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Cash Out Refinance

How Cash-Out Refinancing Works

Have questions about how Cash-Out Refinancing works?

That’s the topic we tackle this week on our weekly Live Q&A live stream on YouTube.  This week, Josh Lewis is joined by Mia Schultz and David Xie as they discuss all things Cash-Out.  You can catch us live on Youtube every Thursday 5p/6m/7/c/8e time zones.

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Transcription of Live Discussion

Josh Lewis: Welcome to the first episode here of find my way home live well, we’re going to get together every Thursday go through important topics that home buyers, home owners questions that they’re asking and that we’re seeing on the site and in our network joining me tonight is Mia Schultz. And I’m going to add.

Josh Lewis: David into the stream here. So once we give you guys a background in case you just stumble on the channel or stumble onto this live stream of what find my way home is and how we got here, way back in 2007, 2008, when the market went nuts and went sideways, my business partner, Scott Schang founded find my way home.

Josh Lewis: Basically taught himself WordPress and started blogging about issues and problems and troubles that homeowners were having and experiencing. And when it came to mortgage and their real estate. So through that time, throughout the years, certain articles got traction. We started getting a lot of input and feedback, people calling and asking questions and wanting to get connected with expert loan officers throughout the country.

Josh Lewis: Through that time, we’ve built up a network of folks that we can connect people with, who can answer their questions. So what find my way home became is basically a network of expert mortgage loan officers throughout the country who can handle things that are a little outside the box that your normal call center loan officer can’t handle.

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Josh Lewis: And can often get you a better terms than what a big box retail lender can handle. So with that the context for tonight show and future shows is that we’re, again, going to pick a topic and we’re going to have a couple of the experts from the network on, and we’re just going to go through it.

Josh Lewis: We’re definitely going to take questions, and answers. I don’t know. This is our first time doing it. We’ve promoted it a little bit, but not too much. So who knows if we’ll end up with any questions, but we’re going to go through that discussion. Like I said, I’ve got Ms. Schultz with me here in Chicago.

Josh Lewis: Mia, why don’t you just give us a little brief introduction to yourself and how you got in the mortgage business and how you came to be a member. One of our first members of the find my way home expert.

Mia Schultz: Hi, Josh. I’m so excited to be here. I didn’t realize this was number one. So we’re excited. I’m on my way.

Mia Schultz: Home has been growing and growing just like you said. And I met up with Scott in 2013 because I had a client that had an issue and I was Googling for answers and stumbled upon GLA Scott’s blog, just like everybody else. And we hit it off, realized there was a need out there for people like us who want to take on the.

Mia Schultz: Maybe more challenging or maybe just knowing the guidelines better than. The next guy and have just been rolling with, find my way home. Since then I work with Geneva financial and I’ve been in the loan business since 2007, right in the crash. And

Josh Lewis: it was a great time to get started right now.

Mia Schultz: Everybody looked at me like I was crazy for getting in, but it ended up to be the best thing ever while everybody else was losing business. I had no place up to go, no place else to go, but up. So it. It was nice to be in that kind of frame of mind that, learning and getting to know the business while things were shaky because it opened a lot of doors.

Mia Schultz: Perfect.

Josh Lewis: In addition to being able to help people in Illinois your home state there what other states are you able to help folks? I am

Mia Schultz: licensed now in 19 states. So I got pretty many out there, but we could list them all below, later.

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Josh Lewis: Perfect. And my other guests here tonight is David

Josh Lewis: David is an originator and a branch owner in in Virginia. David, why don’t you tell us a little bit about where you’re located there in Virginia and how you got into the business and how you became to be a member of the, find my way home expert network.

David Xie: Yeah. Thanks. Thanks. Thanks Josh. So I’ve been doing mortgages for 18 years out of Virginia Beach.

David Xie: And I met you in Scott Chang at a at a coaching group that we are that we coach that, then we get coached at together the freedom club and I saw Scott and give a presentation and it was such a great presentation. He talked about how, there’s so many opportunities out there to help people.

David Xie: I have been told no wrongfully, no. And that, that’s one of those things that, totally touched me. And I said, you know what? I’ve got to figure out a way to, to join this network and make a difference. So my branch, we could do loans in all 50 states and it’s truly been an honor to help out everyone that needs the help.

David Xie: And, I’ll tell you it’s a great network of great professional. And I’m honored to be

Josh Lewis: apart. Perfect. So bringing it full circle. Everyone ended up here on this call through find my way home. I met Scott through find my way home. We became business partners in our mortgage company by wise mortgage here.

