May 4th, 2015 6:41 AM by Jackie A. Graves
Could it be time to
cash out some home equity by refinancing your mortgage? For growing numbers of
owners, the answer this year is an emphatic yes, at least according to new data
from some major lenders.
In a cash-out
refinancing, you convert part of your home equity into money, adding to your
mortgage balance. Say you have a $400,000 home with a $200,000 first mortgage.
You have $200,000 of equity and a couple of worthwhile projects in mind —
paying off high interest rate credit card balances and renovating the house —
that will cost you around $50,000. Since mortgage rates remain attractive in
the 4% range and you can handle the higher monthly payments on a larger balance
loan, you refinance your $200,000 existing loan and take out a new $250,000
loan to replace it. You end up with more debt, but you also walk away with
roughly the $50,000 you need, less transaction fees.
Cash-outs were the
rage during the housing boom years of 2004-07. At their peak, in the third
quarter of 2006, nearly 9 out of 10 owners who refinanced pulled out money from
their homes, according to mortgage investor Freddie Mac. But by late 2008, the
bubble had imploded. Equity holdings plunged. Cash-out refis virtually
Now, with home equity
higher in many markets — especially along the Pacific and Atlantic coasts —
cash-outs are making a comeback, Consider these summaries of in-house corporate
•Bank of America saw
the number of cash-out refinancings funded during the first quarter jump 47%
compared with the same period in 2014.
•LoanDepot, a major
non-bank mortgage originator, says its cash-outs during the first quarter were
up an extraordinary 78% compared with the same period a year earlier.
connects borrowers online with multiple lenders, reports that requests for
cash-outs rose 40% in the first quarter over the same period last year.
Though not all lenders
are seeing the same trend, something significant appears to be underway.
Quicken Loans, one of the largest mortgage originators, said total dollar
volume of cash-outs is up this year, even though the cash-out percentage of all
refinancings is slightly below what it was last year — around 20% of total refi
business. Freddie Mac, which has not completed its first-quarter refi analysis,
said preliminary data indicate that there has been only a modest increase in
cash-outs. Wells Fargo, the country's highest-volume mortgage lender, said it
is not seeing anything like the splashy jumps in cash-out volume reported by
Bank of America or LoanDepot.
What's going on? Some
lenders clearly are tapping into pent-up demand from owners who find themselves
with growing equity and have financial needs prompting them to put some of it
to use. Even lenders who are not recording dramatic growth in volume agree that
a cash-out refi can be an important — and responsible — financial option for
owners who can qualify.
But qualifying for a
cash-out in 2015 is much tougher than it was during the see-no-evil
underwriting years of the housing boom. As a general rule, you need to retain
at least 20% equity in your home after the addition of the new debt. And you've
got to document that you have the income to support payments on the higher debt
executive vice president for national underwriting at Wells Fargo, said
cash-out underwriting guidelines are "stricter than for traditional rate
and term refinancings." That means banks pay special attention to
applicants' debt-to-income ratios, purposes of the additional debt and credit
Bob Walters, chief economist
for Quicken Loans, said cash-outs are nothing like they were a decade ago.
"People are not feeling like their homes are piggy banks" to dip into
for everyday expenses, vacations and the like. Instead, most cash-out refi
proceeds now go to debt consolidation and home remodelings — uses of credit
that improve borrowers' financial situations and help increase home values.
John Schleck, who
heads Bank of America's centralized and online sales, said cash-outs
"should never be the first thing borrowers think of" but rather be
part of a thorough evaluation of their financial needs, resources and ability
to handle more debt.
Bottom line: If you
have a productive purpose for the money and can pass the underwriting tests,
consider a cash-out while interest rates are still favorable. Run the numbers.
They just might work.
Washington Post Writers Group. | To view the original article click here