Are you debating whether or not to do a cash-out refinance on your home loan? If you’re struggling with high-interest debt, a cash-out refinance might be one option to potentially help alleviate some of your financial troubles. A great way to consolidate high-interest debt is to cash-out some of your home equity. In the following article, find out how a cash-out refinance can help you.
Will refinance save me money?
Over the past several years, interest rates have been steadily decreasing, making refinancing tempting for many homeowners. Refinancing your mortgage can save you money in several ways. If you are tired of making two home loan payments: one for your first mortgage and another for your second. Perhaps you want to reduce your current interest rate to a lower fixed or adjustable rate.
Many people refinance because they want to switch to a shorter-term home loan to pay off their mortgage sooner. Refinancing is an option to convert an adjustable-rate mortgage into a fixed-rate mortgage. Optionally, you can cash out some home equity or lower your overall loan payment.
Are mortgage rates at an all-time low?
Mortgage rates are at an all-time low. It seems like every time you read about mortgage interest rates; they are getting lower and lower. Once again, we have record low home loan interest rates. The average rate on a 30-year fixed mortgage is at a record low of 2.88 percent. This is a crazy low-interest rate for a mortgage. If you want to compare mortgage interest rates of today to the interest of the past, you might be shocked. The interest rate for a 30-year fixed mortgage was 18.63 percent in 1981. Compare that to less than 3 percent interest rate we have today.
How much higher are mortgage rates for refinancing?
At the time of writing this article, I have checked one large mortgage lender. The purchase mortgage interest rate was 2.875 percent, while the refinance interest was 4 percent. That is a big difference in the cost of the home loan. The higher interest rate may make refinancing less appealing to homeowners.
What are refinancing mortgage interest rates?
If you are interested in refinancing a mortgage, you should check for the current refinance rates. Keep in mind the interest rates for refinancing may be much higher than interest rates for home purchasing. Therefore, if you are refinancing your home loan, you’ll have to research the current mortgage rates. Don’t settle for the first mortgage lender you contact. Rate shopping is a great way to guarantee long-term savings.
Is it easier to refinance than purchase a home?
The process of refinancing a home loan and purchasing home loan financing is essentially identical. A purchasing mortgage has more components than refinancing. For example, purchasing loans involve a purchase contract and verifying assets. Most refinance applications don’t require any verification of assets.
A purchase home loan is more deadline-driven than a refinance. With a home purchase, there is a hard closing date set, and you don’t have the same restriction to worry about with a refinance. Also, with a purchase loan, there is a seller and the buyer, more people involved with the loan process.
How a Cash-Out Refinance Loan Can Help with Your Debt
As you make your mortgage payments over time, you should start to gain home equity. With each payment, you should own more of your home and owe less on your loan.
Once you start to acquire home equity and have a strong loan-to-value ratio (Hint: The loan-to-value ratio is the ratio of your loan to the value of your home.), you can consider cash-out refinance as a way to deal with your non-mortgage debt such as credit card debt.
By opting for cash-out refinancing, you leverage some money (your home equity) and apply it toward your non-mortgage debt. If your credit card interest rates are high, choosing to pay off that debt sooner rather than later could save you a lot of money in the long run. As long as you’re able to continue to make your mortgage payments after the mortgage has been readjusted by the cash-out refinancing, this could be an ideal way for you to handle your debt.
Two Examples of Cash-Out Refinancing
Interested in learning more about examples where choosing to cash-out refinance mortgage made the most sense financially for individuals?
Adam’s home is valued at $200,000. Over time, he has paid $88,964 for his mortgage. That means he now owns that much of his home. So, his home equity is $88,964, and his loan balance is at $111,035. His non-mortgage debt, more specifically his credit card debt, is $23,634.
By refinancing, Adam paid off his high-interest debt, and he’s now paying $538* less per month.
Here’s another example in which someone cut down her non-mortgage debt through home refinance with cash-out.
Before choosing to cash-out refinance her mortgage, her home equity was $96,268. Her home is valued at $250,000, and she still had to pay $153,732 on her loan. Her credit card debt was at $35,932.
By refinancing, April paid off her high-interest debt, and she’s now paying $562* less per month.
What to Consider with Cash-Out Refinancing and Your Non-Mortgage Debt
Depending on where you live, the value of your house, your credit score, and other variables, the interest rate on your mortgage before and after cash-out refinancing may change, causing your payments per month to decrease, as it did with Adam and April. In addition, if your credit card interest rate is higher than your mortgage interest rate, this may be another reason to consider cash-out refinancing to pay off your non-mortgage credit card debt.
Without home refinance with cash-out, Adam and April would continue to pay off their credit card debt while dealing with high-interest rates. When they both opted to refinance their mortgage loans, they were able to get rid of their credit card debt and avoid dealing with those interest rates. On top of that, their monthly mortgage payments decreased per month, setting them up for a better financial future.
Will refinance rates go up?
If there is one thing we know about refinance rates, it is that they are changing. Even though interest rates have been historically low, no one can guarantee the rates will stay this low indefinitely.
How often do refinance rates change?
Mortgage rates can and often do change daily, well almost. Rates change during the five-day workweek, Monday through Friday, but they don’t change over the weekend.
Should I lock my mortgage rate today?
If you are in the market for a mortgage or to refinance an existing mortgage, you are likely watching mortgage rates daily. Currently, interest rates are at a historic low. Interest rates may go up or down at any time, but it is hard to imagine they would go much lower.
What is a mortgage rate lock?
Locking your mortgage protects you from the potential swings in interest rates. Even a small increase in interest rates can hugely increase the total cost of your mortgage. Make sure that you work with a lender that does offer a rate lock. Some lenders even offer to extend the rate lock if there is a closing delay.
