The new trend for paying for home improvements and other major financial endeavors such as college tuition is coming from the equity built up in the owner’s home. Home equity loans are a great way to extract equity from the home to use for other services but another equity using financial loan is gaining popularity.



Cash-out refinances is becoming a cheaper way to use one’s equity, at least for the time being.

The article, “Seeking Cash, at a Lower Cost," written by Amy Hoak and published in the January 27, 2007 edition of The Washington Post explains how the popular trend of cash-out refinancing has emerged solely as a matter of dollars and sense.

“Because home-equity loans and lines of credit are most often tied to the prime rate, now at 8.25 percent, those options have gotten more expensive even as long-term mortgage rates have remained relatively low, with the 30-year loan averaging about 6.25 percent," said Amy Crews Cutts, deputy chief economist with Freddie Mac."

The recent boom in foreclosures has instilled fear in many mortgage borrowers against borrowing any loan that does not have a fixed rate. Home equity lines will adjust depending on the prime rate. And considering the last year of the market and its instability, many equity refinancers demand a secure fixed rate.

“‘It's all about the prime rate,’ said Michael Kodsi, chief executive of Choice Mortgage Bank in Boca Raton, Fla. A good number of his clients would rather take cash out through refinancing -- whereby their mortgage rate will be fixed -- than take out a loan tied to the prime rate, which has the potential to fluctuate and ‘could go higher down the road,’ he said."

Many banks are experiencing the affects of the recent cash-out refinancing trend as many mortgage companies have been advertising this service.

“‘Banks have been reporting that they have not been getting the business of home-equity lines as they had been before,’ Cutts said."

“‘What's happening [is], you're starting to see the impact of higher interest rates,’ Keith Leggett, senior economist for the bankers association said. ‘As interest rates rose, that . . . translated into basically a slowing in the rate of growth in home-equity lines and home-equity loans.’"

The majority of homeowners utilizing cash-out refinancing are indeed those who are facing resetting rates on the adjustable rate mortgages. As the prospective of a higher setting rate and therefore higher monthly mortgage payment looms, these refinancers are also taking the opportunity to use their equity to pay off other debts such as credit cards at a lower rate.

But on the other hand, not everyone has been receiving a lower interest rate by refinancing.

“‘The median borrower increased their mortgage rate by 12 percent,’ Cutts said, referring to statistics from the third quarter of 2006. The borrowers considered for that statistic originally had fixed-rate loans but refinanced either to an ARM or another fixed-rate mortgage."

With that being said, refinancing will benefit certain people in certain situations. It is the homeowner’s responsibility to determine if refinancing will increase or lower their monthly mortgage rate.

“‘I always counsel folks to look at all of their alternatives,’ Jim Svinth, chief economist for LendingTree.com said. ‘If you refinanced two years ago and you have a 4.5 percent or 4.75 percent [rate] on the first mortgage, you're not going to want to refinance in today's environment,’ he said."

Unfortunately, many people jump on the wagon and do silly things when it comes to their finances. ARMs were not the best option for everyone when they become popular a few years ago and neither is cash-out refinancing. Although both are very beneficial for people who the programs were designed for.