With the rapid appreciation that homes have had in the last two years, most homeowners have equity. A common way to release part of the equity is to cash-out refinance but some homeowners may not be eligible currently.
This type of loan replaces the current mortgage by paying it off and an additional amount of cash for the owner. Generally, lenders will consider a new mortgage up to a total of 80% of the current value.
Typically, the rate on a cash-out refinance will be slightly higher than a traditional purchase money mortgage. As is in any lending situation, the rate depends on the borrower’s credit and income. The best interest rates are available to borrowers with higher credit scores, usually over 740.
Loan-to-value can affect the rate a borrower pays also. A 70% loan-to-value mortgage could be expected to have a lower interest rate than an 80% LTV because there is a larger amount of equity remaining in the property and therefore, less risk for the lender.
There are no restrictions on how the owner can use the money. It can be used for home improvements, consolidating debt, other consumer needs or for investment.
Eligibility Requirements as found in FNMA Selling Guide B2-1.3-03 Cash-Out Refinance Transactions
“Cash-out refinance transactions must meet the following requirements:
- The transaction must be used to pay off existing mortgages by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it.
- Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan.
- The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
- There is no waiting period if the lender documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).
- The delayed financing requirements are met. See Delayed Financing Exception below.
- If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B 2-2-01, General Borrower Eligibility Requirements (07/28/2015) for additional details.)
- If the property was owned prior to closing by an inter-vivos revocable trust, the time held by the trust may be counted towards meeting the borrower’s six-month ownership requirement if the borrower is the primary beneficiary of the trust.
- For DU loan case files, if the DTI ratio exceeds 45%, six months reserves is required.”