Mortgage Grader

Now's a good time to pull cash out of your home

By JEFF LAZERSON / CONTRIBUTING COLUMNIST

Southern California homeowners are breaking into their home equity piggy banks as home values appreciated and equity has swelled.

The number of cash-out refinances between November and January increased an astounding 52 percent year over year. And, home equity lines of credit or HELOC’s increased 13.8 percent from January 2016, according to CoreLogic.

Moody’s recently announced that increased equity borrowing is eroding credit-positive effects of rising home prices on residential mortgage-backed securities or RMBS’s. Moody’s thinks that even if properties continue to appreciate, credit risks could increase as equity extraction loans regain favor.

The vast majority of my clients have pulled money out to do home repairs and home improvements. A second group cashed out to purchase investment properties. The third group wanted to consolidate debt (mainly credit cards, student loans and HELOC’s).

Unlike the days leading up to the mortgage meltdown, it’s refreshing to see responsible thinking is in play. Not one of my borrowers said they were going to use the funds to go on vacation or purchase the big boy or big girl vehicle for themselves.

If you want to pull the trigger on this equity tapping trend, be it as a first mortgage or HELOC, do it now.

“Home prices have clearly peaked in a lot of the big markets. Home prices have peaked (in Southern California),” said Christopher Whalen, Senior Managing Director and Head of Research at Kroll Bond Rating Agency. “If you want to get a cash-out refi, you’ll get a good valuation now.”

For conventional first mortgages, you can tap-out up to 80 percent of the value of your home, not to exceed a loan amount of $636,150 in the O.C.

The Federal Housing Administration will cash out up to 85 percent of your property value, not to exceed a loan amount of $636,150 as well. I found one lender willing to go down to a 550 middle credit score.

Veterans Administration loans have no limitation on cash-out. That’s right 100 percent cash-out, not to exceed the value of your home, all the way down to a 550 middle credit score.

If you have a good rate on your first mortgage, consider a HELOC or a fixed second. I’ve seen them go up to 80 percent of your property value (include your first mortgage in this calculation) with a 680 middle FICO score.

If you do a combo, first and second lien at the same time, some lenders will go up to about 90 percent combined loan to value.

One last thought, I always recommend having a HELOC against your home just to have it in case of emergency. You can typically get the HELOC without charge. Generally, there is a $75 per year charge to maintain the line of credit. That’s cheap insurance should you ever need an emergency tap-out.

If you have questions or comments, please contact Jeff Lazerson by clicking here.