It's probably safe to say that
today's current economic situation is not ideal for the majority
of Americans. As rates continue to creep down, many people start
to consider refinancing. And if you're going to refinance, it's
always a good time to discuss cashing out some equity in the
property.Why is it a
good topic for discussion? For one, if you are refinancing on
the secondary market, you're going to pay closing costs. It's
best to consider all options before you leap. Not that cashing
out equity necessarily makes sense for you. If you just want to
take the kids to Disney or throw a silver wedding anniversary
party for your parents, you might take a second to think of a
better way to finance these items. Do you really want to pay for
them over the next 30 years? However, if you're paying a mound
of money in credit card debt and your existing interest rate is
way higher than current market rate, than it's something to
consider. Or maybe it's time to send a kid off to college.
A cash out refinance works this
way. Say you bought your house three years ago, financed
$100,000 of the $125,000 purchase price at a rate of 7%. In the
meantime your house is worth $150,000 now, and you have amassed
some icky credit card debt. You'd like to pull out $10,000 in
equity from the house to pay off the credit card, and the
current rate available to you is 5.75%. This scenario would make
sense to consider a cash out.
The down side to a cash out
refinance is that, as mentioned before, you have to pay closing
costs. You do usually pay a lower rate in title insurance by
commanding a re-issue rate. And this charge can be a big ticket
item, but other than that the other costs are pretty much
standard as they would be for a purchase. The money you would
need to set up escrow probably will come back to you from your
old escrow account when your old mortgage is paid off. So,
that's more palatable.
Also, keep in mind that if you
pull too much equity out of your house, you might have to face
monthly mortgage insurance. Right now, the minimum loan to value
for a cash out on a primary residence on a Conventional loan is
85%. For FHA, it's 95%. But you can expect that to change soon.
The reason for the changes? Many people in a tight financial
bind sucked the equity out of their homes, then defaulted on the
mortgages. As you can imagine, this move hasn't helped our
economy much. Not much at all. So, lenders have safeguards now
and higher loan to values, to prohibit this from happening as
often.
Make sure you really consider
all options when refinancing. Don't fall into a trap of cashing
out for a quick return with a long term pay back. Make sure
cashing out has a real purpose and benefit for doing so. Your
mortgage lender should be able to crunch the numbers and present
your options. Take your time and don't move too, quickly. But if
it makes sense, then lock that low rate!
