Are you looking to lower your mortgage interest rate while also freeing up a bit of extra cash for expenses like credit card payments or minor home improvements? A limited cash-out refinance could be the solution that helps you achieve both goals at once.
What Is a Limited Cash-Out Refinance?
A limited cash-out refinance allows you to replace your existing mortgage with a new loan—ideally at a lower interest rate—and potentially add a small amount of cash to your loan balance. Unlike a traditional refinance where you might borrow the exact amount you owe, this option lets you borrow slightly more. This extra amount can cover closing costs and provide up to $2,000 in cash, or up to 2% of your new loan balance (whichever is less).
For example, if you refinance a $200,000 mortgage, you could receive up to $2,000 in cash because 2% of $200,000 is $4,000, which is above the $2,000 maximum for a limited cash-out refinance. If you aren’t rolling closing costs into your loan, your new loan amount would increase by the cash amount you take out, and you would repay this with your monthly mortgage payments.
When Is a Limited Cash-Out Refinance Not an Option?
Certain transactions are ineligible for a limited cash-out refinance:
- If you’ve already paid off your primary mortgage, you won’t qualify because this refinance requires an existing first lien on your home.
- You can’t use it to pay off a home equity loan or line of credit not related to your home purchase.
- It can’t combine your first mortgage with subordinate loans like home equity loans or lines of credit into a single new mortgage.
Limited Cash-Out vs. No Cash-Out Refinance
If you don’t need cash, a no cash-out refinance allows you to swap your current mortgage for one with a lower interest rate or a different term. This can reduce your monthly payments or help you pay off your mortgage faster by shortening the term.
Limited Cash-Out vs. Traditional Cash-Out Refinance
For homeowners needing more than a small cash amount, a traditional cash-out refinance may be better. This allows you to borrow significantly more than you owe—up to 80% of your home’s current value in many cases—and receive the difference in cash. This cash can be used for larger expenses like consolidating higher-interest debt or major home renovations.
What Are the Costs?
Refinancing comes with closing costs, typically ranging from 2% to 6% of your loan balance. For a $200,000 loan, that might be $4,000 to $12,000. You can choose to pay these upfront or roll them into your new mortgage balance, though rolling them in increases your loan amount and the total interest you pay over time.
What Do Lenders Look For?
Qualifying for a limited cash-out refinance depends on several factors:
- Loan-to-Value Ratio (LTV): You need to have at least 3% equity in your home, meaning your loan balance plus any subordinate loans can’t exceed 97% of your home’s appraised value.
- Debt-to-Income Ratio (DTI): Lenders typically prefer your total monthly debt payments to be no more than 36% of your gross monthly income.
- Credit Score: Higher credit scores improve your chances of qualifying and getting a lower interest rate. Scores of 740 and above are considered very good to exceptional.
You’ll also need to provide documentation such as recent pay stubs, bank statements, tax returns, and W-2s to verify your income and financial status.
How Can You Use the Cash?
The cash from a limited cash-out refinance is yours to use as you see fit. It’s ideal for smaller expenses such as paying down credit card debt, making minor home repairs, or replacing appliances. Because the cash amount is capped at $2,000, it’s best suited for modest financial needs.
When Should You Consider a Limited Cash-Out Refinance?
Imagine you owe $150,000 on a home valued at $180,000. You want to refinance to a lower interest rate and need about $2,000 for a small home improvement project. In this case, a limited cash-out refinance helps you accomplish both goals: securing a better mortgage rate and getting a little cash back—without needing to pay closing costs upfront if you roll them into your loan.
At Avanti Way Financial, we understand the importance of finding mortgage solutions tailored to your unique financial situation. If you’re interested in exploring how a limited cash-out refinance might benefit you, get in touch with our team for personalized guidance and expert advice.
