Tell us about your existing mortgage and how much money you’re looking
to cash out to see your potential savings.
A cash-out refinance is a way to both refinance your mortgage and borrow money at the same time. At closing of the refinance, you receive a check in the amount of the loan you’ve requested. Your balance owed on your new mortgage will include the principal that is being refinanced, the amount of the check you receive, and any closing costs that have been added to the loan.
You can deduct the interest up to $750K married or $375K if filing separately as long as the money is used for substantial improvements to your home of for a home purchase or home build. These limits are higher if the home was purchased before December 15, 2017, but there is a $1 million married cap and a $500K cap when filing separately. As with all tax issues, it’s best to consult a tax advisor to discuss your situation.
The purpose of doing a refinance is that your new rate is lower than your old one. If you’re being offered the same rate or higher than your current mortgage, you should consider a HELOC to cover only the additional borrowing you wish to do. If the refi rate being offered is lower than your current rate, you may be able to save money with a refi.
Like any lender considering the application of a borrower, the lender wants to quantify the risk of lending to you. The lower the perceived risk, generally the lower the interest rate. If the perceived risk is too high, a borrow may reject you. While a lender typically evaluates many criteria while evaluating an application, these typically include aspects such as your FICO score, your income, your debt-to-income ratio, the loan-to-value of your current mortgage and the combined loan-to-value following your new refinance.
Your home equity is an investment, and like any investment, you hold it with the expectation of earning a return. So when you are considering using your home equity for another purpose, you should consider the return that you expect from that investment. If you can substantially lower your interest payments as a result of refinancing higher interest-rate debt, that may be a savvy move. Just be confident that you have the ability to make your mortgage payments reliably and on time. Also, follow a budget to make sure that you don’t pile up new high-interest debt is consumer spending and not a purposeful investment.
It depends what you consider bad credit. Your FICO score is just one aspect of your mortgage application. If you have other strong factors on your application, such as income and high equity in your home, you may still qualify. Otherwise, you may have to repair your credit before you can get a new mortgage.
The best use of the cash you get out of our refinance is to use it where you expect a return, or a savings, that exceeds the cost of your mortgage. For example, if your mortgage interest rate is 4% but you can refinance your debt and reduce the interest you’re praying by 8%, that may be a great use of funds. Other investments that will yield a return include home renovation and business investments. As in all investments, you want to evaluate your individual situation, and also be sure that you can still make your mortgage payments in case of unexpected setbacks.
Refinancing your primary mortgage is a slower and more expensive process than getting a HELOC. However, if you can pass underwriting and the rate is substantially lower than your existing mortgage, it gives you what is likely your lowest possible interest rate. You can learn more about the pros and cons of a cash-out refinance on our blog.
In finance, it is helpful to look at the long game when making financial decisions. Ask yourself questions such as: Which decision will cost me more in the long run? How much am I paying in interest? Are predictable payments important to me? Depending on your needs, either of these loan products may be right for your situation. Just be sure to take into account all the costs that can accompany either of these approaches to borrowing against the value of your home.
A key difference between a traditional HELOC and a cash-out refinance is how the interest is calculated over time. Cash-out refinances are a fixed-rate home mortgage, resulting in predictable fixed monthly payments. The interest is calculated monthly. Interest on a traditional HELOC is variable rate. The Figure Home Equity Line (FHEL) is a fixed rate† navigates to the related disclosure product that pays out the entire principal amount after closing, and the payments are the same each month and comprised of a slowly shifting combination of principal and interest, just like a regular fixed-rate mortgage. The FHEL does allow you to draw additional funds after you’ve paid a portion of your principal back. Each of those new draws is paid back at a fixed rate, but the rate for each draw is calculated at the time of the draw.
At Figure, we can get you approved for a HELOC quickly in as little as five minutes. Because the entire application is online, we can initiate funding in as little as five days2 navigates to the related disclosure. Contact Figure today and let us help you with your financial needs.