Q&A: Cash-Out Refinancing in MA

12 Questions & Answers About Cash-Out Refinancing in Massachusetts

From Pittsfield to Peabody, Newburyport to New Bedford, and everywhere in between, owning a home in Massachusetts is a significant investment — The Bay State is the fourth most expensive state to live in, with an average home price of $663,942.

If you’re a Massachusetts homeowner, those facts probably won’t come as a surprise. What may be surprising is that there are many refinancing options — such as cash-out refinancing — that are incredibly easy to use to your advantage. In fact, Business Insider ranked Massachusetts as one of the easiest states to refinance.

Refinancing can help you unlock better loan terms, such as lower interest rates, which can help you gain more financial stability. In this article, we dive into cash-out refinancing in Massachusetts by answering 12 of the most frequently asked questions.

Jump to an FAQ:

What is Cash-Out Refinancing?

How Much Cash Can I Get When I Refinance?

What Can the Cash Be Used For?

Are There Different Types of Cash-Out Refinancing Options?

What Are the Alternatives to Cash-Out Refinancing?

What Are the Requirements for Cash-Out Refinancing?

What Are the Benefits of Cash-Out Refinancing?

Are There Any Disadvantages with Cash-Out Refinancing?

What is the Cash-Out Refinancing Process?

Who Should Consider Cash-Out Refinancing?

Who Should Not Consider Cash-Out Refinancing?

How Do I Start the Refinancing Process?

1. What is Cash-Out Refinancing?

Cash-out refinancing is a way for Massachusetts homeowners to leverage the value they have in their home. The process involves borrowing more money than you owe on your current mortgage and receiving the difference in cash.

Here’s an example:

If you purchased a home in Massachusetts that is worth $450,000 and you currently owe $300,000, that means you have $150,000 in equity.

Typically, lenders allow homeowners to borrow about 80% of the value of the home with cash-out refinancing, which is $360,000 in this scenario.

That would give you $360,000 in a new loan, with $300,000 for your mortgage and $60,000 in cash.

However, in most situations, you will not walk away with $60,000. Just like with your original mortgage, you will need to pay closing costs, which could be 2% to 5% of the price of your home. On the low end, this would be $9,000 in closing costs, which will leave you with $51,000.

2. How Much Cash Can I Get When I Refinance?

This will depend on several factors, such as the amount of equity you have, the lender you work with and the type of refinancing option you use. Most lenders allow homeowners to borrow 80% to 90% of the value of their home. VA loans are the only exception, as borrowers can receive up to 100%.

3. What Can the Cash Be Used For?

This is entirely your decision, but keep in mind that the amount of cash you are able to receive will depend on the value of your home.

Typically, borrowers use the cash to:

• Pay off debts, like student loans, car loans or credit cards
• Make home improvements or upgrades
• Purchase a new car
• Pay for college tuition
• Buy a second home
• Make investments

4. Are There Different Types of Cash-Out Refinancing Options?

Yes. In Massachusetts, homeowners have three different cash-out refinancing options:

Conventional Cash-Out

This option is ideal for homeowners with high credit scores and a good amount of value in their home. The borrowing amount is capped at 80% of the home’s value.

FHA Cash-Out

This option is also capped at 80% of a home’s value. Homeowners with lower credit scores or who have experienced bankruptcy can qualify for an FHA cash-out.

VA Cash-Out

To qualify for this option, you must be a veteran. A VA cash-out is advantageous in that borrowers can receive a new loan of up to 100% of their home’s value. However, borrowing more than 90% is not recommended by industry experts.

The type of loan option you choose will determine if you need to pay private mortgage insurance (PMI). FHA loans require PMI, but conventional loans do not. VA loans require a funding fee.

You don’t have to navigate the cash-out refinancing process alone. Reach out to one of our mortgage experts with any questions or to begin the process together.

5. What Are the Alternatives to Cash-Out Refinancing?

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit, much like a credit card. You can borrow money when you need it at an adjustable interest rate. This option is helpful if you are planning a renovation project that will span several years.

Home Equity Loan

A home equity loan is a second mortgage. You receive a lump sum at a fixed interest rate that you are required to repay over a predetermined number of years. This option is ideal for homeowners who prefer making a consistent monthly payment.

For more on this topic, check out our article: The Difference Between a Cash-Out Refinance and a Home Equity Loan.

Reverse Mortgage

If you are over 62 years of age, a reverse mortgage is another way to convert equity into cash. Instead of making monthly payments to your lender, your lender makes monthly payments to you. You are not required to pay back the loan until you sell your home.

