Interested in a California cash-out refinance loan? A cash-out refinance loan is where you get some of your equity back at the closing table by taking out a new first mortgage. You have a new mortgage that is higher than it was before, leaving you thousands of cash in hand to spend as you like.
- You will usually pay a higher rate on a cash-out refi than on your original mortgage.
- Depending on the loan-to-value ratio (LTV), the lender will determine a maximum on how much equity you can pull out when you refinance.
If you qualify for a California cash-out refinance, it is important to know the guidelines and rules in place in the state. You then have a complete understanding of your options under Calfornia law.
The California Cash-Out Refinance Loan Explained
In California, as in most states, you are limited in how much equity you can pull out. Most lenders will only allow you to cash out up to 80% of the value of the home. The LTV is one of the critical factors that determine if you can do a California cash-out refinance.
For example, if your home is worth $200,000 and you owe $100,000, you have an LTV of 50%. California lenders will allow you to borrow up to 80% of the home’s appraised value. Eighty percent of $200,000 is $160,000.
So if you qualify according to your credit score and debt-to-income ratio (DTI), you may be able to pull out up to $60,000, minus closing costs and fees.
Another California Cash Out-Refinance Example
Say you have a home in San Francisco that is valued at $650,000 and you owe $210,000 on a 30-year fixed mortgage at 5.25%.
In March 2020, 30-year fixed rates are trending under 3.5%. If you refinance, you can save several hundred dollars per month in your monthly payment.
But you do not have enough money in your son’s college fund to pay for in-state tuition when he graduates in three years. You need about $25,000 more to pay for his college in full.
If you do a cash-out refi and add $25,000 to your existing $210,000 balance, you have a new 30-year mortgage of $235,000 at perhaps 3.5% or lower. You may end up with a loan that is bigger but with a lower payment each month.
Exceptions to California Cash-Out Refinance Rules & Guidelines
If you have a mortgage loan backed by the Veterans Administration (VA), you are in for some good luck. Because it is a VA loan, you may qualify for special cash-out refi rules:
- You may be able to cash out up to 95% of LTV if the property is not more than two units.
- You want more than $500 back at closing.
- You are consolidating non-mortgage related debt (such as credit cards)
- You are converting a conventional or FHA loan into a VA loan.
Should You Do a California Cash-Out Refinance?
Now that you understand what a cash-out refinance is and the limits in California, should you do it? According to Investopedia, you should consider the following factors first:
#1 Know How Much Equity You Have
Home values were rising at the end of 2019, according to the Federal Reserve Bank of St. Louis. The number of underwater homeowners has fallen in the past three years. You can find out what your equity is by checking how much you owe and find out what your home is worth today. You can have a realtor run comps for you in your neighborhood. Or, pay $400 or so for a new appraisal. Then you know exactly how much equity you have.
#2 Know Your Credit Score
You may not qualify for the lowest mortgage refinance rates if your credit is not top-notch. Usually, you need a score of 760 or higher for the best refinance rates. However, if it is an FHA loan, you can get a low rate with a score in the low to mid 600s, but you probably will need to pay for mortgage insurance.
#3 Know Your Debt-to-Income Ratio
You already have a home loan, so you might think it will be easy to get a mortgage refinance. But when you pull out cash, lenders will check your qualifications carefully. Most lenders in California want to keep the monthly housing payment under 28% of your gross income per month. Your overall DTI, including ALL debt payments compared to your gross monthly income, should be 36% or less.
#4 Know the Costs of a Cash-Out Refinance
You can expect to pay between 3-6% of your total loan amount when you refinance. But you can roll these costs into the new loan, or pay a slightly higher rate in lieu of closing costs. But shop around: Some refi fees may be paid by the lender or lowered.
#5 Know the Break-Even Point
A key factor in your California cash-out refinance is your break-even point. This is when the costs of your refi have been made up by your monthly savings.
For example, if you refinance and it costs you $2,000 per month and you are saving $100 per month in the mortgage payment. It takes 20 months to recoup the loan’s costs. If you aren’t moving soon, this is financially sound. But if you think you will move, you might not want to refinance.
Final Thoughts on California Cash-Out Refinance Rules & Guidelines
Pulling out cash in a refinance can be a good move if you have enough equity and will save .5% to 1% on the interest rate. It also matters what you are going to use the money for. One of the best financial moves is to pull out equity to rehab the home. You can end up paying yourself back by increasing the value of the property.
- Cash-Out Refinance Overview. Accessed at https://www.investopedia.com/terms/c/cashout_refinance.asp
- 2019 Home Equity Report. Accessed at https://fred.stlouisfed.org/series/MSPUS
- Cash-Out Refinance Overview. Accessed at https://www.creditkarma.com/home-loans/i/cash-out-refinance/
- Cash-Out Refinance Rules. Accessed at https://www.calmtg.com/refinance/cash-out-refinance/
- VA Refinance Rules. Accessed at https://valoansofcalifornia.com/va-refinance/9 Things to Know Before You Refinance Mortgage. Accessed at https://www.investopedia.com/mortgage/refinance/9-things-to-know-before-you-refinance-mortgage/