How Does Cash Out Refinance work in Texas?
In Texas, a cash-out refinance is also known as a section 50(a)(6) loan and allows a Texas homeowner to exchange a percentage of their home’s equity for cash – usually for a higher interest rate than their original mortgage. The process to obtain a cash-out refinance is similar to a regular refinance: credit is pulled, inspections and appraisals are performed, and closing costs are administered. But, the difference is that homeowners will receive a lump sum in addition to their new mortgage at the end of the process. Texas allows its homeowners to spend this cash out any way they want.
Texas Cash Out Refinance Rules
Again, Texas is known for having stricter rules regarding cash-out refinances than other states. Though these restrictions have recently been modified and relaxed, Texas homeowners must still meet the following criteria before applying for a cash-out refinance loan:
1. Loan Type
Only FHA, VA, Conventional, and Jumbo Loans can qualify for cash-out refinance. Federally-backed loans are not applicable.
2. Loan Duration
Homeowners in Texas must hold their mortgage note for at least 6 months before applying for a cash-out refinance.
3. Equity
In Texas, homeowners must have at least 20% equity in their home before applying for a cash-out refinance.
4. Lot Size
Any lot exceeding 10 acres will not qualify for a cash-out refinance in Texas.
5. Credit Score
Generally speaking, only homeowners with credit scores of 620 or higher will qualify for cash-out refinance loans in Texas.
6. Debt-to-Income Ratio
A “debt-to-income” ratio is a borrower’s total monthly debt divided by their total monthly income. The resulting ratio will determine whether a lender can confidently fund the requested loan. In Texas, a homeowner’s debt-to-income ratio must sit close to 43% to obtain a cash-out refinance loan.
7. Loan To Value Ratio
The Loan To Value ratio (LTV) is the amount of money a lender will loan and is based on the value of a home. In Texas, lenders will not allow homeowners to borrow more than 80% of a home’s appraised market value.
8. No Extraneous Liens
Homeowners with a Home Equity Lines of Credit (HELOC) or any other liens must pay them off before applying for a cash-out refinance.
9. Waiting Periods
After foreclosure or bankruptcy, Texas homeowners must wait a total of 7 years before applying for a cash-out refinance. Additionally, homeowners experiencing short sales must wait 4 years before cash-out refinancing.
Texas Cash Out Refinance Rates
In Texas, cash-out refinance loans typically have higher interest rates than other types of refinances, with average interest rates currently falling between 6-8%. The exact rate will depend upon each homeowner’s credit score, debt-to-income ratio, and how much they are attempting to borrow. Cash-out refinances are also available as fixed and adjustable-rate mortgages (ARM). A mortgage with fixed interest will remain the same throughout the life of the loan, while an ARM will incrementally increase at predetermined intervals.
How Many Times Can Someone Cash Out Refinance?
In Texas, there is no legal limit on the number of times a homeowner can tap into their home’s equity; however, it does require them to wait at least 12 months between refinances.
Is a Cash Out Refinance Worth It?
In many cases, yes! Homeowners using a cash-out refinance can receive tens of thousands of dollars in liquid money. And, because Texas does not require a homeowner to spend their cash out on any specific purchase, this money can be used for anything. For example, cashing in on your home’s equity can help you make costly home repairs and renovations, pay off other high-interest debt, and act as a downpayment for a second home or any other big-ticket item. However, a Home Equity Line of Credit might be a better fit if you just want to access your home’s equity without refinancing the mortgage.
Texas Cash Out Refinance Bottom Line
A cash-out refinance loan is a fantastic way to help you exchange your equity for liquid cash. This can help homeowners consolidate debt, renovate their homes, and generally put themselves in a better financial position.