Homeowners obtain cash-out refinances whenever they wish to access the equity in their home. Both conventional investors, Fannie Mae and Freddie Mac, allow cash-out refinance loans. Cash-out refinance loans may be used to pay off existing debt other than the mortgage, to provide funds for home improvement or just to allow the homeowners to receive money from their homes' equity. The program’s maximum loan-to-value (LTV) and the property type limit the amount of cash-out allowed.
Lenders allow the highest LTV on cash-out refinances when the subject home is the borrower’s primary residence. Homeowners may cash out up to 85 percent of their homes' value when the home is a single-family property and the borrower’s credit score exceeds 680. If the borrower’s credit store falls under 680, then the maximum LTV is 75 percent. If the home is a two-, three- or four-unit home, the borrower must have a 680 credit score or higher and the maximum LTV is 75 percent.
Second homes or vacation homes may receive cash-out refinances as well. For a home to qualify as a second home, the borrower may not rent it out for any portion of the year. The home must be located a reasonable distance from the primary residence, or be located in a common vacation home area. There is no specific distance a second home must be from the primary, but on average, lenders expect the distance to be at least 50 miles. Homeowners may cash out up to 75 percent of their second home's value if they have a credit score of 680 or higher. Conventional lenders only provide cash-out refinances for second homes that are single-family residences and not located in a co-op.
Fannie Mae and Freddie Mac offer cash-out refinances for investment properties as well. Fannie Mae and Freddie Mac consider cash-out refinances of investment property as one of their riskiest loan programs. Any time a borrower refinances an investment property, the borrower must prove she has at least six months of the investment property's new mortgage payments in reserve. This reserve cannot include any of the funds received from the cash-out refinance. If the new mortgage payment is $2,000, the borrower must have at least $12,000 in the bank just to qualify. Investment property cash-out refinances allow a maximum LTV of 75 percent and require a minimum 700 credit score.
Second Mortgage Option
Homeowners do not have to refinance their first mortgage to receive cash-out on their homes. Many banks offer second mortgage programs, which allow access to the home’s equity without refinancing the entire first mortgage loan. Often, the closing costs are lower for a second mortgage than they are for a new first mortgage.