A mortgage cash-out refinance sounds super confusing to anyone not in the lending industry. But it’s fairly simple. When you decide to opt for a cash-out refinance, you’ll take out a new mortgage on your property that will pay off your existing debt AND you’ll get cash back from the equity you’ve built up in your home.
To give you a sense of whether or not a cash-out refinance is right for you, take a look at Money Under 30’s mortgage cash-out refinance calculator – also known as a Reverse Mortgage Calculator.
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How does the mortgage cash-out refinance calculator work?
The Mortgage Cash-Out Refinance Calculator is one of the simplest calculators offered here at Money Under 30. You’ll need to complete only two input fields:
- Your current home value.
- What is your mortgage outstanding Balance?
Once you have entered those two pieces of information, hit the “Calculate” button to see your results.
The first number you will see will be Your loan-to-value ratio. Once again, that’s your current outstanding mortgage balance, divided by your current home value.
For example, if your current home value is $300,000, and your mortgage outstanding balance is $150,000, your loan-to-value ratio is 50% ($150,000 divided by $300,000).
Why do you need to calculate the loan-to-value ratio?
It’s really the central metric with a cash-out refinance calculator, and cash-out refinances in general.
As discussed above, that’s because the big mortgage funding agencies, like Fannie Mae, limit cash-out refinances to not more than 80% of the value of your home.
How much can you borrow?
is the one most relevant to anyone wanting to do a cash-out refinance. This box will show how much you cash out you can receive from your refinance. This is not the total amount of the new mortgage.
Using the example above, a current home value of $300,000 would enable you to borrow up to 80% on a new mortgage, or $240,000. But since you already owe $150,000, the “How much can you borrow?” box will show just $90,000.
That’s $240,000 on the new mortgage, less $150,000 to pay off your existing loan. The remaining $90,000 will be cash back to you as a result of the refinance.
Remember that the mortgage cash-out refinance calculator is just a starting point
The cash-out amount you will be provided by the cash-out refi calculator will be just a ballpark estimate. The actual amount you will get on your refinance will depend on three factors:
- The appraised value of your home.
- The specific amount you owe on your current mortgage.
- Any closing costs or escrow charges that might reduce the amount of cash back you’ll receive.
Even with those three points in mind, the cash-out refinance calculator is a valuable tool to help you determine if a cash-out refinance will be feasible, and roughly how much you can expect to receive at the closing table.
The only way to know how much cash you can expect to receive with any certainty is to contact a mortgage lender and have them run specific numbers.
What is a cash-out refinance?
A cash-out refinance is when you take a new mortgage on your property that not only pays off the existing indebtedness but also provides you with cash from the accumulated equity in your home.
Because cash-out refinances have the potential to increase the risk of the loan to the lender, you may pay a slightly higher interest rate compared to a purchase money mortgage.
On what’s known as a rate and term refinance, where you’re merely looking to replace your current mortgage with a new one at a lower interest rate, and not taking out any significant cash out, you can borrow enough to cover the following expenses:
- Payoff the current first mortgage loan.
- Payoff a second mortgage, if the funds were used to purchase the home.
- Pay for any closing costs or tax and insurance escrows on the new mortgage.
- Receive up to $2,000 in cash back.
That last limitation is where a refinance has the potential to become a cash-out. Essentially, what is conventionally defined as a cash-out refinance is one that pays off the first three expenses, then provides you with more than $2,000 in cash back.
How much cash can you take from your home?
The major mortgage lending agencies, like Fannie Mae and Freddie Mac, have specific limits on how much cash out you can take on a refinance. They don’t limit the dollar amount of cash, but rather the percentage of your home’s value you can take on a cash-out refinance.
This is calculated using what is known as loan-to-value ratio (or LTV). That’s the amount of the new mortgage amount from the refinance, divided by your home’s market value. For example, if your home is worth $400,000, and you want to take a $300,000 refinance against it, your loan-to-value ratio will be 75% ($300,000 divided by $400,000).
Fannie Mae limits the loan-to-value on cash-out refinances as follows:
- Single-family, owner-occupied residence – 80%.
- Two-to-four family, owner-occupied residence – 75%.
- Second home – 75%.
- Single-family investment property – 75%.
- Two-to-four family investment property – 70%.
If your home is worth $400,000, and you want to do a cash-out refinance for the maximum amount possible, that will be 80% of the property value, or $320,000. That will be the case if your home is single-family and owner-occupied. But let’s say you also owe $200,000 on the original first mortgage – how much cash back will you get?
Let’s break down the numbers. You’ll be getting $320,000 from the new mortgage, but before you can determine how much will be actual cash back you’ll first need to factor in paying off your current first mortgage, plus any closing costs or tax or insurance escrows.
The calculation might look something like this:
- Amount of the new mortgage: $320,000.
- Payoff current first mortgage: $200,000.
- Closing costs and tax and insurance escrows on the new mortgage: $7,000.
- Net cash back from the refinance: $113,000.
Important limitations on cash-out refinances
Conventional mortgages come with a couple of important limitations you need to be aware of.
Time of ownership requirement
Generally speaking, you cannot do a cash-out refinance on a property you have owned for less than six months. There are some exceptions, such as in the case of inherited property. Otherwise, if you own a home for less than six months, the property value will be based on the original purchase price, rather than the property’s current market value. Unless you made the original purchase with a very large down payment, the six-month limit might not be suitable for a cash-out refinance.
The property being refinanced cannot be listed for sale
If it is, it must be removed from the market prior to the disbursement of the proceeds of the new mortgage.
Understanding the right of rescission
There’s one other requirement that applies to all refinances (not purchases!) that you need to be aware of, and that is the right of rescission. Under the provision, you have a right to cancel the new mortgage up until midnight of the third day after the closing. This is to provide you with an opportunity to determine if doing the refinance was the right choice for you.
But the limitation with the right of rescission is that the funds for the new mortgage will not disperse until the right of rescission period has expired. That means if you hold the closing on your cash-out refinance on Monday, the funds will not disperse until the following Friday.
The reason for the delay in dispersing the funds is so that lenders don’t have to reverse the transaction should you choose to rescind. In other words, the funds from your cash-out refinance won’t be available until the rescission period has expired. That means you should not expect a check for the cash proceeds at the closing table.
That will be important to remember if you have immediate plans for the proceeds of the cash-out refinance. For example, if your plan is to use the funds to pay off a loan unrelated to your home, to launch a business venture, or take a vacation right after closing, you’ll need to plan accordingly. Practically speaking, that means the closing will need to occur at least four days prior to the anticipated cash need.
But with all that said, in my many years of being in the mortgage industry and being involved in thousands of refinances, I only recall one rescission. Because of the delay in disbursement of funds, the right of rescission is not a popular concept with borrowers, even if it is for their own protection.