Market Sees Increase in Cash-Out Refinancing
In the final quarter of 2005, one-third of Freddie Mac mortgage applications were from homeowners who were interested in a cash-out refinance. Many of those individuals were refinancing to get rid of their home equity lines of credit.
Is this a good idea? What is the best way to use your home equity?
An example of refinancing
Here’s an example of how this money-saving move works: A homeowner has a $40,000 balance on a home equity line of credit, plus a primary mortgage with a balance of $250,000. The homeowner refinances the primary mortgage for $295,000. That’s $45,000 more than the previous balance. Of that $45,000 “cash-out” amount, $40,000 pays off the credit line and $5,000 goes to closing costs.
This type of cash-out refi eliminates debt through home equity - a popular Florida home loan technique - because of what has happened in the year and a half since the Federal Reserve started raising short-term interest rates. In June 2004, a lot of people paid 4 percent on their equity credit lines. Now they pay 7.6 percent. That can add up significantly.
Mortgage broker Bob Moulton, president of Americana Mortgage, says he has a client who is doing a cash-out refi to pay off a credit line “because his home equity line costs $300 a month more now than a year and a half ago, when he got it.”
Latest mortgage rate numbers
Meanwhile, the benchmark 30-year fixed-rate mortgage rose 4 basis points to 6.32 percent, according to the Bankrate.com weekly national survey of large lenders. The mortgages in this week’s survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index was 5.59 percent; four weeks ago, it was 6.22 percent. And on June 30, 2004, it was 6.3 percent.
Long-term rates, moreover, didn’t move much this week because there wasn’t a lot of economic news to sway things one way or another. ARM rates followed the Fed’s lead from last week, when the central bank raised short-term rates by a quarter of a percentage point.
Some analysts believe that the Fed is leaning toward another hike at the end of March, an action that would boost rates on credit lines even more. That would give homeowners more reason to move forward with cash-out refinances in order to pay off their credit lines.
Finding ways to avoid debt is always a topic of interest for those with a Florida home loan. You should pay close attention to the state of the housing market and the most effective ways to use your home equity. Only you can determine whether or not it’s time to refinance your Florida home loan.
