Mortgage lenders sometimes take an overly gun shy approach to how a mortgage loan is originated. One such example of this is if you have a first and a second mortgage on your home. Let us say your goal is to refinance and to not get any money out but just combine the first and the second mortgage into one new loan. You are not receiving any cash, just looking to consolidate your payments so you can have one easy payment that blankly covers both mortgages. It make sense right? Well not so fast…
Here’s why they cost more, because they are giving you cash in exchange for more debt, so lenders look at those loans as a little bit risky. Additionally, cash-out refinances require you to have a maximum loan-to-value for a primary house at no more than 80 percent loan to value, that’s for both an FHA mortgage and mortgages.
As a result, your first and second mortgage is pushing your loan-to-value up to say 85 percent. So now you have a cash-out refinance and here is why. If you have a second mortgage on your house that is not purchased money, non-acquisition indebtedness and you are desiring to pay that off on a conventional mortgage, Fannie Mae and Freddie Mac consider that loan to be a cash-out refinance. They charge you for a cash-out refinance accordingly even though you’re specifically not receiving any monies cash out at hand.
Here are your options. You pay the piper and you just get the cash out terms which are going to require a full appraisal report or depending on your situation and with the appropriate loan-to-value you can get a little bit more creative. Here is one such example to support having your cake and eating it too. Shift courses and look at going into an FHA mortgage instead. An FHA mortgage will allow you to pay off a first and a second mortgage as long as you have no draws on that second mortgage in the last 12 months and they will let you do it all the way up to 97 percent loan to value on a primary home. The value and beauty of a FHA is you can refinance into one mortgage as a rate and term refinance. The rates on FHA are extremely favorable. The downside to an FHA mortgage is you have to have monthly PMI, which you might feel is unwarranted, but the cost of having a second mortgage is paying PMI potentially for short-term.
After six months goes by you can refinance your FHA mortgage into a conventional mortgage as a rate and term refinance which is the golden nugget of financing. In other words, by going into an FHA mortgage in order to do a rate and term refinance, you are creating a foundation for yourself to make yourself lendable in the future to get the holy Mecca of financing, which is a conventional loan without PMI. Something to think about if you are dealing with a high loan-to-value refinancing your house and are experiencing some financial adversity.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.