If you're a homeowner in Texas, then you may be wondering if a cash out refinance is right for you. This type of mortgage allows you to borrow against the equity in your home, which can be used for a variety of purposes such as home improvements, paying off debt, or investing in other opportunities.
In this guide, we will discuss what a cash out refinance is, how it differs from other types of mortgages and the rules that apply in 2023. We will also provide tips on how to find a lender and have a smooth experience during the refinancing process.
What to Know About a Cash Out Refinance in Texas
A cash out refinance is a type of mortgage that allows you to borrow against the equity in your home. This can be used for a variety of purposes, such as home improvements, paying off debt, or investing in other opportunities. The amount of money that you can borrow will depend on the value of your home and the amount of equity you have built up.
If you are considering a cash out refinance in Texas, there are a few things you should know. A Texas cash-out refinance can also be referred to as a Section 50(a)(6) loan. It’s helpful as borrowers can use the funds for a variety of things, like home improvements to paying off high-interest consumer debt. There are no restrictions!
To qualify for a cash out refinance in Texas, you must:
-Be current on your mortgage payments
This shows that you’re in a position to take out a new, higher loan. If you are behind on payments, your application will likely be denied.
-Have a credit score of 620 or higher
While a lower credit score will qualify you for a conventional or government-backed home loan, there are no FHA options for cash out refinances. Thus, you will need to have accrued a higher credit score to be eligible.
-Have sufficient equity in your home (at least 20%)
Texas requires you to have sufficient equity in your home to avoid “equity stripping.” Issuing a cash out refinance to a person with minimal equity is considered predatory lending and is not allowed in Texas Additionally, no reputable lender would even suggest such a loan.
-Occupy the property as your primary residence
You may be able to take a cash out refi loan on a secondary or investment property, however, the terms and requirements are different. Additionally, you may only carry one home equity loan or cash out loan at a time.
-Not have had any bankruptcies or foreclosures in the past 12 months
Some lenders will have more stringent rules, such as requiring you to be free of any bankruptcies or foreclosures for up to 7 years.
If you meet these qualifications, then you may be eligible for a cash out refinance.
Cash Out Refinance Loans Versus Other Mortgages
There are some differences between a cash out refinance and other types of mortgages, such as:
-The interest rate on a cash out refinance is usually lower than the rate on a home equity loan or line of credit. This is because cash out refinances are considered to be less risky for lenders.
-A cash out refinance will require an appraisal, while other types of mortgages may not. This is because the lender will need to know the value of your home to determine how much money you can borrow.
-A cash out refinance will have different terms than your original mortgage. This is because it is a new loan, and you will be required to make monthly payments for the life of the loan.
Home Equity Loan as a Cash Out Refinance
In Texas, both second mortgages and home equity lines of credit are also considered as cash out refinances. This means a second mortgage must only bring the combined loan-to-value ratio (LTV), including the amounts of the first and second mortgages, to the 80% threshold. Additionally. borrowers are also only allowed one home equity loan per year, with only one junior mortgage allowed to be in place at a time. Texas lenders are prohibited from requiring borrowers to pay debts using the proceeds of a second mortgage or home equity loan.
Are Cash Out Refinance Rules Different in 2023?
The rules for cash out refinances changed in 2022 due to new regulations from the Consumer Financial Protection Bureau (CFPB). Investment properties and second homes require stricter conditions than prior years to complete a cash out refinance. In addition, the CFPB has instituted a new rule called the "Qualified Mortgage Rule" that went into effect in January 2022.
Qualified Mortgage Rule
This rule requires that all cash out refinances meet certain standards to be considered safe and affordable. These standards include:
-The borrower must have a debt-to-income ratio of 43% or less
-The loan cannot have risky features such as negative amortization or interest-only payments
-The loan term can be no more than 30 years long
If you are considering a cash out refinance in Texas, it is important to understand these new rules and how they may affect you. You should also start shopping for lenders now, as the process can take several weeks.
Cash Out Refinance in Texas in 2023: More Changes
Some additional changes apply to cash out refinance loans in 2023. For example, in the past, once you took a cash out loan all subsequent loans were considered under that structure regardless of whether or not you withdraw cash. However, now you can complete a rate and term refinance even if you’ve completed a home equity loan in the past.
Additionally, to cap fees on the home loan, Texas law states that closing costs cannot exceed 2% of the new loan amount. This is further reduced from the previous rule that held at 3%. However, some costs are exempted from this fee cap. These include the appraisal, property survey, and a couple of other reports and fees.