Josh Lewis: Unlike the two of you, we stick to the giant Republic of California and don’t leave and go out to the other 49 states. At least not yet, but Scott and I met basically through a similar spirit. I started doing loans in 1995. In a market that was really difficult. A lot of first time buyers, FHA loans with five, six borrowers on a file.

Josh Lewis: And we learned how to make the hard stuff come together. So Scott and I found Scott through find my way home. So I’m speaking at a live event here. He and I became friends and realized we were on parallel paths. Hey, maybe we should just partner up. So we ended up being partners, both in find my way home and then buy wise our mortgage company here in California, where we’re able to help folks.

Josh Lewis: So that’s enough about the three of us who we are and what we do and how we got here. And a little bit about find my way home. Let’s jump into what we’re going to be talking about tonight and really that’s cash out refund. It’s a big topic. If you look, unless you’ve lived under a rock we were already experiencing pretty rapid appreciation up until COVID and after a little pause the housing market just went nuts.

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Josh Lewis: So anyone that’s owned for a period of time is sitting on 35, 40% equity. Nationwide. The average equity for a homeowner is, or the average loan to value is like 47%. So more than 50% equity in homes with mortgages on average. And that’s not everyone, but that’s a lot of people. So it has a lot of folks saying, Hey I’m behind on my retirement savings or I have some other debt I need to pay off, or I need to send the kids to college.

Josh Lewis: How do I get cash out of my home? To pay for these other expenses or to reallocate some of that equity. So Mia, why don’t you start us off by just telling us a little about, little bit about what a cash out refinance is and what it can do for you?

Mia Schultz: Cash out refinances have become a truly valuable thing in somebody’s life because they’re when they invest in their home, that’s their biggest investment, and life goes on and. You are paying down this debt and hoping to, by the time you retire, have this all paid off well during your lifetime expenses happen, weddings happen, bills accumulate, and you’ve got all this money sunk into your house. That’s equity and that’s your money. And if you need that to live on that cash out, refinances your saving grace, because for a really low interest rate, even at the rates, wherever you are today, you can take out that big chunk of money to.

Mia Schultz: Help you cashflow your life, whether it’s a big expense coming up or just to get things back in order from debt accumulation. And so a cash out refinances, really just taking the money that you’ve invested into your house, along with the accumulation of pre appreciation and taking it out of the house, hanging it back in the.

Josh Lewis: So you’re paying off the current financing. So let’s just take our example again, we’re talking about differences with where you are in Illinois and other parts of the country and us here in California and David in Virginia, those numbers are going to vary, but let’s say you have a home that you might’ve bought 10 years ago for $200,000.

Josh Lewis: It’s gone up to $400,000 in that timeframe, and you’ve paid your mortgage down. You might owe $150,000. There’s $250,000 of equity. To get that with a few options. The cash out refinance is essentially, we’re going to pay off that $150,000 loan with a new, larger loan. And the difference there comes back to you, David with a cash out refinance.

Josh Lewis: What can a borrower do with that money? Are there any limitations in terms of say in this example, someone takes a new $250,000 loan. They have roughly a hundred thousand dollars. What can they do with that? And is there anything they’re not allowed. I

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David Xie: that’s a great question, Josh. What my borrowers have been doing recently and I just did a video on this today on this topic right here is they’ve been taking it and just consolidating that, with with the uncertain future in the rates going up even at the current rate levels they’ve been able to take it out.

David Xie: 5%, five and a half percent and paying off 18, 19% credit card bills. Maybe even paying off, a small balance on a vehicle loan and saving a couple hundred dollars a month with and some borrowers are taking that and investing it in other properties other investment properties and generating cashflow and just building equity on two or three additional properties at the same time.

David Xie: In terms of what I wouldn’t do with it. I probably wouldn’t, buy anything that’s going to depreciate in value. Like I don’t even know what you could buy with it that’s going to depreciate and value nowadays. With everything going up the way that it is.

David Xie: So yeah cash out is a great option. That’s really how I got into the industry was just showing people, worked at a company. All they did was specialize in refinances and we met with customers face to face and to see customers get that cash out at way higher rates than we have right now.

David Xie: And to save a couple of hundreds of thousands of dollars. That, that really made a difference in, in the family.

Josh Lewis: Absolutely. So we talked about a couple of different things. The obvious and easiest one is to pay off higher interest rate debt. Whether it’s credit cards it can be auto loans.

