If you own a home in Texas and have paid your mortgage balance down significantly, you might be eligible to tap into your home’s equity.
This means you can withdraw the cash you built in your home, using it for other needs with a Texas cash-out refinance.
This program used to be outlawed in Texas, but it’s back, allowing homeowners to do what they want with their home equity.
This means you can use your home as an asset to borrow against and still live in, allowing you to use the equity your home earns through the years.
However, the Texas cash-out refinance works slightly differently than cash-out loans in other states.
Here’s everything you must know.
Can you do a Cash-Out Refinance in Texas?
First, here’s the good news. Yes, you can do a cash-out refinance in Texas!
If you owe less than the home is worth, you might be sitting on equity that you can withdraw and use for other purposes.
This is great news for homeowners who need access to funds for investments, medical bills, pay off debt, buy another house, pay for college, etc.
Secured loans, like a mortgage, usually have much better rates and terms because of the security the collateral (the house) provides.
If a borrower doesn’t make his payments, the lender can foreclose on the property and get their money back.
In exchange, you can access more attractive rates than other loans offer.
How Does a Cash-Out Refinance Work?
A cash-out refinance is a loan against your home’s equity.
Equity is the difference between the home’s value and how much you owe on any mortgage loan.
If you have equity, you might be able to borrow against it.
A cash-out refinance replaces your first mortgage, so you only have one mortgage payment, but it might be higher than the payment you’re used to because you borrow a higher loan amount. (the payment can also be lower, depending on what the current interest rates are and what the new loan amount is)
The funds from the cash-out refinance pays off your original first mortgage.
Then, if there are remaining funds, you receive the funds to use how you want.
Some common uses include debt consolidation, home improvements, or covering other large expenses, such as a wedding or college tuition.
More cash-out refinance info:
How Much can you Borrow in a Texas Cash Out Refinance?
In Texas, homeowners cannot borrow more than 80% of the home’s value.
So, for example, if your home is worth $300,000, you can’t borrow more than $240,000.
Say, for example, you already have a mortgage with a balance of $240,000, you wouldn’t be eligible for a Texas cash-out refinance.
But, if you had a first mortgage balance of $200,000, you could withdraw $40,000 from the equity and use it how you want.
Qualifying for a Texas Cash-Out Refinance
Of course, you must show that you qualify for a cash-out refinance.
So even if you have room to borrow up to 80% of the home’s value, you must be able to afford it.
This starts with your credit score. You must have at least a 620 credit score to qualify for a cash-out refinance in Texas.
In addition, your debt-to-income ratio must be 50% or less, and your income must be steady and reliable.
If you’ve filed for bankruptcy or had a short sale, you’ll need to wait a few years before applying for a Texas cash-out refinance.
You must also be a seven years out from any foreclosures.
If you’ve recently closed on your current mortgage, you must wait until you’ve had it for at least six months to use the Texas cash-out refinance program, and if you have any second liens on the property, like a HELOC or home equity loan, you may have to use the loan’s proceeds to pay it off.
Finally, lender costs cannot exceed 2% of the loan amount.
This only pertains to fees the lender charges, not third parties, such as appraisers, title and escrow, and or attorneys.
Read More: Closing Costs for a Texas Mortgage
The Pros and Cons of a Texas Cash-Out Refinance
Like any mortgage program, there are pros and cons to consider with the cash-out refinance.
Understanding the good and bad sides of the loan program can help you determine if you should consider it.
Pros
- You may lower your interest rate and/or mortgage payment. If you can secure a lower rate than you have currently, your payment may decrease, and you’ll save money on interest.
- You can solve certain financial concerns, such as excessive debt or paying for a large expense with competitive interest rates. For example, mortgage loans often have lower rates than other loan options, such as personal loans or credit card advances, saving you money.
- You can use the funds however you want. Your lender won’t tell you how to use the funds; the money is yours to use how you want.
Cons
- You put your house at risk. When you borrow more than you currently owe on your mortgage, you risk your house. The lender can start foreclosure proceedings if you don’t make your payments.
- Government-backed loans aren’t an option. FHA, VA, and USDA cash-out loans aren’t allowed when doing a cash-out refi in Texas, so you must be able to qualify for a conventional loan to secure a cash-out refinance.
- If you have a HELOC, you must close it and/or pay it off with the Texas cash-out refinance funds. In addition, you cannot have any other liens on the property except the first mortgage.
Terms Available for a Refinance
Texas Cash Out refinance mortgage terms can vary, but typically you can choose from:
- Fixed-rate mortgage: Interest rate stays the same for the life of the loan.
- Adjustable-rate mortgage (ARM): Interest rate is fixed for a few years and then adjusts based on a predetermined index.
- 15-year mortgage: Loan term is 15 years, with higher monthly payments but lower interest rates.
- 30-year mortgage: Loan term is 30 years, with lower monthly payments but higher interest rates.
You can decide which loan type works best for you.
There are additional options, like a 10 year mortgage, interest-only options, etc.
It’s best to talk to a mortgage loan officer to get all the options available to you.
For example, if this is your ‘forever’ home, you may want a fixed rate, so you don’t have to worry about your mortgage payment changing.
You’ll know for the life of the term what your payment will be.
However, if you know you’ll move in a few years or your income will change, you may want an adjustable-rate loan.
The benefit of ARMs is you get a lower introductory rate to save money for a few years before the rate adjusts annually.
If you move or refinance the loan before it adjusts, you don’t have to deal with the changing interest rate.
You can also choose your loan term, between 15 and 30 years.
If you can afford a 15-year payment, you’ll pay the loan off in half the time and pay less interest.
But, if you need a lower monthly payment, you can stretch the payments across 30 years or a term between 15 and 30 years.
Cash Out – Final Thoughts
The Texas cash-out refinance offers a way to use your home’s equity and pay competitive rates and terms.
While there are more rules for a cash-out refinance than a standard one, it can be worth it when you tap into your home’s equity.
The rules for a Texas cash-out refinance are different than most other areas, but there is plenty of opportunity to use your home’s equity for home improvements, debt consolidation, or any other use you see fit.
Just make sure you’re aware of the costs, understand what the mortgage payment will be, and can afford the payment.
Are you ready to apply? Start the process by completing the form below.