Cash-Out Refinancing

The maximum loan-to-value (LTV) ratio allowed for a cash-out refinance varies based on many factors, which typically include the occupancy status of your property (owner-occupied or rental), your credit status, and the loan product you qualify for (conventional, FHA or VA). Maximum LTV ratios allowed for conventional and FHA products range from 70 - 80 percent. If you are eligible for a VA loan, you can often finance up to 90 percent of the home’s value.

A cash-out refinance increases the total loan amount, so your monthly payments may increase as well, depending on the new terms versus the original terms (e.g., interest rate, number of years on the loan). Your mortgage payment could even end up being lower in some cases, especially when the repayment period is extended. If you use the cash-out funds to clear a large credit card balance, you'll eliminate that monthly credit card bill. The money you save can easily offset the higher mortgage payment. Better yet, you could apply that old credit card payment amount directly to your new mortgage, helping you pay it off faster and save on interest. A Pennymac Loan Expert can help you explore the best options for your individual situation.

Extending your loan term when you refinance — for instance, by replacing a loan you’ve paid for 5 years with a new 30-year mortgage — will increase the total interest you pay over time. However, Pennymac does offer flexible term options that allow you to choose a shorter term, such as one matching your remaining years, which can save you a significant amount in long-term interest.

If you currently have an FHA-insured mortgage, you have options for a cash-out refinance. Here’s a comparison:

• FHA cash-out refinance: A key advantage is that FHA guidelines may allow you to qualify with a lower credit score than required for a conventional loan.
• Conventional cash-out refinance: The main benefit here is that you could eliminate the mortgage insurance required by FHA loans, potentially lowering your monthly payment.

Regardless of your current loan type, your eligibility for any cash-out refinance will be determined by factors like your property type, the amount of equity you have, your credit history, and your overall financial standing.

Mortgages backed by the Department of Veterans Affairs may be eligible for a cash-out refinance. Even if your current mortgage is not a VA loan, your veteran, service member, or military family status may make you eligible for VA cash-out refinancing. And if you aren’t eligible for a VA loan, you still may be able to qualify for an FHA or conventional cash-out refinance.

Similar to when you applied for your original mortgage, you will need to provide all of the necessary documents that demonstrate your borrowing worthiness. You should also factor in closing costs, although you will likely have the option to roll those costs into your loan amount.

Some of the documentation requested may include:

• Pay stubs
• Tax returns and W-2s and/or 1099s (for self-employed individuals)
• A credit report
• Bank statements

When you refinance your mortgage, including a cash-out refinance, you must pay any associated closing costs, just like when you got the original mortgage. These costs may include escrow fees, an appraisal and upfront private mortgage insurance fees (UFMIP). Depending on the specifics of your situation, you would likely have the option to roll your closing costs into your loan amount and not have to pay them at closing.