Refinancing Your Home Can Turn Equity into Cash

As fall begins its slow roll into winter, many of us start to think about the holidays and all of the expenses that go along with buying gifts, traveling, and making sure our homes are cozy, comfortable places to entertain family and friends. Maybe it’s finally time to put on that addition or remodel? Or, maybe you’re hoping the new year will be the year you pay off some of your debts.  With interest rates on home mortgages still historically low, now may be the perfect time to consider refinancing your home and using some of your equity to pay off credit card debt, a Home Equity Loan or Line of Credit or other loans, make home repairs/remodel, or pay for a much-needed vacation.

Cash Out Refinance: “A cash-out refinance is when a borrower refinances an existing mortgage and the new mortgage is for a larger amount than the existing mortgage,” advises Robert Padula, Empower Federal Credit Union’s Vice President of Mortgage Lending.  “The borrower then gets the difference between the two loans in cash. This allows homeowners to turn some of the equity they’ve built up in their home into useable cash.”

For example, say you currently owe $150,000 on your home, but it’s worth $300,000, meaning you’ve built up $150,000 in equity.  You want $25,000 in extra cash to pay for a kitchen remodel.  You could do a cash-out refinance to pay for your new kitchen.  You would get a new mortgage for $175,000 – the $150,000 you still owe, plus the $25,000 you’re going to receive in cash.

A cash out refinance is similar to regular refinancing in that there are still closing costs. Like with regular refinancing, you’ll pay on average around 3% of the loan amount.  Some lenders will allow homeowners to wrap the closing costs into the new loan, reducing out-of-pocket costs, but ultimately increasing your total loan amount.

If you can get a good interest rate—one that’s lower than your current mortgage rate—-a cash out refinance can be a smart choice.  With lower fixed rates and longer terms, a cash out refinance with closing costs can be an even better option than either a fixed home equity loan or adjustable rate home equity line of credit without closing costs.  A good mortgage consultant can help you figure that out.

Smart Uses of Cash:  Typically, you can use the cash from a cash-out refinance to pay for pretty much anything you want, but there are obviously some uses that make better financial sense than others.  If you have high interest debt such as credit cards, it may make sense to use a cash-out refinance to pay off this debt because the interest you pay for your credit card likely far exceeds the interest on your new mortgage loan.

Using cash to pay down credit card debt has other benefits, too. Paying down credit cards that are at or near their credit limit can give your credit score a boost and you get the tax benefit from moving the credit card debt to mortgage debt because mortgage interest is deductible on your taxes.  Homeowners should check with their personal tax advisor about the deductibility of mortgage interest.

Home improvements are another smart choice.  They can improve your home’s appraised value down the road thereby increasing your equity position or giving your home a higher resale value should you decide to sell.

Do the Math:  But Padula cautions homeowners to do the math before they cash out. “While your new interest rate may be lower, you will be increasing your mortgage balance. Make sure you’re including all closing costs, fees and total interest payments in your calculations and that the numbers work to your benefit.” A cash-out refinance resets the term of your loan, so you could be paying more in interest over the long haul.  It’s important to evaluate all of the factors before moving ahead.

Just remember, whatever you decide to use the cash for, you still owe that money to the lender.  Make sure you can manage your new monthly payments within the loan period before you sign on the dotted line.  Your home is collateral, and you could lose it if you don’t keep up with payments.


Should You Lease or Buy Your New Car?

It’s difficult to resist the allure of a brand-new car, fresh off the lot with its new car smell, flawless finish and new technology.  Then, there’s the constant stream of ads on the radio and TV promoting lease deals, with all of the bells and whistles, for a pretty reasonable monthly payment.  Does it really make financial sense to lease?  The answer is:  it depends.

