Cash Out Christian Refinancing
Cash out Christian refinancing can be one way of helping to relieve a homeowner of debts that may be plaguing him. The term cash out really means that the money from such a refinance plan is used for any purpose other than the mortgage being reduced further. The cash out refinancing loan is an alternative to a home equity loan. Both provide the needed cash for emergencies or luxury items but before singing on the bottom line financial experts strongly advise seeking outside help to decide which loan is best. The question of cash out or home equity is not a one size fits all answer.
In both cases, cash out refinancing lending plan and a home equity plan take advantage of the hard work and sweat a family or an individual has put into paying monthly mortgage payments for a number of years. A since a typical mortgage plan has the borrower paying the bulk of the interest on the loan in the beginning years, by the time a homeowner has a substantial amount of equity in the house, quite a few years of faithful monthly payments have been made, although much would depend on how substantial the initial down payment was. Before considering a cash out or home equity line of credit loan, some serious considerations needs to be contemplated. Ponder the following thoughts.
In either case, whether it is a cash out refinancing loan or a home equity line of credit, the borrower needs to understand that in the very truest sense of the word, a homeowner is starting over again with paying for a place of residence. Once again much more interest will be paid each month than principle and that pattern will continue for a number of years. What that really means is that whatever the money will be used for ought to have long lasting value. For instance, the heartstrings and the parental instincts cry out for a beautiful and glamorous wedding, but in ten years will the elegance of a thirty minute ceremony have been worth the twenty or thirty thousand dollars of equity taken out of one's house? Or for the men, will that "always dreamed of owning" car be worth all of the ten or twenty or thirty years of payments? Yet money for medical bills, an extra bedroom for the staying permanently mother-in-law or college tuition for the budding scientist may really have staying power when it comes to appreciating the monthly payments many years later.
A borrower needs to understand that just because he/she could get a mortgage years before may not prove to be so easy a second time. For example, both credit ratings and debt to income ratios are huge factors when applying for any kind of mortgage related loan, even a home equity loan or cash out refinancing. If over time a homeowner has slowly added to the monthly list of credit debts to pay, just the added debt could nix any hope of getting a cash out financing transaction from a bank or credit union. If monthly credit payments including an existing mortgage exceed forty percent, the debt to income ratio is too high. Making on time payments for every account and never flinching will not make any difference if the DTI ratio is above 40%.
To decide between a cash out refinancing mortgage and a home equity loan, a person will have to know all the exact interest rates and length of time for which the loan will be designed. Many loan companies online offer calculators at their respective websites to help prospective borrowers decide which type of loan is for them. As a person plugs in their own numbers to make a decision, keep these particular issues in mind. A home equity loan is a separate loan on top of the first mortgage while a cash out refinancing loan replaces a person's original mortgage. Additionally, the interest rates on a new mortgage are usually lower than a home equity loan; however, you must pay closing costs when refinancing a mortgage which could amount to thousands of dollars while a home equity line of credit has no closing costs in most cases. In the end, the two options may come within a few thousand dollars of each other in terms of cost over a long period of time, but the cash out refinancing option will allow a property owner to get all of the equity, while a home equity lending agreement will only allow a percentage of the amount to be accessed, usually between fifty and seventy percent.
Americans have been conditioned to want full access to everything that is legally ours to have. People want all the high def channels we can get, we get angry when the ATM only lets us have five hundred dollars of our own money, we want access to our medical records, our school records, our job evaluations and we sure want access to the money we have socked away in our home equity! It's ours after all! Many also spend hundreds of millions of dollars each year on workshops, videos, audio files and books trying to get the most out of their own potential. The Bible says that Christians have within them a treasure described as the light of the knowledge of the glory of God. Wow! What that means is that as children of God, Christians have access to the ability to see many things as God sees them. Not as an arrogant power, but simply as means by which to navigate through life in a different manner than those choosing not to follow God.
