When purchasing a property, it’s essential that you have a good understanding of your financial rights and obligations. This can help you select the right loan and avoid mortgage stress.
Cash-out refinancing is a great option for many home owners. With the help of a mortgage broker or financial advisor, a cash-out mortgage refinance can help you maximise equity in your home and achieve greater financial security.
Unsure whether cash-out refinancing can help you with your mortgage and financial goals? Here’s everything you need to know!
Table of Contents
What is cash out refinancing?
Cash-out refinancing is a mortgage refinancing pathway that allows you to turn home equity into cash in hand.
When you pursue a cash-out refinance loan, you’ll replace your existing home loan with a bigger mortgage. This means that you can take advantage of the home equity you’ve accumulated over time, receiving the difference between the two loans in cash.
Once you’ve obtained cash from your cash-out refinance mortgage, you can use this money however you see fit. Cash can be put towards home improvements or can help you consolidate debt. You can also use the money to support other financial goals.
How does a cash out refinancing work?
A cash-out refinance works by helping you use your home equity to secure funds for other purposes. Using your existing home as collateral, you can take out a new, larger loan and borrow money in cash.
Cash-out refinance loans can be beneficial for many mortgage holders. If you can reduce the interest rate on your primary mortgage and use your cash-out funds wisely, these loans can even support wealth accumulation!
How much can you cash out refinance?
The total value you can obtain through cash-out refinancing will vary based on a number of indicators unique to your financial situation.
This means that it is important to consider your options carefully and speak with a qualified mortgage broker to identify the best refinancing pathway.
How much equity you have in your home
One of the key factors that will influence your cash-out value is your existing home equity amount.
Home equity refers to the amount of money you’ve already paid towards your loan and the outright ownership you currently hold with reference to your property value.
The greater your existing equity in your current mortgage, the more likely it is that you’ll be able to secure a higher loan amount with sufficient cash-out capacity.
Whether you’re prepared to pay for LMI
Next, you’ll need to consider whether you’re willing to pay for lender’s mortgage insurance, or LMI, as part of the refinancing process.
Unfortunately, LMI fees are non-transferrable, which means that they do not carry over when you refinance your loan. LMI is payable when you are borrowing over 80 percent over the property value, regardless of whether you’re pursuing a first loan or are refinancing an existing mortgage.
If you’re willing to pay for LMI, you may be able to borrow extra cash as part of your cash-out refinance loan. If you can’t pay for lender’s mortgage insurance, you’ll need to ensure that your new loan amount doesn’t exceed the 80 percent home value threshold.
Your income and expenses, as well as your credit score
As with any loan, your financial circumstances play an important role in influencing your total borrowing power and your loan options.
When applying for a home loan refinance, you’ll need to consider your debt to income ratio, along with other financial details, such as your credit score and other loans or regular expenses.
By evaluating your income, expenses, and other financial information, your lender can determine whether you’ll be able to service a higher loan. Generally speaking, the higher your income and the lower your expenses, the more money you’ll be able to borrow.
Your interest rate
Similarly, your interest rate on your existing mortgage can affect your cash-out refinance options going forward.
When you apply for a cash-out refinance loan, your lender will consider your required loan repayments, including all applicable interest rates. This will help you obtain the lowest possible rates while proving your ability to meet lending criteria.
In most cases, a lower interest rate is preferable, as this will reduce your ongoing expenses and will allow you to more reliably service refinance rates after switching lenders. This can help you borrow more and pay less for your loan!
Your new loan term
Finally, your new loan term is an important consideration. The amount of time you have to repay your loan can influence monthly repayments and equity value.
While it is possible to take a loan out over a 30-year period, shorter loan terms are often preferable when you’re pursuing a cash-out refinance loan. This can help to prove your financial security and responsibility to your lender.
It’s worth being aware of what your loan term means for your repayment obligations. By being aware of interest rates, monthly payment amounts, and other factors, you can pursue the best value for cash-out refinancing.
How much cash can you get out by refinancing?
There’s no set value to suggest how much cash you can get through cash-out refinancing. However, there are so factors you can keep in mind to produce an accurate estimate.
Most lenders allow homeowners to borrow up to 80 percent of the home’s current value, allowing you to obtain whatever cash falls between this amount and your current home equity.
However, lending thresholds can vary depending on current market conditions, as well as your mortgage type, property type, and credit score. Lenders who offer loans insured by the Federal Housing Administration, or FHA, sometimes offer cash-out refinance options that allow you to borrow up to 85 percent of your home value.
The process of cash out refinancing
Cash-out refinancing doesn’t have to be a challenge, so long as you start the process with a good sense of how it works. Follow these simple steps to get started.
1. Determine how much you’ll need
Before you pursue a cash-out refinance loan, decide on your financial goals, and determine how much cash you’ll need to support them. What are your plans for your cash-out sum?
By planning for financial requirements ahead of time, you can develop a clear understanding of which loan options will be right for you. You’ll be able to quickly assess loan amounts and choose the right options to support your financial situation and obligations.
2. Compare home loans
Next, compare your home loan options to determine which pathways are best suited to your needs. Speak to your broker, and evaluate the difference between your current home equity and your total borrowing power.
By comparing your existing loan and your new loan options, you can accurately estimate the lump sum payment you’ll be entitled to and choose the best loan option to service this need.
3. Work out what your new mortgage will look like
Once you’ve compared loans and have selected the the right mortgage refinancing pathway, it’s time to consider the details. Find out about your interest rates and required repayments to understand what life will look like with your new mortgage.
The stronger your understanding of your new mortgage, the better equipped you’ll be to service the loan without suffering from mortgage stress or having to compromise on your cash-out amount.
4. Apply for your new loan
When you’re confident with the loan you’ve chosen and your ability to repay the loan, you’re ready to apply! When you lodge a loan application, you’ll be asked to provide detailed financial information, including bank statements, loan papers, and income details.
Your lender will assess your loan application to determine an exact value for your new mortgage. You’ll also find out what your refinance rate will be and how this and closing rates will affect ongoing payments.
5. Inform your current lender
Once your cash-out refinance loan has been approved, you’ll need to inform your current lender of your new mortgage. This will allow you to transfer details from your existing mortgage to your new lender and loan account.
Moving your original mortgage to a new mortgage account is a simple process. Your original loan provider can work alongside your new lender to ensure a smooth, seamless transition.
6. Review your new loan documents
As you prepare to finalise your new home loan, you’ll have another chance to review loan documents and gain clarity on anything you’re unsure of. This can help you develop a better understanding of your finances.
After reviewing your documents, you can begin preparing for repayment and interest costs. You can also start to plan how you’ll use your cash-out lump-sum payment when you receive it!
7. Get ready for settlement
Lastly, your new mortgage will need to go through the settlement process, which means you may need to work with a professional conveyancer. You may be required to pay closing costs.
Once your new mortgage settles, you’ll be able to access your cash-out value, allowing you to get started with other financial goals. You’ll also start making regular repayments on your refinanced mortgage amount.
Is a cash out refinancing right for you?
Cash-out refinancing is a great option for many homeowners, whether you want to consolidate debts, fund home improvements, or fulfil other financial needs.
Tori is a finance blogger and researcher at OurTop10.com.au, where she enjoys helping people navigate the world of finance and money. Through her insightful articles and comprehensive research, she empowers readers with valuable knowledge on budgeting, saving, investing, and retirement planning.
Tori’s approachable and empathetic style makes complex financial concepts relatable and easier to understand, She aims to foster a sense of community and leave a lasting, positive impact on her audience’s financial well-being.