As the housing market continues to heat up, more and more homeowners are considering a cash-out refinance as a way of tapping into their equity. This is often done when home prices have risen substantially since the time that they bought, or if there has been some improvement made to their property that adds value – such as adding an additional bedroom.
The pandemic has had a significant impact on the housing market. Home prices have increased significantly in many areas, and this could present an opportunity for those who have built up equity in their homes.
At the beginning of the pandemic, many people found themselves working from home. Zillow reported that nearly two million renters were able to move out further into the suburbs to buy a home because they were no longer required to commute to work every day. Even though the initial shutdowns around the world happened almost two years ago, many companies are still offering work-from-home options to employees, so this trend has continued.
The significant influx of people looking to purchase property, along with supply-chain issues slowing down new construction homes, contributed to the rising prices of homes and home equity increasing. It has been reported that nationwide, homeowners collectively took out more than 1.1 million cash-out refinance loans, and withdrew $63 billion in equity in the second quarter of 2021. These numbers are the largest quarterly volume since mid-2007.
Calculating your home equity
If you’re considering a cash-out refinance, it can be helpful to know approximately how much equity you have in your home and how much you’re eligible to tap into before making any final decisions.
To calculate the total equity in your home, you’ll want to take the current value of your home and subtract your loan balance. Let’s say your property is valued at $550,000 and the balance on your mortgage is $300,000, then you have $250,000 in home equity. You’ll then need to calculate the tappable equity, which is the total amount you can withdraw. This usually is equal to your total equity minus 20 percent of the property’s current value.
Based on this hypothetical scenario, that equates to $110,000 ($550,000 x 0.2). This number is subtracted from the total equity amount. In this example, $250,000 minus $110,000 leaves you with $140,000 in tappable equity.
Determining the current value of your home can be done in several ways: You can hire a professional appraiser, or research comparable properties in your area and see what they have sold for recently. At Filo Mortgage, we can also help you determine your home’s current value if you’re looking into refinancing or other home equity options.
Cash-out refinancing is often a good option for those with home equity. It’s the perfect time to take advantage of rates while they are still low.
Low-interest rates make it a great time to refinance your mortgage and tap into your home’s current equity. Talk to Filo Mortgage today to see if you qualify for a cash-out refinance loan. Cash-out refinancing could be a great way for you to secure your financial future.
However, before you decide to go through with this process, it is important that you consider all of the pros and cons.
Benefits of a cash-out refinance
There are many reasons to refinance your mortgage, but one of the biggest benefits is the ability to turn your home’s equity into cash. Home equity has reached an all-time high, so now may be a good time to consider cashing out.
One of the biggest benefits of a cash-out refinance is that it can provide homeowners with a large sum of money, which can be used for a wide variety of purposes. This could include paying off high-interest debt, making home improvements and renovations, investing in other properties, paying for college, or even taking a vacation. It can also provide you with some extra money each month that you can use however you please.
Aside from the money you receive from a cash-out refinance, there are also the benefits of refinancing your mortgage in general to consider. Getting a better mortgage rate will help to reduce your monthly payments, which can also mean eliminating PMI payments altogether if your loan-to-value ratio drops below 80 percent. Cash-out refinancing can be an excellent strategy in many situations, and it can be especially helpful if you have been struggling to keep up with your current payments.
Drawbacks of cash-out refinancing
There are also some drawbacks to consider before proceeding with this type of refinancing. Refinancing can add additional years of payments and interest over the life of the loan.
Another consideration is that your home becomes collateral for the new loan, so if you default on your mortgage, you could lose your home.
Overall, whether or not a cash-out refinance makes sense depends on a variety of factors specific to each individual situation. If you are unsure what is best for you, it is always advisable to speak with a financial advisor or lender about your options.
Home equity loans and Home Equity Lines of Credit (HELOCs)
You may not want to refinance your current mortgage for several reasons, but maybe you’d still like to tap into your home’s current equity while it’s at an all-time high. In this case, you always have the option of taking out a home equity loan. Unlike cash-out refinancing, a home equity loan won’t replace your current mortgage. Instead, it is a second loan that enables borrowers to liquidate some of their equity and use that cash however they prefer.
Another option for cashing out your equity without refinancing is through a Home Equity Line of Credit, which is also commonly known as a HELOC. These types of loans work like credit cards; borrowers will have a limit that they borrow and repay, and interest is only paid on any outstanding loan balance.
Different cash-out refinancing options
Aside from conventional cash-out refinancing options that allow you to borrow up to 80 percent of your home’s value, there are other cash-out refinancing options available that may be better suited for your situation based on your eligibility. For example, if your initial mortgage was an FHA mortgage or VA loan, you may also qualify for an FHA cash-out refinance or a VA cash-out refinance. These loans have different criteria and terms; for example, VA cash-out finance loans will give borrowers the option to refinance their home’s entire value, rather than just 80 percent. A jumbo cash-out refinance may also be a feasible option, but keep in mind that these types of loans typically only permit homeowners to borrow up to 70 percent of their home’s value.
Contact Filo Mortgage and apply for a cash-out refinance loan
If you have additional questions about cash-out refinance options, or if you’d like more information to determine whether a cash-out refinance is the right solution for you, we are happy to help. Contact Filo Mortgage today to learn more about cash-out refinancing, or to get started on the application process.