April 21st, 2020 10:00 AM by Jackie A. Graves, President
With interest rates plunging to near historic lows and millions
of Americans losing their jobs or worried about a layoff, homeowners are
looking to their home equity for money to stay afloat.
Unfortunately, the economic fallout from the COVID-19 pandemic is
crushing mortgage refinancing. Lenders are more
hesitant to approve refinancing applications as unemployment
skyrockets and they’re toughening requirements for borrowers.
With a cash-out refinance, you replace your loan with a new one
at an amount that’s higher than your current loan balance. You can withdraw the
difference between the two mortgages and use the money to carry you through
Homeowners have a mountain of equity they can draw on. A recent
study by the Urban Institute shows there is $19.7 trillion of tappable home
Here’s what you need to know about doing a cash-out refinance
during the pandemic.
Mortgage rates dropped to
near record lows. The 30-year fixed mortgage averages 3.58 percent nationally,
according to Bankrate data. Mortgage refinance
are also low, with the average 30-year fixed refinance rate at 3.64 percent.
Low refinance rates have triggered a wave in applications. The
Mortgage Bankers Association’s Refinance Index, which tracks refinance
applications, rose 10 percent for the week ending April 10 compared with the
previous week. The index is 192 percent higher over the same week a year ago.
Cash-out refinances reached a 10-year high in the fourth quarter
of 2019, the latest figures available, according to Black Knight. Homeowners
drew more than $41 billion in equity out of their homes in the quarter.
The surge of refinance applications has overwhelmed some mortgage lenders. But the backup
appears to be slowly easing as lenders adapt to new ways of doing businesses
under stay-at-home restrictions. Regulators have also relaxed rules to help
consumers. The Federal Reserve System announced on April 15 that lenders will
be allowed to postpone appraisals for 120 days after new mortgages and
refinances close. In addition, 23 states now allow e-notarization of key
mortgage documents. A bill passed by the Senate would extend this to all
Still, you should expect a new mortgage or refinance closing to
take longer than it would have during pre-pandemic days. But it may be worth
the wait and extra hassle.
“There is a population of homeowners who will stomach a
more-complex mortgage process in order to take advantage of very low interest
rates and the opportunity to save a lot of money,” says Austin Kilgore,
director of digital lending at Javelin Strategy & Research.
Make sure you know when cash-out
refinancing is a smart decision. First, know whether you’d qualify for a refinance.
Unfortunately, you can’t refinance if you’re in mortgage forbearance. As of April 16,
more than 2.9 million homeowners were in forbearance plans, representing 5.5
percent of all active mortgages, according to data firm Black Knight.
“Many homeowners remain rightfully squeamish about cashing out
equity from their homes,” says Greg McBride, CFA, Bankrate chief financial
analyst. “And it is not to be taken lightly, particularly if you’re using
that equity and your home as collateral to pay off unsecured debt.”
Keep in mind that many lenders now enforce stricter
mortgage qualifications. Ask your lender about refinancing requirements, as many are
changing policies right now.
Many people use a cash-out refi to consolidate debt, pay medical
expenses or meet other financial goals. In these cases, a cash-out refi may
provide cheaper access to money than any other type of long-term borrowing.
“It can be a low-cost source of cash,” McBride says.
“Particularly for homeowners that are short on liquidity but high on equity.”
Before you refinance, estimate how much you need and how much
equity you have in your home. Equity is the difference between your current
loan balance and your home’s value. Most lenders restrict you to keeping at
least 20 percent equity in your home when you do a cash-out refinance.
Moreover, you can deduct mortgage interest from your taxes if
you use the cash-out refi money for certain home improvement projects. In turn,
these may increase your home’s value.
There are some risks involved with a cash-out refi. One is
potentially paying more interest in the long run. A cash-out refi can mean
resetting your new loan’s term back to 30 years to make the payments
affordable. If at all possible, try to refinance to a term equal to what you
currently have left on your original mortgage, or better yet, an even shorter
However, if your new interest rate would be higher than what you
currently have, you may want to seek other options for the cash you need right
now. Consider a personal loan or even
a 0 percent
introductory APR credit card if you can qualify.
A cash-out refinance comes with many of the same fees as your
first mortgage. These include application fees, origination fees, appraisal
fees, and more. Keep in mind you’d also pay closing costs on the whole
loan amount. That includes your old loan balance and the money you “cash out.”
If you had a $150,000 balance on your old loan and cashed out $50,000, then
you’ll have to pay 2 to 6 percent in closing costs on the entire $200,000.
So examine all your options. And make sure you crunch all the
numbers to ensure you’re actually saving money and meeting your current goals.
Our mortgage refinance
calculator can help you decide.
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