Is a cash out “refi” for you?
The low rates are still with us, and to put rates into historical perspective, rates have decreased for more than a decade.
Trying to do what is known in the industry as a “cash out refi” can make good sense. This means cashing out equity in your home which can be beneficial if you use the money to put additional value into your home by remodeling a kitchen or bathroom, or adding on to your existing home. You can make improvements to your home, increasing the value of your home, while positioning yourself to reap the additional capital appreciation these improvements might bring, thereby further increasing equity in your home.
Lenders would like you to refinance and cash out for any number of reasons. Paying off higher rate credit cards can be a good move, but only if you are disciplined enough not to run up the credit card bills again. Many credit card companies charge 17 to 24 per cent per year, and people who pay the minimum payment only, can face up to seventeen years of minimum payments to pay off the balance.
It is important to realize that you might have a six or six and a half percent mortgage loan rate, but remember, that loan is probably for thirty years. Those shoes that you bought when feeling flush for $80 can actually cost you twice as much or more when you pay the interest for 30 years. Think twice before you take that plush vacation, buy that Skil Saw, or put a hefty down payment on a new 4 x 4. You’re better off refinancing and trying to drop the Mortgage Insurance Premium (MIP) or Private Mortgage Insurance (PMI) and save that money monthly for your spending stash. Just save the old fashioned way for some of these goodies.
I recently had three clients who wanted to sell their homes. But, they could not sell because they refinanced their existing loans with new loans which gave them 125% equity. You see these loans advertised often, “Get up to 125% equity in your home….fast…easy….” but in the long run, these loans are often PAINFUL!
A loan with 125% equity means that the loan on the home is sometimes greater than the market value of the home. This is called being “upside down.” To sell your home, you have to “come out of pocket” or pony up cash to pay off the existing loan and closing costs when the sales price of the home is not sufficient to meet these costs. Sure, it looks good from the outset, and most people entering into these types of loans do not anticipate selling their home in the near future, but life is not always predictable.
What is left unsaid, is what then happens if there is a downturn in the market and properties begin to decrease in value rather than increase. The person with the 125% equity loan may simply walk away from the house and let the lender foreclose.
We have been in a booming real estate market and most all property owners have benefited. The market is now turning. But you can still benefit from the low interest rates, but do it wisely. If you refinance, make sure you have 20% equity in your home so you can drop the MIP or PMI which can add $50 upwards to $150 or more per month to your payment. You have better things to do with that money than give it to the lender for mortgage insurance!
If you need approximate market values for your home and neighborhood, and you live in Tucson, call me, it’s part of my service to you. And if you have questions about closing costs, or interest rates, I’m here to help you sort out those questions too. And remember, if you make one extra loan payment a year and mark that payment principle payment only, you can reduce a 30 year loan to about 17 years! It’s the magic of compounding interest, reversed!