- Consider a Refinance or HELOC for Extra Funds During COVID-19
- Cash-Out Refinance
- Home Equity Line of Credit (HELOC)
- Options For You
- Cash-Out Refinance Pros and Cons
- What is a cash-out refinance?
- Pros of a cash-out refinance
- Cons of a cash-out refi
- The bottom line
- Is cash-out refinance a good idea — even during a pandemic?
- What is a cash-out refinance?
- Does it make sense even during a pandemic?
- What are the benefits of cash-out refinancing?
- Are there other options?
- Why Cash-Out Mortgage Refinances Are Harder To Get
- COVID-19 impact on mortgage refinancing
- When does a cash-out refinance make sense for you?
- Risks and costs of cash-out mortgage refinancing
- Learn more:
- What Are The Benefits Of Cash-Out Refinancing? Is It Worth It?
- What are the benefits of cash-out refinancing?
- Benefits of cash-out refinancing
- Drawbacks of cash-out refinancing
- How rising rates affect the benefits of cash-out refinancing
- Who can cash out home equity?
- Why cash-out refinances have declined
- The coronavirus pandemic
- A spotty reputation for cash-out loans
- Cash-out refinances vs. other forms of borrowing
- Home equity loans (HELs)
- Personal loans
- Explore your options and interest rates
- Pandemic Remodeling Boom Looming? Cash-Out Refinancing Hits 13-Year High
- Home Improvement Projects Are on the Rise
- Some Borrowers Are Tapping Equity to Create Their Dream Homes
Consider a Refinance or HELOC for Extra Funds During COVID-19
As the COVID-19, or coronavirus, pandemic continues to impact almost every aspect of our lives, it can leave us with many feelings of uncertainty. We may be worried about our health, our family and friends, our jobs and our finances.
Though the United States federal government has issued stimulus checks to taxpayers to help offset the economic impact, many Americans remain particularly concerned about finances. According to a survey by the Kaiser Family Foundation, 39% of Americans had either lost their jobs or lost income due to COVID-19 by the end of March.
During these uncertain times, you may be in a position where you could use a little extra cash. And you’re not alone. Whether it’s to help cover everyday expenses or undertake a home improvement project, there are several ways to get the cash you need.
If you’re a homeowner, you have a couple of particular options available to you: a cash-out refinance or a Home Equity Line of Credit (HELOC). In both cases, you’re essentially converting your home equity into cash.
Keep reading to find out more about refinancing and HELOCs.
When it comes to refinancing your mortgage, it can be done in a few different ways depending on your desired outcome.
If you simply want to get a lower interest rate, renegotiate the life of the loan or obtain terms that are more favorable to you as the borrower, you may opt for a “rate-and-term” refinance.
Since interest rates frequently change, it can be a good option to save some money.
However, there’s another option for refinancing if you have slightly different goals. If you need extra funds – for an emergency, home renovations or to pay off debts – you can also consider a cash-out refinance.
Cash-out refinancing is a way to convert your home equity into cash through the refinancing process. By taking out a mortgage for a larger amount than the previously existing loan amount, the difference is paid out to the homeowner in cash.
Un a rate-and-term refinance, the new mortgage may have a higher interest rate rather than a lower one because your new loan amount is higher, though this isn’t always the case.
Cash-out loans also come with tougher terms for the borrower, as the lender takes on the greater risk.
However, the terms of the cash-out refinance agreement will vary factors such as the amount of equity you’ve built up and your credit score.
Here’s an example of how a cash-out refinance would work. Let’s say your original mortgage amount was $200,000. After a certain amount of time, you’ve paid off $100,000 – which built your home equity – and you still owe $100,000.
With a cash-out refinance, you refinance your mortgage to a new, $150,000 loan amount. The $100,000 balance is what you still owe on your home, but that $50,000 amount gets paid out to you in cash.
Cash-out refinancing has become especially popular in the U.S. during recent years. According to Freddie Mac, which conducts studies on refinancing trends, cash-out borrowers made up 83% off all refinance loans in Q4 of 2018, the highest peak since 2007.
Why is cash-out refinancing so popular? First of all, the money – that cash difference between the two loan amounts – is tax-free because it’s not considered income. Additionally, in some cases you may be able to obtain a lower interest rate than what you were previously paying on your mortgage.
