Summary: This article discusses the pros and cons of applying for a cash-out refinance mortgage loan. While many financial goals are successfully achieved with this product, there are – as with any form of credit – costs and risks. Changes occur from the day a house is bought: changes in-laws, in banking, in personal credit, and in-home values, to name a few. With those changes may come additional expenses to borrowers. On the positive side, there is a mortgage company that goes the distance to minimize surprises and use those changes to the customers’ advantage. The aim of the refinance; the applicant’s current credit evaluation; the state of the property; and all the fees involved are presented in detail so a borrower can make the optimal decision for their present and future well-being. Sammamish Mortgage wants its clients to get the very most out of their homes.
#1. Credit Still Matters
True, credit is a bigger deal for first-time home-buyers who come to the table with little else. Still, the issue does not go away because an applicant for a cash-out refinance has successfully made on-time payments for seven years. Poor decisions, costly emergencies and plain bad luck can sink borrowers into financial holes, and their credit scores will follow. As with a purchase, underwriters look at several factors, credit rating among the most important. Even if a borrower is up to date with the house payments, diminished FICO scores signal a problem. Those in charge of loan approval or denial will examine the credit report to see if the trouble will affect regular remittances down the road.
For the most part, a record of punctual payments works to the applicant’s advantage. It is also true that conscientious homeowners frequently seek cash from their homes in order to consolidate and eradicate personal debt before it becomes unmanageable. The key to a successful cash-out application is to address those obligations before they take a toll on creditworthiness. Otherwise, sincere and hardworking homeowners could find themselves overwhelmed with bills and no way to access the equity that will rescue them from their troubles.
#3. Homeowners Insurance Might Need Updating
The hazard insurance policy currently in force may not be acceptable to the mortgage lender – or, more specifically, to the lender’s investors. This may be frustrating and upsetting for those applying to the bank that holds the present mortgage. To understand the reason is first to understand the secondary market. While some banks hold loans in their own portfolios – and perhaps service them themselves – many financial institutions sell the loans to investors and use the profits to make more loans. The conditions on which the investor will buy a cash-out refinance, say, must be met by the lender and, of course, the borrower. The right insurance is one such condition.
An applicant for a cash-out refinance is seeking to pay off the old mortgage with a new one while pulling out additional funds for one reason or another. The loan, therefore, is more than is owed on the property but it must still never exceed the lender’s acceptable ratio of the loan amount to property value. If the property value is dubbed by an appraiser to have appreciated since purchase, this allows the borrower to apply for more money. The flip side is that it could raise the amount of insurance required. Fannie Mae, for example, mandates that coverage must equal at least 80 percent of the insurable value. Where value goes, so go the premiums.
#3. Value Does Not Always Appreciate
If value does go up, borrowers may be able to take more money out of the property. However, some owners count on appreciation too easily. The good news is that median home prices have been climbing since 2011, according to the Washington State Office of Financial Management. Still, from 2007 to 2011 they had plummeted, largely as a result of the national banking crisis that ensued. Some home owners are upbeat that values will rise perpetually. This is a mistake if history is any guide.
Aside from economic trends, other factors can lead to over-optimism in terms of valuation. Often, owners will assume that improvements made to a house will garner additional financial worth. In fact, some do. Yet there are renovations that return little compared to their cost: remodeled bathrooms, swimming pools and solar panels, for instance. Each of these could very well attract a buyer but none will significantly add value for the purposes of a cash-out refinance. On the other hand, new kitchens, enlarged or added bathrooms and energy-saving windows are looked upon more favorably by appraisers. Minor, low-cost repairs can also help – fresh paint, de-cluttered rooms etc. Important to remember is that appraisers do not always assign the same weight to renovations as do home owners.
#4. Cash-Out Does Not Mean Free
Most refinance applicants remember when they purchased their house. They not only paid the seller, but took care of many third parties: lawyers, title agencies, government recorders, home inspectors, pest inspectors, taxing authorities…the list goes on. While that list is smaller for a refinance, many of the same actors will be back. Cash-out proceeds go first to them and then the borrowers. When deciding how to apply the monies, borrowers must remember the deductions for closing costs and other fees. A close look at the Loan Estimate generated by the lender gives applicants an idea of their returns when all is said and done.
This is where Sammamish Mortgage gives its customers an edge. Not only lender fees but third-party charges as well are guaranteed by the company. By cultivating effective partnerships with settlement agents, title insurers and county governments, for example, this lender is able to present exact figures to the borrowers, precluding any surprises at closing. Nevertheless, outstanding taxes or insurance premiums can change between the dates of application and settlement.
#5. A Tax Deduction…with a Caveat
Home owners can still receive a deduction from their federal income tax obligation if the cash received from their refinance is applied toward “substantial improvements” of the property. If renovation is the aim of this transaction – and the alterations meet IRS guidelines – a cash-out refi could be beneficial come April 15th. Given the elimination of interest deductions in certain other extensions of credit, home improvement will not only help when re-sale time approaches, it mitigates the annual household expenditures by saving on tax obligations.
There is a limit on the size of deductions so borrowers should measure what is available against the standard deduction, now nearly doubled. Given that most homes across the state of Washington are under a million dollars relative to market value, the interest deduction remains a worthwhile option.
Cashing Out is Worth Checking Out
Cash-out refinancing has contributed significantly to the future and quality of life for thousands of Washingtonians. From making debt more affordable to making college more accessible; from improving cash-flow to improving the property, this financial strategy has the potential to benefit many more families across the Evergreen State. Making it successful requires going into the process fully informed and with eyes wide open. Sammamish Mortgage loan officers seek the best course of action for their customers’ financial future. Sammamish Mortgage is a family-owned mortgage company based in the Pacific Northwest. We’ve been offering high-quality mortgage loans to buyers in WA, OR, ID, and CO for over 25 years. If you’d like more information, contact us today. You can also View Rates, or click to get an Instant Rate Quote. Or, you can initiate the application process and Apply Now using our automated online system.
