When homeowners need extra cash, they often borrow against the equity in their home, known as home equity loans or lines of credit (HELOC). Let’s explore the options of cash-out refinance vs. HELOC.

Cash Out Refinance vs HELOC

A HELOC allows you to borrow against the equity in your home to draw out cash when you need it.

How Does a HELOC Work?

A HELOC is a line of credit guaranteed by the equity in your home. HELOCs are interest-only loans taken out over a specific period, for example, ten years. Most lenders will allow you to borrow up to 80% or 90% of the equity in your home.

There are two parts to a HELOC loan, the draw-down period in which you pay interest only and the second part after the term of the loan expires, at which point you pay principal and interest.

During the term of a HELOC loan, you’re able to withdraw the money as and when you need it up to the approved limit of the loan, known as the loan’s drawdown period. You only pay interest on the amount you withdraw, not the total amount you’ve been approved for. After the drawdown period ends, you then pay a combined principal and interest payment on the amount you drew down until the loan is fully repaid.

HELOCs typically incur an adjustable interest rate based on the prime rate which meansinterest rates can fluctuate depending on market conditions and potentially rise over time.

How Does a Cash-Out Refinance Work?

Refinancing means you open a new mortgage to pay off your existing mortgage. With current low-interest rates, refinancing your home can allow you to access additional cash plus obtain a better mortgage rate and terms.

Let’s say your home is worth $400,000, and you owe $200,000. This means you have $200,000 equity in your home. In this scenario, many lenders will allow you to borrow up to 80% of the home’s value, which would be $320,000, leaving you with $80,000 in cash.

How Does a HELOC Work vs Refinance to Pull Out Cash?

A cash out-refinance option allows you to take advantage of fixed, low-interest rates for the life of the mortgage. Keep in mind; a fixed-term mortgage may not offer you the lowest of the lowest interest rates.

HELOC and home equity loans are considered second mortgages. If homeowners default, these loans only get paid back after the first mortgage is paid. In the event of a shortfall, homeowners are still liable for the remaining balance of the second mortgage.

When Should You Choose a HELOC?

If you intend to use the cash over a period of time, a HELOC may be your best option. This option allows you to withdraw the cash as and when you need it or not use it at all. A HELOC is often used as a backup strategy for example if you lose your job. If you don’t use the money, you don’t pay interest.

Most lenders offer competitive rates that range from 2.49% to 21%, depending on creditworthiness. A mortgage banker can walk you through all of your options.

HELOC Requirements

To qualify for a HELOC loan, you will need to have at least 15% – 20% equity built up in your home. The lender will require an independent appraisal to assess the equity value in the home.

Secondly, you need a debt-to-income (DTI) ratio that sits somewhere between 43% and 50%. Lenders will calculate the DTI ratio by calculating your monthly debt obligations by your pre-tax or gross income. Some lenders may not consider monthly expenses such as utilities, food, and transportation costs while others do. It’s important not to overextend yourself and borrow more than you are comfortable repaying back.

Thirdly, you need a qualifying credit score, along with a strong history of paying your bills on time.

When Does a Cash-Out Refinance Make Sense?

A cash-out refinance option offers two big benefits. It allows you to turn your home’s equity into cash plus lock in a lower interest rate on your mortgage. With current economic conditions, home values are increasing exponentially and interest rates are near all-time lows. If you were considering refinancing your home to access cash, there is probably no better time than now.

Cash-out refinance rates are usually slightly higher than a traditional refinance rate. The rate you receive depends on how much cash you want to take out and your credit score.

Talk to your bank to find out current cash-out refinance rates. Typically rates can be anywhere from 0.125% to 0.5% higher than rates you find for a no-cash out refinance mortgage. If needing to finance more considerable expenses, this is one of the lowest-interest forms of borrowing.

A cash-out refinance option makes sense if you plan on remodeling your home, need to pay income tax, pay off an existing home equity line of credit, for debt consolidation or college education.

Cash-Out Refinance Requirements

The rate depends on your personal circumstances and the equity in your home. The rate will be based on the loan-to-value (LTV) ratio along with your credit score, and the value of the loan. The more equity you cash out, the higher the interest rate.

The value of your home will need to be appraised by an independent appraiser. The new loan’s DTI ratio needs to be 43% or less, a LTV ratio of 80% or less, and a credit score of at least 620.

