Cashout or no cashout refinance?

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Hi FWFers! Long time lurker first time post. Hoping to discuss my situation if I should do a cashout or no cashout refinance. 

Here's my situation:

  • bought my first home last year (~$700k) 
  • 20% down and financed the remaining 80% with a 30 year fixed rate at 4.125%
  • home has appreciated $100k - $200k 
  • Credit score is above 740
  • Quoted at 3.5% if I refinance for 30 year fixed super conforming

I'm looking to refinance to capitalize on lower rates; while researching, I saw the option to do a cashout refinance, which can allow me to borrow up to the the max for my type of loan while still maintaining a LTV of 80%.

Should I consider this or just realize the savings in a lower monthly mortgage? The money from the cashout would be invested into bonds for the short term while I search for an investment property.

 

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A Limited Cash-Out Refinance (which is what FNMA calls it), is a loan used to pay off an existing mortgage, and can incl... (more)

BingBlangBlaow (Aug. 30, 2016 @ 1:24p) |

This is fine if you are playing the pointless fwf game of setting up a heloc for emergencies. But op said he wants to in... (more)

cashoutirrific (Aug. 30, 2016 @ 2:59p) |

Thanks for the insight on the true interest of the cash out (@Bend3r). I assumed a cash out refi would be at the same ra... (more)

neoinvestor (Aug. 31, 2016 @ 1:50p) |

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Bond prices are near all-time highs. If you choose to invest, they might not be the ideal choice given the potential for a fed rate increase.

This isn't free money, it's going to cost you several hundred dollars a month. Unless you have a solid investment that will outperform the cost of borrowing, don't cash out.

megatard said:   This isn't free money. Unless you have a solid investment that will outperform the cost of borrowing, don't cash out.
  Along the same lines, if you (and/or your SO) are the type to spend the extra cash in for e.g., vacation, luxuries, redo bathroom etc., just because you have extra cash in your account, dont do cashout refi.

When I've shopped, rates for cash out refinances have been at least .25% higher than non-cash out. There's a small threshhold of 1% or so that is allowed before it's considered 'cash out', and I've often taken a small balance increase that way, but I usually avoid the formal 'cash out' level. The small amounts typically aren't cash in hand, they go toward generous prepayments of taxes and insurance.

It sounds like a no-cash refi followed up by a heloc might be best for you. You should be able to get a heloc at no cost at all, and though the rates will be adjustable, they should still be terrific. "No cost" helocs often have fees if you close (refinance again) within 3 years or 5 years, but the ones I've used have never required actually drawing or holding any particular balance.

cash out. rates are super low and you can always refinance if they go down.

Agreeing with ruffles on this. Dumb Americans are house-rich and cash poor. Don't be a dumb American with rates so low.

rufflesinc said:   cash out. rates are super low and you can always refinance if they go down.
  unless if you're in TX.  One cash out and you're always cash out so any future refinancing would be at cash-out rates plus higher title policy costs (so, essentially higher closing costs meaning either more fees or a higher rate to absorb those). 

Escrow account doesn't count into cash out or the 1%/$2k(? going from memory) limit on cash back from close.  So, since you're near the end of the year, you can also effectively "cash out" the yearly taxes for free without doing a cash-out.  So, if you leave the escrow account on, you not only save a quarter point in fees that are charged for waiving escrow but also get a small cash out for free.  If you have an existing escrow account, that balance is sent to you by check a couple weeks after funding.  In TX you're also not even allowed $1 back from close for non-cashout, unlike other states (again not including escrow though).

OP's numbers actually don't look very good for a cashout if in TX, if rate is typically .25% higher like someone stated.  YMMV other states if you go and refinance the next day then you will only be paying the 6% for a short time, so maybe it's not as expensive.  6% for even a couple months is not something I'd regularly do.
Current loan estimate: $560k, 80LTV (700k purchase price)
potential cashout 80LTV: $640k loan, 80LTV  (assuming 100k increase to $800k)

So, with the above assumptions (I have not gotten quotes, go get them and you can calculate the effective interest rate in the same manner ), essentially you're only getting $80k cash for increasing the interest on the other $560k by 0.25%.  This makes it an effective 5.75% loan on the extra $20k for as long as you keep this new mortgage  ($80k/$640k = 8 times as much.   8*0.25+3.75% = 5.75%)  Or roughly 4.875% if he gets to cash out an extra $160k instead of $80k.  But due to the escrow option, even increasing by 200k appraisal would only mean $80k minus escrow would be incremental funds received for going the cash-out rate.  The above calculations also all assume you're doing a no-cost finance.  If you're paying any fixed closing fees (settlement, origination, title, etc), then you have to pay those again when you refinance.  So add to long-term effective rate on the extra $80k loan the ratio of these two if you intend to rapidly refinance. (Example:$5k closing costs would be 6.25% of $80k.  So if you refinance you get the new lower rate but you must add 6.25% to the new rate for your real effective rate of borrowing that extra $80k.  Basically if you intend to refinance <7 or so years in the future there is no valid reason to go with anything other than a no-cost loan where lender covers closing costs.  It's such a small interest difference over a short time for 0.125% or even .375% but if you have to absorb the closing fees over just a few months that's always going to be much more expensive.  Around 6-7 years has been the breakeven I calculated for my purchase and 2 refis between $0 lender costs and "no cost".)

