How much money can you get from a refinance?
Typically, a cash-out refinance is limited to an 80% loan-to-value (LTV) ratio on a single-family home. In other words, your loan can't equal more than 80% of your home's value. However, this amount can differ based on factors such as the lender you choose and some of your own personal financial circ*mstances.
Many loans come with a maximum LVR of 95%, which means you cannot borrow more than 95% of the value of your home. What this also means is that if you wish to refinance you must have at least 5% equity in your home. To put yourself in the best position to refinance, you should have at least 20% equity in your home.
A cash-out refinance is a mortgage that lets you turn the equity in your home into cash at closing. With a cash-out refinance, you take out a mortgage larger than the amount you still owe on your house, and you receive in cash the difference between what you owe on your current mortgage and the new cash-out mortgage.
In a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. You usually pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same.
Most lenders let borrowers only refinance 80% – 90% of their loan value. In this scenario, if you take out $20,000 in a cash-out refinance, you'll be removing over 90% of your home equity. If this is your plan, you'll likely have trouble finding a lender willing to originate your refinance.
Most major mortgage lenders won't offer loans under the $50,000 mark. Lenders are used to people asking for the maximum amount they can borrow (the average maximum mortgage loan amount is $ 300,000), so some might not even have an official minimum threshold.
Eligibility for refinancing a home loan
Unlike with your first mortgage, where you need to pay a deposit of 20% of the property's value to avoid lenders mortgage insurance, you'll need to have built up 20% equity in your property to avoid a charge if you want to refinance (see 'costs of refinancing a home loan' below).
The cash-out refinance process, from application to fund disbursem*nt, can take anywhere from 30 to 60 days, as noted by Balance Homes. After closing, there is a mandatory 3-day rescission period, which allows you time to reconsider your decision.
Taking out a larger mortgage to get cash out often means you'll have a higher monthly mortgage payment, even if you managed to secure a lower interest rate. Should you become unable to pay the loan on-time, the lender can put a lien on your home and potentially foreclose and take possession of the home.
Today, mortgage interest rates have eased back down but remain significantly higher than they have been over the past few years. Refinancing may not be the right choice for many homeowners, especially those who took advantage of historically low rates in 2020 and 2021 and whose current loan has a sub-4% rate.
Do you end up paying more when you refinance?
Refinancing can lower your monthly payment, but it will often make the loan more expensive in the end if you're adding years to your mortgage. If you need to refinance to avoid losing your house, paying more, in the long run, might be worth it.
Refinancing doesn't necessarily have to affect the equity in your home, but in certain cases it definitely can. Factors that determine the equity in your home include the balance owed on your mortgage and how much your home is worth. The difference between these two figures is your home equity.
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
When you refinance, you are required to pay closing costs like those you paid when you initially purchased your home. The average closing costs on a refinance are approximately $5,000, but the size of your loan and the state and county where you live will play big roles in how much you pay.
You can refinance your home as often as it makes financial sense. If you're cashing out, you may have to wait six months between refis. Holden Lewis is a mortgage reporter and spokesperson who joined NerdWallet in 2017.
| Mortgage Amount | Term Length | Monthly Repayments |
|---|---|---|
| £50k | 20 years | £316 |
| £50k | 25 years | £278 |
| £50k | 30 years | £253 |
| £50k | 35 years | £237 |
Refinancing is generally easier than securing a loan as a first-time buyer because you already own the property. If you have owned your property or house for a long time and built up significant equity, refinancing will be even easier.
To refinance your mortgage, you'll need to meet your lender's refinancing requirements, which will likely include having enough equity in your home and having a debt-to-income ratio of 43% or lower. Our goal is to give you the tools and confidence you need to improve your finances.
The lender will review these bank statements to verify your income and expense history as stated on your loan application. They will also review your account balance information to make sure that you have sufficient liquid assets to pay for your down payment and closing costs.
Banks and lenders all earn fee income when loans are refinanced. Example: If the existing loan is already held in the bank's portfolio of loans, and the existing loan's rate is higher than today's lower rates, the consumer may benefit from that new lower rate and monthly payments.
What happens at closing for refinance?
You'll be asked to review and sign several documents, including affidavits and declarations. Be sure to read all documents carefully and understand their purpose as they are legally binding. When everything is signed and completed, you'll leave the office with a new loan, including a new rate and term.
To get a cash-out refinance, lenders usually require: Home equity of at least 20% An LTV ratio of no more than 80% A current appraisal of your home to verify its value.
Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent).
Key takeaways
The benefits of a cash-out refinance include access to money at potentially a lower interest rate, plus tax deductions if you itemize. On the down side, a cash-out refinance increases your debt burden and depletes your equity. It could also mean you're paying your mortgage for longer.
A cash-out refinance comes with closing costs comparable to your first mortgage. Typically, you can expect to pay between 2% and 5% of the loan amount.
