Cash Out Refinancing
When someone talks about cash-out refinance loans, they are referring to a home mortgage where the borrower receives cash back at closing after paying off the first mortgage, any liens, and any closing costs. The maximum loan amount of any owner-occupied cash-out refi loan cannot exceed 80% of the property value or loan-to-value (LTV). People take advantage of cash out loans for several reasons like consolidating their debt, home improvements, funding a college education, taking a vacation, or even just to have extra cash on hand.
When a homeowner refinances their existing mortgage and gets cash back at closing, the mortgage will be considered a Cash Out Refi Loan. The old rule on a cash-out refi, “once a cash-out, always a cash-out” is just that, an old rule. It was always treated as a cash out for the rest of the loan term. The title will always reflect the mortgage to be a Cash Out until such time that the mortgage is paid in full. The homeowner can refinance the loan at a future time, but the cash out rule will always apply to the subsequent mortgage loans. This rule has changed effective January 1, 2018. We’ll discuss more the changes for 2018 shortly.
Cash Out Refi Rates
Generally, mortgage rates for Cash Out Refi Loans are slightly higher compared to Rate and Term Refi Loans. For obvious reasons, the equity is being pulled out of the home in the form of cash back to the borrower. Rate and Term Refi, on the other hand, simply refinances the existing mortgage with either:
- lower rate,
- shorter term, or
- lower monthly payment.
There is the closing cost factor in Cash Out Refi loans. Another Cash Out rule was the total closing costs cannot exceed three percent (3%) of the loan amount. This is where the rule will apply to subsequent mortgages after the initial cash-out loan. When a homeowner refinances and existing cash-out refi loan, not only will the rule regarding rate and 80% loan to value (LTV) applies, the 3% Closing Costs rule will also apply. This is true for the remaining term of the loan until such time that the loan is paid off in full in the future. Again, specific changes in Cash-Out rule for 2018 applies to this provision.
There are certain requirements in order for a homeowner to qualify for cash-out refi loan. Eligibility requirements for a Cash-Out Refinance loan include:
- The borrower must have 6-month ownership of the property being financed;
- All liens on the property must be paid off upon closing;
- Borrowers are required to wait 12 months between Cash-Out Loans.
Cash Out Loan Terms
Fixed Rates are eligible for 15 – 30-year term, and so are 7 & 10 Year Adjustable Rate Mortgages. The Cash-Out Refinance Loan does not allow for 3 or 5-year Adjustable Rate Mortgages.
Cash-Out Refinance Rule Changes for 2018
The SJR60 was passed by the Texas Legislature on May 6, 2017, voted by the majority of Texas voters on November 7, 2017, and became effective on January 1, 2018. The SJR60 applies to all home equity loans made on or after January 1, 2018, and to all home equity loans refinanced on or after January 1. The major changes are as follows:
- Eliminating the provision prohibiting home equity loans on properties with an agricultural exemption other than dairy farms – Lenders may close a Section 50(a)(6) loans on properties with an agricultural exemption in place at the time of closing.
- Reducing the 3% fee cap to a 2% fee cap with certain fees excluded from the 2% fee cap – The total fees for the refinance loan cannot exceed 2% of the total loan amount but third-party fees are excluded. The following fees are exempt from the 2% fee cap:
- an appraisal performed by a third party appraiser,
- a property survey by a state registered or licensed surveyor,
- a state base premium for mortgagee policy of title insurance with endorsements established in accordance with state law, or
- if a mortgagee title policy is not issued, a title examination report if its cost is less than the state base premium for a mortgagee title policy without endorsements.
- Permitting, under certain conditions, a home equity loan to be refinanced as a non-home equity loan – The SJR60 allows the owner to refinance the home equity loan as a non-home equity refinance loan under Article XVI, subjection 50(a)(4) if:
- the refinance is not closed before the first anniversary of the date the home equity loan was closed;
- no additional funds are advanced other than the funds advanced to the homeowner from the original transaction;
- the principal amount of the refinance when added to the aggregate total of the outstanding principal balance on the loan does not exceed 80% of the homestead’s fair market value at the time of refinancing; and
- the lender provides the owner a written notice prescribed by proposed subsection (f)(2)(D) of SJR60 on a separate document within three (3) business days of application and at least twelve (12) days before the refinance is closed.
- Repealing the 50% ceiling on additional advances under Home Equity Lines of Credit or HELOCs – The SJR60 eliminates subsection 50(t)(6) that prevents additional advances on a HELOC if the principal amount outstanding on the HELOC exceeds 50% of the fair market value of the homestead on the date the HELOC was established. However, the 80% fair market value cap under subsection (a)(6)(B) is not affected by the repeal of subsection 50(t)(6).
- Updating who is authorized to make home equity loans – subsection (a)(6)(P)(i) states that subsidiaries of the banks, savings and loan associations, savings banks, and credit unions doing business under the laws of Texas or of the United States also may make home equity loans. The subsection (a)(6)(P)(vi) replaces the term “broker” with “banker” or “mortgage company”, clarifying that licensed mortgage companies and registered mortgage bankers may make home equity loans.
- Amending the 12-day Notice Disclosures prescribed for 50(a)(6) loans – the addition of a provision that states, “fees and charges to make the loan may not exceed 2 percent of the loan amount, except for a fee or charge for an appraisal performed by a third party appraiser, a property survey performed by a state registered or licensed surveyor, a state base premium for a mortgagee policy of title insurance with endorsements, or a title examination report. Basically, the 3% fee cap changing to a 2% fee cap with exceptions.
For additional information, contact our Home Loan Specialist at (866) 772-3802