Do’s and Don’ts of a Cash-Out Mortgage Refinance
There is a lot of Do’s and Don’ts of a Cash-Out Mortgage Refinance. You like Millions of homeowners may be wondering if it’s time to take advantage of your growing equity to improve life with a Refinance.
I’ve helped hundreds of clients over the years with mortgage refinances. When done properly a Cash-Out Refi can really be a game-changer but when done poorly it has the potential to set families up for major disaster. I’ve identified some Do’s and Don’ts to be aware of when deciding if a Cash-Out Mortgage Refinance is the right thing to do.
Let’s start by talking about property values. It’s been just over ten years since the Mortgage Meltdown and we’re finally seeing home values recover and even exceed previous levels from before the crash. Last month an appraiser told me he’s seeing home values in some neighborhoods grow by as much as 12%-15% annually. That means that for a family with a $300,000 home they could realize as much as $45,000 in appreciation this year.
When is Cash-Out a good idea?
In my mind, the key to using a Cash-Out Mortgage Refinance effectively isn’t so much about the Interest Rate, Home values, or amount of cashback. It’s more about why you’re considering getting Cash Out and how it benefits you long-term.
For example, using the equity in your home to consolidate debts and save $1500 a month in debt payments could be a great thing. This will allow you to start saving more for retirement. But using the equity in your home to buy a new boat and a flat-screen TV could be putting you at risk.
Good Reasons to do a Cash-Out Mortgage Refinance
- Lowering your Interest Rate – Refinancing your mortgage usually makes sense if you’re either doing a low/no-cost refinance and dropping your rate by at least .25% or more. Or if you’re paying standard closing costs you’ll typically want a drop of .75%-1% or more on your new interest rate.
- Consolidating High Rate Debts – If you’re raising your Mortgage Interest rate a Refinance might still be a great idea if you’re consolidating other high payment and high rate loans. For example, raising your mortgage rate from 4% to 4.5% could make sense if you’re paying off other debts with rates above 10%. The goal long-term is for you to pay less interest and keep more of your own money. This strategy could help you do that.
- Starting a Business – Business loans typically have interest rates at 8% for well-qualified businesses and as much as 25% or higher for new not so qualified businesses. A 4.75% mortgage rate and 30-year payment term could make or break a business that is struggling to build cash flow.
- Home Remodel – Home Remodels can be a good reason to take cash out. But make sure you’re making improvements that will either make this a home you’ll love for many decades or that will add real value to the home. Often I have clients who will invest $50,000 in upgrades to the home. Only to be devastated to find the upgrades increased the home’s real value by $20,000 when they go to sell a couple of years later.
Bad Reasons to do a Cash-Out Mortgage Refinance
I’m not allowed to steer my clients toward one decision or another but I do try to help them understand the risks involved with certain decisions. These are some of the motivations that make me nervous when doing a cash-out Refinance:
- Consumer Spending – Using Home equity is a good solution to get you out of a hole you’re already in. But using it to get into a bigger hole is a bad idea. Cars, Electronics, Vacations, or other toys have little to no real value long-term. Taking on a 30-year debt for something like this is essentially the same as handcuffing yourself to a rock and throwing away the key. Maybe you can handle it but you’re going to bear that weight for a very long time.
- High Cost to Reward Ratio – When doing a Cash-Out I like to see a significant benefit for my clients. For example, saving $1000-$3000 in total monthly debt payments is a great improvement. This frees them up and allows them to live better and save more. What I don’t like is for them to pay thousands in closing costs to just save a minimal amount in monthly payments and/or receive just a few thousand dollars in cashback.
If you’re going to do a Cash-Out Refinance my recommendation is to take full advantage of it to get the maximum benefit, the kind of benefit that will make it so you don’t have to refinance again ever or at least for a very long time. If possible roll all of your debts into one monthly mortgage payment, use the equity to get you closer to your goals and do your best to mitigate high costs and interest rates.
Current Interest Rates
Depending on the type of loan you’re looking at, current interest rates are still averaging in the low to high 4% range. Most analysts project rates to go higher in the next few years so the current combination of high home values and record low-interest rates might make right now the best time to pull the trigger on a Cash-Out Refinance.
Call me to talk about your options and weigh the pros and cons of doing a refinance now.
Heritage Home Loans
Heritage NMLS #1497455 Trevor?s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770