With skyrocketing home values across the nation, many homeowners are feeling “equity rich”.
According to CoreLogic, the average equity increase per borrower is up to $57,000. This was just between the last quarter of 2021 compared to that same quarter of 2020. In total, that is a 31% increase, representing the largest equity gain in more than 11 years.
Because of this, and since it is a hard time for buyers, we always bring up to our clients the opportunity for a cash-out refinance. You can use this money for a number of reasons: to invest in another property, to fix up your current home, to pay down other debt you have, etc. And the process is easier than ever.
A cash-out refinance is very similar to a rate/term refinance. The biggest difference is the rate. Cash-out refinances are riskier for lenders to take on than a rate/term refinance. Thus, cash-out refinances do have higher interest rates. You may be looking at a higher monthly payment and it needs to make sense financially for you to pull the money out.
The lender will ask for all of your same documentation that you will need for a rate/term refinance:
- Last two years tax returns
- Last two years W2s
- Last two paystubs
- Asset statement(s)
- Mortgage bill/property tax bill/Homeowner’s insurance bill
The process takes between 30-45 days in today’s market. At the close of the cash-out refinance, you get your equity in cash form from the escrow company. Most lenders will only allow you to go up to a 75%-80% loan-to-value on a cash-out refinance.
You only want to do a cash-out refinance if you plan on holding onto the home for a significant period of time. If you plan to sell your home in the next 1-2 years, it does not make sense to go this route.
Another very viable option is a Home Equity Line of Credit or HELOC. This is where you get a second mortgage on your property that acts as a line of cash. Every time you “draw” from your HELOC, you will be charged interest on that money.
HELOCs do typically have higher interest rates like a cash-out refinance. There can be balloon payments at the end of the term as well as interest-only payments for the life of the HELOC. Same with the cash-out refi, lenders will typically only go up to 75% or 80% loan-to-value.
There are many ways to use the equity in your home to your advantage and grow your wealth. To run scenarios by us, reach out today: email@example.com