Personal Loan

A personal loan is independent of a mortgage. Personal loans typically offer better interest rates than credit cards, making them a good option for debt consolidation.

Try Our Mortgage and Amortization Calculator

6. What Are the Requirements for Cash-Out Refinancing?

There are a few factors that will determine whether you qualify for cash-out refinancing in Massachusetts. Each lender will set their own requirements, but you will generally need to meet the following criteria:

• You need to have equity in your home. In order to cash out, you need to have a good amount of equity in your home. If you have $50,000 in debt that you are looking to pay off, but only $35,000 in equity, you may find another type of loan more beneficial.
• Your credit score should be at least 620. Generally, your credit score should be at least 580 to refinance but a cash-out refi option calls for a score of at least 620. If your credit score is lower than 620, you may want to explore your FHA cash-out options.
• Your debt-to-income (DTI) ratio should be under 50%. Your DTI ratio is the amount of your monthly debt payments divided by your total monthly income. If you earn $4,000 a month in income and your debt payments are less than $2,000, your DTI will put you in a good position for cash-out refinancing.

7. What Are the Benefits of Cash-Out Refinancing?

Massachusetts homeowners can use their equity to take advantage of the following benefits:

Increase Your Home’s Value: Using cash-out refinancing to improve your home is a great way to increase its value.

Tax Deductions: The interest you pay on your cash-out refinance mortgage is tax deductible, while other debts are not.

Lower Interest Rates Than Other Debts: Credit card debt and student loans carry high interest rates. If you’re using cash-out refinancing to consolidate debt, you can get a much lower interest rate and ultimately save money in the long run.

8. Are There Any Disadvantages with Cash-Out Refinancing?

There aren’t necessarily disadvantages, but there are a few factors to consider before you decide if cash-out refinancing is right for you:

Appraisal & Closing Costs: Your home will need to go through the appraisal process just as it did when you applied for your first mortgage. There will also be closing costs to cover the attorney fees, broker fees, appraisal fees and other logistics. You can typically expect to pay an average of 2% to 5% of the price of your home in closing costs.

New Loan Terms: With cash-out refinancing, you are replacing your existing mortgage with a new one, which means you may get a different monthly payment, interest rate or timeframe for your loan repayment.

Financial Stability: If you are considering cash-out refinancing to pay off debt and become more financially stable, make sure that you also plan to adjust your future spending habits. Failing to repay your loan could place you further into debt and puts your at risk of foreclosure.

9. What is the Cash-Out Refinancing Process?

Cash-out refinancing in Massachusetts follows a similar process as any other type of refinancing option.

First, you will need to get quotes and apply for refinancing. You should reach out to a mortgage broker or lender to get an idea of the current interest rates and the type of cash-out refinancing option you prequalify for. You will need to provide your lender with the same information and documents as when you applied for your existing mortgage, such as bank statements, tax returns, W-2s or 1099s, and proof of alimony or child support payments.

Next, you will have the option to lock in your rates with the lender you have partnered with. This guarantees your interest rate and protects you if rates increase before your loan closes.

Then an underwriting team will review all of your financial documents. Don’t be alarmed if they contact you to request more information. When the underwriters have everything they need, you will receive a completion notice and a date for your closing.

During the closing process, you will need to sign the loan papers and pay any of the closing costs that were not added to your loan. For cash-out refinancing, you can expect to receive your cash typically three to five business days after closing.

10. Who Should Consider Cash-Out Refinancing?

To determine if cash-out refinancing is the right move, you should assess your current financial situation and consider your long-term goals.

In Massachusetts, cash-out refinancing is a great option if:

• You can get a lower interest rate than your current mortgage.
• You have a substantial amount of equity in your home.
• You are planning to live in your home for the next several years.
• You will use the cash for long-term financial benefits, like home improvements that will increase its value or paying off debts.

11. Who Should Not Consider Cash-Out Refinancing?

On the other hand, cash-out refinancing may not be the right option if:

• You do not yet have a substantial amount of equity in your home.
• You have 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.
• You are planning to use the cash to pay off debt, but do not have a long-term plan to maintain financial stability.

12. How Do I Start the Refinancing Process?

You’re already in the right place! At Blue Water Mortgage, we understand that there is a lot to consider when you’re weighing your refinancing options and we’re here to answer all of your questions.

We’re available to our clients 24/7. To start a conversation with one of our mortgage specialists, contact us here. We’ll work to get an understanding of your goals and guide you in the right direction.

Roger Odoardi

Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.