Refinance or take cash out

Rate-and-term refinance

A rate-and-term refinance replaces your current mortgage with a new one to change the interest rate, the loan term, or both, without taking meaningful cash out. Fannie Mae calls this a limited cash-out refinance: cash back to you is capped at the greater of 1% of the new loan amount or $2,000.

• Common reasons: a lower payment, a shorter term to pay the loan off sooner, or moving from an adjustable rate to a fixed rate.
• You pay closing costs again. The VA suggests a simple check that works for any refinance: divide your closing costs by your expected monthly savings to see how many months it takes to break even.
• If you might sell or move before you reach that break-even point, the refinance may not be worth it.
• If you have an FHA or VA loan now, ask about streamline options: the VA IRRRL is for homeowners who already have a VA-backed loan, and FHA has its own streamline refinance rules in HUD Handbook 4000.1.

Sources: Fannie Mae Selling Guide B2-1.3-02, limited cash-out refinances · VA, Interest Rate Reduction Refinance Loan (IRRRL) · HUD Handbook 4000.1, FHA Single Family Housing Policy

Cash-out refinance

A cash-out refinance replaces your mortgage with a larger one and pays you the difference in cash at closing. Owners use it for repairs, a condo special assessment, paying off higher-cost debt, or other big expenses.

• Your first mortgage is replaced, so the new rate and term apply to the whole balance, not just the cash you take.
• Under Fannie Mae’s rules, an existing first mortgage being paid off generally must be at least 12 months old, and at least one borrower must have been on title for at least six months (with some exceptions).
• How much you can take depends on your equity, the loan type, the property and your credit. Fannie Mae publishes maximum loan-to-value limits in its eligibility matrix; I’ll tell you what applies to you.
• VA cash-out refinances can also replace a non-VA loan for eligible veterans.
• Turning credit card debt into mortgage debt can lower the monthly payment but stretch the debt over many more years, secured by your home. We’ll look at the total cost, not just the payment.

Sources: Fannie Mae Selling Guide B2-1.3-03, cash-out refinances · VA, cash-out refinance loans

HELOC vs cash-out refinance

Both let you borrow against your equity. The big difference is what happens to the mortgage you already have.

Either way, your home secures the debt. If you can’t repay, you could lose the home.

Sources: CFPB, What is a HELOC? · Fannie Mae Selling Guide B2-1.3-03, cash-out refinances · CFPB, What is a Loan Estimate?

Refinancing with credit challenges: the basics

A lower credit score doesn’t automatically rule out a refinance, but it changes which options are open and what they cost. Here is what lenders generally look at:

• Your recent mortgage payment history. Late mortgage payments in the past year matter more than most other credit issues.
• Your equity. More equity gives more room; a cash-out refinance usually has tighter limits than a rate-and-term refinance.
• Your debt-to-income ratio with the new payment. Try the DTI calculator.
• Streamline options. FHA and VA streamline refinances have their own rules; the VA IRRRL is only for an existing VA-backed loan.
• Non-QM options can look at a file differently when a standard loan doesn’t fit, and I offer them. They usually cost more, so we’ll compare them honestly. See complex loans.
• Sometimes the best move is to wait. If a few months of on-time payments or paying down a card would open a better option, I’ll tell you that.

Sources: HUD Handbook 4000.1, FHA Single Family Housing Policy · VA, Interest Rate Reduction Refinance Loan (IRRRL) · CFPB, What is a Qualified Mortgage? · Fannie Mae Selling Guide B3-5.1-01, credit scores