After figuring out what a cash-out refinance is and the financial benefits it can offer, one may be left with one important question – how much can I get from a cash-out refi? For most conventional cash-out refinance loans, homeowners are only allowed to borrow at most 80% of their home value. This is what is referred to as the loan to value ratio.
Here is an example to help understand how this works;
Your home is valued at $300,000. You will need an appraiser to get an accurate figure. The maximum loan amount you can get from that value is 80% of $300,000, equivalent to $240,000. Assuming that you have a mortgage balance of $200,000, the maximum cash-out you can get is $40,000.
Please note that various lenders have different loan-to-value ratios. It can be more or less than 80%. Also, as you will see later on, the different types of cash-out refi loans have varying loan-to-value ratios.
From this example, you can see that this homeowner has equity of $100,000. We got this figure by subtracting the mortgage balance of $200,000 from the current home value of $300,000. However, because of the loan to value ratio, which requires a certain amount of home equity (mostly ranging around 20%) to be left untouched, you can only cash out $40,000.
It’s essential to understand how these things work so that you can know how much to expect. Also, for homeowners that have taken a second mortgage from the home’s equity, that amount should be subtracted from the available cash-out.
First, the credit score of a homeowner significantly affects the rates. Higher credit scores attract lower rates. Another factor that affects the cash-out refi loan is the amount of equity you want to cash out. As you’ shop’ around for cash-out refinance loans, you should inquire about the rates from different lenders and compare until you find one that is favorable.
Different Types of Cash-out Refinance Loans and How Much You May Get from Each
1. Conventional Cash-out Refinance Loans
These are loans whose guidelines are set by Freddie Mac and Fannie Mae. With these, you can cash out around 80% of your home value.
2. FHA Loans
Cash-out refinance loans backed by the Federal Housing Administration allow you to borrow up to 80% of home value. They, however, come with an added benefit. You can qualify for these loans with a low credit score of around 500.
3. VA Loans
These are meant for veterans and have a higher borrowing limit of up to 90%. VA loans don’t require payment for mortgage insurance.
When it comes to cash-out refinance, you need to know that it’s impossible to cash out all of your home equity. It will be capped at a certain percentage, and you need to be aware of closing costs.