If you’re planning to make home repairs with your cash-out, you may be able to deduct the mortgage interest from your taxes. And compared to other types of financing – such as a home equity loan (which is different from a home equity line of credit) it may be a more affordable option.
Home Equity Line of Credit (HELOC)
Similar to cash-out refinancing, a home equity line of credit is a way to use your home equity to get the funds you need. With a HELOC, the equity of your home serves as collateral. In return, you receive a revolving line of credit that functions much a credit card.
Homeowners are approved for a specific amount of credit. Lenders will look at your income, debts, credit score and other financial history to determine the credit limit. They may also take a percentage of your home’s appraised value and subtract that from the amount owed on the existing mortgage.
The borrowing period for a HELOC is generally set for a fixed amount of time, which is called the draw period. Draw periods typically last 5 or 10 years, and you may have the option to renew at the end.
One benefit of a HELOC is that you have the choice about how much to borrow and when. Although other types of loans may require you to borrow a lump sum, a HELOC is more flexible. Your monthly payments will reflect the amount you’re actually borrowing.
Additionally, you have flexible repayment options. You also get to choose when and how you’d to pay off your HELOC – whether you want to make interest-only payments during the draw period or pay more against the principal (the loan amount).
If you choose interest-only payments during the draw period, you’ll begin paying off the principal plus interest after the draw period ends and the repayment period begins. Repayment periods generally last 20 years.
with cash-out refinancing, many homeowners who choose HELOCS do so only for major financial items such as home improvements, education or medical bills.
Options For You
If the coronavirus pandemic has put your finances in a pinch, there are several opportunities available to help you obtain extra funds when you need them.
We invite you to learn more about our options for refinancing your mortgage or applying for a home equity line of credit.
At Academy Bank, we’re here to answer your questions and work with you to find the best solutions for your needs during this uncertain time.
Subject to credit approval
Cash-Out Refinance Pros and Cons
Tap to learn how COVID-19 may affect refinancing
Due to the coronavirus pandemic, refinancing your mortgage may be a bit of a challenge. Lenders are dealing with high loan demand and staffing issues that may slow down the process.
Also, some lenders have increased their fees or temporarily suspended certain loan products. If you can’t pay your current home loan, refer to our mortgage assistance resource.
For the latest information on how to cope with financial stress during this pandemic, see NerdWallet’s financial guide to COVID-19.
What is a cash-out refinance?
A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house. The difference goes to you in cash and you can spend it on home improvements, debt consolidation or other financial needs. You must have equity built up in your house to use a cash-out refinance.
Traditional refinancing, in contrast, replaces your existing mortgage with a new one for the same balance. Here’s how a cash-out refinance works:
- Pays you part of the difference between the mortgage balance and the home’s value.
- Has slightly higher interest rates due to a higher loan amount.
- Limits cash-out amounts to 80% to 90% of your home’s equity.
In other words, you can’t pull out 100% of your home’s equity. If your home is valued at $200,000 and your mortgage balance is $100,000, you have $100,000 of equity in your home. You can refinance your $100,000 loan balance for $150,000, and receive $50,000 in cash at closing to pay for renovations.
Link your mortgage to NerdWallet to track your remaining balance and home value together.
Pros of a cash-out refinance
A cash-out refinance might give you a lower interest rate if you originally bought your home when mortgage rates were much higher. For example, if you bought in 2000, the average mortgage rate was about 9%. Today, it’s considerably lower. But if you only want to lock in a lower interest rate on your mortgage and don’t need the cash, regular refinancing makes more sense.
Debt consolidation: Using the money from a cash-out refinance to pay off high-interest credit cards could save you thousands of dollars in interest.
Higher credit score: Paying off your credit cards in full with a cash-out refinance can build your credit score by reducing your credit utilization ratio, the amount of available credit you’re using.
Tax deductions: The mortgage interest deduction may be available on a cash-out refinance if the money is used to buy, build or substantially improve your home.
» MORE: How and why to refinance your mortgage
Cons of a cash-out refi
Foreclosure risk: Because your home is the collateral for any kind of mortgage, you risk losing it if you can’t make the payments. If you’re doing a cash-out refinance to pay off credit card debt, you're paying off unsecured debt with secured debt, a move that's generally frowned upon because of the possibility of losing your home.
