The maximum LTV ratio for a cash-out refinance is 80%. Depending on your credit and income, you might not be able to qualify for a 80% LTV. If you have bad credit, the maximum allowed LTV by your lender might be lower.
For example, let’s say that your home is valued at $500,000, and you currently have a $300,000 mortgage. This means that your current LTV is 60% ($300,000 divided by $500,000). With a maximum LTV of 80%, you can borrow up to an additional 20% of your home’s value, or $100,000. You can refinance your mortgage for $400,000, pay off your existing mortgage of $300,000, and withdraw $100,000 in cash.
To calculate how much you can borrow, use our mortgage refinance calculator to see how much home equity you can access and how a change in mortgage rates can affect your mortgage payments.
Pros of a Cash-Out Refinance
With a cash-out refinance, you can borrow a large amount of money at a low interest rate, and it will require lower monthly payments compared to other methods of borrowing. Here are the pros of a cash-out refinance:
Cash-out refinancing is done so that borrowers can borrow more money. However, cash-out refinances are chosen specifically so that borrowers can borrow a large amount of money all at once. This is in comparison to other options that might have lower limits, such as personal loans or lines of credit.
Since you are borrowing money California online payday loans direct lender as a secured loan through your home, you will be paying a low interest rate. Unsecured loans, such as personal loans, will have much higher interest rates.
Mortgages are amortized over a period that can be 25 years or even longer. This means that your mortgage payments are spread out over a very long period of time. If you were to borrow with a personal loan, for example, you would have to repay the loan in a shorter period of time, which will require higher loan payments.
Cons of a Cash-Out Refinance
The pros are all based on borrowing more money, but borrowing more money can be a con in itself. Borrowing more means that you will be paying more. Here are the cons of a cash-out refinance:
Borrowing more money can be both a pro and a con. If you’re not financially responsible, or you’re borrowing money for purposes that won’t add value or save you money, then the ability to borrow more money might not be such a good thing.
The money that you’re borrowing isn’t free, and it will come with interest costs. Unless you’re able to refinance at a significantly lower mortgage rate, it’s likely that your monthly interest payments will increase. You’ll be paying more interest than you otherwise would.
Borrowing more money with your home as collateral means that you are putting your home more at risk than before if you’re not able to keep up with mortgage payments. This is especially true since your cash-out mortgage payments will now be higher. If you can’t keep up with your payments, you might face foreclosure or power of sale.
Since you still need to pay interest on the additional amount that you borrow, you should try to use the money wisely. This can include things that can save you money or can make you more money. Some uses for a cash-out refinance include:
Consolidating your debt can save you lots of money, especially if it’s high-interest debt such as credit cards. In fact, debt consolidation was the top reason that Canadians refinanced their mortgage. You can pay off credit cards, personal loans, lines of credit, car loans, and student loans with money from a refinance.