For example, if you see an interest rate from a bank for a $425,000 mortgage at 3.3 percent but fail to lock in the rate. A month later, you are ready to refinance your home loan, but interest rates went up to 3.45 percent. With a 3.3 percent interest, you can expect a monthly payment of $1,861.31 on a 30-year loan. Your monthly payment for the same loan but a higher interest rate (3.45 percent) would lead to a monthly payment of $1,896.60.
The difference between the two payments may not seem like much at first, but it adds up throughout the life of the mortgage. Due to the higher rate, you will pay more than $12,000 during the life of the loan.
How much does it cost to refinance my home?
Refinancing is a great way to save money in the long-run, but it’s not without expenses. Before you sign on the dotted link, it’s critical to understand the complete cost to refinance your home.
The short answer to “How much does it cost to refinance a mortgage?” is between 2% to 6% of the loan amount. The total cost to refinance depends on multiple factors:
- The size of the loan
- Mortgage type
- Home equity
- Credit score
- The bank or lender you work with
- Mortgage term
Before you refinance your mortgage, understand how much you will have to pay in closing costs. Compare the cost of refinancing with the amount of money you expect to save by refinancing. If the savings outweigh the cost, refinancing should make sense for you.
Do you have to pay for an appraisal to refinance?
Generally, lenders require the homeowner to pay for the appraisal.
Do you have to pay out of pocket to refinance your home?
You can pay to refinance your mortgage out of pocket or by using some of your home equity. Another option is to do a “no-out-of-pocket-refinance.” The disadvantage of this option is that you will have to pay a higher interest rate. In other words, the bank or lender pays your closing costs for you, but you are paying a slightly higher than the market interest rate.
It is critical to know that the higher interest rate is going to increase the total cost of your mortgage.
How long does it take to refinance a house?
The time it takes to refinance a house largely depends on the lender. A refinance normally takes anywhere from 20 to 45 days. No one can give you an exact number of days. It is always a range, an estimation.
Can I refinance with a credit score of 620?
Every mortgage lender has its own credit score requirements. You’ll need a credit score of 620 or higher to qualify for a conventional mortgage refinance. Some government programs may accept an even lower credit score to qualify. For example, FHA mortgages have a minimum credit score requirement of 500.
Can I refinance from a VA loan to a conventional mortgage?
If you currently have a VA loan on your home, you can refinance it into a conventional mortgage. Because conventional mortgages normally have higher interest rates and charge a monthly PMI, refinancing your VA loan to a conventional mortgage may not make sense.
One popular reason to refinance a VA loan to a conventional mortgage is to allow borrowers to use their VA credit to buy another property. As a VA borrower, you normally only have one credit to use for a VA mortgage. You can use the credit over-and-over, but you can’t use it more than once simultaneously. When you free up your VA credit, you can buy another home.
Should I refinance if I am going to sell?
There are expenses with refinancing your mortgage. Therefore, you should not refinance unless the time it takes to recover the closing costs on the refinance is sooner than the time in which you want to sell your house. For example, if your closing costs are $6000, and you are saving a proposed $400 per month on a refinance, that’s a 15-month recapture (15 x $400 = $6000).
Are refinance closing costs tax-deductible?
The IRS limits your ability to deduct much of the expenses and closing costs associated with the process of refinancing your mortgage. A few of the additional expenses may qualify for valuable tax deductions.
You can deduct mortgage refinance closing costs if the costs are considered either real estate taxes or mortgage interest. Unfortunately, refinance closing costs, including fees for services, like appraisals and title insurance, are not tax-deductible expenses. If you paid “discount points” or “points” when you refinanced, you might be able to deduct them when you file your taxes.
You can deduct the interest of your refinanced mortgage if the following applies:
- The mortgage is secured by your home. If you stop paying on your mortgage, the lender can foreclose on your house.
- The home loan is for your primary residence or second home that you are not renting out.
- You “itemize” deductions on your tax return.
You cannot deduct the following refinance closing expenses:
- Inspection costs
- Escrow fees
- Attorney fees
- Legal and recording fees
- Appraisal fees
How many years before you can refinance your home?
For some mortgages, there is no waiting period for refinancing. Even if you recently bought a home or even refinanced fairly recently, you might be able to refinance again. Many people can refinance into a lower interest rate mortgage with no waiting period. Some homeowners might have to wait only six months to refinance.
How soon can you refinance?
For the most part, how soon a homeowner can refinance depends on the type of home loan.
Cash-Out Refinance Rules
If your goal is a cash-out refinance, you generally have to wait six months before you can refinance. With a cash-out refinance you generally have to have at least 20 percent equity in your home. Before you do a cash-out refinance, you have to build up enough equity to qualify.
Conventional Mortgage Refinance Rules
If you have a conventional home loan backed by Freddie Mac or Fannie Mae, you might not have to wait at all to refinance after a previous refinance or closing on your new home. Some lenders have a six month “seasoning period” before they allow current borrowers refinance with them. In that case, if you want to refinance with the same company, you might have to wait. If you don’t want to wait, you might be able to work with another lender. Shop around to learn about your options for refinancing.
Hopefully, there is no prepayment penalty on your mortgage. The prepayment penalty is a penalty fee some lenders charge if you refinance your mortgage prior to a set date. Verify that your home loan doesn’t have a prepayment penalty.
You should always shop around before you refinance a home loan, to make sure that you are getting the lowest interest rate on the market.
Government Home Loan Refinance Rules
Government-backed home loans such as USDA, VA, and FHA have different rules for refinancing. With a government-backed mortgage, you can use a streamline refinance. Streamline refinancing expedites and simplifies the process, so you can get a lower rate loan faster. Generally, homeowners have to have a good history of on-time mortgage payments, and they have to wait up to seven months before they can use a streamline refinance.