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How to Do a Cash-Out Mortgage Refinance

Cash-out refinance rates and requirements are different depending on the type of loan you are refinancing.

The term cash-out refinance refers to obtaining a new mortgage to replace your existing one and getting cash back in the process. You essentially take out a new loan for a greater amount than your current mortgage and spend the cash back how you see fit.

If you have a conventional or Federal Housing Administration (FHA) loan, you can typically receive up to 80 percent of the value of your home. You could receive up to 100 percent of your home’s value with a Veterans’ Administration (VA) loan.

Typical Qualifications for a Cash-Out Mortgage Refinance

Keep in mind that each lender will have slightly different qualification requirements for this type of refinance deal. However, here is the most common criteria:

  • A minimum credit score of 620

  • An 80 percent or greater loan-to-value ratio, which means you must retain at least 20 percent of the equity in your home after taking out the loan

  • 50 percent or lower debt-to-income ratio

And here are the factors lenders consider when determining how much loan to offer you:

  • The current value of your home

  • How much you owe on your current mortgage

  • Amount of equity required by the lender

The amount of cash you will receive is the difference between the new loan amount and the balance on your existing mortgage.

You will also need to present several forms of documentation to gain approval for a cash-out refinance loan. Typical examples include proof of income, satisfactory payment history on your current mortgage, and a current appraisal of your home conducted within the last 90 days.

Pros and Cons of a Cash-Out Refinance

As with most things, there are pros and cons of a cash-out refinance that you should consider before making a decision.

Cash-Out Refinance Pros

One of the leading reasons people apply for a cash-out refinance is to lower their mortgage interest rate. You will also pay a lower interest rate when repaying the cash you took out on the loan. With historically low mortgage interest rates still the norm, you may be able to lower your monthly mortgage payment significantly.

Here are some other benefits to consider with a cash-out mortgage refinance loan:

  • You can consolidate credit card and installment debt into a single payment. However, you should consider this option carefully since mortgage loans can span as long as 30 years. Although you would save money with lower interest rates upfront, you could ultimately end up paying more by taking longer to pay off your debt.

  • You can use the money you receive back from the loan to pay large expenses such as home repairs or college tuition. Both provide a return on investment, and your interest rate will be much lower.

  • You may be able to deduct mortgage interest on your tax return.

Cash-Out Refinance Cons

Before taking out a cash-out mortgage refinance loan, be sure you understand all fees associated with the transaction and determine your break-even point before proceeding with it. This is an important step as you don’t want to find out later that the fees are too steep.

Other than the fees, you should also remember the following:

  • Try to avoid spending the money on non-essential things, such as a vacation, or you could find yourself in even greater debt.

  • Since the refinancing loan is associated with your home, you risk losing your home if you fall significantly behind on payments.

  • It will take you longer to pay off your mortgage unless you make extra payments.

How Does a Cash-Out Refinance Work?

Once you have carefully weighed the benefits and drawbacks of a refinancing loan, you will need to complete a few additional steps before applying for one.

Obtain Your Free Credit Report Before Applying for a Refinance Loan

When you know you will soon be applying for a large loan, it is always a good idea to obtain a copy of your credit report. Under the Fair Credit Reporting Act (FCRA), you may request one report each year from Experian, Equifax, and Transunion at no charge.

You should review your credit report before applying for a refinancing loan to make sure it doesn’t contain any errors that could cause the lender to deny your application. Contact the reporting agency right away if this occurs and ask for a correction. The FCRA provides 30 days for the agency to correct the error or explain why it is correct and should stay on your file.

Arrange a Home Appraisal

The amount of your new loan depends entirely on the current value of your home. Most lenders offering cash-out refinancing loans require applicants to obtain a home appraisal no sooner than 90 days before closing. You will need to pay for the home appraisal with your own funds.

Compare Cash-Out Refinance Rates and Loan Terms

When comparing lenders, remember that even a quarter of a percent difference with interest rates can mean paying thousands of additional dollars over the course of the loan. You also want to pay attention to whether the lender offers you a fixed or adjustable interest rate.

Closing a Cash-Out Refinance

The closing process for a cash-out refinancing loan is similar to an original mortgage loan except that it does not involve another party. You will meet with a lender to sign several documents and remit any outstanding fees. At Listerhill Credit Union, you can complete many of your closing details online, including signing documents electronically.

