Summary: There are good and bad ways to use the proceeds from a cash-out refinance.…
Summary: This article conveys four different loan products that are accessible to borrowers with solid equity built up in their properties. Second mortgages, home equity loans, home equity lines of credit and refinancing existing liens each carry benefits and disincentives. Consult a lender to decide.
Remodeling and renovation funded by a cash-out refinance has several benefits. Although the cash disbursed subtracts from the borrower’s equity, physical improvements will add value to the property. By itself, the loan will raise the LTV ratio. Nevertheless, rehabilitating and upgrading the house lowers LTV by raising the overall value. In this way, the use of the proceeds offsets the loss of equity. Other advantages accrue from cash-out mortgages as well. The net effect of paying down credit cards is a rise in the credit score, making future loan approvals more likely. Using funds for education can lead to more lucrative employment. To be sure, prudent use of refinance returns strengthens a borrower financially, the drop in equity notwithstanding.
Financial consultants generally advise against cash-out deals to buy new cars, for example. Other bad reasons include aiding struggling relatives and paying for a vacation. These things do not add — but subtract — value. A car begins depreciating once outside the dealership while a vacation — as refreshing as it may be — is an unquestionable loss financially. The power of the cash-out refi is its ability to advance a household economically. It is an investme/nt of earned equity into the future. Like every financial transaction, it should always make sense.
One of the most valuable assets in the typical financial portfolio, home equity, is the least understood. In fact, it represents all kinds of potential for WA state homeowners. Essentially, equity equals ownership, i.e. that percentage of the property owned outright as opposed to financed by a lender. Equity is originally established with a down payment at the time of purchase — most of the time — and built upon as borrowers pay down mortgage loan principal and when property value increases. Over time, that ownership portion grows large enough to borrow against.
Cash-Out Refinance In Washington
At the same time, many large expenses are effectively addressed by a cash-out refinance. Higher education, health care, home renovation/reconstruction. credit card balances or unexpected legal bills can put a hard financial burden on individuals and families. Taking advantage of accumulated equity with a cash-out refinance will pay off those obligations. Conversely, however, that big cash infusion effectively reduces the equity the borrower has built up. Interest aside, if equity is 50 percent in a $500,000 home, the borrower owes $250,000. Refinancing that amount with a $50,000 cash-out provision means the ownership portion drops to 40 percent. The good news is that with good credit the rate on a cash out refinance is often close to the same rates on a rate/term refinance or new home purchase.
This often makes refinancing your first mortgage with cash out the cheapest overall option to consolidate debt or borrow money for home improvement.
When Cashing Out, You Can Put A Down Payment On A Second Home
Equity is also a good means to expand real estate holdings. If income and assets allow, a cash-out refinance can provide the down payment on a second home or an income-producing property. The loan underwriters will want the numbers to demonstrate profit on an investment property; a second home mortgage will increase the debt-to-income ratio. With these caveats in mind, refinancing to buy real property assets can likewise serve the borrower’s financial interests. Getting the best information from mortgage consultants and financial advisers should precede any assumption of additional indebtedness.
The Second Mortgage
For one thing, decent home equity allows an owner to take out an additional loan using the property as collateral. A second mortgage looks very much like the first: often a fixed rate loan amortized — or paid off in regular installments — right from the start of the loan term, 15 or 30 years e.g. However, the application is underwritten with the first mortgage in mind, i.e. loan-to-value ratio is combined with the outstanding balance on the first mortgage (CLTV). So, if a house worth $500,000 has $100,000 left on the first mortgage, the LTV sits at 20 percent. Should the owner take a second mortgage for $50,000, the CLTV will be 30 percent. It is against that figure that the application is measured.
From the legal perspective, a lender has less control over a second mortgage. Whereas a first mortgagee (lender) can foreclose promptly when payments are in default, the second mortgagee has fewer options…especially when first mortgage payments are overdue. The second lien is said to be subordinate to the first. This means that if a borrower stopped paying both mortgages, the first mortgagee has the first crack at foreclosing on the property. The second mortgagee, on the other hand, can only hope there is anything left after the first recoups its losses. A mortgage is in second position when 1)it is recorded at a later date than the first or 2)it is subordinated to the first by legal agreement.
Rates on a second mortgage are generally higher than rates on first mortgages due to the increased risk for the lender being in second lien position. Additionally second mortgages are not backed by government agencies such as Fannie Mae, Freddie Mac, HUD or the VA.
Home Equity Line of Credit
As with a fixed home equity loan, a home equity line of credit (HELOC) can sit in first position but is often subordinate to a primary mortgage. Another similarity is that the funds can go to serve a variety of needs (see tax rule above). In addition, interest charges are, again, lower than personal, unsecured credit lines. The HELOCs great advantage, nevertheless, is in its flexibility. During what is known as the draw period, borrowers can take from the line what they need for their purposes — either the full line of credit or only part of it. Only interest needs to be paid back during the draw period. When the subsequent repayment period commences, no further draws are allowed and repayment will include principal and interest. Of course, as with mortgages, the credit will come with closing costs and associated fees although it is not uncommon to open a HELOC free of charge.
Home Equity Lines of Credit rarely have a fixed rate option which makes them risky if you are borrowing large sums of money long-term. A HELOC is a perfect tool to have in place in case of an emergency or unexpected economic opportunity, but other options such as a cash out refinance will often be a better way to go if you need to borrow the money long-term.
Discuss the Options with a Reputable WA State Lender
As is evident, some of these loan products are very similar, almost identical. Their differences, though, can have long-term financial implications for borrowers in Redmond and throughout WA state. Talking with a loan officer from a well-established and prominent mortgage issuer is the first step to discovering which credit instrument best serves a home owner’s interests. Issues like lien position, debt consolidation and home improvement can also be clarified. Contact us for a pre-approval, free quote or consultation. Of course, if you’d prefer, you can Apply Instantly or simply get a Rate Quote to get started.
Sammamish Mortgage has been around for more than 28 years, and we would be delighted to help you with our knowledge and expertise. We are based in the Pacific Northwest and we offer quality and streamlined mortgage loan programs in WA, OR, ID and CO.