Experts believe interest rates will continue to rise as the Federal Reserve Board tries to reign in inflation. If you are retired or nearly there, you’ll want to ensure that your income is not depleted by rising interest rates. It may be time to lock in any variable loans, or do a cash-out refinance on your mortgage to pay off debts at a lower rate.
A nationwide rebound in the housing market has lifted home values, and millions of Americans now have more equity in their homes. The growth of home equity is prompting more homeowners to take cash out of their homes to fund home repairs, pay-off higher interest consumer loans, and other costly endeavors.
In a cash-out refinance, you refinance an existing mortgage loan with an even larger loan. You can take the difference between the old and new loans and spend the extra money however you see fit. Cash-out refinances work best when you can lower the rate on your mortgage even as you increase the loan balance. Most cash-out refinances have a longer payment term than the original loan, which helps to limit any rise in the monthly payment.
Fannie Mae and Freddie Mac allow homeowners to borrow up to 85 percent of the value of the home, but private lenders, concerned about risk, may allow even less. Borrowers with excellent credit can expect to find interest rates on cash-out refinances backed by Fannie or Freddie ranging anywhere from 0.25 percent to a full percentage point higher than those for regular rate-and-term refinances.
With a cash-out refinance you’ll need to be able to pay for the closing costs on your new mortgage, and you’ll want to make sure the new payment is doable from a cash-flow perspective. One type of program, called a low-cash-out refinance, allows you to avoid paying all of the closing costs up front. Instead, any costs not covered at closing are tacked onto the remaining loan balance, and can be paid over time. You’ll need to use extra home equity to roll your costs into the new loan, but you won’t have to tap into your savings.
A cash-out refinance is different than a home equity loan or line of credit. A cash-out refinance gives you a new first mortgage that replaces your original loan. In contrast, a home equity loan is a separate loan that rests on top of your mortgage loan. It provides a lump-sum of cash, and you then make payments over a fixed term. A home equity line of credit works more like a credit card, where you borrow and repay funds over time. In general, a cash-out refinance will give you a lower interest rate and longer available terms than a home equity loan.
If you would like to put your home equity to work, Penny Lane Financial can help you decide which financing strategy is best for you.