Cash Out Refinancing Lowdown

Planning to get your mortgage refinanced? Be careful!

There are several agents out there who can cause a lot of trouble for the borrowers. Take the example of Catherine Chaney who was earning around $1,600 per month and her broker advised her to get her house mortgage refinanced. He told her that she could get extra cash at a lower rate of interest by getting her house refinanced. She could then use the cash for making improvements in her house.

This was the same buyer who has helped her buy her house, a nice cozy yellow bungalow south of Shaker Heights. All she had to do was declare that she was earning close to $3000 per month. This act of deceit helped her get the refinance (that she originally did not aspire for). But now she had to pay interest at the rate of 9% as compared to the earlier 6%. Since the amount involved was higher her monthly payouts were more. Add to this was the loss of tax benefit that she had been receiving earlier. She lost her tax rebate because she had borrowed far more than her home's actual value. Mother Jones gives some more instances like this so as to help you become more cautious.   

Cash out Refinance market is booming! Should we be alarmed?

Now more and more Americans are going in for Cash out Refinancing to meet their immediate cash requirements. Therefore what we are soon going to have is a population that is heavily in debt. Is this good? Note for instance that this spring Freddie Mac, the U.S. mortgage market's second-largest financier experienced a downpour of cash out refinancing requests. It now has the largest market share of 88% which is the highest that it has seen in the last 16 years. The company reported that homeowners drained at least $81 billion in home equity this way during this year's second quarter.

More alarming is the fact that the most of this refinance is being done at a rate that is higher than the old mortgage rate. This is probably being done either because all of sudden there is a lot of demand for that extra cash or simply because the applicants feel that the rate of interest is going to go further up. By getting their house refinanced at this stage, they feel that they could enjoy the benefit of a relatively lower rate of interest if they act now. Statesman reports:

"The hard thing, of course, is telling the difference between the smart, savvy people out there, the people who are not, and the people who are but have bad luck — they lose their job, one of their kids gets a horrible illness, there's a death in the family, or something else that rocks the boat," Cutts said.

What happens if you want to refinance your house for more than what it costs

Refinancing your house for more than what your house is worth may sometimes put you in a precarious situation. You may find that it would be very difficult for you to sell the house when the time comes. This price of course escalates because you have to pay around 6% to the real estate agent also.

Apart from this note that when your house is refinanced for an amount higher than what it costs you also stand to lose some of the tax advantage. In order for the proceeds of refinancing to be fully tax deductible, you have to ensure that the money goes either towards buying a second home or for carrying out home improvements. Should you use the refinanced amount for something else or for repaying some other debts then the IRS has some restrictions that you have to adhere to. The interest that you are charged on amounts that are over the home equity debt limit are not deductible generally since they are treated as personal interest. Follow this link to read more.

Tax implications of getting cash out when refinancing

Tax wise one has to be quite judicious in the use of cash out refinance. For instance if you are looking at using the cash for paying off another loan that is not tax deductible, then it is a great strategy to follow. IRS lays allow an individual to take up to $100,000 cash in addition to the original debt that was used to buy the home, through Cash out refinance. The individual can therefore deduct the interest component from the taxable income.

Therefore, cashing out while refinancing could be a great option for those who need the extra cash. Firstly, the arrangement allows the person to make use of a lower rate of interest (if the rates have dropped since the mortgage was first taken). Secondly, the person gets to take out additional cash for current use. And lastly he also receives a tax benefit out of the whole deal. It may appear that by giving tax rebates, the government may perhaps be picking up some part of the tab on the loan repayment. Read more on the article on Bankarte.

Mortgage Refinance calculator that helps you decide which way to go: cash-out-refinance or second mortgage.

Confused about whether to refinance to raise cash or take out a second mortgage on your house to get that extra cash that you so require for your son’s upcoming college education? Here is a Mortgage Refinance calculator that does a lot of number crunching and lets you know which way to go.
This calculator has been developed by Chuck Freedenberg of DecisionAide Analytics and is useful for Borrowers with a mortgage who need to raise cash and are trying to decide whether they should do a cash-out-refinance or take out a second mortgage.

This calculator effectively compares the total cost of a new fixed rate mortgage that includes cash out with the cost of retaining the existing mortgage plus a new second mortgage, over a specified future period. Apart from this, it also shows the break-even rate for the second mortgage that you are contemplating.

