I recently attempted to qualify for a home equity loan on my primary residence, my humble abode. I had read and researched the straight home equity loan versus the home equity line of credit (HELOC) and I decided on the HELOC as the best path forward.
There are varied opinions from bankers, finance experts, and other personal finance folks on the merits of using the equity in your house, or any form of secured debt, for your financial situation. I am of the opinion that using a HELOC in a specific way is highly advantageous.
Unfortunately, the banks that I contacted decided that a HELOC was NOT the best path forward for me, and they declined my attempt to secure funding. My inference from some feedback is that my debt-to-income ratio was too high for their taste. I can’t blame them, my financial situation currently resembles the Bad News Bears.
Strike One – Denied Access to Home Equity Loans
Getting denied by the banks was certainly a blow to the ego. You put your financial business out there to a bank, give them every bit of financial data to show where you stand, only to have the banks tell you that your situation really sucks.
At least here on the blog, I control the information that I put out. With the banks, I have to provide all kinds of personal information. I felt like they would eventually ask for blood samples for all living beings in the house.
But so what, I got denied. There are worse things in life. I picked up my damaged ego, got back in the batters box, and looked in for the next pitch coming at me.
The Cash-Out Refi
As I was talking to a chatty lender about the possibility of doing a home equity loan, she started talking about doing a refinance of my current home mortgage. My initial reaction was to say “no thanks” and keep the conversation focused on the home equity loan, but this woman was very chatty and kept talking about this mortgage refinance.
Finally I gave in and started asking questions about the refinance. This lender was great, gave me lots of info. I then began talking to other lenders and researching the possibility of doing a cash-out refinance on my house.
The cash-out refi is a process of accessing the accumulated equity that you have in your house. The positives are that you get instant access to the equity without having to sell your house and you get to take advantage of historically low interest rates, locking it in.
On the other hand, the negatives are that you start a new mortgage, back to square one, and you are paying for the debt you just added to your house. There are always tradeoffs to financial moves like this.
For me, the refi will provide access to funds that I will use to pay off enormous amounts of debt. I can wipe out about half of my current debt with this move. It will free me up to the point where I will have significant cash flow coming in every month. Woo hoo!
I decided to move forward with the refinance process. I began the exhaustive process of finding and submitting paperwork. Thankfully technology has reached a point where this is much easier. The hardest part was finding the paperwork needed.
Part of the refi process is to do an appraisal on the house, to assess the current value. That value is then used to determine whether I would qualify for the loan amount, based on the equity it would provide and the debt-to-income ratio it would adjust to.
So I authorized the appraisal on a Friday and got a call on Monday. I was expecting a few days before they came out to the house to do the walk-through, but this gentleman was ready to go…right away…two hours away! I agreed to the schedule and he came out to the house two hours later. Thankfully we had prepped the house over the weekend, did our best to clean things up.
We walked and talked as I showed the appraiser my oh so humble abode. I was so nervous about the value that was going to be spit out by the calculations on that clipboard in his hands.
At the end of the proceeding, this kind older gentlemen tells me that the house will definitely appraise for more than the requested loan amount. Whew! Great news! Felt like I dodged a bullet there…I’ll explain with the numbers below.
Here is a quick look at the potential numbers if this refi goes through…
• Bought the house at $240,000. It was a foreclosure that needed some work, but we got an excellent deal.
• Mortgage amount was $245,000 @ 4.5% (we rolled in the VA funding fee to the loan).
• Currently owe $221,000 on the mortgage.
• Current equity from mortgage = $24,000 (not accounting for current value yet).
• I am applying for a new mortgage of $295,000 @ 3.375%.
• I expected the appraised value to come back somewhere at $285,000. The tax assessed value is $286,300, which is a good starting point.
• That would put my expected equity at about $64,000. If the appraised value went any lower, I might be denied because my debt-to-income would be too high.
Well, the appraiser did his work and when he was leaving, he said that the house would appraise for more than my requested loan amount of $295k. I was ecstatic. The next day, the appraisal came back at $315k, which was $30k higher than I expected or even dared hope for.
I’m still cautiously optimistic because this thing isn’t done yet. I got through the appraisal process and will have $20k in equity left in the house, even after getting the new loan, if I qualify for the loan at $295k.
Waiting for Approval
Now it’s all become a waiting game. I am just waiting. Waiting to see what other paperwork I need to provide. Waiting to see if the appraisal sticks at $315k. Waiting to see if I am approved for the refinance loan.
I don’t like waiting. I’m an impatient bastard. Thankfully I have a short family trip coming up that will distract me. I’m hoping that will keep me mentally occupied long enough to keep me from worrying. We’ll see.
I’ll let you know how things shake out with this refinance once I know more. Like I said earlier, I’m cautiously optimistic, but if I let myself dream for a moment…and obsess over the spreadsheets…I see a future with much less debt, cash available to invest, and much less stress on my tired brain. Wish me luck.
Have you ever refinanced your home to take advantage of lower interest rates or to get to your accumulated equity? Let me know about it in the comments.
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