New terms: Your new mortgage will have different terms from your original loan. Double-check your interest rate and fees before you agree to the new terms.
“If you’re doing a cash-out refinance to pay off credit card debt, avoid running up your cards again.”
Closing costs: You’ll pay closing costs for a cash-out refinance, as you would with any refinance. Closing costs are typically 2% to 5% of the mortgage — that’s $4,000 to $10,000 for a $200,000 loan. Make sure your potential savings are worth the cost.
Private mortgage insurance: If you borrow more than 80% of your home’s value, you’ll have to pay for private mortgage insurance.
For example, if your home is valued at $200,000 and you refinance for more than $160,000, you’ll probably have to pay PMI. Private mortgage insurance typically costs from 0.55% to 2.
25% of your loan amount each year. PMI of 1% on a $180,000 mortgage would cost $1,800 per year.
Enabling bad habits: Using a cash-out refi to pay off your credit cards can backfire if you succumb to temptation and run up your credit card balances again.
» MORE: See current cash-out refi rates
The bottom line
A cash-out refinance can make sense if you can get a good interest rate on the new loan and have a sound use for the money.
But seeking a refinance to fund vacations or a new car isn’t a good idea, because you’ll have little to no return on your money.
On the other hand, using the money to fund a home renovation can rebuild the equity you’re taking out; using it to consolidate debt can put you on a sounder financial footing.
You’re using your home as collateral for a cash-out refinance, so it’s important to make payments on your new loan on time and in full.
Is cash-out refinance a good idea — even during a pandemic?
For some homeowners who have paid down their mortgages and who have significant equity in their homes, a cash-out refinance loan may seem attractive due to current low-interest rates on home loans. This is especially true for those facing financial adversity due to the COVID-19 pandemic who want to get their hands on extra cash.
Low rates could make taking money your home more affordable. If you're considering refinancing your mortgage and want to see how much money you could save on monthly payments, visit Credible's online marketplace to compare lenders and get free personalized rates.
However, cash-out refinancing during the coronavirus pandemic doesn't make sense for everyone. Before you move forward, you may want to consider a few key factors that will help determine if borrowing against your home is the right choice for you.
What is a cash-out refinance?
It's a special type of refinance loan. It involves taking out a new loan not only to repay your current debt but also to borrow more than you already owe on your home so you receive cash back.
If you have a $300,000 loan on a house worth $500,000, a cash-out refinance loan would allow you to pay off the current $300,000 and borrow some additional money. Your cash-out refi loan might be for $350,000 so you could pay off your current lender and walk away with $50,000 you can use for any purpose.
WHAT IS CASH-OUT REFINANCE AND HOW DOES IT WORK?
Cash-out refinancing lets you tap into equity in your home so your money isn't tied up in the house if you need it. It's different from other ways of getting cash your home, such as a home equity loan or home equity line of credit.
Either of these other two options would require you to have two loans while a cash-out refi lets you have just one.
A HELOC also provides you with a line of credit you can draw from as needed, while a cash-out refinance loan would give you a specific lump sum of money upfront that you'd pay back on a fixed schedule over time.
Does it make sense even during a pandemic?
If you can qualify for a good mortgage refinancing rate and you have a solid reason to take cash your home during a pandemic, a cash-out refinance may make sense.
You can visit Credible to get pre-qualified for such a loan and to shop around for loan options among different mortgage lenders. By providing some basic information, you can find out if approval for a loan is ly and can see what rate you'd pay so you can determine if a mortgage refinance loan is affordable.
PERSONAL LOAN OR HOME EQUITY LOAN: WHICH IS BETTER?
For example, you may want extra money for debt consolidation or to cover living costs during the pandemic.
You do need to qualify for mortgage refinancing though, which means you need a good credit score, proof of income, and equity in your home.
If your new loan is for more than 20 percent of the value of your home, you'd ly have to pay for private mortgage insurance (PMI).
If you've lost your income or your property value has fallen during the coronavirus lockdown, you may not be able to get a cash-out refi loan.
What are the benefits of cash-out refinancing?
