Cash Out Refinance

March 21st, 2010

Cash out refinancing, where you borrow above what you owe on your existing mortgage, is many times a better way to go than getting an equity line. Equity lines are usually adjustable rate mortgages based on Prime Rate, which is currently very low. But:

-Prime Rate can spike with a lot of volatility.
-Prime Rate equity lines are “interest only”, so you are not paying down the principal. You may as well put your new kitchen or bathroom on a credit card, and never pay it off.

So if I can, I prefer to counsel people to do a cash out refinance of their entire mortgage.

However, the problem is that loan-to-value’s have gotten stricter (i.e. lower), so a cash out refinance has gotten harder to get these days with appraisals seemingly flat to dropping (depending on the area). The current loan-to-values (LTV) are:

-Conforming Loans, which go up to $417,000, you can still go to 80% LTV, but will get a little better rate at 75% LTV and lower.

-Conforming-Jumbo loans, which go from $417,001 to $729,750 (in high cost areas) are limited to 60% LTV. This new category of loan was created by Congress to stimulate the purchase of homes, so the cashing out of homes has a very restrictive (i.e. low) LTV.

-Jumbo loans, over $729,750, are usually limited to 75%, or less.

-And on FHA loans you can borrow up to 85% LTV.

-And to compare, most equity lines cap out at 80% LTV.

Here is an example:

Your house is worth $500,000 and you owe $300,000 on the current mortgage. On a new cash out refinance mortgage you can get up to 80% LTV since this would be a Conforming loan, or up to a $400,000 new loan amount, which yields you $100,000 cash out (less after you subtract closing costs). Or, you can leave the existing $300,000 loan in tact, and you can get a $100,000 equity line.

So you can see how you really need a lot of equity before you can pull some equity out in a cash out refinance.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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