Cash-Out Refinance

  
     

Cash-Out Refinance – Low, Low, and Higher

The Bottom Line: Anyone carrying a large amount of consumer debt who has a home with significant equity should consider a cash-out refinance as a potential solution. A cash-out mortgage has low (historically low) interest rates and low monthly payments. The cash-out refinance mortgage is especially attractive to borrowers who have a current mortgage at above market rates. A cash-out mortgage has low monthly payments. Since a mortgage generally has higher upfront costs than other loans, it is important to check the break-even costs before using a mortgage to consolidate debt.

Who wouldn’t want to save money on their current mortgage and lower their costs on their credit card and other personal debt?

Mortgages are one of the most secure loans. The benefit of using a home as collateral is that the borrower can get a long-term loan at a low interest rate. In fact, as recently as January 2016, mortgage rates are hovering near all-time lows.

There are a variety of reasons to take a cash-out refinance. Popular reasons include debt consolidation, using for home improvements,or paying for a college education.

Before taking out a cash-out refinance consider:

  • How much equity you have in the house?
  • What size monthly payment is affordable?
  • How long you believe you will stay in the home before moving or selling the home?
  • Is the interest rate and upfront fees for the new loan worth the cost?

Cash-out Refinance Mortgage – How Much Money?

Home prices are on the rise. After the Great Depression and Home Market crash in 2008, home prices have greatly increased. In many parts of the country, prices have reached their pre-crisis peak levels. Millions of homeowners, who watched their equity shrink or even disappear, are now sitting on homes worth much more than their mortgage.

A conventional loan program allows for a cash-out refinance up to 80% of the value of your home. For example, if a borrower has a home that is worth $250,000 and their mortgage balance is currently $120,000, then their current LTV is 48%. Theoretically, if they qualify based on credit, income and other lender requirements, then the borrower can add another $80,000 on top of their existing mortgage and reach the 80% LTV.

Comfortable Payments and Low Interest Rates

Low interest rates are the main reason that many homeowners are refinancing their mortgage. The low rates allow the borrower to lower their overall financial costs, lower their monthly payment, and/or reduce the time it takes to payoff the loan.

A cash-out mortgage allows the borrower to save money on their current mortgage and to readjust their overall debt load into affordable monthly payments.

Here is one example to help you see how a cash-out mortgage can save money:

Current Situation: The current appraised value of the home is $300,000 and LTV is 60%. Here is a brief overview of a hypothetical debt situation.

 

Credit Card Debt

Current Mortgage

Medical and Other Bills

Amount

$15,000

$180,000

$20,000

Interest Rate

18%

5.75%

 

Monthly Payment

$450.- and decreasing

(Based on minimum payments of 3% and at least $20).

$1177

No set payment.

Time left to Pay

Over 21 years using minimum payment method

23 years

Due immediately

 

Cash-out refinance:

By combining the current mortgage together with all of the current credit card debt and medical and other bills, the borrower can take a cash-out mortgage of $215,000, with a LTV of 72%.  If the borrower refinanced into a 23-year loan at 3.65%, the overall monthly costs would be $1,152, which is less than the current mortgage payment. (The interest rates used for this illustration are based on Freddie Mac’s Primary Mortgage Market Survey from Feb 11, 2016 rates, with the rate coming with lender fees of 0.6%.)

Not only is the borrower left with lower mortgage payments, but each month they will have additional money in their pockets by paying off their credit card debt. Also, by paying off the medical debt and other bills, the cash-out mortgage refinance removes the risk of collection accounts and everyday financial stress.  

Cash-out Refinance Mortgage – Stretching out Payments

Compared to a short-term personal loan, a cash-out refinance mortgage stretches out payments. Although it is possible to take out a mortgage for a shorter period, this will greatly increase the size of the monthly payment.

If a borrower wishes to pay off the loan at a faster pace, then accelerated payments or lump sum prepayments are an effective method to lower financial costs, payoff the mortgage sooner and build equity in the home at a faster rate.

Is a Cash-out Refinance Mortgage a Good Option?

First of all, a cash-out refinance mortgage is only an option if you have own a home, have sufficient equity, and can qualify for a mortgage based on your credit and income.

The major consideration in taking out a cash-out refinance mortgage is finding an interest rate that saves you money on your current mortgage. If your current mortgage has a low rate compared to the current rates, then you should consider a second mortgage, such as a home equity loan or home equity line of credit(HELOC).

Beyond the interest rate, it is important to find a cash-out mortgage with a monthly payment that is affordable. Transferring unsecured debt to a mortgage adds foreclosure risk on your house. However, for many, the affordable monthly payment, financial savings, peace of mind from avoiding debt collectors, and implementation of a realistic debt elimination plan makes a cash-out mortgage a great option.