If you have lots of equity in your home, getting some money it could be an affordable way to get access to the cash you need during the COVID-19 pandemic. Because a mortgage loan is a secured debt, the interest rate is usually lower than other types of loans, such as a personal loan, so a cash-out refi could be one of the cheaper ways to borrow.
HOME EQUITY LOAN VS. HELOC: WHICH IS BETTER?
A cash-out refinance loan could also reduce the interest you're paying on your current mortgage balance as interest rates are near record lows right now due to the Federal Reserve's efforts to stimulate the economy.
When you qualify for a low mortgage refinancing rate, borrowing extra money against your home may not raise your payment by much — if it raises it at all. If you extend your repayment term or substantially lower your interest rate, your monthly payment could stay the same or even go down.
Of course, if you take longer to pay off the debt, you'd end up owing more total interest over time even if your monthly payments are the same or less.
Are there other options?
If you can't qualify for that specific loan right now because you're struggling financially due to COVID-19, you should talk with your lender about mortgage relief options. Most lenders are willing to put your loan into forbearance, although interest will continue accruing.
EVERYTHING YOU NEED TO KNOW ABOUT MORTGAGE REFINANCE
You can also explore other loan options, such as taking out a personal loan for debt consolidation instead of tapping into the equity in your home. Credible can help you compare both mortgage loans and personal loan rates so you can determine which option is best for you.
Just be sure you research mortgage options carefully, avoid falling for mortgage myths, and understand your loan options so you don't put your home at risk.
Why Cash-Out Mortgage Refinances Are Harder To Get
With interest rates plunging to near historic lows and millions of Americans losing their jobs or worried about a layoff, homeowners are looking to their home equity for money to stay afloat.
Unfortunately, the economic fallout from the COVID-19 pandemic is crushing mortgage refinancing. Lenders are more hesitant to approve refinancing applications as unemployment skyrockets and they’re toughening requirements for borrowers.
With a cash-out refinance, you replace your loan with a new one at an amount that’s higher than your current loan balance. You can withdraw the difference between the two mortgages and use the money to carry you through financial hardship.
Homeowners have a mountain of equity they can draw on. A recent study by the Urban Institute shows there is $19.7 trillion of tappable home equity available.
Here’s what you need to know about doing a cash-out refinance during the pandemic.
COVID-19 impact on mortgage refinancing
Mortgage rates dropped to near record lows. The 30-year fixed mortgage averages 3.58 percent nationally, according to Bankrate data. Mortgage refinance rates, are also low, with the average 30-year fixed refinance rate at 3.64 percent.
Low refinance rates have triggered a wave in applications. The Mortgage Bankers Association’s Refinance Index, which tracks refinance applications, rose 10 percent for the week ending April 10 compared with the previous week. The index is 192 percent higher over the same week a year ago.
Cash-out refinances reached a 10-year high in the fourth quarter of 2019, the latest figures available, according to Black Knight. Homeowners drew more than $41 billion in equity their homes in the quarter.
The surge of refinance applications has overwhelmed some mortgage lenders. But the backup appears to be slowly easing as lenders adapt to new ways of doing businesses under stay-at-home restrictions. Regulators have also relaxed rules to help consumers.
The Federal Reserve System announced on April 15 that lenders will be allowed to postpone appraisals for 120 days after new mortgages and refinances close. In addition, 23 states now allow e-notarization of key mortgage documents.
A bill passed by the Senate would extend this to all states.
Still, you should expect a new mortgage or refinance closing to take longer than it would have during pre-pandemic days. But it may be worth the wait and extra hassle.
“There is a population of homeowners who will stomach a more-complex mortgage process in order to take advantage of very low interest rates and the opportunity to save a lot of money,” says Austin Kilgore, director of digital lending at Javelin Strategy & Research.
When does a cash-out refinance make sense for you?
Make sure you know when cash-out refinancing is a smart decision. First, know whether you’d qualify for a refinance. Unfortunately, you can’t refinance if you’re in mortgage forbearance. As of April 16, more than 2.9 million homeowners were in forbearance plans, representing 5.5 percent of all active mortgages, according to data firm Black Knight.
“Many homeowners remain rightfully squeamish about cashing out equity from their homes,” says Greg McBride, CFA, Bankrate chief financial analyst. “And it is not to be taken lightly, particularly if you’re using that equity and your home as collateral to pay off unsecured debt.”
