Many people are not aware of a rule that has altered, made more expensive, or stopped people’s refinance attempts. This rule states that on a Conforming Loan (loans up to $417,000) or Conforming-Jumbo loans (loans from $417,001 to $729,750) if you are refinancing and paying off any 2nd trust (HELOC: Home Equity Line of Credit, or HELOAN: Home Equity Loan) that the transaction must be deemed a ‘cash out refinance’ as opposed to a ‘no cash out refinance’. This is important for several reasons.
The first important thing this rule changes is that if your loan is deemed a cash out refi, you are usually restricted to a lower Loan-To-Value (LTV). For example:
-you owe $300,000 on your 1st trust mortgage
-you owe $56,000 on a HELOC that was taken out subsequent to the purchase of the home.
-you want a new loan of $360,000 to refi the 1st, HELOC and closing costs for the refi into one new loan. Your home is worth $400,000
-the $360,000 loan is 90% of the $400,000 appraisal, and on a no cash-out refi a 90% LTV is acceptable (in some cases 95% LTV may be acceptable)
-however, since the rules now say that when paying off a 2nd trust the new loan must be called a “cash out refi” and since a cash out refi has a maximum LTV of 80%, this loan would be rejected, because 80% of the $400,000 appraisal is $320,000 and a new loan of $320,000 does not cover the payoff of the 1st trust and the 2nd trust.
Let’s take another more shocking example:
-a new refinance loan is desired of $600,000, to payoff a 1st trust of $540,000 and a $60,000 HELOAN taken out when the property was purchased.
-since this loan falls between $417,001 and $729,750 it is considered a “Conforming-Jumbo” loan, and the maximum LTV for this loan is 90% for a no cash out refi, and 60% for a cash out refi.
-let’s assume the home is worth $750,000
-80% of $750,000 is $600,000
-so the new loan was hoped to be an 80% LTV no cash out refi, with no PMI (Private Mortgage Insurance)
-however, the maximum new loan, since a 2nd trust is being paid off, is 60% of $800,000, or $480,000.
-and of course $480,000 does not come anywhere near being enough to do what is needed on this hypothetical loan.
A last example, and surprisingly the most “make sense” example of all the three classes of loans:
-assume someone wants to refinance a Jumbo loan (one over $729,750).
-the loan to be refinanced is $1,000,000, comprised of paying off an $800,000 1st trust and a $200,000 HELOAN that was taken out after the home was purchased.
-the home is worth $1,500,000
-on Jumbo loans, the rules are different than Conforming and Conforming-Jumbo loans, Jumbo loans state that as long as the 2nd trust being paid off is either:
1. a HELOAN taken out when the property was purchased, or…
2. a HELOC (regardless of when it was taken out) that has not had more than $2,000 drawn against it in the last 12 months…
-then the loan can be deemed a no cash out refinance, and you can use the higher LTV’s allowed.
-this policy should be (and used to be) used across the board on all loan types!
The reason that this is even an issue in the first place is that lender’s worry that when people take cash out through a 2nd trust, at some point in the history of the property, that refinancing that amount into a new loan should then still be called a cash out refi.
The problems are that the LTV’s are lower on a cash out refi, the rates are usually a bit higher, and the underwriting can be more strict on a cash out refi versus a no cash out refi.
So refinancing a 1st and 2nd trust together into one loan is not quite as simple as you’d think. Take into account the above, and as always, make sure you are dealing with a “very” seasoned mortgage lender. The rules are so complicated and change so quickly, you need an experienced professional now more than ever.