Cash-Out Refinance Tips To Maximize Your Finances
Should you be taking out cash from your home? Or should you keep building up your home equity?
Did you know that homeowners now have record amounts of home equity? With rising home prices, home equity has reached historic high levels. According to a recent report published in September 2018, by mortgage experts Black Knight, home equity grew by $635 Billion in the first two quarters of 2018.
"tappable equity surpassed $6 trillion for the first time in Q2 2018. There is now 2.7X as much tappable equity as at the bottom of the housing market in 2012 and 21% more than at the pre-crisis peak in 2006
However, according to the same report, homeowners are showing a reluctance to take out cash from their homes. Part of the reason for the slow down in cash-out refinances is rising interest rates.
Many homeowners still can benefit from a cash-out refinance or other home equity loan alternatives.
Craig Repmann, Executive VP at Heritage Mortgage Banking Corporation in Morristown, New Jersey offers some practical advice for homeowners with equity in their homes. "In many cases, borrowers can use cash-out refinance to pay off high-interest rate credit cards, gaining in multiple ways" he explains. "They pay off their debts at a lower rate, improve cash flow by paying less each month, and can drastically improve their credit scores."
Five Cash-Out Tips From a Mortgage Veteran
We asked Jason Le, a mortgage loan officer with more than 16 years of experience in the industry for top five cash-out refinance tips. He noted that the market is continuously changing and it is essential to stay informed.
Tip #1: Reassess your mortgage every year.
Stay in the loop with interest rates and your home’s value to accurately reassess your situation. Interest rates are constantly fluctuating. Even if interest rates are rising, you can check to see if a 15-year mortgage or an Adjustable Rate Mortgage (ARM) offers a better fit for your situation. Perhaps you couldn’t qualify for a refinance due to a low credit score or lack of income at one time, but now, an improved financial situation or new mortgage product will open up some opportunities. Use a cash-out refinance calculator to check your monthly payment scenarios.
Tip # 2: Don’t be afraid to borrow or leverage your equity.
Home equity is still the cheapest money you can find. Take advantage of this if you see a real benefit. Some of the top reasons to use home equity are debt consolidation, home improvement, and to acquire a rental income property. If you are happy with your home and neighborhood but are feeling cramped, for example, a cash-out refinance could provide funds to expand and improve your home.
Tip #3: If you are a parent, see how your home equity can help your kids.
Many new grads face student loan debt and/or credit card debt, and the challenges of starting out on their own, which could include marriage and/or saving for a down payment on a home. Parents with home equity to tap into could allow them to help their kids - and avoid dipping into their investments and savings to do so.
Tip #4: The use of home equity can provide a piece of mind in case of an emergency.
Do you have an adequate emergency fund? If not, a cash-out refinance or other home equity loan product can help you build this up and gain peace of mind. An emergency fund can save you money in the long run by avoiding having to turn to expensive short-term credit. Make sure to use the money only for essentials and in a real emergency, not for luxury items.
Tip #5: Cash-out refinance doesn’t mean high payments.
The recasting of the mortgage can help keep payments the same, if not lower, while providing the cash you need. For example, a homeowner who refinances a mortgage into a 30-year loan generally would still have low monthly payments. If you are planning to move in a few years, and are confident you are not going to hold on to your loan for a long time, a 5/1, 7/1, or even 10/1 ARM could be an option, providing lower monthly payments. If you are using your cash-out refinance for debt consolidation and elimination, consider the extra benefits you will obtain from paying off your debt - and at a lower interest rate.
More Cash-out Refinance Products Available to Underserved Borrowers.
Repmann points out that products are available for borrowers with lower credit scores, so it pays for homeowners to do their research and find the best options available to them. "The market is opening up after years of tight credit restrictions,” he says, “Niche investors will lend to borrowers who have lower FICO scores, although the maximum loan-to-value ratio will be less than that for borrowers with excellent credit.”
This shift in the market can be of great value to underserved borrowers, he says, "such as business owners who were unable to qualify for a cash-out refinance previously, due to the inability to show qualifying income on tax returns." Now, these individuals "can submit 12 or 24 months of bank statements to show sufficient cash flow."