A Cash-Out Refinance is a type of mortgage refinance transaction in which you access the equity you have in a property without having to sell it.  The property can be owned either free-and-clear or have an existing loan.  You can cash-out refinance any occupancy type: Primary Residence, Second Home, or Investment Property.  And there is no restriction on the type of property: single family home, condo, town-home, etc.  You calculate the amount of Cash-Out you will receive as follows:

• If the property is owned free and clear and currently has no mortgage:
  • Cash-Out Amount = New Loan Amount – Closing Costs

• If there is an existing loan on the property that needs to be paid off the amount of cash-out you can receive is calculated as follows:
  • Cash-Out Amount = New Loan Amount – Existing Loan Balance – Closing Costs

What are Some Common Reasons you Would Want to Cash-Out Refinance Your House?

• Your home has increased in value and you would like to access some of the equity of your home without selling it.

• You purchased a property without financing either as a requirement of the purchase contract (often done to negotiate a lower purchase price) or because the property was not financeable (ie. it was a rehab and needed a lot of work) & now would like to use delayed financing to recoup some of the money you have tied up in the property.
• As part of a divorce, to divide the equity between the parties as part of a marital settlement agreement or as directed by the court.
• To make home improvements.
  • Home improvements can pay for itself over time by increase the value of your home over time, which increases your equity & offset the cost.
• For other investments.
  • Some people choose to pull cash-out on a property if the investment vehicles they can put the money in will generate more interest than the interest rate of the mortgage.   This difference is called a “spread”.

• To buy another property.
• Debt Consolidation (discussed below).
  • Replacing 20% interest on credit card debt with a 3-4% interest mortgage can save substantial money over time.
• Or for any reason you might want the cash-out for.

How do you Calculate the Maximum Loan Amount for a Cash-Out Refinance?

The maximum amount of money you can cash-out of your property is based off of the value of the property.  Therefore, the first step in determining the maximum loan amount for a cash-out refinance mortgage is to get an appraisal on the property.  The appraisal is an independent opinion of the value of the property.  The appraisal must be ordered by your lender but certain regulatory controls have been put in place since the housing collapse to insure independence of the appraiser and that the value is not influenced by either the borrower or the lender.  The regulation surrounding appraisals is contained in the HVCC or Home Value Code of Conduct.  Cash-out Refinance maximum loan limits are based on a combination of factors once the value of the property has been established:

• Credit Score
• Your Debt Ratio
• Loan Type (and not to exceed the max county loan limit)
  • Conventional Loan = 80% LTV
  • FHA Loan = 85% LTV
  • VA Loan = 100% LTV

Are There any Unique Closing Costs With a Cash-Out Refinance?

The closing costs for a cash-out refinance home mortgage are dependent on the state, loan program, and interest rate you select. There are no “special” closing costs unique to cash-out refinances. The closing costs for a cash-out refinance follow a similar calculation as they would for an equivalent purchase or rate/term refinance mortgage.      

Do I Have to Bring any Money to Closing in a Cash-Out Refinance?

No, typically closing costs are rolled into the new mortgage and netted out of the amount of cash-out received.

Are There any Prepayment Penalties with a Cash-Out Refinance?

• Conventional Loans = No
• FHA Loans = No
• VA Loans = No
• USDA Loans = No
• Jumbo Loans = Maybe
• Portfolio/Community Bank Loans = Maybe

What are the Seasoning Requirements for a Cash-Out Refinance?

Many lenders require 12 months to pass from the time you purchase a property before you can take cash-out based on the appraised value of the property.  There are some exceptions that allow you to cash-out money earlier than 12 months through a program called “Delayed Financing”.    

What is “Delayed Financing”?

Delayed financing refers to the acquisition of financing on a property after you have already purchased it.  As mentioned previously, it is common for people to make “Cash Offers” on properties to secure a lower purchase price than other competing offers because the seller will have the assurance that the loan will close since there is no financing contingency.  Another reason being that some properties are not financeable if they are in need of repairs and not considered livable by lender underwriting guidelines.  Below are some general guidelines associated with Delayed Financing:

• The funds used to purchase the property are not borrowed.  If only a small portion of the funds were borrowed, then the lender will calculate the loan amount as a percentage of the value based off of the Purchase Price minus the amount of borrowed funds.  
• The value of the property will be based on the lower of the purchase price or the appraised value for 12 months from the date you purchased the property.  You will not be able use the appraised value until 12 months have passed.
• You will need to source the funds used for the purchase of the property for delayed financing refinances occurring within 6 months of the date of the purchase.  After six months, the funds used to purchased the property do not need to be provided.

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