One of the most popular aspects of owning a home is to pull out money in a cash out refinance mortgage for major purchases. You can do whatever you like with the money, but the most popular uses of equity include paying for college, home renovations, and buying investment property. 2024 is looking like a time of growing home prices and rising interest rates, although homeowners still want to access cash out through a refinance or home equity loan.
How Does Cash Out Mortgage Refinance Work?
A cash-out refinance loan constitutes a particular form of mortgage refinancing that capitalizes on the accumulated equity in your property, furnishing you with cash in return for accepting a larger mortgage obligation. In simpler terms, through a cash-out refinance, you obtain a new mortgage that surpasses your current mortgage balance, enabling you to retain the excess funds. Learn more about the cash out refinance requirements.
Is it Wise to Do a Cash Out Refinance?
This can prove particularly advantageous, even after factoring in closing costs, especially when you require a substantial sum of money. Additionally, a cash-out mortgage refinance has the potential to enhance your credit profile. By utilizing the funds to eliminate existing debt, there is a possibility of observing an uptick in your credit score, chiefly if your credit utilization ratio decreases as a result.
Does Your Current Mortgage Rate Go Away with a Cash Out Refinance Loan?
When refinancing for cash back, you do not get to keep your old mortgage rate, For example, if you have a 3% first mortgage rate and you want to do a cash-out refinance to get an additional $50,000 cash, and the new mortgage rate is 7%, then your monthly payment goes up dramatically. This is one of the reason, borrowers consider the HELOC line of credit to get money.
What to Expect with Cash Out Refinance Process
Upon accepting the new mortgage offer, the money from the cash-out refinance will be released. These funds can be used for a wide range of purposes. However, you should expect a higher monthly payments and and extended repayment terms compared to your previous mortgage. For example, if you had 25 years left on your previous mortgage and your new cash out refinance loan was on a 30-year term, than you should expect to be paying 5 more years.
Given that the borrowing limit for a cash out refinance loan hinges on the level of equity in your home, your lender will mandate an appraisal to evaluate the current value of your property. If property values in your vicinity have appreciated, there’s a chance that your house is now valued higher than the initial purchase price, potentially augmenting the sum you’re eligible to borrow. In a sense, the higher value the appraiser give your home, the more money you can borrower with a cash out refinance.
How Long Does it Take to Refinance: The duration of the entire cash out refinancing process can fluctuate depending on the lender. On average borrowers are closing on cash out loans in 4 to 6 weeks. However, Self employed borrowers should expect the cash out refinance process to take longer as the underwriters will likely be review a few years of tax returns or bank statements.
Top 8 Reasons for a Cash Out Refinance Mortgage
If you are thinking of a cash out mortgage this year, here are some great reasons to pull the trigger now:
#1 Cash Out Refinance Rates Are Rising
The Federal Reserve has raised the rates 7 times in the last two years. That increase was already scheduled for earlier in 2016, but combined with the rise in rates after Trump won, rates for a mortgage refinance did go up significantly.
Midyear 2023, rates were in the range of 6 to 7% for a 30 year fixed loan. In September , Freddie Mac published a report that rates had risen to 7.125% on the same loan for qualified applicants.
While these rates are still very low historically, there are signs that rates could rise further in 2024. The IMF has raised economic expectations for US GDP based upon what Trump wants to do with tax and spending policies. Also, the Fed has suggested that more rate hikes are on the near horizon.
So, for those mulling cash out refinancing, you may want to do it sooner than later, as a .5% increase in rates could make the refinance less worth the cost. Cash out refinance rates remain competitive but many borrowers are choosing a home equity line, because they can keep their low rate first mortgage.
#2 Home Prices Are Rising
There is a general feeling in the country that Trump will be good for the housing industry. This could lead to an increase in home prices and an increase in equity. Already this year, home prices were rising nicely in most of the country at the rate of 3-5% per year on average.
With home prices rising, there is a good chance that you have substantial equity in your home that you can use for things that you really need.
Also, note that the HUD raised the FHA loan limits on conforming and FHA mortgages this year. This indicates that home prices are rising and the federal government thinks they will continue to do so.
#3 Lending Standards Are Continuing to Be Relaxed
It was tough to pull cash out of your home right after the mortgage meltdown of 2009. In many instances, cash out lenders were very tight with their money. Today, things are largely back to normal in most parts of the country. Borrowers continue to choose the home equity loan products and cash out refinances.
More Flexibility in Qualifying for Cash Out Mortgage Refinancing from Fannie, Freddie, FHA, VA and Private Money Sources
If you have not made any late payments on your mortgage in the last year and have at least average credit, you should be able to do a cash out refinance, pull out cash and still get a lower rate on your mortgage. Closing costs are part of the mortgage process, but request an no cost refinance option, as it could save you thousands of dollars.
