The Federal Reserve Has Swooped In to Save Mortgage Rates

Last updated on March 24th, 2020

In light of the ongoing coronavirus outbreak, which were the Federal Reserve’s very own words, the Committee took bold action to lower the target range for the federal funds rate to 0% to 0.25%.

That’s a full percentage point lower than the 1% to 1.25% it had been previously. And comes on top of the half-point cut executed just over two weeks ago.

As such, the prime rate has fallen from 4.75% to 3.25%. The prime rate directly affects consumers via things like credit card interest rates and home equity lines of credit (HELOC)s because they’re typically tied to that index.

For homeowners with HELOCs, their interest rates will adjust down 1.50%, which will provide meaningful monthly payment relief.

But what about first-lien mortgage rates, which hit record lows a couple weeks ago, then shot back higher once the market was flooded with mortgage-backed securities (MBS).

Well, the Fed also addressed that issue by effectively starting a new round of quantitative easing, which will probably be known as “QE4.”

Fed Pledges to Buy Agency MBS to Lower Mortgage Rates (QE4)

  • Fed said coronavirus outbreak has hurt communities and disrupted economic activity in the United States
  • To promote maximum employment and price stability it has lowered federal funds rate to 0% to 0.25% range
  • Also announced it will increase its holdings of Treasury securities by at least $500 billion and holdings of agency mortgage-backed securities by at least $200 billion
  • This will lead to lower mortgage rates for homeowners

The federal funds rate doesn’t directly affect consumer mortgage rates, you aren’t getting a 0% mortgage rate.

However, the Fed’s emergency announcement to buy agency MBS does.

First, here’s what they’re doing to combat a recession and ease global markets:

“To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion,” the FOMC statement read.

“The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

In short, the Fed has come to the rescue of the mortgage market, which didn’t seem like it needed rescuing until excessive mortgage demand worked against consumers.

Because there was a flood of mortgage applications, and not enough demand from investors of mortgage-backed securities, lenders were basically forced to raise mortgage rates to limit supply.

But now that the Fed has pledged to purchase at least $200 billion in agency MBS, and reinvest payments into agency MBS, lenders shouldn’t have trouble fetching a higher price for the home loans they sell.

As such, they’ll be able to decrease mortgage rates and perhaps we’ll see those record lows again.

How Low Will Mortgage Rates Go with QE4 in Place?

  • 30-year fixed mortgage rates were averaging around 3.75%-4% before the news hit
  • When the Fed launched QE3 in September 2012 it led to record low mortgage rates
  • At that time the 30-year fixed fell from around 3.55% to 3.31%
  • Expect mortgage rates to return to the low 3s and perhaps to new all-time lows over time

So we know mortgage lenders (and homeowners) are going to see some relief from QE4. The next logical question is how much will mortgage rates actually fall.

As noted, interest rates were suppressed by an oversupply, but now that a whale of a buyer has pledged to buy hundreds of billions in MBS, we should see interest rates fall again.

That’s great news for consumers, namely those looking to refinance mortgages or purchase a new home.

The bad news is mortgage rates jumped more than half a percentage point last week as a result of the oversupply, and thus might not hit those all-time lows again. And even if they do, it could take some time to do so.

When the Fed launched QE3 back in September 2012, the 30-year fixed averaged roughly 3.55%. During the weeks and months that followed, rates fell about 25 basis points.

In fact, the prior record low for the 30-year fixed was 3.31%, recorded during the week ended November 21st, 2012.

We’re in similar territory now, with mortgage rates pretty close to those September 2012 levels.

So we might see rates move in familiar fashion, from around 3.75% to 3.375% and on down to 3.25% if all goes according to plan.

Whether they hit 3% or even dip into the high 2s remains to be seen, but given the Fed’s pledge to buy billions in MBS, coupled with the 10-year bond yield below 1%, it’s certainly possible.

I just wouldn’t expect lenders to go too crazy in lowering rates at the moment, given they still have a ton of demand and lots of applications in their pipelines to process.