All you have to feed in information like ‘how long you expect to stay in your house’, ‘Rate of Interest on Savings’, ‘Income Tax Bracket’, ‘Current valuation of the house’, some pertinent questions on your current loan and also information on loans currently available. The calculator puts all this information in a background equation and helps you get the required information. 

Follow this link for more information on this calculator

List of documents generally required for Cash out Refinance mortgage

Following is the list of documents that are generally required by most Cash out Refinance mortgage companies:

• Authentic proof of income
• Proof of employment with complete details
• Verification of Assets
• Residential Mortgage Credit Report (RMCR) or trimerged credit report. The applicant may also sometimes be required to submit additional credit requirements
• Residential Appraisal Report depending upon property type and Desktop Underwriter/Loan Prospector (DU/LP) findings.
• For non-automated underwritten loans the applicant has to provide a Residential Appraisal Report with interior and exterior inspections
• When you are refinancing a construction-to-permanent property, documented Construction contract and paid receipts for recent improvements have to be included
• And finally HUD-1 for acquisition cost of subject property. HUD-1 is a form used by the settlement agent to list all charges imposed upon a borrower and seller for a real estate transaction. It therefore gives each party a complete list of their incoming and outgoing funds.

Follow this link for more information

To Cash out Refinance or not! That is the question

Some things look good on paper but are better not tried in actual life. Loan Consolidation is one of these. When you are offered the option to lower your monthly payment, through cash out refinancing, it may sound very exciting. Remember there is nothing like a free lunch and that you have to pay. However harmless the proposal may look, there is always a loophole that may end you in trouble. When you stretch your payment term and bring down your monthly payment, what you are doing is in effect paying much more than you originally set out for.

The truth of life also is that – once a spender, always a spender. No matter how much one may decide to do away with the unnecessary ‘binging’ very few people actually are able to kick off their habit t spend when they can actually save. Therefore it is important to gauge your requirement carefully before taking the plunge. Bankarte explains:

When debtors use home equity to pay off their bills, they usually swear to God they'll never carry a credit card balance again; but they forget to change their spending habits, and they forget to save for emergencies and big-ticket items. When the car needs a new transmission, or they "need" a vacation, the plastic get resurrected and the debt cycle resumes.

Cash-out-refinance Vs Home equity financing: some more differences

Cash-out-refinance and Home equity financing are similar when it comes to tax deductibility, but there are several factors that make them dissimilar. Read on:

• In case of cash out refinance, you have one loan and only one loan payment to consider. However in the case of home equity financing, you have the option of having a lump sum loan or a revolving line of credit.
• In the former case your existing mortgage is refinanced usually for a higher overall amount using some of the accumulated equity in your house. In latter case however you can borrow all or just part of your home's equity
• Cash out refinance is generally used for obtaining additional cash and spreading the payments out over a longer term. In case of home equity financing, you have the flexibility of a shorter repayment term or spreading the cost over a longer term
• You can generally get cash out refinancing at a lower rate as compared to home equity financing.

Wellsfargo reports:

Using your home's equity to get tax-deductible* borrowing power for big-ticket expenses such as college tuition or home improvements is an option many homeowners choose. Both cash-out refinance and home equity loans are usually tax deductible, but the similarity ends there.

Home-sweet-home: Cash out refinanced!

Everybody I know wants to buy a house of their own if they already have not done so. Most of us are so fed up of living in rented apartments that we cannot wait to have a house that we can truly call ours. But no sooner than we have a house, an asset all paid up, we hop onto the mortgage bandwagon and get ourselves some handy cash out of it for a seemingly ‘pressed’ urgent need. So far acceptable!

But then a couple of years down the line, another seemingly urgent and unavoidable need crops up and we start looking at the ‘end product of our dreams’ for a new cash inflow. We get cash-out-refinance and get some cash in hand by re-trading our mortgage for a new one. I guess it was fine to look at our houses as assets that would bail us out when the entire world crashed around us. But in the drill of mortgaging our homes again and again have we started looking at our homes as piggy banks that filled and emptied on a whim? What happened of our dream of owning a house that was so much a product of our love and labor?