Cash-Out Refinance vs. A Home Equity Loan

When you have equity in your home, which is likely your biggest investment, you can use it to achieve other financial goals. A cash-out refinance is one way to get cash out of your house, as is a home equity loan. With both options, you can do various things with the money, like consolidating debt or renovating your home, but there are differences between the two approaches and pros and cons of each.

How Does a Cash-Out Refinance Work?

A cash-out refinance is a new mortgage and a first mortgage that lets you use the equity in your home to take out cash. If you’ve had your mortgage loan for long enough to build significant equity, you may have the option to do a cash-out refinance.

You’re most likely to be able to do a cash-out refinance if the value of your home goes up.

When you do a cash-out refinance, you’re replacing a current mortgage with a new one. As you might imagine, this isn’t an especially popular option currently, with such high interest rates that are continuing to go up.

The loan for your new mortgage is more than what you owe currently, and then once you receive your loan funds disbursement, you can keep the difference between the amount of the new loan and your current balance minus the equity you leave in your house, and any closing costs and fees.

Typically to take cash out of your home, you need to keep 20% equity in your home. Remember that your monthly payments will go up because you have a new loan amount.

With a cash-out refinance, you aren’t usually able to get a loan for the entire value of your house—many of these loans require you to keep some equity in your home.

If you want to qualify for an FHA and conventional loan, you have to keep 20% equity, and with a VA loan, you can get a loan for 100% of the value of your house, which is the only exception.

The cash you take out is tax-free; you can use it however you want.

What About a Home Equity Loan?

Home equity loans are a second loan separate from your first mortgage, and they let you borrow against the equity you’ve built in your home. You aren’t replacing your current mortgage, which is one of the big differences between this and a cash-out refinance, and it’s a second mortgage meaning an altogether separate payment.

The terms are separate from a home equity loan as well, but you are borrowing against your equity, which is the difference between the value of your home and what you owe on your first mortgage.

You might be eligible to borrow up to 85% of the equity in your home, but your income and credit history will play a role too.

The rates on a home equity loan can be higher compared to other similar options, and the repayment periods usually span up to 30 years. Mortgage insurance isn’t required but can be with some cash-out refinance mortgages, and there may not be origination fees.

If you have a lot of equity you’ve built up in your home, you might consider a home equity loan because you can borrow a larger amount of money, pay off your first mortgage and then put whatever’s left of your loan towards another goal or expense.

When we compare a cash-out refinance and a home equity loan side-by-side, the cash-out refinance loan would likely be cheaper because the interest rate will be lower. By contrast, a home equity loan comes with lower closing costs, but because you’re paying more interest over time, it will still be the more expensive option.

Many financial experts say it’s best to avoid taking out home equity loans for anything aside from projects that will impact your home equity directly, which is worth keeping in mind, especially in the current interest rate environment.

WRITTEN BY ASHLEY SUTPHIN

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What’s a Good Debt-To-Income Ratio?

You’ll see the term debt-to-income ratio a fair amount if you're applying for a mortgage. Debt-to-income ratio is also known as DTI.

This is a measure of your monthly debt payments divided by your gross monthly income.

Lenders use DTI and your credit history to determine whether or not you can repay a loan. Every lender will have its own DTI requirement.

Calculating Your DTI

A lender wants to see a low DTI because this shows them that you’re more likely to be able to manage your monthly payments successfully.

When you have a low debt-to-income ratio, it’s a healthy balance between your debt and how much you're making. The lower this percentage, the higher the chances you’ll get a loan or line of credit.

If you have a high ratio, it shows a lender that your debt is already too high compared to your income, which could be a red flag you shouldn’t take on more obligations financially.

To calculate your DTI, you should add your total monthly obligations that are recurring. These obligations can include mortgage and student loans, car loans, credit card payments, and child support. Then you divide this by your gross monthly income.

Your gross monthly income is the amount you earn every month before taxes and deductions.

How Does DTI Affect Getting a Mortgage?

Lenders want a broad, comprehensive view of your finances when you apply for a mortgage. When you apply, they’re going to look at your DTI primarily to decide whether or not to approve you and figure out how much you can afford to pay for a house.

Lenders also look at your credit history, your money for a down payment, and your gross monthly income.

What DTI Does a Lender Want to See?

While every lender is different, most lenders want a DTI ratio smaller than 36%. They want to see that no more than 28% of your debt will go toward servicing your mortgage.

