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.

Cash-out Refinancing Vs Home Equity Loan

Ever wondered how Cash-out Refinancing is different from Home Equity Loan? Home equity loans are sometimes referred to as second mortgages. It is like taking a second loan on your current mortgage. However cash out refinancing is essentially refinancing your current mortgage for a higher amount than you currently owe.

When one opts for cash out refinancing he does so with the knowledge and intention that the interest rate would be lower than that on a home equity loan. Also remember at all times that when you decide on cash our refinancing you have to pay the closing costs of the mortgage. This amount can be very high at times. However when you go in for home equity loan, you are not expected to do so. Also, some times it is better to get a home equity loan than cash out refinancing. This is beneficial especially when the refinancing rate is higher than the current rate.

Follow this link to know more

What Constitutes Cash-Out-Refinancing?

What are the kinds of financial transactions that can be grouped under the cash-out refinancing banner? According to the exclusion rule, any refinance that is not a non-cash-out refinance is a cash-out refinance.

A non-cash-out refinance is used to pay the first mortgage that was completely used to buy the property in question. Such a refinance amount is less than the sum of the balance of the loan, the settlement costs, and 2 percent of the new loan amount or $2,000, whichever is less.

Any refinance that does not meet the above conditions is a cash-out refinance. A cash-out refinance generally carries a higher interest rate since statistics state that people who carry out a cash-out refinance have a poor record when it comes to repayment.

Cash out refinancing a means to pay-off all debts

The party is over... no more exorbitant home improvements or reckless purchases. It is time to take stock and plan to discharge your debts. Cash out refinancing is still a popular way to pay-off debts. If you have bought your house on a 30-year mortgage you must have by now jumped on the home equity bandwagon.

Home equity line of credit, which attached a 4 percent interest, was very attractive and you have opted for it. But now the short-term interest rates have been hiked to 7 percent. So you will have a cash outflow much higher than before. Besides this your monthly outflow will only be going to the interest and nothing to the principal borrowed if it’s an equity line of credit.

At this juncture you have the option for cash out refinancing and by opting for this you can wind up your equity lines of credit. As the rate is fixed, hiking rates of long or short-term loans will not affect you. The other main thing is that all your debt is paid off and you might even have some cash to spare.

This is the beauty of this scheme and most homeowners are realizing this and using this to pay off all debts. It is no wonder that refinance providers are claiming that 34 percent of applications received are for cash out refinancing.

However, the boom in home values is coming down and there is a slow down in all areas right from consumer spending. All the extravagant expenditure is gone and people are slowly looking to just get out of their mortgages or equity line of credit and be debt free. So the approach is a saner more logical one as your home can still deliver you out of debt. You may break even after paying out the costs of refinancing or you might end up with some extra cash.

Where did the refinanced cash go?

2005 was a year when it dawned on you that your home is a source of money. Yes hardly what you expected of your mortgage-ridden abode! But, it was all true home values had zoomed and you could refinance your old loan for a new one!

People found that after taking a new loan they could pay off the old mortgage and pocket the difference. Aggressive marketing began and before you know it you got the extra cash out of refinancing and you are planning on how to spend this money. So where did all the money go? What did people do in 2005 with their home equity cash?

Some wise homeowners resorted to home improvement projects to increase the value of their homes. And it became the top project people spend their refinanced cash on. Others used the money to pay off huge credit card debts and this was wise as credit card rates are increasing. Some of you took out the cash for your kid's education and paid college fees - thereby invested in your child's future.

However, if you used the cash from home equity frivolously like some people did you would now be in more debt than ever before. So what were some of these frivolous choices? People bought boats, fancy cars and added totally over-the-top improvements for their home. Californians even made movies out of the cash from their home equity. Others looked for beach houses and holidays.

Some chased dreams while others chased their debts. And, it is heartening to know despite all the crazy spending some people did most families went about refinancing in a responsible way. The average loan-to-value ratio after refinancing is still 70 percent! So after all most of us have been quite conservative and cautious of our home equity windfall.

Is cash-out refinancing still a good option in 2006?

Interest rates are rising, so is there any sensible reason at all for refinancing and taking cash out of your home? Cash out refinancing can help if you are a "piggyback" borrower. You could use it to pay off a home equity line of credit and consolidate your mortgages. This happens if you bought a home and didn't have the money to make the 20% down payment. 

So you eventually would have bought your house on a first mortgage of 80 percent the value of the home and a 10 % second mortgage and paid the remaining 10%. If this is the case most likely you became a piggyback borrower you would have taken a HELOC as your second loan as interest rates were below 5%. But, now as the rates have shot above 7% it definitely is not a good idea any more and cash out could be your way out.

