If you are looking for some financing, you can look at your home’s equity as a source. When you refinance your existing mortgage for a new one, you can choose to do a cash-out refinance.
A cash-out refinance works by pulling money from your home equity. Ideally, you need at least 20 percent home equity to qualify for this type for refinancing.
Loan-To-Value Ratios (LTV) and Loan Limits
For lenders to know the maximum loan limit for your refinance, your loan-to-value ratio has to be established.
How does a lender derive the LTV ratio? There are two factors to be taken into account. First is your home’s current value. The other one is the mortgage balance you have on your property. There are also borrowers who have more than one mortgage loan for a single property. These should be summed up altogether to arrive at an overall mortgage balance.
As a hypothetical example, your home’s current value is $200,000 and your current mortgage balance is $100,000. Your current LTV Ratio is 50 percent ($100,000 / $200,000).
This also means that you have $100,000 worth of home equity ($200,000 – $100,000).
Most lenders will allow an LTV ratio of 80 percent or below for a cash-out refinance. Based on the allowed LTV ratio of 80 percent, your maximum loan amount is $160,000. Let’s say you loaned $160,000. After paying off your mortgage balance which is $100,000, you’re left with the difference of $50,000. This is the money you get. You have to take note that there are also refinancing costs and other fees you need to cover.
Other Options to Squeeze Out Money from Equity
- Home Equity Loan
This is disbursed to the borrower in a form of a lump sum. The interest rate is also fixed. Your house becomes the collateral.
- HELOC (or the Home Equity Line of Credit)
The money can be disbursed to the borrower in divided amounts and anytime the borrower wishes. The borrower can only spend up to the loan limit. Int the same manner as a Home Equity Loan, the property becomes the collateral. The interest rate is adjustable, meaning it can fall below or hover above the prime rate.
- Reverse Mortgage Loan
Borrowers must be 62 years old or older to qualify for this loan type. The cash can be disbursed through a line of credit, a lump sum, a fixed monthly disbursement or a combination of these. The loan does not have to be paid off so long as the borrower lives in the residence.
Refinancing Needs Careful Planning
If you’re thinking of refinancing just for the sake of pulling out money, hold your horses! Refinancing, especially cash-out refi, needs careful planning. It is more advantageous if you refinance your mortgage to bring the current interest loan down.
Also, you’d have to look at how long you want to be paying off debt. You can shorten your loan term when you refinance by increasing the principal payment. But if you are not up for that, you’re looking for a new mortgage that will extend for another 20 to 30 years.
You have to be cautious on how you use this refinance option because you are putting your home at risk. Talk to a lender to learn more about this refinance type and many other options.