My house needs several expensive repairs. My neighbor just did a major update on his house, and he told me he did it with a cash refinance. We also need a new car. What should we do?
Dear Refi Home,
There’s a lot in your question that I hope I can assume correctly and give you some solid advice.
I have to assume that you are consumer debt free and have built up your emergency savings fund at three to six months of your current living expenses. Also, I’m assuming your car is paid off and you won’t be borrowing money from your equity to buy a new car. Getting out of debt and having emergency savings are higher priorities than making repairs to your home or buying another car, and they’re definitely not things I recommend borrowing against your home to achieve. . That said, let’s talk about what you could do with a cash refinance.
Bankrate.com says homeowners took $70 billion of equity out of their homes in cash refinances in the third quarter of 2021. That was the highest rate in more than 14 years. In 2007, the housing bubble was about to burst, keeping many vulnerable to foreclosure. Last year, borrowers had higher credit ratings and withdrew money at a third of the ’07 rate. Higher home values reflect lower loan-to-value ratios. This led to the lowest total market debt on record, with the average borrower’s mortgage debt at just 45%. This is a sign of the inflation of real estate values that we are experiencing.
Fares are on the rise, so if you’re hoping to get a decent fare, you need to act fast.
I recently recommended a cash out refi for one of my sons. His historic home needed a new roof and some interior work. Because he is an Army veteran, he was able to get a fantastic rate with no closing costs. His property appreciated, so his refi provided enough cash to cover all the repairs at a lower mortgage payment. It was a total victory for his family.
A traditional refinance involves hiring a financial institution to exchange your existing mortgage for a new one at a better rate. With a withdrawal refi, you borrow more than your remaining mortgage balance and convert the equity in the form of a check or wire transfer to your bank account. In other words, you draw equity from your home to use for repairs.
There are pros and cons with the term of the loan. A 30-year note offers lower monthly payments, but a higher interest rate and higher total costs over the life of the mortgage. A 15-year note will cost less in the long run but has higher monthly payments. Decide which loan term is best for you. Remember: the shorter the term, the better the rate.
Prudent use of funds
A cash refi makes sense if you need money for home improvements or repairs. Using your mortgage to get a new HVAC or a new roof may be the cheapest money you can find. If you want to update kitchens or bathrooms, look for what provides lasting value. Be aware of the resale potential in your area. The increase in home market value will add to the equity in your home. My rule of thumb is to always use funds to put back into your home to protect its value. Avoid using your home equity as an ATM for impulsive spending or lack of self-control.
Using a withdrawal refi to pay off private student loans at high rates makes sense, but not on federal loans with reasonable interest rates. Using your capital to invest in your career can be beneficial. On the other hand, do not refinance in cash to go on vacation or buy consumer goods. Instead, find ways to increase your income or reduce your expenses. You can also do a simple refi to get a lower payment that would allow you to pay off the debt. Some financial professionals argue that withdrawal refi can be put to good use in increasing retirement savings if placed in a diversified portfolio. For most people, taking equity out of their home to invest is a risk I don’t advise taking. Above all, don’t use it for day-trading or buying volatile stocks like crypto.
Dangers of cash-in refinancing
- Foreclosure risk: A larger home loan can increase your mortgage payments. Never purchase more than you can comfortably cover, or you could fall behind on your payments and lose your home.
- Closing costs: Fees vary by lender. Make sure you fully understand all fees in order to accurately compare and evaluate quotes.
- Overspending cycle: Paying off high-interest debt with low mortgage rates makes sense if you exercise self-discipline to avoid repeating your mistakes. Control your expenses and manage your finances wisely, otherwise you could find yourself in the same situation in the future.
Other considerations involve how long you plan to stay in the house and whether you have a prepayment penalty on your mortgage. If a larger loan reduces your principal to less than 20%, you may need to pay for private mortgage insurance (PMI). Avoid this.
If you already have a low mortgage rate, a home equity loan or line of credit can serve your purposes. Whatever you choose to do, proceed with caution. Do your research on the lender, the terms of your note and the costs involved. Most of this information is available online or by asking your lender for comprehensive disclosure documents. Read all the fine print. To ask questions. Don’t assume you’re not vulnerable to the scam. Seek wise counsel and pray for wisdom. God gives it generously (James 1:5).
We have several Crown Stewardship Podcasts that you might find beneficial. Some of our more recent ones include preparing for inflation, seeking debt relief, and cutting spending while increasing faith.
Chuck Bentley is CEO of Crown Ministries of Finance, a worldwide Christian ministry, founded by the late Larry Burkett. He is the host of a daily radio show, my money life, featured on over 1,000 Christian music and talk stations in the United States, and author of his most recent book, Seven Gray Swans: Trends That Threaten Our Financial Future. Make sure you follow Crown on Facebook.