Alert: Refi Solicitations Increase While the Cash-out Refi Moves toward the Endangered Species
Friday, June 21, 2019
June 21, 2019
Homeowner Alert: Refi Solicitations Increase While the Cash-out Refi Moves toward the Endangered Species List
As interest rates have recently fallen, mortgage application volume has spiked. Most of this new mortgage activity is refinances. You may have heard from your loan officer or lender offering to refinance your mortgage to a lower interest rate – and this may represent a great opportunity for you to improve your cash flow by getting a lower monthly payment.
But this will not come without cost and you should be aware that those costs may come in the form of an addition to the amount of your mortgage. The costs are the key here (origination fee, appraisal, new title insurance, and/or a credit report). The best way to determine the value to you is to review a Net Tangible Benefits (NTB) analysis. (Many states require this analysis and many lenders routinely provide it.) This will analyze the costs of the refinance versus the savings from a lower payment amount and how long it will take to recoup the costs. It will also provide a view of the benefits if you are going for a shorter term loan (for instance from 30 to 15 years) or if you are converting from an adjustable rate to a fixed rate mortgage. If your lender has not given you an NTB, ask for it. If they cannot provide it, perhaps you should keep shopping for a lender who can.
Cash-out refinancings (the decision to refinance your original loan to a larger loan) have long served the interests of homeowners who are thinking about adding onto their home or paying for their children’s college tuition. They have also served to destabilize a fair number of homeowners who may have used their accumulated equity in their home for less wise: boats, motorcycles, vacations, or a new wardrobe.
At Your AHA, we advise all of our members to think of a cash-out refi as a way to shift from one investment strategy (your home) to another (your child’s education and long term income prospects, or an updated kitchen and bathroom). It is one of the most useful tools for homeowners to use in order to avoid more debt. Last year, BlackKnight estimated that most borrowers doing a cash-out refi took out an average of $62K from their loans.
Well, now the cash-out refi may be getting harder to get. Government supported programs at FHA, the VA and the Government Sponsored Entities of Fannie Mae and Freddie Mac are examining the product offering with an eye towards significantly limiting the offering, if not total elimination. The alternative to the cash-out refi is a second loan, also known as a home equity line of credit (HELOC). The HELOC does not change your interest rate on your original loan, but the interest on the HELOC will not be tax deductible, whereas the new cash out refi loan’s mortgage interest will be deductible (subject to the limitations of current tax law), although possibly with a higher interest rate than the original mortgage.
The benefits and burdens of the choices homeowners face are best worked out with a tax professional, but the back of the envelope calculations suggest that if you have a large balance on your loan, the cash-out refi may be to your advantage over the HELOC right now. Conversely, if you have a shorter term need for the cash, the HELOC option might be better.
So, what is the take-away? Do some careful planning and exploration before taking a cash-out refi or a HELOC and be on alert to increased hype and sales pitches about both.
Summer Arrives: Keep your ‘cation Safe!
Whether you are going on vacation or enjoying a staycation, take a few moments to review these tips for a safe and fun summer:
· National Safety Council, Summer Safety Tips, article here.
· Centers for Disease Control and Prevention, Make Summer Safe for Kids, article here.
· Centers for Disease Control and Prevention, Be Summer Savvy, article here.
AHA Rewards Summer
This is the time for clearance sales on summer apparel, double cash back offers on many everyday items and discounts on all types of travel services. Just go to AHA Member Rewards for the best of summer savings.