If you have a gross income of $5,000 a month, the maximum amount you could put toward mortgage payments would be around $1,400 a month in the eyes of most lenders.

Lenders also assess your total debts, which shouldn’t be more than 36%, so again, if you were making a gross income of $5,000 a month, that would be around $1,800.

In most cases, 43% is the highest ratio you can have as a borrower and still get a qualified mortgage. Otherwise, if your number is above that, your lender will probably deny your application because your expenses each month would be seen as too high compared to your income.

Your debt-to-income ratio doesn’t affect your credit score, and your income isn’t included in calculations that credit-reporting companies do.

What does count toward your credit score is another ratio—credit utilization. This is the amount of credit you use compared to your limits.

Credit reporting agencies know your credit limits on individual cards and total. You should aim to keep the balances on your cards at no more than 30% of your credit limit. Lower is always better here.

Summing Up

Your DTI gives lenders an idea of how you manage debt and if you have too much. If your DTI is less than 36%, your debt is considered manageable relative to your income, and at least based on this factor, you should be able to access new lines of credit.

If your DTI is between 36%-42%, lenders might be concerned about lending you money. If your DTI is 43%-50%, creditors might deny applications. You should focus on paying off the debt before applying for something like a mortgage.

If your DTI is higher than 50%, you might consider debt relief options.

WRITTEN BY ASHLEY SUTPHIN

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How to Make Sure Your Home Closes Escrow—Seller’s Version

You just heard those magic words: “We have a deal.” Now, you just have to get through escrow and you can move on to the next stage in your life. That means making sure your home doesn’t end up back on the market. Here are 6 steps you can take both before you list and during the escrow process to make sure everything goes smoothly all the way to closing.

1. Carefully consider your sales price

If you’re working with an experienced real estate agent, he or she should have a recommended pricing strategy based on area comparables. Pressuring your agent for a higher sales price could cause the home to sit on the market and, if you do get an offer, the appraisal may not match the sales price. “If the appraisal comes in too low, the seller will have to lower the selling price or (the buyer) will have to pay cash for the difference,” said Investopedia.

2. Look for liens

"Overall title issues account for 11% of closing delays and may come to you as a surprise,” said Homelight. “Sometimes clearing up title is as simple as verifying that a debt has been paid and recorded correctly, the same way you would clear up errors in a credit report. Other times, addressing outstanding debts can take months to settle. Before you put your house on the market, be sure to pay off any debts, loans, and taxes that may show up as a title defect against your property.”

3. Disclose, disclose, disclose

Sellers are legally required to disclose all material defects in the home, so trying to hide issues can backfire. “Any problem with the property will be uncovered during the buyer's inspection, so there's no use hiding it,” said Investopedia. “Either fix the problem ahead of time, price the property below market value to account for the problem, or list the property at a normal price but offer the buyer a credit to fix the problem.”

4. Be reasonable and willing to negotiate

It’s easy to get stuck on your list price and not want to come down even one dollar. But if things show up in the aforementioned inspection report—things the buyer has a legitimate reason to request fixes—sticking firm to that price could cost you this the deal.

5. Limit contingencies

If you’re having trouble selling your home and the only buyer who’s come along in three months has two dozen contingencies, that’s one thing. If you have a couple of offers, with one who doesn’t need to sell their other home before securing financing on yours, it’s an easy call, right? Obviously the offer price and other factors like the overall financial strength of the buyer are important, but the great thing about having limited contingencies is that you have a clearer path to closing.

6. Stay friendly with neighbors

The last thing you need is for the grumpy guy across the street to make a fuss because of increased traffic on the street during showings, inspections, appraisals, etc. and scare off a timid buyer. Maybe the situation warrants a knock on the door of neighbors who have a rep for being testy. Bring a plate of cookie or a gift card to Target for their troubles and you may be able to pacify them.

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WRITTEN BY JAYMI NACIRI

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How to Make Sure You Don’t Fall out of Escrow—Buyer’s Version

According to The Truth About Mortgage, the “sale fail” rate of homes is rising. “More than four out of 100 sales look as if they’re going to close, and then fall out of escrow for one reason or another,” they said.

So how do you protect your purchase and make sure you get to the finish line? These four tips will help.

1. Prepare yourself for the inspection

Especially if you’re buying an older home, there are bound to be some surprises in the inspection report. The sale fail trend is particularly pronounced for older homes.