Another reason to refinance is that adjustable mortgage rates are also increasing at higher pace than fixed-rate mortgages. Home equity loans which give lump sums at a fixed rate, are also increasing in rates and so should no more be considered for home-improvement projects. 

But, iIf you are a homeowner who wants to remain in your home by refinancing fixed rate mortgages to pay of interest hikes you will end up owing more by refinancing. Borrowers also use cash out refinancing to pay the costs for refinancing and it will all lead to bigger debts.

However, if home improvements being made do actually increase the value of your home - cash out refinancing is still a good option. The main decision should be to improve your habits of being in debt and cash out refinancing is still a great option but only a temporary reprieve at its best

Mortgage before or after paying cash for home?

Most people have mortgage except for a small portion of people who have enough money to make an outright purchase. Even so, you may not want to lock all your funds in a house and you are interested in getting a mortgage. However if you take a mortgage after the purchase of the house it will not be called a 'mortgage'. Instead it will be called a "cash-out refinance".

Cash-out refinance loans are considered riskier than purchase mortgage and are priced higher. But it will be relatively easier to get a cash-out refinance loan than a purchase mortgage. Besides if you are unhappy with your refinance loan provider you can opt out of the deal at any point and start again with another. Usually, timing is not critical on a refinance loan and even after a loan closes, a borrower refinancing with any lender other than his current lender, has three days to rescind it. So if you have the money it would be wiser to opt for mortgage after purchase and remain in control.

Read: Best time to take out mortgage when buying home

Cash-out Refinance: Defined

Is the process of taking out a new mortgage at an amount that exceeds the existing balance on the current mortgage in order to refinance the original mortgage and receive additional cash for other use.

Jim Cosman MD for consumer finance said It's good for someone who has to make a purchase and they know they're going to pay it off in a few years or they may want to move out in a couple of years.

Read More here on the basics of Cash Out Refinance

Cash-out Refinancing vs Home Equity Loan

With cash-out refinancing, you refinance your mortgage for more than you currently owe, and then pocket the difference. Cash-out refinancing differs from a home equity loan in a couple of ways. First, a home equity loan is a separate loan on top of your first mortgage; a cash-out refinance is a replacement of your first mortgage. Second, the interest rate on a cash-out refinancing is usually, but not always, lower than the interest rate on a home equity loan.

Another difference, You have to pay closing costs when you refinance your loan; you don't have to pay closing costs for a home equity loan. Closing costs can amount to hundreds or thousands of dollars. Finally, it doesn't make sense to refinance a higher amount at a higher rate. If your current mortgage is at a lower interest rate than you could get by refinancing, it's probably better to get a home equity loan.

Vickie Hampton, associate professor of family financial planning at Texas Tech University in Lubbock said It is relatively rare, But if you can get as much money as you need with good terms on a home equity loan as you can on a mortgage refinance, and you can get a rate that's attractive and lock it in, then that seems like a very wise thing to do.

Read more on Cash-out Refinace or Home Equity Loan

Refinancing Options to Plan the future

Continuous increase in home values makes people buy more. They can avail a huge amount of cash by refinancing their home. As the interest rate is lower on cash out refinancing, many people want to take the advantage of it and avail good money. They spend the money in paying their old credit cards or buy more equity or goods.

It has been noticed that housing prices have rose to a considerable extent in the recent years. Those who have own home, now began feeling wealthy as the prices of their houses have gone up. By opting for cash out, they can put their property as collateral and get enough money against this. They refinance their existing mortgage for a higher amount and pocket the extra money to spend at their own will. washingtonpost.com reports:

Consumers had a lot more to spend than ordinary income, almost $600 billion more in 2004. How much of that was actually spent (as opposed to being put into bank deposits, stocks or mutual funds) is unclear. Consumer surveys cited by Greenspan suggest perhaps two-thirds, a big chunk of it on remodeling.

Mortgage Mania and Refinancing

According to reports, Americans have taken more than $8.8 trillion in mortgages to buy homes or apartments. It was an increase of 42 percent since the 2001 recession. The soaring in prices of houses made the homeowners believe that they have become wealthier now. This belief made them spend more money in luxurious items and other recreational activities.

As they need a large amount of money to fulfill their needs, they have chosen to refinance their mortgages. They have taken the advantages of low interest rates. According to SMR Research in Hackettstown, N.J, borrowing against home equity rose to $715 billion last year. It is expected to rise more this year. poughkeepsiejournal.com reports:

So millions are buying homes with no down payments. Or they have adjustable-rate mortgages or interest-only mortgages or optional payment mortgages.

Read More: If debt explodes, trouble follows