Cash-out refis are all the rage, but experts suggest caution when using the funds.
By Erik J. Martin
CTW Features
Americans like the concept of getting cash back during monetary transactions. It’s a big reason why they often use debit cards when checking out at brick and mortar stores, gravitate to websites like TopCashback and Ebates that promise cash back rewards for online purchases and choose a cash-out refinance when they want to reset their mortgages.
New data suggests the latter option is particularly popular today. Forty-nine percent of borrowers that refinanced their properties in the first quarter of 2017 chose a cash-out refi, up from 44 percent tallied in the fourth quarter of 2016, according to a Freddie Mac report, that represents the highest level of cash-out refis occurring since the fourth quarter of 2008.
While this activity still doesn’t best the cash-out refi peak of 89 percent observed in the third quarter of 2006, the fact that nearly half of all borrowers are deciding to pull money out during a mortgage refinance is significant, according to the experts.
“These facts do not surprise me,” said Dale Robyn Siegel, president of Circle Mortgage Corp. in Harrison, N.Y. “We went through a bad spell with home values and job loss for many years, and too many people were in the red. But once home values began to rise again, there was more equity in one’s home to use to cash out.”
David Ratti, branch manager for the Annapolis, Maryland office of Embrace Home Loans, agrees.
“Since 2008, this country’s homeowners have been unwinding debt that’s built up over a decade from earlier cash-out refinances,” said Ratti, explaining why cash-out refis fell out of favor over the past few years. “Economic downturn conditions were limiting cash-out as home values dropped and credit tightened, and the fact that homeowners also clamped down on spending contributed to fewer cash-outs.
“But now, home prices are rising rapidly due to limited inventory,” Ratti said. “This has caused an overall increase in values, which enables more people to cash-out again when they refinance.”
According to Ratti, most borrowers use the extra money they draw out during a refi for debt consolidation, home improvements, college expenses and capital purchases such as financing an automobile, boat or RV.
“If you can reduce the cost of your debt, a cash-out refi can be beneficial,” Ratti said. “For example, if you have a first and second mortgage, and the latter is a variable rate loan, it may make sense to cash-out to pay off the second mortgage.”
According to Siegel, good candidates for a cash-out refi are borrowers that can find two key reasons for doing so.
“The reasons should be to lower the rate, the monthly payment, the term or overall debt – pick two,” Siegel said. “Also, the more equity you have left over after you refinance, the better. Never go over 80 percent of the current value of your home.”
According to Bethany Londyn, a Keller Williams agent in Santa Monica, Calif., cash-out refis are ideal when they save you money or gain you equity.
“But if you’re aiming to devote cash-out dollars to a home improvement project, make sure the funds are less than two times the amount of value added,” Londyn said.
Many pros also aren’t keen on recommending cash-out refis for luxury items like a boat.
“If you want to buy a boat, get a boat loan,” Siegel said. “There would be no reason to put the financial stability of the place where you live in jeopardy just to buy a luxury item.
Michael Moskowitz, CPA and president of Equity Now in New York City, cautions that not all borrowers qualify for a cash-out refi.”
“Some would-be home refinancers face challenges. To get a loan now, borrowers need a higher credit score than five or 10 years ago, and they need to document income and employment much more thoroughly,” Moskowitz said.
When shopping for a mortgage refi that comes with or without cash out, be sure to compare rates, terms and fine print carefully.
“Get all information in advance and in writing in the form of a loan estimate, and don’t wait for surprises to happen at closing,” Moskowitz said.
© CTW Features