If you’ve got considerable equity in your home, you’ve got some serious purchasing power. And you may be able to use the wealth you’ve amassed in one home to buy another. If you take advantage of cash-out refinancing. Here’s how.
Your First Home Finances Your Second Home
Whether the next house you purchase is a vacation home or an investment property, you might be able to finance its down payment, or perhaps even the entire home, through cash-out refinancing. And at an interest rate that’s comparable with the rates of mortgages for primary residences.
How does cash-out refinancing work?
You are essentially refinancing your existing home mortgage for more than you currently owe, getting the difference in cash. That way you achieve two things: refinancing your current mortgage at a new rate, and getting money to buy a second home. The repayment clock resets to either a 15-year or 30-year mortgage, whichever you choose — you are basically doing a reset on your current mortgage at a different rate.
Let’s look at a hypothetical cash-out refinancing. Say you owe $100,000 on a mortgage for a home that’s worth $200,000. So you have $100,000 in home equity. You can refinance the home for $150,000 and get $50,000 in cash. It’s as simple as that!
How much cash can you get with cash-out refinancing?
Oftentimes lenders will allow you to take out up to 80% of the equity you have in your home; 20% home equity is the line above which most borrowers don’t have to pay for mortgage insurance. In some cases, such as with VA Loans, homeowners may be able to take out up to 100% of the home’s value with cash-out refinancing.
What are the requirements for cash-out refinancing?
While there is no one single set of requirements for all programs, most guidelines take these qualifications into account:
- DTI. Your debt-to-income ratio probably should not exceed 45% — and remember that your existing mortgage counts as a debt.
- Credit score. You may be able to get cash-out refinancing with a credit score that is as low as 620.
- Longevity. Exceptions aside — inheritance is one — most lenders will want you to have owned the home for a minimum of six months in order to approve conventional cash-out refinancing.
Talk to one of the lending specialists at City Lending to see if the equity in your home could make the dream of buying a second home come true.