Still, it’s huge news because it means lenders have certainty now to originate ultra-cheap mortgages without fear of being stuck holding the bag.

But it might take some time for rates to trickle down and reach record lows again. Again, hang tight here, as I mentioned before.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.

Source: thetruthaboutmortgage.com

Will Forbearance Prevent You from Getting a Mortgage in the Future?

Last updated on May 19th, 2020

Since the CARES Act rolled out in early April, more than four million Americans have reportedly put their mortgage payments on hold for up to 12 months.

The massive numbers taking part can be attributed to the widespread fallout from the coronavirus epidemic (COVID-19), and also the ease at which a homeowner can request assistance, with not much more than a letter or simple request to their loan servicer without proof.

It’s expected that many more borrowers will request mortgage forbearance in the month of May and beyond, as evidenced by a recent survey from Bankrate.

Update: There Will Be a 3-Month Waiting Period to Get a Mortgage After Forbearance

Need Help, But Not Yet Asking for It

need help

Apparently, many Americans are concerned about making mortgage payments in light of possible job losses or income curtailments, but most haven’t reached out for help yet.

Some 70% of Millennials said they were concerned about their ability to make mortgage payments over the next three months, but only 60% said they have contacted their lender.

Meanwhile, 56% of Gen Xers are concerned, but a mere 29% have reached out to their lender or loan servicer.

It’s even worse for Baby Boomers, with 43% concerned, and only 17% asking for help.

As to why, some said they didn’t know it was an option, or simply haven’t gotten around to it, or are waiting for lenders to reach out to them (good luck!)

Others cited unspecified reasons or said they came up with their own solution.

For me, this proves that homeowners are reticent to ask for help, possibly because they think it’ll count against them somehow, even though mortgage forbearance isn’t supposed to harm credit scores or result in delinquencies.

Mortgage Lenders Will Know You Requested Forbearance

  • Lenders told not to report loans in forbearance as delinquent to credit bureaus
  • But loan servicers and lenders are still flagging accounts on credit reports
  • Will these borrowers be considered “late” once the forbearance ends?
  • Could presence of forbearance on credit reports prevent borrowers from getting another mortgage?

My initial thoughts are it shouldn’t count against you, but that’s not always how it works, especially if a private company plays by its own rules.

After housing blew up a decade ago, the Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) were rolled out to help struggling homeowners.

While these initiatives provided relatively immediate relief to homeowners, they also resulted in various waiting periods to get subsequent mortgages.

So a homeowner who opted to receive assistance may have had to wait a year or two to get another mortgage.

These waiting periods were even longer (up to four years) if the borrower received a principal reduction that resulted in them owing less than originally agreed.

But shorter if there were extenuating circumstances, of which there will be for just about everyone this time around.

The question is will they use the past as a model for the future? Things were a bit different back then because there was perhaps some borrower fault, and basically none today.

While you could argue that all homeowners should have reserves saved up for moments like these, they often aren’t required by Fannie Mae, Freddie Mac, the VA, or the FHA.

So you can’t really blame a homeowner impacted by an unforeseen virus to continue making mortgage payments. Nor can you blame them for accepting the assistance you’re offering.

In other words, I can’t see Fannie, Freddie, the FHA, or the VA disallowing a mortgage refinance or a new purchase loan if they extended the forbearance in the first place.

In the case of a refinance, mortgage lenders (or the investors) would presumably receive the missed payment amounts via the payoff to make them whole.

Will Mortgage Forbearance Count Against You?

  • Just because your mortgage isn’t late doesn’t mean it won’t hurt you
  • Lenders may impose waiting periods for borrowers post-forbearance
  • They will likely scrutinize loan files if you requested forbearance in the past
  • It will be key to show them the event is behind you if you want another mortgage

Sure, you’re not technically behind on the mortgage, per the CARES Act and other forbearance programs, but lenders will know that you entered into a mortgage forbearance plan. It’ll be noted on your credit report.

