Ask Our Broker With Peter G. Miller: Money Business
Question: During the past few years the value of our home has increased significantly. We now want to take out cash to start a small business. How much cash can we get?
Answer: The latest figures we have at this writing show that refinancing at this time is largely for cash-out reserves. In the fourth quarter, according to another study from Freddie Mac:
• 63 percent of all refinancing involved a larger loan, meaning cash out;
• 35 percent showed no change in the amount owed, meaning just a rate and term refinance, going to a lower rate or from an ARM to a fixed-rate loan;
• 2 percent of the refis were for less money; and
• 8 percent were for loans that had been reduced by prepayments before being refinanced.
If rates are rising then why are so many people taking cash out of their homes? Two reasons stand out.
First, home values in most markets have steadily increased. As of March, says the National Association of Realtors, existing home prices nationwide showed 73 straight months of year-over-year gains.
Second, while mortgage rates are up they’re not up a lot. As of late April real estate financing was widely available in the 4.5 percent range, a remarkably low figure by historic standards.
As to how much you can borrow, different lenders have different standards but most will require 20 percent equity. So, as an example, imagine that you might a home in 2010 for $200,000 that today is worth $275,000. You bought with 5 percent down and originally had a $190,000 mortgage. Today at 4 percent the mortgage balance is down to roughly $163,500 through amortization.
The alternative in this situation is not to refinance. Instead, add a home equity line of credit (HELOC) or a second mortgage for the same amount. In this way, the original mortgage with its lower rate will remain in place.
While refinancing can give you a new 30-year mortgage, a second loan or HELOC is likely to have a shorter term, say 10 or 15 years. A shorter term means higher monthly costs and that can raise affordability issues.
With a HELOC be certain you understand all terms because the repayment phase is relatively short, which means monthly repayment costs can be steep.
In addition, because of the tax reform legislation, be sure to speak with a tax professional to see how mortgage interests costs will be treated when refinancing.
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.
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