Keep in mind that many lenders now enforce stricter mortgage qualifications. Ask your lender about refinancing requirements, as many are changing policies right now.
Many people use a cash-out refi to consolidate debt, pay medical expenses or meet other financial goals. In these cases, a cash-out refi may provide cheaper access to money than any other type of long-term borrowing.
“It can be a low-cost source of cash,” McBride says. “Particularly for homeowners that are short on liquidity but high on equity.”
Before you refinance, estimate how much you need and how much equity you have in your home. Equity is the difference between your current loan balance and your home’s value. Most lenders restrict you to keeping at least 20 percent equity in your home when you do a cash-out refinance.
Moreover, you can deduct mortgage interest from your taxes if you use the cash-out refi money for certain home improvement projects. In turn, these may increase your home’s value.
Risks and costs of cash-out mortgage refinancing
There are some risks involved with a cash-out refi. One is potentially paying more interest in the long run. A cash-out refi can mean resetting your new loan’s term back to 30 years to make the payments affordable. If at all possible, try to refinance to a term equal to what you currently have left on your original mortgage, or better yet, an even shorter term.
However, if your new interest rate would be higher than what you currently have, you may want to seek other options for the cash you need right now. Consider a personal loan or even a 0 percent introductory APR credit card if you can qualify.
A cash-out refinance comes with many of the same fees as your first mortgage. These include application fees, origination fees, appraisal fees, and more.
Keep in mind you’d also pay closing costs on the whole loan amount. That includes your old loan balance and the money you “cash out.
” If you had a $150,000 balance on your old loan and cashed out $50,000, then you’ll have to pay 2 to 6 percent in closing costs on the entire $200,000.
So examine all your options. And make sure you crunch all the numbers to ensure you’re actually saving money and meeting your current goals. Our mortgage refinance calculator can help you decide.
What Are The Benefits Of Cash-Out Refinancing? Is It Worth It?
The number of cash-out refinances vs. ordinary refinances fell sharply in 2020. Yet one of the key benefits of cash-out refinancing is that it’s typically the least expensive way to borrow a large sum of money. So what’s going on?
It’s ly that many Americans are spooked by economic uncertainty during the COVID-19 pandemic.
But others may be put off from a cash-out refi because home equity borrowing gets a bit of a bad rap historically.
If you’re wondering whether a cash-out refi is a good idea, here’s what you should know about the benefits and how to do it safely.
Verify your cash-out refinance eligibility (Mar 25th, 2021)
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What are the benefits of cash-out refinancing?
If you need to borrow a large sum of money, and you have plenty of home equity, a cash-out refinance is often the cheapest way to do it.
A cash-out refinance lets you borrow against the value of your home. Since these are ‘secured’ loans — meaning the house is used as collateral — they have much lower interest rates than other forms of borrowing.
For example, current mortgage interest rates for someone with strong credit are around 3% — whereas personal loan rates range from about 6% to over 20%.
Low interest rates aren’t the only reason to consider a cash-out refinance, either.
Benefits of cash-out refinancing
- You could lock in a lower interest rate on your mortgage
- You can use the funds for any purpose; debt consolidation and home improvements are popular uses
- You don’t need a specified purpose for the funds; you can even put them toward things emergency funds and investments
- You have the option to shorten your loan term or change loan programs when you refinance
Generally, a cash-out refinance is worth it if you need cash and you can benefit from refinancing your existing loan.
Putting the funds to good use could even improve your overall financial situation.
For example, debt consolidation can give you a fresh start if you find yourself with high credit card balances or other high-interest debts. And, provided you don’t run those up again, you could save hundreds each month and transform your finances.
Many homeowners also use cash-out funds to make home improvements that increase the value of the property and net a bigger profit when they eventually sell. In this way, they see a great return on their refinance.
But of course, a mortgage refinance isn’t the right decision for everyone.
Drawbacks of cash-out refinancing
- There are closing costs (typically 2%-5% of the new loan amount)
- You re-start your mortgage term, usually for another 15 or 30 years
- If your home’s value drops, you could owe more on your mortgage than the home is worth
- If you can’t make loan payments, you could face a foreclosure
The risks of cash-out refinancing are similar to any mortgage: if the loan defaults, your home is on the line.
