For
Keller homeowners who've been making regular mortgage payments, it feels good to watch your net worth make upward progress. That’s especially true if your house is also gaining value. With a growing amount of equity comes peace of mind, knowing you have the option of tapping into it when you want.
Whether it’s time for a new roof or you need to consolidate debt, you may see a traditional cash-out mortgage refinance as the ideal tool to access the money you need. However, if you’re considering a cash-out refi, you may be unaware of some of the pitfalls, or you may not know about the alternative solutions that might work in your financial favor.
With a cash-out refi, homeowners can borrow against the equity in their home by taking out a new mortgage loan. This new loan includes the original loan balance and the additional amount borrowed against the equity.
To many, cash-out refi loans seem like a great option because of their suprior interest rates, especially when compared to personal loans and credit cards. The problem is that they can end up becoming more expensive than homeowners expect and derail their budget projections for the upcoming year.
Hear are three things all homeowners need to consider before they opt for a cash-out refi loan:
Interest rates are rising: After enjoying historical lows, mortgage interest rates have reached 5 percent, the highest in eight years, according to the
Washington Post. With a cash-out refi, homeowners face trading their lower interest rate for a higher one.
Less convenient than other loan products: The application and approval process for a cash-out is anything but efficient, thanks to time-consuming activities like property appraisals and in-person closings. In all, the loan process can take anywhere from 30-60 days.
Additional fees: Borrowers often don’t realize that cash-out refis come with closing fees for such things as appraisals, title searches and credit reports, adding another layer of cost to the loan.
A smarter solution that can potentially spare borrowers thousands in interest cost is a home equity loan. Instead of starting over with a new mortgage, you’d simply take out a separate loan against the equity in your property. This option lets you keep your mortgage interest rate.
To make things more clear, here’s a comparison of how the two loans could affect a homeowner like you.
Let’s say you took out a $175,000 mortgage six years ago at 3.625 percent interest. After making monthly payments of $798, your balance is $153,365. Now you’re looking to do some renovations and pay off some credit card debt, and you need to borrow $75,000. With your home valued at $300,000, there’s more than enough equity.
With a cash-out re-fi loan, you’d “reset” your mortgage balance at $228,365 with an interest rate of, say, 5.75 percent interest. That brings your monthly payment to $1,333, but in 30 years, when the mortgage is paid off, total interest comes to $287,225 (that’s the interest you paid on your original mortgage and the interest you’ll pay with the refinanced loan).
With a $75,000 home equity loan, you may receive a higher rate, but it applies to a much smaller loan amount. If you secured a home equity loan at 9.0 percent APR, your monthly payment for your mortgage and equity loan combined would be slightly higher at $1,559. However, the term of your equity loan is 15 years, and your mortgage is still on track to being paid off in 24 years. In all, your total interest payments come to $174,238 (original mortgage plus home equity loan).
Bottom line: In this scenario, a home equity loan comes out as the better financial decision, because not only are you finished paying six years earlier, you would save $112,987 in interest alone.
Another upside to using solutions other than cash-out refis is that there are now convenient and fast solutions that let borrowers access their equity with ease.
Keller homeowners should discuss their options with a professional before proceeding with any action.
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