One of the most comforting aspects of owning real estate is that it appreciates in value. On average, real estate prices in the U.S. grow by 4.4% every year—the percentage can be as high as 23% in hot property markets.
Long-term capital appreciation is a recurring theme in refinancing mortgages. So, what is a cash-out refinance loan? It’s a nifty little financial maneuver to exploit the capital appreciation on your existing property.
Cash-out refinancing (or cash-out refi) can take on many roles—it’s a hassle-free funding option during emergencies and also a reliable liquidity aid in an investor’s toolkit. Use our guide to get a conceptual and operational grip on this form of funding. We will:
- Define a mortgage cash-out loan
- Explain the scenarios you can use it for
- Evaluate the viability of conventional and non-conventional cash-out refi lenders
What Is a Cash-Out Refinance Mortgage Loan?
A refinancing strategy is like a restart button on a current loan. You use it to eliminate a current obligation with a new loan that presumably has a lower interest rate.
In the plainest of terms, a cash-out refinance loan enables you to swap your existing property mortgage for a bigger one. The cash-out mortgage takes capital appreciation into account and reflects the latest market value of your property. You get to pay off the outstanding dues on your old mortgage with the new loan while pocketing the difference in principal sum as cash. Hence the term “cash out,” which refers to the conversion of an asset (in this case, the capital gain) into cash.
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Depending on the lender, you may also have the option to renegotiate the terms of the cash-out loan. For example, you can ask for:
- A lower interest rate
- Flexible rates during the tenure
- A shortened or extended repayment window
Cash-out refinancing is no easy math, though. The amount you can borrow or cash out is dictated by two factors:
- Your share of equity in the property
- The lender’s LTV (loan-to-value) ratio
What Is Home Equity in Any Mortgage?
Your home equity is the intrinsic value of the property that remains after you’ve paid off the mortgage. Here’s an example to help you understand—say you got a 5% fixed-rate, 30-year mortgage deal for a $200,000 property in 2017. Here are the estimated specifics of the loan:
|Value of the property||$200,000|
|Funding at 70% LTV||$140,000|
|Annual principal amortization* ($140,000/30)||$4,667|
*Note that actual amortization schedules require complex calculations because of inflation, taxes, and other variables in the equation. We’ve taken a rough estimate for the sake of simplicity.
In this case, the down payment would be your equity share in the property—basically 30%.
Let’s move forward five years to 2022. You’ve repaid $23,335 towards the principal, which means your existing mortgage balance is $116,665 (free of the interest component), and this raises your equity to $83,335—you roughly hold about 41% ($83,335/$200,000*100) equity now.
The fun part here is that the property value has climbed up to $300,000 by 2022, so your current equity (at 41% holding) stands at $123,000—which is your new “tappable equity.” While you’ve benefited from the capital appreciation, the actual loan amount would depend on the LTV serviced by the new lender.
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How Does the Loan-to-Value for Cash-Out Refinance Work?
Regardless of how much tappable equity you have, most lenders won’t allow you to access 100% of it. It’s common for cash-out refinance providers to service the same LTV ratio as the previous lender. In continuation of our example from the previous section, here is what you can expect with a typical cash-out refinance loan at 2022 values:
|Value of the property||$300,000|
|Funding amount (at 70% LTV)||$210,000|
|Repayment of the old mortgage||$116,665|
|Money left in hand||$93,335|
To sum it up, you extracted a cushy, tax-free stream of $93,335 for your $123,000 equity hold in the property, which is only possible with the cash-out refinance strategy. Know that a percentage of your in-hand cash would generally go towards appraisal fees, private mortgage insurance (PMI) costs, legal charges, and other closing charges. Certain lenders offer no-cost cash-out loans at the expense of a higher interest commitment in the long run.
