make the leap to a cash-out refinance, there a definitely a few things you’ll want to be aware of. When you get a cash-out refinance, you pay off your original mortgage and replace it with a new loan. This means your new loan may take longer to pay off, your monthly payments may be different or your interest rate may change. Be sure to look at the Closing Disclosure from your lender and analyze your new loan terms.

You will also pay closing costs when you refinance. Some common closing costs include credit report fees, appraisal fees and attorney fees, depending on your state. If you only need to take out a very small loan, you should take a look at whether the closing costs would negate anything you save with a lower interest rate. So, do you think a cash-out refinance is right for you? It can be a powerful tool and can give you the money you need to move toward your goals. If you’re still on the fence, speak with a financial advisor, use the Rocket Mortgage online refinance calculator or speak with an home load expert.

This article was created by SheKnows for Rocket Mortgage.

Quicken Loans, LLC; NMLS #3030; Equal Housing Lender. Licensed in 50 states. Please visit for more information.

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