Homeowners usually refinance their mortgages for two main reasons: to save money or to tap their equity. Some people use refinancing to get a lower interest rate, while others put their equity toward another expense, like home renovations.
If you are thinking about refinancing your current mortgage, you have a number of refinance options to choose from, including a limited cash-out refinance. Keep reading for a closer look at what a limited cash-out refinance is, its benefits and drawbacks and how it can help you achieve other financial goals.
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What is a cash-out refinance? How does it work?
What is a cash-out refinance? How does it work?
A new loan is used to replace your existing mortgage with a cash-out refinance. A different term length or a lower interest rate can be used to determine the loan's interest rate. Most lenders base their eligibility for a limited cash-out refinance on the same factors as traditional mortgage loans, such as:
If you approve, you can get a limited cash back that is no higher than 2% or $2,000 of the new loan balance. The rule is set by Fannie Mae guidelines. Keep in mind that a limited cash-out refinance loan is larger than the initial loan amount. All closing costs, like refinancing costs, are added to the new loan balance.
Fees associated with a limited cash-out refinance will vary depending on your original loan balance, refinance costs, and the final amount totaled in your new loan.
Title, recording and other fees associated with closing costs are associated with title, recording, and other fees associated with closing costs.
The full payoff amount for your original mortgage is the full payoff amount.
A regular is similar to a limited cash-out refinance in that you can use both types of refinance loans to pay off an existing home loan. A standard cash-out refinance can give you a larger amount of money in cash, depending on how much equity you have in your home. Your new loan will be larger than your original loan, but you'll pocket the difference in cash.
When choosing a limited cash-out refinance loan, a borrower only gets a maximum of 2% or $2,000 in cash.
Standard and limited cash-out refinance loans aren't your only options. You may consider these other types of refinancing loans:
No cash-out refinance - also known as a rate- and-term refinance, a no cash-out refinance replaces your existing loan with an equal or lower loan amount. This is a smart option if you want a lower interest rate or a different term length but don't want to receive cash in hand.
Cash-in refinance allows you to refinance your existing loan while paying a large amount toward the principal before closing. You can use this option to streamline refinance - FHA streamline refinance loans by refinancing existing FHA-insured loans. You can only use this option if you are an existing FHA borrower. The cash back you receive is minimal and the new loan doesn't exceed the original mortgage amount.
There are pros and cons that you should consider before applying for cash-out refinancing.
A limited cash-out refinance may allow you to have a shorter loan term. This is especially true if your credit score or debt-to-income ratio has changed, or if national loan rate averages have decreased.
You can increase your loan amount to cover closing costs. You can roll them into your new loan balance instead of dipping into your savings to pay closing costs. This increases the amount you have to repay.
You can get up to $2,000 in cash. The limited cash-out option allows you to receive a small amount of cash without having to take out a much larger loan.
You are using your home as collateral. If you can't make your payments, your lender can seize your home if you use your property as collateral.
There is no guarantee that you will get a lower interest rate on the new loan until the new loan is processed. You may get a higher interest rate on a new loan depending on your financial history and current average loan rates.
Your monthly payment may be higher. When closing costs, associated fees and the cash-out option are included in the total balance, your overall monthly payment can be higher than your original loan.
If you find yourself in one of these situations, a limited cash-out refinance can be the most beneficial option.
You can fund other expenses, such as home renovations or repairs, with a maximum of $2,000 in cash.
You don't want to take out a home equity loan. A mortgage is an additional mortgage that becomes a second lien on your property. A refinance leaves you with a single loan and payment.
You don't want to pay closing costs out of pocket. You can roll your closing costs into the new loan balance and pay this amount off over the course of the loan.
If you want to refinance your mortgage, use Credible to do it in a matter of minutes.
A limited cash-out refinance loan may not be the right option for your needs. Consider these common scenarios in which your financial goals can be met more comfortably with no cash-out refinance:
If you have limited equity in your home, you might find it easier to qualify for a cash-out refinance compared to a limited cash-out refinance.
If your original mortgage was an FHA loan or an adjustable-rate mortgage, transitioning to a conventional loan with a fixed-rate mortgage can ensure that your monthly payments will stay the same over time.
You want to lower your interest rate and loan term without taking out significant cash. Most refinancing options don't force you to take high cash amounts. A cash-out refinance can give better terms, allow you to keep your existing loan amount and allow you to pay closing costs out of pocket, all without getting any money back.