Is it Time to Choose a Cash Out Refinance?

Should You Choose A Cash Out Refinance?

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 choose a home equity loan to get your cash.

If you plan to use the proceeds for something like a new car or vacation, think twice. Finance experts don’t recommend financing short-term items with long-term loans. Do you really want to spend the next 30 years paying for a week’s fun or a car you keep for five years?

Cash Out Refinance Pitfalls

Home equity is the primary way many families build wealth, according to Harvard University’s Joint Center for Housing Studies. Cashing out home equity is just like pulling money out of your retirement account, because when you sell your home, you’ll have less equity for your future.

In addition, cash-out refinancing costs can be higher, and they are based on the entire loan amount, not just the cash out.

If you owe $100,000 and want $10,000 cash out, and the fee for cash out is one point (one percent of the loan amount), it can cost you $1,100 to borrow $10,000. That’s an 11 percent surcharge.

Cash Out Refinance Alternatives

The Consumer’s Guide to Mortgage Refinancings emphasizes that you should consider alternatives before taking a cash-out refinance.

Home equity lines of credit (HELOCs), for example, often come with no closing costs. They can be great for funding a series of home improvements or paying annual college tuition.

Home equity loans are (usually) fixed-rate second mortgages that may be cheaper than cash out refinancing.

Lifestyle changes are an option for slimming down expenses. And there’s always eBay if you’ve got extra stuff you can sell.

Qualifying For A Cash Out Refinance

Underwriting standards for cash out refinances are usually higher. That’s because these mortgages are riskier for lenders than rate-and-term loans.

Many lenders won’t allow cash out refinancing for vacation or investment properties.

For a Fannie Mae or Freddie Mac cash out refinance, the minimum credit score for cash out refinancing is 40 points higher than for rate-and-term loans.

If you want an adjustable rate mortgage (ARM), expect lower loan-to-value limits and tougher underwriting

Email me at arjun@lendclear.com for more information.