Cash-out refinancing is gaining popularity nowadays. With mortgage rates remaining low despite increasing home values, more and more people are now putting their home equities into good use. Home equity, as you know, refers to your outstanding mortgage balance subtracted from your home’s current market value. Choosing to cash this out means that you would apply for a higher mortgage loan than your existing one and the difference between the two is the cash you would get at closing. Most of the time, homeowners do this to pay another loan with a high interest that they have, such as credit cards, or to fund home renovations.
Based on Freddie Mac’s 2014 quarterly refinancing report, there was a total of $8 billion home equity cash-outs during the third quarter. Meanwhile, in 2013, for the second quarter, it was $5.6 billion; and for the third quarter, it was $6.1 billion. This means that for that certain period in 2014, about 28% of the borrowers used the home equity cash-out refinancing compared to last year’s 21% and 14% respectively. It goes without saying that more borrowers have really opted to go for home equity option as the years went by. But no matter how high these numbers are, nothing can compare to the statistics of home equity cash outs in the second quarter of 2006. It was considered to be the peak season of the transaction where $84 billion was cashed out by almost 89% of the borrowers.
Based on existing data, borrowers in the third quarter are the ones who benefit a lot from a home equity cash-out. It will save them more than $1.5 billion in interest payments for the first year of their new loan. This means almost $2,700 in savings for each of the borrowers, so consider the time period when you are signing up for a home equity cash-out. Also, it is advisable to make extra payments to your principal before refinancing so you could accumulate sufficient equity to avert paying mortgage insurance which is often needed for loan-to-value ratios over 80%. And eventually, if you choose to refinance, statistics show that 36% of the borrowers have shortened the term of their loans and this is a pretty good takeaway.
According to Chairman and Chief Executive Steve Calk of the Federal Savings Bank in Chicago, the trend of cash-out refinancing through home equity is soaring high. It has become more possible through the increase in people’s home equities as well as mortgage rates which are a bit lower or the same with the ones they are currently engaged in. People are now seeing home equity cash-out as an instant means of improving cash flow for up to $300 to $500 a month. This amount is surely of big help, especially to the people who may need to pay credit card balances that have been long overdue or those who are in the brink of bankruptcy.
Another benefit of the money you’ll get from a home equity cash-out is that you could remodel your home to increase its appeal and value before you sell it. Some people may not be able to do such due to hindrances like lack of budget. Dan Gjeldum, SVP of Guaranteed Rate in Chicago, emphasizes this point. Many times, HELOCs come with a variable rate which is constantly changing. Taking a cash-out from home equity is definitely more appealing rather than home equity lines of credits with fixed rates. Over the last quarter, there was an average of $19,000 obtained by borrowers doing cash-out refinances, according to the data of the Federal Savings Bank.
A word of caution though; before attempting to refinance using home equity cash-out, make sure that you have your mental image of the financial picture you wish to attain. It would be smart to use the money for paying credit cards to lessen your liabilities. It would be wise to use it for home renovation which would definitely add up to the value of your home. Remember, home improvements give you a better return on investment.
Contrary to all the positive outlook towards home equity cash-outs, Freddie Mac’s Chief Economist Frank Nothaft thinks that its growth is slow and most likely short-lived. While there is a gradual appreciation in housing markets, there is also a gradual uptick in the dollar amount of cash-out refinances. When this happens, mortgage rates will go higher and people would not opt for cashing out anymore since they would want to hold on to their mortgage rate which are relatively lower.
What happens is instead of cashing out, borrowers would just take out a second mortgage so they can preserve the cheap mortgage they already have. They may do this using a closed end home equity loan or through a HELOC. Nothaft also asserts that not all people are eligible for home equity cash-outs. Those refinancing under the Home Affordable Refinance Program of the government have high loan-to-value ratios and are most likely having a hard time paying their mortgages. This is an example where the option of home equity cash out may be limited to a few individuals and is not available for everybody.