Home refinancing has made headlines in recent years, but the stories typically revolve around government-sponsored programs that help distressed homeowners. Now owners are coming out on top as home prices rise. According to a National Association of Realtors (NAR) report, single family home prices rose more than 4% between mid-2013 to mid-2014, while during that same period average sales prices increased $9,000.
Some markets fared far better. Atlanta, Georgia house prices skyrocketed 16% in the past year, and Eugene, Oregon homes were up 18%.
The year-over-year changes are significant, but they do not paint the entire picture. Increases in 2014 represent a small part of the equity growth since 2011. In all, home prices are up 27% since that year, equaling a median price gain of $46,000. The result: a 160% increase in cash-out refinance volume since 2012 according to Freddie Mac.
More Homeowners Utilizing a Cash-out Refinance
Homeowners are taking advantage of cash-out refinance programs in order to capitalize on their newfound equity gains. About $8 billion in equity was cashed out in the second quarter of 2014 alone. That’s up from just $5 billion in the first quarter.
There’s good reason for the increase. Not only does cash-out refinancing help homeowners secure better terms for their home loans, but they can take out extra to make home improvements or finance other personal goals.
While cash-out loans are a little more difficult than some of the no-doc streamline loans available like the VA streamline refinance, they are still straightforward and follow traditional refinance rules. If you think a cash-out refinance could be the right move for you, here’s what you need to know…
Cash-out Refinance Rates
Interest rates for cash-out refinance loans are only slightly higher than those of no-cash-out mortgages. A cash-out refi applicant can expect to get a rate that is one-eighth to one-quarter percent higher than a borrower receiving no cash. For instance, if you receive a 4.0% APR no-cash refinance, you could expect a 4.125% or 4.25% APR cash-out refi, depending on your credit score. As could be guessed, lower credit score borrowers will pay higher cash-out refinance rates.
Mortgage rates in general are hitting one-year lows, so cash-out refinance borrowers are obtaining lower rates than did no-cash-out borrowers just a few years ago.
How to Qualify for Cash-out
A cash-out refinancing program is basically a new home loan to replace your current one, but at a higher amount than you owe. You get a nice check for the difference to do with as you please. Ideally, people get the most out of a refinance if they can get a lower interest rate, but with a cash-out refi, they also get some extra money.
Of course, don’t think you’re going to get a blank check out of the deal. The more you borrow, the less equity you’ll have in your home, so lenders impose limits on how much cash you can actually get. The standard limit for most lenders is an 85 percent loan to value (LTV) ratio. In other words, if your home is worth $200,000, you could borrow up to $170,000. If you owe $150,000 on your mortgage, you would receive $20,000, less required closing costs. That goes for both conventional loans and if you are aiming for an FHA cash-out refinance.
Cash-out Refinance Questions to Consider
If you’re thinking of adding tens of thousands of dollars onto your mortgage debt, even if it doesn’t seem to affect your monthly payment all that much, remember that you’ll be on the hook for the next 30 years, give or take. In other words, make sure you’re borrowing extra funds for something that improves your life in some way, not just for some whim, like buying a sports car. Most people use cash-out refinancing to pay off their other higher interest debt, make home improvements, or for some sort of emergency.
Another factor to consider is how the amount you’re borrowing will affect your equity. If you open a conventional loan for more than 80 percent of the value of your home, you’ll have to tack on PMI (Private Mortgage Insurance) to your monthly payment. Mortgage insurance is added to any FHA cash-out loan.
Cash-out Refinance or Home Equity Loan?
If you’re wondering if it’s better to just take out a home equity loan, the answer is it really depends on your situation, and you’ll have to crunch the numbers. For one thing, a home equity loan will be an additional loan on top of your current mortgage, so you could miss out on a lower interest rate for your primary mortgage. That being said, if you already have a good interest rate and won’t see much savings by refinancing, then getting a home equity line of credit could be a simpler, and more cost effective process.
Cash-out Refinance Closing Costs and other Considerations
Keep in mind that a cash-out refinance requires closing costs, whereas a home equity does not have as many fees to close. Mortgage closing costs averaged about $2,500 nationwide according to a recent survey by Bankrate, so the additional expense is something to consider.
Lastly, think about where you are on your mortgage journey, and what your plans might be for the next few years. If you’ve only been a homeowner for a few years and plan to stay at that location for the long term, a cash-out refinance could be an excellent move. On the other hand, if you’re 22 years into your mortgage and/or are thinking of relocating in the near future, a refinance isn’t a good option for you since it takes time to recoup closing costs.
If you think going the cash-out refinance route could be a good move for you, be sure to do some research, think about how you intend to use the money, consider how it will effect the amount of equity you have, and then decide if it’s worth the closing costs and additional debt you’ll be taking on. If you meet all the criteria of an ideal borrower, then go for it soon while rates are still low so you can get the most out of your cash-out refinance.
Apply for a Cash-out Refinance for Accurate Numbers
The best way to make a wise decision about a cash-out refinance is to get ahold of a professional and have him or her work up an accurate rate and closing cost quote for your situation. With accurate numbers, you can make an educated decision.