Cash-out Refinancing in NH [What Is it and Is it Right for Me?] Roger Odoardi Whether you purchased a cabin in the White Mountains or a cape on the Seacoast, a mortgage is a major undertaking. Refinancing might seem just as intimidating, but it doesn’t have to be. This financial move simply means paying off your existing loan and replacing it with a new one in favor of a lower interest rate, a shorter mortgage term, or to tap into equity. The estimated average fixed rate in 2020 is 3.6%, a record low according to Freddie Mac. As a homeowner dealing with NH’s high property taxes, it’s tempting to take advantage of the hot market and low interest rates. Since there are quite a few refinancing options to consider, where do you start with your home loans? After spending time on home improvements or reevaluating your investment portfolio, you may have contemplated leveraging equity with a cash-out refinance. But how do you know if it’s the right option for you? This post covers the pros and cons and different types of cash-out refis that New Hampshire residents can consider. By the time you finish reading, you should know whether or not a cash-out refinance is right for you. So, let’s get started. When should you refinance? First of all, how do you know if it’s the right time to refinance? If you have a chance to reduce your monthly payments or shorten the term of your loan, refinancing is a great option. If you purchased your home a few years ago and your rate is higher than NH’s current market rate, then you could benefit from refinancing your mortgage. Research is important. Cash-out refinancing isn’t a cure all, but it’s worth consideration. Trusted mortgage brokers will help guide you through each refinancing option and evaluate how they align with your goals. For homeowners who are interested in bringing debt under control or making a long-term investment in their property, a cash-out refinance could be the best option. Try our Mortgage Calculator >> What is a cash-out refi? Cash-out refinancing allows homeowners to tap into the equity of their property and pull it out as cash by taking out a new loan. The new mortgage replaces the old one and you receive the difference (minus closing costs) as cash. Since New Hampshire’s home values are low and interest rates are favorable, this option is becoming much more attractive. For example, if you purchased a home worth $400,000 and have a current mortgage of $300,000, then you have $100,000 in equity. In a typical cash-out refi, you can borrow about 80% of the home’s value, which is $320,000. With the current mortgage of $300,000, the cash-out refinance would allow you to borrow $320,000 total with $20,000 in cash. After closing costs, that could be about $10,000 in your pocket to use as you please. Who is eligible? With the exception of USDA loans, every NH borrower who is eligible for home ownership or has a mortgage qualifies for a cash-out refinance. Qualification isn’t the only consideration, though. Borrowers are strongly advised to consider their equity and long-term goals; these two factors help determine whether or not cash-out refinancing is a good option. Is it tax deductible? Interest on a mortgage is tax deductible up to a certain amount. A cash-out refinance in New Hampshire doesn’t impact writing off interest on your mortgage, but since IRS tax laws are always changing, it’s prudent to consult an accountant for more detail. Will interest rates be lower? Cash-out refinance rates fluctuate like all interest rates. However, since pulling out existing equity is considered a risk, there’s an adjustment up in the interest rate. Borrowers experience higher interest rates with cash-out refinancing than rate-and-term refinancing. We’ll cover rate-and-term in more detail later, but this refinancing option is considered more conservative because the borrower is refinancing to lower the term or rate of their loan. Don’t let that be a deterrence, it’s still possible to receive a lower interest rate with a cash-out refinance. For example, if the homeowner’s current rate is 4%, the cash-out refinance rate could be 3.5%. Although the homeowner could lower their rate to 3% with a rate-and-term, the cash-out refinance is still lower than their current rate. Even if the rate does go up, it’s typically not much of an increase, so depending on the homeowner’s goals, an extra quarter or half a percent is well worth the flexibility of a cash-out refinance. What about closing costs? On a cash-out refinance, closing costs could be higher, so recoupment is slightly harder. If you’re planning to sell your property in the next year or two, refinancing might not be the best option. However, if you’re planning to stay for a while, you can recoup the cost by saving on a loan or pulling out enough cash for renovations that improve your home’s value — and with NH’s four seasons, there’s plenty of work to be done! Who benefits most? Cash-out refinancing is a great option for a wide range of homeowners, especially those who borrowed at an interest rate that is higher than the current rate. Now that rates are down and home values are increasing, there’s much more equity to work with. Savvy homeowners interested in capitalizing on their appreciating home value and making home improvements to build more equity find cash-out refinancing a very attractive option. Advantages and Disadvantages There are pros and cons to every refinancing option, and cash-out refinancing is no different. Receiving cash up front is beneficial simply because you collect a large sum of money to use at your discretion. Instead of tapping into more expensive sources of borrowing money, you take advantage of low interest funds to accomplish new goals. So, what are some of the best ways to use the cash from your cash-out refinance? 