Do you have equity in your home? If so, you can use this equity to get cash in hand with cash-out refinancing. Here’s how it works.
Cash-Out Refinance 101
You take out a new loan to replace your current one. You then get the difference between the new mortgage and the balance on the old one in cash, which you can spend however you like.
Your new mortgage comes with a new rate, new terms, and a new set of closing costs. Texas law limits these costs to 2% of the loan amount, but that limit does not include third-party costs, like appraisal fees, title insurance fees, and others. One helpful feature homeowners appreciate about a cash-out refinance is choosing to pay the closing costs upfront or rolling them into the new mortgage.
As for qualification, in general, most lenders want to see a credit score of at least 620 and a debt-to-income ratio (DTI) of 43% or lower.
Cash-Out Refinancing Rules in Texas
Texas has laws governing cash-out refinancing and recently loosened some restrictions. Some things to keep in mind include*:
- There’s an 80% equity ceiling. This means you must leave at least 20% equity in the home. For example, say a home is valued at $200,000 with $120,000 owed on an existing mortgage. The homeowner could get $40,000 cash back with a new loan of $160,000, leaving $40,000 in equity (20% of $200,000).
- Key time restrictions. Your eligibility for a cash-out refinance begins six months after you buy your home. After you get a cash-out refinance, you need to wait a year for a new cash-out refi. You have to wait four years after both a bankruptcy and a short sale and seven years after a foreclosure to qualify for a cash-out refinance.
- No government-backed mortgages. Texas doesn’t allow cash-out refinancing with FHA, VA, or USDA loans.
- No second mortgages. Borrowers have to pay off home equity loans and home equity lines of credit (HELOCs) before cash-out refinancing.
Important Steps to Take
- Figure out what your home is worth. You can do this with a professional appraisal or an online home value estimator.
- Determine how much money you need and for what. You want to use this financial tool carefully. Often, borrowers will use the cash to make home improvements that increase a property’s value.
- Check your credit score. The higher your score, the better interest rate you may get.
*These rates are subject to change. Consult with a mortgage professional for the latest guidelines.