Cash Out Refinance

What it is and when to use it

If you have a significant amount of equity built up in your home and would like to convert that equity into actual money you can use, a cash out refinance may make sense for you. Here are some of the key things you should know.

What is a cash out refinance?

A cash out refinance is when you take out a new home loan for more money than what you owe on your current loan and receive the difference in cash. For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity. With cash out refinancing, you could receive a portion of this equity in cash. If you wanted to take out $40,000 in cash, this amount would be added to the principal of your new home loan. In this example, the principal on your new mortgage after the cash out refinance would be $240,000.

When is a cash out refinance a good option?

A cash out refinance makes sense in a number of situations:

• When you have the opportunity to use the equity in your home to consolidate other debt and reduce your total interest payments each month
• When you are unable to get other financing for a large purchase or investment
• When the cost of other financing is more expensive than the rate you can get on a cash-out refinancing

What can I use the cash for?

You are free to use the cash in just about any way you want. Many people use it to pay down high-interest credit card debt. Even though you’ll still owe the same amount of total debt when all is said and done, you can save a lot in monthly interest payments. You may also get the benefit of deducting these interest payments from your taxes, whereas your credit card debt is not tax deductible 1. In this situation, your lender will most likely pay your previous lenders directly at the time of your closing.

Alternatively, some people use the cash for a major purchase or expense if financing is not available or is more expensive than the rate on a mortgage. In this situation, your lender may give you your cash directly to use at your discretion.

Other common reasons for cash out refinancing include:

• Home improvement projects
• Education expenses
• Purchasing an investment property
• Paying for emergency expenses
• Vacations
• Elderly care

Be cautious about using cash-out refinancing or other long-term financing to pay for current or short term expenses. For example, if you use a cash out refinance to pay for a car that you’ll keep for six years, the interest rate will often be much lower than the rate on a new car loan, but you could be paying back the loan for another 24 years. If you use a cash out refinance to pay back credit card debt, you’ll have more credit available on the card, but remember that you still owe the same total amount, or a little more if you finance your closing costs.

Use the Cash Out Refinance Calculator to see how much equity you can take out of your home and estimate how much you’ll reduce your payments by consolidating your existing debt.

Home equity loans

Another option to access the equity you’ve built in your home is through a home equity loan. While a cash-out refinance replaces your current mortgage with new terms, a home equity loan can either refinance your current mortgage with new terms, or be an additional fixed rate loan. Usually, a traditional cash-out refinance has closing costs that can amount to hundreds or even thousands of dollars. However, you may be able to avoid these costs with a home equity loan.

1 Consult your tax advisor about the tax deductibility of mortgage interest.

Advantages of Homeownership

Is owning a home right for you?

Becoming a homeowner comes with a lot of responsibility, but also a lot of rewards. To help you decide if owning a home makes the most sense for you, here are some of the main reasons people choose homeownership over renting.

It’s a Good Investment

While home prices move in cycles over the short-term, if you stay in your home for a long time, it could increase in value and give you a substantial return on your investment.

If you are currently renting a home or apartment, use the Rent vs Buy Calculator to help determine which option provides the most economic benefits for you over the time you plan to be in your residence. When using the calculator, be sure to include some assumption about future increases in your rent, as most landlords periodically raise rents.

You Build Equity

When you subtract the amount you owe on your home loan from the total value of your house, the amount left over is your home equity-the “dollar” value of your home that actually belongs to you. There are two ways to build equity:

1. With each monthly mortgage payment you make, a portion goes toward reducing the amount you owe on your loan, which increases your equity. In a sense, paying your mortgage is a form of savings, as it increases the equity in your home.
2. As your home increases in the value, it creates more equity for you

In a sense, paying your mortgage is a form of savings, since it increases your home equity which you can tap into if you need money in the future.

When necessary, you can borrow against your home equity to meet a variety of financial needs, including home improvements, education or medical expenses. A home equity loan or line of credit can also be used to pay off high interest credit card debt, since the interest rate is generally lower and the interest payments are tax deductible. Read the Cash Out Refinance article for more information on how you can one day access the equity that you build in your home.

You Enjoy Significant Tax Deductions

Owning a home can reduce the amount you pay in income taxes each year. Your mortgage interest and property tax payments may be deductible from your federal taxes, as well as many state taxes. Certain closing costs and loan discount points also may be tax deductible1. In the early years of your mortgage, when interest represents the bulk of your monthly mortgage payment, these tax deductions can put a significant amount of money back in your pocket.

You Build a Strong Credit History

When you buy a home and consistently make your monthly loan payments on time, it demonstrates to other lenders that you are a good borrower and the risk of you defaulting on a loan is low. This strong credit history will be helpful in the future when you need other loans for buying a car, making improvements to your home, or paying other major expenses.

You’re Free to Create the Home You Want

Homeownership offers tremendous freedom to create the living environment that you have always wanted. You can own pets, paint rooms whatever color you like, make changes to floors and carpeting and do all the things that make a house your home – all without having to get approval from a landlord.

