This ARTICLE On Cash-Out Refinance Mortgage Rates And Loan Level Pricing Adjustments Was PUBLISHED On March 18th, 2020
Home values have been skyrocketing throughout the U.S.
- This means many homeowners have equity in their homes
- Homeowners need equity in their homes to do a cash-out refinance mortgage
- Cash-Out Refinance Mortgage Rates are higher than rate and term refinance rates
- This is due to added layers of risk on cash-out mortgages
- Lenders will apply loan level pricing adjustments, also referred to as LLPA, on cash-out refinance mortgages
In this article, we will cover and discuss Cash-Out Refinance Mortgage Rates And Loan Level Pricing Adjustments.
Reasons Why Cash-Out Refinance Mortgage Rates Are Higher Than Rate And Term Refinances
There are many advantages of cash-out refinances.
- All proceeds from a cash-out refinance is tax-free
- The proceeds from using the equity from your home are not taxable
- However, Cash-Out Refinance Mortgage Rates are higher than rate and term refinance rates
- This is due to the lender taking on an additional layer of risk
- For example, let’s assume market rates are 3.5% for prime borrowers
- Par rate of 3.5% is offered to prime borrowers with 740 FICO, 20% or more in equity, single-family homes, lower debt to income ratios, and other positive factors where it minimizes risks for borrowers
- The mortgage rate bar will start at 3.5% by lenders
- Then loan level pricing adjustments are added for risk factors sustained by lenders
In the next paragraph, we will give our viewers examples of loan level pricing adjustments.
Cash-Out Refinance Rates And LLPA Including On Cash-Out Refinance Mortgage Rates
Many homeowners who apply for cash-out refinances wonder why they are getting charged a higher rate than the par rate.
- This is because of pricing adjustments
- Loan Level Pricing Adjustments are pricing hits charged by the lender due to layers of risks associated with the borrower and/or loan programs
- Cash-out refinances are considered higher risk loans to lenders
- This is because it reduces the equity in the home
Pricing Adjustments on cash-outs can have pricing hits of 0.50% or higher.
Cash-Out Refinance Mortgage Rates And Other Common LLPAs
Here are common loan level pricing adjustments charged by lenders:
- Cash-out refinances
- Loan to value: The higher the LTV, the higher the mortgage rates
- Property types: Single-family homes versus condos, multi-unit, manufactured homes
- Credit scores
- Debt to income ratios
- Manual versus automated underwriting
- Loan size
- State the property is located
- Appraised value
- Type of refinance programs
- Occupancy of borrower
- Number of units on multi-family properties
- Lock period terms– 15 days, 30 days, 60 days
- Lender-paid versus borrower-paid
- Escrowed versus non-escrowed
- Loan program and terms
Not all mortgage companies have the same type of pricing adjustments. One LLPA by one lender may not apply with another lender.
Pricing Adjustments By Mortgage Companies
Many mortgage companies advertise at very low rates. Be very careful when shopping for rates.
- Not all borrowers have the luxury to shop for rates and terms due to lender overlays and having lower credit profiles
- However, many high credit profile borrowers should shop for rates and terms
- One lender may quote borrowers very low rates but they may have higher closing costs
- Bait and switching borrowers from one loan program to another are very common
- For example, some mortgage companies may advertise rates as low as 2.875% when par rates are 3.5%
- However, if you read the fine print on the ad, it may have conditions to get the 2.875% rates such as it only applies for 15-year versus 30-year loans, need to pay discount points, and closing costs may be extremely high
Compare and contrast mortgage rates, closing costs, and pricing adjustments. Make sure to get all quotes on paper though a Loan Estimate. You can wheel and deal to get the best mortgage rates. However, lenders can get you a better rate with a competitor’s Loan Estimate. This is why getting Loan Estimates by various lenders is important.
Pricing Adjustments Are Different Depending On Lenders
Never respond to mass mailers.
- Many scammers and unorthodox brokers use mailers to get leads
- Always do your due diligence by checking and researching the loan officer and mortgage company
- Low rates may be important but make sure you read the fine print
- Compare mortgage rates with closing costs
- Get quotes by a few different lenders
- For homeowners with stellar credit and have no intentions of refinancing in the future may want to buy down rates with discount points
As mentioned in the earlier paragraph, make sure all quotes are in writing via the Loan Estimate.
Reasons To Take Advantage On Cash-Out Refinancing
Lenders will not monitor what you do with the proceeds from a cash-out refinance mortgage.