Josh Lewis: We’re going to be careful because an auto loan usually has 3, 4, 5, 6 years left remaining on it. And now we’re stretching that out over 30 years. But that’s a great strategy. And one of the things that we can do in some of these examples, we have a client we’re doing a refinance for, it wasn’t even that much money of credit card debt.

Josh Lewis: I think we’re talking less than $50,000 of credit card debt we’re paying off, but it was $1,900 of monthly payments. So when you look at. She is increasing her interest rate about a half of a percent, but we were able to shorten the term and still massively lower the monthly payment. So those are some of the strategies that your loan officers should be looking at with you.

Josh Lewis: But beyond, above and beyond just the cash out for paying off and consolidating debt. We talked about the investment purposes. There’s no real limitations to what you can invest in. The lender is going to let you take that cash out. You can put it in the stock. I have a client. You guys will find this interesting.

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Josh Lewis: I had a client a few months ago. Our loan amounts and home values are a little higher here in Southern California. $1.7 million appraisal. You had about 700,000. He took $400,000 out to buy crypto about the same time that crypto had a little bit of a correction, but he’s got the long view on it.

Josh Lewis: He’s. I pay for his retirement and he’s going to pay that mortgage off when his crypto doubles or triples. So you can invest in crypto. You can invest in stocks, you can invest in bonds. You can invest in a business. I have some clients here recently that wanted to buy a building for their business.

Josh Lewis: They owe $300,000 on a $2 million. Pull some money out to buy a business property. So investments and Mia, you had talked about, you can pay for a wedding. You can pay for a kid’s education, you can pay for your own education, any number of things that you can do with that. Any stories or recent success stories you guys have of a client that has taken cash out and what they’ve what they’ve done with the funds.

Josh Lewis: I know David, you had told us about a few investing in properties. Anything that you have here recently.

Mia Schultz: I have most of my clients recently have been refinancing just to consolidate debt. And that’s just such a satisfaction when you put those deals together, the same way where they’re dealing with a thousand dollars in monthly payments, and we could refinance their home equity, their home loan and bring them down and save them maybe $800.

Mia Schultz: Which is just crazy. And that could just save somebody from just digging up, digging themselves deeper into a hole. People just need that little breather and to stretch it out and cashflow their monthly. So it’s pretty exciting. I had another person who was also doing a cashout refinance that they were just getting their feet.

Mia Schultz: It was a young couple, just getting their feet wet in the world and wanted to invest some of their equity. And just like you had said, they’re going out, they took out a cash out refinance. They’re going to behave 5% on. New loan and they’re probably going to be making 10, 12% on their investments. So it pays for itself, in those kinds of situations, it’s really painful.

Josh Lewis: Absolutely. Yeah. So in the context of that, obviously not everyone qualifies for our cash out refinance. David, do you want to talk us through the parameters of the, maybe the different types of why? Why don’t we do this? David, you start and walk us through, what are your options with the conventional meaning under Fannie Mae and Freddie Mac guidelines, conventional cash out, and then Mia, maybe you can tell us how that differs for say an FHA or a VA loan, which both of those are very different from one another.

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Josh Lewis: But David, how about the.

David Xie: Yeah, conventional cash out is typically I guess it really depends on whether it’s a a single family residence, a duplex, a multiunit. I think the pricing, obviously the higher, the loan, the value, and what loan to value is your loan versus the value of your home.

David Xie: The higher, the loan, the value, the more pricing adjusters there are. And there aren’t as many adjusters which MEO will get into what the. Cash out refinances. So we evaluate a couple of different things. We’re looking at the credit score and on a conventional refinance, that’s going to have a bigger adjustment on credit score, the loan to value the debt to income ratio.

David Xie: So I think for the consumers that are watching this right now, one of the most important things is to really dive deep with your your loan on. And just totally understand where the adjustments happen and whether it makes sense to refinance. And sometimes let’s say the debt to income ratio is a little high.

David Xie: Maybe we can pay off a little bit of debt to, to get the debt to income ratio, maybe under a 45% debt to income ratio. Or if it makes more sense to get 75% instead of 80% because of the pricing adjusted. That may be something that they want to consider, especially with the values coming in or being much higher.

David Xie: Now we’re able to offer 75% loan to value and your customers are still able to get more cash out. There’s a lot of different factors loan level pricing adjustments and things like that, that we look at that need to be considered when doing a cash out refinance. I would just make sure, we’re we’re looking at that appraised value and not having different like sites like realtor.com or Zillow influence us in thinking that the value is going to come in at those numbers.

