As a homeowner, you’ve probably heard the term “equity” in the context of building wealth. Equity refers to the difference between the value of your home and the amount you still owe on your mortgage. For example, if your home is worth $400,000 and your mortgage balance is $250,000, your equity is $150,000. Equity can be a valuable asset, representing the wealth you’ve built through homeownership. However, many homeowners aren’t aware of how to access this equity to help achieve their financial goals. One way to unlock this wealth is through a cash-out refinance or a Home Equity Line of Credit (HELOC).

Cash-out refinancing is a popular option for homeowners who need to access equity in their homes. It allows you to refinance your existing mortgage and take out cash from the equity you’ve built up. On the other hand, a Home Equity Line of Credit (HELOC) is a revolving line of credit secured by your home’s equity. It allows you to borrow funds as needed, up to a certain limit, and you only pay interest on the amount you borrow.

UNDERSTANDING CASH-OUT REFINANCING

A cash-out refinance is a type of mortgage refinance where you take out a new loan that’s larger than your current mortgage and use the difference in cash. For example, if your current mortgage is $200,000 and you qualify for a cash-out refinance of up to 80% of your home’s value, you could take out a new loan for $320,000 ($250,000 to pay off your current mortgage and $70,000 in cash). The cash you receive can be used for anything—from paying off high-interest debt to financing home improvements or investing in a business.

HOW DOES CASH-OUT REFINANCING WORK?

Cash-out refinancing works by refinancing your existing mortgage with a new one that has a higher loan amount. The amount of cash you can receive is based on the equity you’ve built up in your home. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, then you have $100,000 in equity. If you qualify for a cash-out refinance, you may be able to refinance your mortgage for $250,000 and receive $50,000 in cash.

WHY CASH-OUT REFINANCE?

• Home improvements: A cash-out refinance can provide the funds you need to renovate or upgrade your home.
• Debt consolidation: Consolidating high-interest debt such as credit cards or personal loans may lower your monthly payments and interest rates.
• College tuition: Use the funds to pay for tuition and other college expenses for yourself or a family member.
• Emergency expenses: Cover unexpected expenses, such as medical bills or home repairs.
• Investment opportunities: A cash-out refinance can provide the funds you need to invest in a business or real estate.

BENEFITS OF CASH-OUT REFINANCE & HELOC

• Lower interest rates: Consolidating high-interest debt with a cash-out refinance or HELOC can lower your interest rates.
• Potential tax benefits: Mortgage interest is tax-deductible, so you may be able to deduct the interest paid on your cash-out refinance or HELOC.
• Simplified payments: Consolidating debt can simplify your monthly payments.
• Access to cash: Both options give you access to the funds you need without taking out a separate loan.

HOW TO QUALIFY FOR CASH-OUT REFINANCE OR HELOC?

Qualifying for a cash-out refinance or HELOC is similar to qualifying for a traditional mortgage refinance. Factors lenders consider include:

• Equity: Lenders typically require a minimum of 20% equity in your home, but some may allow borrowing up to 85-90% of your home’s value (LTV) depending on the lender and loan type. This can vary based on your credit score and overall financial profile.
• Credit score: Lenders generally prefer borrowers with a credit score of 620 or higher. However, borrowers with lower scores may still qualify with compensating factors, such as higher income or significant equity.
• Debt-to-income ratio (DTI): Lenders typically prefer a DTI of 43% or lower, but some may approve DTIs as high as 50% for certain loan products or borrowers with strong credit and assets.
• Employment and income: Lenders will evaluate your employment history and current income to ensure you have a stable source of income and can afford monthly payments. Self-employed borrowers may need additional documentation, such as bank statements or profit and loss statements, to verify income.
• Compensating factors: Some lenders may consider other compensating factors, such as significant cash reserves, high credit scores, or a history of on-time mortgage payments, which may allow for more flexibility on LTV or DTI limits.

THE BOTTOM LINE

Cash-out refinancing and HELOCs provide homeowners with convenient ways to access additional funds and improve their financial flexibility. With the equity built up in your home, you can use the funds for debt consolidation, home improvements, or other investment opportunities. However, qualifying for these options requires meeting certain criteria, including enough home equity and creditworthiness.

If you’re considering a cash-out refinance or HELOC, our mortgage experts at Prime Choice can help you explore your options and find the best solution for your financial goals. Contact us at (877) 787-7463 or Click Here To Get Started.