Cash Out Christian Refinance LoanWith a cash out refinance loan, individuals replace a current mortgage with a new one that has a higher payoff amount. The extra cash comes from tapping into the house's equity, or the difference between the appraised value of the property and the payoff amount of the original mortgage. People who have lived in the same house for a long time or live in an area of the country where home values are rising, often have a good amount of equity built up in the property. For example, because of a combination of principal payments and increasing values, a homeowner may owe $140,000 on a residence that is appraised at $200,000. The equity amount is $60,000.
Perhaps the homeowner bought the house when interest rates were higher than they are now. To get a better rate of interest, this individual decides to refinance the loan. Knowing that he has $60,000 of equity, he may decide to borrow more than the $140,000 actually owed on the original mortgage. The homeowner applies for a cash out refinance loan for $160,000, or 80% of the appraised value. When the application is accepted, the new lender pays off the original loan and then gives the borrower the remaining funds of $20,000 less any closing costs and fees. Because the homeowner understands the importance of making wise financial decisions, he uses the additional funds to make improvements and upgrades to his property. These projects increase the market value of the home by more than the amount that the individual spent. By following the guidance of Scripture, "I, wisdom, dwell together with prudence; I possess knowledge and discretion" (Proverbs 8:12), the homeowner handled the cash out refinance loan in a wise and prudent manner.
Another homeowner with an identical mortgage situation decides to refinance her original loan to get a lower interest rate. But she decides to borrow $180,000, or 90% of the property's appraised value of $200,000. Because the new cash out refinance loan is more than 80% of the value of the home, the borrower is required to make monthly PMI payments in addition to the house payment. PMI stands for private mortgage insurance and is mandatory whenever the loan-to-value ratio is less than 80/20. At the closing, this homeowner receives a check for $40,000 (less closing costs). Some of the money is spent on home improvement projects, but the majority is used to consolidate old credit card debt and to take a two-week dream vacation. A year later, the credit cards are maxed out again and the homeowner is stuck with higher mortgage payments due to the PMI. Wisdom and prudence were missing from her decision-making process.
As can be seen from the above examples, a cash out refinance loan can help reduce monthly payments and increase the value of one's property. Or it can be a financial mistake. The second homeowner had other options. Perhaps she needed to read books on personal finance to learn how to live within her means so she could get rid of credit card debt once and for all. If the interest rate on her original mortgage really was much higher than current rates, she could have borrowed only the amount needed to pay off the original mortgage without tapping into her equity. If money was absolutely needed for home improvement projects, the homeowner should have determined the cost of these needs ahead of time and only taken enough of the equity to pay for the projects. Her biggest mistake was using equity to pay for items that have no lasting value. Consolidating her debt didn't help because she maxed out the cards again. And she will be paying for that dream vacation for the next thirty years. That kind of dream is really a nightmare. To avoid PMI payments, the homeowner could have applied for a cash out refinance loan that equaled no more than 80% of the home's appraised value and then applied for a second mortgage or a home equity line of credit (HELOC) for any additional funds.
As can be seen from the two examples, prospective borrowers need to consider many factors before applying for a cash out refinance loan. Industry experts suggest that homeowners refinance mortgages when current interest rates are at least a half point less than the interest rate being paid. For example, a homeowner may want to replace a mortgage with a rate of 7.25% if he qualifies for a mortgage with an interest rate of 6.75% or less. Even a more favorable interest rate may not be incentive enough to refinance. If the family plans to move in a few years, the new loan's closing costs may be more than the savings from the lower monthly payments. When the closing costs are calculated, the family may find it is more prudent to leave the original mortgage alone and apply for a second mortgage or HELOC if they need to tap into the equity.
Before agreeing to any specific loan, the Christian borrower is advised to obtain a good faith estimate from the lender. This document outlines all application fees and closing costs, including a calculation of owed taxes and an estimate of the monthly payment. With this type of information, the prospective borrower can weigh all available options without making the mistake of only looking at either the interest rate or the monthly payment. Worksheets and calculators are available at many lending websites that can help prospective borrowers look at the entire mortgage picture. With this type of objective financial information, the homeowner will better understand if a cash out refinance loan is the best option given his individual circumstances.