Re-Fi Rates With Cash Out

These are usually considered risky loans. A refi-with an equity take-out is a red-flag to anyone looking to buy the loan. Many of the loans that went bad from the bubble years were of this type.

Qu: By 'cash-out', do you mean that the loan is equal to or greater than the purchase price? If so, I've heard it referred to as 'mortgaging out'. Just curious as to the meaning of the phrase.
Thanks.

No, it means you refinance an existing loan , and in the process borrow additional funds.

dwell: "Cash-out" just means that the total amount of debt increases in conjunction with the refinancing of the original loan.. The loan-to-value ratio can still be fairly low. It can also be very high, as in the case of the risky cash-outs to which Riversider alluded.

"Cash-out" refis are distinguished in the the secondary market from simple "rate/term" refis that modify other loan attributes without significantly increasing the balance.

Think of the "cash out" portion. new funds borrrowed as a home equity loan but with equal claim(same lien status) as the rate/term refinanced portion. The full additional borrowings may not be tax deductible(believe they are capped at 100/125k).

Thanks guys. I mostly deal with commercial RE. Based on River's description, it sounds like a consolidation of the first lien and the 'home equity loan' (which is really a 2nd mtg) into a new loan, the principle of which may be larger than the 2 loans combined.

Agree W81st: I think the most important issue is how much equity the owner has left after 'cashing out'. As River said, if there's no equity left after cash out, it's a red flag.

No, dwell, there was never a second lien.

basically think of having an existing 300k loan @ 4% on a house that has appreciated to 500k, you then go to the bank and get a new loan for 400k @ 4.25%(could be lower too). Because you borrowed more money, it's no longer considered a simple refinance, but a refi-equity take out, which indicates that you took out more equity during the refinance. This is important because such loans have a higher incidence of defaulting than pure refis.. And it makes sense because the people doing these loans usually are cash strapped and looking to take money out of their house to meet bills.

Sunny Hong, who posts good advice on these boards regarding mortgages, might be good to work with on this.
sunny.hong@bankofamerica.com

Note that I have no experience with him -- business or personal. I've only read his replies on here to other posters' questions.

Thanks, River. OK, I've done this, but didn't know it was called "cashing out". Guess it comes down to not over leveraging the equity & treating the property as an ATM.

Hi - seems like a lot of post trying to define cash out.
Now that it is well defined, can anyone answer the original question?
FYI - after refi cash out, property will still have 1.4 million of equity.

You may be better off selling and renting.

JohnJents: Looks like the new loan will be at/near the "high-balance conforming" limit of $729,750 on a property that's worth about $2.1MM. In that case, the rate loooks about right. On a conforming loan, an LTV of 35% isn't really any better, from the bank's point of view, than 70%. Either way, the loan is going straight to Fannie/Freddie.

West 81 - the total amount is over the 729K (790K) therefore they tell me it is called a jumbo mortgage.
Do you think I can do better than 4.75%?

John,
A mtg in excess of $729,750 is a Jumbo Mtg & the rates for that are higher. So, it seems you're real question is 'what is the best/lowest rate for a jumbo loan'? Maybe re-post with that specific question.

fyi: http://en.wikipedia.org/wiki/Jumbo_mortgage

That's correct - actually it is a jumbo mortgage that includes a cash out - not sure if there is an upcharge in the interest rate since there is a cash out. I will repost later today with more clarity.

John,
IMO, I think the 'cash-out' issue is secondary. Your primary issue is finding the lowest rate & best terms for a jumbo refi. What will primarily determine the terms & conditions of this loan are appraised value, loan to value ratio, your credit score & your debt load.

May I suggest you speak to your accountant before doing this loan?

May I suggest you do some actual comparison shopping before doing this loan?

I refi-ed at 70% LTV (no cash out, but I don't think it's relevant) jumbo, 4.125%, 7/1. Chase.

I should add, they wanted at least 70%LTV, but the actual numbers worked out closer to 65%LTV. As far as I know, LTV doesn't matter as long as it's 70%. What does matter is how big the mtge is (different depending on diff. lenders). I saw difference scenarios where the breakpoints were 1m, 3m, 5m, etc.

