The High Cost of “Cash Out;” Delayed “Hot Season”
DEFERRED DEMAND/PEAK HOMEBUYING SEASON IS NOW
CNBC reported that “mortgage applications to purchase a home rose 5% for the week and were a remarkable 33% higher than a year ago.”
America’s average home price also hit an all-time record high of $365,700, as buyers are now out in droves.
This all corroborates what many of us have been observing already – our normal peak spring buying season has just been delayed by a few months.
HIGH COST OF CASH OUT
Many lenders significantly curtailed their mortgage offerings as a result of the COVID crisis.
Every type of mortgage but for the most “vanilla” was deemed too risky in a post COVID world.
Lenders were terrified of having unsalable loans on their hands, so they either stopped offering many types of mortgages or they significantly raised rates.
One of those loan-types often deemed “too risky” was “cash out refinances,” or refinances that involve increasing one’s principal balance in order to garner additional cash.
For “low balance” conforming loans (up to $510,400 in most locales), the “hit” to rate for cash out is not significant – maybe 1/8% for a 75% loan-to-value loan for a borrower with good credit.
But, for “high balance” conforming loans ($510,401 to $765,600), the “hit” to rate for cash out is as much as 3/4% to rate, depending on the lender.
Many jumbo lenders and investors stopped offering cash out loans altogether, and the ones that still do charge significant premiums.
ALTERNATIVE TO CASH OUT
If borrowers face too big of a hit for cash out, we often recommend that they stick to a “rate and term refinance” and then get a home equity line of credit or a 2nd mortgage after close.
We also show borrowers how they can increase their loan amount to “effectively” get cash via a rate and term refinance by financing their current and future payments.
Many lenders also allow borrowers to walk away with us much as $2,000 of cash with a “rate and term refinance,” although this is not allowed in Texas.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167