Ain't Nobody (Doing a Cash-Out Refi Right Now)
If you believe the statistics, 90% of homeowners with a mortgage will have a home loan rate somewhere under 5% these days. And it's a safe bet to assume that a high percentage of those may be under 4% or even 3%. If you're one of these fortunate borrowers, the thought of refinancing your historically-priced mortgage to get cash out --- a.k.a., a "cash out refinance" --- is a non-starter. To quote Chaka Khan, "ain't nobody" is doing a cash-out refi unless they ain't got no better option.
But often there can be a better option. The most common one is a home equity line of credit, or HELOC. But these loan types are adjustable rate mortgages (ARMs) that track Prime Rate, which, here in the fall of 2023, is currently at 8.5%. However, the vast majority of HELOCs have fully-indexed rates that have a margin over Prime, so in reality, these HELOC borrowers might already be paying double-digit interest rates, with the threat of rates going higher still.
Perhaps the best alternative to a cash-out refinance or a HELOC, and one that many have not considered in a long time is the fixed rate second mortgage, also known as a home equity loan or "HELOAN." Like with a HELOC, a HELOAN preserves the great rate on your existing first mortgage. You don't touch that loan in this process, you just add a "subordinate" or "junior" or "second" lien on your title and you get your cash out that way instead.
Here's the concept that applies to both a HELOC and a second mortgage. Let's say your home is worth $600,000 and you have a $300,000 mortgage against it today. You have a 50% loan-to-value (LTV) and $300K worth of "equity." If you need to get $100,000 of that to do an important remodel or renovation, you could either transact a cash-out refinance on your $300K mortgage and get a new loan of $400K, but you would be subject to today's higher rates, or you could leave the $300K mortgage alone, and get a second loan for the $100K. At the end of this process, either way, you would have accessed $100K of the $300K equity in your property and would have a total LTV of 67%.
So, what are the other key features of the HELOAN?
- No closing costs.
- No prepayment penalties.
- Loan amounts to $750,000.
- Fast, efficient process and online application.
- Fixed rates for 10-year, 15-year, 20-year, or even 30-year terms.
So if you already have a great rate on your first mortgage but you need funds to complete a remodeling project, make a large-ticket purchase, consolidate debt OR even "refinance" your adjustable rate, maxed out HELOC, think about a fixed rate second mortgage and let me know if you have any questions!
Now we're flying through the stars,
Mortgage Loan Officer
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by U.S. Bank and do not necessarily represent the views and opinions of U.S. Bank. In no way do I commit U.S. Bank to any position on any matter or issue without the express prior written consent of U.S. Bank's Human Resources Department.