Cash Out Refinancing Lowdown

Estimating Costs in Good Faith

-- By Pushpa Sathish, Staff Writer

Applying for a loan or a refinance on your current mortgage is bound to leave you buried under a mound of paperwork. One important document that you should receive from your lender within three days of your loan application is the GFE or Good Faith Estimate. This paper, which lists the costs that are associated with your loan such as lender origination fees, attorney closing fees, appraisal fees, costs associated with title insurance, taxes, and other related charges.

The document is just an estimate, and the costs listed may vary from the time the paperwork was started to the time the deal is closed. You can get your lender to clarify any discrepancies that arise in the costs actually incurred and those listed in the GFE. Normally, some costs that are constrained by time are bound to change if the time taken to close the deal is a long period.

A GFE lists costs that are related to the closing of the transactions, and does not detail expenses that are incurred and paid for before the application.

Adjustable Rate Mortgage Refinances

If you are going in for a refinance on your mortgage, check out the adjustable-rate mortgages available. These have the advantage of a very low interest rate for a certain period of time. Once this expires, the rate adjusts to the current market rate.

This option is especially suitable for those who are looking to sell their home and pay off the mortgage. They can use the low interest period to look for a suitable buyer for their home.

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

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?

When should you opt for Cash-out-refinance!

Every one likes the feel of money in their hands and there is always a need that can be met with the extra dollars that come by. Cash-out-refinance gives you the option of getting additional cash while trading the current mortgage for a new one. Say you still have to pay $70,000 of the $150,000 mortgage that you had taken. To top this, you need an additional $30,000 to meet house renovation expenses. You can take a fresh mortgage for $100,000 and continue to pay your monthly installments as before.

The additional cash that you have thus received helps you tide over your current cash need. However one has to judge the cash requirements and then opt for this option. Generally legitimate requirement for additional money is seen in cases like for house renovation, debt consolidation, college tuition, purchase of a new vehicle, emergency expenses and the likes.

For more information read this article on Home Loan Center

The new emerging face of cash-out-refinance

Freddie Mac, the mortgage investment giant recently revealed that a lot of people, who got their houses refinanced, did so at a higher rate. The percentage of people who did this is almost as high as almost 9 out of 10 homeowners. And this trend is like to continue. 2-3 years back the scenario was a bit different with most of the people getting their homes refinanced at a lower rate. However this seems to have changed dramatically in 2006. With the interest rates showing a consistent upward trend, people are discovering the benefits of having fixed rate cash out refinance deal.

Therefore they are not looking for bargain deals as they want to avoid a situation wherein they may be faced with a double digit interest rate which quite a possibility in the case of floating interest rates. Therefore they are trading their old mortgage for a new one albeit with a fixed rate of interest which costs more than their old mortgage. But given their need for additional cash, and the added advantage of a fixed rate of interest the deal seems to be satisfying for them. Lat Times reports:

Cash-outs may be booming, but they are not new. They've existed for years as a financial tool to extract equity and convert it to immediately spendable money. During the refi boom years of 2003 and 2004, for example, anywhere from a third to half of all refinancers pulled out additional cash.