Your house is a valuable asset. You may want to get funds from your house without selling it. If so, you can consider doing a cash-out refinance. This type of loan allows you to pay off your existing mortgage and get additional cash for your needs. In exchange, you will have a new loan secured by your home.

What Is a Cash-Out Refinance?

A cash-out refinance is a mortgage loan you can take out on your own house. The proceeds from the loan are first used to pay off your existing mortgage and any other liens. When the new loan amount exceeds the total payouts, the remaining amount gets distributed to the homeowner in cash.

If you receive a cash-out from a refinance, you can do whatever you want to with the money. Remember that the cash you receive is part of a long-term loan, and you must pay it back. As such, you want to spend it on something that adds value to your property or life for the long term.

A simple example of a cash-out refinance is if you had a house worth about $400,000, but you owe $250,000 to your first mortgage. You can refinance the first mortgage loan with a new mortgage for $320,000. You will receive $70,000 after paying the first mortgage from the new loan's proceeds.

Is There a Limit on the Cash You Can Take Out?

Lenders will not do a cash-out refinance for a loan that exceeds 80% of the appraised value of your house. The amount of cash you can get from a refinance is thus limited to 80% of the worth of the property, less the first mortgage amount.

If you have other liens on the property besides the first mortgage, these liens will get paid from any new loan proceeds before the lender pays cash to you. Examples of other liens include a home equity line of credit or a second mortgage.

You will also have to pay closing costs and fees on the new mortgage.

Can You Get a Better Interest Rate?

Interest rates on refinanced loans are generally higher than for a new purchase. Your interest rate will depend primarily on existing market conditions with some adjustments based on your credit score, percentage of equity in the property after the refinance and the total amount of the loan.

On a refinance of a mortgage loan that just paid off your existing balance, you would expect to get a lower rate than a cash-back refinance. Lenders typically charge interest rates on straight refinance loans up to half a percentage point less than a cash-out loan.

Depending on when you purchased the property and the rate you agreed to, you may get a better interest rate than your original loan.

How Do You Qualify for a Cash-Out Refinance?

To qualify for a cash-out refinance, you must have at least 20% equity in the property. The lender will order an appraisal to get an independent assessment of your home's value. The lender will use the reported value less existing liens to determine how much equity you have.

For example, if the appraised value is $380,000 and you have $300,000 in existing liens, your percentage of equity is about 21% ($300,000/$380,000).

Lenders usually require a debt-to-income ratio of 43% or less when payments for the new loan get factored into your total monthly installment obligations. Lenders determine this ratio by dividing your total monthly installments by your gross monthly income.

Other steps you need to take to qualify for a cash-out refinance include:

• Filling out the loan application

• Providing documentation of all income

• Signing required lender disclosures

What Types of Cash-Out Refinance Loans Do Lenders Offer?

Funding for cash-out refinances generally comes from three types of loans. A conventional loan requires good credit, and you can borrow up to 80% of your home's value.

A VA loan is possible for a cash-out to refinance if you are a veteran or meet other qualifications. VA loans have fees that must get paid at the loan initiation but allow borrowers to have mortgage amounts up to their home's full value.

An FHA loan is available if your credit is not good enough to qualify for a conventional loan. FHA loans charge fees at the loan initiation. Lenders still require buyers to have credit scores of about 600 and will allow you to borrow up to 80% of the property's value.

Are There Other Ways To Get Cash From Your House?

Other ways to get cash from your house include a home equity loan, home equity line of credit or a reverse mortgage. You can get a personal loan if you want to borrow cash without involving your home. Lenders typically charge higher interest rates on personal loans not secured by your residence.

Home Equity Loan

A home equity loan is a loan in addition to your first mortgage. The lender files a lien in the second position behind your original lender. You will make payments on both loans.

Home Equity Line of Credit

A home equity line of credit is like a credit card secured by your house but with a better interest rate. The lender will approve you for an amount you can draw up for your cash needs. Your home secures this loan.

Any sales proceeds go towards the amount owed on home equity loans or lines of credit after your first mortgage gets paid. To qualify for a home equity loan or line of credit, you must have at least 20% equity in your property.

Reverse Mortgage

A reverse mortgage is an option for persons over the age of 62. You usually need to have 50% equity in your home to qualify. You do not make payments on the loan while it is outstanding. Instead, you pay the balance owed when you sell the house.

Can You Get a Tax Deduction?

You can deduct the interest payments you make on the mortgage you took out when you initially purchased your home. You can deduct interest payments on a refinanced loan for the amount of the proceeds that are paid off the original loan.

You can also deduct interest on any amounts used to pay for specific home improvements, such as additions and remodels, replacement of heating and cooling systems, and a new roof.

Should You Use a Cash-Out Refinance To Consolidate Debt?

You need to review your debts to determine if consolidation through a cash-out refinance makes sense. You may get a lower interest rate on the refinanced loan on some debts but not others. You would not want to consolidate debts with lower interest rates with the refinance proceeds.

In addition, consider the loan terms for your existing debts. A refinance loan is a long-term loan, so it may not make sense for you to consolidate shorter-term arrangements. This is especially true if you can pay these amounts off in a few years.

When Should You Get Cash-Out on a Refinance?

The optimal time to refinance and take cash-out is when interest rates drop below the rate you are paying on your current mortgage. You want to ensure rates have dropped enough to cover additional fees and closing costs you will have to pay.

You should also know that refinancing will extend your payment term and result in you making additional interest payments.

If you have cash needs for significant home improvements that will improve the value of your home, a cash-out refinance makes sense. You should probably not refinance to purchase a car or other asset that will not last as long as your home improvements or provide as much value.

You must consider many factors in your decision to refinance your home. Make sure you research all your options to determine the best course of action for you.