Cash Out Refinance Options in Houston
Cash-Out Refinancing in Houston: What You Need to Know
A Houston cash-out refinance loan, also known as a Section 50(a)(6) loan, is a type of mortgage refinancing option available in the state of Texas. It allows homeowners to refinance their existing mortgage while accessing their home's equity.
The main purpose of a cash-out refinance is to provide homeowners with funds that can be used for various purposes. Some common uses of the cash include home improvements, debt consolidation, paying off higher-interest debts like credit cards or personal loans, funding education expenses, or even investing in other properties.
By refinancing your mortgage and accessing the equity, you essentially replace your existing mortgage with a new one with a higher loan amount. The difference between the new loan amount and the amount needed to pay off your old mortgage is paid out to you in cash.
Houston Cash-Out Refinance Eligibility Requirements
Stay current on your mortgage payments: It's important to demonstrate that you are up to date with your existing mortgage payments. Falling behind on payments could result in a denial of your cash-out refinance application.
Have sufficient equity in your home (at least 20%): Houston regulations require a minimum amount of equity to prevent predatory lending practices known as "equity stripping." Reputable lenders will not suggest a cash-out refinance if you have minimal equity. You should have at least 20% equity in your home.
Reside in the property as your primary residence: While it may be possible to pursue a cash-out refinance on a secondary or investment property, keep in mind that the terms and requirements may differ. Moreover, you can only carry one home equity loan or cash-out loan at a time.
Maintain a clean financial history: Generally, you should not have had any bankruptcies or foreclosures within the past 12 months. Some lenders may have more stringent requirements, extending the bankruptcy and foreclosure-free period to up to 7 years.
Houston Cash-Out Refinance Process
Houston Cash-Out Refinancing Rules
- Closing costs charged by your lender cannot exceed 2% of your loan amount. This does not apply to third-party closing costs like attorney fees, appraisal fees, and title insurance fees. It applies only to fees charged by your lender such as loan origination and processing fees
- Your new loan amount cannot exceed 80% of your home's value. That means you must leave 20% equity untouched when cashing out. For example, if the value of your home is $200,000, you could borrow up to $160,000. If you owed $120,000 on your existing mortgage, you could borrow up to $40,000 cash back
- All liens (second mortgages) must be paid off. If you already have a home equity loan or home equity line of credit (HELOC), your new cash-out refi will have to pay off these loans as well as your primary mortgage. This could reduce the amount of equity you're able to withdraw
- You'll need to wait six months to refi after initially buying the home. You're eligible for a cash-out refinance in Houston only when you've had your existing mortgage loan for at least six months. Also, you can't get a new cash-out refi unless it's been a year since your last one
Conforming Home Mortgage
Our Conforming Home Mortgage option is designed to fit the needs of those looking for a mortgage that conforms to the guidelines set by Fannie Mae and Freddie Mac.
Jumbo Home Mortgage
A jumbo loan is a mortgage for high-value properties that exceed the conforming loan limits set by government-sponsored enterprises, with stricter qualification requirements and higher interest rates due to the larger loan amount.
- Waiting times after foreclosure, bankruptcy, or short sale. You'll have to wait seven years after a foreclosure, four years after a bankruptcy, and four years after a short sale before you can qualify for a Houston 50(a)(6) cash-out refinance
- There are no cash-out mortgages backed by the federal government. That means there's no FHA cash-out refinance or VA cash-out refinance allowed in Houston
- You can't take out a home equity loan or HELOC (second lien) if you already have a Houston cash-out loan in place
- Houston cash-out refinance loan rules apply only to your primary residence. In other words, investment properties and second homes are not bound by these rules
Non-QM Mortgage
This type of loan may be suitable for those who can demonstrate their creditworthiness through bank statements or Debt Service Coverage Ratio (DSCR).
Minimum Credit Score for Texas Cash-Out Refinance
A minimum credit score of 620 or higher: While lower credit scores may be acceptable for conventional or government-backed home loans, Houston does not offer FHA options for cash-out refinances. To be eligible, you'll need a credit score of 620 or higher.
The state of Texas does not establish these underwriting rules for mortgage loans. Instead, it's private mortgage lenders who determine whether you qualify for a new mortgage based on your credit profile.
However, it's important to note that this doesn't mean that banks have complete freedom to approve you regardless of your credit score or a very high debt-to-income ratio (DTI). Lenders still need to adhere to the regulations set by Fannie Mae and Freddie Mac for conventional loans.
Nonetheless, mortgage lenders do have some flexibility in their decision-making process. For instance, if your credit score is not excellent but your DTI is low, a lender might make an exception and approve your mortgage application. This underscores the importance of shopping around and comparing offers from different lenders. In Houston, the current laws have made this process a bit more convenient for cash-out refinance applicants.
In fact, the state now permits various types of financial institutions, including savings and loan associations, credit unions, bank subsidiaries, mortgage companies, and mortgage bankers, to provide cash-out refinance loans. This means you have a wide array of options when it comes to shopping for the best interest rates and loan terms for your cash-out refinance.
FAQ's About Cash Out Refinancing in Houston, TX
What is a cash-out refinance?
A cash-out refinance is a mortgage refinancing option that allows you to replace your existing mortgage with a new, larger loan and receive the difference in cash, enabling you to tap into your home equity for purposes like debt consolidation, home improvements, education expenses, or investment opportunities while potentially securing a lower interest rate or better loan terms than your current mortgage.
What's the difference between a cash-out refinance and a HELOC?
The difference between a cash-out refinance and a HELOC (Home Equity Line of Credit) comes down to structure, payments, and rates, a cash-out refinance replaces your existing mortgage with a new, larger loan giving you a lump sum of cash at closing with one fixed monthly payment, while a HELOC is a revolving second mortgage that acts like a credit card where you draw funds as needed during a 10-year draw period and make monthly payments only on what you borrow, typically at a variable interest rate.
How does a cash-out refinance work in Houston?
A cash-out refinance in Texas works under strict state constitutional requirements (Article XVI, Section 50(a)(6)) that include a mandatory 12-day waiting period between application and closing (longer than the federal 3-day right of rescission), an 80% maximum loan-to-value ratio (meaning you must maintain at least 20% equity), lender fees capped at 2% of the loan amount, and restrictions limiting borrowers to one home equity loan at a time on their primary residence.
What are the pros and cons of a cash-out refinance?
The pros of a cash-out refinance include accessing large amounts of cash at lower interest rates than credit cards or personal loans (typically 6-8% vs. 15-25%), consolidating high-interest debt into one lower payment, potential tax deductibility if funds are used for home improvements, possibly lowering your overall monthly obligations, and maintaining one simple mortgage payment instead of multiple debts, while the cons include reducing your home equity, paying closing costs (2-5% of the loan amount), resetting your mortgage term which can mean paying more interest over time, risking your home if you can't make payments since it's collateralized, and potentially higher monthly payments if you're refinancing into today's higher rates.
Is the money from a cash-out refinance taxable?
No, the money from a cash-out refinance is not taxable because the IRS treats it as loan proceeds (borrowed money) rather than income. You're not earning the money; you're borrowing against your home's equity and are obligated to repay it, so it doesn't count as taxable income when you receive the cash at closing.