Taking Cash Out Of Your Property
By Paul Esajian on November 8, 2013
Despite the recent attention given to short sales and foreclosures, there are still many homeowners who have managed to build equity into their property. If you managed to buy at the bottom of the market and have rode the wave of appreciation the last few years, you may be sitting on a lot of money. Instead of selling, you may want to keep the property and pull some cash out. Mortgage guidelines have made taking cash out much more difficult than in years past, but it can still be done. However, at what cost is the cash worth it for you to consider?
Should you decide to take cash out, you will see an increase in your monthly payments. If you did not have a mortgage, taking cash out will give you one. If you did have one, now you have increased it by taking cash out and the closing cost amount. That alone will add to your payment, but it will also increase from an interest rate hike. If you bought in the last two years, you bought at or near all-time interest rate lows. With the add-ons for the cash out and the increase in rate, you could be looking at anywhere from a .50-.75 increase in your rate.
You also have to factor in what a new mortgage will do to your term. If you have been paying 10 years on a 30 year mortgage, taking a new loan would essentially wipe away all those payments and start the 30 year clock over again. Taking a 15 or even 20 year mortgage will lower your term, but will increase the payments to a point where it may not make sense to do the loan. If you are just looking for the lowest payment, the 30 year term will give that to you but will take all of 360 months to pay off.
What are you going to do with your money? This should be the first and most important question you ask yourself. If you are using it to make money and reinvest, you are putting that money to good use. It is when you take money out of properties to pay for old debt or spend recklessly that taking cash out is prohibitive and does you no good. It may fill a short term need, but in a few months you will end up right back in the same place. Only now with more debt.
If it is your plan to take cash out, you should find out if you can first. You may have the best intentions for your money and have another property lined up, but you may be surprised to find out you are not qualified. Cash out loans require a higher credit score of at least 680 and lower debt to income ratios. You can purchase a house with a lower score, but lending guidelines won’t let you take money out. You may also be capped at 80% or 85% of the appraised value depending on the lender and other factors.
Taking cash out is something that you should think long and hard about before you do it. It can help grow your business and help you acquire new properties, but it can also but you in a hole that will take years to overcome.