May I further suggest you have your attorney review the mortgage agreement before you sign it? Advise the bank upfront in writing that your attorney must review all documents once you have signed the commitment. You don't want your lawyer first reviewing documents at the closing because by then, it's too late to re-negotiate & draft new documents. Also, if you decide to refi, make sure that it's a consolidation so that you save mtg tax.

John,
Can I be nosy? May I ask what you're using the new cash for? Why are you re-financing?

If you are getting 4.75% for say, 2m, 30 year fixed, no points, I think that's pretty good.

"What does matter is how big the mtge is (different depending on diff. lenders). I saw difference scenarios where the breakpoints were 1m, 3m, 5m, etc."

Yes, this is how banks look at it.

Since the loan is conforming it will be sold or underwritten as if it were to be sold to Fannie or Freddie. Both will charge points for no other reason than it's an equity take out, which the broker will price out and convert to a higher rate. I assume that since you need to convert equity to cash your credit or more correctly capacity is not the highest, which probably speaks to the 35% LTV they threw at your. As the LTV goes up and FICO goes down the rates will keep rising.

River,
Qu: if the value increased & therefore the equity increased, is it still considered an equity take out?
Ex: purchase price was $100 & purchase mtg was $30. Time passes & now appraised value is $250 & owner wants to refi for $60. Is this an 'equity take out', which would trigger a higher rate?
Thanks

I just closed on a similar loan, it is about a 15% loan to value ratio, jumbo, condo and average credit. I got a 4.75 rate with no points.

Dwell,
When the new mortgage increases your debt level, then it's a refinance with an equity take-out(hybrid).
The categories are
Purchase
Rate/Term Refi
Refi/Equity take-out
Equity take-out.

The last is like a home equity loan (in purpose), except this is a first lien.

And your example is very typical of many of the refis that occured prior to 2007. People kept refinancing and tapping into the increased value of their home and borrowed more, repeating the process several times.
This is why so many borrowers are facing foreclosure. There just weren't that many homes sold in 2005,2006,2007, but when you add the equity take-out refis you then see the problem.

Another example is the 80/20 buyer, who took a 80% purchase mortgage(i.e. 6% 30 year) and a piggy-back second. The 20% second lien was typically a fixed rate mortgage for 10-15 years(at say 9-10% interest). When the home appreciated in value(say ~25% the borrower refinanced both into a single 30 year 6% 80% LTV loan(assuming rates stayed flat)

Ooops. Forgot to say it's a 15 year fixed.

The 3 c's of underwriting(credit, capacity, collateral), some include a 4th(character) but that really can't be quantified. Anyone looking to do an equity take-out is suspect on capacity, so the loan is underwritten more on the collateral side, which speaks to the significant LTV haircut. The lender definitely factors in the foreclose option and wants to make sure they are protected agains loss.

Thanks, River. I've never heard the term 'equity takeout', but, yes, that's what it is. I just thought of it as a plain ole refi.
Ya, that 80/20 dreck, oh, & how 'bout a 5 yr ATM, interest only? Yup, lots of gimicky, amateur, sucker stuff.

sounds like a good loan, rvargas.

Cash-out Refi may also be used.. Means the same thing.

should be 5 yr ARM

The entire cash-out portion could still be tax-deductible if it is used for home improvement (up to $1mm). Otherwise, only the initial 100K of the new proceeds would still be deductible, along with the original balance.

Also, you will have to pay mortgage tax on the cash-out portion of the loan. You can do a CEMA and avoid the mortgage tax on the original loan amount.

As for rates, 4.75% is a good rate for a jumbo 30yr fixed. The question is do you really need 30 years of rate protection, especially with jumbo 7yr Arms at 3.75% or a 10yr Arm at 4.375%?

And they're called cash-out refinances, not equity takeouts.

Maybe that's how you brokers talk about it. But when the loans get sold and packages trade they are referred to as equity take-outs. I could understand why so many prefer the teri cash-out refinance since it communicates what the buyer wants to do .."get cash" and not what he does not want to do , "reduce his equity"..... I agree they are one and the same..

And they're called cash-out refinances, not equity takeouts.
Is that how you convince clients you know stuff: Use of a particular jargon or vernacular?

Sunny Hong can hook u up. BofA, now therez a real bank...

