What Is a Cash-Out Refinance Loan?
Financial professionals often describe cash-out refinance loans as a cross between an equity loan and a traditional refinanced mortgage. Americans all across the country are using this method to withdraw equity in cash from their homes. In fact, cash-out refinances climbed by 24% over one year by the end of 2019.
When homeowners refinance their mortgage, they get cash for a percentage of the difference between the remaining value of the loan and the current value of the home. Texas law allows homeowners to take out up to 80% of the home equity. The new mortgage then covers the balance of the old mortgage and creates a new loan.
Your Detailed Guide to Cash-Out Refinance Loans
The Cash-Out Refinance Process
1- Credit Check
Before applying for any loan, make sure to check your credit score. There are free programs online that you can use. You can also request a free copy from the three leading credit reporting agencies if you haven’t done so in the past 12 months.
2- Home Appraisal
Rock Mortgage may request a home appraisal to confirm the value of the property, which may cost you a few hundred dollars. Remember to inform us of any repairs or upgrades you have made to the home since you first purchased it.
3- Locked Interest Rate
Some homeowners prefer to lock the interest rate quote as soon as possible for a specific period. This gives some protection during the closing process, which may take up to 45 for it to complete.
4- 12 Day Letter
Texas law requires homeowners to sign a letter that details the cash-out refinance process in the state. Even when cash-out loans may take a shorter time to complete, the law requires a 12-day waiting period between the initial application and loan closing.
5- Your Loan Closing
Homeowners may need to dip into their new cash reserve to pay for the closing costs. Note that if you decide to roll the closing cost back into the new loan, it may lead to higher interest rates.
The Cash-Out Refinance Eligibility Requirements
1- Credit Score
Homeowners need at least a credit score of 660 to refinance a home loan in most instances. While it’s essential to check your credit score, note that lenders may use a different scoring model than free platforms do.
2- Wait period
Texas law allows homeowners to withdraw equity from their homes via a cash-out refinance loan once per year. However, if the house is an investment property, homeowners might be able to remove equity more often.
Texas law requires homeowners to leave at least 20% of the equity in their homes at all times. Because of this, it’s crucial to ensure you have enough capital to cover the cost of the loan and have money left over. This includes the closing and appraisal cost.
4- Proof of Income
Rock Mortgage’s underwriters need to review documents proving steady income. A year of W2s typically suffices for full-time employees. Business owners and self-employed workers may need to supply at least two years of tax returns to show proof of consistent income.
5- Debt-to-Income Ratio
When applying for a mortgage the first time, your lender considered your DTI. Rock Mortgage also considers this for cash-out refinance loans. Each person’s financial situation is different, but generally speaking, homeowners should aim for a DTI of 36% or less.
Commonly Asked Questions About Cash-Out Refinance Loans
Does Texas regulate second homes and investment properties?
Texas does not regulate cash-out refinance loans for investment properties and second homes. At present, the laws only apply to primary residences.
Is the “Once a Texas equity loan always a Texas equity loan” clause still valid?
As of January 2018, this clause is no longer effective in Texas. Homeowners are now free to refinance their homes using any suitable financial product available after using a cash-out refinance loan.
What are some benefits of cash-out refinancing?
Cashing out has several benefits for homeowners at different stages of their lives:
- Use the cash for any purpose, such as starting a business or paying off debt.
- Buy out a co-owner after a divorce or business split.
- Get a shorter-term loan to match a smaller balance.
- Take mortgage-interest deductions when money gets reinvested into the property.