“Homes built from 1959 through  1969 had the highest sale fail rate at 5.2%, compared to homes built in 2016, with a dropout rate of only 2.6%, which is among the lowest proportion of failed sale bands,” said The Truth About Mortgage.

While you can’t be prepared for everything, you can go into the process with a realistic understanding that the condition of the home may reflect its age. Expecting everything to be in tip-top shape will probably leave you disappointed.

2. But…don't be afraid to negotiate

That being said, the defects and recommended repairs that end up on inspection reports can be a lot to digest, and you have every right to expect a renegotiation for anything major. Your real estate agent should be able to provide guidance on how much seller cooperation is reasonable so it doesn't put your home purchase at risk.

3. Don’t be cavalier with your credit

You’ve been pre-approved for a loan. Yay! Maybe you should celebrate by buying a new car or a house full of new furniture. No! Your preapproval is based on a number of factors, but credit score and debt-to-loan ratio are two of the big ones. Any change to those figures during escrow and you could find yourself with no financing.

“The underwriter—employed by your mortgage lender—will check your credit score, review your home appraisal, and ensure your financial portfolio has remained the same since you were pre-approved for the loan,” said Realtor.com. Since underwriting typically happens shortly before closing, you don’t want to do anything while you’re in contract that’s going to hurt your credit score. That includes buying a car, boat, or any other large purchase that has to be financed.”

You may think it’s rare that a financing issue hampers a closing, but, “In fact, 32% of settlement delays come from buyer financing issues which can crop up at the very last minute,” said Homelight.

4. Make sure you have all the required documents when you go to close

The last thing you want is to get to your closing and realize you forgot one of the documents you need. Don’t leave the house without:

• A driver’s license, passport, or some other government-issued photo ID

• Proof of your homeowner’s insurance

• A copy of your sales contract

• Any and all home inspection reports

• Any other paperwork the bank used for loan approval (double-check with your lender in plenty of time)

• A notarized document giving you power of attorney if your spouse won’t be present at closing

• A bank check or wire transfer for the full amount of your closing costs (check with your lender on the means of payment and final amount)

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WRITTEN BY JAYMI NACIRI

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What to Expect When Closing on a House

Details matter, especially when it comes to the all-important loan estimate and closing disclosure. Here’s what you should know about closing on a home and what to bring to the closing.

After all of the components of the home buying process — negotiations, appraisals, inspections, and insurance — it’s exciting to (finally) get to closing. But do you know what really happens during this final appointment? Closing on a home can be nerve-racking simply because many first-time buyers don't  know what to expect or bring along.

Here, we’ll walk through the details of what to expect at closing.

How Your Closing Date Is Set

The closing date is typically set in the offer letter. That's because most sellers will want to know when they can expect the closed sale once the home is under contract. Typically, closing is set 30 to 60 days from when the offer is accepted. This can change, though, depending on various factors, including inspections and paperwork processing with the lender.

How to Select Your Closing Attorney

Depending on the state you live in, closing may take place at the closing attorney’s office or the title company. The buyer has the right to choose the closing attorney, who acts in the interest of the buyer. The closing attorney takes care of the closing “housekeeping” items, such as preparing paperwork, making sure all paperwork is properly signed, conducting a title check on the property, and receiving and distributing money. The closing costs often include the fee for the closing attorney.

If you’re buying a home with an FHA loan, a mortgage loan option backed by the Federal Housing Administration that allows home buyers to put as little as 3.5% down, lenders may recommend one of their pre-approved attorneys. If you, as the buyer, don't have an attorney, the lender can also choose one for you. You’re not required to accept that recommendation.

Closing Paperwork You’ll Receive

Home buying consumers should familiarize themselves with two pieces of paperwork: the loan estimate and the closing disclosure. Both tools explain the loan terms, like interest rate and other costs associated with the loan (for example, taxes and recording fees). You should receive the loan estimate no more than three days after your loan application. Keep the estimate in a safe place to compare with your closing disclosure for any discrepancies. 

Your lender must provide you with a closing disclosure, which will resemble your loan estimate, no later than three days before closing. Double-check the interest rate information, address, and all other relevant information for accuracy. If something differs from what you expected, contact your mortgage broker or lender for clarification.

The closing disclosure will detail information about your mortgage loan and the exact amount you’ll need to bring to closing to cover closing costs. 

