Cash-Out Refinancing: The Pros & Cons for Maine Homeowners Roger Odoardi The Pros & Cons of Cash-Out Refinancing for Maine Homeowners Home values are high and interest rates are low. For Maine homeowners, now is the perfect time to consider cash-out refinancing. Cash-out refinancing is a way to turn the equity you have in your home into cash. By refinancing your mortgage for more than you owe, you can use the difference to fund renovation projects, pay off credit card debt or purchase a second home. The opportunities are endless, but cash-out refinancing may not be the right option for everyone. Read on for a look at everything you need to know about cash-out refinancing in Maine. How Does Cash-Out Refinancing Work? Maine Cash-Out Refinancing Options The Pros & Cons of Cash-Out Refinancing Eligibility for Cash-Out Refinancing When Cash-Out Refinancing is the Best Option How to Refinance in Maine: The 4 Steps Frequently Asked Questions How Does Cash-Out Refinancing Work? Cash-out refinancing involves borrowing more money than you owe on your existing mortgage. You receive the difference in cash, which can then be used to make home improvements or pay off debts. Lenders typically allow homeowners to borrow up to 80% or 90% of their home’s value. Cash-out refinancing is often more beneficial than taking out a second mortgage or applying for a personal loan. Cash-Out Refinancing Example Let’s say you purchased your home for $300,000. You currently owe $200,000 on your mortgage, which means you have $100,000 in equity. Now, maybe you want to build an addition onto your house or pay off some debts. Whatever your reason, let’s say you need $40,000 in cash. You can turn to cash-out refinancing to get a new loan for $240,000 — that covers the $200,000 you still owe on your home plus the $40,000 you are planning to use for home improvements or debt consolidation. Maine Cash-Out Refinancing Options Maine homeowners have three different options for cash-out refinancing: Conventional Cash-Out This option is ideal for homeowners with at least 20% equity in their home. VA Cash-Out Veterans can receive up to 100% of their home’s value through this option. However, it’s recommended that borrowers do not cash out any more than 90% of their equity. FHA Cash-Out Homeowners must have at least 15% equity in their home. Homeowners with lower credit scores can qualify for this option. What About a Home Equity Loan or a Home Equity Line of Credit (HELOC)? A home equity loan or a home equity line of credit allows Maine homeowners to take out a loan that is separate from their mortgage. A lender considers your home’s value and all of your debt to determine how much money you can borrow. With a home equity loan, you are required to repay the amount at a fixed rate over a pre-determined number of years. With a home equity line of credit, you pay at an adjustable rate. The Pros & Cons of Cash-Out Refinancing Pros Cons Interest is Tax Deductible You Will Have to Pay Closing Costs Use the Money for Home Upgrades or Debt Consolidation Your Loan Terms May Be Different Than Your Previous Mortgage Potential for Lower Interest Rate Interest Rates Can Fluctuate Pros of Cash-Out Refinancing Tax Deductions For Maine homeowners, the interest you pay on a cash-out refinance mortgage is tax deductible. Other debts are not tax deductible, so cash-out refinancing can yield more tax benefits. Home Upgrades Whether you are considering adding a pool to your backyard or need to update your HVAC system, cash-out-refinancing lets you use your equity to fund your project. In the long run this can be more affordable than using a credit card or a personal loan with a high interest rate. Debt Consolidation Student loans and credit card debts come with high interest rates and high monthly payments. It’s becoming more and more common for homeowners to use cash-out refinancing to consolidate all of their debt into one monthly payment, which also offers the benefit of a lower interest rate. Related Reading: The Pros & Cons of Debt Consolidation Through Refinancing in Maine Interest Rates Cash-out refinancing could give you a better mortgage interest rate, especially if you purchased your home at a time when rates were high. And as we just mentioned, some debts can carry high interest rates — in some cases 15% to 20% for credit cards. Using cash-out refinancing to pay off debts will give you a much lower interest rate. Cons of Cash-Out Refinancing Interest Rates Yes, interest rates can be both a pro and a con. Mortgage interest rates fluctuate, and cash-out refinancing is no exception. Since this option carries more risk than other types of refinancing because you are using your equity, you could possibly end up with a higher interest rate compared to rate-and-term financing. Closing Costs You will have to pay closing costs for cash-out refinancing, just as you did when you originally purchased your home. These costs will include attorney fees, broker fees, appraisal fees and more. Typically, you will pay an average of 2% to 5% of the price of your home in closing costs. Different Loan Terms Cash-out refinancing replaces