A mortgage gives you a loan to buy your apartment and once you own it, you can refinance if you want to change lenders or reduce your rate. A cash-out refinance allows you to dig into the equity in your apartment or take out a bigger mortgage and have the difference paid to you in cash.
Banks will ask you how you intend to use the cash. “It needs to be used for investment, renovation, or to consolidate debt,” says Keith Furer, a mortgage banker with GuardHill Financial.
So, who is it right for?
A cash-out refinance is open to owners of condos, co-ops, townhouses or one- to four-family buildings.
New Yorkers who have seen their apartments increase in value but don't have much liquidity are those who are best able to take advantage of the program. National Cooperative Bank, a Brick Underground sponsor is among the lenders who offer cash-out refinance mortgages. Brittney Baldwin, vice president of National Cooperative Bank says, "If you are wanting to consolidate some credit card debts that are at a higher interest rate or you are looking to renovate a kitchen or a bathroom you can consolidate your current mortgage all in one."
Furer points out that many owners already have low interest rates but that means, with a cash-out refinance, "people can pull money out and keep their payments the same.”
"Even though you may have a rate in the 3 percent range it still may make sense to do a cash-out refinance to get rid of those higher cost credit card payments if you are planning to stay in your unit for at least five years," says Baldwin.
Banks will require owners to have a minimum percentage of equity in the apartment before offering a cash-out refinance loan, exactly how much differs from lender to lender. Furer says the figure will be based your financials, and credit as well as the property type and loan amount. He points out some banks will limit the amount that you can cash out.
What is a typical rate?
Your rate will depend on "the factors of the transaction," says Furer. That means the property type, the loan to value ratio, the loan amount, how much cash you want out of the arrangement and the loan program itself. All these details add up to a level of risk for the bank. Cash out is seen as riskier than other types of loans. "As with any loan, rates move up and down. In general, cash-out refinance rates will be slightly higher than purchase or rate and term transactions," Furer says.
Preparing for a cash-out refinance
Before you speak to a mortgage broker about a cash-out refinance, find out the value of your property. Ask the agent who sold you the house to do a comp search, they are usually happy to help. A mortgage broker will do an appraisal anyway but Furer says, "it’s a good idea to be in the ballpark to find out what the equity might be."
Don't assume you will be able to get the cash, says Furer, and if you plan on using the money to redo a kitchen or bathroom, whatever you do, don't start the renovation. He says the whole property needs to be usable in order to get a cash-out refinance so if you've ripped up floors, pulled out a bathroom or you're in the middle of a renovation you won't be approved.
"The bank is always thinking, 'if we foreclose, how difficult will it be to sell the property?'" The other risk is that the rate could go up. Even an open permit can be a problem. "Hard money rates are higher and have additional fees," says Furer.
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