Have a Massive Mortgage? Here Are Some Tips for Refinancing

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If you're looking to refinance your home and pull out funds for home improvement, there's good news. Lending guidelines were recently loosened on cash-out refinance transactions.

Here's what you should know if your loan size exceeds $417,000.

First off, it's going to cost more. Here's why: When a mortgage loan exceeds this threshold, it moves from "conforming" to "conforming high balance" which contains a pricing adjustment for delivery to Fannie Mae or Freddie Mac. Additionally, when you elect to cash-out refinance, another pricing comes into the equation driving the terms higher than if your loan was lower and you weren't looking to cash out your equity.

How the New Refinancing Guidelines Are Changing Costs

If you attempted a cash-out refinance on your home for a high-balance mortgage in 2015, you would have been limited to a 70% loan-to-value ratio (i.e. how much you want to refinance compared to the value of the property) with higher rates. To put this in perspective, the interest rate on a 30-year fixed-rate mortgage at the end of 2015 was 4%, assuming a loan done as "rate and term" (i.e. not pulling any money out). That same loan would cost a whopping 4.625% with a cash-out refinance, all other factors being equal. You heard that right. You'd pay 0.625% more in rate just for pulling cash out versus doing a rate-and-term refinance under the same 70% loan-to-value scenario. Freddie Mac offered the option of going as high as 80% loan-to-value with even heavier fees on loans in excess of $417,000.

The new guidelines allow competitive pricing all the way to a 75% loan-to-value ratio, with a minimum credit score of at least 700. Better credit scores, of course, always yield a better rate and fee combination as well. (You can check your credit scores for free each month on Credit.com to see where you stand.) These revised changes allow for lower loan adjustments for both the 75% loan-to-value and 80% loan-to-value ratios, to the maximum conforming high balance loan limit for your county. In the county of Sonoma, Calif., for example, this means cash-outs all the way to $554,300. Other counties such as San Francisco offer cash-out loan sizes up to $625,500.

How Jumbo Loans Come Into Play

Jumbo home loans are conforming high-balance loans that are $1 over the maximum county high-balance loan limit. In most U.S. counties, the threshold is the same $417,000 noted above, but can be higher in more expensive markets. Mortgage lenders examine the financial picture of applicants looking for big mortgages far more closely than Fannie or Freddie Mac loans, and for good reason – they are riskier to the banks.

Most jumbo mortgage loans will allow a cash-out refinance as high as 70% loan to value with at least a 700 credit score or better and good credit and income history.

Some other factors to consider when researching mortgage loan programs and cash-out scenarios:
  • If you are combining a first and second mortgage into one, be on the lookout.Fannie Mae and Freddie Mac consider second mortgages taken out after you bought the home to be cash out, and subject you to stronger home equity requirements. Loans insured by the FHA do not have this limitation and will go to a 97% loan-to-value if your intention is only to combine the first and second mortgages into one. Fannie and Freddie will refinance your loan as rate and term, which will allow a higher loan-to-value ratio (less equity) if the first and second mortgage was acquisition debt, meaning both the first and second mortgage were used to purchase the home.
  • If your first and second mortgage combined exceed $417,000, you may be able to be put on a jumbo mortgage loan program allowing you to refinance your loan as a rate-and-term refinance. You are not allowed to have made any draws or advances on your second mortgage in the past 12 months.
Before you decide on what type of refinance you want to pursue, be sure to ask questions, do your research and make sure you understand the fine print associated with the new loan.
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