How Would You Know if it’s the Best Time to Cash-Out Refinance?


Mortgage interest rates are at tempting levels that could make you wonder if it’s the right time to reap the rewards of your investment as a homeowner. Cash-out refinancing could be an option if you want to take advantage of the historically low interest rates and augment your finances especially during this difficult time as the nation deals with a health crisis.

However, you should also know that a cash-out refinance is not for everyone. Mortgage lenders have tightened their requirements for borrowers moving forward with a cash-out refinance. Below are some of the signs that a cash-out refinance could benefit you:

You have a considerable amount of home equity

In real estate, home equity is that portion of your home that you truly own in terms of value. When taking out a cash-out refinance, you need to have enough home equity that you can convert into cash. Most lenders would require that you have at least 20 percent equity in your home. For example, if your home’s current appraised value is $250,000 and you still owe $200,000 in your current mortgage, it means that you have a $50,000 worth of home equity ($50,000 is 20 percent of $250,000). To get an idea of your home’s appraised value, consider checking listings in your area or consult a realtor. Lenders typically offer better interest rates for borrowers with more equity because they could recoup their losses if the borrower defaults with the new loan.  

Your credit score has improved

Although it’s possible for you to do a cash-out refinance even if you have a poor credit score, you can get much favorable rates if you have a good credit score. Mortgage lenders typically offer much better rates to borrowers with good credit scores because they’re considered as low risk. If you think you have a good credit score, it’s critical that you closely monitor your credit report to ensure that no one’s using your personal information without your permission. Currently, the three major credit bureaus (Experian, Equifax, and TransUnion) allow you to check your credit report every week for free until April 2021.

You don’t have too much debt on your books

Like taking out a mortgage to buy a home, lenders determine the amount of debt a borrower has. This is especially important if you’re taking out a conventional cash-out refinance. Your debt-to-income ratio or DTI must not exceed 50 percent, meaning half of your monthly gross income is not being used to pay your total monthly debts. You may not get the best interest rate for a cash-out refinance if you have high DTI because you’re likely unable to repay the new loan you’ll take.   

You have finances to cover closing costs

Although some lenders could offer you a “no-cost” refinance, you may find it ideal if you have sufficient cash reserves to cover closing costs. Depending on your loan size, the average closing costs for a cash-out refinance could go around between 2 percent to 6 percent of the loan amount. If you can cover the closing cost, you can pocket the full amount of the proceeds of the new loan. You’ll find out that your closing costs will be slightly higher because the loan you’ll take is higher than your current loan balance. You’ll eventually recoup your closing costs if you don’t have plans of selling your home anytime soon.    

A skilled RPM loan advisor can help you run numbers

A cash-out refinance could be a viable option if you want to augment your cash flow during this difficult pandemic situation. You can use the money to consolidate your high-interest debts, fund your children’s college education, or even make home improvements. If you’re considering this option but you’re still unsure if now is the best time for you, an RPM Mortgage loan advisor may help you run your numbers to figure out if you’ll benefit from the process. Get in touch with us today to better understand your options.