While it might not be a formal delinquency or late mortgage payment, it’ll be visible to creditors when you apply for a new credit card, auto loan, or a mortgage.

It’s a notable event from a credit perspective, and thus will be shared, though it shouldn’t officially count against you.

In other words, its presence doesn’t necessarily mean you won’t be able to refinance or get another mortgage on a different property, especially if it wasn’t your fault.

However, you’re going to have to qualify for the mortgage, like you usually would in normal times.

That might be the dividing line, not so much a waiting period or a flat-out denial just because you took advantage of widespread mortgage forbearance.

Note that guidelines will vary by bank, especially if it’s a jumbo loan or portfolio loan that isn’t backed by Fannie Mae or Freddie Mac, or a government agency like the FHA or VA.

Regardless, it’ll be very important to stay current on mortgage payments post-forbearance. The same goes for any other accounts that show up on your credit report.

An underwriter will dig into your financials to determine this to ensure it’s an isolated incident and really behind you.

Ultimately, it might hinge on the borrower showing that they are back on their feet and that it was a blip related to COVID-19 and not due to their own personal financial missteps or issues.

Like those loan mods in the past, it’ll be crucial that the borrower make on-time payments once forbearance ends to ensure they qualify for a new mortgage without further delays.

Those who still need assistance post-forbearance, via a loan modification or further forbearance, will likely have trouble qualifying for another mortgage.

But that’s pretty obvious – if you can’t pay your existing home loan, why would a lender give you another one?

Read more: Will home prices go up or down due to COVID-19?

Source: thetruthaboutmortgage.com

Esurance Auto Insurance Review

  • Car Insurance

Esurance is one of the biggest providers of auto insurance in the United States, offering cheap insurance policies for drivers in most states. But how does this company perform with regards to services and prices? In this Esurance insurance review, we aim to find out.

Find your best rate on Car Insurance!

Attention: Still Open During the Financial Crisis…

Tip: Act now to see if you qualify for lower rates!

Compare free personalized quotes from the nation’s top providers.

What is Esurance?

Esurance was founded in 1999. It positioned itself as a direct-to-consumer insurer and was one of the first insurance companies to do this. Within a year, it was offering policies to people across 24 states and was then acquired by the White Mountains Insurance Group.

A decade later, Esurance was purchased by Allstate in a deal worth $1 billion and from there the brand continued to grow. Today, Esurance is available in 43 states and continues to offer direct insurance products. This means that you don’t need to go through an agent or use the telephone and can simply apply through www.Esurance.com.

Esurance Coverage Options

In addition to all the usual coverage options, including liability coverage, collision coverage, and comprehensive insurance, Esurance offers the following features:

Rental Coverage from CarMatch

If you have comprehensive coverage and collision coverage and your car is undergoing lengthy repairs or has been stolen, Esurance’s CarMatch service will provide you with a rental car for up to 6 weeks or to the value of $3,000.

CarMatch will keep you on the road and ensure your life isn’t ground to a screeching halt just because you no longer have access to your car.

Gap Insurance

Gap insurance is often required if your car is financed as it will ensure the entirety of the balance is paid if the car is totaled.

If you purchase your car for $30,000 worth of finance and then total it in 2 years, the insurer will typically pay the value of the car at the time it is destroyed. By that time, the value could have dropped by as much as 25% (new cars depreciate rapidly in the first few years) and thanks to the added interest, the balance may be much higher than its value at the time of the accident.

Gap insurance will cover the remainder and ensure you’re not left to foot the bill by yourself. With Esurance gap insurance, up to 25% of the car’s value will be covered, which should be enough to bridge the gap.

Roadside Assistance

Esurance policyholders can add roadside assistance for a small cost. If they breakdown by the side of the road, they will be covered for services such as tire changes and towing, although this cover has a limit of $75 and every call for roadside assistance is considered an insurance claim.

Drivesense

Drivesense is a mobile app that’s offered in most (but not all) states. It tracks driving habits and allows Esurance to paint an accurate picture of your behavior, including your speed and the time of day that you drive.