TLDR: 1. You get a free 1/4 point in fees by not waiving escrow.  2. Also if you do not waive escrow, you get to effectively "cash out" the escrow account for free without doing a "cash out refinance" by rolling the escrow into the loan.  Not mentioned, but this also allows for slightly negative costs refinances as most lenders will not "pay you" directly to refinance (Instead they reduce the credit at the last step to absorb any "overages") but likely will allow you to apply any overages to the new escrow account.   3.  Try to calculate the real effective cost/rate for cashing out the small amount of additional funds, it's not incredibly difficult but "APR" increasing by "only 0.25%" results in a much higher effective rate on that incremental portion of the loan.  Generally, the smaller the incremental portion of the loan is, the higher the effective rate is.  4. If you are in TX, the rules are different and if you ever use a cash-out refinance, then any future refinance transaction will be classified as a cash-out regardless of actually cashing out any more funds.

Edit: I had an initial mistake, for some reason I was figuring $20k cash out for $100k value increase instead of $80k like it should have been.  Corrected and bolded most of the corrections.  Doesn't look as bad but still not that great.

Bend3r said:   
rufflesinc said:   cash out. rates are super low and you can always refinance if they go down.
  unless if you're in TX.  One cash out and you're always cash out so any future refinancing would be at cash-out rates plus higher title policy costs (so, essentially higher closing costs meaning either more fees or a higher rate to absorb those). 

Escrow account doesn't count into cash out or the 1%/$2k(? going from memory) limit on cash back from close.  In TX you're also not even allowed $1 back from close for non-cashout, unlike other states.

  Reason #372 not to live in Texas.

SummerSoFar said:   
Reason #372 not to live in Texas.

It could be much worse. I could live in one of those weird states that would add additional tax to all my income and thus penalize me for choosing to live within rather than beyond my means.  I think the goal is to discourage cash-out loans because most of the people doing them don't know how they work nor look at the fees.  There is also a 3% cap on closing costs/fees in TX for cash-out loans which theoretically limits the most predatory type.  The TX cash out rules are part of the state constitution.

Bend3r said:   
The TX cash out rules are part of the state constitution.

  .... what? That's the craziest thing to have in a state constitution.
 I could live in one of those weird states that would add additional tax to all my income and thus penalize me for choosing to live within rather than beyond my means.
TX makes up for it with property taxes?

rufflesinc said:   
 I could live in one of those weird states that would add additional tax to all my income and thus penalize me for choosing to live within rather than beyond my means.
TX makes up for it with property taxes?

And lower property prices? Every time I've said property taxes are high in texas anywhere on Fatwallet (admittedly probably only once or twice...), I've been countered that the property taxes for a "like property" are still often equal or lower in texas, because the property values aren't over-inflated.

I also was trying to acknowledge higher property taxes though not explicitly, and I didn't really explain what I meant with the second half of the sentence. Living beyond means/spending everything ->
Case1: Very expensive home purchase and very large mortgage interest deduction, high spending resulting in no investments to provide growing extra income
- Results in lower taxable income and a higher property value for tax to be applied to.
Case2: Small home purchase and very little mortgage interest deduction thus lots of savings/investments providing extra taxable income
- Results in a higher taxable income and a lower property value for tax to be applied to.
- Both cases will get to deduct the property tax amount, so I did not even mention that part as it's a wash.

In a high property tax state with no state income tax, Case 2 is favored over Case 1. In a no/low property tax state with state income tax, Case 1 is favored over Case 2.

Bend3r said:   
rufflesinc said:   
 I could live in one of those weird states that would add additional tax to all my income and thus penalize me for choosing to live within rather than beyond my means.
TX makes up for it with property taxes?

And lower property prices? Every time I've said property taxes are high in texas anywhere on Fatwallet (admittedly probably only once or twice...), I've been countered that the property taxes for a "like property" are still often equal or lower in texas, because the property values aren't over-inflated.

