The financial homeowners' market has re-entered the realm of cash-out refinancing, a tool relatively rare and exiled since the high-profile real-estate bubble bust of the mid-2000s. A loan taken out on property owned, "cash out refinancing," can extend both the reach of the loan, and amount to a figure above and beyond the cost of the transaction, including associated costs and expenses, such as loan fees; taxes; insurance; payoff of existing liens and similar financial debts and obligations.
For instance, an existing loan with a $100,000 balance, associated with a home that has since increased in value to $200,000, potentially can be refinanced to pull out the increased equity. Cash-out refinancing allows a qualified borrower to potentially obtain a new mortgage for the current market value of the home, thus obtaining cash for the increased equity in the home. Generally, fees and other charges consume some of the extra cash. In this example, a cash-out refinancing transaction might net the borrower $50,000 thanks to fees and transaction costs.
Brokers may recommend home equity liquidation to generate cash that in turn will be used for further investment activities, whether in securities, insurance products such as annuities, or other products.
A cash-out refinance differs from standard home equity loans in several ways. In addition to the aforementioned "above and beyond" reach of the refi, such significant home-equity liquidation carries associated risks and benefits, including the oft-misadvertised lower interest rates and the (oft-unadvertised) closing costs for the cash-out refi.
Depending on the liquifying structure, closing costs can run into the thousands of dollars.
The move towards liquifying home equity invariably occurs as property values rise and skyrocket - it simply becomes appealing to refinance in such a significant way with rapid valuation increases because the profits and proceeds seem too good to be true, especially when it is so easy to reinvest the newly available funds in recommended securities. The serious risk then occurs when property valuations reach unsustainable levels and then decline, occasionally in a collapse referred to as a real estate bubble burst or financial crisis. By then, the liquified funds may be otherwise tied up, resulting in further losses upon attempting to pull them out of securities or other investments.
In the mid-to-late-2000s market bust, many homeowners were left holding renegotiated loans for higher balances due to increased property valuations, even though by late decade, such prices had fallen drastically. Worse, many of the loans were adjustable rate mortgages. As interest rates on the loans adjusted upwards, borrowers were unable to pay the monthly mortgage payments. Since the "bubble" was so wide ranging, the investments sold by the brokers failed to generate sufficient income to cover the increased mortgage payments. In the most obnoxious cases, the investments themselves failed, leaving the homeowners with no money to pay down the loan or otherwise refinance. As a result, the homeowners lost their houses.
The 2003 IMF World Economic Outlook, for instance, found that equity price busts result in four-percent losses in GDP while housing busts lead to output loses twice as significant.
Colonial Mortgage Co. President Paul Skeens stated that his firm is already seeing a return to the liquidation and cash-out refinancing maneuver as recession-era investors and real estate owners are gaining confidence in the recovering market, readying themselves to cash out on properties and investments made during the previous decade and, in turn, invest in new properties or securities.
Since 2008, we have represented numerous clients whose brokers recommended the high-risk cash-out refinance strategy and subsequent purchase of securities and/or insurance products. We routinely find that the brokers often received outsized commissions for the securities or insurance products sold to the clients. In some instances, we found that the broker received an additional commission from directing the client to a particular mortgage broker.
If you have executed a cash-out refi or a broker has recommended liquifying your home equity and such a recommendation has proven harmful to your investments or interests due to unexpected costs, valuation decreases, debts, investment failures, or foreclosure, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.
News: Cash-out refinancings back in vogue as home equity surges (LA Times)