Why more borrowers are resetting their loans
at potentially lower rates and converting equity into cash
By Erik J. Martin
With mortgage interest rates remaining at or near historic lows, it’s hardly a surprise that many Americans are refinancing their mortgage loans to reset to a lower fixed rate and possibly even a shorter term.
In fact, according to Black Knight Financial Services, at the end of January, 3.3 million borrowers currently could save at least $200 per month by refinancing their 30-year mortgages. Nearly 1 million have the potential to save $400 or more.
Many homeowners are going a step further with a cash-out refinance: tapping into their home’s equity to draw out extra cash during a mortgage reset.
Cash-out refinancing increased by volume in the third quarter of 2015, the sixth consecutive quarter of increases, according to Black Knight. More than 1 million borrowers opted for a cash-out refi between the third quarters of 2014 and 2015, a period during which $64 billion was cashed out, equating to an average of more than $60,000 per borrower, the highest amount tallied since 2007.
“As the real estate market has recovered, people have discovered that they have equity in their homes again,” says Amy Tierce, regional vice president of Wintrust Mortgage in Needham, Mass.“This, in combination with continued low rates, encourages borrowers to use the equity in their homes.”
“Homeowners interested in lowering their monthly bills can consolidate debt by refinancing their mortgage. It’s a smarter way to finance,” says Jason van den Brand, CEO of Lenda, San Francisco.
“Homeowners have many reasons to convert equity into cash today, including paying off high-interest credit card debt,” he says. “Mortgage rates are lower than rates on personal loans and credit cards.”
By converting home equity into cash for a big purchase, such as funding education or financing a home improvement project, “Consumers are getting a low interest rate and are able to finance the purchase over a longer period time, making the monthly payment significantly lower,” says van den Brand.
Qualified borrowers can also choose to reduce their interest rate for their remaining loan balance. Adjustable-rate mortgage borrowers can refinance to a new ARM or to a fixed rate loan at today’s fixed rate pricing.
“Either way, this could mean they pay less overall for their mortgage,” says Doug Lebda, founder/CEO of Charlotte, N.C.-based LendingTree.
The best candidates for a cash-out refi typically have at least 20 percent equity in their primary home, a good credit score, a steady job with verifiable monthly income and the discipline to stay put for several years. The rate you qualify for will depend on how much equity you build up in your home, the loan-to-value of the new loan, and if you choose a “no closing cost” cash-out; the latter may increase your rate between 0.125-0.25 percent, according to Tierce.
A cash-out refi is often preferred to alternative forms of financing, such as a home equity loan, home equity line of credit or private loan.
“Because it’s secured by real estate, the interest rate on a cash-out refi is lower than rates for unsecured financing, and because it’s a first mortgage the interest rate is lower than rates for home equity loans, which are usually second mortgages,” says Lebda.
A cash-out refi has some disadvantages. Its underwriting guidelines are typically stricter, closing takes longer and comes with higher costs and private mortgage insurance is required for any loan-to-value over 80 percent. You pay interest immediately on the money you borrow via a cash-out refinance.
“The good news is that it’s easier to do a cash-out refi today than it was a couple years ago. Lending guidelines changed after the housing crisis, but they are easing up a little,” says Mark Ferguson, Realtor with Pro Realty, Greeley, Colorado.
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