Sunday, November 30, 2008

Cash Crunch? Maybe It’s Time to Cash Out?

It’s that time of year when people start scrambling for cash or assess their financial standings. Thinking about pulling equity out of your property? Know what your options are before making a move…

It’s probably safe to say that today’s current economic situation is not ideal for the majority of Americans. As rates continue to creep down, many people start to consider refinancing. And if you’re going to refinance, it’s always a good time to discuss cashing out some equity in the property.

Why is it a good topic for discussion? For one, if you are refinancing on the secondary market, you’re going to pay closing costs. It’s best to consider all options before you leap. Not that cashing out equity necessarily makes sense for you. If you just want to take the kids to Disney or throw a silver wedding anniversary party for your parents, you might take a second to think of a better way to finance these items. Do you really want to pay for them over the next 30 years? However, if you’re paying a mound of money in credit card debt and your existing interest rate is way higher than current market rate, than it’s something to consider. Or maybe it’s time to send a kid off to college.

A cash out refinance works this way. Say you bought your house three years ago, financed $100,000 of the $125,000 purchase price at a rate of 7%. In the meantime your house is worth $150,000 now, and you have amassed some icky credit card debt. You’d like to pull out $10,000 in equity from the house to pay off the credit card, and the current rate available to you is 5.75%. This scenario would make sense to consider a cash out.

The down side to a cash out refinance is that, as mentioned before, you have to pay closing costs. You do usually pay a lower rate in title insurance by commanding a re-issue rate. And this charge can be a big ticket item, but other than that the other costs are pretty much standard as they would be for a purchase. The money you would need to set up escrow probably will come back to you from your old escrow account when your old mortgage is paid off. So, that’s more palatable.

Also, keep in mind that if you pull too much equity out of your house, you might have to face monthly mortgage insurance. Right now, the minimum loan to value for a cash out on aprimary residence on a Conventional loan is 85%. For FHA, it’s 95%. But you can expect that to change soon. The reason for the changes? Many people in a tight financial bind sucked the equity out of their homes, then defaulted on the mortgages. As you can imagine, this move hasn’t helped our economy much. Not much at all. So, lenders have safeguards now and higher loan to values, to prohibit this from happening as often.

Make sure you really consider all options when refinancing. Don’t fall into a trap of cashing out for a quick return with a long term pay back. Make sure cashing out has a real purpose and benefit for doing so. Your mortgage lender should be able to crunch the numbers and present your options. Take your time and don’t move too, quickly. But if it makes sense, then lock that low rate!

Let My Experience Work For You!
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at or call direct: (865) 567-0113 Toll Free: 1-800-489-8910. For more information visit her website at Home Loans Plain Talk.

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