Cash-Out Refinances – A Popular Option in this Changing Market

Cash-out refinances are popular because they allow a homeowner to turn the equity in their mortgage into cash that can then be used however they want – that could involve paying down debts, investing in new properties, making home improvements, or even making a large purchase; there are no rules on the proceeds from a cash-out.

Understanding the Parts of a Cash-Out Refinance

A cash-out comes with standard fees and credit requirements like a refinance, dependent on a customer’s unique qualifications:

• Greater than 620 FICO
• LTV values up to 80%
• Have owned the home at least 6 months

The type of mortgage being refinanced will also make a difference:

• Conventional and FHA loans will be limited to 80% of the home’s value
• For VA loans, up to 100% can be used

Let’s imagine a scenario:

A homeowner’s initial mortgage was $500,000 – over time from their initial closing until now, they’ve paid the balance down to $200,000.

In a cash-out refinance, the homeowner can take out a new, higher loan – we’ll say at $250,000 – and then pocket the difference in cash – in this case, it would be $50,000.

The Popularity of Cash-Out Refinances are Understandable

There is currently an estimated $21.1 trillion in equity in homes across the U.S.

Compare that against:

• S. credit card debt is estimated to be $841 billion dollars.¹
• Student loans are estimated to be in excess of $1.75 trillion.²

Response to Lack of Inventory

Lack of new housing continues to affect the US economy, and the aftereffects of the COVID pandemic have acted in a multiplier effect with the associated slowdown of the supply chain so important to builders and developers.

In response, a cash-out refinance can be the perfect solution for homeowners who want a change of scenery but find it impractical to sell in the current environment. For example, the money taken out in a cash-out refinance can be used to make improvements on, add an extension to, or renovate a current home and ultimately add value or turn a property into a dream home designed to better fit their needs and sell for more in the future.

Using Lower Rates to Pay Off Higher Rates

Outside of putting cash directly into their pockets, homeowners also could explore a cash-out refinance to pay down a high-interest mortgage using the lower rate of the cash-out refinance.

Keep Educated with Caliber Home Loans

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Sources:

1. https://www.fool.com/the-ascent/research/credit-card-debt-statistics/#:~:text=Consumers%20have%20a%20total%20of%20%24841%20billion%20on,while%20other%20types%20of%20debt%20have%20been%20rising
2. https://www.statista.com/chart/24477/outstanding-value-of-us-student-loans/