By agreeing to this app, you can get an immediate discount on your auto insurance policy. The underwriters will then use the data to tweak your premiums. If you’re a safe driver, you don’t spend a lot of time behind the wheel, and you don’t drive quickly, the Drivesense app is a great way to guarantee low premiums.

Other Types of Insurance

Esurance offers homeowners insurance policies in thirty-one states, with a further twelve states offered home insurance through one of Esurance’s many partners. These policies are comprehensive and cover many of the same things found with other major insurance providers. Esurance also offers a few things not found elsewhere, including additional water damage coverage.

Some of the additional features and discounts offered by Esurance home insurance policies include:

  • Save money if you have safety features fitted, including smoke detectors and alarms.
  • Spend less if you have a new home.
  • Choose to add identity theft protection to your policy.
  • Get cover if you own a house that has been extended.
  • Your first claim will not increase your rates or cause you to lose a no claims discount.

Average Cost of Esurance Across the United States

Esurance insurance rates are generally amongst the top 10 cheapest rates in any given state. In our research, we found that Esurance generally lagged behind the likes of GEICO and, in many other states, Safeco and State Farm, but the rates were consistently cheap enough to warrant including them in your comparison shopping.

To give you an idea of how much Esurance customers can expect to pay, take a look at the following average quotes.

  • Alabama: Average Cost of Minimum Insurance Coverage = $700; Average Cost of Full Insurance Coverage = $1,400.
  • Alaska: Esurance car insurance is not offered in this state.
  • Arizona: Average Cost of Minimum Insurance Coverage = $700; Average Cost of Full Insurance Coverage = $1,500.
  • Arkansas: Average Cost of Minimum Insurance Coverage = $600; Average Cost of Full Insurance Coverage = $1,500.
  • California: Average Cost of Minimum Insurance Coverage = $700; Average Cost of Full Insurance Coverage = $1,900.
  • Colorado: Average Cost of Minimum Insurance Coverage = $650; Average Cost of Full Insurance Coverage = $1,000.
  • Connecticut: Average Cost of Minimum Insurance Coverage = $800; Average Cost of Full Insurance Coverage = $1,750.
  • Delaware: Esurance car insurance is not offered in this state.
  • Florida: Average Cost of Minimum Insurance Coverage = $1,300; Average Cost of Full Insurance Coverage = $3,000.
  • Georgia: Average Cost of Minimum Insurance Coverage = $900; Average Cost of Full Insurance Coverage = $2,500.
  • Hawaii: Esurance car insurance is not offered in this state.
  • Idaho: Average Cost of Minimum Insurance Coverage = $400; Average Cost of Full Insurance Coverage = $1,000.
  • Illinois: Average Cost of Minimum Insurance Coverage = $600; Average Cost of Full Insurance Coverage = $1,100.
  • Indiana: Average Cost of Minimum Insurance Coverage = $450; Average Cost of Full Insurance Coverage = $900.
  • Iowa: Average Cost of Minimum Insurance Coverage = $350; Average Cost of Full Insurance Coverage = $1,500.
  • Kansas: Average Cost of Minimum Insurance Coverage = $500; Average Cost of Full Insurance Coverage = $1,400.
  • Kentucky: Average Cost of Minimum Insurance Coverage = $950; Average Cost of Full Insurance Coverage = $2,000.
  • Louisiana: Average Cost of Minimum Insurance Coverage = $1,100; Average Cost of Full Insurance Coverage = $3,000.
