Consumers are no stranger to the present economic times we are living in right now as everything is rising, and inflation is rampant virtually everywhere. Gas prices, stock prices, housing prices, mortgage rates, the list goes on. As costs rise the need to borrow money for people in particular situations rises as well.
If you have been thinking about doing a cash out refinance to combine consumer debt, do home improvement, buy another property, or need cash for any reason; here are ways to go about safely obtaining and accessing your home’s equity.
1. Cash out refinance on your first mortgage. This might mean having to give up your 2.75-percent 30-year fixed rate mortgage. You pay off those consumer debts and recognize that to access the cash touching your first mortgage is a possibility. It means having to take today’s prevailing 30-year fixed rate mortgage which is in the mid 4 percent at the present time. A few advantages are the payment is fixed, deductible, and scalable for the future.
2. A home equity line of credit is like a credit card tied to your house which also has a high rate. We are in an inflationary environment right now and this situation may last throughout the rest of 2022. As a result, the federal reserve is hiking the fed funds rate plus a margin of 3 percent prime rate. The prime rate usually has a margin. It is prime plus a margin with your home equity line of credit, meaning it is realistic to expect your home equity line of credit that you presently have or a new one is going to have future rate and later future payment increases. Payment increases on a home equity line of credit with a balance is realistic. The advantage of a home equity line of credit is that it’s very low cost to get, and you only borrow on what you pay, meaning you only borrow on what the balance of the home equivalent of credit is so there’s no balance. It works the same way as a credit card. However, the costs and margins which is the bank’s profit motive are going to likely increase as costs are rising. It would not be uncommon to think the home equity line of credit interest rates could be as high as 6 to 7 percent in the next few months.
3. A fixed rate second mortgage, which is a hybrid between a fixed rate mortgage and a home equity line of credit; it is still not deductible like the home equity line of credit. However, it is a fixed payment over a 30-year loan or a 10-year loan. The only advantage to this type of product is that it is a fixed rate payment, however, because it is in second position on your home much like the home equity line of credit is it is also going to have a higher interest rate more than likely somewhere around 6.5-7.5 percent.
With all three of these options which one makes the most financial sense for you? A line of credit could be a good decision but if you need to borrow a chunk of money on your home equity line of credit to pay off debt or to do a home improvement project, a clever idea would be pay off that home equity line of credit. However, most diligent families today do not have that spending ability. To go into a fixed rate mortgage on a new first mortgage even though the rate might be higher could supply immediate fixed rate payment relief to conduct the goal, whether that fixing up the house or paying off debt. It might not be a bad idea to consider doing a first mortgage instead of a home equity line of credit because it is also tax deductible and as we mentioned, it is also scalable. It would be quite easy for you to refinance that loan and do what is called a “rate and term refinance” which will get you a better interest rate and better terms than a cash out and take advantage of rates again down-the-line.
In other words, you could access money for cash out project or debt consolidation project, and then refinance that loan in the future when rates come down. It might not also be a horrible idea to consider the possibility of a more aggressive debt paydown structure. You could cash out refinance all your debt into a 30-year mortgage or a 15-year mortgage which could give you a faster home payoff time and radically change your financial picture for the better. A good mortgage lender that can clearly and accurately articulate the pros and cons to each of the three products above. It would be a good first step in deciding what might aid you in your decision-making process for tapping your home equity for whatever your financial goals are.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.