Cash-out refinance:
“Cash-out refinance” is one of the options that’s existing in the refinance categories. To understand it easily, please remember one sentence that might help you to remember the whole concept: “Transfer your house’s equity into your hand as cash”. Which means you can spend this money for any kind of purposes(Any purpose including the use of this money may contribute to the other houses as downpay when making housing decisions). Normally, Borrower are allowed to refinance up to 80% of an existing home’s value, but some loan plans might have different numbers and requirements from it. The amount of the new mortgage would cover the amount of the existing loan, the difference between two loans would transfer to cash and put into the borrower’s hand, it is the process of satisfaction of the existing loan, and then making a new obligation toward the loan.
In most of the cases, refinancing should always provide additional benefits toward borrowers, including better rate and term, or cash out money into borrowers hand... lender would make refinancing decision base on the borrower’s LTV, and credit report, as the standard, to determine how much money that they’re willing to loan to an borrower.
When to use “rate and term refinance”?
One of the great examples is that before the beginning of housing recovery stages in 2008, most of the people were getting a comparatively higher interest rate at that time, but in the following year, 2009 and 2010, has been through huge changes which lower the interest rate almost 1% per year,(2007: 6.34, 2008: 6.03, 2009: 5.04, 2010: 4.69). That’s the reason why people are starting to apply for a new mortgage(refinance), because if they do so since 2009, they could lower their monthly payment and interest spending. The greater amount of cash out was also acceptable because the risks are lower at that time.
How to calculate the house’s equity?
For example, a house was selling for 1 million, and the original mortgage amount was 0.8 million, at this time, the home’s equity is 1 million minus 0.8 million equal to 0.2 million. ($1000000-$800000=$200000)
What’s the benefits of rate and term refinance?
Lower borrower’s interest rate: is the current interest rate lower than what you got before? If the question is yes, then the borrower might have a higher chance to get more benefits from refinance. It also means that the borrower might get higher percentages to qualify for a loan, since the lower interest rate always = lower risk.
Decrease borrower’s interest payment toward monthly payment: lower the interest rate also means that the borrower could lower the interest payment toward the total payment, or we can say that the bigger portion of borrower’s payment would go to the principal, and that’s the key point that the borrower would receive benefits.
Shorten the term length: Borrowers can make their term shorter if they want. For example, a borrower might change their 30 years fixed to the 15 years fixed, it means that the people can make a bigger portion of their payment into the principle, and people would pay less interest throughout the whole plan, and that’s how the borrower receives benefits from it.
Change loan type: people could change from ARM 5/1 to 15 years fixed, or change to FHA from conventional loan.
Requirements of rate and term refinance: Credit report: Generally, people needed 620 to get approval from most of the conforming loans, while FHA and jumbo loans might have lower requirements. When people have been through such a situation, VA streamline refinance and FHA streamline refinance might be their preferred option.
DTI: lender might consider to approve borrower’s application when the debt to income ratio is at most 50%. (DTI range for most of the loan would be 30-40).
Documentation: Generally, rate and term refinance, cash-out refinance, and purchase mortgage were required at almost the same level of documentation, including 3 months pay stubs, W2 or 1099 for the past 2 years, Insurance, statement of assets and liabilities(especially when applied as business).
The main differences between “rate and term refinance” and “cash-out”: The biggest difference is always about 1.having cash that goes back to borrowers hand, or, only changes the term and rate of the plan without getting any money to the borrower’s hand, and it is always the main difference when people are concern.
What situation would disqualify an application:
When the applicant has a high debt to income ratio, (normally, higher than 50%), the application would easily be denied by the lender, since the borrower’s situation is considered to be high risk that the lender might not tolerate.
Would lenders deny an application after closing? The short answer is, Yes. The situation could be when lenders find out the existence of the mortgage fraud, such as documentation fraud that was created by the industry insider or borrower, it would not just bring the high risk to the lender, but also bring the potential risk that causes the lender to lose part or all of the money that they lend out.
What kind of services that are necessary to the refinancess process but do not exist in the purchase mortgage: Two things would be talking about in this topic. The first one would be right of rescind. This can be strict. When people apply for refinance, they would always need to provide 3 business days of recind to the borrower, without any exception. During these 3 days, the borrower could choose to move out from the refinance anytime. It is their right and power that the first time buyer doesn’t own.
Do I have to refinance with the same bank that I got the purchase mortgage from?
The short answer is no. The new mortgage would satisfy the existence of the old mortgage and create new space for the new mortgage without any losses on the borrower’s old and new lenders' benefits. But one advantage is needed to mention is that if a borrower chooses to refinance with the same bank, it may save some of the turn time from the loan servicer, because some of the borrower’s documentation has been verified before.
How long does the refinance process take?
No one could provide an exact number in this situation, but normally, It could be around 30-45 days. Apparicial, inspection, insurance or any kinds of services might delay the process and make the loan funded later.
Do we need to get the appracial from the same lender?
For most of the loan programs, the answer is not necessary. But for the situation of VA to VA streamline refinance, FHA to FHA streamline refinance, or USDA to USDA streamline refinance, the borrower doesn’t even need an appraisal when applying for the refinance.
How long does an appraisal take from the apprecier to determine the value of a home?
Normally, it would take the appricer about 25 mins to 2 hours to complete the whole process. It depends on the size of the house, the size of the front yard and the backyard, and the complexity of the house might lead the time longer.
What is the “rule of thumb” principle for refinance a mortgage? By law and the ethics, the loan originator is not allowed to refinance the house for the borrower when it never brings advantages and benefits to the borrower’s situation. But how good is considered advantages and how bad is considered the other way? The answers in lower APR/interest rate by 1% would be considered a good refinance plan that is bringing a great amount of advantages and benefits to the borrower.
What are the main differences between refinance and HELOC? Refinance is always related with the existing loan, for most of the time, it would be only related with the only one existing mortgage. But HELOC is something that outside of the existing mortgage, for most of the circumstances, HELOC could be considered as the second line of mortgage that doesn’t have any relation with the existing one. So, when calculating the HELOC, the formula would always be some numbers that don't involve the existing mortgage.
Key points:
Refinance could also help an individual to pay off the mortgage earlier. For example, changing the mortgage plan from 30 years to 15 years is a reasonable example, but something needs to make sure at the same time which is that bringing the benefits to the customer is the essential of the whole process.
Every loan applicant could have the right to apply for multiple mortgages, and trigger multiple LE(loan estimate) at the same time. They also have the right, and can only have the right to choose one of them at this time. It could be considered unethical if a borrower works with an MLO throughout the whole process and decides to opt out at the end, but it is alway LEGAL.