Cash Out Refis Becoming a Hot Topic Again in SF

In the Bay Area, cash out refinancing is once again becoming a common conversation at the real estate table.  What is it, exactly?   It’s a way to exchange your home value for cash, without selling it.  Over time, your property increases in value, which increases your equity position.  Couple this with paying down the principal balance over time, and you start to really come into equity.  Cash-out refinancing is the process of getting money/cash for that equity you have.  With home prices in the Bay Area spiking the way they have, this means that there are plenty of opportunities to do such a refinance.   The amount of home equity borrowers now have at their disposal has reached an all time high in the Bay Area, surpassing pre-crash levels.  Nearly 80% of San Francisco and surrounding market homeowners have tappable equity and I see this is as a possible cash injection that could further fuel a hot macro-economy.

Cash-Out refinancing is different from the other 2 types of mortgages.  Rate/Term refinances simply lower your rate with a loan amount similar to the closing balance of the old loan, and leaves you with a lower payment.  A limited cash-out refinance allows you to wrap in your closing costs into the new mortgage so that the new balance is slightly higher than the closing balance of the old loan.  When doing a cash out refinance, you get a larger loan that pays off your old loan and its closing costs, and leaves you with some cash back (pending qualification and loan guidelines).

Borrowing against your home, especially here in the Bay Area, remains one of the cheapest sources of money available.  The financing is considered less “risky” and the interest is cheap when compared with other avenues of borrowing cash – unsecured credit, cash advances, private loans, personal loan/line of credit from bank, etc.  The reason is that your home is what is securing the loan.  From a lenders standpoint, this makes the loan far less risky and therefore can be done with much lower interest rates than other avenues, as well as less costly.  Cash out refinancing is generally far less expensive than selling your home to get money.

How much cash/equity you can take out will ultimately depend on the loan program and the valuation of your Bay Area home.  The new total loan won’t normally exceed 80% of the property valuation in most conventional and JUMBO loans.  For FHA, it can go up to 85% and VA loans can go up to 100%.  Before going down that road, however, you should ask yourself:

  • How long do I intend to stay in this home?
  • How will this refinance affect my monthly payments?
  • Is this the best use of my equity? 

In terms of what to do with the equity, Cash out refinances can help improve cash flow by paying off other debts with higher interest rates or payments. They also can be good sources of funding for education for a household’s children.  Essentially, the money can be used for almost anything, including home improvements, investments, medical bills.  Some of those home improvements can actually increase the value of your home, adding more equity back into the house.  If you don’t plan to stay in your home very long, or you can’t improve on the terms of your current mortgage with a new home loan, it might be cheaper and smarter to wait until you sell to get your cash.  To incur costs when you will actually be selling and potentially dumping your mortgage anyways in the near-to-immediate future makes no sense.  In such cases, its best to just wait before paying off such debt balannces.

What about a HELOC, some people ask me these days.  Thanks to the new tax bill, a HELOC is now the same as a large credit card because the interest is no longer tax deductible.  At one point, this was the main caveat to taking out a line of credit against a home.  However, with this shift in tax law, it now makes more sense to do a cash out refinance to access equity and still leave yourself in a good position (tax wise) as opposed to getting a HELOC.

To learn about how much equity you are sitting on and how it may be better put to sensible use, contact me at arjun@lendclear.com.