Rules That Are Specific to Cash Out Refinance in Texas
As we all know, everything is bigger in Texas. That includes the rules around cash out refinance. Here are a few things to keep in mind if you are looking to do a cash out refi on an investment property in Texas:
-You must have owned the property for at least six months before you can even think about doing a cash out refi.
-There is a 12-day “cooling” or “waiting” period, meaning you cannot close until 12 days have passed since you made the application.
-The loan amount can only be up to 80% of the appraised value of the property. So, if your property is worth $100,000, the most you could borrow would be $80,000. But of course, be sure to subtract the amount you still owe from that number. If your home appraises at $100,000 but you still owe $50,000, you can withdraw as much as $30,000 in cash.
-There are additional fees associated with a cash out refinance in Texas. These include things like mortgage insurance, origination fees, and title insurance. Be sure to factor these in when you are considering a cash out refinance.
While the rules around cash out refinance in Texas may be different than in other states, they are still relatively straightforward. As long as you have owned the property for at least six months and have a good idea of what the appraised value is, you should be able to do a cash out refinance without any problems. Just remember to factor in the additional fees associated with this type of loan.
Can You Close a Cash Out Refinance Loan in Texas More Than Once?
The Texas Constitution does not limit the number of cash out refinance loans you can get on one home. This is a departure from previous rules! However, the law does require that you wait at least a year between any subsequent cash out refis. With home prices steadily rising, it’s not impossible to imagine that within a few short years you could rebuild enough equity for another cash out refinance.
Are There Cash Limits on a Cash Out Refinance?
There is no limit on how much you can take out on a cash out refinance, as long as it’s within the 80% equity window. However, there is no maximum dollar amount.
Cash Out Refinance of Investment Properties
Have you ever thought about doing a cash out refinance of your investment property? If so, there are a few things you need to know before you can do so. In Texas, there are some stricter rules about cash out refinance when it comes to investment properties. For example, you will likely need a credit score of 640 or higher, and you can anticipate a higher interest rate than on an cash out refi on your primary residence. Additionally, the loan-to-value ratio (LTV) will require more equity versus debt than for a primary residence. While some states allow up to 75% of the property’s value, in Texas, you can only borrow up to 70% on an investment property.
How to Find a Lender for a Cash Out Refi in Texas
Before you get commit to using one particular company, you can shop around and compare offers from different lenders to find the best deal. When you are comparing offers, be sure to look at:
-The interest rate
-The fees charged by the lender
-The terms of the loan
-The length of time it will take to process the loan
As a local mortgage company in Houston, we offer cash-out refinance loans in Houston and across Texas. With excellent rates available to you today, we are here to help you build wealth with the best possible refinance loan options for you.
Tips and Tricks for a Smooth Cash Out Refi Experience
Here are some tips and tricks to help you have a smooth cash out refinance experience:
-Start shopping for lenders at least two months before you plan to apply for a loan. This will give you time to compare offers and find the best deal.
-Check your credit report and score before you apply for a loan. This will help you identify any potential red flags that could result in your loan being denied.
-Gather all of the documents you need before you apply for a loan. This includes tax returns, pay stubs, bank statements, and proof of income.
-Be ready to answer detailed questions about your financial history. The lender will want to know why you are taking cash out of your home, and how you plan to use the money.
-If you are self-employed, be ready to provide various additional documentation. The lender may require tax returns, business licenses, or other documents.
If you follow these tips, you can increase your chances of having a smooth cash out refinance experience. Cash out refinances are a great way to get cash from your home equity, but it is important to understand the process and compare offers from different lenders before you apply for a loan.
Takeaways on Cash Out Refinance in Texas in 2023
Texas is one of the most popular states for cash out refinances. This is because Texas has some of the highest home values in the country, and many homeowners have built up a significant amount of equity in their homes.
In Texas, cash out refinances are available for both primary residences and investment properties. However, there are some differences between the two types of loans. Investment property cash out refinances are typically more expensive and have stricter eligibility requirements.
Another difference between cash out refinances in Texas is the rules that apply to them. In 2023, new regulations from the Consumer Financial Protection Bureau (CFPB) will go into effect that will change some eligibility rules. So make sure to work with an experienced mortgage lender in Texas to get the most accurate, up-to-date information and guidance you need to get the most out of your cash out refi.