“Leasing a vehicle often advertises a lower monthly payment when compared to financing a vehicle with the same loan terms,” explains Empower Federal Credit Union’s Vice President of Consumer Lending, Kevin Peterson.   “On a lease, you’re paying for the depreciation of the car during the lease term, rather than the whole vehicle cost.  If you need access to additional cash every month, leasing may be a more favorable option.”  Peterson goes on to caution that if you plan to put a lot of miles on your leased vehicle or do not take the best care of the interior/exterior, leasing may not be your best bet.  Most leases require you to pay additional fees at the end of your term for above normal wear and tear on the vehicle.  This includes exceeding mileage allowances and repairing any damage, interior and exterior.

A lease can make sense for someone who is just starting out in a career and has no savings but needs a reliable car.  “A lease is like renting an apartment versus buying a home,” says Peterson.  “If you’re not proactive about setting aside the money you’re saving every month (versus buying) for your next vehicle, you can get caught in the renting/leasing cycle forever.”  While leasing, you will never develop any equity in your vehicle to put toward your next vehicle.

If low monthly payments and the opportunity to drive the newest car model with the latest technology and safety features are worth the extra cost to you, leasing may make sense.  Keep in mind that you should be able to afford the lease for the entire period, since the early termination penalties can be costly.  Plus, you'll have nothing to show for it when your lease is up and you have to return the car.

Leasing Pros:  low (or no) down payment; lower monthly payment; drive a new/nicer car; low maintenance costs; you can return car at end of lease term

Leasing Cons: always have a car payment; limited auto insurance options; mileage limitations; can’t modify or customize vehicle; no trade-in value/no equity; potential for return fees/penalties at end of lease

If you'd like to work toward owning a vehicle outright, for the long-term, and would like more flexibility and control over how you use your vehicle, you might want to finance or buy it.  Paying cash is often the optimal scenario, but not all of us have lump sums sitting around in our savings account.  Most of us will need to finance an auto purchase.  Be sure to research lenders and interest rates in advance.  Local banks and credit unions frequently have the most competitive rates.  Use online sites to research the type of vehicle that is right for you.  They can be great one-stop-shops to research, locate, insure and finance your next vehicle.  

Be careful when choosing your loan term.  Opting for a longer-term auto loan (e.g. 6+ years) to keep your monthly payments lower sounds good, but makes it easier to get “upside down” on your loan, where you owe more than your vehicle is worth.  If you decide to get rid of your vehicle before it’s paid off, you will have paid so much in finance charges compared to principal, that you may as well have leased.  

Best advice:  If you decide on a long-term loan, hold on to the vehicle until it’s paid off.

Buying Pros:  no mileage limitations; more auto insurance and financing options; don’t have to worry about wear and tear; no payments at end of loan term; equity is yours when loan term expires

Buying Cons:  higher down payment; higher monthly payment; maintenance costs; longer term financing can be as costly as leasing

Buying and leasing both have their pros and cons.  It's important to ask yourself what your priorities are and what’s your ultimate goal.

“Buying your vehicle and planning to own it for 8 to 10 years is, from a purely economic perspective, the best financial decision.  Some, not all decisions are financial though” adds Peterson.


Car Depreciation: How it Affects Your Next Car Purchase

Whether you’re looking to buy a new or used vehicle, they both face a simple reality:  all cars lose value.  New cars reliably lose as much as 20 percent of their value in their first year – 10 percent the moment you drive it off the lot and another 10 percent by its first birthday.  Depreciation rates for used cars vary a bit more.  They are affected by many factors, including consumer demand for a specific vehicle, new/used car inventory, lease returns, consumer trends, manufacturer pricing and promotions, and the car’s specific features/options.  The “trendy” car of the moment will tend to hold its value much better, until it’s no longer popular or fashionable.

Depreciation rates have fluctuated quite a bit in the last nine years.  2008 saw a record high rate of 26.5 percent, while the very next year recorded a recession-low of 11.1 percent.  Low depreciation levels continued through 2014, but times have changed and rates are in an up-tick once again.  Industry experts expect the vehicle depreciation rate to reach 17.8 percent in 2017, just slightly higher than 17.3 percent recorded in 2016.

