Market hitting peak for cash-out refinancing

With home prices up 24% in 14 months, borrowers with growing equity and good credit should act now before mortgage rates go higher.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | April 23, 2021

Guess what else is soaring alongside 40-year high inflation rates? Credit card debt.

Credit card balances increased $52 billion in Q4, 2021, according to the Federal Reserve Bank of New York. That’s the largest quarterly increase observed in 22 years of the data.

At 5.11%, this week’s average Freddie Mac 30-year fixed mortgage rate is nearly double its 2.65% all-time low 14 short months ago. As mortgage rates climb toward 5.3%, this may become the fastest ever that rates have doubled in Freddie’s 51-year tracking history.

The number of consumers earning more than $100,000 per year who are living paycheck to paycheck was up 42% in January 2022 compared with December 2021 according to Lending Club.

Scary.

But there’s a silver lining to these economic numbers.

Despite soaring mortgage rates, Southern California home prices are up an astounding 24% from that all-time mortgage low, CoreLogic figures show. For many, that means having equity in their homes they can tap to pay down debt.

Qualified borrowers typically can cash out 75% to 80% of their equity on jumbo, conventional and Federal Housing Administration (FHA) financing. Veterans Affairs, or VA, loans allow up to 100% cash-out refinances in most cases.

For example, 80% of a $1 million home value means a maximum loan amount of $800,000.

I’ve seen this movie too many times in my career. As household debt rises, the monthly payments can get so overwhelming for some, and those financial struggles can turn into late payments that show up on their credit reports.

Recent late payments of any kind quickly sink your credit scores. Lower scores result in either more expensive borrowing costs or credit denial.

Ideally, a FICO middle score of 740 or higher for all borrowers on a loan is super good. Once you get below 620, there’s no chance for conventional financing. FHA and VA may provide loans to those with lower scores.

The 2010 Dodd-Frank requirement that borrowers have the ability to repay their loans precludes mortgage lenders from providing unqualified borrowers with new mortgage financing. In other words, even if you have a ton of equity, income or — in the case of fog-the-mirror mortgages — no income, bad credit can sink your otherwise good chances of getting a mortgage. Tapping equity for those borrowers usually means selling.

My suggestion is to always have enough cash in the bank as a cushion to cover at least six months of house payments and other debts (cars, credit cards, etc.). I recommend 12 months reserves for those in high-risk situations like having a commission-driven job or working in industries vulnerable to layoffs.

Better to have the liquid funds and not need them rather than needing funds and not having them. If you are pulling out cash, take extra to cover future payments.

Other reasons to refinance are to knock your rate down or get rid of mortgage insurance.

There are just 54,000 high-quality refinance candidates in the Los Angeles, Orange, Riverside and San Bernardino counties, according to recent Black Knight data. And just 1.34 million nationally.

Black Knight defines refi candidates as 30-year mortgage holders with at least 20% equity in their homes, credit scores of 720 or higher who could cut their first lien mortgage payment by at least 0.75 of a percentage point.

If you’ve recently tried to pull out cash and you were turned down, now may be a better time to revisit this. Mortgage lenders have gone from being red hot busy to cold as ice. The low hanging fruit is gone. The industry has become more interested in tackling those tougher transactions.

Home prices will plateau before they start falling. This is the top of the home equity market. Grab it if you need it, especially before mortgage rates rise further.

Freddie Mac rate news: The 30-year fixed rate averaged 5.11%, rising 11 basis points from last week. The 15-year fixed rate averaged 4.38%, up 21 basis points. Both loan types are at 12-year highs.

The Mortgage Bankers Association reported a 5% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was an earth shattering $800 less than this week’s payment of $3,518.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 4.625%, a 15-year conventional at 4.5%, a 30-year conventional at 5%, a 15-year conventional high-balance ($647,201 to $970,800) at 4.875%, a 30-year conventional high-balance at 5.375% and a 30-year jumbo purchase loan at 4.625 %.

Eye catcher loan of the week: A 30-year adjustable mortgage, locked for the first seven years at 3.99% with 1 point.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.