On the day of closing, you’ll receive:

A mortgage note stating you agree to repay the loan

A deed of trust to secure the mortgage note

What to Bring to Your Home's Closing

A cashier's check for closing costs (or paperwork confirming wire transfer of funds from your bank)

Proof of homeowners insurance (likely already verified, but bring a copy to closing just in case)

Copies of any paperwork you’ve received from contract to close (again, just in case, for your reference)

How Long Does Closing on a House Take?

The good news is the actual closing, where you sign paperwork and receive the keys, can take a few hours or less for a simple and straightforward transaction (supposing that you’ve thoroughly reviewed the paperwork beforehand). If the situation is complex, plan for a little more time at closing. Remember, the inspection, appraisal, and other activities before closing on a home can take longer, generally four to six weeks leading up to the closing day.

Common Home Closing Mistakes to Avoid

Given the length of time between contract and closing, most closings should be fairly routine and go smoothly. Why? All of the legwork has been done before this date (such as checking the title, inspecting the home, loan underwriting with the lender, and so on). Unfortunately, hiccups can happen. That's why you'll want to avoid these common mistakes:

• Try to avoid closing on the last day of the month. If something goes wrong, you’ll want time to correct it. This is because prepaid interest on the loan accrues and is due at closing. If pushed to a new month, the interest will continue to build. 
• Don't skip the final walk-through. Buyers should do this to ensure no new damage has occurred shortly before closing. If buyers opt not to do this, they cannot hold the seller responsible for damages after property is transferred at closing.
• Don't make any big financial purchases between contract and closing. The bank loaning the money for the mortgage has financed the home based on the most current financial information available. If you finance a car, an appliance, or any other big purchase, this affects your financial information. And that can delay closing on the home significantly. Unless you're facing the most dire circumstances, hold off on big purchases so that you can get into your first home as quickly as possible.
• Don't skim the closing documents. You want to check for typos on names and addresses.

Armed with the information above, first-time buyers should feel comfortable going into their first closing. Once the closing is over, you should receive keys (unless otherwise negotiated with the seller), and you’re officially the owner of your new home!

Got Questions?  Email us at Info@EstatesByTheBeach.Com

BY: Lauren Bowling

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7 Benefits of Buying a Home

Interest rates are only one factor when it comes to buying a house now.

Interest rates sure do get a lot of attention. But they shouldn’t be the only part of your home buying decision-making process. After all, the answer to the question "is right now a good time to buy a house" boils down to whether the time is right for you: To start your new chapter. To invest in what makes you happy. Interest rates don’t negate the benefits of buying a home. Unlike that other big-ticket purchase — a car — home value doesn’t take a nose dive once you get the keys. Quite the opposite.

Is Owning a Home a Good Investment?

Let’s dig into the advantages of buying a house.

Benefit #1: Long-term Financial Growth

When it comes to long-term, stable financial growth, real estate is your ace in the hole. If you bought a home 30 years ago for the median price at the time — about $105,900 — that same home would have appreciated by almost $280,000 in 2022 to about $384,900, according to the National Association of REALTORS®. Even factoring in the lowest point for the market in recent memory — the Great Recession — home values have risen over time, and have kept pace with inflation.

Benefit #2: Building Equity

The down payment and the principle in your monthly mortgage payment goes straight to your equity. Rent money just goes. That equity, an interest percentage in the home, gives you a lot of flexibility. You can:

Trade up to your next home when the time is right;

Tap equity to borrow money to pay for home repairs and renovations (making your home even more valuable!); or

Use it to consolidate credit card debt or even help pay for college. (Just keep in mind when you use equity, your home becomes your collateral.)

Thanks to equity, the typical net worth of homeowners is $300,000 compared with $8,000 for renters, according to 2022 NAR data. That’s a lot of financial leverage.

What are the Tax Advantages of Owning a Home?

Benefit #3: Tax Savings

Believe it or not, savings and taxes can play together nicely. Equity is savings, and when you sell a primary residence, you don’t typically pay taxes on the gain. You can take up to $250,000 ($500,000 for a married couple) without owing taxes. So all that appreciation goes with you on your next adventure.

Benefit #4: Deduction of Property Costs

If you itemize, you also can deduct some of your property costs from your federal taxes. Those include the annual interest you pay on your mortgage, your state and local property taxes up to $10,000, and in the year you buy, some of the fees you paid to close on the home. Only itemize if it means you can claim more than the standard deduction, which for tax year 2022 is $12,950 for single filers and $25,900 for married couples.

