Feb

Mortgage Refinancing and Debt Consolidation

Most financial analysts would agree that mortgage refinancing to consolidate adjustable rate debt is a good move for consumers financially. Trading debt with adjustable interest rates for a fixed simple interest loan that is tax deductible is simply smart financing. Whether you choose a second mortgage or refinance loan may depend on your equity, credit score and preference. A few years ago, no equity mortgage refinancing was easy to find, but today most 100% refinance options do not allow cash out or debt consolidation. For example, the popular streamline refinance program that is insured by FHA or VA does not require an appraisal, but they again, no cash out is allowed. The FHA streamline refinance even requires borrowers to pay for closing costs out of their pocket.

Freddie Mac reported that in the fourth quarter 46% of homeowners who refinanced their home loan reduced their principal balance by paying in additional money at the closing table. This is the highest “cash-in” share since Freddie Mac began keeping records on home refinancing patterns in 1985. Freddie Mac also said in its 4^th quarter refinance analysis that “cash-out” borrowers, those who increased their loan balance by at least 5%, represented 16% of all home refinance loans, the lowest cash-out share since the analysis began in 1985. The average cash-out share over the past 25 years has been 62%.

Cash-out refinance activity in recent years has been harder due to tighter loan guidelines and tougher underwriting standards. When you factor in the declining in property values, it’s easy to see that cash out refinance loans are very difficult to get approved in today’s mortgage climate. Among the refinanced loans in Freddie Mac’s analysis, the median appreciation of the collateral property was a negative percent over the median prior loan life of 4.1 years.

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