Conclusion

Whether you choose a cash-out refinance vs. HELOC, consider why you need the cash, when you need the cash (now or later), and how long you plan on staying in your home. Make sure you factor in other costs such as application fees, mortgage insurance, and any other applicable fees and budget accordingly. Our mortgage team is here to answer any questions you have and to walk you through your options.

What Happens When COVID Mortgage Deferment Ends?

As families and individuals alike struggle to recover from the numerous hardships caused by COVID-19, some may wonder how to proceed when the time comes for their COVID-19 mortgage deferment to end.

Depending on the borrower, COVID-19 forbearance could apply to a home mortgage, student loans, or any other type of repayment plan.

The following information will offer valuable insight into COVID-19 forbearance, how it works and what to do if you still can’t afford to make your mortgage payments after your deferment period is technically over.

What is COVID-19 Mortgage Deferment?

Because the recent pandemic has heavily impacted public health as well as the economy, many financial institutions are granting borrowers deferment — a temporary pause in loan repayment until the borrower regains financial stability. Keep in mind that deferment is not loan forgiveness, it simply takes the pressure off of the borrower for a short time.

While there is no doubt that everyone has felt the effects of the COVID-19 pandemic in some capacity, it’s important to know that loan deferment is not a given. Borrowers are typically required to qualify for deferment, which can prove more difficult if loans are held privately. However, thanks to the March 2020 CARES Act, many homeowners are still able to qualify for deferment and even receive deferment extensions.

CARES Act

The Coronavirus Aid, Relief, and Economic Security Act — or the CARES Act — is a stimulus bill worth over $2 trillion that was passed on March 27, 2020, to help American workers, families, and businesses deal with the aftermath of the Coronavirus.

The CARES Act offers two primary protections to homeowners who have federally or GSE-backed mortgages. “GSE” refers to government-sponsored enterprises, such as Fannie Mae and Freddie Mac, two federally-supported home mortgage companies.

First and foremost, the CARES Act prevents FHA or USDA lenders from foreclosing on homeowners before March 31, 2021. Similarly, VA, Fannie Mae or Freddie Mac lenders cannot foreclose on homeowners before February 28, 2021.

Furthermore, the CARES Act grants homeowners the right to receive forbearance for up to 180 days if they have experienced financial hardship because of COVID-19. Borrowers can then contact their loan servicer to request an additional 180 days at no cost, for a total of 1 year of forbearance.

Because some institutions have a forbearance request deadline of February 28th, 2021, it’s vital that homeowners request forbearance as soon as possible.

What Happens When COVID-19 Forbearance Ends?

If you are nearing the end of your forbearance period, it’s essential to communicate with your loan provider. Don’t hesitate to describe your financial situation and tell them if you will not be able to make your mortgage payments after your forbearance is over. After all, if you aren’t open with your loan servicer, they may have no choice but to penalize you. On the other hand, if you communicate early and often, they are more likely to help you find a solution.

As previously mentioned, borrowers have the right to a 180-day extension on their forbearance. However, if you have already taken advantage of your 1-year forbearance and you still won’t be able to make your payments, there are options available to you. Your loan servicer may offer a loan modification, help you facilitate a short sale, or find your next living situation, if applicable.

How Does COVID-19 Forbearance Repayment Work?

When it’s time to resume your mortgage payments, there are several repayment options at your disposal. By communicating with your loan provider, you may be able to establish a repayment plan that slightly increases your monthly payment until your backlogged mortgages are paid.

Secondly, you may be able to obtain a deferral or partial claim if you can resume your normal payments, but cannot afford to increase your monthly amount. In this case, your missed payments will likely be added to the end of your loan or put into a second mortgage or “junior lien” that will be paid when you sell, terminate, or refinance your mortgage. You could also give your provider a lump sum if you can repay all of your missed payments at once.

Do I Have to Pay a Lump Sum?

While paying a lump sum is an option after forbearance, it is certainly not a requirement. If your provider presents a lump sum payment as your only option, inquire about alternatives. You can check out this helpful Forbearance Fact Sheet for more information.

Can I Extend My Forbearance?

Given that the CARES Act allows for a 180-day forbearance extension, homeowners whose loans are insured by the FHA, the HUB (U.S. Department of Housing and Urban Development), the VA, section 184 or 184A of the Housing and Community Development Act of 1992, the Department of Agriculture, Freddie Mac or Fannie Mae providers are permitted a total of 365 days of forbearance.