  • Maine: Average Cost of Minimum Insurance Coverage = $350; Average Cost of Full Insurance Coverage = $850.
  • Maryland: Average Cost of Minimum Insurance Coverage = $1,000; Average Cost of Full Insurance Coverage $1,900.
  • Massachusetts: Average Cost of Minimum Insurance Coverage = $500; Average Cost of Full Insurance Coverage = $1,200.
  • Michigan: Average Cost of Minimum Insurance Coverage = $1,000; Average Cost of Full Insurance Coverage = $2,000.
  • Minnesota: Average Cost of Minimum Insurance Coverage = $700; Average Cost of Full Insurance Coverage = $1,300
  • Mississippi: Average Cost of Minimum Insurance Coverage = $550; Average Cost of Full Insurance Coverage = $1,600.
  • Missouri: Average Cost of Minimum Insurance Coverage = $650; Average Cost of Full Insurance Coverage = $1,500.
  • Montana: Esurance car insurance is not offered in this state.
  • Nebraska: Average Cost of Minimum Insurance Coverage = $550; Average Cost of Full Insurance Coverage = $1,250.
  • Nevada: Average Cost of Minimum Insurance Coverage = $850; Average Cost of Full Insurance Coverage = $2,200.
  • New Hampshire: Esurance car insurance is not offered in this state.
  • New Jersey: Average Cost of Minimum Insurance Coverage = $1,000; Average Cost of Full Insurance Coverage = $1,800.
  • New Mexico: Average Cost of Minimum Insurance Coverage = $650; Average Cost of Full Insurance Coverage = $1,650.
  • New York: Average Cost of Minimum Insurance Coverage = $1,300; Average Cost of Full Insurance Coverage = $2,300.
  • North Carolina: Average Cost of Minimum Insurance Coverage = $400; Average Cost of Full Insurance Coverage = $1,050.
  • North Dakota: Average Cost of Minimum Insurance Coverage = $350; Average Cost of Full Insurance Coverage = $1,150.
  • Ohio: Average Cost of Minimum Insurance Coverage = $400; Average Cost of Full Insurance Coverage = $1,000.
  • Oklahoma: Average Cost of Minimum Insurance Coverage = $700; Average Cost of Full Insurance Coverage = $1,500.
  • Oregon: Average Cost of Minimum Insurance Coverage = $750; Average Cost of Full Insurance Coverage = $1,400.
  • Pennsylvania: Average Cost of Minimum Insurance Coverage = $550; Average Cost of Full Insurance Coverage = $1,350.
  • Rhode Island: Average Cost of Minimum Insurance Coverage = $900; Average Cost of Full Insurance Coverage = $2,300.
  • South Carolina: Average Cost of Minimum Insurance Coverage = $650; Average Cost of Full Insurance Coverage = $1,550.
  • South Dakota: Average Cost of Minimum Insurance Coverage = $400; Average Cost of Full Insurance Coverage $1,450.
  • Tennessee: Average Cost of Minimum Insurance Coverage = $450; Average Cost of Full Insurance Coverage = $1,300.
  • Texas: Average Cost of Minimum Insurance Coverage = $900; Average Cost of Full Insurance Coverage = $1,700.
  • Utah: Average Cost of Minimum Insurance Coverage = $550; Average Cost of Full Insurance Coverage = $1,300.
  • Vermont: Esurance car insurance is not offered in this state.
  • Virginia: Average Cost of Minimum Insurance Coverage = $500; Average Cost of Full Insurance Coverage = $1,300.
  • Washington: Average Cost of Minimum Insurance Coverage = $750; Average Cost of Full Insurance Coverage = $1,500.
  • West Virginia: Average Cost of Minimum Insurance Coverage = $750; Average Cost of Full Insurance Coverage = $1,550.
  • Wisconsin: Average Cost of Minimum Insurance Coverage = $350; Average Cost of Full Insurance Coverage = $950.
  • Wyoming: Esurance car insurance is not offered in this state.