David Xie: Cause if there’s one thing that I’ve learned in this industry, Those numbers are, typically off by anywhere between five to 20% in value. I recently did a refinance for a borrower that had cash out refinance and we’re expecting the house to come in at three 50. Surprisingly it came in at 400,000, which was great for him.

David Xie: We were able to drop that loan to value 10% and he still got the amount of cash out that you wanted for

Josh Lewis: his. So David hold onto that thought on the appraised value. I want to circle back and just make sure for the folks watching at home, so minimum and maximum figures. So let’s say you’re looking at a conventional loan.

Josh Lewis: You don’t want an FHA loan, which will have mortgage insurance. You’re not eligible for a VA. So you’re looking for a Fannie Mae, Freddie Mac loan. What is the minimum credit score required to be eligible for a cash outlet? It doesn’t guarantee that you would get it, but what’s the minimum to be

David Xie: eligible.

David Xie: Six 20 on a conventional loan. As you guys know it’s pretty challenging. And as six 20, I would say once you get to about 6 45, if there’s enough equity, I think we could really get it through as, at, as at a six. About six 20 is the minimum. And when

Josh Lewis: you say it’s tough at the low six 20 squares, it’s tough in two regards, right?

Josh Lewis: It can be more difficult to get an approval on automated approval and get the loan just through period. But then you had talked about loan level price, adjustments. So the terms people, you, I’m sure you guys get this question all the time. What is the rate? I can’t tell you what the rate is because there’s not a rate.

Josh Lewis: There’s a rate for every loan. So what you’re talking about is these loan level price adjustments. The best terms are at 60% or below loan to value on a conventional loan and different tiers. As we go up seventies important, 75 is important. 80 is important. What’s the maximum loan to value. What’s the maximum percentage of your home’s value that you can take out on a condition.

David Xie: 80%.

Josh Lewis: Okay. And if it’s a, if it’s a single family and owner occupied, you had mentioned some other scenarios. So for our conversation, most of the phones watching are talking about taking cash out of their condo or single family residence. So 80%, you’re going to need a minimum of a six 20 credit score.

Josh Lewis: And let’s go back now and talk and to both of you. It’s really important when a client calls in and they say, Hey, I want to do cash out. And depending on how much equity they have, like that example, I gave someone owes one 50 on a $400,000 house. Appraisal can come in $50,000 low. They’re still going to be able to get a bunch of cash.

Josh Lewis: A lot of our people are saying, I need to do this, that or the other, and I need X number of dollars. So we need to know, are we under 80%? Are we going to get it under 70% to get the terms? So what Mia do you do specifically? When a client says, Hey, my house is worth $400,000. And that it’s important that we hit somewhere in that number.

Josh Lewis: What do you do to ascertain the value besides just the Zillow and Redfin, the stuff that’s available to consumers?

Mia Schultz: I do, it depends on the client and the area that we’re shopping in. But we do have some of our own ABMS that we use also to look at value. I try not to depend on the Zillows and the realtors.

Mia Schultz: We will go, I’ll talk to them about their purchase price, how long ago they purchased it and assume some value appreciation there as well. In our business, people look at the loan to value and the credit scores and all the limits that they read about online. And just like you were saying, David.

Mia Schultz: It’s about the balancing act that we have to do, and they don’t realize that they can’t get that cash out refinance with a six 20 credit score and a 55 debt ratio, just because it says that in the guidelines, we’re all a balancing act and it all goes through automated underwriting. And that, I don’t think a lot of people realize that we don’t have that direct answer and can’t give them that.

Mia Schultz: Yes, we’re cool because you meet these minimum parameters. So with regards to the loan to value. The lower, the loan devalue, the better that balance is going to look if you have a lower credit score and vice versa on the other side. When we’re going into this, we don’t want to waste anybody’s time or money with appraisals and things.

Mia Schultz: If we really don’t think that they’ve got a shot, because a lot of people, I think everybody, myself included, always think that our homes are. Bigger price than they really are. And so we have to keep everything in check and go with the worst case scenario. And if we get more than we can up that loan amount down there.

Josh Lewis: May I, you said something really important. We don’t want to waste a client’s money when the value is not there. And that’s a different view of it versus an inexperienced loan officer who just doesn’t know out of ignorance, how to track down the value. But. Some of the big call centers. They don’t care.

