Interested in Cash-Out Mortgage Refinancing? Here’s What You Need to Know.

Why paying down your mortgage faster could be a good investment strategy

MarketWatch

With rates on 30-year mortgages nearly a percentage point lower than they were last year at this time, a growing number of homeowners have been not only refinancing but also cashing out equity. But borrowers, beware: There are a number of pitfalls and costs to consider. Cash-out refinancings, as the maneuvers are known, allow homeowners to refinance a mortgage and borrow cash at the same time. The total loan—including the cash-out and the refinanced mortgage—can register up to 80% or more of a home’s value. Say the remaining total of your mortgage is $200,000 and your home value is $400,000. You might take out a loan for $300,000, with $200,000 constituting a refinancing of your mortgage and $100,000 going to you in cash. “Tapping your home for cash can be a smart thing to do,” says Jack Ablin, chief investment officer at Cresset Wealth Management in Chicago. “The availability of credit is high, the process is simple and interest rates are low. But it’s not for everyone.” The strategy is particularly useful for homeowners in their 30s, 40s, or early 50s who want cash for a productive purpose, such as a home improvement, to pay off credit-card debt, or to finance college for their children. If you use the cash to pay off credit-card bills, you can replace high interest-rate debt with the lower interest-rate debt of a mortgage. But keep in mind that you’re replacing unsecured debt with secured debt, and could lose your home if you default. “You’re putting the risk on your house,” says Tom Fredrickson, a New York City financial planner in the Garrett Planning Network. The 30-year fixed-rate mortgage average was 3.73% in the latest week, according to Freddie Mac. That is down from 4.62% a year ago. For older people who would extend the maturity of their mortgage well into retirement by using a cash-out refinancing, the idea doesn’t make sense, experts say. That’s because you’d be stuck with mortgage payments at the same time your income may be dwindling. “As you get older, you should be making a concerted effort to reduce your debt, so you don’t have the millstone of a large mortgage around your neck in retirement,” says Karim Ahamed, a financial advisor at Cerity Partners in Chicago. Also, experts say to stay away from deploying the cash for frivolous spending like vacations. “You should use the money in a way that would be an investment rather than an expenditure,” Fredrickson says. Keep in mind that your cash-out refinancing will likely have a higher interest rate than a regular refinancing, because the cash-out portion makes your loan bigger. It also bears noting that you’ll incur closing costs on your refinancing—generally 3% to 6% of the new loan amount—and you also may face a state or local mortgage-transfer tax. “Your lender may say there are no out-of-pocket costs,” Ablin says. “But that doesn’t mean it’s free. It may just be rolled into the loan.” A popular alternative to a cash-out refinancing is a home equity line of credit. A Heloc is less expensive, with the absence of closing costs and mortgage transfer taxes. But interest rates are generally higher for Helocs than for cash-out refinancings. “If you expect to repay your loan in three to four years, you’re probably better off with a Heloc,” Fredrickson says. “It takes at least that long to benefit from the lower rates of a cash-out refinancing.”

Scams that target the elderly, whether by phone, computer or in person, succeed to the tune of billions of dollars a year. But fear and shame often keep victims from seeking the help that their grown children could provide, experts say. “One of the reasons parents don’t tell us when they may have fallen victim or come close is that they fear [their children will] pack up their home and they’ll lose their independence,” explains Ron Long, head of Wells Fargo’s Elder Client Initiatives Center of Excellence. To help aging parents protect themselves, their grown children must tactfully broach the subject of their vulnerability. The key is to adopt an attitude of empathy and non-judgment, says Amy Nofziger, director of fraud victim support at AARP, an advocacy organization for older Americans. “Always start the conversation with empathy and compassion, and don’t be paternalistic,” she advises. Studies have shown that we become less skeptical and more impulsive as we age, Long says. “The bad guys know that, and they know that’s where the money is,” he says. Scammers relieve elderly Americans of as much as an estimated $36.5 billion annually. The bad guys also know that open lines of communication between elderly parents and their offspring can make their job a lot harder, says Dan Ludwin, president of wealth management firm Salomon & Ludwin, in Richmond, Va. A few years back, a client’s parents fell for a story that their grandson had been arrested and needed bail money, he says. Over multiple phone calls, the scammer discouraged the elderly couple from notifying the grandson’s parents, supposedly to spare him their opprobrium. “They were surprised they fell victim to a scam and, in hindsight, they saw the signs, the pressure, the secretive nature of the request,” says Ludwin, noting that the couple sent payments of $1,000 and $1,500 before finally smelling a rat. Ultimately, the couple did notify their son, and they agreed to accept his help in avoiding future scams. To open lines of communication before trouble has struck, keep things as light as possible. One approach is to use news items as an icebreaker, Nofziger says: “Hey, mom and dad, have you heard about this grandparent scam? It’s where someone pretending to be your grandchild claims to be in trouble.” Steer the conversation toward role-playing, she advises: “What would you do if happened to you?” Once a dialogue is established, you can bring up other kinds of security concerns. Be mindful that elderly parents were socialized differently. Having been taught to be polite on the phone, for example, they might hesitate to cut off fast talkers. One solution: Leave by the phone a short “refusal script”—along the lines of “I don’t do business over the phone before I contact my son. Thank you, goodbye.” Remember that basic technology can be confusing to those who may have already passed middle age by the time cellphones and email had become ubiquitous. The good news is that older people will often defer to their children on technology issues. Offer to make sure their security software is up to date. Show them that you save trusted contacts’ names and photos on your own cellphone, and that you let unidentified callers go to voicemail. They’ll probably want you to help them set up their contacts the same way. One artifact of the generational divide is that many older people still carry their Social Security card in their wallet. “You can say, ‘That’s not the norm anymore, mom and dad. Social Security cards are a gold mine for scammers,” says Nofziger. To really get ahead of things, start talking about scammers and fraudsters while your parents are still relatively young and sharp. Every family should agree on when and how the children should start helping more with their parents’ finances, says Long. “And the best way to get to that is have these conversations earlier, rather than in the moment of crisis,” he says. Naturally, many families will have trouble bridging a trust gap between child and parent. That’s the time to bring in a trusted intermediary, whether it’s an attorney, a religious leader, or an old friend, says Long. And if parents resist your help, be patient. Accepting care from your children “can be kind of a role reversal,” says Nofziger. “After 18 years, my mom finally will call me now when she gets a suspicious phone call.”

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Why paying down your mortgage faster could be a good investment strategy