One of the perks of home ownership is the ability to build equity. When you make improvements to your home that increase its value, you boost your equity. If home prices in your area increase and your home is up to par -- more equity. You can even build equity the good old-fashioned way by paying down your mortgage balance over time. The more equity you have, the more you're able to cash out when you refinance.
A cash-out refinance replaces a previous loan with an entirely new one. The cash-out proceeds pay off the primary loan, any secondary financing, such as home equity loans or lines of credit, any debts you want paid and the refinance's closing costs. You pocket, or "cash out," the remaining proceeds for your personal use. The cash-out amount is actually paid in the form of a check or transferred to your bank account via wire, rather than in cash.
The lender measures the amount you borrow against your home's value. The maximum amount you can cash out largely depends on this calculation, known as the loan-to-value ratio. Maximum LTVs vary by lender and loan type. The LTV ratio for a principal residence on a cash out refinance is higher than the LTV on a rental property cash out refinance. As a general rule of thumb, the more risky the refinance, the lower the LTV you are allowed. For example, conventional loans under Fannie Mae guidelines have a maximum LTV of 85 percent for single-unit primary residences. Under the same guidelines, an investment property with two to four units has a maximum LTV of 70 percent.
Regional loan limits also affect the amount you can cash out on a refinance. Conforming loan limits are set by the Federal Housing Finance Agency. In most areas of the country, the conforming loan limit as of 2012 is $417,000. In high-cost areas, the conforming loan limit is higher. (see ref. 3) Conforming loans offer the most competitive interest rates and are available to the widest-range of borrowers. Non-conforming loans, also known as jumbo loans, have higher interest rates and are harder to qualify for, but potentially yield a higher cash out amount.
The maximum amount you can cash out is the difference between how much you pay off with your new loan and how much of a loan you take out. For example, your principal, one-unit residence is worth $200,000. You must pay off a primary mortgage of $100,000, a home equity line of $20,000 and high-interest credit card debt of $10,000. Your closing costs total $4,000, which you will roll into your new loan balance. So far, your cash out refinance is paying off $134,000 and your LTV is 67 percent. You're refinancing with a Fannie Mae loan, therefore, your maximum loan amount allowed is $170,000 -- 85 percent of your home's value. You can expect to pocket a maximum of $36,000 from this cash-out refinance.
- Fannie Mae: Standard Eligibility Requirements: Principal Residence: Cash Out Refinance
- Federal Housing Finance Agency: Metropolitan Statistical Areas, Micropolitan Statistical Areas and Rural Counties where Maximum Conforming Loan Limits for Mortgages Acquired in 2013 exceed $417,000 in Contiguous U.S. or $625,500 for locations in Alaska, Hawaii, Guam, and U.S. Virgin Islands
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