More Advantages of Buying a Home

Benefit #5: Fixed-rate Mortgage Payment

Unlike rent, your fixed-rate mortgage payments don’t rise over the years so your relative housing costs may actually go down the longer you own the home. That is, if your earnings go up, a static mortgage payment means your home debt load becomes a smaller percentage of your monthly nut.

Here’s an example: Say your mortgage payment is $2,329 this year and your monthly gross salary is $6,667 (roughly $80,000 per year). That means you’re putting 35% of your salary toward the mortgage. Now, fast forward a few years. Say you saw 5% salary growth annually, and you’re at $7,700 gross per month. Your mortgage payment is still $2,320, but now you’re only spending 30% of your salary on your mortgage.

Of course, keep in mind property taxes and insurance costs will likely go up.

Benefit #6: Improved Credit Score

Speaking of those mortgage payments: Each one, paid on time, is helping to further build your credit score.

Benefit #7: Remodeling Your Dream Home

One of the biggest pros of owning a home is that you can turn the house you can afford into your dream home – bit by bit. Those holes in the wall and paint colors your landlord freaked out about? No worries. You can upgrade amenities, décor, and style to your vision — whether that’s cottagecore, Barbiecore, or anything in between.

Bonus Benefit: Work with a REALTOR®

You don’t have to go through the buying, or selling, process alone. A REALTOR®, an agent who’s a member of the National Association of REALTORS® and subscribes to its code of ethics, has the expertise to help you assess the market; expand and reframe your home search into areas you might not have thought of; refer you to reliable lenders; and guide you through the offer, negotiations and closing.

When the time is right to go forth, we’ve got you covered on every step of the buying process.

Got Questions?  Email us at Info@EstatesByTheBeach.Com

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Should you wait it out if you can’t find a house you like in your price range?

Buying a house is a huge step in life. When looking for a house within a specific price range, it can be challenging to find the perfect fit right away. However, whether or not you should wait it out depends on your individual circumstances and priorities. Here are a few factors to consider when making this decision:

Urgency: Determine how urgently you need to move into a new house. If you have a pressing need to relocate due to work, family, or other reasons, waiting indefinitely may not be feasible. As with any decision, time is always a factor. Whether buying a house or selling, urgency will limit your options. If you have the luxury of time you can be patient and wait for something that best suits your needs.

Budget: Assess your budget and financial situation. Consider if you can comfortably afford to wait for an extended period without compromising your financial stability or if you’re facing time constraints, such as rising interest rates or changing housing market conditions. The fact is there is never a perfect time to buy a house. Never a perfect time to get married…have a kid, etc. Again, like many decisions in life it comes down to the numbers. It doesn’t matter the price, the interest rate or the cost of insurance. What matters is when you throw all of that into the pot, does your budget allow it.

Market conditions: Research the current real estate market in your area. If the market is competitive with limited inventory and high demand, waiting for your ideal house may take longer. On the other hand, if it’s a buyer’s market with more options available, you may have more flexibility to wait for a better fit. This is a byproduct of the first two factors we discussed. Same thing, there is never a perfect time to enter the market. If you know your price range and truly have a goal to buy a house, be disciplined but be aggressive!

Flexibility: Consider if you have the flexibility to adjust your expectations or broaden your search criteria. Sometimes, expanding your search to different neighborhoods or considering alternative property types (e.g., condos, townhouses) can provide more options within your price range.

Compromises: Determine how important it is to find a house that meets all your desired criteria. If certain features or amenities can be added or renovated later, you might consider compromising on some aspects to find a suitable home within your budget.

Time frame: Assess how long you have been searching and how much time and effort you are willing to invest in finding the right house. It’s essential to find a balance between waiting for the right opportunity and avoiding an excessively prolonged search that could lead to frustration and fatigue. Make sure you don’t fall into the trap of paralysis of analysis. Does your perfect house really exist? There is always something you can find wrong with a house.

Ultimately, the decision to wait it out or explore other options depends on your personal circumstances and priorities. Consider consulting with a real estate agent who can provide guidance based on your specific situation and local market conditions. Good luck!

Got Questions?  Email us at Info@EstatesByTheBeach.Com

WRITTEN BY CARL FANARO

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