But there’s a little more to consider here, because with a cash-out refi, your new loan amount is higher than your current mortgage. Your monthly payments could potentially be higher, too.
These drawbacks mean a cash-out refinance typically isn’t best if you only need a small amount of money, or if you won’t see a return on your investment ( using a cash-out refi to pay for a vacation or a new car).
Refinancing typically isn’t ideal if you’re close to the end of your mortgage term, either.
But if you can benefit from a refi and you’ll put the funds to good use, a cash-out refinance can be a very smart way to finance big expenses.
With today’s real estate values on the rise, cashing out equity is a safer prospect than it was in the past.
Check your cash-out refinance options (Mar 25th, 2021)
How rising rates affect the benefits of cash-out refinancing
2020 was an amazing time for mortgage rates.
Average 30-year rates hit 16 new all-time lows that year. And 2021 kicked off with another record low of 2.65% on January 7, according to Freddie Mac.
But then interest rates started to rise. At the time this was written, they were close to 3%.
Of course, there’s always a chance rates could drop again. But it’s more ly they’ll go higher. Check out today’s mortgage rates to see.
Rising rates could make a cash-out refi less attractive to many homeowners in the near future — especially those who already have a low rate, and could potentially increase their mortgage payments and interest cost by refinancing.
If rates go up substantially, it may be better to leave your current mortgage in place, and opt for a home equity loan or HELOC. That way you’re paying a higher rate on a smaller loan amount, and you leave your current mortgage intact.
If you’ve been on the fence about a cash-out refinance, now’s probably the time to get serious about applying.
Who can cash out home equity?
Pre-housing crash, it was far easier — almost too easy — to cash out home equity. That’s part of the reason these loans sometimes get a bad rap.
But those days are gone. Today, you can expect lenders to comb through your personal finances before giving you the green light.
This makes it tougher to get approved for a cash-out mortgage loan than in the past, but it also protects homeowners from unsafe borrowing.
Most lenders have the following minimum requirements for a cash-out refi:
- You must retain at least 20% equity — That means you can borrow the difference between your mortgage balance and 80% of your home’s market value, which will be reappraised for the loan
- You need a credit score of at least 620 — The higher the better, as you could get approved for a lower mortgage rate
- You need reliable income and employment — Lenders want to see you can easily afford the new loan’s monthly payments
- Your DTI is below 43% — Your monthly debt payments (housing costs, credit card debt, student loans, child support, etc.) take up no more than 43% of your gross monthly income. This is your debt-to-income ratio or ‘DTI’
Of course, it’s your job to make sure you can comfortably afford your new loan. But, if you can clear these hurdles, you may well be in good enough financial shape.
Verify your cash-out refinance eligibility (Mar 25th, 2021)
Why cash-out refinances have declined
Low mortgage rates made home buying and refinancing incredibly popular in 2020.
In fact, mortgage debt jumped by $182 billion just in the last three months of 2020, according to the Federal Reserve Bank of New York.
And yet, Freddie Mac reckons the share of cash-out refinances was way down in 2020.
True, some of that may be a result of the larger total number of refinances skewing the math. But the fact remains: cash-out loans accounted for only 35% of all refinancing transactions across the first nine months of 2020. And that compares with 52% in 2019 and 76% in 2018.
So, what’s the reason for the decline?
The coronavirus pandemic
Judging from other data concerning debt, it may be that borrowers are holding back on ‘unnecessary’ debts across the board during the pandemic.
The Federal Reserve’s G.19 report, which shows trends in consumer credit, says store and credit card balances (“revolving credit”) tumbled 11.2% in 2020. That’s $118.3 billion less debt sitting on plastic.
Meanwhile, the New York Fed calculates that balances on home equity lines of credit (HELOCs) saw a $13 billion decline that year.
So it may be that homeowners have been scared straight by the pandemic, and are limiting their borrowing during these uncertain times.
A spotty reputation for cash-out loans
In the early 2000s, cash-out refinances accounted for between 80% and 90% of all refinances, according to a Refiguide analysis Freddie Mac data.
Some people were using their homes as ATMs to prop up unsustainable lifestyles. Others were persuaded into a cash-out refi by unscrupulous lenders looking to turn a profit.