“To put this into real terms, if you purchased a used vehicle for $10,000 in 2017, it will only be worth $8,220 at year-end.  In 2009, your car would still have been worth $8,890,” said Kevin Peterson, Empower Federal Credit Union’s Vice President of Consumer Lending.

What does this mean for prospective car buyers?  A number of things:

If you buy new, your new vehicle will be worth even less and will not retain its value as long as it had in previous years.  This means the trade-in value for your new vehicle, several years down the line, will be less than it was just a few years ago.  Of course, this will vary by make, model, condition, and trim package, but as a general rule, expect your car to be worth less at a faster rate.  You can help maintain your car’s value by servicing it regularly and keeping the interior clean.

If you’re buying used, look for cars with all of the bells and whistles.  New car buyers often skimp on upgrades to keep the purchase price low.  If you’re shopping for a used vehicle, it pays to look for cars with extra features, particularly optional safety features.  You’ll pay a bit more, but cars with strong safety features will hold their value better in the long-term, even with higher depreciation rates.

Declining car values mean some lenders will be a little more stringent in their approval process.  They may urge potential buyers to take out additional insurances as part of their loan package.  An example of this is GAP insurance, or Guaranteed Asset Protection.  If you finance a vehicle and have an accident that’s declared a total loss, the insurance company will only reimburse you for your car’s value before the accident.  This may or may not be enough to pay off your vehicle loan.  In most cases, GAP insurance will cover the difference between the value of your totaled vehicle and what you still owe.  At the same time, in a market in which vehicles are depreciating faster, lenders may be less likely to finance more expensive insurances, like extended auto warranties.  

Regardless of whether you’re buying new or used, Peterson recommends buyers do their homework when it comes to making such a big purchase.  It’s no surprise that the internet is the number one resource for researching vehicles.  Peterson adds, “Use online sites to research the type of vehicle that is right for you.  They are great one-stop-shops to research, locate, insure and finance your next vehicle”.  

Peterson also suggests, “Many local lenders accept loan applications via in-branch, over the telephone or online.  In addition, they offer auto insurance options and have existing relationships with car dealers, which may help to streamline the auto buying process.”

What’s Stopping You from Buying a Home or Refinancing Your Mortgage?


“I don’t have enough saved for a down payment or closing costs.”

A recent Zillow-sponsored online survey of 10,000 renters ages 18 to 75 nationwide found that 67.9 percent of participants believe their inability to save for a down payment was their biggest barrier to homeownership.  This was heard from market to market, regardless of geography or average home cost.

“There is a common misconception among would-be home buyers that twenty percent down is the only financing option available to them,” says Bob Padula, Empower Federal Credit Union’s Vice President of Mortgage Lending.  “The reality is that as home prices continue to adjust back to their pre-recession levels, fewer and fewer home buyers will have that 20 percent sitting in the bank.  But there are several loan products available to first-time home buyers that don’t require 20 percent down.”

A HomeReady™ mortgage is one such product.  With down payments as low as 3 percent and competitive interest rates, a HomeReady™ mortgage is an ideal solution for someone with limited funds for a down payment and/or who needs to use income from a household member not listed on the loan, or someone who needs to have a co-signer.

Padula also suggests buyers research programs like the First Home ClubSM which allow first-time home buyers to earn up to $7,500 toward the purchase of their first home by opening a dedicated savings account and making monthly deposits into that account.  Through this and similar first-time home buyer programs, you may be able to purchase a home with as little as 3 percent down and use grants and gifts from family members toward closing costs.

Seller concessions are another way to help offset the burden of closing costs.  Your realtor can advise you as to what is realistic and appropriate for your local real estate market.

“My credit is not great.  I probably will not qualify.”

In the same Zillow survey, 53.2 percent of respondents attributed their home buying difficulty to the ability to qualify for a mortgage. And 50 percent said debt from credit cards and other loans was their most significant hurdle.

“To qualify for a mortgage, your credit score can be as low as 620.  And, if you have 20 percent equity in the property, there is no minimum credit score requirement,” advises Padula.

