Tips for Using the Cash-Out Calculator
The cash-out calculator uses information from your current mortgage to determine how much money you may have available to you through a home loan refinance.
Have the following information ready before you get started:
- Your home’s current market value — an estimate of the amount it would sell for in the current real estate market
- Your existing mortgage balance, the interest rate, and your monthly payment amount
- Your desired amount of cash out
The calculator will provide assumptions for the cash-out refinance interest rate, loan term, and estimated closing costs. If you know these figures, you can enter them for a more customized estimate.
What is the difference in a cash-out refinance versus a home equity loan
Both a cash-out refinance and a home equity loan allow you to leverage the equity in your home for money you can use for large purchase such as debt consolidation, home improvements or other personal expenses. And in both cases, lenders require borrowers to leave some equity in their homes.
There are some differences, however. A cash-out refinance replaces your existing mortgage with a new one (including a new interest rate and term). A home equity loan is a second mortgage, in addition to your existing mortgage, thus requiring you to make a second monthly payment.
And because cash-out refinances are a primary (aka “first”) mortgage loan, they typically have lower interest rates than home equity loans.
Pros and cons of cash out refinancing
As you consider your loan options, be sure to think through these advantages and disadvantages of cash-out refinancing.
Pros of cash-out refinancing
- You can get access to a significant amount of money, that you may not have in a savings account, to support your financial needs or goals. Depending on your home’s equity and your existing mortgage balance, you might be able to access tens of thousands of dollars.
- Cash-out refinancing has lower interest rates versus most home equity loan or line of credit options.
- You may get tax benefits. If you use your cash-out refinance to make home improvements, you might be eligible for a tax break. We’d suggest you speak with your tax advisor or accountant for further tax implications.
- It can help you improve your credit score. If you use your cash-out refinance to pay off your credit card debt, you might improve your credit score.
Cons of cash-out refinancing
- You could increase your risk of foreclosure. If you’re unable to repay the loan by making your monthly payments, you could lose your home.
- You may pay more total interest in the long run. A cash-out refinance is a new loan with a new loan term (up to 30 years) and amortization schedule. If your current loan is nearly paid off, you’ll find yourself starting all over again with paying interest to the lender. Compare amortization schedules for your existing loan and your cash-out refinance loan to understand this effect better.
- As with any new mortgage, you’ll have to pay closing costs. These are typically 2% – 5% of the value of the loan, although some lenders offer incentives on closing costs and some offer options to finance closing costs into the total cost of the loan.
- You may have to pay private mortgage insurance (PMI). If the refinance loan reduces your equity to under 20%, your lender may require you to pay PMI, in which case this may not be a best financial decision for the homeowner
Cash-out refinance for FHA, VA, and USDA loans
- Cash-out refinancing is only available for owner-occupied properties and is not available for second homes or investment properties.
- When determining the final loan amount, the lender may factor in income, length of ownership and occupancy, and credit score.
- The lender will require an appraisal of the property.
- The lender will require that your mortgage payments have been made on time and in full for at least the previous 12 months.
- The lender will require a front-end debt-to-income ratio (DTI) that is less than 29% and a back-end DTI that is less than 41%.
- The lender will require you to pay for PMI if your equity is less than 20%.
Frequently-asked questions about calculating a cash-out refinance
What is cash-out refinancing?
With cash-out refinancing, you can take advantage of the equity in your home to get money you can use today. You replace your current loan with a higher value loan and take away a portion of your home’s equity as cash.
The money made available in a cash-out refinance typically is used to consolidate debt, pay for home renovations or fund financial investments.
Want to learn more? Checkout this article with advice on if a refinance is right for you.
What is the maximum loan-to-value (LTV)?
LTV is a ratio that divides the current balance of your mortgage by the value of your property. So, if your mortgage amount is $100,000, and your property value is $250,000, your LTV is 40%.
Lenders look at LTV when deciding whether to approve a cash-out refinance. Generally, they extend the best terms to those with an LTV that is less than 80%.
This information is provided for general informational purposes. All transactions are subject to credit approval. Contact a mortgage banker for a custom quote.