Josh Lewis: They are literally intentionally trying to get your credit card and order an appraisal as soon as possible because they figure you’re committed. Once you spent four or five, $600 on an appraisal, now you’re committed to the process and whatever it comes in at, they’ll adjust the pricing. They’ll adjust the loan amount and you’re already have some money in the game.

Josh Lewis: So that’s why we talked about it’s really important. Okay. If you’re going to a higher loan to value, I’d say anything over 70%, we’re starting to getting into pricing issues. It’s easy to be 5% off in a value in your estimate, especially if you’re just using tools like Redfin and Zillow. So Mia mentioned proprietary.

Josh Lewis: AVMs. That’s an automated valuation model and it’s a fancy word for exactly what Zillow and Redfin do. Those numbers are an AVM and for the most part, they’re pretty good, but what they don’t do, if we pay for a proprietary AVM, it’s going to do some different things. It’s going to say. The value is $422,000.

Josh Lewis: With 97% confidence. You don’t see that in a Zillow or Redfin. It might come back and say 91% confidence or 60% if you’re in a rural area without a lot of comps. And it’s also going to give us a range of saying, Hey, we say with 90% confidence, it’s 4 22. The range appears to be anywhere from three 90 to four 50.

Josh Lewis: And by doing that extra step and doing that extra research now, Here’s your best case. If the value comes in high, here’s your worst case. If it comes in low and there’s no surprises and you go into it making educated decision. So just a quick little recap on the conventional minimum is a six 20 credit score.

Josh Lewis: Maximum loan to value is six 80. Okay. For the most part with conventional loans, we don’t have limitations on how much cash you can take out. It really comes down to can we get an approval? And for the most part, most lenders will not do a manual underwrite on a conventional loan. So we have to get that through the automated underwriting system.

Josh Lewis: So Mia, why don’t you tell us a little bit about I don’t necessarily want to lump them together, but the government loans, FHA and VA. Both used to be uniquely different than conventional. Now, FHA is similar, but tell us what FHA looks at in terms of what you can do. Cash out wise.

Mia Schultz: FHA is, has a lot more leniencies than a conventional loan conventionals are very sensitive when it comes to that balancing act that I talked about with credit score and loan to value and debt ratio.

Mia Schultz: On the FHA side, we can have a much bigger debt ratio where. We can get more people approved and we can also have a lower credit score where the system, the underwriting system, isn’t going to be as sensitive to. Us putting those through as a cash out is another risk factor in itself because you’re taking equity out of the house.

Mia Schultz: So the system looks at that as well. We can still go to 80%, but you do have to 80% loan to value on an FHA loan, but you still do have to pay PMI because it is a government loan. So even though you’re under that normal. Threshold of 80% on the conventional side where you wouldn’t normally have to pay PMI.

Mia Schultz: We do have to pay it on the FHA side, but if you can get that cash in your pocket, it’s definitely. We’re looking at.

Josh Lewis: So in a perfect world, we really want to go conventional on a cash out refi because we can avoid that mortgage insurance, but we can have potentially more flexibility. So some folks it’s the only option it truly is.

Josh Lewis: I have a client that we closed about two months ago, she was referred to us in, had a really tough situation and she had a five 60 credits. Now I was actually stunned by this that I’m thinking, okay, we meet the manual underwriting guidelines. And on an FHA loan, you can do most lenders will do a manual underwrite, which means the automated underwriting system will not approve it.

Josh Lewis: You can put it in front of a real human and they go through it and tell you whether it does qualify. And in this one, we ran it through with the 5 63 credit score. It was a 50% loan to value and the DTI was reasonable. The debt to income ratio is pretty good. And it gave us an approval. So with that was the only way she was getting the loan.

Josh Lewis: So we can whine and cry all. We want that it has mortgage insurance, even though it’s a 50% loan to value, but for her, it was the only game in town. And so that FHA is super helpful in that regard. David, that varies probably the most flexible option that we have left. For those of you who have served in the military and served the United States are eligible for a VA loan.

Josh Lewis: Tell us about the flexibilities on the VA cashout refinance.

David Xie: So VA is definitely right up my wheelhouse being in Virginia Beach and being one, like pretty much right down the street from the largest military base on the east coast definitely helps out a lot. With the VA loans. Most of our traditional lenders are going to go to 90% loan to value on the cash out.

David Xie: There’s definitely some net tangible benefits that have to be met. And for what is the net tangible benefit? What is the benefit to the veteran? Are they cutting their teeth? Are they getting cash out to consolidate debt or lower their monthly payments. So there’s gotta be a benefit.

