Cash-Out Refinancing

A cash-out refinance is when you replace your current loan with a new one for the same amount usually with a lower interest rate. The payment term can also be shorter in many cases. Depending on if you have equity, you may also have the option to receive this in a lump sum.

Now, why is this beneficial? This can reduce your current interest rate on your initial mortgage and utilize the funds you take out.

Lets use an example, you have a current outstanding balance of $100,000 on your mortgage. The home your living in is now worth $300,000. In this example, you have $200,000 in your Denver, CO home assuming this is where you live. Now you can take that extra cash that you have after a refinance and put it towards some kind of home renovation. Maybe that kitchen you and your “honey” have been dreaming about.

You’ll want to maintain at least $60,000 in equity in your home or be able to borrow up to $140,000 in cash. Lenders will require this before you can really even consider it an option. Also consider what closing costs there are such as an appraisal fee, the final amount will vary.

Because you’re increasing the loan amount, your interest rate will go higher after completing a cash-out refianance. You can expect a clsoing cost just like with any other type of home buying service. Apart form that, this process will be just like when you aquired your first mortgage. You will fill out an application with your lender of choice and provide all the documentation to ensure you’re qualified.

Preparing for a Cash-Out Refinance

1. You’ve picked a lender, now what?

Now you need to identify your lenders specific qualifying requirements. The most obvious metric is going to be your credit score and most likely where they will start first. Once this has been thoroughly reviewed they will then asses your debt-to-income ratio under a specific percentage that should be within a minimum of 20 percent of the equity in your home. Make sure to write down all the requirements as you discover your options.

2. Figure out your required amount needed.

You may be considering this type of refinance because there is something specific you want to spend the money on. We recommend you clearly spell out what it is you want to use the money for. It is always helpful to have goals such as debt consolidation where you’d want to gather all the information about what you owe. If you plan on using the cash for home renovations, make sure you get a handful of quotes from reliable and established contractors. You’ll want to figure in time and costs for materials and labor.

3. Gather all the necessary information when you apply.

So you’ve spoken to a handful of lenders and now your ready to make a decision. The due diligence is completed and your sure you’ve got the best rate and terms. Now its time to get a folder to keep all necessary documents in one place all neat and tidy. Its possible you may need to seek additional documents once you’ve started the evaluation process with the lender.




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Sierra Pacific Mortgage NMLS# 1788. Michael Shotnik NMLS: 218281, CO License: 100017466. Not licensed in Alaska or New York.  To check license status of mortgage loan originator, visit D.O.R.A. and NMLS consumer access.