topic Re: Should I do a Cash Out Refi? in Personal Finance

Should I do a Cash Out Refi?

DR527 — Tue, 18 May 2021 14:36:08 GMT

I'm not sure if this makes complete sense. So like everything else financial. I bring my questions here. My wife and I have been getting out of debt. And had a three and a half year plan. We have gone from $135k to $95k in the last year. So we are making progress. We recently talked about refinancing our mortgage. We just brought the house(I posted about it) not too long ago. But to our surprise because of the housing market boom. Our home equity is up $50k. And could climb higher. We are in a amazing school district and a shortage of new houses. The house 7 doors down from ours. Is being bid on $100k over asking price 🤯.

My wife and I find ourselves in a odd situation. We could keep on our current schedule. And be debt free in 2 and a half years. Or we could refinance like we were thinking, but go from a 30yr to a 15yr. It will increase our monthly mortgage payment by $1100. And we could be completely out of debt besides our home overnight. This would free up $3k a month, no longer going to debt payments. We are really torn on what to do. The math said that not paying high interest for 2 and half years is smart. And also going from a 30 to 15 year mortgage is smart and will get is back some equity quick. But is this a weis move. Has someone done this same thing and have a story they can share?

Re: Should I do a Cash Out Refi?

privacyadvocate69 — Tue, 18 May 2021 13:59:02 GMT

I recommend not doing it.

I've done it twice. Big mistake. All I accomplished was running up the debt on my house, and charging my cards back up again. I realize not everyone does this - but still, NO.

Here is another way to think about it - you'd be making "secured debt" (secured by your house) out of "not-secured debt". That's generally not a great idea for the reasons you can imagine.

I JUST went through this scenario. I am in the middle of doing a 30 year (23 years left) to 15 year refi right now (closes at the end of the month). I specifically chose NOT to do a "cash out" for the reasons mentioned above. Also, the COSTS on a "cash out" are generally higher than a "no cash out". Look closely at that. Instead, we got two AmEx personal loans ($25K each, at 7%). Higher rate, but we don't increase the debt on the house. We also went to a 15 year mortgage, which increases our payments by $200/month. Even with a VA IRRRL loan (about the cheapest re-fi you can get), the breakeven point vs simply paying an extra $200/month on our existing mortgage is around 5 years.

Also consider - the prices houses are going for now is a bubble. It's not sustainable. The last thing you want to do is refi with an inflated valuation and find yourself upside down on your mortgage. That's a disaster. Just to give you an idea...Zillow put our valuation at $233K. A month eariler, it had it at $120K. That's just nuts (on both ends). I estimate our ACTUAL house value at something more around $170-180K. You would also have to be ABSOLUTELY INSANE to buy this house for ANYTHING CLOSE to $233K. The bank used the $233K valuation for purposes of the loan and determining equity and loan to value and such - but there was NO WAY I was going to cash out based on that amount. Our current loan has a balance of $119K. After the refi, it will have a balance of $124K or so.

Based on everything you've written - get the refi to knock your loan down from 30 to 15 years. Don't cash anything out. Solve your credit card debt another way.

Re: Should I do a Cash Out Refi?

DR527 — Wed, 19 May 2021 00:45:13 GMT

I really appreciate you giving me your personal experiences. My wife and I are considering going to a 30yr to 15yr. To be more or less a financial wash. Where we are stuck is the savings and cash flow of not having the payments. I tend to over think most things and she tends to follow her feelings. So we wanted to reach out for some advice. Almost everyone and everything is saying it is risky to do. But In my mind the math out weights the risk.

For example almost everyone talks about a possibility of a worst case scenario. Like a job lost or health issue. While I understand that's always a serious factor. I feel like those things are out of your hands anyway. If they were to happen what would most people do? They would be forced to sell their home before they lost it. And used the money.

And then I think about equity in general. And again this is my wife and mines first house. Actually I'm the first person in my family to be a home owner. So I'm very new to a lot of this. But equity isn't real.?. It can move up or down based on the market and it can completely dry up. What happens to all of my or anyone else's equity if the housing market crashes again? We would all be out of luck unless we owed our homes out right and had no plans of moving. It all seems so simple and also so scary. Because it's fake money and a real house.

Re: Should I do a Cash Out Refi?

Kidcat — Wed, 19 May 2021 01:15:15 GMT

@privacyadvocate69 wrote:
I recommend not doing it.

I've done it twice. Big mistake. All I accomplished was running up the debt on my house, and charging my cards back up again. I realize not everyone does this - but still, NO.

