Refinancing a loan is a process you can use to get rid of your current loan. When you do this, you get a new loan that replaces it. Your new loan might be for the same amount as your existing loan or higher. If you want to take some cash out of the loan, you might be able to with a cash-out refinance, but you must learn how lenders determine the amount you can borrow. Here is an explanation of how lenders can determine refinance amounts.
1. Lenders Consider a Person's Credit and Financial State
The first thing to understand is that your credit score and financial state affect your ability to refinance your loan. Lenders carefully analyze these factors about each person that applies for a refinancing loan. If you do not meet the necessary criteria, you might not qualify for a refinance loan. If you have good credit and are in a good financial position, you will more than likely qualify for a new loan. If you are unsure if you qualify, you can talk to a lender to learn more about the criteria they use to make their decisions.
2. The Home's Appraised Value
The second thing a lender does is ask for an appraisal. An appraisal is something an expert completes that reveals a home's current value. A lender will not issue a loan on a house until the appraiser completes the job and submits the report to the lender. The lender needs to know how much the house is worth before issuing the loan. Additionally, the appraised value tells the lender how much to offer for the refinance loan.
3. The Equity Percentage Requirements
Finally, the lender bases the amount they will loan you on the equity percentage requirements, which vary by loan program. Loan programs will have their own requirements for equity percentages. You can ask the lender what percentage they base this decision on if you want to learn how much money you can borrow if you refinance your mortgage loan.
For example, if your house appraises for $200,000, the bank might offer a refinance loan for $160,000 if they require 20% equity. If they require only 3.5% equity, they might issue a loan up to $193,000.
If you have questions about how to refinance your loan, talk to local financing services. They can help you find the right options for your situation.