Cash out refinance mortgages allow a borrower a great deal of flexibility regarding how the proceeds from a loan can be used.  A cash out refinance is the process of taking out a new mortgage for an amount that exceeds the existing mortgage balance on the current mortgage in order to refinance the original mortgage and receive additional cash for other uses.  Mortgage lenders generally allow borrowers to use the proceeds from a cash out refinance loan for almost any legal purpose.

The diverse range of disbursement options with a cash out refinance include obtaining cash for home improvements, paying off a second mortgage or home equity loan, consolidating other debt, making investments, paying current or upcoming expenses, and related payouts.

However, there are circumstances where the use of the cash from a cash out refinance can present a problem or added underwriting requirements for the loan request.  If the borrower intends to create of any new liability through the use of the cash out proceeds, the proposed new liability will generally need to be meet the mortgage lender’s underwriting standards.  An example of a new liability may include using the proceeds from the loan for a down payment on a second home or investment property.  In this example, the borrower is going to have a new mortgage payment that must be included in the borrower’s debt to income ratios.

Not all mortgage lenders will care that the funds from a cash out refinance will end up creating a new liability and will simply apply normal underwriting standards to the loan.  Avoiding any complications or unnecessary underwriting requirements when the cash is going to be used for purposes that could create a new liability can also be easily avoided by keeping the request open ended.  A borrower that is going to use the cash proceeds for investments or financial reserves is an acceptable purpose and covers a wide range of possibilities without adding a new liability.

Cash out refinances are available on both a fixed rate mortgage or an adjustable rate mortgages and can have a variety of different terms.  Underwriting requirements may vary from lender to lender but generally follow the requirements established for mortgages that are used for home purchase transactions.  The mortgage lender will evaluate the borrower’s credit, the loan to value, income to debt ratios, and the property type before making the loan approval or deciding on the amount of cash out that may be allowed with the loan request.

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