David Xie: However, if there is a true benefit to refinancing and there’s a different, like type one and type two cash out refinances now with the VA loans with true net tangible benefits certain lenders can go up to a hundred percent loan to value. I did a hundred percent cash out refinance probably about two months ago.

David Xie: For borrower. The rate had a little bit of a light, low level pricing adjustments. And it’s going to be totally different from the conventional side that I just talked about. There, the loan level pricing adjustments are really minute on the government loans. Whereas, with with the conventional refinance, it’s every one of my fingers, they may not interlock and form that perfect combination.

David Xie: So we don’t know until we run it through the automated underwriting system, but just like the FHA, it does give you the ability to manually underwrite a loan. The, that’s definitely a huge benefit to the veterans to be able to do that. And typically those rates are going to be lower. Then your conventional loans and the funding fee, unfortunately, that has to be paid.

David Xie: However, the benefit on the funding fee is that it gets rolled into the loan on this cash out refinance as well. Yeah, 90 to a hundred percent is the high. If we’re going down to 60 50% there’s not that much of a pricing improvement on that. It’s definitely provides a lot of flexibility.

David Xie: And thanks for your service. If you qualify for VA loan active duty reservists, surviving spouses they qualify for the cash out refi.

Josh Lewis: And that the VA loan, when you say a hundred percent cash out, that’s legitimately about the only loan in the world, but lets you go to a hundred percent cash out.

Josh Lewis: Any more. For the most part you had hinted at this 90% and below is going to get you the best terms or better terms. If you need to go over 90, up to a hundred, you can absolutely do it. You’re going to pay a little bit of a premium for it. So we’ve talked about a number of things we talked about, what you can do with the cash.

Josh Lewis: We’ve talked. What is required for you to get cash with both conventional FHA and VA loans? Why don’t we talk a little bit, so we’ve gone through, what are the pros of getting cash out. You can invest in other things, you can maximize your cashflow by paying off some higher interest debt you can invest and get a greater return somewhere else.

Josh Lewis: What do you guys think or see? What are some of the downsides or potential downsides of taking.

Mia Schultz: One of the things that you had touched on earlier, I love to do when I do the, my, the cash out refinances, where I’m doing debt consolidation. Generally people are coming to me, within that first 10 years of their mortgage.

Mia Schultz: And it’s an awesome feeling for them. And for me, if I can get them into a 15 year. And pay off all of their debts because now, some people do have that concern that, okay, I’m going to take out this cash, throw another $50,000 on my house and I’m going to spread it out for another 30 years.

Mia Schultz: I’m never going to pay it off, but if we can consolidate and instead of taking. Break that you like I referred to before that $800 discount, let’s say we paid off all your debt. And instead of taking that break, we put you into a 15 year loan and save you maybe $200 a month. Instead, you’re going to pay it off that much quicker, save thousands and thousands of dollars.

Mia Schultz: And we’ve just now killed two birds with one stone and puts you in a much better place. Yeah,

Intro: no,

Josh Lewis: I, I love being able to shorten the term because we talk about you go back, you came in 2007. What I can say is 2004, 2005, 2006. I was talking to one of my buddies who was also in the business. At that time of David.

Josh Lewis: You said you go back 18 years, right? So you were in the business at that time. It was not uncommon to have clients that you did two and three cash out refinances in that two to three year time. People it’s a cliche or a joke. Now people were using their home as ATM. Seriously, people were using their home as an ATM this other, even

Mia Schultz: in the business.

Mia Schultz: That’s what everybody did.

Josh Lewis: And for us here in Southern California, where everyone’s trying to keep up appearances, it was nuts. You had people that were driving cars or out at the river with boats that you’re like, you can’t afford that. I know what you do for a living, but long way of saying we don’t want to do that.

Josh Lewis: To strategically use the equity in your home and the growth that we’ve seen over the last 10 or 12 years. You don’t want to just take it out. David made a really good point earlier. Don’t buy depreciating assets. Don’t buy that boat. So boats may have appreciated over the last three years since since COVID, I don’t think that’s going to be a longterm trend where boats are going to be appreciating assets.

Josh Lewis: So be very careful with what you’re acquiring. If you’re taking on home equity. To buy a property. David, any other cons or things that you can think of that people should be aware of when considering using their home equity?

David Xie: I do want to bring up a point. I’m an avid boater.