Whatever the motivation, these high cash-out numbers ly played a role in the Great Recession.
As Wharton finance professor Nikolai Roussanov says, “people had borrowed a lot against their homes when house prices were rising. And when house prices collapsed, they ended up having these unsustainably large debt burdens.”
But that was then and this is now.
Yes, it’s still a bad idea to use cash-out refinancing to live beyond your means.
But, if you need money for something serious, and you’re borrowing responsibly, cash-out refinancing may well be your best way forward.
Cash-out refinances vs. other forms of borrowing
We’ve said a couple of times that cash-out refinances are great for borrowing large sums. But, unless you want to refinance anyway (perhaps you can reduce your mortgage rate and monthly payment), they’re a terrible way to borrow small amounts.
That’s because a cash-out refinance is a whole new mortgage. And you have to pay closing costs, just as on your existing mortgage.
Given that upfront fees are typically 2%-5% of the mortgage’s value, that’s ly to be several thousand dollars. And paying thousands to borrow just a few thousand doesn’t make financial sense.
Home equity loans (HELs)
a cash-out refi, a home equity loan lets you borrow a large lump sum from your equity.
Home equity loans also usually have closing costs in the 2%-5% range. But you pay those only on the amount you’re borrowing (not the full mortgage amount). So the total cost will be lower. And, these loans have only slightly higher interest rates than cash-out refinancing.
Meanwhile, home equity loans have another advantage over cash-out refinances. Namely, you don’t reset your mortgage term.
Unless you opt for a shorter term, refinancing means you end up paying for your house over a longer period.
Suppose you’ve had your home 10 years. And you refinance to a new 30-year mortgage. You’ll be paying your home down over 40 years. And that’s 40 years of paying interest, which isn’t cheap, no matter how low rates are.
A home equity loan avoids that issue by leaving your current mortgage intact.
A home equity line of credit (HELOC) is a bit a credit card in that you’re given a credit limit and can borrow up to that sum. You pay interest only on your outstanding loan balance, and can borrow, repay, and re-borrow as often as you wish.
HELs, HELOCs are second mortgages. But, un HELs, they tend to come with small or zero closing costs. So these are a better way to borrow smaller sums — or large ones over a brief period. Interest rates are typically a bit higher than for HELs.
For most borrowers, rates on personal loans are appreciably higher than for cash-out refinances, HELs, and HELOCs.
However, a few lenders offer personal loans to the very best borrowers (stellar credit scores, high incomes, and lots of assets) at similar rates.
The upside is these are “unsecured” loans, meaning they’re not tied to an asset. So, un with mortgages and second mortgages, you’re not putting your home on the line if things go wrong.
Explore your options and interest rates
Cash-out refinances are safer and more affordable than they were years ago.
It’s ly you’ll be able to take cash out no matter what type of mortgage you have. These loans are commonplace for conventional, conforming, FHA and VA loans. Only USDA loans ban cash-out refinancing.
Of course, while you’re at it, you should fully explore your refinance options.
For example, why stick with an FHA loan when you could refinance to a conventional one without private mortgage insurance?
And, naturally, you should shop around between multiple lenders to make sure you get the full benefits of cash-out refinancing, including the lowest possible rate and loan costs.
Verify your new rate (Mar 25th, 2021)
Pandemic Remodeling Boom Looming? Cash-Out Refinancing Hits 13-Year High
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Many homeowners are in the money, and they’re dipping into it, as residential real estate values skyrocket and cash-out refinances balloon. Home values swelled by 6.95% in September, the fastest rate since May 2014, according to the latest S&P CoreLogic Case-Shiller Home Price Index.
Largely due to strained housing supply and increased demand driven by extremely low mortgage rates, some 16.7 million residential properties were considered equity-rich in the third quarter of 2020—about one every four homes, according to ATTOM Data Solutions, a real-estate data firm. Owners of homes that fit this definition hold 50% or more equity in their properties.
Low rates aren’t just lighting a match under homebuyers. Homeowners who want to save money are lining up to refinance as rates hit rock bottom. The average 30-year fixed-rate mortgage dropped to 2.71% this week, the lowest rate ever recorded, according to Freddie Mac. Cash-out refinancing has also boomed, as borrowers want to tap their equity without selling their homes.
