Refinancing Your Way Into Trouble
By Paul Esajian on December 18, 2013
If you are facing a cash shortage, one of the ways to get cash quickly is by refinancing any existing properties you may have. While this may serve as a short term solution, it can also have lasting ramifications when you are not careful. Between interest only and short term adjustable rate mortgages, there are options available that can serve as a short term band aid, but sting quite a bit in a few years. Before you explore taking money out of any property, you need to know exactly what you are getting into and exactly what the effects will be in the long term.
Investor loan programs have changed quite a bit since the height of the market some five years ago, but there are still many options available. The biggest change has to do with credit score and the percentage of available equity. Most lenders currently cap cash out loans to 65-70% of the appraised value. The first hurdle for cash out loans is getting the appraised value to where you think it should be. You may also have time restrictions on how quickly you can take cash out after you closed. Most loan programs are at least 90 days and you may also need documentation for any improvements made. Taking cash out is difficult, but far from impossible.
If refinancing is an option, you will be left with some financing decisions. You can chose between interest only, 5, 10, 15 and 30 year mortgages. If you take the lower rate of the five or 10 year fixed spread out over 30 years, you can reduce your payment in the short term, but are subject to where the market is after your fixed period ends. There are caps on how high the rate can go, but it will most likely be an increase from the payment you were making for the last 60 or so months. A lot can change in five years, but if the cash flow only makes sense for the adjustable or interest only payment, you stand to be in trouble in the not so distant future.
Any funds from the cash out should be supported with a plan. To take money out just to cover current expenses or to buy something you have your eye on doesn’t make too much sense. If you have a true short term emergency of if you can use the money to reinvest, that can be argued as a good reason to refinance. Every time you take money out of your property, you are paying closing costs and taxes for that transaction. The less equity you have, the more you are at the mercy of the market. If the market takes another dip and home prices go down or even stay the same, you will be left with limited options.
Refinancing and taking cash out makes sense in certain situations, but certainly not for everyone. If we have learned anything from the mortgage meltdown, it is that the market can change on a dime and when it does you had better be prepared. If you are going to take cash out ,have a solid plan for all of the funds and know exactly what you are getting in for down the road.