Cash Out Vs. Rate & Term Refis – What’s The Big Deal?
Prior to the 2008 meltdown, as much 90% of all refinances were “cash out,” meaning borrowers increased their loan amount with almost every refinance.
That percentage has since dropped to about 50%, as borrowers are more conservative nowadays and they don’t want to incur the extra cost associated with cash out refinances.
Borrowers are allowed to increase their loan amount, without incurring “cash out” charges, as long as the extra funds go towards closing costs.
Financeable closing costs can include one-time fees such as title insurance, escrow, appraisal fees, etc., and recurring costs such as property taxes, insurance, HOA dues and interest.
In California, borrowers are also allowed to get the lesser of $2,000 or 1% of the loan amount as “cash” and still avoid “cash out” charges.
In Texas, borrowers are not allowed to get any cash back unfortunately.
CASH OUT CHARGES AND LIMITATIONS
Cash out refis are limited to 80% loan-to-value ratios in most cases, and to 85% loan-to-value for FHA loans.
Rate and Term refis (where loan amounts do not increase), in contrast, are available up to 95% loan-to-value ratios for conforming loans and up to 96.5% for FHA loans.
VA is the exception to the cash out rules, as they allow for 100% loan-to-value cash out loans.
The charges for cash out loans range from as little as 3/8 of a point (1% of loan amount) for borrowers with high credit scores and low loan-to-value ratios, all the way up to over 3 points for borrowers with low credit scores (under 640) and higher loan-to-value ratios (over 75%).
These higher fees can be absorbed or offset by rate increases from 1/8% to over a full 1%. On average, cash out refinance loans probably result in rates that are about 1/4 percent higher than a rate and term refinance.
SHOULD BORROWERS STILL TAKE CASH OUT?
If borrowers have substantial home improvements, tuition debt, or consumer debt that they are unable to pay off quickly, cash out loans always make sense even if the rates are bit higher.
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