#4 Cash Out Refinances Offer a Fixed Rate
A big benefit of cash out refinances is that your rate is fixed for 15 or 30 years. This means that you know exactly how much you are going to be paying for many years.
This is different than a home equity line of credit, or HELOC which has a variable interest rate.
Many home owners prefer the security of a fixed rate refinance, even if the rate is slightly higher in the short term than a HELOC variable rate.
#5 Increase the Value of Your Home
Done wisely, renovations on your home with home equity can add substantially to the value of the property. When you sell your home, you will be able to see a substantial return on your investment.
#6 Mortgage Rates Are Still Lower Than Credit Cards
Some homeowners opt for pulling cash out of their home to pay off higher interest debts, such as credit cards. If your interest rate on your cash out refinance is 6.5%, you could easily save 10% or more in interest per year over a credit card. If you already have an interest rate on your existing mortgage below 6%, you may want to consider a home equity loan for cash out.
Also, mortgage interest is tax deductible whereas credit card interest is not. If you are going to pay interest on debt, it makes more sense to pay a low rate rather than a high rate, AND write off the interest on your taxes.
#7 You May Qualify for a Cash Out Mortgage with No Closing Costs Up Front
A common option today allows you to avoid paying your closing costs up front. You can have them tacked onto your loan balance and pay them over time.
As closing costs can amount to two or three percent of the loan balance, the closing costs are a substantial cost. Why not take advantage of this and wrap the closing costs into your new cash out mortgage?
#8 Cash Out Rules Are Easier to Qualify for with FHA
If you have an FHA loan, you can do a cash out refinance program with FHA. While you do need to qualify with income and credit, the lending criteria are quite flexible. Many homeowners can qualify with a credit score in the mid 600’s and in some cases with even lower credit scores.
#9 Consolidate Debt with a Cash Out Refinance
The cash out refinance mortgage can prove to be effective instruments when confronted with the necessity to settle a substantial amount of lingering, high-interest debt, such as credit card balances, personal loans and high interest auto loans. By virtue of being a secured loan, a cash-out mortgage typically provides more favorable interest rates compared to the unsecured loans and credit lines that borrowers frequently employ to refinance existing debt. Consequently, homeowners have the opportunity to choose a cash out refinance loan or a home equity loan that saves a tremendous amount of money, sometimes even thousands of dollars, while simultaneously diminishing their overall debt burden. With this approach, borrowers experience a monthly momentum as their outstanding balance steadily diminishes over time.
Tax Benefits for Cash Out Refinancing
Deductible home mortgage interest extends to loans of up to $750,000, provided the funds are employed for the acquisition, construction, or significant enhancement of your residence. This tax benefit also encompasses refinancing.
Should you decide to refinance into a larger loan and reset the term, particularly with a 30-year mortgage, it’s important to note that your monthly mortgage interest payments may increase. However, any rise in expenses might be mitigated if you secure a lower interest rate. Get the updated rules for tax deductions on cash out refinancing.
What Are the Substitutes for Cash-Out Refinancing?
Cash-out refinances facilitate access to your home equity while simultaneously replacing your current mortgage loan with a new one. In a perfect world, the new mortgage should feature a shorter term, a lower interest rate, or a fixed rate, especially if your current mortgage has an adjustable rate. However that rarely happens as most cash out refinance loans are extended for 30-year terms and interest rates are typically higher in this present financial climate.
However, what if you are already have the benefit of being locked into a record-low fixed interest rate in the 2 to 4% ranges then you should noy be forced into a refinance mortgage to get a some cash back and a higher interest rate. Is it possible to get cash back with a home equity loan or HELOC while retaining your existing mortgage and adhering to its original payment schedule?
Home equity loan: This option enables you to borrow a lump sum from your home equity. You continue making your existing monthly mortgage payments and add a second monthly payment for the new equity loan.
Home equity line of credit: Your available home equity can serve as a source for a revolving credit line, allowing you to borrow funds as needed, repay them, and reuse the credit line. HELOCs often feature variable interest rates. Borrowers always appreciate the interest only payment option that increases the cash flow and minimizes the monthly payment.
Takeaways for Today’s Cash Out Mortgage Programs
Pulling cash out of your home and refinancing is a good way to get to get the cash you need for college, home improvements or debt consolidation. If the Fed raises rates two or three more times this year as they have indicated, this could put a cash out mortgage refinance out of reach for many homeowners. Yes, cash out refinance rates are rising, so you probably should strongly consider doing an equity loan today an revisit the cash out mortgage refinance in the near future when the rates finally begin to fall.
About RefiGuide.org
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has worked as a mortgage loan officer in the industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, Linkedin and ActiveRain.
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