KENNETH R. HARNEY (MUG ON FILE)
For thousands of American homeowners, the question of the week is not whether to refinance their mortgage, but whether to pull extra cash out when they do refinance.
Put another way: Mortgage-rate decreases since the summer have rendered the refi question a no-brainer for lots of people. If you can cut your fixed mortgage rate from the mid- or upper-7 percent range to the mid-6's at a cost you can recoup in 12 to 18 months, then the answer is almost always yes to a refi.
But what happens to the equation when you like many other homeowners are tempted to take out extra money, beyond your current total mortgage debt, to use for some non-housing purpose?
Say you have a $200,000 home with an existing $140,000 first mortgage at 8 percent. You know you can save a bundle by refinancing into a new 30-year $140,000 mortgage at 6.75 percent.
But what if you want to pull more cash out of the transaction say another $20,000 to $30,000 to help pay for the kids' tuition, or to invest, or to buy a new car? Are you going to have to pay more? The answer is not so simple.
The automated underwriting systems widely in use and connected to mortgage-industry giants Fannie Mae and Freddie Mac will evaluate, and price, you differently when you want to pull extra cash out. Ditto for most large mortgage companies that sell their loans into pools that become bonds on Wall Street.
But some lenders won't charge you extra, or hold it against you, if you want some more cash in your pocket. Here's a quick overview of what to expect in the little-charted financial territory known as "cash-out refi's."
Both Fannie Mae and Freddie Mac are happy to buy mortgages involving cash-out refinances. But executives at both companies say that cashing out increases your statistical probability of default down the road. As a result, you may have to pay a bit more on the rate from the lender who sells your loan to either Fannie or Freddie.
For both companies, a key factor is your "loan-to-value" ratio, or LTV. Once you push your LTV over 75 percent through a cash-out, you likely will be asked to pay a premium on your rate. How much of a premium depends on contractual arrangements with individual lenders and on your overall risk profile, according to both companies. But mortgage-industry sources say one-quarter of 1 percent extra on the rate would be a typical surcharge.
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