Esurance Car Insurance Discounts

Discounts are offered by most car insurance companies and are a great way to bring those rates down and save a few bucks on your premiums. Esurance, like all good auto insurance companies, offers a wide spectrum of car insurance discounts, including:

  • Safety Discounts: If you have anti-theft and safety devices installed in your vehicle, you can save a substantial amount on your car insurance policy. Such features include airbags, anti-lock brakes, car alarms, and tracking devices.
  • Bundling: Also known as a multi-policy discount, this is provided to policyholders who purchase homeowners insurance and car insurance together.
  • Good Student Discount: Maintain at least a B average to collect on this student-centric car insurance discount.
  • AutoPay: By selecting AutoPay, going paperless and paying upfront, you could shave a few percent off the total cost of your premiums.
  • Multi-Car: If you have several drivers and vehicles in your household, add them to the same policy and you will save a huge amount of money compared to purchasing those policies separately.
  • Good Driver Discount: If you have no traffic violations or claims, you will be offered much lower rates in general.
  • Homeowners Discount: Homeowners and married policyholders will pay less than single renters.
  • Driver Course Discounts: Complete a driver safety course or defensive driving course to save on your Esurance policy.

Esurance Expert and Customer Reviews

Esurance has a poor score for claims satisfaction, with JD Power giving it a Below Average score overall. It also has a higher rate of complaints than many of its competitors, despite the fact that it scores surprisingly well for customer satisfaction.

​It seems, therefore, that the majority of customers are very happy with the process of applying for auto insurance, as well as the low cost of these policies. But as soon as they need to make a claim, Esurance drops well below the average satisfaction rates and there are a few red flags.

Although this is a concern, there’s nothing to suggest that Esurance is not paying out the amounts that it should. Instead, the majority of the complaints concern minor delays. Esurance also has a high financial strength rating from companies like AM Best, which is not surprising when you consider the reputation of its parent company.

Esurance Auto Insurance Review: Summary

Esurance is not as old as the likes of GEICO and State Farm and it also falls a little short in terms of the benefits and products it provides, with most of the additional options provided by partners.

However, if you’re looking for a low-cost direct insurance provider that doesn’t require you to go through insurance agents and streamlines the application process, look no further.

Source: pocketyourdollars.com

Home Equity Loan Vs. Cash-Out Refinance

Being a homeowner comes with plenty of perks: you get to set roots at your residence, decorate and paint however you want, and above all, use your home as an investment. If you’ve built up equity in your home, you may be looking for other ways to benefit from your investment.

Home equity loans and cash-out refinances are two types of loans consumers can use to take advantage of their home equity by saving money on loan payments, simplifying debt repayment, and access additional capital.

If you’ve considered either of these loan types, it’s important to compare how they work and the benefits and drawbacks of each before you make your decision. In this article, we’ll discuss home equity loans vs. cash-out benefits, drawbacks, and give you the information you need to determine which one is right for your financial situation.

Home Equity Loan Definition

A home equity loan allows you to borrow money using your home equity (the value of your property, minus remaining mortgage) as collateral. Home equity loans are also known as second mortgages.

Cash-Out Refinance Definition

A cash-out refinance is a loan that allows homeowners to convert their existing home equity into cash that they can use for whatever they want.

Similarities Between Home Equity Loans And Cash-Out Refinances

Home equity loans and cash-out refinances are both loan types that use home equity as loan collateral. In addition, they share the following similarities:

  • Both typically have fixed interest rates
  • Both generally require a post-transaction loan-to-value ratio of 90% or less to qualify
  • Both offer lump-sum payments

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4 Unexpected Benefits from Turning Down Your Thermostat :: Mint.com/blog

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Comparing Home Equity Loan Vs. Cash-Out Refinances

We’ll dive deeper into how home equity loans and cash-out refis work and when they’re most applicable a little later on in this post. For now, we’ll cover a few of the main differences between home equity loans and cash-out refinances:

  • Cash-out refinances offer adjustable rates
  • Cash-out refinances are a single loan, not an additional mortgage
  • Cash-out refis typically have lower interest rates
  • Home equity loan lenders typically pay part or all of the closing costs

Reasons To Use A Home Equity Loan Or A Cash-Out Refinance

Now that you know a little bit about them, let’s discuss why some homeowners choose home equity loans vs. cash-out refinances, and vice versa.

