If you need cash to pay bills, replace a car or make improvements to your home, a cash-out refinance is one way to get the funds you need. Lower interest rates could mean you’ll pay less than your current mortgage after a refinance, even if you roll the fees into the loan. How much cash you can get out of your house depends on how much equity you’ve built up in the home and your lender’s loan terms.
The equity you have in your home is the difference between how much you owe on the home and what it's worth. If you’ve been paying on your house for a while, you might suppose that you’ve built up a lot of equity. But falling home values reduce your equity. Your equity depends not on how much you’ve paid, but rather how much the home is worth. Your lender will require an appraisal to determine your home’s value at the time of the loan, but you can look at recent sales prices of similar homes in your neighborhood to get an idea of your home’s value. You can also contact local real estate agents and ask their help in assessing your home’s value as well.
Lenders limit the amount of a home’s value they will finance. Some will lend 80 percent of the home’s appraised value, while others will only lend 70 percent. For instance, if your home is worth $300,000 and you owe $200,000 on it, you have $100,000 in equity. If your lender will loan up to 80 percent of the home’s value, the most cash you could access would be $40,000 -- that is, 80 percent of the home’s value, $240,000, minus the $200,000 you still owe on the loan.
Depending on when you got your original loan, you may find the refinance process much more arduous than the original mortgage process. A record number of defaults have made lenders more stringent than ever in qualifying people for loans. Be ready to hand over your banking, tax and employment records. Your credit should be in the best shape you can make it. If you have any problems outstanding on your credit record, try to address them before you apply for your cash-out refinance.
Although a refinance is a good way to lower your interest rate and your house payments, a cash-out refinance may not be the best way to access the equity in your home, depending on your needs. If you’ve built equity and need cash, consider a Home Equity Line of Credit, or HELOC, which opens a line of credit based on the equity in your home, which you can access as needed. You might also consider a home equity loan, which works like a second mortgage. You’ll make payments in addition to your first mortgage, but the terms of the loan the interest rate may be better than a refinance loan, since the amount you’re borrowing is smaller.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.