Cash-Out Refinance Mortgage Options
Home values have been increasing year after year with no sign of a correction. Many homeowners who purchased a home a few years ago are enjoying historic annual returns for the past several years. Many homeowners cannot believe how much equity they have in their homes. Homeowners with substantial equity may be eligible for a cash-out refinance. Proceeds from cash-out refinance mortgages are tax-exempt. You do not have to pay taxes on the proceeds of the cash-out refinance. This holds true no matter how much the proceeds are.
Cash-Out Refinance for Major Home Renovations
Home improvement can get quite costly. Some home renovation projects such as roofing, windows, HVAC systems, appliances, kitchens, and bathrooms, can run into thousands of dollars. No credit card or multiple credit cards can have enough room for homeowners to expense larger home renovation projects. It is tough for hard-working Americans to build up substantial savings these days to do expensive repairs to their home. One of the major benefits of cash-out refinance is to get the cash needed for the much-needed home renovation projects that your home needs.
Reserves for Homeowners
A home is most people's biggest investment they will ever make in their lifetime. Every five to ten years, most homeowners need to update their homes with renovations that cost thousands of dollars. It can be coating the driveway, major landscaping around the property, or other high-cost repairs to maintain and update your home.
Homeowners should always have plenty of reserves for a rainy day. For example, HVAC systems can break down and cost thousands of dollars to repair and/or replace. Why not take advantage of the equity in your home and do a cash-out refinance for the much-needed repairs or major renovations to your home.
When the deep freeze happened in the Midwest a few years ago, tens of thousands of homeowners needed new furnaces and plumbing repairs for their busted frozen pipes. Reserves is a must for all homeowners in the event of some unexpected extenuating circumstances.
Cash-Out Refinance to Buy-Out Chapter 13 Bankruptcy
Many people do not know that you can do a cash-out refinance during or after a Chapter 13 Bankruptcy repayment plan. Believe it or not, many bankruptcy attorneys do not know that you can qualify for a mortgage during a Chapter 13 Bankruptcy repayment plan. HUD, the parent of FHA, and the Veterans Administration (the VA) are the two only federal mortgage agencies that allow homebuyers to purchase a home and/or homeowners to go through a refinance. Mortgage rates on cash-out refinance are slightly higher than rate and term mortgage rates due to loan level pricing adjustments.
Mortgage During Chapter 13 Bankruptcy Repayment Plan
FHA and VA loans are the only two mortgage programs that allow cash-out refinance during Chapter 13 Bankruptcy repayment plan. Homeowners are allowed to do a cash-out refinance with trustee approval. The trustee will approve a cash-out refinance if the trustee knows what you will be doing with the cash. If it is to buy out the Chapter 13 Bankruptcy, you will have no problem in getting trustee approval. Even if the proceeds from the cash-out refinance were to be used for useful reasons such as home improvement, the bankruptcy trustee will approve.
Homeowners in an active Chapter 13 Bankruptcy can end the Chapter 13 Bankruptcy early by buying out the Chapter 13 with a cash-out refinance. Most Chapter 13 Bankruptcy repayment plan is for a five-year term or 60 months. Five years is a long time to be under the eyes of the Bankruptcy Trustee and be watched what you can or cannot do. Many homeowners with equity in their homes can do a cash-out refinance on a VA and/or FHA loan and pay their outstanding bankruptcy balance before the five-year term is up and get it discharged.
How Can I Use Proceeds from a Cash-Out Refinance Mortgage?
A mortgage lender will not set any parameters on where you can use the proceeds from your cash-out refinance mortgage. There are many types of cash-out refinance (conventional, FHA-streamline, bank statement or w2 only mortgage refinance). Many people use the funds for any purpose like costly home repairs, doing a complete home renovation, doing a room addition, paying off high-interest credit cards, paying off student loans, paying for a wedding, paying off an auto loan, or consolidating debts. Yet others can use it for investments such as buying precious metals or using it for a down payment on a second home or investment property. The bottom line is you can use it for any purpose you like.
What Is Equity in a Home?
Most homeowners have a 30-year fixed-rate mortgage. The monthly mortgage payment consists of principal, interest, taxes, insurance or PITI. Every time a homeowner makes a mortgage payment, part of the principal gets paid which reduces the mortgage loan balance. As your mortgage matures, the combination of the principal reduction and appreciation of the home, homeowners gain equity in their home. Equity in a home is the value of the home minus what the homeowner owes. Equity is the net value of the home if the homeowner were to sell the home and pay off the lien to the lender. Equity is what the homeowner will pocket selling the home and paying off the mortgage.
What Is a Cash-Out Refinance Mortgage?
A cash-out refinance mortgage is when a homeowner has substantial equity in their homes where they can cash in of the equity in exchange for a larger mortgage and larger monthly payment. A cash-out refinance will pay off the existing mortgage you have and give you the extra cash proceeds from your equity in exchange for one single larger mortgage. There
Case Scenario of Cash-Out Refinance Mortgage of a Homeowner
With the exception of VA loans, every loan program will have a maximum loan to value on a cash-out refinance mortgage. The loan to value is the loan balance divided by the market value of the home based on a recent appraisal ordered by the lender. VA loans allow up to a 100% LTV loan to value on cash-out refinance. Let's take a case scenario where a homeowner wants to do a cash-out refinance with an FHA loan. FHA loans and conventional loans allow up to an 80% LTV on cash-out refinance. The home is valued at $500,000. The homeowner owes $200,000. The maximum loan to value the new FHA and/or conventional loan allows for the new cash-out refinance is 80% of the $500,000 which is $400,000. With the new loan of $400,000, $200,000 is used to pay the existing loan and the other $200,000 would be cash proceeds to the homeowner.
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