“In addition to lowering payments, many homeowners are taking the opportunity to extract equity through a cash-out refinance,” says Len Kiefer, deputy chief economist at Freddie Mac. “In the third quarter of 2020 U.S. homeowners cashed out $39 billion of equity, the highest level since the fourth quarter of 2007.”
Home Improvement Projects Are on the Rise
Remodeling activity has been steadily falling since the first quarter of 2019, according to the latest Leading Indicator of Remodeling Activity (LIRA) report by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. But that may be about to change.
When the coronavirus pandemic hit the U.S. in March, home improvement projects took a big hit, with the annual growth rate at 2.1%, falling from 3.3% the previous quarter.
Now, Harvard researchers predict that the annual growth in renovation and repair spending will rise to 4.
1% by the first quarter of 2021, which would mean a jump in spending from $332 billion currently to $337 billion by the end of 2021.
“The remodeling market is bouncing back from the initial shocks caused by the pandemic, as homeowners continue to spend significant time in their homes and are adapting it for work, school and leisure,” says Chris Herbert, managing director of the Joint Center for Housing Studies. “The surge in DIY and small-project activity is lifting the remodeling market, but it remains to be seen if the strong sales market this summer translates into larger improvements that would drive even stronger growth in the coming quarters.”
Hardware stores, garden centers and building materials suppliers had a year-over-year sales increase of 13.2%, the second largest increase in all sales categories, according to an October U.S. Census Bureau report.
This uptick in remodeling activity also can be seen in increased search volumes for contractors, handyman services, home repairs and other home improvement-related topics. About 70% of home projects begin with Google searches, says Max Anderson, lead economist for Porch.com, an online marketplace that pairs homeowners with contractors.
When the pandemic hit, search volumes on these topics decreased by about 40% overall. Repair-driven services, such as plumbers, only fell by about 10%, but deferrable projects, kitchen remodels, took a 70% nosedive. But by June, search volumes were exceeding normal levels, spiking by about 40% year-over-year from June to July.
“Usually, with black swan events, normal activities might get moved around, but on an annual basis things don’t change that much. Beyond this moving around in home improvement search volume, we’ve also seen a sustained lift of 10% to 15% overall, which is true growth,” Anderson says.
Some Borrowers Are Tapping Equity to Create Their Dream Homes
As homeowners spend more time in their houses, there’s an increased demand for space and comfort. In-home classrooms and offices are on the rise, and so is the desire for more usable outdoor space. Rather than sell their home and jump into an overheated market in search of a bigger and better place, some homeowners are transforming their existing homes.
In November, cash-out refinances were up by 58% from six months earlier at Better.com, an online mortgage lending company. This could mean that even more homeowners are considering home improvements and larger investments, says Zoey Cigar-Hodge, mortgage expert at Better.com.
“Homeowners are financing projects with cash-out refi funds. Due to the pandemic, everyone is home and most people are critiquing everything their home lacks and dreaming of everything their home could be,” Cigar-Hodge says. “They are now looking to take advantage of the low-rate market and make their home comfortable for year-round use.”
The refinance activity isn’t limited to conventional mortgages. VA refinance loans were up by 241% in 2020 compared to 2019.
For some veteran homeowners, this was an opportunity to lock in a lower rate and tap into home equity to make home improvements or pay down debt—which are the two most popular uses for the money from cash-out refinancing, says Chris Birk, vice president of mortgage insight and director of education at Veterans United Home Loans.
Birk says that deciding whether to sell and get a more suitable home versus using equity to improve an existing home depends on the borrower’s goals, their long-term plans and their unique situation.
“With tight inventories and home prices at record highs in many markets, now is still a remarkable time to sell for homeowners who are prepared for that next property,” Birk says.
“Some veterans are using their home equity to make improvements that are ly to add value and boost resale value in the coming years.
Others have decided to make upgrades to homes they plan to live in for the long haul.”
Although average mortgage rates are well below 3%, rates for refinancing are often slightly higher, Birk says. Borrowers should keep in mind that the rate you qualify for is largely determined by the lender, the loan type and the borrower’s credit profile.
Borrowers should get loan estimates from multiple lenders and carefully compare rates, costs and fees to ensure they’re getting the best deal possible.