Cash Out Refinance
The main ingredient of the cash-out refinance is its option to provide the borrower with additional cash from an increased loan amount. This privilege comes at a price. Conforming lenders set lower limits on cash-out loans, as compared to non-cash-out refinances.
Note that if the property has no current mortgage liens on it, then any refinance would obviously be a cash-out refinance.
For conforming programs, the maximum total Loan-to-Value (LTV) ratio for cash-out refinances are usually as follows:
- Single-family, owner-occupied residential property: 80%
- Two-unit to four-unit, owner-occupied residential property: 75%
- All non-owner-occupied residential properties: 65%
Rate & term (No cash out) refinances, by comparison, regularly allow up to 90% of the property's value. Some programs actually allow LTVs of 100% and 125%.
Strictly speaking, the cash-out refinance—and its lower loan limits—applies to the following four situations:
- Cash back to the borrowers. The borrower can receive surplus cash from applicable equity in the property. However, most conforming lenders limit the cash-out amount (after all other costs and pay-offs) to only $50,000. Non-conforming lenders also often set cash-out limits; but these limits are usually higher than those for conforming.
- Debt consolidation. Conforming lenders classify any refinance that consolidates non-mortgage debts, such as credit cards and other personal loans, as cash-out refinances. Those consolidation funds are essentially cash-out of the property's established equity.
- Replace a first or second mortgage that is less than one year old. If you are refinancing a first or second mortgage loan that is less than one year old—regardless of whether the borrower is receiving cash back—conforming lenders classify the refinance as a cash-out.
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