How Do You Request Extension?

It is important to remember that neither the initial forbearance request nor the forbearance extension is automatic — homeowners must request both from their loan provider.

The thought of contacting your loan provider to request a forbearance or a forbearance extension can be intimidating, particularly if you aren’t sure that you will be able to make your mortgage payments in the near future.

However, you are not alone. As of December 2020, more than 2.8 million homeowners were on forbearance plans. Loan servicers understand that this is an incredibly challenging time for many people financially, physically, and emotionally. Generally, loan providers want to avoid foreclosure as much as you do, you just have to communicate with them.

The first step is to contact your loan provider and communicate honestly about your situation. Together, you can establish a plan going forward to handle your forbearance and missed payments. Remember, without communication, your loan servicer may be forced to penalize you — contact them as soon as possible to discuss forbearance.

What if You Still Can’t Afford Your Mortgage Payments After Forbearance?

If you are nearing the end of your forbearance period, have already received an extension, and still cannot afford your mortgage payments, it may be time to consider downsizing to a more affordable living situation.

This could involve selling your home through a short sale, foreclosure, or a deed-in-lieu of foreclosure. While these are not ideal situations, your loan provider can be a helpful resource in guiding you towards your next best step if repayment is not an option for you.

Partner With Capital Bank Experts to Navigate COVID-19 Forbearance

The above information provides an in-depth look at COVID-19 forbearance, how homeowners can manage their loan repayment plans, and what to do if you can’t afford your payments after forbearance.

Regardless of your current financial situation, remember that you are not alone. Communication with your financial institution and loan provider is paramount to receiving forbearance and finding a repayment solution.

Once your forbearance ends, Capital Bank Mortgage Bankers are available to discuss possible next steps if you’re looking for financing, connect with our team today.

Home has become more important than ever these past few months. It’s our safe space. Being quarantined, though, can make us view home in a new light – and inspire us to make changes to the property to benefit the whole family.

So if you’re considering updating a bathroom, remodeling the kitchen, or making other upgrades, why not refinance your mortgage to renovate your home?

Financing Your Renovation

You have options for financing a renovation. You might want to look for a personal loan or use your credit cards to pay for the work. The problem is that both have high interest rates, so you could end up paying a lot more than the renovations cost.

Taking out a Home Equity Line of Credit (HELOC) is also an option. A HELOC allows you to borrow against the available equity in your home. The good news is you only pay when you spend and can minimally pay back just the interest every month, like with a credit card. The bad news is, you’re accruing amounts to a second mortgage and has to be paid off within the pre-determined loan term.

Your best option to pay for home renovations may be to refinance your current mortgage. Home loan interest rates are historically low. Many people with equity in their homes are refinancing to get cash out, or to lower their monthly payments, or both. A cash-out refinance is the way to go right now.

How Much Cash Will You Need from a Refinance?

Before you can know how much cash to take out with a new mortgage, you’ll need to determine how much your renovation will cost.

Bids from two or three contractors on the scope of work to be completed will let you compare their estimated costs. A good contractor will tell you that no one ever knows what problems they’ll encounter when they start taking apart a house, and advise you to add 10%-20% extra to your budget in case of overages. (Hey, you’ve watched Property Brothers, right?).

You may even want to chat with a Realtor® if you’re thinking of selling your house in the next five to seven years, to make sure your upgrades will give you the return on investment you’re looking for.

Make Your Mortgage Refinance Work for You

A “cash-out refinance” means that you get a new mortgage loan for more than you owe on your current mortgage, then pay the old loan off and take the difference in cash. This is a great way to cover the cost of home renovations because you make your home equity work for you and add value to your home at the same time. You will:

• Consolidate debt into a single monthly payment
• Keep monthly payments as low as possible because of current low interest rates
• Increase the value of your home with upgrades, potentially adding equity quickly

Closing costs on a refinance are much lower than on purchase loans, an average of 1%-3% of the loan. Some of those costs are related to prepaying one or two months of mortgage payments, plus paying property taxes and homeowners insurance into escrow; you’ll get that back through those amounts being applied to your monthly payments.