- Borrowers can use it for any purpose they deemed fit
- They can use the proceeds to pay down credit cards, HELOCs, automobile loans, student loans, personal loans, or other debts
- Or they can use it for investment purposes, pay for weddings, go on vacation, or buy a second home
- According to the Federal Reserve, the average assessed interest on credit cards is 17.14%
- The average consumer balance on credit card is $31,170.60 in the second quarter of 2019
- Paying down high-interest credit cards and other higher interest debts is the best idea on proceeds from cash-out refinances
- Average car payments are normally high due to short amortization schedules
Paying off a car loan will greatly reduce your monthly payments since mortgages are amortized over 30 years versus 5 years on auto loans.
Fannie Mae And Freddie Mac Cash-Out Refinance Mortgage Rates And Guidelines
Fannie Mae and Freddie Mac set the guidelines on conventional loans.
- All borrowers need to go through the Automated Underwriting System (AUS) to determine your eligibility and maximum loan to value
- Fannie Mae and Freddie Mac allow up to 80 LTV on cash-out refinancing on conventional loans on single-family homes
The AUS will evaluate borrowers’ credit, income, and other factors within a matter of seconds and render an automated underwriting system approval.
Loan Program Guidelines
Below is the maximum loan to value requirements on cash-out refinancing:
- HUD requires a maximum loan to value of up to 80% LTV
- Fannie Mae and Freddie Mac allow up to 80% LTV on cash-out refinancing on single-family homes
- VA Loans allow up to 90% LTV on cash-out refinance mortgages
- Non-QM caps Loan to Value up to 80%
- Jumbo mortgages allow up to 70% to 80% LTV depending on the loan size
What Type Of Factors Are Taken Into Consideration By The Automated Underwriting System
The AUS will take the following into consideration:
- Borrowers credit scores, credit history, and payment history
- History derogatory events in the past
- Credit tradelines, its history, and payment patterns
- Recent credit inquiries
- Debt to income ratio
- Down payment
- Public records reporting on credit report
- Employment history
- Gift versus own funds
An approve/eligible per AUS is the golden ticket. FHA and VA allow manual underwriting.
Fannie Mae Maximum LTV On Non-Single Family Homes
Fannie Mae’s Maximum Standard Eligibility Requirements are determined by the Automated Underwriting System. Here are the maximum loan to value guidelines on conventional loans:
- Single-family homes are capped at 80% LTV
- 2 to 4 unit multi-family properties limits the LTV to 75%
- Second-home cash-out guidelines cap LTV to 75%
- Investment homes are capped at 75% LTV for single-family homes and 70% LTV on 2 to 4 unit multi-family properties
Debt service coverage data can be calculated by dividing the total monthly rent by the P.I.T.I. on investment properties.
Freddie Mac Cash-Out Refinance Guidelines On LTV
Freddie Mac’s maximum LTV ratios are the same as Fannie Mae.
For primary residence:
- 1 unit maximum LTV is 80%
- Maximum LTV on 2-4 unit multi-family homes is 75% LTV
- Maximum LTV on investment homes is 75% on single-family homes
- The LTV gets reduced to 70% LTV on 2 to 4 unit multi-family homes
- Second homes caps at 75% LTV
Cash-Out Refinance Mortgage Rates And Closing Costs
It is very important for borrowers to shop for rates and review the various Loan Estimate. The Loan Estimates are overly disclosed. This is because if the loan office under discloses on the loan estimate by more than 10%, the lender is liable to cover the costs including third party fees and charges.
Below are typical closing costs on a mortgage:
- Origination charges are yield spread premiums, discount points, application fee, credit report fees, processing, and underwriting fees
Services Borrowers Cannot Shop For:
- Third-party fees such as home appraisal fees, home inspection, upfront MIP, and other third party charges need to be listed
Services Borrowers Can Shop For:
- Title charges, attorneys fees, and other fees borrowers can shop for
- Any closing costs and/or potential closing costs need to be summarized and listed on the Loan Estimate
Recording Fees And Government Costs
- Recording fees, transfer stamps, and city, county, state fees need to be disclosed
- These costs depend on the city, county, state the property is located
Property Tax And Insurance Escrow (Pre-Paid)
- Prepaid costs are the amount of property tax and homeowners insurance premium lenders impound so they pay it directly to the county and homeowners insurance provider
- Two months of property tax and homeowners insurance is held upfront by lenders to set up borrower’s escrow account
Qualifying For A Mortgage With A Direct Lender With No Overlays
For more information about this article and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at email@example.com. We are direct lenders with no lender overlays on government and conventional loans. We are also experts in non-QM and alternative financing. Our team is available 7 days a week, evenings, weekends, and holidays.