- June 5, 2017
- Posted by: steve
- Categories: cash out, mortgage articles, mortgage news, refinance
Cash-out refinance can be a tempting option, but it’s important to know how it works. Read here to learn when to use a cash-out refinancing.
You purchased a home for the first time and you’re ecstatic with your investment. A few years later, you’re back on the market for a mortgage broker in palm beach gardens to refinance your loan. You may need a cash-out loan to pay for a home renovation or even clear an emergency medical bill.
If this is so, you’re not alone. Many homeowners are refinancing their loans – not just once, but two or even three times.
The benefit of this is they can get lower APR rates each time. Of course, this is determined by the current market.
Homeowners looking for mortgage brokers in palm beach county may be able to do the same. But first, there are some things you should know.
HELOC vs Cash-Out Refinance
When you refinance your mortgage, you’re borrowing against the equity of your home. The funds you receive can then be used to pay for whatever you want. This is also why it’s known as a cash-out refinance.
The terms for this type of refinance loan is different than a home equity line of credit (HELOC). Here’s a quick overview:
Cash-out refinance: Used to pay off your current mortgage and the left over is cashed out for your personal use. This is given to you in a lump sum at the time of closing. The terms of the new loan may be better or worse (higher or lower interest rate, longer or shorter time to pay off, etc.).
HELOC: This doesn’t replace your existing loan, so you’ll have two loans to pay off. It has separate terms and repayment schedule. It’s referred to as a second mortgage. This is a good option for those who have already paid off their first mortgage.
How Are Funds Received?
When you apply for a refinance home loan, you get the funds as a lump sum payment. The amount you receive is the difference after paying off your mortgage, closing costs, prepaid and any other fees.
What About Interest Rates?
The interest rates for refinancing is a bit different than a home equity line of credit. With this option, you are given either an adjustable-rate or fixed-rate mortgage. You can get more details about this when you consult with a mortgage broker.
HELOCs are little different. Some lenders will require you to pay principal and interest with your monthly payments.
If you pay this on time, you can build up your credit. Plus, it’ll help you save on interest over the lifespan of your loan. Variable and fixed rate options are also available.
Are there Closing Costs?
As with any loan, there are closing costs associated with refinancing. This is paid at the time you close, just like with an initial mortgage. HELOCS, however, don’t have closing costs. If they do, then the cost is normally low.
Real World Examples of Refinancing
Now that you know more about refinancing, you’re ready for some real world examples.
Say you’re a homeowner with a property worth $500,000 and an existing mortgage for $300,000. The home equity for the house is $200,000. The equity is what you own, or 40 percent of the total value.
This equity can be tapped into by cashing out or using HELOC. If you were to opt for a HELOC for $100,000, this would boost your loan balance to $400,000 and decrease your equity to $100,000.
The funding received from the HELOC can be used for whatever you want. No need to put it towards your current mortgage, which maintains the same terms and rate.
If you were to get a cash-out refinance for $400,000, it would go towards paying off the $300,000 owed for the mortgage. This now creates a new single mortgage for $400,000. The $100,000 is yours to spend.
The question now is which method is right for you?
What Are the Pros and Cons of Refinancing?
Now, it’s time to review mortgage for purchase pros and cons. First, we will start with the positives:
- Pay off major expenses: It’s not uncommon for homeowners to refinance their home loan to consolidate debt. You can also use it to pay off college expenses, medical bills or even fund a business.
- Improve your credit: By paying off your debts, you can increase your credit score. This may be why many homeowners refinance their home loan to pay off credit cards. A lower APR is also possible.
- Stable rates: Compared to HELOCs, cashing out can give you a steady interest rate. This makes it more desirable for homeowners looking to remodel their properties.
- Tax deductible: Mortgage payments can be deducted on your taxes, giving you a larger refund.
It’s just as important to know the good with the bad – here are the cons:
- Expect to pay more: Interest rates may be lower than your current mortgage. However, it will likely be higher than the market rate (about 1/8 of a percent point).
- Complex and pricey: The process can be just as cumbersome as an original mortgage. This means lots of paperwork and documents. The closing costs can also range into the hundreds or thousands of dollars.
- Higher financial risk: It’s possible that you could end up owing more on your property than it’s worth. This happens when property values drop. Stats show cash-out refinance default rates are higher than regular refinances.
- Limits on cash amount: These days, you can only take out between 80% and 90% of home equity.
- Private mortgage insurance: When you get a loan for over 80 percent of your home value, you’re required to purchase private mortgage insurance. The cost of PMIs can be between 0.05% to 1% of your loan amount every year.
Why Do Homeowners Consider Refinancing?
There are various reasons why a homeowner would want to refinance their mortgage. It could be to:
- Pay for college
- Cover an emergency
- Invest in stocks and bonds
- Make home improvements
- Buy another home or commercial property
- Other personal reasons
Using refinance loans to cover credit card bills is popular because it can take a 20% APR rate down to 5% to 8%. The savings are even more if you can refinance your mortgage with no closing costs.
Is a Refinancing Your Mortgage Right for You?
It all comes down to your financial situation and preferences. The reverse mortgage benefits could work well for you if you’re looking to cash out quickly. And if you’re trying to avoid having two loans out at once.
Your best bet is to find a broker that can help you find the best deals. If you qualify, you could get into a VA streamline mortgage refinance program. There may be other programs available, like those designed for the self-employed.
Frequently Asked Questions About Cash-Out Refinance
If you still have a lot of questions, you’re not alone. Here are some of the most frequently asked.
Is there a seasoning requirement for a cash-out loan?
Yes. In most cases, the lender won’t cash-out a property without seasoning for 12 months. This means you’ll have to own it for at least 12 months before you can refinance. There are some lenders who will offer up to 75% of your loan-to-value without seasoning requirements.
Is there a max LTV for refinance loans?
There are strict terms for the cash amount you can take. Most lenders have a max LTV of 85%. It used to be 100% before the property values dropped drastically.
Can the cash be taxed?
The good news is no. Since the money isn’t “free,” it isn’t taxable. No need to worry about income tax.
Can I deduct cash-out refinance on tax return?
Yes. Since it’s not treated as an income (since you have to pay it back), you can deduct it on your taxes. Do note there are limits – $100,000 or $50,000 for married filing separately. If you take out $200,000, only $100,000 will be tax deductible.
If the additional $100,000 was used to renovate your home, then this could be deducted as a home acquisition debt.
Are cash-outs available for rental properties?
Yes. However, expect the LTV limits to be much lower. Primary residences have a max LTV between 80% and 85%. Rental properties may have a max LTV of 70% to 75%.
Are cash-outs available for FHA loans?
Yes. There are restrictions on LTV limits. The max LTV is 85% (used to be 95% before the housing crash).
Does it take longer to pay back a cash-out refinance?
When you refinance your mortgage, you are setting back paying it off. It’s also possible you could spend more on interest. It’s recommended that you don’t serially refinance your mortgage for these reasons.
Finding a Mortgage Broker in Palm Beach Gardens
If a cash-out refinance sounds right for you, you can apply for one at New Florida Mortgage. We offer quotes to both resident and non-resident mortgage applicants. Those looking for pre-approval for a first-time home buyer loan are also welcome to apply.