You can even get a “no cost” refi by rolling the closing costs and fees into the life of the loan. You won’t pay upfront but you will have a higher monthly payment.

Let’s look at an example of how a cash-out mortgage refinance works.

A Cash-Out Refinance Example

Suppose you bought your home for $200,000 with a mortgage of $160,000. You’ve lived there five years and paid the loan balance down to $142,000. Based on prices of similar, recently sold homes in your neighborhood, you believe your home would be appraised at $230,000. That means you potentially have $88,000 in home equity ($230,000 – $142,000, home value minus what you owe).

Let’s say your lender will allow you to take out a mortgage of up to 80% of the $230,000 appraised home value. That means if you qualify for the loan, you can get a new mortgage of $184,000. After paying off the old mortgage of $142,000, you will have $42,000 for home improvements (minus loan fees and closing costs).

As with any new mortgage, you’ll go through the loan process. You’ll need a professional appraisal of your home, proof of your income and assets, and a qualifying credit score to determine the amount of loan you can get and the interest rate you’re offered.

Cash-Out Refinance Advantages

A cash-out refinance can make good sense whether you use the cash to renovate your home, get rid of an outstanding debt, or pay school tuition. And with current low interest rates – particularly if your credit score has improved over the years – you could end up with better loan terms than you started with!

Contact a Capital Bank Home Loans mortgage professional. Our knowledgeable, personable, and experienced loan officers will be able to help you take advantage of the positives and guide you through the refinancing process.

With interest rates at historical lows right now, mortgage interest rates are holding steady, too. So it may make sense to refinance – get a new home loan and pay off the old one.

There are several things to look into and factors to consider before you decide, but it boils down to this: Will refinancing save you money?

Basically, there are three questions to ask yourself to see if you can save money by refinancing:

1. Are mortgage interest rates lower than when I got my home loan?
2. Has my credit score improved since I got my current mortgage?
3. Is my home worth more now than when I got my existing mortgage?

A “yes” to any or all of these show that it could be a good time to refinance!

Benefits of refinancing

One benefit of refinancing is to get more favorable loan terms than you have currently.

With a lower interest rate on the same loan amount as your existing mortgage, your monthly payments will be lower. Or, if you’ve paid down the loan over time and can refinance to a smaller loan – with the same or lower interest rate than you have now – you also can lower your monthly payments. A better credit score will improve the interest rate you can get.

Another benefit of refinancing is to use the equity in your home to get cash out.

If your home has increased in value since you got your current mortgage (and with today’s historically low interest rates), you may be able to refinance for the same or larger loan amount than before. If you qualify, a cash-out refi allows you to get a new home loan plus cash at closing from the equity in your home. This could let you pay off high-interest debt (like credit card debt), make home improvements, or pay for a child’s tuition.

Loan terms to Look at When Refinancing

Loan Duration

You can change your loan duration with a refinance, shortening or lengthening the new term of the loan. Here are some different types of home loans.

15 vs. 30 Year

A fixed-rate mortgage has a predictable monthly payment for the life of the loan. The duration of the loan impacts monthly payments, amount of interest paid, amount of time it takes to build equity in the home, and the length of time it takes to pay off the loan.

15-year and 30-year mortgages are the most typical lengths of fixed-rate mortgages:

• A 15-year mortgage will have higher monthly payments than a 30-year mortgage, but the upside is paying less interest over the life of the loan. You’ll build equity in your home faster and pay off the mortgage sooner, too. For instance, if you’re now entering what’s considered peak earning years (ages late-40s to late-50s) and can handle higher monthly payments, it may make sense to refinance to a 15-year loan to pay off your home before you retire.

• A 30-year mortgage has lower monthly payments than a 15-year mortgage because they are spread out longer. You will pay more interest and take longer to build equity and pay off the mortgage than with a loan of shorter duration. People often choose a 30-year mortgage for the monthly affordability. Lower payments also may create a sense of security in the long-term financial ability to handle the ups and downs of life without losing one’s home.

Adjustable-rate Mortgage

Home loans can have adjustable-rate mortgages, too. Depending on the terms, this type of loan will have a fixed interest rate for a short period of time – 1, 5, 7, or even 10 years – before the rate adjusts higher or lower to current interest rates of the time.

A featured rate early in the loan term can let borrowers buy more expensive homes than would be affordable with a fixed-rate loan. The loan can be a budget-buster, however, if interest rates rise significantly, and may require a homeowner to refinance when the rate adjusts.