your original mortgage with a new loan. Because of this, there may be different monthly payments or a different interest rate. Additional Debt If you’re using cash-out refinancing to consolidate debts, you also need to consider adjusting your future spending habits. There is always the risk of accruing additional debt, which can hinder your credit score and make your financially vulnerable again. Eligibility for Cash-Out Refinancing Each lender will set their own qualification requirements. To qualify for cash-out refinancing in Maine, you will likely need to meet the following criteria: You must have equity in your home. You’ll need to already have a good amount of equity in your home in order to cash out. Your debt-to-income (DTI) ratio should be less than 50%. The DTI ratio is the amount of your monthly debt payments divided by your total monthly income. Your credit score is 620 or higher. Refinancing generally requires a credit score of at least 580, but if you are looking at a cash-out option your score will need to be higher. Other factors to consider: You will need to get an appraisal. As with any type of home loan, you will need to go through the appraisal process with a third party. You won’t get the cash right away. It usually takes between three and five days after closing to receive the money. When Cash-Out Refinancing is the Best Option As a homeowner, it’s important to take a good look at your current financial situation and consider your long-term goals. Cash-out refinancing can be a great option for some homeowners, while others may benefit more from a HELOC or another option. Cash-out refinancing is recommended if: You have a good amount of equity in your home. You qualify for a lower interest rate than your existing mortgage. You are planning to live in your home for the next several years. You are planning to use the cash for financially beneficial purposes, such as paying off debts or increasing the value of your home. Cash-out refinancing is not recommended if: You have only been in your home for less than a year. You do not have sufficient equity in your home. You do not plan on staying in your home for the next few years. You are planning to use the cash to pay off debt, only to accrue more debt later on. How to Refinance in Maine: The 4 Steps Step 1: Get Quotes & Apply Reach out to a mortgage broker or lender to get an idea of what type of a refinancing option you may prequalify for. You will need to gather all of the necessary financial documents to share with your lender. These documents include tax returns, W-2s or 1099s, bank statements, and proof of alimony or child support payments. Step 2: Lock in Your Rate Once you’ve selected a lender, they will give you the option of locking your interest rate. This will protect your rate from increasing before your loan closes. Rate locks typically last between 15 and 60 days. Step 3: Underwriting & Approval Your documents will be reviewed over the next few days by an underwriting team. They may contact you for more information or to get more documents. Once they have everything they need, you will receive a completion notice and a final closing date. Step 4: Closing You will receive a disclosure a few days before your closing date. This will detail the final numbers for your loan. During the closing process, you will pay any closing costs that were not included in the final loan amount. If you are doing a cash-out refinance, you will receive the money a few days later — typically three to five days after closing. Cash-Out Refinancing: Frequently Asked Questions Q: How much cash can I get when I refinance? A: Lenders will typically limit cash-out amounts to 80% of your homes value. The only exception is for VA loans, which allow borrowers to receive up to 100% of their home’s value. Q: What’s the difference between cash-out refinancing and a home equity loan? A: Cash-out refinancing is replacing your existing mortgage with a new one. A home equity loan is an additional loan that is separate from your original mortgage. For more on this topic, read our article: The Difference Between a Cash-Out Refinance and a Home Equity Loan. Q: What can I use the cash for? A: This is ultimately up to you and will depend on how much equity you have in your home. Cash-out refinancing is frequently used to consolidate and pay off debts, renovate a home, purchase a second home or make investments. Q: Who benefits most from cash-out refinancing? A: Homeowners with equity and who originally borrowed at a high interest rate can often find a better rate through cash-out refinancing. How Can Blue Water Help You? Blue Water is here to answer any and all of your home mortgage questions. Whether you’re considering cash-out refinancing to consolidate debt or have been researching a HELOC to make a few home renovations, we’ll use our expertise to guide you in the most advantageous direction. We’re available for our clients 24/7 and are always happy to discuss goals and crunch numbers. To start a conversation with one of our mortgage specialists, contact us here. 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.