Far fewer homeowners are now tapping their equity through a cash-out mortgage refinance than just a few weeks ago. That’s despite the fact that since the pandemic began, owners have built up equity at a breakneck pace and a cash-out refi would let them draw out funds.
The obvious reason for far fewer cash-out refis is that mortgage rates have risen as the Federal Reserve tries to tamp down inflation through monetary policy moves. “When interest rates rise, of course you have to pay more to borrow against your house. That makes homeowners a heck of a lot more cautious,” says Keith Gumbinger, a vice president at HSH Associates (HSH.com), which tracks mortgage markets across the nation.
Granted, cash-out refinancers are typically far less rate sensitive than those who refinance to cut their monthly payments. Home renovation is one major reason many turn to a cash-out refi.
“People hankering for that dream kitchen redo or the addition of a first-floor bathroom to spare them climbing the stairs don’t want to heap all those expenses on their high-rate credit cards,” Gumbinger says.
Likewise, some owners prefer to finance their renovation with a cash-out refi rather than a home equity line of credit, also known as a HELOC. With such loans, borrowers bear the “huge risk of rising rates,” he says.
Due to the recent rise in mortgage rates, overall refinance demand has dropped 68% within the last 12 months. That’s why qualified borrowers interested in doing a cash-out refi can now expect a cordial reception from the lending industry, which has lost business due to rate rises.
“There’s no doubt lenders are hungrier now. Customers aren’t coming through the doors and windows like two years ago,” Gumbinger says.
Here are a few pointers for those pondering a cash-out refi:
-- Investigate your credit worthiness as a first step.
Clearly, lenders are much more risk-averse than they were before the financial downturn of 2008. They’ll want to see strong income (preferably on a W-2 statement) balanced against a low level of personal debt. They also want essentially good credit.
“You don’t need pristine credit, but you’d better not be subprime or no one will want to make you a loan now,” says Eric Tyson, author of “Personal Finance for Dummies.”
Before you shop for the right lender, he says it’s smart to review your credit picture to see if flaws or mistakes pop up. Under federal law, you’re entitled every year to one free credit report from each of the three large credit reporting bureaus: Equifax, Experian and TransUnion. To obtain these, just go to this website: annualcreditreport.com.
To know if you’re likely to qualify for the best available mortgage rates, you’ll also want to access your credit scores. Such scores, which draw on data from the credit bureaus, provide lenders with a quantitative measure of a person’s credit risk. Most lenders use FICO scores, pioneered by the Fair Isaac Corp.
Usually you need to pay a fee to obtain your credit scores. One approach is to buy these through a Fair Isaac website: myfico.com. You can also receive credit scores through the credit bureaus.
There are multiple reasons to examine your credit before shopping for a mortgage lender. The most important is that this will spare the lending institutions the need to run their own credit checks on you, which could potentially cost you points on your FICO score. Then only the lender you ultimately select will then need a firsthand review of your credit.
-- Exercise caution when considering online lenders.
Tyson says it’s not impossible to find online lenders who offer both good rates and excellent service. But he urges you to be careful if you choose this avenue to refinance.
“Some online lenders will only communicate through email. They won’t take phone calls. This can be very limiting if you have questions or run into complications,” Tyson says.
Another possible issue, he says, is that any out-of-town lender -- whether online or not -- could potentially undervalue the property you’re seeking to refinance.
“A lender who doesn’t catch the nuances of your marketplace could appraise your property for less than it’s worth, making it tough for you to do the cash-out refinance you’re seeking,” Tyson says.
-- Request referrals from local real estate agents.
Seasoned real estate pros in your community can be very helpful in suggesting the names of good mortgage lenders.
“Using word-of-mouth in the real estate community is always a great first step,” Gumbinger says.
However, he suggests you ask questions about the names given to you by a real estate agent. For instance, you’ll want to know if the lenders were recommended on the basis of their low rates or smooth customer service or both. You shouldn’t have to sacrifice either.
-- Tap other business professionals for referrals.
“Ask accountants or lawyers in your area. Also, ask neighbors, friends or colleagues,” Tyson says.
In addition, he says you may also want to call credit unions in your area. These are not-for-profit financial cooperatives owned by their members. If you don’t already have access to a credit union through your workplace, you can likely find one that’s open to anyone in your geographical area. One way to do this is by visiting the Credit Union National Association website: cuna.org.
-- Don’t give out your Social Security number prematurely.
Of course, no quality lender will guarantee that your mortgage rate has been locked in without first pulling your credit scores. But that doesn’t mean you should give out your Social Security number (the key to pulling your credit scores) while you’re still doing comparison shopping.
“If you walked into a grocery store and the cashier wouldn’t quote you the price of a quart of milk without your credit score, you’d walk right out the door. That shouldn’t be any different with a mortgage,” Gumbinger says.
(To contact Ellen James Martin, email her at email@example.com.)