Posted On August 20, 2019
In lieu of the Federal Reserve’s rate cut, many homeowners are considering a mortgage refinance. Refinancing your mortgage could help you lower your monthly mortgage payment through a lower interest rate, reduce or eliminate mortgage insurance, change loan programs or terms, or get cash out. When homeowners get cash out, they are able to use their home’s equity to finance other needs like a home renovation project or to pay down higher interest debt.
Most real estate experts recommend building up at least 20% equity in your home before taking cash out. Now, the Trump Administration has moved to limit cash-out refinancing for FHA Loans. In 2009, the cash-out refinance cap was adjusted from 95% of the property value to 85%. Now, that figure will be pushed to 80% to ensure borrowers have built up at least 20% equity in their homes. Similarly, Fannie Mae and Freddie Mac have a cash-out refinance cap of up to 80% of the value of the home. Maintaining an equity cushion in your home when doing a cash-out refinance protects you from a possible drop in your home’s value and puts you in a safer financial position. The policy change will likely be implemented this September, as more and more homeowners explore cash-out refinance options amidst record low mortgage rates.
The Federal Housing Administration (FHA) chief risk officer, Keith Becker, said, “the risk at 85% is more than what we think is appropriate to bear and more than what we think we should expose taxpayers to.” Following the Financial Crisis, Americans have been more cautious with tapping into their home’s equity. However, as home values rise and mortgage rates trend lower, many homeowners are using cash-out refinances to improve their homes or cover other expenses. According to the FHA, in the past twelve months 151,000 FHA borrowers completed a cash-out refinance, compared to just 43,000 during the same period five years earlier. Cash-out refinances made up 63% of all total FHA refinances, up from 39% in the previous year.
A cash-out refinance is a new loan origination and replaces your existing mortgage with a new mortgage that includes the balance owed plus the amount of cash you withdrew. A new loan origination will come with new closing costs, so be prepared to cover those fees as well. Your loan limit will depend on the type of loan. Check with your loan officer to determine what type of loan best suits your needs. If you have any questions about a cash-out refinance or any type of refinance, check out our mortgage calculators to compare rates and terms.
Sources: The Wall Street Journal