Leading up to the purchase, potential home buyers should do everything in their power to boost their credit scores. Be sure to double-check your credit reports to ensure you’re not being unfairly penalized for old, paid or settled debts.  It’s also best to stop applying for new credit a year or so before you apply for a mortgage and until after you close on your home.

If you’ve accrued substantial debt, Padula recommends looking into debt consolidation with an unsecured personal loan and starting to pay down what you owe at the lowest possible interest rate.  Consolidating credit card debt from multiple sources into one loan can immediately improve your credit score.

“Renting is cheaper than buying.”

Many believe that monthly mortgage payments will far exceed what they are currently paying in rent.  With the exception of a handful of mostly west coast markets, this is usually not the case.  Although the savings of buying versus renting vary from market to market and change as interest rates change and rents fluctuate, on average, buying a home is currently 33.1 percent cheaper than renting .

“I can’t afford to maintain a home.”

Recognizing that there are costs associated with home ownership that go above and beyond the down payment and monthly mortgage bill is important and being financially prudent.  When you’re house hunting, look to buy a home that has been well-maintained and/or recently had major components upgraded or replaced, such as a new roof, new HVAC, new water heater, plumbing or electrical upgrade.  Sometimes it pays to buy a newer home, but not always.

Regular home maintenance can prevent small problems from becoming major (and costly) repairs. Maintaining an “emergency fund” and adding to that fund every month ensures you have the necessary cash on hand to pay for a repair or replacement that takes you by surprise.  A thorough home inspection prior to purchase can give you a better idea of the condition of the home you’re considering and the types of repairs you may be faced with if you become its owner.


“I’m not sure if it makes sense for me to refinance, and I don’t even know where to begin.”

If you’re like many homebuyers, your realtor held your hand through the process of buying your first home and qualifying for your first mortgage.  Now that you’re considering refinancing, you just don’t know where to begin.

A good mortgage lender will be able to address all of your concerns and some you weren’t even thinking about.  He or she can help you with the financial analysis and help you determine which mortgage product and term will work best for you and your income level.  Just like with first-time home buyers, there are refinancing options that can reduce your out-of-pocket costs at closing and your monthly payments going forward.



Mortgage Rates Still Low Enough to Put Money Back in Your Pocket

While low interest rates may not be helping to grow your savings account or share certificates, they can help your pocket book in a very real way if you’re looking to purchase a home or refinance an existing mortgage.  Despite recent rate hikes by the Federal Reserve, interest rates on home mortgages continue to be at historically low levels, offering homeowners and prospective homebuyers some significant advantages.

“For those homeowners who think they missed out on the ‘refinance boom’, this could still be a great time to refinance,” advises Robert Padula, Empower Federal Credit Union’s Vice President of Mortgage Lending.  “Even though rates have increased since December, they're still at multi-decade lows. If you look at the 30-year fixed mortgage rate over the past 10 years, it peaked around 6.76%. Right now, rates are just above 4.0%, and if you’re looking to pay off your mortgage faster, 10 and 15-year fixed rate terms are in the high 2% to low 3% range.  Rates have risen, but they're still historically low.”

Reduce Your Monthly Payment:  If you currently own a home and have good credit, consider refinancing your existing mortgage to lower your interest rate and your monthly payment.  Lowering the interest rate on your mortgage allows a bigger chunk of your monthly payment to go toward paying down principal instead of interest, if you continue to make the same monthly payment.  Or, you can use your monthly savings to make home improvements or pay down other higher interest debt like credit cards.

Increase Your Purchasing Power:  Simply put, purchasing power is the amount of home you can afford to buy for the budget you have available to spend. The interest rate on your mortgage impacts not only your monthly housing costs, but also your overall purchasing power.  If you’re buying your first home, or are considering buying a second-home or investment property, lower interest rates can help to increase your purchasing power by allowing you to buy a slightly more expensive home and still stay within budget.  As interest rates increase, the price of the house you can afford will decrease if you plan to stay within that same monthly housing budget.

