Freeing up over $1,000/mo with a cash-out refi
I decided I was going for it: “Can you get me your 2018 & 2019 W-2s, your last two paystubs, your last two statements from your checking account and 401k statements?” I shyly asked. No response. I should’ve known better than to ask you in the middle of a Selling Sunset binge. How could I believe I could pull your attention away from that one hot chick starting drama with the other hot chick while trying to sell that mansion 99% of us will never buy, let alone set foot in, all while trying to have some #burgersandbotox?! Mission failed. Back to the drawing board.
The Loan Application
Eventually, we got our act and, more importantly, our files all together. Mortgage loan applications can be so tedious. It’s a seemingly never-ending hunt for statements & documents accompanied by a back & forth with underwriters who inevitably will dream up more “required” documents to draw out the process as long as possible. I’m convinced UWs have bets on who could have the longest email thread with applicants – JUST KIDDING, I get that they are just doing their jobs. After dozens of documents and probably three times as many emails, they had what they needed. Just kidding again – the “that should be the last one” line got used at least 3 times on us. But it’s fine, we kept the endgame in mind. My biggest takeaway: If you have businesses – do not slack on your book & record keeping! Lesson learned…I think.
The appraisal was rather painless. I think my biggest struggle was trying to put our own value on our house. As a realtor, I’ve done my fair share of CMAs to value a property. A CMA, or competitive market analysis, is a study of other similar homes in the area that have sold, are currently for sale and/or failed to sale combined with other market trends or characteristics to create an opinion on the value of any given home. The problem for me was the fact that in our neighborhood, the homes are so unique. We don’t live in a cookie-cutter neighborhood. I could see our home appraising for $375k but also for $600k so I was a mess anticipating what we would end up at. On our street alone at the time, there was already a home pending at an asking price of $600k and another at $675k that was under contract its first weekend on the market. Anyway, appraising at less than around $400k would basically eliminate the usefulness of the cash-out refi. When I got word back from our appraiser, I was relieved – she appraised the house at $428,000. We would be able to take out a loan for 80% of that. After closing costs & fees, we would payoff the existing mortgage, all our high-interested credit card debt and eliminate our PMI in one fell swoop.
The Waiting Game
From there, we thought we would be closing in mid-September but unfortunately, refinances just get pushed to the back of the line when it comes to closing priorities. So it took until almost the end of October before we finally signed closing papers! Below, you’ll see the snippets of credit card balances from August (on the left) to today (on the right).
Yay for pictures but what do they actually mean? It shows all the balances on the left, aside from the CSP which we regularly use, that were paid off from proceeds of the cash-out refi. Mission accomplished!
Net Savings from the cash-out refi
If you really think about it, you might conclude that we didn’t really payoff the high-interest credit card debt but instead just moved it into our mortgage. You’d be 100% correct. But the biggest takeaway should be the comparison between the combined minimum payments from those credit cards of $1,231 to the difference in our mortgage of about $150. This can be attributed to the interest rate on that debt being reduced from 15-20% on CCs down to about 3.5% in the mortgage.
That’s almost $1,080 per month freed up from the high-interest credit card debt. Now we have to decide how to best re-deploy that into the rest of the paydown plan.
For everyone else…
It is possible you might be thinking that doing a cash-out refinance isn’t really paying off debt but rather just shuffling it around. As I mentioned above, it’s true. It’s kinda like the Balance Transfer method I’ve used before. But the key difference that makes this such a useful tool is the payment amount. Think about it. We reduced a required payment of $1,231 down to $150. That’s $1,080 per month that was freed up TO HELP ELSEWHERE. In my opinion, that’s where the big disconnect is. Some people will look at this as money justification that they can buy a new car or new clothes or that latest iPhone but what if you kept that $1,080 working on paying down debt or saving & investing it rather than allowing lifestyle creep? You’d get to that financial independence finish line so much faster!
So maybe think about doing a cash-out refi. It might reset your mortgage timeline if you refinance into a 30yr fixed but what if you’ve paid off enough to refi into a 15yr fixed without raising your mortgage payment too much? I read somewhere that the average length of time homeowners stay in one house is about 8yrs. I would recommend that if you’ve lived in your home for more than 5 years and haven’t refinanced, it’s worth looking into your home’s current value, your mortgage balance and your existing interest rate to see if this could be a useful tool for you. Look into it. The worst that could happen is it’s not worth doing and you move on. When is season 4 of Selling Sunset coming out?