The Ultimate Guide to Cash-Out Refinancing in CT Roger Odoardi With a high cost of living and high home prices, Connecticut has been ranked as the eighth most expensive state to live in. Considering this fact, it’s no wonder why homeowners in the Constitution State are exploring their refinancing options — especially with 2020’s record-low interest rates. One option is cash-out refinancing, which allows homeowners to leverage their equity for debt consolidation, home improvements or any other scenario that may require a large sum of cash. Read on for our complete guide to cash-out refinancing in Connecticut to determine if it’s the right option for you. Cash-Out Refinancing 101: How it Works Your Cash-Out Refinancing Options The Cash-Out Refinancing Process Is Cash-Out Refinancing the Right Option? Get Started with Cash-Out Refinancing Cash-Out Refinancing 101: How it Works The equity that you have in your home is the basis of cash-out refinancing. You replace your existing mortgage with one of higher value and receive the difference in cash. For example, if your home is valued at $300,000 and you owe $200,000, that means you have $100,000 in equity. If you want to refinance to pay off $40,000 of debt, you would get a new mortgage that is worth $240,000 — that’s $200,000 for your new mortgage principal and $40,000 to pay off debt. Most lenders allow borrowers to refinance 80% of the value of their home, which in this scenario is exactly $240,000. With cash-out refinancing, you can decide how to use the money that is taken from your homes value. You can make home improvements or upgrades to increase the value, pay off student loan debt, purchase a new car, increase your investment portfolio or even put a down payment on a second home. Keep in mind that the amount you are allowed to receive in cash will depend on the value of your home. The lender you work with and the refinancing option you select will also affect the amount. The majority of lenders allow homeowners to receive up to 80% of their value in cash, but homeowners with VA loans can receive up to 100%. As with any type of home loan, you will need to pay closing costs when you refinance, so the final amount in your pocket may be less than expected. The Benefits & Uses of Cash-Out Refinancing Invest the Cash: It’s becoming increasingly common for homeowners to use cash-out refinancing to add funds to their retirement account or start a college savings account. Consolidate Debt: You can use the cash to pay off debts that may have high interest rates, such as credit cards or student loans. Since mortgage rates are often far lower than other interest rates, you could end up saving a significant amount of money in the long run. Make Valuable Home Improvements: Maybe you need to renovate your basement or replace an outdated HVAC system. Or maybe you want to add an in-ground pool or a brand-new two-car garage. You can use the cash to make these renovations, which can ultimately increase the value of your home. Get a Lower Interest Rate: Speaking of interest rates, they are at all-time lows. If you purchased your home at a high rate, you could benefit from a new, lower rate from cash-out refinancing. Your Cash-Out Refinancing Options There are three different types of cash-out refinancing options for Connecticut homeowners: Conventional Cash-Out Homeowners with high credit scores and a significant home value typically opt for a conventional loan. With this option, you can only borrow 80% of your homes value. Private mortgage insurance (PMI) is not required. FHA Cash-Out FHA loans also limit the borrowing amount to 80% of your homes value. The difference with this type of loan is that it is intended for borrowers with a lower credit score or who have experienced bankruptcy. PMI is required. VA Cash-Out Veterans can qualify for this option, which allows borrowers to receive up to 100% of their homes value in cash. VA loans do not require PMI, but they do require a funding fee. Alternative Refinancing & Loan Options In some scenarios, cash-out refinancing may not be the best option. But don’t worry! There are other routes you can explore: Personal Loan Personal loans are separate from your mortgage and can offer a better interest rate than credit cards. Home Equity Line of Credit (HELOC) A HELOC works similar to a credit card in that you have a revolving line of credit. With this option, you can borrow money on an as-needed basis at an adjustable interest rate. Home Equity Loan A home equity loan acts as second mortgage. Your lender provides you with a specific lump sum that you repay over a set number of years. If you prefer the consistency of the same monthly payment at a fixed rate, this option may be more attractive than a HELOC. To learn more about home equity loans, check out our article: The Difference Between a Cash-Out Refinance and a Home Equity Loan. Rate-and-Term Refinance This option allows Connecticut homeowners to take advantage of lower interest rates. An example would be extending a 20-year mortgage to a 40-year mortgage. The longer terms can come at a much better interest rate, which can significantly lower your monthly mortgage payment. Reverse Mortgage A reverse mortgage is available to homeowners who are 62 years of age or older. This option is another way to convert your equity into cash, only instead of making monthly payments to your lender, your lender sends you monthly payments. You are not required to pay back a reverse mortgage until you sell your home or the property becomes vacant. Try Our Mortgage and Amortization Calculator The Cash-Out Refinancing Process What can you expect with cash-out refinancing in Connecticut? Here’s a look at the requirements and the four-step refinancing process: Qualifications for Cash-Out Refinancing Generally, every Connecticut borrower who has a