How to Draw on Equity to Expand Your Housing

In many ways, 2021 disappointed pandemic-weary young families longing for larger housing. In their quest to buy a bigger place, many competed in fiercely fought bidding wars. Yet due to a shortage of inventory, they went home empty-handed.

But some homeowners seeking more spacious quarters have a Plan B. Through mortgage refinance, they can generate enough funds to expand their current property.

“Your chances of buying a bigger house in a hot neighborhood are greatly limited right now. Yet if you’re rich in equity, it’s comparably easy to refinance and take out cash for an addition,” says Michael Crowley, an independent real estate broker.

In recent weeks, mortgage rates have been on an upward trajectory, though they’re still hovering just above historic lows. One explanation for rising rates is that the Federal Reserve is pursuing tighter monetary policy to combat inflation.

“Nobody is cheering for higher rates. But they may be a necessary evil to tame an out-of-control economy,” says Keith Gumbinger, a vice president at HSH Associates (hsh.com), which tracks mortgage markets throughout the United States.

Some younger families are apprehensive about adding to their mortgage debt, given the rising cost of living — especially for food, gas and child care. What’s more, millions are still paying off student loans.

But if the numbers work for you and your finances are in good order, doing a cashout refi could help you create the more commodious living space you seek for a reasonable cost.

If it’s been several years since you last applied for a mortgage, you may need a refresher course on the basics.

“Don’t let your fears about how to proceed keep you from moving forward with your refinance plans. Especially now, when rates are forecast to go higher, it’s a mistake to hem and haw in hopes they will drop again before you apply,” Gumbinger says.

Assuming you have good credit and steady income to repay a larger mortgage, you should face few barriers in the mortgage application process.

“Of course, there are hoops to jump through, but none are substantial unless you are self-employed or have a spotty job history,” says Crowley, a past president of the National Association of Exclusive Buyer Agents (naeba.org).

In most ways, applying for a cash-out refi is no different than applying for a plain vanilla refi or a mortgage to purchase a home. Here are a few pointers:

Educate yourself on mortgage basics before you apply.

Sid Davis, the author of several real estate books, says the main concepts of mortgage lending aren’t hard to grasp if you take a little time to do so. You can do a quick study of mortgage essentials by visiting the website of the U.S. Department of Housing and Urban Development: hud.gov.

In addition, he suggests you pick up a book on mortgages, though anything published more than a year or two ago is likely out of date.

“When it comes to mortgages, the turf is changing so quickly,” he says.

Seek a lender who will meet you face-to-face.

Most lenders are comfortable taking refi applications from homeowners they’ve never met. On a technical level, there’s no reason your lender can’t process your application by phone, text, email, fax or overnight delivery, says Marty Qualls, a Utah-based lender who originates mortgages for several large banks.

“But you’ll have a lot more credibility with lenders if you go into their office,” says Qualls, who’s been in the mortgage business since 1992.

Meeting face-to-face is an especially good idea for borrowers who anticipate special challenges to loan approval. Such applicants include entrepreneurs and those with relatively limited assets.

Respond promptly to your lender’s request for documents.

Dale Robyn Siegel, a lawyer and mortgage broker, says that due to strict federal regulations — many imposed after the housing downturn of 2008 — loan officers must work diligently to assemble the files needed to meet the exacting requirements of their underwriters (who have the final say on approval). Hence, they’re grateful to applicants who help them obtain documents without nagging.

“Good preparation is a big plus,” says Siegel, author of “The New Rules for Mortgages.”

Ideal loan applicants arrive at their initial appointment with all the primary documents they’ll need, including recent pay stubs, W-2s, bank statements and tax returns.

Mortgage officers are also pleased when loan applicants review their credit reports in advance of applying. Under federal law, you’re entitled each year to one free credit report from the three large credit bureaus: Equifax, Experian and TransUnion. Just go to this website: annualcreditreport.com.

You may also want to access your credit scores. Such scores, which draw on data from the credit bureaus, provide lenders with a quantitative measure of a person’s credit risk. Most lenders use FICO scores, pioneered by the Fair Isaac Corp., though other rival scores are also now in use.

Normally, you need to pay a fee to obtain your credit scores. One approach is to buy these through the Fair Isaac website: myfico.com. You can also receive credit scores through the credit bureaus. FICO scores range from 300 to 850.

Stay in close touch with your lender until the new loan closes.

Given recent problems with credit that have exposed record numbers of consumers to identity theft, some refi applicants are now facing complications.

Davis says lenders appreciate applicants who reply promptly to their requests for information and communicate often while their applications are under review.

“Whether you stay in touch by text, phone or email, connecting with your lender nearly every day is a great idea,” he says.

To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.