Here is another way to think about it - you'd be making "secured debt" (secured by your house) out of "not-secured debt". That's generally not a great idea for the reasons you can imagine.

I JUST went through this scenario. I am in the middle of doing a 30 year (23 years left) to 15 year refi right now (closes at the end of the month). I specifically chose NOT to do a "cash out" for the reasons mentioned above. Also, the COSTS on a "cash out" are generally higher than a "no cash out". Look closely at that. Instead, we got two AmEx personal loans ($25K each, at 7%). Higher rate, but we don't increase the debt on the house. We also went to a 15 year mortgage, which increases our payments by $200/month. Even with a VA IRRRL loan (about the cheapest re-fi you can get), the breakeven point vs simply paying an extra $200/month on our existing mortgage is around 5 years.

Also consider - the prices houses are going for now is a bubble. It's not sustainable. The last thing you want to do is refi with an inflated valuation and find yourself upside down on your mortgage. That's a disaster. Just to give you an idea...Zillow put our valuation at $233K. A month eariler, it had it at $120K. That's just nuts (on both ends). I estimate our ACTUAL house value at something more around $170-180K. You would also have to be ABSOLUTELY INSANE to buy this house for ANYTHING CLOSE to $233K. The bank used the $233K valuation for purposes of the loan and determining equity and loan to value and such - but there was NO WAY I was going to cash out based on that amount. Our current loan has a balance of $119K. After the refi, it will have a balance of $124K or so.

Based on everything you've written - get the refi to knock your loan down from 30 to 15 years. Don't cash anything out. Solve your credit card debt another way.

I am going to each and say no. OP I am not sure how you incurred the $135k debt you've been paying down, but I would get to the bottom of that issue first. I've made the mistake of a cash our refi only to rack up credit card debt. So then not only are you paying a higher mortgage but you also have new cc debt too. I also recently refi'd and I have a crapload of equity and was tempted to cash out some, but I held firm and did a simple rate and term refi. So I say there is no issue with the refi, but I would steer clear of cash out if I were you. There are so many horror stories

Re: Should I do a Cash Out Refi?

privacyadvocate69 — Wed, 19 May 2021 01:38:26 GMT

The "math" may absolutely say refi. In the real world, there is more than just "math".

There are other realities and considerations to keep in mind. You've identified some of them. It's all about risk and risk management and personal habits, temptations, hedging against the possibilities and possibly even aliens from outer space.

One of the things that we did was buy a house well below our means. We could lose one entire income and still make our house payments. Our mortgage payment is about 6% of our monthly income, and that's without putting down any downpayment too. Even on on just my wife's income, it would be about 13% of our monthly income. That's a serious hedge. Most people would push it to as high as 30% of their income. Not us. Not even close. Sure, it would be nice to have 2 or 3 times the house. I prefer being able to sleep at night.

You can not pay your credit card bills and still have a place to live. That works out less well with not paying your mortgage.

In short, "the math" isn't everything, and shouldn't be the only thing you consider with these kinds of decisions.

Re: Should I do a Cash Out Refi?

jmw1 — Wed, 19 May 2021 02:13:42 GMT

Forget about how much over asking your neighbor will get. You ain't getting any of it.

Your appraisal will run low and you won't be able to capture any of that equity today. Although appraisers may consider active listings, they will be a lot more conservative and favor comps instead like the lowest two. Especially on a refi appraisal, they will go low. Take the Zillow estimate, subtract 8%, and you'll be near the number the appraiser will actually give you.

Throw the extra money at the higher interestcredit card debt and pay it off. When you are done, come back and do the 15year. Usually there isn't enough of a spread between the 30 and the 15 to sacrifice the guaranteed lower payment on the 30. Things happen and you'll wish you had the lower payment on the 30.

Re: Should I do a Cash Out Refi?

privacyadvocate69 — Wed, 19 May 2021 02:27:14 GMT

With regard to the above...it depends on lender and circumstances. My lender didn't do an appraisal and just used the Zillow value for the valuation.

Didn't really matter much, since my loan balance was $119K, the refi was for $124K (rolling in the fees) and the Zillow was at $233K. The actual value could be for a lot less than the Zillow and still clear all necessary thresholds.

Re: Should I do a Cash Out Refi?

jmw1 — Wed, 19 May 2021 02:40:30 GMT

@privacyadvocate69 wrote:
With regard to the above...it depends on lender and circumstances. My lender didn't do an appraisal and just used the Zillow value for the valuation.

Didn't really matter much, since my loan balance was $119K, the refi was for $124K (rolling in the fees) and the Zillow was at $233K. The actual value could be for a lot less than the Zillow and still clear all necessary thresholds.

