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What loan terms come with each option?

The 30 year fixed is the most common term for a cash out refinance. The rate and payments will stay the same for over the 30 year amortization. This type of transaction is popular because of the security it provides with the least amount of risk. But as mortgage rates have dropped since 2013, the HELOC has become more and more popular because it allows a borrower to access the equity in their home without touching the rate on the primary mortgage. But, before making that commitment to either loan, make sure you are aware of the the long term consequences.

Cash Out Products: FIXED

  • Total refinance (a new primary loan)
    • The rate is fixed for the term of the loan.
    • Rates are consistent with market rates
    • Terms can be 10,15,20,25 and 30 years
  • Fixed second (behind the primary loan)
    • The rate is fixed for the term of the loan
    • Terms range from 15, 20, and 30 years
    • Rates can be 1%-3% higher than a fixed first loan

Cash Out Products: ARM's

  • Total Refinance (a new primary loan)
    • The rate is adjustable after the fixed period
    • The initial rate is usually lower than a 30 year fixed rate
    • Fixed periods range from 3,5,7,and 10 years
    • Cash out limits are reduced for ARM's
  • HELOC (equity line in second position)
    • The rate is a pure adjustable...meaning it adjusts every month
    • The rate is usually tied to the Prime Rate plus or minus a margin ranging from -1% to 3%.
    • Loan features can include a 10 year recast, a 10 year interest only period, a 10 year draw period, a 20 year balloon payment and a 30 year amortization.

 

What is the rate on the current loan?

  • Interest rates dropped to record lows in 2013. Since then, any one who could has refinanced into a low rate. 

                                                     

















A cash out refinance is a loan taken on a property already owned where the new loan amount is higher than the existing loan.  The new loan will pay off the existing lien, if any, and give the owner cash to use at their leisure. The limits on the amount of cash received is based off of a new appraisal and the lender's maximum limits. There are 3 ways to access money from your house:

  1. A total cash out refinance - where you get a new first loan higher than the current balance.
  2. A HELOC - an adjustable loan that you can draw from.
  3. A fixed second - a fixed loan with a one time draw.


Which loan makes sense? (cont....)

Which loan makes sense?

There are several factors that can determine which loan makes sense.

How much equity do you have?

  • Loan limits for a "cash out refinance" are generally 80% of the appraised value. But, for a high balance conforming loan the limit is 75% and for jumbos it can be as low as 65%. So, if you need to access your equity above the available loan limits for your loan product, you may have to get an HELOC regardless of what you want. Equity lines and fixed seconds can commonly go to 85% to 90% of the combined value.
  • Note:  FHA loans allow 85% loan value on a cash out transaction.
  • Strategy: On occasion, a borrower has a slightly higher rate on their primary loan than what is available today.  But, because of low equity they cannot access the equity using a cash out refinance. A new first and second loan could be the best option for this case. This way the first loan is refinanced at the going rate, lowering their payments on that balance, and the line of credit is accessing the cash. You can even take some of the cash out in the first loan and some in the second.  That way a portion of the balance is in a 30 year fixed and some in an equity line.

How much cash do you need?

  • The reason the amount of cash is a consideration is because you have to be aware of what interest rate is tied to the amount you are borrowing and what rate you already have.  For example, if you need $50,000 cash out and you already owe $300,000, but doing a total refinance increases your rate by .25%...you may benefit more with a HELOC, even though the rate for the equity line could be higher. That is because a large percentage of the debt is at a lower rate.
  • But, if you borrower $100,000, now owing $400,000, a total refinance may make more sense because now 25% of the total loan balance is at a higher rate. The goal would be to find the aggregate rate to see which one makes more sense.
  • Also, take into consideration that equity lines typically have an adjustable rate feature; meaning, the aggregate rate can change over time. 

How soon you want to use the money?

  • A couple of the drawbacks for an equity line are: 1) the rate is adjustable and 2) the rate is usually higher than a standard 30 year fixed, even after the adjustments for "cash out". Basically, the longer you keep an equity line the higher chance you will pay more interest and possibly at a higher rate than when you started.
  • Consider getting an equity line if you can pay back the funds quickly before the interest rate rises. Consider a total cash out refinance in to a 30 year fixed or fixed rate second if you want to stretch out the payments as long as possible without exposing yourself to higher rates and interest.
  • The perfect scenario for an equity line could be a homeowner that needs $50,000 for a remodel and can pay the money back in a few years.  The initial draw is $15,000. The next draw 3 months later is $20,000.  And the final draw is for $15,000 another 3 months later.  Then, over the next 2 years, the money is paid back. Remember, interest is only charged on the amount borrowed.
  • The perfect scenario for a total refinance could be where a homeowner needs to pay off $25,000 in credit card debt and remodel a kitchen for $25,000 ($50,000 total). First, the payment for the credit cards would be about $500/mo (2% times the balance).  Now, that $25,000 payment in the mortgage equals about 1/3rd than in credit card debt. Second, the homeowner plans on living in the property for a long period of time and wants less risk to higher interest rates. The 30 year fixed total refinance would be a good choice.

How soon you can pay it back?

  • Similar to how soon you need the money, you have to figure out a payback plan.  
  • Paying back over a short period of time:  HELOC's are pure adjustable loans.  So, with accelerated principal payments 1) the amount of interest you pay over the life of the loan will decrease and 2) your payments adjust lower with each additional principal payment. This is because the payments are based off the balance and readjusts each month.
  • Paying back over a longer period of time:  a 30 year fixed can easily trump a HELOC when paying it back at the normal payment because 1) it will have zero risk to rising interest rates and 2) the rate usually starts out lower than a HELOC and 3) the payments are full principal and interest.
  • Disadvantage to HELOC's. 1) they usually have a 10 year draw and a 20 year balloon payment (the remaining balance has to be paid at 20 years). They also typically come with an interest only feature. The downside to this is many people make the minimum I/O payment and when that 10 year period comes the loan recasts for 20 years and the payments skyrocket.

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Cash out refinance

Contact us to see if a cash out refinance is right for you.