Cash-Out Refinancing FAQ

If you have equity in your home, you may be eligible to access the cash to make home improvements, pay down high-interest debt, or for any other needs you have. But how do cash-out refinances work? What are the guidelines? In this article, we will answer frequently asked questions so you can better understand if it is the right option for you.

How long does a cash-out refinance take?

You can expect a cash-out refinance to take 45 to 60 days. However, with a little help, it is possible to speed up the processing time. The faster you are able to provide documentation and secure the appraisal, the faster your lender can underwrite and process your loan. It is a team effort to get the cash in hand that you want from your home equity.

How soon can you do a cash-out refinance after purchasing a house?

Typically, you will have to wait at least six months after a home purchase to refinance with a cash-out. You will also want to make sure you have enough equity and it is a smart financial move before committing to the decision. Be sure to speak with your lender to understand if you are eligible and if it is the right option for your needs.

How does cash-out refinancing work?

The way a cash-out refinance works is similar to an original home purchase, minus the sales contract. You will be required to prove that you are able to afford the loan, provide your documents, and lock in your rate. A typical cash-out refinance process includes:

• Determining what interest rate and loan term you qualify for to ensure a cash-out refinance is right for you

• Completing your lender’s loan application

• Providing the required documentation

• Scheduling a home appraisal

• Responding to requests for additional documentation as needed

• Waiting for the “clear to close”

• Closing on your cash-out refinance

• Receiving your funds on the disbursement date

If you can stay in sync with your loan officer and quickly provide the necessary documentation, you likely can close on your loan that much faster.

How long does funding take after closing the refinance?

Cash-out refinances have a three-day rescission period allowing you an opportunity to change your mind about the new loan. That is why you will not get your cash at the closing table. If you move forward with the loan, you will receive your funds on the fourth day—the disbursement date.

For example, if you close on Monday, you have Tuesday, Wednesday, and Thursday to change your mind. If you keep the loan, it will be funded that Friday, which is when you receive your share of the equity that you took out with the cash-out refinance.

Do I need an appraisal to refinance?

Yes, you will typically be required to have a home appraisal to refinance your mortgage. If you are taking cash out of your home’s equity, you must confirm the home’s value and set your new loan amount. A streamline refinance program will not require an appraisal and may be a better option if your refinance appraisal comes in too low.

How long does a refinance take after appraisal?

After the appraisal, it is common for the final underwriting to take about two weeks.

The type of appraisal you choose can also determine how long it takes to close on your loan and your lender will determine which appraisal type is needed:

• Full Appraisal: A full appraisal is similar to the one completed when you bought the home, with one significant difference: you can be present. This can be beneficial because you can stage the house to look bigger, spruce up each room, and have a list of improvements you have made that may have gone unnoticed. However, it is the most detailed and time-consuming.

• Drive-by Appraisal: If you only need a drive-by appraisal to refinance, the appraiser does not have to come into the home. You do not even have to be home when they do the appraisal. The report is less involved and takes less time, which may speed up your closing time.

• Appraisal Waiver: Sometimes borrowers can request an appraisal waiver. Just as it sounds, it is a waiver to the traditional appraisal. Instead, lenders can use automated data from an underwriting system to determine your home’s value. This option is reserved for good credit borrowers who are not at risk of default, and for properties without grave concerns about its value. And, it speeds up the time to close.

What can delay a refinance?

There are many reasons a refinance could be delayed, including appraisal issues, but here are the most common concerns:

• Appraisal comes in too low. If you think your home is worth one value and the appraised value is lower, you could receive less cash than you anticipated.

• There are not enough comparable sales. Appraisers get your home’s value by comparing it to homes that sold recently in the area. If you live in an area with few sales, it could be harder to find appropriate comparable sales.

• The appraiser may consider the neighborhood declining. Appraisers have the discretion to rate a neighborhood increasing, stable, or declining. Anything but declining is okay, but if the appraiser thinks the neighborhood is in trouble, it could affect the amount of money you can take from your home’s equity.

• Lender backlogs can occur when there is more demand for home loans, especially when interest rates are low. This may make it difficult for lenders to keep up with the surge of applications they receive.

• Paperwork delays in underwriting can delay closing on a refinance if you are unable to submit the required documents to your lender in a timely manner.

• Credit snags will also hinder your loan’s ability to close on time. Changes to your credit score or financial situation may change the underwriter’s evaluation of your ability to repay the loan.

• If your rate lock expires prior to closing on the new loan, it may require you to work with your lender to extend the lock or get an entirely new rate.

How much does a cash-out refinance cost?

Typically, you can expect the closing costs on your cash-out refinance to cost between 2% to 6% of the total loan amount. The exact costs will depend on the loan amount, location of the property, and other fees determined by your lender. The largest closing cost is usually the loan’s origination fee, which may be 1% of the mortgage total. Other costs include the appraisal fee, credit check, mortgage insurance, title services, notary fees, and more.

So, if you are getting a cash-out refinance for a $300,000 home loan, your closing costs may be between $6,000 to $18,000.

Is cash-out refinancing a good idea?

Determining whether or not a cash-out refinance is a good financial move will depend on your unique situation. Ask yourself, how are you going to use the funds? Can you afford the new mortgage payment and interest rate? For most borrowers, it is often a good use of their home’s equity, especially if they have other long-term financial pieces in place, such as life insurance and retirement funds.

What is the max cash-out refinance limit?

The amount of cash you can take out with a cash-out refinance will depend on your loan type and your lender. For instance, conventional and FHA loans require you to leave at least 20% equity in your home after a refinance. This means the loan-to-value ratio (LTV) limit for a single-family home is 80%. However, VA cash-out refinances allow up to 100% if you qualify.

Does a cash-out refinance change your interest rate?

Yes, your interest rate can change if you choose to replace your original mortgage with a cash-out refinance. Your new loan will be larger, with different terms that include a new interest rate.

It is important to remember that there is no need to rush into the refinancing process. Determining if it is a good time to refinance your mortgage will depend on your situation, current interest rates, and various other factors. Be sure to consult with your lender to determine when and if a cash-out refinance is right for you.