mortgage — with the exception of a USDA loan — is eligible for cash-out refinancing. Your lender may have these additional requirements: A Sufficient Amount Of Equity in Your Home: You can’t receive cash if you don’t have enough equity. With most cash-out refinancing options, the lender requires you to keep 20% of your homes value, meaning you can cash out up to 80%. If you are looking to make $40,000 worth of home improvements but only have $40,000 of equity, you may need to consider other options. A Credit Score of at Least 620: Refinancing most often requires a credit score of at least 580, but cash-out refinancing requires a score of 620 or higher. If your score is under 620, you can look into FHA cash-out refinancing. A Low Debt-to-Income (DTI) Range: To find your DTI ratio, divide your monthly debt payments (bills, mortgage, etc.) by your monthly income. So, if your monthly debt payments are $1,500 and your monthly income is $3,500, your DTI ratio is 42%. Most lenders recommend a DTI ratio under 50% for cash-out refinancing. The 4-Step Cash-Out Refinancing Process in Connecticut Step 1 Your first step is to partner with a lender or mortgage broker to get an idea of the current interest rates. They will go over your financial history and goals to help you find a cash-out refinancing option that works best for your situation. The lender or mortgage broker will need to see the same documents that you provided when you applied for your existing mortgage: bank statements, tax returns, W-2s or 1099s, proof of alimony or child support payments, etc. Step 2 The lender or broker will give you the option to lock in your rate. This means that the rate you agreed upon will be the rate you receive when your loan closes, even if rates fluctuate in the meantime. Step 3 Your financial documents will be reviewed by an underwriting team. It’s common for this team to contact you for additional information during this process, so don’t be alarmed. Once they have everything they need, the underwriters will send you a completion notice and a date for your closing. Step 4 The final step is the closing process. This process is nearly identical to the one you went through for your existing mortgage. You’ll need to sign all of the necessary paperwork and pay any closing costs that weren’t lumped into your new mortgage. In the case of cash-out refinancing, you can expect to receive the cash within three to five business days after you close. A Few Additional Considerations You’ve probably noticed a lot of similarities between cash-out refinancing and applying for a mortgage. With that in mind, here are a few additional notes about the process: You’ll Need to Get an Appraisal: Appraisals from an independent third party are required for cash-out refinancing. Be sure to factor this into your timeline; appraisals can take anywhere from a few days to a few weeks to complete. You’ll Have to Pay Closing Costs: As with any mortgage loan, there will be closing costs to cover broker fees, appraisal fees, attorney fees and other fees. On average, closing costs can be 2% to 5% of the price of your home. You’ll Probably Receive New Loan Terms: Since you are replacing your existing mortgage with a new one, your new terms may come with a different monthly payment or interest rate. In the best-case scenario, these will be lower than your previous terms. You Won’t Get the Cash Right Away: After closing, you will need to wait between three to five business days to receive the cash. Is Cash-Out Refinancing the Right Option? Every homeowner and every situation is different. To determine if cash-out refinancing is the right option for you, ask yourself the following questions: What are your current mortgage terms? How much equity do you have in your home? What is the value of your home? What are your short-term and long-term goals? In Connecticut, the amount of equity you have in your home will be the main deciding factor. Cash-out refinancing can also be a good option if: You can get a lower interest rate than your current mortgage. You are planning to use the cash for long-term financial benefits, like home improvements that will increase its value, or paying off debts. You are planning to live in your home for the next several years. Cash-out refinancing may not be the right option if: You do not yet have a good amount of equity in your home. You want to use the cash to pay off your debt, but you don’t have a long-term plan to maintain financial stability. You have only been in your home for less than one year. You do not plan on staying in your home long-term, or for the next few years. Get Started with Cash-Out Refinancing The cash-out refinancing process may seem straightforward, but it can be difficult to navigate on your own. Blue Water Mortgage knows that there are many questions that can arise when you begin the refinancing process, which is why we are always here to help. We utilize a transparent approach to assess your current financial status and understand your goals, and work to help you find the best lending options for your needs. We maintain close relationships with big-name mortgage lenders, which gives us the advantage of being able to shop around to help you find the most competitive rates possible. In addition, we are locally owned and operated and we encourage our clients to call us anytime, 24/7. Contact us here to speak with one of our mortgage specialists. We can’t wait to discuss your goals and offer a solution that fits perfectly with your needs. Roger Odoardi Roger is an owner and licensed Loan Officer at the Blue Water Mortgage office in Hampton, NH. Roger graduated from the University of New Hampshire Whittemore School of Business and has been in the mortgage industry for over 15 years. Roger has originated over 1500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.