Lower mortgage rates and high appreciation in some areas are driving a national surge in home refinancing.
Both purchase and refinance applications jumped in the past week, with mortgage applications up 26.8 percent from a week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending June 7, 2019. Refinance applications jumped 47 percent in the same period to the highest level since 2016, according to Joel Kan, MBA's associate vice president of economic and industry forecasting.
In the past seven months, mortgage rates have dropped a percentage point, with the national average 30-year fixed mortgage rate at 3.97 percent, according to Bankrate.com. The 15-year fixed rate is 3.25 percent.
The drop in rates has opened the refinancing door to many homeowners, primarily those who have taken out their mortgages in the last two years, when rates were higher, and those who missed previous refinancing opportunities, says Greg McBride, chief financial analyst at Bankrate.com. “This is the first glimpse we've had of rates this low in 18 months,” he says.
In addition, a new Bankrate.com survey shows that 66 percent of those living in the same home as before the Great Recession say their home is worth more than it was pre-recession.
"We've seen some pretty solid appreciation” in some markets nationwide, says Richard Bettencourt, president of the National Association of Mortgage Brokers. Yet some states — Louisiana, Mississippi, Arkansas, West Virginia and Illinois — have areas where homes are still “underwater” — worth less than what the owners owe on their properties, according to ATTOM Data Solutions’ first quarter 2019 U.S. Home Equity & Underwater Report.
Among the top reasons people take cash out of their homes are debt consolidation and home improvement, says Bill Banfield, executive vice president of capital markets, Quicken Loans Inc. Others use their home equity to pay off mortgages on second homes, to pay college tuition or to pay for expensive vacations.
"At a certain age you need to think about your long-term plan, about your retirement,” says attorney Dale Siegel, owner of Circle Mortgage Corp., Harrison, N.Y., and author of The New Rules for Mortgages.
If you are approaching 50 or older and have considerable equity in your home, a cash-out refinance can be tempting now, but it has risks, experts say.
If your estimated retirement date is 15 or more years away, a cash-out refinancing can be a way to access cash at a relatively low interest rate. “The more time you have to retirement, the better you can take advantage of a cash-out refinance,” Siegel says. It gives you time to pay down the loan.
Still, keep in mind the potential impact of a cash-out refinance on your total financial situation. “If you refinance, there are consequences,” says certified financial planner Andrew Feldman, president of AJ Feldman Financial in Deerfield, Ill. “A higher balance, a different monthly payment.”
Here are some guidelines for a cash-out refinance:
Keep the amount of cash you take out reasonable
If you limit your cash-out borrowing to just 5 percent of the balance, for example, on a $200,000 refinance loan, you will increase your loan amount by just $10,000. “That small of a difference is not material,” says Quicken Loans’ Banfield. If you want to access an additional $30,000 or $50,000, increasing your loan to $230,000 or $250,000, make sure you can sustain a higher monthly mortgage payment, if there is one, Feldman says.
Have a backup plan
Before moving forward, look at your monthly cash flow, how secure your job, business or other income is, what you intend to do with the funds, and when you might wish to retire, financial professionals say. “If you increase your mortgage payment and you lose your job, how are you going to sustain that monthly payment?” Feldman asks. “You need a plan B. Do you have savings?"
Earmark the money for a purpose
The largest percentage of cash-out refinances are for debt consolidation, Banfield says. The second most common reason is to access funds for home improvement. Since passage of the Tax Cuts and Jobs Act of 2017, only interest on the cash-out portion from a refinance that is used for home improvement is tax-deductible, effective 2018; cash-out refinance funds used to pay off credit card debt are not. If you use your home equity to pay off your credit cards only to run up that debt again, the risk can be substantial.
"Home values can go up and down, so you want to be careful about depleting the equity in your home,” Siegel says. “Increasing the debt on your primary residence when you're approaching retirement is not a good idea.”
Make a long-term plan
If you're earning $50,000 or $100,000 now, consider what your income will be in retirement. It's likely to be lower, so be sure you will be able to handle the monthly mortgage payment in retirement or can pay off your mortgage before you retire. “You want to keep the [home] equity as savings,” Siegel says, in case you want to sell your house later in life and buy a lower-priced home for cash, eliminating a mortgage payment. People with good credit scores typically maintain 30 percent equity after the cash-out refinance, Quicken Loans’ Banfield says. So, for a $300,000 house, you will still have $90,000 in equity after the refinance transaction.