Ready to find that Florida home of your dream?  Contact me and let’s get “homeowner” on the list of your greatest achievements!

1 Consult your tax advisor about the tax deductibility of mortgage interest.

National Snapshot: What’s Ahead for Real Estate

The U.S. unemployment rate is at a 50-year low, and consumer confidence remains high. In fact, the University of Michigan’s latest Surveys of Consumers found that Americans have their most positive personal finance outlook since 2003.¹

However, if you follow national news, you’ve probably heard speculation that we could be headed toward a recession. Global trade tensions and a slow down in the GDP growth rate has sparked volatility in the stock market, leading to economic uncertainty.

Given these differing signals, you may be wondering: How has the U.S. housing market been impacted? Where is it headed? And more importantly … what does it mean for me?

MORTGAGE RATES ARE NEAR HISTORIC LOWS

In August, Freddie Mac reported that the average 30-year fixed mortgage rate hit its lowest level since November 2016, falling to 3.6%, down a full percentage point from a year earlier.² Variable mortgage rates also fell when the Federal Reserve cut interest rates at the end of July for the first time since 2008.³

This was welcome news for many in the real estate industry. Freddie Mac predicts that low interest rates and a robust job market will help the housing market remain strong despite the threat of recession.

“There is a tug of war in the financial markets between weaker business sentiment and consumer sentiment,” said Sam Khater, Freddie Mac’s chief economist. “Business sentiment is declining on negative trade and manufacturing headlines, but consumer sentiment remains buoyed by a strong labor market and low rates that will continue to drive home sales into the fall.”²

What does it mean for you?

If you’re looking to buy a home, now is a great time to lock in a low mortgage rate. It will shrink your monthly payment and could save you a bundle over the long term. Or if you plan to stay in your current home for a while, consider whether it makes sense to refinance your mortgage at today’s lower rates.

PRICES CONTINUE TO RISE AT A MODEST PACE

According to the S&P CoreLogic Case-Shiller Indices, housing prices continue to rise. But the rate at which prices are rising is slowing down. For May 2019, the National Home Price Index rose by 3.4%, down from 3.5% the previous month.⁴

Of course, national averages often don’t present the whole picture. Some markets have seen modest declines, while other areas are witnessing double-digit increases. The key differentiating factor in most cases? Housing affordability.⁵

Since 2012, home prices have increased at about three times the pace of wages, according to National Association of Realtors chief economist Lawrence Yun.⁶

“Housing unaffordability will hinder sales irrespective of the local job market conditions,” said Yun. “This is evident in the very expensive markets as home prices are either topping off or slightly falling.”⁵

But what about all this talk of a recession? Will we see housing values plummet like they did in 2008? Economists say no.

If we look at history, the real estate crash experienced during the Great Recession isn’t typical.

The recent Housing and Mortgage Market Review report from Arch Mortgage Insurance provides data to support this. “What we found is that the next recession is likely to be far less severe on the housing market than the last one. It’s not that this time is different; it’s that last time was really different from historic norms.”⁶

“A large decline in national home prices is unlikely in the next recession,” Arch economists write. “A persistent housing shortage should help cushion home price declines.”⁶

What does it mean for you?

If you have the ability and desire to buy a home now, don’t let the threat of a recession hold you in limbo. The market is cyclical, and it will experience ups and downs. But over the long term, real estate has consistently proven to be a good investment.

 

STARTER INVENTORY REMAINS TIGHT WHILE LUXURY MARKET SOFTENS

As we’ve seen in the past, it’s become a tale of two sectors.

The low-end of the market remains highly competitive as buyers compete for affordable housing. A lack of new construction during the last recession led to an undersupply of starter homes. This trend continues—despite growing demand—due to a lack of skilled workers, rising land and material costs, and a slow permitting process in many areas.⁷

The result? There’s a shortage of homes for sale that Americans can actually afford to buy.

The luxury market, on the other hand, has softened. Economic uncertainty, changes to tax laws, and rising prices have slowed demand. Plus, to recoup their higher costs, builders flocked to this segment—causing an overabundance of supply in some areas.

“If you’re selling an entry level home, you’re probably still looking at a pretty competitive market in most places,” according to Danielle Hale, chief economist at Realtor.com. “But if you’re selling a more expensive home you probably have to adjust your expectations.”⁸

What does it mean for you?

Move-up buyers, you’re in luck! If you’re ready to trade in your starter home for something more luxurious, you may get the best of both sectors. We’re still witnessing strong demand for entry-level homes, giving sellers the upper hand. At the same time, buyers of high-end homes are finding a greater selection (and more negotiating power) than they’ve had in years.

INVESTORS ARE BUYING HOMES AT RECORD LEVELS

There’s one group that hasn’t been slowed down by lack of affordability or economic uncertainty: investors.

According to CoreLogic, investors are purchasing homes at a record pace. In 2018, the share of U.S. homes bought by investors reached 11.3%—the highest level since the company began tracking nearly 20 years ago.⁹

Notably, this increased activity wasn’t led by institutional investors, but instead by small and individual investors focused on the starter-home segment.⁷ Declining interest rates and an uncertain stock market has led investors to flock to real estate as they seek out greater stability and higher returns.

