Every week I try to give you my opinion on not only rates but other economic factors that may have an influence on your lives. I even read your feedback and was asked last week which is better… a cash-out refinance or an equity line??? Today, I will share my honest opinion on factors to consider when deciding between a cash-out refinance or an equity line to pay off higher interest rate debt, such as credit cards, lines of credit, and installment debts (like car loans). Of course, if you have it, you will want to keep your below 4% 30-year fixed rate in place, if you can. What I will show you today may offer a fresh perspective, challenging the conventional thinking in retail mortgage banking. In the current real estate market, things are moving at a slower pace. Many mortgage bankers are actively seeking ways to generate business, especially in a climate where home sales are sluggish. Many mortgage professionals might suggest a cash-out refinance on your current home, even if your existing mortgage rate is below 4% (which is true for many homeowners in America today). They will also tell you that rates will be going down over the next 18-24 months and you will have the opportunity to refinance to an even lower rate at that time. As you know…. I agree with this part of their statement, as I do believe you will have a chance to refinance if your current or refinanced rate is above 5%.
So how to decide??? Start by running the numbers… Know your current mortgage balance and payment. Then, decide how much cash you want to get out of your home. When looking at the refinance option, work with your mortgage lender to determine what the payment would be on a new mortgage to cover your current balance, plus the cash you want to get out. Of course, the payment will be higher because of the higher rates and the higher loan balance. But… if you’re paying off high interest-rate debt (mostly variable, consumer installment and credit cards), you should take that monthly savings into account. Don’t forget about the closing costs and how that takes away from the amount of cash you get at closing.
The other idea is to do an equity line with an interest-only payment to get the same amount of cash out to pay off those debts. I have checked with many equity line folks who are offering equity lines in the prime + 1.25% range with interest-only payments or 9.75% based on today’s prime.*** On the surface, you might say… “9.75% seems awfully high” and “it is variable, based on the Prime rate which follows moves by our Federal Reserve.” I would say both of those observations are true, and I would have the same opinion before doing the math and using some logical thinking. To run the numbers on this scenario, take your current mortgage payment and add the proposed payment on the line of credit. Again, consider the closing costs associated with the new loan, as well as the reduced monthly debt on the debts you will pay off.
So, I am not saying that cash-out refinances are bad and those trying to convince you to do them are “bad” loan officers. Sometimes, and depending on your circumstances, a true cash-out refinance may be your best option. There are some folks in this industry whom I genuinely respect who are promoting cash-out refinances. My point is to ask the questions and compare yourself; you have options. I make a living placing folks in debt, but I am not a fan of debt, especially consumer credit card debt. Our industry’s responsible for putting our clients in programs that are overall their best option and not the best option of their “loan officer.” When thinking of pulling cash out for debt consolidation or even a rehab cash on your home, compare your options before you possibly payoff your current below 4% 30-year fixed rate.
Now, take both scenarios, and compare. Below is a breakdown of a sample scenario taking out $100k. Rates and payments are not advertisements of available offerings. Payments do not include taxes and insurance.
- $500,000 Current Mortgage @ 4% = $2387 Principal & Interest Payment
- $600,000 New Mortgage @ 7.75% / 7.791% APR = $4298 Principal & Interest Payment (30 Year Term)
- $100,000 HELOC @ 9.75% = $813 Interest-Only Payment
By my calculations in this scenario, the HELOC option is about $1100 less each month. You get to keep your $500K 4% 1st mortgage, and if you believe, like I do, that the FED is done with raising rates….your equity line payment of roughly $813 will start to go down with each cut that the FED makes over the next several years. Also, while equity lines are not cost-free to obtain….in most cases the cost can be less than the cash-out refinance. Paying off consumer/variable debt at high rates is a very good thing. Paying them off and saving close to $1100 per month, in this scenario, versus a true cash-out refinance and the not worrying about refinancing until rates get below 4% again…. seems to be the better overall choice here. Keep in mind that equity line rates and cost vary from bank to bank and what I showed is just one quote. The other thing about equity lines, in most cases, is if you pay the balance down…you can redraw back to your original credit line limit down the road if you need to.
Understand, I am not saying that cash-out refinances are a bad thing and those trying to convince you of doing them are “bad” loan officers. In some cases, and depending on your individual circumstances, a true cash-out refinance may be your best option. There are some folks in this industry who I truly respect who are promoting cash-out refinances. My point here is to ask the questions and compare for yourself, you do have options. I make a living placing folks in debt, but I personally am not a fan of debt… especially consumer credit card debt. I believe it is our industry’s responsibility to place our clients in programs that are overall their best option and not the best option of their “loan officer”. When thinking of pulling cash out for debt consolidation or even a rehab cash on your home, compare your options before you possibly pay off your current below 4% 30-year fixed rate.
***BankSouth Mortgage does not offer this type of credit line and this is not an advertisement for these rates.
Remember… The BEST RATE… IS A LOCKED RATE… with a float down… ask me about our program that allows you to lock your rate and then float down if rates move lower.
Make sure you (or your buyer) get pre-approved before looking at homes so we can determine if you are looking in the correct price range and have you armed to submit an offer with a pre-approval letter!
Thank you for reading this blog. I hope that the facts and insights I share provide value for you.
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Blog post date: Friday, November 17, 2023