Cash-Out Refinance Guidelines

Documentation Needed

For any mortgage, regardless of type, a number of documents are required. Remember the number "2," and you should be fine. You will need to provide your lender with tax returns (including W-2 or 1099 forms) for two years, pay stubs for two months and bank statements (all pages) for two months. Your mortgage lender will more than likely require additional information, but these items are required 99 percent of the time. When you are talking to your lender, you will be required to fill out an application and a credit check will be performed.

The first item any homeowner wants to know when going to purchase a mortgage is the interest rate. The rate can make or break the deal within minutes of walking in the door. The single most important factor in determining the rate is the borrower's credit score. The higher the score, the better the rate. A number of other factors come into play, but the credit score has the largest impact. Be sure to regularly check your credit score to make sure that it is in the "good" range--which is above 720. Make sure that there are no errors on your report, and try to "clean up" your credit as much as possible. Keep your credit cards open, but with a low balance in relation to the limit. Try to diversify your credit--having a credit card, a car loan and a mortgage shows that you are responsible (if paid on time) in a number of different ways, therefore boosting your score.

The second biggest consideration in a cash-out refinance is the loan to value. This ratio is the amount of the loan divided by the value of your house. When house prices are falling at record rates, this number is hard to come by without an appraisal first. Although it may be an initial cash outlay, it is the only way to know the value of your home. All lenders require one.

The standard rule for a cash-out refinance is that your loan-to-value ratio cannot be more than 85 percent, which limits the amount of cash that you can pull out of your mortgage.

Each mortgage company's rules vary, but a standard rule of thumb is that you cannot pull out more than 20 percent of your equity in cash. This, however, is a standard that is lowered if you are in a higher-valued house (a "jumbo" mortgage that is above $417,000). If you tried to pull out more than $100,000 cash (not to pay off other debts but literal cash), red flags would go up in the file and you would not be allowed to proceed further.

If you are using the extra cash pulled out of the mortgage to pay off other debts, those debts will be paid directly by the closing attorney or title company. You will not receive the cash to do it yourself. This is especially the case if several debts are being paid off. The mortgage company wants to ensure the fact that your debts are being paid and that the refinance puts you in a better, not worse, financial position.

One extra payment a year on a 30-year fixed mortgage helps to pay it off seven years earlier. Two extra payments a year cuts the term of the loan in half. The only "negative" is that early payment does not lower the monthly payment.

An easy way to get an extra mortgage payment paid is to pay your mortgage biweekly as opposed to monthly. You will make 26 payments this way, which is the equivalent of one extra monthly payment a year. This is easier on the budget than the outlay of one full mortgage payment at the end of the year.

Additionally, make sure that the extra payment goes toward the principal balance and not future payments. That is the only way to reduce the overall interest paid on the loan.