“With declining mortgage rates … they’re searching for a better return for their money,” said NAR chief economist Lawrence Yun.¹⁰

What does it mean for you?

If you’re looking for a way to “recession proof” your money, you might want to consider investing in real estate. People will always need a place to live, and (unlike the stock market) a rental property can provide a steady source of cash flow during uncertain economic times.

I’M HERE TO GUIDE YOU

While national real estate numbers can provide a “big picture” outlook, real estate is local. As a local market expert, I can guide you through the ins and outs of our market and the issues most likely to impact sales and home values in your particular neighborhood.

If you have specific questions or would like more information about how market changes could affect you, contact me to schedule a free consultation. I’m here to help you navigate this shifting real estate landscape.

Sources:

1. University of Michigan Surveys of Consumers – http://www.sca.isr.umich.edu/
2. Freddie Mac – https://freddiemac.gcs-web.com/news-releases/news-release-details/mortgage-rates-drop-significantly?_ga=2.29332539.689041222.1565464527-928629548.1565464527
3. CNN – https://www.cnn.com/2019/07/31/business/fed-rate-cut-july-meeting/index.html
4. S&P Dow Jones Indices – https://us.spindices.com/documents/indexnews/announcements/20190730-965771/965771_cshomeprice-release-0730.pdf?force_download=true
5. National Association of Realtors – https://www.nar.realtor/newsroom/metro-home-prices-increase-in-91-of-metro-areas-in-second-quarter-of-2019
6. Forbes – https://www.forbes.com/sites/alyyale/2019/04/18/with-a-recession-looming-is-now-the-time-to-sell-your-home/#7d3a21665bce
7. CNN – https://www.cnn.com/2019/08/09/economy/mortgages-home-buyers/index.html
8. Forbes – https://www.forbes.com/sites/carolinefeeney/2019/07/01/halfway-into-2019-how-is-the-housing-market-holding-up/#7e656e3ec5d8
9. CoreLogic – https://www.corelogic.com/blog/2019/06/special-report-investor-home-buying.aspx
10. Fox Business – https://www.foxbusiness.com/economy/investors-snapping-up-homes-at-record-levels

Happy Labor Day…a little history

Labor Day pays tribute to the contributions and achievements of American workers and is traditionally observed on the first Monday in September. It was created by the labor movement in the late 19th century and became a federal holiday in 1894. Labor Day weekend also symbolizes the end of summer for many Americans, and is celebrated with parties, street parades and athletic events.

Why Do We Celebrate Labor Day?​

​In the late 1800s, at the height of the Industrial Revolution in the United States, the average American worked 12-hour days and seven-day weeks in order to eke out a basic living. Despite restrictions in some states, children as young as 5 or 6 toiled in mills, factories and mines across the country, earning a fraction of their adult counterparts’ wages.

People of all ages, particularly the very poor and recent immigrants, often faced extremely unsafe working conditions, with insufficient access to fresh air, sanitary facilities and breaks.

As manufacturing increasingly supplanted agriculture as the wellspring of American employment, labor unions, which had first appeared in the late 18th century, grew more prominent and vocal. They began organizing strikes and rallies to protest poor conditions and compel employers to renegotiate hours and pay.

Many of these events turned violent during this period, including the infamous Haymarket Riot of 1886, in which several Chicago policemen and workers were killed. Others gave rise to longstanding traditions: On September 5, 1882, 10,000 workers took unpaid time off to march from City Hall to Union Square in New York City, holding the first Labor Day parade in U.S. history.

The idea of a “workingmen’s holiday,” celebrated on the first Monday in September, caught on in other industrial centers across the country, and many states passed legislation recognizing it. Congress would not legalize the holiday until 12 years later, when a watershed moment in American labor history brought workers’ rights squarely into the public’s view. On May 11, 1894, employees of the Pullman Palace Car Company in Chicago went on strike to protest wage cuts and the firing of union representatives.

On June 26, the American Railroad Union, led by Eugene V. Debs, called for a boycott of all Pullman railway cars, crippling railroad traffic nationwide. To break the Pullman strike, the federal government dispatched troops to Chicago, unleashing a wave of riots that resulted in the deaths of more than a dozen workers.

Who Created Labor Day?

In the wake of this massive unrest and in an attempt to repair ties with American workers, Congress passed an act making Labor Day a legal holiday in the District of Columbia and the territories. On June 28, 1894, President Grover Cleveland signed it into law. More than a century later, the true founder of Labor Day has yet to be identified.

Many credit Peter J. McGuire, cofounder of the American Federation of Labor, while others have suggested that Matthew Maguire, a secretary of the Central Labor Union, first proposed the holiday.

So take the time to reflect on all that we have…some times we take what we currently have for granted.  It hasn’t always been this way and many sacrifices were made for us to be able to enjoy where we work, who we work with and celebrate the ability to work.​​