OP wants a cashout refi and I think he's counting on his neighbor's pending sale to gain enough LTV space to make the cashout refi amount meaningful given the extra pricing hits for the cashout. On the other hand, rate and term refi on 50% LTV doesn't matter much for appraisal. Not surprised the computers waived the appraisal on your deal.

Re: Should I do a Cash Out Refi?

DR527 — Fri, 21 May 2021 01:14:04 GMT

Yeah.. if I couldn't pull out enough to pay my debts off completely. I probably wouldn't even bother with the refi.

The rough breakdown is this:

$35k Personal Loan (was originally $50k) / $1,100 month

$26k Car Loan(upside down $10k) $650 month

$24k CC on Two Cards(A whole mess of things since the year started, mother in law filed behind on bills, my mom passed and Brothers and Sisters had zero dollars to give me for funeral cost, etc) before this year didn't have this debt. $900 month

$10k Student Loans(was $26k) been hitting hard since the zero percent interest. $200 month, but I have been dropping between $500 and $1000 month.

I am lucky enough that. My wife and I make ok money. But I hate making these payments. Rather clear cut everything at once. But either way. We will get it to zero.

Re: Should I do a Cash Out Refi?

SouthJamaica — Wed, 19 May 2021 16:13:24 GMT

@DR527 wrote:
I'm not sure if this makes complete sense. So like everything else financial. I bring my questions here. My wife and I have been getting out of debt. And had a three and a half year plan. We have gone from $135k to $95k in the last year. So we are making progress. We recently talked about refinancing our mortgage. We just brought the house(I posted about it) not too long ago. But to our surprise because of the housing market boom. Our home equity is up $50k. And could climb higher. We are in a amazing school district and a shortage of new houses. The house 7 doors down from ours. Is being bid on $100k over asking price 🤯.

My wife and I find ourselves in a odd situation. We could keep on our current schedule. And be debt free in 2 and a half years. Or we could refinance like we were thinking, but go from a 30yr to a 15yr. It will increase our monthly mortgage payment by $1100. And we could be completely out of debt besides our home overnight. This would free up $3k a month, no longer going to debt payments. We are really torn on what to do. The math said that not paying high interest for 2 and half years is smart. And also going from a 30 to 15 year mortgage is smart and will get is back some equity quick. But is this a weis move. Has someone done this same thing and have a story they can share?

My advice is

(a) if you can get an interest rate reduction, and the saved interest is significantly greater than the closing costs, then by all means refinance, otherwise don't;

(b) do not get "cash out". This is your home. Borrowing against it is bad. Pay down the debt, don't increase it; and

Re: Should I do a Cash Out Refi?

Anonymous — Thu, 20 May 2021 03:54:29 GMT

@jmw1 wrote:
Usually there isn't enough of a spread between the 30 and the 15 to sacrifice the guaranteed lower payment on the 30. Things happen and you'll wish you had the lower payment on the 30.

I think this is also key. If the spread isn't that big, you can still pay more on a 30 year mortgage when you can (assuming no prepayment penalty) and keep some flexibility. So if rates are significantly lower than your existing mortgage, consider refinancing but to another 30 year one (making sure that closing costs don't negate any reasonable interest rate savings).

I did switch my final mortgage to a 15 year one, but that was only when the balance was sufficiently low, and I knew I could pay it off fairly quickly.

Re: Should I do a Cash Out Refi?

tcbofade — Thu, 20 May 2021 22:34:52 GMT

Full disclosure, I've read this a few times in order to make a reasonable response.

Full disclosure part 2, earlier this year, I did exactly this... but was in a slightly different financial position. I did a cash out refi in January, paid off a bunch of debt (not all) and effectively turned our negative cash flow into positive cash flow... literally overnight. Then took the remaining cash from the refi to pay off MORE debt further improving our financial situation.

So I won't say that it's a BAD idea... but I will say that if you are already in a positive cash flow situation and your debt is going down every month... I wouldn't do it.

As someone else mentioned, the housing bubble is a bit ridiculous right now and you certainly COULD pull some cash out of your home but when the market settles back to reality you will effectively be under water in your home and nobody wants that.

If you're making progress as you are, I wouldn't do it.

Good luck, whatever you decide!