Home Equity Loans

Home equity loans enable you to borrow a predetermined amount of money, for a set term, at a fixed or variable rate, just like a mortgage. This is why home equity loans are considered “second mortgages.” Lenders typically allow homeowners to borrow 80 – 90% of the home’s value in total, which includes both mortgages. Home equity loans generally come with a 15-year payback time frame.

Home equity loans can be used to refinance an existing mortgage or:

If you’ve built up equity in your home, using a home equity loan to refinance can be especially effective when interest rates are high.

Advantages Of Home Equity Loans

  • Home equity loans give you the option of fixed payments, which can help borrowers plan for monthly payments.
  • You have the option to maintain the rate and term of your first mortgage if you’re happy with it.
  • A home equity loan can help to avoid paying mortgage insurance.

Disadvantages Of Home Equity Loans

  • Home equity loans often have higher rates than primary mortgages because lenders assume that you’ll pay off your first mortgage before you pay off your second.
  • Primary lender liens take precedence over home equity liens, so second mortgage lenders typically charge more because of the added risk they face.
  • Home equity loans that are used for expenses other than building, renovating, or buying a home do not qualify for tax-deductible interest, as a result of the 2017 Tax Cuts and Jobs Act.
  • Having two mortgages to pay off can complicate your debt repayment efforts.

Cash-Out Refinances

As you learned above, cash-out refinances share many of the same benefits of home equity loans, but both loan types have their own pros and cons, too. Let’s take a look.

Advantages Of Cash-Out Refinances

  • You only have one mortgage to pay off, rather than two separate ones. This is less risky for the lender, which means you’ll likely benefit with a lower rate than a second mortgage.
  • Qualifying for a cash-out refinance is typically easier because lenders don’t need to worry about you paying off one mortgage before the other.
  • Cash-out refinance rates are typically lower than first mortgages, which means you’re saving more money on interest. Mortgage rates have been dipping since January 2019, the average rate for a 30-year mortgage when this post was written was 3.6%.
  • Since these interest rates are lower, you could use the loan to pay off debts with higher interest rates, like your credit card balance or student loans.

Disadvantages Of Cash-Out Refinances

  • A cash-out refi will have different rates and terms from your original mortgage, which may not be ideal if you’re happy with your current terms.
  • You’ll need to budget for closing costs in order to take out a cash-out refinance.
  • You may need to pay mortgage insurance if you borrow more than 80% of your home’s value.
  • The amount of equity you have in your home determines how much you have access to borrow. If you don’t have enough equity to meet your goals, a cash-out refinance may not be beneficial for you.

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Consumer IQ 101 – Mind the Pre-Checked Boxes :: Mint.com/blog

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Which Loan Is Right For Me?

Should you opt for a cash-out refinance or a home equity loan? It depends on your financial situation and preferences to determine which loan makes the most sense for you! If you’re unsure, consider speaking with a financial advisor to see how the benefits and drawbacks of each loan type apply to your circumstances.

In general, when evaluating loan types, you may want to consider:

  • How much equity you have in your home
  • Your current mortgage’s interest rate
  • The amount you want to borrow
  • How long you need/want to repay the loan
  • Whether you want fixed or flexible loan terms

Now let’s take a look at a few examples where home equity loans and cash-out refinances can be most beneficial.

A home equity loan may be a good choice if:

  • You want to use a second mortgage so that you don’t need to pay for mortgage insurance
  • Current mortgage rates are higher than the rate you got with your existing mortgage
  • You want to use your home’s value without impacting your existing mortgage

A cash-out refinance may be a good option for you if:

  • You have enough equity to borrow what you want
  • You want to consolidate for a lower rate
  • You want to make home improvements
  • You would like to keep a single mortgage payment rather than multiple


It’s
important to note that since both of these loan types use your home’s equity as collateral, you run the risk of having your home foreclosed if you are unable to make your payments.

Key Takeaways

  • Home equity loans and cash-out refis are both loans that use homeowner equity as collateral.
  • Both allow homeowners to access home value in the form of lump-sum payments.
  • It’s important to consider the pros and cons of both in order to make the best financial decision for your situation.
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Source: mint.intuit.com