Can I Increase My Mortgage? - Try a Cash-Out Refinance
Do you need more money? Maybe you ran up a lot of debt: credit cards, personal loans, student loans? Or perhaps you like your home and want to do some home repairs or home improvements?
If you currently have a mortgage, then one way to get a significant amount of money is to take a cash-out refinance mortgage. Did you know that according to a recent Freddie Mac report, about 70% of refinances in Quarter 1 2018 had a loan amount more than 5% than the original loan?
Equity: The Key to Taking Out a Cash-Out Refinance
How can you use your home to get more money? A cash-out refinance is based on the amount of equity you in your home. To figure out your equity, you need to know your mortgage balance and your current home value. You can then calculate your loan to value ratio (LTV) and the amount of your home equity.
The next step is to figure out the maximum LTV the lender will allow. Lenders generally cap purchase and Rate and Term (R/T) refinance mortgages at about 95-97% of your home value. However, a cash-out conforming mortgage is limited to about 80% for a single unit primary residence.
Cash-out Refinance: What to Look For
The most simple type of refinance loan is a rate and term (R/T) mortgage. You replace your current mortgage with a new mortgage. The total amount stays the same unless you decide to add-on closing costs. When shopping for an R/T refinance mortgage compare interest rates, length of the loan, type of interest rate, and closing costs and fees.
A cash-out refinance loan not only readjusts your current loan but also increases the total amount of money you owe, meaning that your monthly payment will probably increase unless you increase the length of the loan. If for example:
- Your current mortgage balance is $180,000 loan at 5.25% with 20 years left to pay, and you pay $1,213 a month. Your home is currently worth $270,000, and your LTV is 67%
- You take out $30,000 in additional funds, bringing your LTV to 78%.
- Assuming that your new cash-out mortgage of $225,000 is a 30-year loan at 4.75% your new monthly payment will be $1,095. If you refinance into a 15-year loan at 4.25%, then your monthly payment will be $1,580.
If you are doing a debt consolidation loan, then your new cash-out refinance loan will replace current debt payments, so compare overall payments. If you are using the money for other purpose consider alternative financing costs.
Cash-Out Refinance: How to Make it Work for You
For a cash-out refinance to work for you compare interest rates, monthly payments, fees, the amount of time you will hold on to your mortgage, and the alternative costs of the new money you are taking out.
Here are three common scenarios:
- Current interest rates are less than your existing mortgage: You can refinance your current mortgage into a lower interest rate and take out new cash at an attractive interest rate. If you can afford higher payments, then look at a shorter-term mortgage, such as a 15-year loan which has lower interest than a 30-year mortgage.
- Current interest rates are higher than your existing mortgage: Even if interest rates are currently higher than your existing mortgage, you might be in need of a lower monthly payment. A 30-year cash-out mortgage offers you an affordable payment and improves your financial situation.
- Current interest rates are higher than your existing loan. If you can afford the payments, along with an additional mortgage for the cash-out portion, then consider taking out a second mortgage, either a Home Equity Loan (HEL) or a Home Equity Line of Credit (HELOC).
Since mortgage rates are rising in 2018, consider an Adjustable Rate Mortgage. If you are planning on holding on to your loan for between 7-10 years, then a 5/1 or a 7/1 ARM can both lower your initial interest rate and monthly payments. Depending on interest rate movements and how long you hold on to the loan you can also benefit from overall lower financial costs.
Finally, consider closing costs including lender fees and third party costs. One easy way of comparing your options is to ask the lender for a no-cost loan.
A cash-out refinance is not always the best fit. If you already have a low-interest rate mortgage and you are not looking to lower your monthly payment, then consider a home equity loan alternative. Get a free consultation with a mortgage expert now.
Qualify for an FHA Cash-Out Refinance
FHA loans are popular because they have lower credit score requirements. In general, the FHA loan allows for a credit score as low as 500 if your LTV is under 90%. If your LTV is over 90% (up to 96.5%) then you need a minimum credit score of 580.
Since FHA cash-out transactions are limited to 85%, the minimum required credit score is 500; however, most lenders have stricter requirements. FHA loans require a debt to income ratio of 31% for home-related expenses, and 43% for total debt to income ratio.
One important thing to keep in mind is that FHA loans require mortgage insurance, both upfront and monthly payments.
Here are a few more points that are important to consider if you are trying to qualify for an FHA cash-out refinance: (source: https://www.hud.gov/sites/documents/4155-1_3_SECB.PDF (Change Date March 24, 2011 4155.1 3.B.2.a)
- 4155.1 3.B.2.a) Eligibility for Cash Out Refinances Cash out refinance transactions are only permitted on owner-occupied principal residences.
- Properties owned free and clear may be refinanced as cash out transactions.
- 4155.1 3.B.2.f Cash Out Refinancing for Debt Consolidation Cash out refinancing for debt consolidation represents considerable risk, especially if the borrowers have not had a corresponding increase in income. Careful evaluation of this type of transaction is required