Re: Should I do a Cash Out Refi?

tacpoly — Fri, 21 May 2021 04:27:02 GMT

@DR527 wrote:
I'm not sure if this makes complete sense. So like everything else financial. I bring my questions here. My wife and I have been getting out of debt. And had a three and a half year plan. We have gone from $135k to $95k in the last year. So we are making progress. We recently talked about refinancing our mortgage. We just brought the house(I posted about it) not too long ago. But to our surprise because of the housing market boom. Our home equity is up $50k. And could climb higher. We are in a amazing school district and a shortage of new houses. The house 7 doors down from ours. Is being bid on $100k over asking price 🤯.

My wife and I find ourselves in a odd situation. We could keep on our current schedule. And be debt free in 2 and a half years. Or we could refinance like we were thinking, but go from a 30yr to a 15yr. It will increase our monthly mortgage payment by $1100. And we could be completely out of debt besides our home overnight. This would free up $3k a month, no longer going to debt payments. We are really torn on what to do. The math said that not paying high interest for 2 and half years is smart. And also going from a 30 to 15 year mortgage is smart and will get is back some equity quick. But is this a weis move. Has someone done this same thing and have a story they can share?

If you could get enough cash out of your house to eliminate all other debt and get a 15-year mortgage that increases your monthly payments by only $1,100, then I think there are 2 additional requirements for this to make sense:

1. You plan to stay in your home for a long while. <-- This would mitigate worries about being "upside down" with your loan should the housing market falls back down to earth. If you plan to stay until your mortgage is paid off who cares if you're underwater for 10 years of a 15-year mortgage? But if you foresee the possibility of moving before then, then a cash-out refi may not be a good idea. This being your first home, would you want to move if you have (more) kids, for example.

2. You have a way guarantee that you would not run up other debt again. <-- It would be a disaster if you put your house as collateral to pay off unsecured debt, then run up more debt.

If the above are satisfied, the $1,100 increase in mortgage payment would be more than off-set by the $3,000 that you no longer need to put towards debt payments. I would suggest putting the $1,900 towards emergency savings so you won't need to take on personal loans or credit card debt when other unexpected things happen.

By the way, while job loss or health issues may be out of our hands, they don't have to lead to financial ruin if you plan for it. For example savings, health insurance, supplemental and long-term disability insurance can support you during those difficult periods.

I would suggest a realistic assessment of your and your wife's situation with regards to spending habits, job/income stability, even family planning, relationship stability over the long term as you decide.

Re: Should I do a Cash Out Refi?

Citylights18 — Sat, 22 May 2021 07:03:55 GMT

I did a cashout refi with Third Federal to 85%. They are currently offering 1.99% APR for a 30 year and 1.89 for a 15 year so competitive rates at the moment.

My personal opinion was worth it because while you're paying more a month after taking cash out, the additional payment isn't too much higher and with the new larger mortgage you'll get a bigger tax deduction and more equity going towards principal each month than with a smaller mortgage.

When you have less debt you've got a better credit score and can move around what remains taking advantage of 0.0% interest rate BT offers from credit cards. That is tougher to do when you're minimum payments are so high and you have limited cap on the CC limits.

But I would not go 100% cash out if that's what you are thinking. If you can get just a chunk of that debt down it would cause the remainder of it to collapse.

Re: Should I do a Cash Out Refi?

805orbust — Sat, 22 May 2021 11:48:39 GMT

Wow... this is a good one. I've done it both ways in different decades. You've gotten great advice here. I will only tell you this: When you have to take the time to grind out and pay off debt the old fashioned way with no shortcuts there is HUGE shift in the way your mind operates.

1. You will NEVER want to feel the weight of a mountain of debt ever again.

2. You realize exactly how far your money goes and realize that things like paying off your mortgage can happen in a VERY short time.

3. This shift in mindset affects your entire attitude towards finances, debt, and investing. You make it a point to stay ahead of everything, which is valuable beyond comprehension.

I would say if the refi makes sense from the standpoint of lowering an interest rate/payment or forcing you into a more rapid payoff, then do it. If it were my Son I would tell him to add the mortgage to that list of debt and take 4 years to get out from underneath everything... Imagine having the rest of your life with no mortgage. What could you and The Mrs accomplish? What would your daily mindset and mood be? These are goid questions to ask as you'll never be the same afterwards. Best of Luck to you!

Re: Should I do a Cash Out Refi?

Citylights18 — Sat, 22 May 2021 15:13:56 GMT

@DR527 wrote:
Yeah.. if I couldn't pull out enough to pay my debts off completely. I probably wouldn't even bother with the refi.

