Most homeowners who refinanced mortgages in the second quarter of 2011 did not cash out any home equity. A Freddie Mac analysis found that 77 percent of borrowers who refinanced either maintained their mortgage balance or lowered it by bringing cash to closing. Only 23 percent of borrowers who refinanced increased their mortgage balance by at least 5 percent, compared with the average cash-out share of 46 percent between 1985-2010.
Taking cash out with your refinance
If you're considering whether or not to pull cash when refinancing, consider the following points:
- You must have equity in your property to do a cash-out refinance. Part of the reason there is a decline in cash-out refinancing is that many homeowners have lost too much home equity. About 11 million U.S. homeowners are underwater and owe more on mortgages than their houses are worth. Without a lot of home equity, you may not even qualify for a refinance deal unless you agree to bring cash to closing to boost your equity.
- Some mortgage lenders may not allow you to do a cash-out refinance. Getting approved for a refinance isn't always easy in this real estate market, even if you have a high credit score. You may have to shop around and compare mortgage quotes from several lenders to find one that will agree to a cash-out refinance.
- It could pay to refinance even if you can't pull cash out because mortgage rates are so low. "Savvy homeowners are taking advantage of some of the lowest fixed-rates in more than 50 years to lock in interest savings," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement. "Over the first half of 2011, fixed-rate mortgage rates hit a low during June, with 30-year product averaging 4.50 percent and 15-year averaging 3.68 percent over the last four weeks of June, according to our Primary Mortgage Market Survey."
- Decide how important it is to pay off a home loan in full. Doing a cash-out refinance could set back your plan to pay off your mortgage. If you are uncomfortable taking on more mortgage debt, it's probably better to keep the same loan balance when refinancing or bring in cash to decrease the principal balance.
- Do you have a home equity loan? Carrying a high balance on a home equity line could make it tough to take cash out of your property or even qualify for a refinance.
Falling home values
Get mortgage rates from several lenders to compare various loan packages. Unless you have a good credit score it will be tough to qualify for the best mortgage rates. Even if you can qualify for a cash-out refinance, are you sure that's a good idea? Housing prices have continued to decline and it is uncertain when they will rebound. There is always a risk that pulling too much cash out of your home now could ultimately lead to being underwater if housing values continue to fall.