Keys for Getting the Best Cash-Out Refinance Loan for You

 

Any mortgage loan refinance that turns any of the property’s equity into cash or funds is considered a “cash-out” refinance mortgage loan. And even in today’s climate, many homeowners and property investors have various options when it comes to finding a cash-out refinance loan.

The advantage of cash-out refinance loans is that there are generally no strings attached to the funds. The borrower can use the cash-out refinance funds to improve the property, to make investments, to build up savings or to pay off and consolidate debts.

In fact, many borrowers on cash-out refinance mortgage loans joke that they don’t really get much cash out, because almost all of the surplus cash from the refinance goes to pay off debts. Regardless of what you intend to do with the money, if your property has substantial equity, then you have an opportunity to turn that equity into cash.

This article will review the details and requirements of the cash-out refinance, as well as share tips and strategies for finding the best and most affordable cash-out refinance loan on the market.

Cash-Out Refinance Limits

The loan-to-value (LTV) limits on cash-out refinance loans are much lower than non-cash-out refinance loans. Translation: lenders lend a bit less on cash-out refinance loans, as opposed to standard refinances that do not give anything back to the borrower.

The stated reason for the lower LTV limits on cash-out refinance loans is that lenders tend to view them as more risky. Even though they may put the borrower on better footing (especially when they’re paying off bills), cash-out refinance loans are seen as more risky because they lower the property’s equity cushion.

Recently, most private mortgage insurance (PMI) companies have stopped providing mortgage insurance coverage on first mortgage cash-out refinance loans over 80%. So even if mortgage lenders were willing to provide higher LTV limits on their cash-out loans, they would be unable to get the necessary mortgage insurance coverage.

Just to clarify, the LTV limit is the percentage of the property’s appraised value that the mortgage loan provider will lend.

For example, a refinance loan with a 90% LTV limit means that the loan amount will be limited to 90% of the appraised value. So, if a property appraised for $200,000, a 90% LTV loan would be $180,000 ($200,000 x 90%).

The main reason lenders set lower limits on cash-out refinance loans is because of Fannie Mae’s and Freddie Mac’s very own guidelines, which call for lower LTV limits on the cash-out refinance loans they guarantee. The reason Fannie and Freddie does this is because their primary goal is to help consumers buy homes — not to turn their equity into cash.

Consequently, these are the conforming (Fannie Mae and Freddie Mac) loan-to-value limits for cash-out refinances, for borrowers with acceptable credits.

 

Usage	Property Type	LTV
Owner-Occupied	Single-Family Home	85%
Owner-Occupied	Condominium Unit	85%
Owner-Occupied	2- to 4-Unit	75%
Second Home	Single-Family Home	75%
Second Home	Condominium Unit	75%
Investment	Single-Family Home	75%
Investment	Condominium Unit	75%
Investment	2- to 4-Unit	70%

FHA loans also allow for cash-out refinance LTV limits of up to 85% (down from 95% LTV until 2009).

Cash-Out Refinance Options

For many homeowners and property investors, a standard cash-out refinance loan may not be the right vehicle. This is the case for borrowers with the following situations:

• Not enough equity to satisfy the above conforming loan LTV limits
• Have a very good first mortgage loan they’d prefer not to replace
• Have had their current mortgage for several years
• Don’t qualify for conforming or FHA cash-out refinance loans

Instead of a standard first mortgage refinance loan, you may want to consider a home equity loan or a home equity line of credit (HELOC) instead. These second mortgage loans keep your current first mortgage in place, but lets you tap into your equity for cash.

HELOCs are especially advantageous because they give you a credit line, instead of a lump sum loan amount. You can borrow and pay back whatever balance you maintain on that credit line, which is secured by the second mortgage lien against your home. The big benefit of the HELOC is that you only pay interest on the balance you maintain. If you never use your credit line, you can rest assured that you always have those funds available if you need it — but won’t have to pay any interest until you do use it.

In the event of a foreclosure or sale, the second mortgage loan is paid only after the first mortgage loan has been completely satisfied. That means that the lender on the 2nd mortgage loan has a higher risk exposure, which is why home equity loans and HELOCs do have higher interest rates. Nevertheless, they’re still a worthwhile financing option to consider if a standard first mortgage cash-out refinance loan doesn’t make sense or is unavailable for you.

Note that if you don’t need much cash, a standard refinance loan may suffice. In fact, most standard “rate and term” (no-cash-out) refinance loans allow for cash back to the borrower up to $2,000. And because they’re technically not a cash-out loan, you can get a higher LTV limit.

Cash-Out Refinance Process

The procedures for a cash-out refinance loan follows the basic refinance loan process, with a few notable exceptions:

• Long-term debts. If the loan will be paying off any long-term debts, including large credit card balances, the payments for those debts will not be included in the debt-to-income calculation that the lender uses to qualify your income. In other words, it will be easier to qualify your income for the new loan, because your long-term debts may be excluded from consideration.
• Debt payoff statements. If the loan will be paying off debts, the lender may require the closing or escrow agent to ensure that those debts are paid off directly. So after the refinance loan closing (and three-day right of rescission waiting period), the closing agent will use the refinance loan funds to pay off existing mortgages and your personal debts indicated by the lender.