Connecticut Cash-Out Refinance Rules & Guidelines

Home prices in Connecticut have risen 1.4% over the last year, according to Zillow.com. This growth, combined with super low-interest rates around 3.3% or 3.5% is leading to many in the state to refinance their mortgage before rates rise after the COVID-19 pandemic has receded.

Residents of Connecticut who have kept their jobs and have a solid credit score may be wise to do a cash-out refi to lower their interest rate and take out thousands of dollars of equity to make some home improvements, such as a family room extension, remodeled kitchen, or finished basement.

Below is important information to know about doing a cash-out refinance in Connecticut.

Connecticut Cash-Out Refinance Overview

Buying a home in Connecticut is a big expenditure; Zillow.com states the median home value in the state is nearly $260,000. That is the biggest investment in most people’s lives. It is smart to do what you can over the years to maintain that investment and improve it as money comes available.

With the COVID-19 pandemic, there is a unique opportunity to get access to the cash you need to renovate your kitchen or expand your family room. Interest rates are low, so a cash-out refinance can be very tempting.

A cash-out refinance means you are replacing your old mortgage with a new one that has a higher balance (and ideally) a lower interest rate. The amount that is above and beyond what you owe is your equity, and you can take that as a check at the closing table. You may pay a higher interest rate on a cash-out refinance than on just a regular refinance, but the rate still will be low in the current economic environment.

For example, say you got a $200,000 mortgage and you owe $100,000 on it. You have at least $100,000 in equity, assuming the property value has not gone below $200,000.

If you want to take out $50,000 in equity to expand your family room, you can refinance at $150,000. So, you would have a new loan with a $100,000 remaining balance, plus the additional $50,000 that is paid to you in cash. If you refinance a 4.5% loan to 3.5%, you may not have much change in payment. But you’ll have that cash you can use to improve and add value to your home.

Rules & Guidelines on Connecticut Cash-Out Refinance

Doing a cash-out refi is usually a smart move when interest rates are falling in uncertain economic times. But you will need to qualify. So, you need a steady job and steady income. Lenders are becoming more particular about verifying income and employment after the COVID-19 pandemic has rocked the US economy.

Also, you will probably need a 680 FICO score to qualify for a Fannie Mae or Freddie Mac-backed mortgage. A 36% back-end debt-to-income ratio (DTI) is usually required. This means your gross monthly income compared to your total monthly mortgage payments is less than 36%. Some FHA-approved lenders may allow a back-end TDI of 43%.

To qualify for a Connecticut refinance with cash out, you must have 20% equity in the home. Also, lenders will not allow an LTV of more than 80%, meaning you cannot borrow more than 80% of your home’s value. Some of the equity you have must be left in the home.

Considerations with a Connecticut Cash-Out Refinance

Ready to get that cash-out refinance rolling? Great! But it is a good idea to consider these points before calling your lender.

  • Closing costs. Connecticut closing costs average $3,853. Pay your closing costs in cash at closing if you can. If not, roll them into the loan, but you will pay interest on that money for years. A key consideration is how long you will stay in the house. If you save $100 per month on your new, low-interest rate, you need to stay in the home for 38 months to break even. If you plan to move sooner, refinancing may cost you more than it saves you.
  • Do you already have a low-interest rate below 4%? You could be better off with a home equity line of credit or a home equity loan. These second mortgages let you take out cash from your home but leave your first mortgage intact. You will pay a higher rate on a second mortgage because it is riskier for the lender. But a rate of 5% or 6% is a lot better than putting your home improvements on a credit card.
  • If you refinance with a 30-year mortgage, your payments are starting over. Paying on your home into retirement is not what most people want. Think about refinancing into a shorter-term loan, such as a 15-year mortgage. Bonus – your interest rate on a 15-year note will be even lower than on a 30-year.
  • You need to use your equity for home improvements to write off the interest on your loan. The IRS recently changed its rules on this matter.

Final Thoughts on Connecticut Cash-Out Refinance Rules & Guidelines

Pulling cash out with a refinance could be a great idea. Interest rates are low and home values are still on the rise. Improving your home will probably add to its value, too. So, if your job is secure and your credit is solid, look into a cash-out refinance soon before interest rates rise.

Connecticut Cash-Out Mortgage News

  • Low Mortgage Rates and Refinancing Keeping Some Mortgage Brokers in Connecticut Busy: Unclear economic times have driven down mortgage interest rates and have attracted may Connecticut homeowners to the idea of refinancing. Some want to reduce their 30-year monthly mortgage payment and others want to get a 15-year mortgage with about the same payment. (WTNH.com)
  • Coronavirus Leads Some to Consider Home Finance Moves: The coronavirus is putting a lot of people under financial stress. Fortunately, interest rates have dropped significantly, so for homeowners with a job and credit, you can do a cash-out refinance, lower your payment, and get the extra cash you need. (NBC Connecticut.com)
  • Mortgage Brokers and Lenders See Uptick in Refinancing Due to Pandemic: Mortgage brokers in southeastern Connecticut are seeing many homeowners considering forbearance if they have lost their job. But those who have not are considering taking advantage of low-interest rates and refinancing their mortgages. (Theday.com)

Author: Bryan Dornan

Bryan Dornan is a financial journalist and currently serves as Chief Editor of Cash Out Refi Tips.com. Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, Linkedin and ActiveRain.

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