Besides simply refinancing a home loan into a lower rate or shorter or longer term, there are two popular ways to head into a refi: seeking to get cash out, or bringing cash to the table. The latter approach, a “cash-in” refi, has become more popular in recent years.
Freddie Mac reports that even with $6 billion in equity being “cashed out” in refinances in the first quarter of 2011, that figure is still the lowest it’s been in 15 years. Instead, the entity’s research reveals, 75 percent of homeowners left their loan balance where it was. And a full 21 percent opted to bring money to closing to lower monthly payments or shorten the term of the loan.
Using Your Equity for Good
However, home equity remains a common and accepted way to secure money for needed home improvements as well as life emergencies, high-interest debt repayment, and other purposes. With interest rates low, borrowers can get into a more-preferable loan, save money in the long term, and still walk away with cash in hand. In Orange County, with property values high, owners who have a lot of equity also have a lot of options.
The key is to keep a close eye on loan-to-value ratio and make sure you don’t get in over your head. A mortgage calculator can help you run the preliminary numbers, and a reputable lender will advise you of the best options for your situation.
Deciding on a Cash-out Refi
Here are some cases in which a cash out mortgage refinancing loan makes sense:
1. You are carrying revolving debt (credit cards, etc.) at a very high interest rate, or foresee a large expense or medical bills.
2. Your home is in need of improvements. This may be for safety, to increase the house value, or for long-term enjoyment of the homeowners. Be sure to carefully research which types of remodels or upgrades are likely to “pay off” when the home is sold.
3. You foresee the ability to easily keep up with your mortgage payments through the term of the loan.
4. You are comfortable using your home as collateral.
5. Your loan-to-value ratio is good, and you won’t go over the 80-20 limit that usually triggers the requirement to buy Private Mortgage Insurance (PMI).
6. You have a high FICO score (or recently improved your credit rating) and can secure a low interest rate.
7. The interest rate on the home equity loan (which wouldn’t require closing costs) or first mortgage replacement loan will have a low interest rate.
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