Listerhill Credit Union is here to help with your cash-out refinance or any of your financial needs.

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  • The Great Giveback Official Rules

    1. Eligibility: No purchase or obligation necessary to participate and win. All participants must be 19 years of age or older at time of contest participation. Employees of Listerhill Credit Union are not eligible to register for the contest.

    2. How To Enter the Contest: All Listerhill members who have consumer loans in good standing, (subject to limitations below) are automatically entered. Anyone who takes out a new loan with Listerhill Credit Union, or refinances a loan from another lender with Listerhill Credit Union (subject to limitations below) will automatically be entered to win. Limit of one entry per loan.

    NO PURCHASE NECESSARY: To enter the contest without a loan, send a self-addressed, stamped envelope to: Listerhill Credit Union, P.O. Box 566, Sheffield, AL 35660, Attn: Great Giveback Contest Entry. Limit one entry per person. Written entries must be received no later than July 3, 2021.

    Listerhill Credit Union will not be responsible for incomplete, lost, late, misdirected or illegible entries or for failure to receive entries. All entries become property of Listerhill Credit Union and none will be returned. Any questions regarding the number of entries submitted shall be determined by Listerhill Credit Union in its sole discretion, and Listerhill Credit Union reserves the right to disqualify any entries by persons determined to be tampering with, violating, or abusing any aspect of the contest.

    3. Contest Entry Requirements: In the event the Credit Union, in its sole discretion, determines that any Entry contains content that does not comply with these Official Rules or does not otherwise comply with regulatory guidelines, Credit Union reserves the right to disqualify the entry.

    4. Determining the Winner: A Credit Union employee will select at random four (4) $500 winners (one per day July 12-15) and one Grand Prize Winner from all entries received on July 16, 2021. You do not have to be present to win.

    5. Prizes: $500 Cash Prize: the Credit Union will award four (4) members with $500 cash each. Grand Prize: The Credit Union will pay up to $25,000 toward your loan with Listerhill Credit Union, or combination of loans. No loan payments will be made to loans with any other lender. No cash equivalent provided, and the total prize amount may be less depending on the outstanding amount of loan balance(s) with Listerhill Credit Union. In no event will the prize awarded exceed the total amount of the winner’s outstanding balance of qualifying loans with Listerhill Credit Union. Federal, state and local taxes are the sole responsibility of the winner. IRS regulations require the Credit Union file a 1099 on behalf of the winner.

    A Credit Union employee will call the prize winners and the prize winners will be called up to five times during regular business hours at number provided on entry form and will leave no messages. Failure to reach winner during these calls may result in disqualification of winner, forfeiture of his or her interest in all prizes, and selection of a substitute winner drawn from the drum. Winner will be required to schedule a time, at least 48 hours in advance, to visit Listerhill Credit Union, located at 4790 2nd Street, Muscle Shoals AL, 35661 in person, during regular business hours within seven (7) days of being notified to claim prizes by providing proof of eligibility for prize won and completing and signing an affidavit of eligibility and a liability and publicity release. Failure of any Winner to timely contact the Credit Union, visit the above Credit Union office in person and sign and return any required affidavit and release, or to claim a prize or comply with any term or condition of these Official Rules, will result in drawing Winner's disqualification and the forfeiture of his or her interest in the prize. Winners may waive their right to receive prizes. Prizes are non-assignable and nontransferable. No substitutions allowed by winner.

    6. To be eligible to win, all loans must be in good standing (not more than 30 days past due at the time of drawing. Eligible loans are limited to auto loans (no indirect dealer loans), personal loans (no loans secured by real property, such as mortgages, 2nd mortgages, and Home Equity Lines of Credit) and recreation loans made to consumer borrowers (not business or commercial loans).

    6. Participation. By participating, entrants agree to be bound by these Official Rules and the decisions of the Contest. Except where prohibited, acceptance of any prize constitutes winner's consent to the publication of his or her name, biographical information and likeness in any media for any commercial or promotional purpose, without limitation the Internet, or further compensation. Prizes not won and claimed by eligible winners in accordance with these Official Rules will not be awarded and will remain the property of the Credit Union.