You can also find lenders who offer higher LTVs than your old mortgage, but your in-hand cash would most likely be less than 80% of your present equity value. Some exceptions include:
- Federal Housing Administration (FHA)-backed lenders who offer up to 85% LTV
- U.S. Department of Veterans Affairs (VA)-guaranteed loans that provide up to 100% LTV
Cash-Out Refinance Loans—Potential Borrowing Scenarios
There are plenty of ways to play around with the equity-based extra funds you get from a cash-out refinance loan. Some common borrowing scenarios can be:
- Home renovations—Most conventional property rehab loans are a pain to qualify for with their contractor requirements and frequent inspections. If you have the equity for it, cash-out financing is a better option for DIY construction and low-intensity upgrades without committing to a down payment
- High-interest debt management—If you’ve accumulated credit card debts or personal loans that require huge interest payouts, you can consider using a cash-out loan to consolidate them and move to a low-interest model
- Personal expenses—People struggling to meet certain expenses, like a child’s tuition or a wedding, often use their home equity to pay for their obligations instead of taking out a high-interest personal loan
- Investment—To savvy property investors, capital appreciation on a property is money sitting idle. They use a cash-out refinance loan to extract the appreciated value and reinvest it in their lucrative commercial avenues. Many investors also use such loans to reinstate a falling return on investment (ROI) on their current portfolio
Keep in mind that your real-time debt value expands with the cash-out loan, so even if you get a lower interest rate, your cash outflow may be larger because of the current principal sum.
Source: MART PRODUCTION
Where To Get Cash-Out Loans
You can get cash-out loans from conventional or alternative lenders, depending on what suits your current situation.
Conventional Loans for Cash-Out Refinance
If you choose a traditional or conventional cash-out refinance loan, you have to look for relevant mortgage products from banks, credit unions, and lenders backed by government agencies like FHA and VA. Once you find a suitable loan package, fill out the form and submit the requested documents (W-2s, 1099s, bank statements, recent credit reports, property and existing mortgage papers, etc.) to apply for the loan. The basic qualification criteria followed by most traditional lenders require you to:
- Have a credit score of 580 or higher
- Maintain a tolerable debt-to-income (DTI) ratio (should be 50% or less, including the refi)
- Keep an equity of 20% or higher after the refi—basically, if your appreciated equity in the property is 41%, the extra cash-out amount wouldn’t exceed 21% (41–20)
Once you’ve submitted all the documents, you have to wait for 30 to 60 days for the lender to assess your paperwork and forward you the check.
Alternative Loans for Cash-Out Refinance
Borrowers go for alternative cash-out refi loans when they don’t qualify for traditional loans or are looking for fast and convenient processing. One of the most popular non-traditional funding options is a hard money cash-out refinance loan, which is quite flexible in terms of eligibility requirements and loan structure.
Hard money lenders can afford a more straightforward approach to loans because they operate privately and have fewer bureaucratic guidelines to follow. They lend at competitive LTV ratios according to the latest appraised value of the property without nitpicking over the borrower’s credit score, DTI ratio, or other financial details. As a result, the paperwork required is minimal, and the loan can be processed within a few days.
Source: Andrea Piacquadio
Because hard money lenders offer funds with less gatekeeping, they charge slightly higher interest rates than traditional lenders—nothing irrational, though, because it’s still a highly competitive market.
The equity requirement in the case of cash-out hard money loans depends entirely on the lender’s level of risk tolerance. Most hard money lenders like borrowers to retain some equity in the property as that reduces instances of default, but they usually don’t have strict guidelines.
Refinance Faster With Cash-Out Loans From Hard Money Loan (HML) Solutions
Hard Money Loan (HML) Solutions is a lending organization operating from Florida that specializes in all kinds of asset-backed funding. It is one of the best options you have if you want to cash out your equity quickly.
HML Solutions works with a premium group of veteran investors helping people get seamless access to funds when they need it. Contact HML lenders for a cash-out refinance loan if you:
- Cannot qualify for traditional loans
- Need emergency funding
- Require a reliable bridge (temporary) financing option
- Want fast processing without much paperwork hassle
- Need more tappable equity-based cash than what other lenders offer
Most lenders have restrictive lending terms and won’t consider funding in difficult scenarios. What sets HML Solutions apart from other hard money lenders is the luxury of having tailor-made refinancing packages.
