You want to convert your home equity into cash but aren’t sure what the process entails or how long it’ll take. In this guide, you’ll learn how the cash-out refinance process works, what documents you need to apply and how long it takes to finalize the transaction.
How a Cash-Out Refinance Works
To illustrate, assume your home is valued at $435,000, and you owe $285,000 on your mortgage. If the lender approves pulling out 80 percent of your equity, that will come to $63,000 ($435,000 * .80 – $285,000). At closing, your current loan will be paid off and replaced with a new mortgage for $348,000 ($285,000 + $63,000). Furthermore, you’ll receive the $63,000 within a few days to use however you see fit.
How Long Does a Cash-Out Refinance Take?
Closing on a cash-out refinance loan usually takes 30 to 60 days. But you won’t get the funds in hand right away.
How Long After a Cash-Out Refinance Will You Get Your Funds?
Most lenders wait three business days after the loan closes. They do so in case you decide to rescind the contract. If you’d like the funds sooner, you may be able to waive your right of rescission by petitioning the lender for a rapid disbursement due to a financial emergency.
Cash-out refinances are slightly different from investment properties or second homes. Depending on the lender, you could get a check the same day you close the loan.
The Refinancing Process Timeline
A cash-out refinance involves swapping your mortgage for a new one and pulling out a portion of your equity. Lenders will generally let you borrow up to 80 percent of the equity you’ve built in your home. But instead of getting a second loan, the cash you pull out is rolled into a new mortgage.
Below is a breakdown of the cash-out refinance process:
Prequalification Stage
Get pre-approved and view potential loan options. It involves submitting financial information to potential lenders to see what loan options you may qualify for. This stage is critical as it also gives you an idea of the loan amount you’re eligible for and the interest rates and terms available.
Application and Processing Stage
If you find a good fit, submit a formal loan application to the lender. Also, submit the required documents to the lender, including pay stubs, recent bank statements and tax returns. The lender will then begin processing your application to determine if you meet the guidelines.
Underwriting Stage
During the underwriting stage, your lender will examine your financial details to assess your lending risk. Part of this process includes getting a home appraisal to determine the current value of your property. The home appraisal is critical because the amount of cash you can take out will depend on the equity you have in your home. If the underwriter requests, you may also need to provide additional documents or statements to clarify your financial situation.
Closing the Deal
The final step is to close on your cash-out refinance loan. You’ll sign all the necessary paperwork, and the lender will pay off your existing mortgage. Next, you’ll receive the difference between the new loan amount and what you owed on your previous mortgage in cash.
Factors That Can Accelerate the Refinancing Process
Several factors can speed up the refinancing process.
Having Your Documentation Ready
Being organized and preparing all necessary documents in advance can significantly speed up the refinancing process. It can also help you avoid any delays when your file goes to underwriting for review and approval.
Maintaining a Good Credit Score
A high credit score can streamline the approval process. Lenders may require less verification and may be more willing to expedite your application if you have a history of responsible credit use (i.e., lower balances on credit cards) and timely payments, as reflected in your credit report.
Quick Appraisal
If you can schedule and complete the appraisal without delays, it can move the process along faster. Sometimes, you might even be eligible for an appraisal waiver, which can save time, depending on the loan type and lender.
Factors That Can Delay the Refinancing Process
Unfortunately, you could also experience delays in the refinancing process in any of these situations.
Low Credit Score
A lower credit score can slow down the refinancing process, as lenders may take additional time to assess your risk level. It could also lead to more stringent verification requirements, higher interest rates or, in some cases, a denial.
Appraisal Delays
If there are scheduling conflicts, a lack of available appraisers, or if further property inspection is required, the appraisal process can take longer than expected. Unfortunately, this delays the overall refinancing timeline.
Title Issues
Encumbrances such as liens or disputes over property boundaries can hold up the refinancing process. Resolving these issues may require additional legal work and documentation, which also means a more extended timeframe to get to the closing table.
Typical Documents Needed for a Cash-Out Refinance
The application process for a cash-out refinance is similar to what you experienced when you applied for a home loan. Some lenders request more documents than others, but you should be prepared to submit the following to the loan officer:
- Two most recent pay stubs (or four if you’re paid weekly)
- Two most recent bank statements
- Two most recent tax returns
- W-2s for the two most recent tax periods
- Your employer’s name, phone number and email address
- Proof of homeowner’s insurance
You could also be asked to write a letter of explanation if you have credit issues or recent gaps in your work history.
If the underwriter needs more information to process your loan application, your loan officer will notify you. Be sure to provide the requested documentation promptly to avoid delays with your application.
Appraisal For a Cash-Out Refinance
Before the lender approves you for a cash-out refinance, they’ll order an appraisal to confirm your home’s value. This could take a few days to complete or over a month, depending on market conditions.
Some borrowers are eligible for a cash-out appraisal waiver, which automates the process and reduces the time spent waiting for a traditional appraisal to be completed. The lender relies on data from the underwriting system to assess your home’s value, but you’ll typically need good or excellent credit to qualify.
Be mindful that an appraisal that comes back too low could lead to processing delays. You could also encounter issues if your neighborhood lacks comparable sales or is declining, which means you could be eligible for a lower loan amount than you initially anticipated.
What Can You Use Cash from a Refinance For?
There are no restrictions on how the funds from a cash-out refinance can be used. Some homeowners consolidate high-interest debt, boost their nest egg, establish an emergency fund, invest or start a business. Ultimately, you’re free to use the funds however you see fit.
Conclusion: Is a Cash-Out Refinance Worth Your Time?
A cash-out refinance could be worthwhile if:
- You have a sizable amount of equity in your home.
- Interest rates are lower than what you have with your current lender.
- You intend to use the cash to improve your home’s value or financial well-being.
- You plan to consolidate high-interest debt.
- Your finances are stable, and you can afford the new monthly payments without stretching your budget thin.
However, you may want to explore other options to access cash if:
- You only have a small amount of home equity.
- Rates have not dropped since you took out your current loan.
- The costs and fees associated with refinancing outweigh the benefits you’d gain from the cash-out.
- You plan to use the funds for non-essential expenses that won’t boost your financial health.
- You will get a longer loan term and pay a much higher amount of interest over the loan term.
- You’re at risk of defaulting on your mortgage due to financial hardship.
Other Frequently Asked Questions
Here are some frequently asked questions regarding cash-out refinances and the timeline you can expect when you apply.
Most lenders let you pull out up to 80 percent of your home equity or the difference between your home’s value and what you currently owe on the mortgage. So, if your home is worth $525,000 and you owe $365,000, you may qualify for a cash-out refinance of up to $55,000. You’ll get a new loan for $420,000 ($365,000 + $55,000) and a check for $55,000 a few days following the refinance closing.
In short, yes. A thriving real estate market means it could take some time to have an appraisal done, which means your closing may be delayed. However, selecting well-qualified borrowers may qualify for a cash-out appraisal waiver.
Yes, you can get an FHA or VA-backed cash-out refinance.
Yes. You’ll pay closing costs between 2 percent and 5 percent of the new loan amount.
Not necessarily. You can apply for a cash-out refinance right away if you have a conventional loan. However, government-backed loans have a waiting or “seasoning” period:
FHA streamline refinance: 210 days, although you may be eligible sooner if you plan to refinance into a conventional loan and meet specific eligibility requirements
VA cash-out refinance: 12 months of consecutive, on-time payments
If you have a USDA, you won’t be able to do a cash-out refinance with another USDA loan. However, the lender you plan to refinance with will likely require 12 months of consecutive, on-time payments.