Balloon Mortgage

A balloon mortgage with its low monthly payments may entice a borrower to qualify for a bigger loan and a more expensive house than they thought possible. Buyer beware.

A balloon mortgage is for a shorter loan duration than traditional mortgages and consists of nearly interest-only monthly payments. At the end of the loan term, the entire mortgage becomes due in a big “balloon payment.” Because this loan doesn’t amortize (pay off the principal amount over the life of the loan), a borrower won’t build much equity in the property or pay down the loan.

A balloon mortgage is usually a short-term solution. Because this type of loan is so risky, many people need to refinance their balloon mortgage before it comes due.

FHA Loan Refinancing

If you have an FHA home loan you are allowed to refinance to lower your monthly payments. An FHA Streamline refinance is a way to fast-track a new loan and still retain the same FHA-qualifying, low-interest benefit. The guidelines strictly limit what you can get from the refinancing, and there are some costs involved as with any new loan.

Things to consider about refinancing

As a rule, you have to wait six months after you’ve gotten a mortgage to refinance. And interest rates aren’t the only factor in refinancing – there are costs to getting a loan. You’ll go through many of the same processes for refinancing that you went through the first time you got a mortgage, including fees and closing costs.

Here’s a formula for figuring out if the costs of refinancing are worth it.

Break-even Point: When Cost = Savings

If you’re going to spend money to save money, you’ll want to find your break-even point – the point in time or loan payments when cost = savings. Once you pass that break-even point, you actually start saving.

The formula is: Loan Costs divided by Monthly Savings equals Number of Months to break even. Here’s an example. If you refinance to save $150 each month on mortgage payments, and you pay $3000 in fees/closing costs to get the new loan, it will take you 20 months to break even (3000/150=20). So, as long as you plan to stay in your home at least two years (24 months), you’ll be saving money by refinancing. If not, then refinancing might not be the right step.

As always, every individual homebuyer’s situation is different and it’s best to talk it over with an expert. If you think you want to refinance your home loan, contact Capital Bank to speak to a knowledgeable, experienced loan originator.

What Do I Need to Refinance?

Are you ready to refinance your mortgage? Here are the documents a new lender will ask to see:

• Proof of income: paystubs, two years of tax returns, W-2/1099 forms
• Proof of assets: home ownership documents and current home value, bank accounts, investment /retirement accounts
• Credit report
• Statements of debt: credit card statements, school and car loans, other outstanding loans/debt
• Current mortgage statement

Home Refinance FAQs

Does it make sense to refinance my mortgage?

There are various factors in deciding when it makes sense to refinance. Identify your goals (i.e. lowering your mortgage payment or changing your loan terms), and determine if that goal is achievable. Read the tips in this blog and get in touch with a loan officer to help you in your mortgage refinancing process.

Does refinancing hurt my credit?

According to credit bureau Experian, refinancing can temporarily lower your credit score because of credit checks, multiple loan applications, and closing your old mortgage account. One hint: make sure all loan applications are within a 45-day period to count as one credit inquiry. Your score will go up again as you make regular on-time payments on the new loan.

How do mortgage points work?

A lender may offer you the chance to lower the interest rate on your loan by paying mortgage points, each worth 1% of the amount you borrow. Buying points will increase your closing costs but may save you money in the long run by reducing your monthly payments. You can do the math here.

What is a cash-out refinance?

A cash-out refinance is when you get a larger loan than your old home loan. The difference between the two loans comes back to you as a cash payment.

What is a cash-in refinance?

A cash-in refinance is when a borrower brings money to the table to lower their current mortgage amount owed. This can be to avoid mortgage insurance on the new loan, get a lower interest rate, or even to qualify for the refinance.

Can I refinance a VA loan?

The U.S. Department of Veterans Affairs allows a VA-backed home loan refinance to reduce monthly payments or make payments more stable (e.g., replacing an adjustable-rate mortgage with a fixed-interest one). Applicants have to meet certain eligibility and loan requirements.

* Capital Bank, N.A. is not a debt management, tax planning, financial planning or credit counseling service provider. The information provided is strictly for informational purposes and not meant as legal or financial advice. Please seek professional advice from an accountant, financial advisor or credit counselor.