Tap into Home Equity:  Now is also a good time to borrow money at inexpensive rates.  Homeowners can elect to take out a Home Equity Loan by borrowing against the value of their home. In doing so, homeowners receive funds in a lump sum so they can undertake home remodeling projects or finance an education or vacation.  However, if you take money out of your home, it is always a good idea to use that money wisely. One of the smartest decisions is to pay off higher interest rate debts, like credit cards, to lower your overall monthly payments. This allows you to free up cash each month and to start saving for the future.

Future Outlook:  Many experts predict that mortgage rates will continue to rise and could be closer to 5% by this time next year.  If you’ve been putting off refinancing or buying a home, now is the time to pull the trigger.  Padula advises homeowners to shop around and compare interest rates, closing costs, and other features to find the combination that works best for them.


8 Things Every First-Time Home Buyer Should Do:

It’s the American Dream. Picket fences.  Window boxes.  Shade trees and a lawn to mow at your own Home Sweet Home.  Even if that isn’t your dream house, owning a home, whether it’s an apartment, duplex, townhouse, ranch or quaint Cape Cod is often a top priority among many Americans.  Thanks to record low interest rates over the past several years, many first-time home buyers have been able to make their dreams come true. By thinking ahead and doing a little planning, owning your own home is possible.  Here are some helpful tips:

1:  Start saving for a down payment before you think you’re ready to buy a home or even start looking.  Put away a little from each paycheck into a separate account each month.  You’ll be surprised how quickly it adds up.

2:  Look into first time home buyer programs in your area.  “Many banks and credit unions have specific programs for first time home buyers,” suggests Empower Federal Credit Union’s Vice President of Mortgage Lending Bob Padula.  “Some of them require you to open an account and save a minimum amount per month for a specific period of time.  In return, you’re offered a first-time home buyer grant to put toward your first home.  This can often be several thousand dollars.  That combined with your own savings is a great start on a down payment or to put toward closing costs.”

3:  Don’t commit before you’re ready financially or otherwise. Owning a home is a huge commitment and more expensive than many home buyers realize.  Be sure you are ready for the financial commitment that comes with a mortgage and the responsibility of maintaining your home and investment.

4:  Think ahead.  The house you need today won’t likely be exactly what you need in 3-5 years.  It’s smart to plan for the future so that you’ll outgrow your home a little slower.  If you think you might have children or need a yard for a pet, those are good things to keep in mind.  The average first-time home buyer only owns his/her first home for an average of 4-10 years.  But planning for your future today can save you money in the long run.

5:  Set priorities in advance about location, size, number of rooms, school district, etc.  If you know in advance what trade-offs you’re willing to make, you’re better able to make well thought out decisions during the home buying process and avoid the disconcerting feeling of buyer’s remorse.

6:  Secure financing and understand your budget before falling in love with a property.  Buying a home should not be a decision you make based on emotion.  It’s best not to find your dream house and fall in love with it before you understand if it’s even within your budget.  “Generally speaking, most prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income,” advises Padula.  It’s usually a good idea to fill out a home mortgage worksheet or use an online affordability calculator so you have a rough idea of what you can afford.  Then meet with a mortgage lender to fill out the necessary paperwork so you are pre-approved for a certain loan amount before you even start going to open houses.

7:  Understand all of the financial costs associated with home ownership.  Depending on your down payment, these can include paying Private Mortgage Insurance (PMI), homeowner’s insurance, property/school taxes, and home owner’s association (HOA) fees on top of your monthly mortgage payment.  It’s also smart to have an idea of the age and replacement costs of various components of your home, particularly things that are rather costly to replace such as the roof, HVAC and water heater.  If you’re likely to be replacing one of these within the first few years of ownership, that’s an additional expense you’ll need to plan for sooner rather than later.

8:  Don’t spend every dollar you qualify for.  It is usually the smartest decision to be fiscally conservative and set an upward spending limit that is less than the total mortgage for which you’ve been approved.  This can open up additional options such as buying a less expensive home and remodeling or qualifying for different lending programs with lower rates that save you money in the long term.