Josh Lewis: So everyone should buy a boat regardless.

Josh Lewis: No.

David Xie: I own two small boats now, but the big boats, boats stands for right. And bring on another thousand. So yeah, definitely not appreciating assets. Don’t treat your house as a critical. It’s it hurts me when I see people that have done that. And then when they get to the age of retirement and they’re like, I’ve got nothing.

David Xie: I’ve got th this decision that you make, when you do the cash out, refinance is going to influence your next five years, 10 years, 15, 20 years, right? Whatever you do just really think about it from the long-term perspective. And it took me a long time to get to this point, now when I look around at all the things that, that have acquired and I’m like, wow, that made me happy when I bought it. But now it’s it’s just a paperweight. So when it comes down to doing a cash out, and that’s what I love about this crew here, we always try to do things for the right reason.

David Xie: And I love that Mia brought up the whole point about, Hey, let’s shorten your term. If we can con if we could do a refinance, consolidate some debt, save. On a shorter term or even make it even, and all of your consumer debts paid for. That’s a huge win for everybody, and that’s that decision is going to affect, your family future generations and everything.

David Xie: Whenever you’re making a decision like this that, and it’s going to affect the roof over your head definitely, weigh out the pros and the cons, write it all out. What is the benefit of taking this cash out? Am I going to have enough cash reserves? If I do buy that additional rental property am I prepared for the next crypto drop?

David Xie: Am I prepared for the, if the stock market drops 20% and I put it in there, am I prepared to hold it? Or am I the type of guy that has like really weak hands and, I’m holding bags and it, buying it is easy, selling it as. So I’m definitely weigh all that, all those things out when you’re considering.

Josh Lewis: No really good advice and in a big way that I like to wrap it up th the find my way home expert network, we don’t have a monopoly on knowledge or wisdom or experience, but whoever you’re working with, make sure that they’re truly in. And not a salesperson. You can see the difference here of how an advisor approaches going through your options for getting cash out of your home or what you’re possibly doing it versus someone that’s a salesperson that says, oh, cool, you want cash out?

Josh Lewis: How much here’s, how we can get it and how quickly we can get it in your hand. Do you want to have a strategic long-term approach to it? And probably most importantly, remember that. Trying to accumulate home equity doesn’t mean that we don’t find good ways to utilize it to further our financial futures, but you want to do it strategically with the plan of arriving at retirement without having to pay a mortgage payment, to have a roof over your head.

Josh Lewis: So with that we talked about there pros and cons of cash out. How about this? Are there alternative ways of getting cash out of your home besides doing a cash out refinance? David. Do you have any thoughts on that?

David Xie: The easiest way is a home equity line or a line of credit. The one bad thing about that, just like when I got a home equity line of credit, I just couldn’t keep track of it.

David Xie: It was just one of those debts that, when you’re looking at your mortgage, when you’re may making payments on it, it’s amortized. So every single month, Hey, it’s going to tick down a little bit and the longer you pay on it, it takes down a little for a faster. Even a guy like me, who’s in the mortgage industry.

David Xie: I just never understood my home equity line. I was just like, wow. This is just cheap money. And every time I look at it, it’s wow, I paid it down a dollar or it’s just so my Newt a guy like me I prefer the cash out refinance. Alternative ways.

David Xie: I really can’t. Can’t think of any other alternative ways of getting

Josh Lewis: cash out. So really it’s any type of second mortgage, right? You can do a home equity line of credit, which you talked about, and you could also do a fixed rate second, but it’s a second mortgage going behind your first mortgage.

Josh Lewis: You’re going to say.

Mia Schultz: Yeah, I have a client that I’m working with right now, and they’re looking to try and move across the country and they have a lot of equity in their house. They don’t want to be rushed to sell their home in order to buy the next home. So this is a good reason to use a home equity line because in most cases I agree with David.

Mia Schultz: But this is going to be a short-term. They’re going to take the equity out in a second loan so that they’ve got to sit in the bank so that they can pay their earnest money down payment, moving costs and everything, and then move themselves across the country. Then sell their home, pay off both of the loans.

Mia Schultz: So that would be a case where we wouldn’t advise somebody to do a whole cash out refinance, depending on the length of time that’s involved. There are risks involved with the home equity lines. I’m sorry, with the home equity line of credit versus the fixed rate line a second loan because the interest rates do fluctuate.

Mia Schultz: On the second loan, if it’s a short term fix for a certain requirement that you need then great. A home equity line of credit is wonderful. And then you get to keep your first rate on your first mortgage. If that’s.

