Should I do a Cash Out Refi?

[DR527]

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? 

[privacyadvocate69]

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.

[DR527]

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. 

[Kidcat]

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@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.

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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

[privacyadvocate69]

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.

[jmw1]

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.

[privacyadvocate69]

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.

[jmw1]

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@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.

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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. 

[DR527]

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. 

[SouthJamaica]

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@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? 

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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.