The rough breakdown is this:
$35k Personal Loan (was originally $50k) / $1,100 month
$26k Car Loan(upside down $10k) $650 month
$24k CC on Two Cards(A whole mess of things since the year started, mother in law filed behind on bills, my mom passed and Brothers and Sisters had zero dollars to give me for funeral cost, etc) before this year didn't have this debt. $900 month
$10k Student Loans(was $26k) been hitting hard since the zero percent interest. $200 month, but I have been dropping between $500 and $1000 month.

I am lucky enough that. My wife and I make ok money. But I hate making these payments. Rather clear cut everything at once. But either way. We will get it to zero.

I would think about from a cash flow perspective. What is costing you the most?

$35k Personal Loan ($1100 a month)

$24k Credit Cards ($900 a month)

$26k Car Loan ($650 a month)

$10k Student Loans ($200 a month)

In total you've got 95k there but what is costing you the most? The student loan isn't costing you much and you are putting you're extra money towards knocking that one down. Car loan is about average for the american consumer. Take those two out and then you are looking at 59k of personal debt between the loan and credit card.

If you can cash out refi that 59k that might only cost you $200 dollars more on a 30 year mortgage. I'm not a big fan 15 year mortgage because if you want to rent the property out at some point you'll have a higher underlying mortage. Its better to just get the 30 and make extra payments to the principal that you can remove at any time you want. You can direct the extra 1900 a month freed up to the cash out refi to mortgage payments if you feel compelled to do so.

I wouldn't worry too much about the car payment. At $650 a month you are paying it down at least $7000 a year factoring in interest. With the student loan when you refi you skip a mortgage payment and I would use that as an opportunity to double up on the student loan. If you can knock out the student loans then you can put all the more extra to the mortgage.

30 year cash out refi to 85% to knock out the 59k is what I would do here. It will also help your credit to knock out the personal debt. Student loan and auto loan are credit score builders as you pay them down. Add an extra payment to the 30 year to pay it off in a 15 year time frame which you can always remove if the job situation changes.

IMO this is a good time to try it while you have the valuation and rates are super low. Third Federal Savings and Loan has a low cost refi for only $250 up to 85% if you live in one of the states they service. Don't go 100% out on a cash refi. For one its going to be a bigger monthly payment and for two its more risk. You don't really need it. Its really more about opening up the cash flow.

Re: Should I do a Cash Out Refi?

Citylights18 — Sat, 22 May 2021 15:24:42 GMT

@SouthJamaica wrote:
@DR527 wrote:
I'm not sure if this makes complete sense. So like everything else financial. I bring my questions here. My wife and I have been getting out of debt. And had a three and a half year plan. We have gone from $135k to $95k in the last year. So we are making progress. We recently talked about refinancing our mortgage. We just brought the house(I posted about it) not too long ago. But to our surprise because of the housing market boom. Our home equity is up $50k. And could climb higher. We are in a amazing school district and a shortage of new houses. The house 7 doors down from ours. Is being bid on $100k over asking price 🤯.

My wife and I find ourselves in a odd situation. We could keep on our current schedule. And be debt free in 2 and a half years. Or we could refinance like we were thinking, but go from a 30yr to a 15yr. It will increase our monthly mortgage payment by $1100. And we could be completely out of debt besides our home overnight. This would free up $3k a month, no longer going to debt payments. We are really torn on what to do. The math said that not paying high interest for 2 and half years is smart. And also going from a 30 to 15 year mortgage is smart and will get is back some equity quick. But is this a weis move. Has someone done this same thing and have a story they can share?
My advice is

(a) if you can get an interest rate reduction, and the saved interest is significantly greater than the closing costs, then by all means refinance, otherwise don't;

(b) do not get "cash out". This is your home. Borrowing against it is bad. Pay down the debt, don't increase it; and

(c) do not increase your monthly payment, use whatever free cash you have to pay down your credit card debt.

I think the OP has a cash flow issue between the CC and PL. What ever extra they have ($500 or $1000) a month is going to the student loan.

They could knock out the $1900 with the cash out for a few extra hundred dollars a month on their mortgage and expedite the student loan payoff. Then turn around and set up extra payments to the mortgage once the student loan is paid off, all the while raising their credit score. That would definitely accelerate credit score improvement over slowly paying down a card.

Also they might be able to get into a better rate on their mortgage than what they are in now which is also a factor.

Re: Should I do a Cash Out Refi?

DR527 — Sat, 22 May 2021 19:24:45 GMT

I really appreciate everyone's advice on this. My wife and I have read and dissuss every post. Like we never consider "refi for another 30, or taken out just enough for the biggest debt payments, or thinking about the cost of renting the home out later. My wife and I are committed to paying this debt off. I think we will refi.