The amount of money you can receive when you choose a "cash-out" refinance depends on the equity that you have in your home.
How do you know how much equity you have in your home? Home equity is what you'd walk away with if you sold your home today and used the proceeds to pay off your mortgage. For example, if you owe $200,000 on your mortgage, and your home is worth $300,000, you have $100,000 in equity.
But that doesn’t mean you can take all of the equity out of your home. Most lenders won't approve a cash-out refinancing if the amount of the mortgage exceeds 80% of the value of your home. This calculation is known as the loan-to-value ratio, or LTV.
If the value of your home is $300,000, and the lender's maximum LTV for a cash-out refinance is 80%, the biggest mortgage you likely could qualify for would be $240,000. If you still owe $200,000 on your mortgage, you could take about $40,000 in cash out of your home in a cash-out refinancing. Keep in mind that there may be lender fees and other costs that you'll pay to refinance your mortgage. These may be out-of-pocket costs or you may be able to wrap the costs into your new loan.
There's another type of cash-out refinancing that allows for higher loan-to-value ratios. However, it restricts what you can do with some of the money you take out of your home.
For example, a limited cash-out refinancing may allow for a loan-to-value ratio of up to 97%, but all or most of the money that’s not used for paying off your old mortgage must be earmarked for approved uses, like financing your closing costs.
Fannie Mae will allow
borrowers to take a small amount of cash back in a limited cash-out refinance that they can use for any purpose -- $2,000 or 2% of the new loan amount, whichever is less.