The HML team facilitates flexible loan packages that serve the borrower’s situation. The entire deal is based on transparent and time-conscious discussions. HML Solutions values reliability in client relationships—once you qualify for a cash-out loan, the team guarantees to fulfill the commitment.
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HML Cash-Out Mortgage Loans—Qualification and Terms
The value of your real estate is the main component of any HML cash-out loan. The lenders approve anyone who brings healthy collateral and holds decent equity—they don’t dig through bank documents, tax returns, and credit reports. You can get up to 70% LTV on the latest appraised value of your property, which can be:
- Single- or multi-unit home (investment or owner-occupied)
- Rental unit
- Commercial structure
- Vacant land
- Special-purpose property
Not sure if your property qualifies? Reach out to HML Solutions to get a quick assessment of your deal. The HML team is all about finding remedies—in the odd case you don’t qualify, the representative will try to suggest other (available) funding options in good faith. If your situation isn’t supportive of cash-outs, you can also choose other loan products offered by the group, such as:
- Rehab loan
- Construction and reconstruction loan
- Fix and flip loan
- Foreclosure/REO loan
- Business loan
While the HML loan structure is customizable, here’s what the group’s generic cash-out loan can look like:
|Parameter||What HML Solutions Offers|
|LTV||Up to 70%|
|Down payment||Not required|
|Origination fee||2 points or 2%|
|Closing time||3 days to 2 weeks|
|Amortization||No—interest-only monthly payments with a balloon repayment at the end of the tenure|
HML lenders don’t charge any prepayment penalty as long as you settle the loan after six months of closing.
Consult an Experienced HML Lender—Apply for a Cash-Out Loan Today
Any deal with HML Solutions starts with a free consultancy offered via phone. Here’s how the process works:
- You fill out and submit an HML loan application
- An HML lender checks your application and contacts you over the phone
- You provide crucial details about your property and funding requirement
- The lender appraises your property if required
- The HML team carefully designs a loan package and makes you an offer
- You give your approval for the title work once you accept the offer
- The funds are delivered to you right after the legal deeds are set up
If your property has recently been appraised and the relevant mortgage deeds are in order, you can get your cash-out funds within three days. Most deals are usually funded within ten days.
HML Solutions commands a solid 5-star rating on Google. Apply today and discover headache-free cash-out financing!
Source: Google Reviews
Alternatives to Cash-Out Financing
It’s good to stay informed about other funding options besides cash-out refinancing. Some common alternatives include:
- Personal loan
- Second mortgage
- Home equity line of credit (HELOC)
Cash-Out Refinance vs. Personal Loan
People usually go for personal loans when they don’t qualify for cash-out loans or need emergency funds. Personal loans often don’t require collateral commitment—you get approved based on a high credit score and sound financial health. While there is no risk of losing your property, personal loans offer super-limited funding and entail high-interest rates. They are not suitable for large expenses.
Cash-Out Refinance vs. Second Mortgage
Second mortgage refers to the second home equity loan you take out on your property. It doesn’t automatically clear off your existing mortgage like cash-out loans. You have the option to repay the first mortgage out of the new loan proceeds or simultaneously keep up with dual interest payments. Second mortgages generally carry high penalties if you miss payments, and the risk of foreclosure is also greater compared to other forms of credit.
Cash-Out Refinance vs. HELOC
A home equity line of credit (HELOC) gives you a credit limit according to your equity and the draw period. It follows a pay-as-you-spend model—withdraw as much or as little as you want during the period and pay interest only on the amount taken out.
HELOCs and cash-out loans have almost similar interest rates, so it’s a matter of suitability. If you want a lump sum, go for a cash-out loan, but if you’re looking for a credit card-like arrangement, HELOC should work for you.
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