Cash Out Mortgage Refinancing for Home Improvements
by Clarence C. from Sparta, TN
Ask Kate about cash out mortgage refinancing for home improvements: Meet Clarence whose home needs a new roof and other renovations. He asks for the inside scoop on tapping into his home's equity with a conventional cash out refinance. I've added a couple of alternatives as well, VA home loans and reverse home mortgages.
Ask Kate: Cash Out Refinance By Clarence C. from Sparta, TN
At last look my credit rating was over 820. I am retired and currently have a mortgage balance of around $24,000.
I have made 200 of 360 payments. My current rate is 5.75. I currently have a 30 year Freddy Mac loan.
I want to do some work to my home. My home is estimated at around $76,000 by last tax appraisal. I would like to refinance $60,000 to $64,000 to cash out money for a new roof and some renovations.
I went to the bank that I now have my loan through to see about refinancing. They do not lock in a rate and take about 6 weeks to process. They gave an estimate of closing costs of $3500 to $5000.
How would you recommend that I go about a refinance? How do I find the best deal? I wish at my age that I did not have to refy, but to do some maintenance and remodeling it is the only way. I think even with closing costs, it makes sense to refinance.
I want to keep around the same monthly payment of $245. But, we have always paid at least $300 to lower interests costs over the years.
Can you give me any advice on the best way to proceed? I am a veteran but my bank loan officer said I should stay away from VA loans.
Thank you, Clarence
Kate's Answer: Cash Out Refinance
Congratulations on that pristine credit score! Good job!
Now onto the risks as well as rewards to cash out mortgage refinancing before I add in a couple of alternatives you might feel are worth exploring.
Risks and Rewards of Cash Out Mortgage Refinancing
Low interest rates and tax deductions for mortgage interest make the process of extracting available equity during a refinance attractive to homeowners. Like you have discovered, the cash can then be invested back into home improvements to increase the value.
But I have a warning! Unless your lender agrees in writing, don't begin the improvements until the loan process is closed. Getting a jump on tearing apart a home during a refinance can result in dire complications. Case in point, read Bb's refinance story at Cautionary Cash Out Mortgage Refinancing Tip
Are there other notable risks? In my estimation, the two greatest risks are over-financing a home and either ending up underwater if the real estate market collapses again
or not being able to afford the increased mortgage payment
Additionally, the interest rate and closing costs may be higher for cash out refinancing. So read the fine print carefully.
Details to Consider Before a Cash Out Refinance
And as a side note, the appraised value is often substantially different from a tax assessment. The lower the tax assessment, the less you pay in taxes
. But a market appraisal preformed by a licensed appraiser
is most likely be required by your lender to determine the amount of cash they will give you, over and above your current loan amount.
Secondly, make sure you do not borrow an amount so high that it would cause you to have to pay for private mortgage insurance (PMI). Go here to see how lenders calculate PMI
Instead of totally relying on your current bank, why not shop a couple more lenders, if for no other reason than due diligence. Think of your effort as job interviews. You'll find a treasure trove of questions to ask prospective lenders at Low Mortgage Payments: Question Your Way to Success
Lastly, two major areas you should be familiar with before refinancing are closing costs and locking in a rate. Go here to learn more about closing costs
and how to successfully lock in your mortgage rate
VA Cash Out Refi: Alternative to Conventional Refinancing
You might check into VA home loans (mortgages for veterans and active military)
regardless of what the bank's loan rep told you. I say this because some financial institutions have trained their sales staff to advise against certain loan programs not handled by their banks. But just because the bank isn't VA approved doesn't mean the program isn't worthwhile.
VA offers cash out refinancing to its veterans, up to 100 percent of a home's loan-to-value (LTV). For example, let's say your home appraises for $100,000. VA may allow you to roll in closing costs and borrow up to $100,000. The difference between the mortgage payoff and the refinanced loan amount in this example would be issued to you in the form of cash which you could apply to home improvements. Here's how mortgage lenders calculate your loan-to-value (LTV)
Reverse Mortgage Loans
Although you didn't ask about this, I'd like to toss one more idea into the ring... reverse home mortgage for senior homeowners. This loan program pays off your current mortgage and begins paying you a monthly income. Yet it requires no house payment from you, the borrower.
It's not without risk or restrictions so it is extremely important to use an experienced reverse mortgage consultant to guide you through the application process. Attending approved counseling sessions before making a decision is a must.
Even so, the program might be worth exploring. Go to What Is a Reverse Mortgage
to learn more about the home loan that's similar to a cash-out mortgage for Seniors minus the monthly payment!
Best wishes for your refinance and home improvements,
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