A limited cash-out refinance, also known as a rate and term refinance, allows you to obtain more favorable loan terms, use equity to pay off mortgage-related debt, and receive a limited amount of money back at closing. If you have significant equity in your home, you can refinance through a limited cash-out option allowing you to obtain more favorable loan terms than a typical cash out refinance.
Lenders will not finance more than your home is worth or allow you to take out too much of your equity when refinancing. They usually have a specific percentage of your home’s value known as the loan to value ratio. Lenders require an 80% loan-to-value ratio or less but some may allow up to 95% for a limited cash-out refinance.
The equity is the difference between how much you owe on a property and how much it’s currently worth. For instance, if you currently owe $300,000 on your home and it is worth $400,000, you technically have $100,000 worth of equity. This technically means you have a 75% loan to value ratio, which means you can only pull out $20,000, which might be exactly what you need for major remodel or to pay off debt.
A refinance transaction is where the mortgage amount generally is limited to the some of the unpaid principal balance of the existing first mortgage including prepaid items, closing costs, points, and any other fees such as mortgage liens or second or third mortgages.
A basic cash-out refinance is refinancing an existing mortgage loan where you apply for a completely new mortgage for a larger amount than your existing mortgage and you receive the distance between the two loans in cash. Your new mortgage may have a different interest rate and different terms depending on how you set it up.
To find out which option works the best for you give us a call. You can find out your rates, see if you qualify, and weigh the cost difference between the two.