4 ways to use the cash Renovations: If you’ve had your eye on a three-car garage with a $30,000 price tag, you might be hesitant to put it on a credit card because that interest rate could be anywhere from 10-20%. A personal loan could run up to 8%. Instead, you could use a cash-out refinance and rewrite your mortgage for, say, 3%. Since this loan is over a longer period of time, taking out $30,000 this way is only an extra hundred or so a month. You no longer have to clear the snow off your car in the long winter months, and you simultaneously increase the value of your home. Investing: You can use the cash out to invest and diversify your portfolio. By borrowing at a low interest rate, you can potentially invest it up to double the rate since the money isn’t tied up in a mortgage. Paying off debts: If you’re looking to get back on track, you can use your cash-out refi funds to tackle student loans or other outstanding debts, reducing your overall monthly expenses. Purchasing a second home: If you’ve been eyeing a second home near Lake Winnipesaukee, you can refinance one home and take the cash to make a sizable down payment on your next property and receive a more attractive interest rate on the new house. Even though there are plenty of great ways to use these funds, cash-out refinancing does come with disadvantages. As we mentioned earlier, pulling out equity is a risk, so a different refinancing option could provide a lower interest rate for you. Not to mention, if you fail to meet payments, you lose the equity that you’ve gained. How could monthly payments change? Let’s say a NH homeowner put 10% down and they’re paying PMI (private mortgage insurance) with a rate over 4%. They’ve already completed renovations, rates are quite a bit lower and they need a bit more cash to finish some work. With new home values and a 3% interest rate, they could save $150/month on interest and get rid of the $150/month PMI while pulling out $20,000 cash. Even though they’re borrowing money, their net is actually better because they’ve already saved $300 by dropping their interest rate and PMI. Potential Disadvantages Foreclosure: Since your home is collateral, foreclosure is a big risk, especially if you’ve used the cash to purchase a second home. Paying unsecured debt with secured debt is risky because failing to meet payments could cause you to lose one or both properties. Accruing more debt: Well-intended borrowers using a cash-out refinance to pay down credit card debt without curbing spending habits run the risk of accruing additional debt without improving credit or getting rid of that astronomical credit card interest rate. Similarly, if you let temptation take over and use the money to take advantage of tax-free shopping or lavish vacations, then you could quickly put yourself in financial jeopardy. As a borrower, you have to take an honest look at your goals and motivations to determine whether cash-out refinancing helps you meet them. This option is a great long-term play for disciplined, goal-oriented borrowers, and it’s designed for homeowners who are making strategic moves and planning to stay in the Granite State a little longer. Different types of cash-out refis There are three different types of cash-out refis: VA, FHA and conventional cash out. Each differs slightly in the amount of equity you can borrow and the qualifications to do so, but the closing costs will be similar across the board. VA — Borrowers must be a veteran to be eligible for a VA cash-out refinance and can receive up to 100% of the home’s equity. Anything over 90% equity becomes less advisable, but this loan provides much more flexibility to New Hampshire homeowners looking to make sizable home improvements. FHA — Borrowers are capped at 80% of their home’s equity. Homeowners considering an FHA cash-out refinance can still qualify if they have credit blemishes, a lower credit score, or experienced bankruptcy a few years ago. Conventional cash out — This cash out is also capped at 80% of the home’s equity and is intended for higher credit score borrowers in a good equity position. What other refinancing options are out there? Cash-out refinancing isn’t for everyone. There are additional loan programs and refinancing options that a bank or credit union could help secure. Home equity loan (HEL) — A home equity loan allows you to borrow separately from your existing mortgage with fixed interest and payments. Lenders determine how much money you can borrow after factoring in your home’s value and your