Refinancing your home before going through with a sale can help you in the market. With a refinanced mortgage loan, you can negotiate a lower interest rate or secure funds to make home improvements before entertaining buyers. However, many lenders have restrictions that prevent homeowners from selling soon after refinancing.
Keep reading to learn how to leverage cash-out refinancing to extract funds, add value to your home, and attract potential buyers.
Should You Sell Your Home After a Cash-Out Refinance?
While some lenders have restrictions preventing borrowers from selling their homes soon after refinancing, it isn’t impossible. You can sell after refinancing as long as your agreement doesn’t contain a clause that states you can’t sell your property within the first six to 12 months after receiving the loan amount. Ask your lender about any owner-occupancy clauses in your contract and discover whether you have any grounds to sell before the waiting period has expired.
Cash-out refinancing can carry high closing costs. However, if the benefits of selling your home outweigh the initial expenses, refinancing can be a flexible strategy to prepare your home for sale and encourage solid bids on the market.
How Does a Cash-Out Refinance Work?
A cash-out refinance is a mortgage refinancing option that lets you turn your home equity loan into cash. Cash-out refinancing provides you with a new home loan for more than your current mortgage balance. The lender pays you the difference in loan amounts in cash, which you can repurpose for emergencies, debt consolidation, or home improvement projects. The new home loan comes with new terms and monthly payments, so understanding your refinancing plan and ensuring you can honor the agreement is essential.
The amount of cash you receive depends on the equity in your home, which is how much your home is worth on the market compared to your current loan amount. Lenders often perform an appraisal to evaluate your home’s value before extending an offer. The value of your property may have increased since you last financed your home, increasing the amount of equity and how much you can borrow for your new home loan.
A Brief Cash-Out Refinance Example
You took out a $300,000 mortgage loan to purchase a $400,000 property and still owe $100,000. You’ve built up $300,000 in home equity. You want to refinance and the rates have fallen enough for you to get approved for up to 80% of the equity in your home.
Your lender can lend out 75% of the value of your home—that’s a new home loan valued at $325,000. Since you still need to pay $100,000 to address the remaining principle, you’re left with $225,000 to apply to existing debt or invest elsewhere. You begin a new monthly payment schedule for the total amount with new terms.
Weighing the Requirements for Cash-Out Refinance
You need to meet certain requirements to qualify for a cash-out refinance. The terms vary from lender to lender; some mortgage loans come with higher interest rates than others. It’s a good idea to research and ensure you find an offer with terms that suit your situation.
Common requirements include:
Debt-to-Income (DTI)
Calculate your debt-to-income ratio by totaling your monthly payments and dividing the figure by your gross monthly income. Potential borrowers with DTIs at or below 45% have the best chances of a successful cash-out refinance.
Credit Score
A high credit score is instrumental to securing a home loan with an ideal interest rate. You can successfully apply for a cash-out refinance with a score of around 620 or higher.
Home Equity
Lenders often require borrowers to have at least 20% equity in their home before they agree to a refinance rate. Pay off at least 20% of the current appraised value of your home before pursuing refinancing.
Cash-Out Refinance vs. Home Equity Loan
A cash-out refinance replaces your current mortgage with a new one. A home equity loan requires you to take out a second mortgage in addition to your original one. You have two liens on your company—two creditors with separate claims on your property.
While you deal with lower closing costs for a home equity loan, a cash-out refinance may make more sense if you plan to stay in your home for a while. Home equity loans offer a significant amount of money with the caveat that you have to juggle two mortgages. If the new terms aren’t to your liking and you can’t repay the new loan amount, you risk foreclosure.
Before agreeing to any terms, you should check your interest rate and fees and calculate the total interest you’d pay over the life of the loan. You could add many years of repayment and interest, potentially straining your financial situation. Using the cash for a home improvement or renovation project can increase your equity and help you sell your property on the market. Using the money to purchase a new car or vacation is less beneficial because you see a limited return on your investment.
Sell Your Home Safely With Trinity Home Buyers
When the time comes to sell your home, Trinity Home Buyers is here to make the process simple and effective. We have real estate investment down to a science. Our team has spent over 14 years in the industry refining our approach and helping people all across the St. Louis area sell their homes for cash quickly and as-is. We guarantee a closed deal and money in hand within 21 days of our first conversation.
Are you ready for a hassle-free home sale? Reach out today.
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