If you have equity in your home, you might want to tap into it in order to have cash in hand. Some people just don’t like having their investment tied up in their home. Others need the cash for things like home renovations, college tuition, or debt consolidation.
Just how much of your equity are you allowed to take out? It depends on the loan program, as each program has different requirements.
Conventional Cash-Out Loan
If you are taking out a Fannie Mae or Freddie Mac loan, you have conventional financing. These loan programs charge PMI (Private Mortgage Insurance) if you put less than 20% down on the home. They also offer the lowest interest rates and best terms on the loans. You can eliminate the PMI on these mortgages once you owe less than 80% of the home’s value.
If you want to take cash-out of your home with a conventional loan, you can refinance up to 80% of the home’s value. In other words, you must leave 20% of the equity you have in the home untouched. For example, if your home is worth $300,000, you can borrow up to $240,000. You just deduct the amount of your first outstanding mortgage from this amount, and you have the amount that you can receive as cash in hand.
FHA Cash-Out Loan
The FHA also offers a cash-out refinance program. This program has slightly more flexible guidelines, as they only require a 3.5% down payment when you buy the home and they allow lower credit scores than the conventional loans offer.
The FHA loans also allow up to an 85% LTV on a cash-out refinance. On the same $300,000 home, you could take out up to $255,000 with a cash-out refinance. Again, you deduct the amount you owe on y our first mortgage from this amount and that’s the cash you will receive in hand.
Something to understand about FHA loans, though, whether a purchase or cash-out refi, is the mortgage insurance. FHA loans charge mortgage insurance for the life of the loan. No matter if you purchase a home or refinance it, you pay 0.80% of the outstanding loan amount each year. The lender will divide the amount you owe up into 12 increments, adding it to your mortgage payment, but you pay it until you pay the loan in full.
VA Cash-Out Loan
The VA loan is a unique product. First, it’s only available to veterans that served enough time in the service and that had an honorable discharge. If you meet those requirements and prove that you are eligible for a VA loan with a Certificate of Eligibility from the VA, you can refinance with a cash-out loan for 100% of the home’s value. In other words, you can take out all of the home’s equity as long as your home isn’t worth more than the standard conforming limit of $424,100.
Keep in mind that every time you refinance your VA loan, you pay the VA funding fee. This is how the VA funds its reserve account and remains in business. The VA doesn’t require borrowers to pay mortgage insurance. Instead, they guarantee the loans themselves by paying banks back out of the reserve fund.
If you take out a cash-out refinance, you’ll pay the funding fee of 2.15% again if you were a member of the regular military. If you were in the Reserves or National Guard, you’ll pay 2.4% of the loan amount. This fee is due at the closing, but some lenders allow you to wrap it into your loan amount.
If you opt for a portfolio lender rather than a conventional or government-backed loan, you may find even more options for a cash-out refinance. Portfolio lenders keep the loans on their own books, so they can make their own rules.
It pays to shop around and find the best deal for your situation. Only you know how much cash you need and which mortgage payment you can afford most comfortably. Make sure you look at the big picture and understand how much interest the extra money will cost you. This way you can determine if it’s the best decision for you or if there is an alternative way to get the cash you need.