The simple answer is this: you can get as much cash as the bank or mortgage lender decides to give you. However, in life there are few things actually that simple. This is no exception…
There are several factors affecting the amount of cash with which you walk away, but credit-worthiness and debt-to-income ratio are the two most important tests in determining the viability of a “cash-out” refinance or equity loan transaction.
Your credit grade in a mortgage transaction is based upon not just your actual score, but several other factors as well, such as the number of late pays on your current mortgage, the cumulative balance of collection accounts, number of active
on-time trade lines, and the presence of bankruptcy, foreclosure , or judgments. All of these factors analyzed together will put you into a predefined bucket, or “grade”, typically measured in letters just like when we were school (A, A-, B, etc.). This grade will have an effect not only on the maximum ” LTV ” (loan-to-value), but also your interest rate.
-DEBT-TO-INCOME RATIO (DTI)-
So let’s assume you have perfect credit and no limitations are put on the amount of the loan based solely on your proposed equity position. The next question is can you afford your new proposed monthly mortgage payment. The answer to this question is reached via a standardized calculation that measures your total monthly obligations against your monthly income.
This part really is as simple as it sounds. List your total income from: stable employment, pension, SS/disability, veterans benefits, child support, etc. (*You can use anything that is proven to be regular and is expected to continue.) Next you add up all your monthly credit obligations, i.e. credit/charge cards, car notes, student loans (unless deferred for at least 6-12 months), etc. PLUS your new proposed mortgage payment, including tax and insurance escrow, PMI , and HOA dues. Divide the “debt” into the “income”, and now you know what your debt-to-income ratio is.
Most banks limit your DTI to a maximum of 45% when determining if you can afford your new loan. Some banks will go higher, as often as 55% or even 60%, but will charge a higher rate to coincide with the higher risk they are taking.
While the above two items determine the fate of a loan decision, there are other things to keep in mind. For instance, there are several states which have laws that limit the amount of cash you can take out of your home. This is done in an effort to protect the consumer from overextending themselves or finding themselves “upside down” in the event of a real estate downturn.
The biggest question you should ask yourself when thinking about getting cash from your home is whether or not there is cheaper money somewhere elsewhere. Mortgage interest rates are low right now, but there are often still thousands of dollars of upfront costs associated with a mortgage transaction. If you intend to pay the loan off quickly, often it is cheaper to pay a little higher interest to get a personal loan that does not have any upfront fees.