I also was trying to acknowledge higher property taxes though not explicitly, and I didn't really explain what I meant with the second half of the sentence. Living beyond means/spending everything ->
Case1: Very expensive home purchase and very large mortgage interest deduction plus no investments to provide extra income
- Results in lower taxable income and a higher property value for tax to be applied to.
Case2: Small home purchase and very little mortgage interest deduction thus lots of savings/investments providing extra taxable income
- Results in a higher taxable income and a lower property value for tax to be applied to.
- Both cases will get to deduct the property tax amount, so I did not even mention that part as it's a wash.

In a high property tax state with no state income tax, Case 2 is favored over Case 1. In a no/low property tax state with state income tax, Case 1 is favored over Case 2.

  well no worries. I live in MI, with income tax AND high property tax, the only upside being it's not TX 

Never bet the house on anything. While I am a believer of OPM (using Other People's Money), home ownership is your safe harbor and sacred ground to you and your family. Bonds are not a good investment at this time.
Refinance for interest rate may be a valid reason to do so, but keep the loan amount near current levels.
FICO 740 is borderline to good vs better credit and can vary. Go back to basics.
Have all credit cards and cars paid in full or work more in that direction. Do not use the house to do so.
Have a six month budget emergency fund which includes allowance for insurance costs if your employment disappears.
Have a retirement plan in place which considers 401k / IRA /ROTH IRA options.

JW10 said:   Never bet the house on anything. While I am a believer of OPM (using Other People's Money), home ownership is your safe harbor and sacred ground to you and your family. Bonds are not a good investment at this time.
Refinance for interest rate may be a valid reason to do so, but keep the loan amount near current levels.
FICO 740 is borderline to good vs better credit and can very. Go back to basics.
Have all credit cards and cars paid in full or work more in that direction. Do not use the house to do so.
Have a six month budget emergency fund which includes allowance for insurance costs is your employment disappears.
Have a retirement plan in place which considers 401k / IRA /ROTH IRA options.

  
Welcome to the forums, Mr. Ramsey.

Bend3r said:   
rufflesinc said:   
 I could live in one of those weird states that would add additional tax to all my income and thus penalize me for choosing to live within rather than beyond my means.
TX makes up for it with property taxes?

And lower property prices? Every time I've said property taxes are high in texas anywhere on Fatwallet (admittedly probably only once or twice...), I've been countered that the property taxes for a "like property" are still often equal or lower in texas, because the property values aren't over-inflated.

 

well with mikef07 gone, you probably won't hear that argument much anymore!

SlimTim said:   When I've shopped, rates for cash out refinances have been at least .25% higher than non-cash out. There's a small threshhold of 1% or so that is allowed before it's considered 'cash out', and I've often taken a small balance increase that way, but I usually avoid the formal 'cash out' level. The small amounts typically aren't cash in hand, they go toward generous prepayments of taxes and insurance.

It sounds like a no-cash refi followed up by a heloc might be best for you. You should be able to get a heloc at no cost at all, and though the rates will be adjustable, they should still be terrific. "No cost" helocs often have fees if you close (refinance again) within 3 years or 5 years, but the ones I've used have never required actually drawing or holding any particular balance.


What is the actual "official" allowance for extra without being cash out, if anybody knows for sure? 1%? Varies by lender?

100 K cash out @ 3.5% is going to cost 3500 per year in interest. You should be paying at least 25% in marginal tax rate (fed + state). Extra mortgage payments would reduce the taxes. So net out of pocket cost for 100 K will be 2625 per year or $220 per month

Affordability test - pass - When you refinance down from 4.125% to 3.5%, with 100 K cash out, monthly mortgage payment will only increase very slightly and current payment is obviously affordable

Investment test - So either you can save $200 per month or you can buy the flexibility to acquire an investment property at some point of time. If you can follow through with the plan to buy the property, go for cash out. If 100 K will burn a hole in your pocket and you will spend it on living large for a while, you decide. YOLO

needdealsnow said:   100 K cash out @ 3.5% is going to cost 3500 per year in interest. You should be paying at least 25% in marginal tax rate (fed + state). Extra mortgage payments would reduce the taxes. So net out of pocket cost for 100 K will be 2625 per year or $220 per month  
Not quite.  I had a mistake in my prior post's calculations and corrected.  But here's how it works with your example numbers and an assumption that the current balance is close to 80LTV of purchase price.

