Cash-out mortgage refinances harder to get
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 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.
Here’s what you need to know about doing a cashout refinance during the pandemic.
Mortgage rates dropped to near record lows. The 30-year fixed mortgage averages 3.58% nationally, according to Bankrate data. Mortgage refinance rates are also low, with the average 30-year fixed refinance rate at 3.64%.
Regulators have relaxed rules to help consumers. The Federal Reserve announced April 15 that lenders will be allowed to postpone appraisals for 120 days after closing. In addition, 23 states allow enotarization of documents.
Still, you should expect a new mortgage or refinance closing to take longer than it would have during prepandemic days.
“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.
“Many homeowners remain rightfully squeamish about cashing out equity from their homes,” says Greg McBride, Bankrate chief financial analyst. “And it is not to be taken lightly.”
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 cashout 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.
“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. Most lenders restrict you to keeping at least 20% equity in your home.
Moreover, you can deduct mortgage interest from your taxes if you use the cash-out refi money for certain home improvement projects.
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 your original mortgage, or an even shorter term.
However, if your new interest rate would be higher than what you currently have, you may want to seek other options. Consider a personal loan or even a 0% 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, origination and appraisal fees. Keep in mind you’d also pay closing costs on the whole loan amount.
So examine all your options. And crunch all the numbers to ensure you’re saving money.