Josh Lewis: And just to follow up on that. We’re in a unique position here on in Southern California in general, in that bigger loan amounts.

Josh Lewis: Because of the bigger loan amounts, people are seem to be more aware of interest rates and we’re more likely to take advantage of the really low interest rates the last few years. So it’s not uncommon for me to have. Call up and say, Hey, we’ve got a ton of equity in our house. We owe 400 at 2.8, seven, 5% on a 30 year fixed home’s worth a million dollars and we need $75,000 to add on to.

Josh Lewis: Okay. Does a five D there’s going from 2.875 to 5% to get $75,000 against 400,000 owed. It doesn’t make sense. So the things that David said that, that home equity line of credit a fixed rate second is going to have an even higher interest. But at least it’s fixed. It may not be ideal, but in that situation again, when we’re laying out the numbers never lie, work with an advisor who can pencil these out for you.

Josh Lewis: And we can say a blended rate in that situation is probably better to take the. The seconds are just as much work as a first mortgage. They’re not very profitable. So a lot of lenders don’t do them. You’re gonna have a harder time finding someone to get to do it, but it may absolutely be the right answer for you.

Josh Lewis: So a couple things that I like to point out in there is it’s that blended rate. The, so the more you’re wanting to take. The more, it makes sense to get a new first loan. And when I say the more, I don’t mean more dollars. More relative to the first, if you’re taking out 50% of the value of your first mortgage, you’re probably in a situation where you’re looking at wanting to just put that into a new fixed rate and something to be aware of, because we do have a lot of people that are super attached to their super low fixed rate on their first mortgage, but they want cash out.

Josh Lewis: We’re looking at the federal reserve is in an aggressive rate hiking cycle, but they’re at the very beginning of it. The last meeting they raised a quarter of percent markets are expecting 1.4% more of rate increases at the next three fed meetings. So probably a half. And then they’re betting, there’ll be likely more than a quarter, but not quite the half.

Josh Lewis: So that’s just, it’s just the way the wagering in the futures market works out. By the end of the year, we’re looking at a 2% higher rate. So the fed doesn’t directly impact mortgage rates. They absolutely directly impact home equity lines of credit. So if we say today, you’re going to get a home equity line of credit at 5%, by the end of the year, that rates now at 7%.

Josh Lewis: So we have to look and say, where is everything going with, where inflation is at and where mortgage rates are at and how likely is it to stay that high? What is your plan? Over the long-term. There’s definitely options besides a new first mortgage of getting cash. But if you think that’s the direction you want to go, you need to work with someone that can pencil out those options for you.

Josh Lewis: So I think we’ve done a pretty good job of going through, the pros and cons, how to do it. What’s required. Mia, did you have any finishing thoughts or anything we didn’t cover that you think a homeowner should consider when taking a to cash?

Mia Schultz: The biggest thing is every situation is unique and has several different directions that you can take.

Mia Schultz: And like we mentioned, make sure that you’re with an advisor, who’s going to take the time to walk you through. What’s going to happen five years or 10 years or 15 years down the road when you make this decision.

Josh Lewis: Perfect. How about you David? Any other thoughts? Okay.

David Xie: No, I th I think we covered a lot.

David Xie: I definitely wanted to touch on that blended. But you did a great job covering it. So you took the words right out of my mouth and that’s really hard to do. That’s

Josh Lewis: that’s what we’ve got. I read David’s mind and then I speak for him wherever we go. So with that definitely want to thank both of you for being here for the inaugural episode of find my way home live.

Josh Lewis: If you’re finding this on YouTube, if you find it somewhere on the internet, find it on Facebook and you’ve never been out to find my way home visit the website at find my way home. It’s a library of articles, explanations, videos accumulated over the last 15 years that walked through every issue, a home buyer and home owner could have in relation to financing.

Josh Lewis: And most importantly, we have the. The access to the profiles for all of the experts to find someone who can help you in your area. If you don’t already have an advisor that you’re working with. So definitely check out, find my way home, come back next week. I’m not a hundred percent sure of what our topic is.

Josh Lewis: We’re going to be covering, but we’re gonna pick something else that is of importance to homeowners and home buyers, and we’ll go through it. So thank you for joining us. And we look forward to seeing. Thank you.

David Xie: All right. Thanks. Bye. Give us the thumbs up and like our channel.

Josh Lewis: Perfect David. Thank you.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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