The Covid-19 crisis brought falling mortgage rates, rising property prices and a withdrawal refinancing boom that has not been seen in more than a decade. Withdrawal refinancing may lose some of its appeal if interest rates continue to rise – but that doesn’t mean potential borrowers are out of luck.
Thanks to historically low mortgage rates, more than 7 million mortgages were refinanced in 2020, most since 2006 and nearly double as of 2019, according to Attom Data Solutions. Withdrawal refinances that homeowners can use to potentially lower their interest rate and monthly mortgage payment while pocketing cash by adding the amount to the total amount of the loan were popular options. Homeowners raised an estimated $ 48.4 billion in equity through refinancing in the final quarter of 2020
most since the real estate crisis.
However, the group of people who would benefit from a refinancing has shrunk as the benchmark’s 30-year fixed-rate mortgage has risen. The average rate has risen nearly 0.5 percentage points from its January low to 3.13% last week. According to Black Knight, the number of high-quality refinancing candidates has shrunk from 18.8 million to 11.2 million during this period.
“The glory of lower interest rates has waned somewhat,” said Gary Schatsky, financial advisor and president of ObjectiveAdvice.com Barrons. “A month ago … the difference would have been noticeably bigger.”
That doesn’t necessarily mean that withdrawal refinancing is off the table. Prices are still closer to historical lows than the 10-year benchmark mortgage average of 4%. And property prices have risen significantly, which means more people may be able to tap into the equity of their home. However, this means that for some homeowners the choice may not be as clear-cut as it was last year. Depending on a borrower’s goal, other loan products like a home equity line of credit or Heloc might be more appropriate, advisors say.
How much cash you need – and when you need it – are two of the most important factors when deciding on a loan. Withdrawal refinancing results in a lump sum payout that is added to a borrower’s monthly mortgage payment at an often fixed rate, while a heloc acts as a line of credit and charges the borrower with floating rates based only on short-term rates when they use the money.
Because of this, experts say a Heloc might be a better choice for short-term expenses that a borrower might want to repay relatively quickly or in an emergency – although lines of credit could be frozen in times of widespread economic upheaval, says Jamie Hopkins, director of retirement research at Carson Group. “[During] In national crises, you can’t really rely on the line of credit even if you’ve already set it up, ”says Hopkins.
Greg Sarian, CEO and founder of Hightower Sarian Strategic Partners, says he would recommend a Heloc for expenses under $ 75,000, like a car or an unexpected home repair – especially if the borrower plans to repay it within 18 months. “When the need is lower and the time frame is shorter, I think the Heloc is an optimal way to go,” says Sarian, adding that unlike disbursement refinancing, Helocs have no closing costs.
Withdrawal refinancing might be the right choice for larger, longer-term expenses when long-term interest rates are relatively low and expected to rise– like now. “If the need for credit is longer term, I would secure that funding today,” says Sarian, adding that borrowers typically use payout refinancing for needs in excess of $ 100,000, such as major home renovations, a second home, or the occasional business open. According to Paul Appleton, head of consumer lending at Union Bank, this could also be a decent way for borrowers to consolidate more expensive debt Barrons.
Disbursement refinancing is essentially a mortgage. As with other home loans, the interest rate is tied to movements in the 10 year Treasury yield and is often fixed. “Fixed stability and stability in fixed payments are always welcome,” says Keith Gumbinger, vice president of the Mortgage website HSH.com.
While rising interest rates could undermine the benefits of refinancing, payout refinancing might still be right for a homeowner’s specific situation. “The key is never to say never, but to understand the inherent risks and benefits of each of your alternatives,” says Schatsky.
There are good reasons to consider all of your options before using the equity. “A lot of people who drained their equity in the last boom ended up underwater when real estate prices fell from unsustainable levels,” says Gumbinger, who adds that standards have risen since the real estate crisis. But using equity today could mean it won’t be there tomorrow. “For many people, equity in their home is their greatest asset when they approach retirement.”
And if you get too much equity now, borrowers could get into trouble trying to sell in the next few years, says Carson Group’s Hopkins. He advises homeowners to stay in their homes for at least five years after refinancing. When house prices are rising fast like they did during the Covid-19 crisis, Homeowners have more equity to develop. If home appreciation flattens or declines in the coming years, borrowers who overfund their home equity could owe more than their home is worth. Even those with positive equity risk have little left after the costs and fees are closed when they sell their home, Hopkins says.
Home equity “can take a painfully long time to accumulate,” says Gumbinger. “You should always take your home equity seriously and protect it.”
Write to Shaina Mishkin at [email protected]