A much closer estimate is:
100k cash out @3.75% rather than ~$550k being at 3.5% (SlimTim said the rates he was seeing on cash out were at least 0.25% higher rate on the whole loan for cash out, I have not rate shopped, but that's the assumption for rate/fee difference used here).
Interest for a year at 3.5% on $550k without cash out (and same shortcut of pretending no slight decrease in principle over the year): $19,250
Interest for a year at 3.75% on $650k with cash out: $24,375
Difference: $5,125 ==> It costs at least $5125 in interest for the $100k rather than only $3500/$3750.
Effective interest rate on that $100k cash out: 5.125%

Is it possible to refinance 1st without cash out - and then then get a separate HELOC? HELOC rate might be slightly higher, but you can use it as line of credit and withdraw the money only when you need it.

bluegreenturtle said:   
SlimTim said:   When I've shopped, rates for cash out refinances have been at least .25% higher than non-cash out. There's a small threshhold of 1% or so that is allowed before it's considered 'cash out', and I've often taken a small balance increase that way, but I usually avoid the formal 'cash out' level. The small amounts typically aren't cash in hand, they go toward generous prepayments of taxes and insurance.

It sounds like a no-cash refi followed up by a heloc might be best for you. You should be able to get a heloc at no cost at all, and though the rates will be adjustable, they should still be terrific. "No cost" helocs often have fees if you close (refinance again) within 3 years or 5 years, but the ones I've used have never required actually drawing or holding any particular balance.


What is the actual "official" allowance for extra without being cash out, if anybody knows for sure? 1%? Varies by lender?

  
My lender says $2k actual cash cashout after all other possible impounds.

You could always do the cash-out refi at negative points, wait three months (or less, arguably), and then just do a traditional refi at a lower rate.

billybwilde said:   
bluegreenturtle said:   
SlimTim said:   When I've shopped, rates for cash out refinances have been at least .25% higher than non-cash out. There's a small threshhold of 1% or so that is allowed before it's considered 'cash out', and I've often taken a small balance increase that way, but I usually avoid the formal 'cash out' level. The small amounts typically aren't cash in hand, they go toward generous prepayments of taxes and insurance.

It sounds like a no-cash refi followed up by a heloc might be best for you. You should be able to get a heloc at no cost at all, and though the rates will be adjustable, they should still be terrific. "No cost" helocs often have fees if you close (refinance again) within 3 years or 5 years, but the ones I've used have never required actually drawing or holding any particular balance.


What is the actual "official" allowance for extra without being cash out, if anybody knows for sure? 1%? Varies by lender?

  
My lender says $2k actual cash cashout after all other possible impounds.

You could always do the cash-out refi at negative points, wait three months (or less, arguably), and then just do a traditional refi at a lower rate.

 
A Limited Cash-Out Refinance (which is what FNMA calls it), is a loan used to pay off an existing mortgage, and can include closing costs, points, and prepaid items. Current RE taxes can only be included in the new loan amount if an escrow account is established (unless state law prohibits the lender from requiring an escrow account), and delinquent RE taxes more than 60 days past due can not be included. The actual cash that can be received by the borrower is the lesser of $2,000 or 2% of the new loan amount (so $2,000 is most cases, but if you have a loan less than $100k, it'll be 2%). There are cases where you can actually receive more than $2,000 at closing - if you had paid $400 up front for an appraisal (or any other paid outside of closing costs), you could technically receive $2,400. The reverse is true as well (you could include the payoff of a $500 lien or something that isn't allowed under a LCO refi and receive up to $1,500 cash back at closing; the net affect being the same).

https://www.fanniemae.com/content/guide/selling/b2/1.2/02.html#A...

Also, I belive if you do a CO refi, you'd have to wait 6 months before you could refi that loan as a LCO refi.

prozario said:   Is it possible to refinance 1st without cash out - and then then get a separate HELOC? HELOC rate might be slightly higher, but you can use it as line of credit and withdraw the money only when you need it.

This is fine if you are playing the pointless fwf game of setting up a heloc for emergencies. But op said he wants to invest. I say if you can afford the cashout refi today and can buy an investment property with 100k (although not sure how you can in op's area) then just go for the cashout and lock yourself in since you know you can afford it. If you are a betting man and think rates will fall, then you do the no cashout refi and heloc and collect rent for two years to show on your tax return as income and then refi to a fixed rate.

Thanks for the insight on the true interest of the cash out (@Bend3r). I assumed a cash out refi would be at the same rate as a no cash out. I also didn't know that waiving an escrow account would cost me an additional 0.25% at closing.

My plan is to go with a no cash out refi. I'm not doing a cash out because I am not confident I have an investment vehicle that can beat the true rate, and I don't have an investment property lined up. I do plan to buy one within the year, still searching. The no cash out refi and separate heloc sounds appealing (@prozario).

Thank you everyone else for you input.

I'm in the process of shopping with lenders. I've reached out to 4 lenders found through zillow mortgage, fatwallet finance, and nerdwallet mortgage (which is backed by zillow lol).

Will report back what I went with.



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