Economic uncertainty in March 2020 from coronavirus fears has pummelled the stock market, causing investors to funnel cash into bonds. One of the benefits for homeowners is mortgage rates have declined.
Mortgage rates recently have declined to approximately 3.3%, causing a flood of mortgage refinance applications to pour into lenders’ inboxes. According to a recent survey from the Mortgage Bankers Association, the number of people applying for mortgages is the highest since 2012, and 75% of them are refinancing applications.
Are you interested in a cash-out refinance in Florida? Below is important information to know about cash-out refis in the Sunshine State.
Florida Cash-Out Refinance Overview
Before we get into the details of Florida laws, let’s break down what a cash-out refinance is. A cash-out refinance allows you to replace your current mortgage rate with a new one (usually at a lower rate) for a larger amount than you have now. You can take the extra cash left at the closing table and do what you like with it.
Want to remodel your kitchen or bathroom? How about extending your family room? With some of your hard-earned equity, you can do those projects with a Florida cash-out refinance.
Let’s look at a simple example. Say you have a home that is worth $300,000 and you owe $120,000 on it. You may be able to refinance your mortgage for more than you owe with a Florida cash-out refinance if you meet your lender’s credit, income, and debt-to-income ratio (DTI) criteria.
You may be able to take out $50,000 in equity and refinance your loan for $170,000. This example assumes an 80% loan-to-value (LTV) that keeps a required 20% equity in the property.
Rules & Guidelines on Florida Cash-Out Refinance
Florida allows you to take equity from your home once per year. However, you need to keep 20% of your equity in your home. During the last financial downturn, some lenders allowed borrowers to take 100% or even more of their equity. When property values crashed, many homeowners were upside down on their loans (owing more than the home was worth).
Florida laws prohibit borrowers from over-extending themselves, so you only can borrow up to 80% of your home’s current value.
For example, say your home has a current appraised value of $200,000 in Tampa. You owe $100,000 so your LTV is 50%. Lenders in Florida will let you borrow up to 80% of the $200,000, which is $160,000.
If you qualify by your credit, income, and DTI, you might take out $60,000 minus the loan’s closing costs and fees.
But for people with a VA loan backed by the Veteran’s Administration, it may be possible to borrow up to 95% of LTF. For those with an FHA loan, borrowing up to 85% of your home’s value may be possible. Talk to your Florida mortgage loan officer for more information.
Florida Cash-Out Refinance – Can It Reduce Your Payment?
Maybe! If you have a mortgage rate higher than the market average in 2020, you could snag a lower rate and pull out thousands in equity. Historically, many financial experts said if you can save 2% on your rate, you should refinance. But in modern times, many lenders say that saving 1% on your rate is more than enough savings to justify a cash-out refinance.
Lowering your interest rate helps you not just to save money; it also increases the rate at which you grow your equity. For instance, a 30-year fixed-rate mortgage with a rate of 5.5% on a $100,000 house has a total payment of $568. Lower your rate with a Florida cash-out refi to 4.1% and you pay only $483.
Additional Benefits of a Florida Cash-Out Refinance
If you have a lot of equity in your Florida residence, why wait years until you sell the home to tap your cash? You can enjoy many benefits of your equity today, plus (hopefully) enjoy a lower interest rate. Consider:
- Add value to your property: One of the best uses of your equity is to make improvements to your home that add enjoyment and value to the property. Remodeling your kitchen or extending the family room could add thousands of dollars of value when you sell your home. Plus, you will add immensely to the enjoyment of your home as long as you live there.
- Pay off debt: If you owe $10,000 on a credit card at 20%, you could pay that off with your equity and pay 4% or less. A side benefit of this move is you will probably increase your credit score. The credit agencies prefer installment debt to revolving credit card debt, and your scores should see a nice bump.
- More money to invest: If you think about the magic of compounding interest, it can make sense to pull equity from your home at a low-interest rate and invest it into real estate or a business where you can make a high-interest rate.
Final Thoughts on Florida Cash-Out Refinance Rules & Guidelines
Pulling the trigger on a Florida cash-out refinance can be a great choice for your finances. If you can save 1% on your interest rate and pull out tens of thousands of dollars to improve your home, it can make a lot of sense.
If you are concerned about refinancing and starting your 30-year mortgage all over again, think about refinancing into a shorter-term loan. Yes, your payment will be higher in most cases, but you will enjoy a lower rate and pay off your home much faster. Plus you have that equity in your pocket to do with as you wish!
- Mortgage Rates Drop to Unprecedented Lows. Accessed at https://www.citizensvoice.com/news/mortgage-rates-drop-to-unprecedented-lows-1.2609843
- Veteran’s Administration Cash-Out Loans. Accessed at https://www.va.gov/housing-assistance/home-loans/loan-types/cash-out-loan/
- 5 Benefits of a Cash-Out Home Refinance. Accessed at http://blog.ditech.com/blog/the-5-benefits-of-a-cash-out-home-refinance
- When and When Not to Refinance. Accessed at https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/