outstanding debts. The rates are usually higher than a line of credit, but they don’t change. Home equity loans tend to be a short-term solution to quickly tap into equity because you might sell soon. Home equity line of credit (HELOC) — This line of credit uses your home as collateral. Think of a home equity line of credit like a credit card where borrowers can take out up to 90% of the house’s value. There’s a 5 to 15-year “draw period” where you can borrow money, and then you enter a 10 to 20-year repayment plan where you have to pay full interest and principal. The benefit is that interest only builds on what has been drawn from the line of credit. However, since the rates are adjustable, they could continue to increase over time. There’s more uncertainty with a line of credit versus a fixed rate where you know the payment and rate upfront. HELOCs are also best utilized as a short-term solution if you’re considering selling in the near future. For more information, check out our post on consolidating debt with a home equity loan. Rate-and-term refinance — If interest rates drop in NH, buyers can take advantage of this refinancing option to either lower their monthly payments or shorten their mortgage term. For example, you could extend a 20-year mortgage to 40 years but with a lower interest rate and longer term, monthly payments could become much more manageable. Or, you could use this option to pay the new interest rate and negotiate a 10-year mortgage. Those monthly payments would become twice as high, but with a better rate, total payments could be even lower than the original mortgage. Is a cash-out refinance the right move? Ultimately, every borrower needs to ask the same questions. What’s your mortgage? What’s the current value of your home? How much equity do you have? These answers dictate whether or not a cash-out refinance is right for you. It really comes down to the amount of equity that you have. Consider a borrower with a 15-year loan at a 2.875% interest rate. Even though they have 10 years left, they want to pull out $10,000 with a higher rate. They’ll pay a higher rate to refinance and after a few thousand dollars in closing costs, their take-home cash will only be a few thousand dollars. In this situation, the borrower is much better off with an equity loan or a line of credit. Now, let’s consider a first time home buyer who put less than 20% down. They’re currently paying PMI and have been making consistent payments for 10 years; with their equity, they could benefit from a cash-out refi since it would likely drop PMI and provide money in their pockets to perform needed renovations or use for other priorities. If you’re looking for a short-term solution without a lot of cash up front, a cash-out refi might not make much sense. However, when planned accordingly, cash-out refinances can be a game-changer for your long-term investment strategy. Ready to Ask Questions and Run Some Numbers? Get Pre-Approved Now >> Steps for refinancing in New Hampshire Your refinance to-do list is relatively straightforward; the timeline closely follows your first mortgage. Find the right loan and lender. Determine which type of refinance is right for your goals. Consider adjustable-rate or fixed-rate mortgages, the term and rate of your new mortgage, and closing costs. You may also wish to consider an official Loan Estimate, a detailed summary of the new mortgage. Lock your rate. After you’ve selected your lender, they will commit to honoring your rate, even if it fluctuates the next day. Provide documentation. Then, you’ll need to upload financial documents, including tax returns, W-2s or 1099s, bank statements, and proof of alimony or child support payments. Underwriting and final approval. All documentation gets reviewed in a few days by the underwriting team, which may ask you for additional information or follow-up materials. Then, you’ll receive a completion notice and closing date. Closing and funding. After the loan is finalized, you can review the closing disclosures with final costs and sign necessary documentation. Why refinance with Blue Water Mortgage? Even though the steps are relatively straightforward, they’re intimidating to navigate without a full picture of the current market. That’s where a mortgage broker comes in. Although we love the freedom and flexibility that cash-out refinancing offers, at Blue Water, we recognize that it isn’t the right move for every borrower. We apply this transparency across our client interactions. Ultimately, we work to understand your goals and find the best lending solutions for your unique needs. Blue Water Mortgage nurtures multiple relationships with big mortgage lenders, which means we can shop around and find the most competitive rates. We’re locally owned and operated with all the technology and service you’d expect from a larger company. Our clients are encouraged to call us on our cell phones to crunch numbers, even on the weekend. We’d love to talk about your goals and develop a solution to meet them. Interest rates are always changing and we’re ready to help you secure the best one. To speak with a mortgage specialist, click here.