NY Morgtage sounds like the only person on this string that knows what he is talking about.
I talked to a few mortgage brokers and most banks do not do cash-out re-fi 30 year fixed loans regardless of the LTV.
NY Mortgage - can you explain how a CEMA works and also can you get a 7/1 or 10/1 Arm with a cash out or are you proposing the re-fi on the outstanding mortgage only ant the CEMA for the cash out?
Also - correct me if I am wrong, but the lower the LTV the better?

JJ: There definitely are some banks still doing Jumbo 30yr Fixed, cash-out refis up to 65-70 LTV. You'll just find a lot more options, and far better pricing, on the Jumbo Arms.

Assuming everything is ok (credit, income, etc...) based on your LTV and loan amount you could certainly get either Arm with typically as much cash-out as you wish up to the 65-70 LTV threshold. You would take out one new loan and the CEMA would apply on the existing loan amount and mortgage tax would be paid on the cash-out portion of the loan.

WTF would put you into an ARM in this environment. WHAT kinda a fking bullshit short sighted "advice" is that? TAKE AS MUCH $ on fixed terms..... you'll thank me later.

A CEMA (also referred to as an Assignment) is a way of refinancing your loan and avoiding having to pay the mortgage recording tax (1.925% of the loan amount in the 5 boroughs) again. Your original lender will "assign" your existing note to your new lender meaning you only would have to pay mortgage tax on the new funds (cash-out) because no mortgage tax would have previously been paid on this amount. Essentially, a new note is created for the new cash-out proceeds and all of the notes are consolidated into one loan. It may sound complicated but it's not, and it's entirely seamless to you.

The whole process takes anywhere from 2-4 weeks and costs anywhere from $700-1,200 depending the banks involved. It's an easy process and, aside from signing a few forms, you don't really have to do much.

But there are a few banks that won't assign out your mortgage so if you do a loan with them, you're basically stuck with them on future refis. And trust me, they will not volunteer this information upfront.

W67th: Most people living in NYC don't need 30 years of rate protection. That is an excessive and costly insurance policy. Everyone's situation is unique, but 7 or 10 years of rate protection is usually plenty for most people. Unless you are reasonably certain you plan on being in your property (or keeping your mortgage) for 13+ years or more, why would you need to over-pay for the 30yr Fixed over a 10yr Arm?

The spread between Arms and Fixed on Jumbo loans is pretty wide right now. On an $800K loan, you could save $8k a year in interest for 7 years or $4K in interest for the next 10 years vs. a 30yr Fixed.

However for conforming loans (below $730K) it's a different story. Since the difference in rates between Arms and Fixed is so small, the 30yr becomes really attractive for most borrowers because the cost of the extra rate protection is so small.

first off, if you consider it a home and you can provide for a family, I'd like to know my kids won't have to move if i drop dead. So Id' like everyone to think of their "home" as a home, and put zero leverage on it => that'd mean you'd be out of a job NYmortgage dude. That is the over-arching philosophy from which i am viewing this imploding nyc re bubble.

2nd off, the bigger the mortgage, the greater the bk risk => the less IR risk insurance you need? So $900K mortgage, you think MOST nycers can pay that off in 7-10 yrs, so an after tax savings rate of $100K, now mind you, thats' after fed/state/city/nanny/2 private schools/car/ vaca/ $100K max on 401K and 10 iphones in a yr (thnk you steve jobs).... and YOU THINK 99% of nycers are able to sock away $100K? FLMAOz.... for the last 15yrs, it HAS BEEN proven that NYCERs, took $100K out EVERY YEAR to live the above LIFESTYLE.

FLMAOzzzzzzzz.... NYmortgage dude, you remind me of my fellow MBAers who went to Perrins to work on executive compensation. They'd create the comps for executive pay, they tell new clients, use our comps plus 5%, a year later all comps are higher by 5%, then they'd start all over again.

YES! lets' go 30% down, then 20% down, then 10% down, then 30 yr fx, 20yr fx, 10yr fx, op arm, neg op arm, neg op arm w/ full moon equity out, divorce opt arm w/ neg curve inverse bubble eq out..... HOLY mtherFKER, HOW'd we get a $20MM 500 sq ft studio in LIC?

W 67th Steet - First, it is very hard to make heads or tails out of what you are saying. Second, if you drop dead, your wife will be banging another guy in 6 months, probably a divorcee with kids. So don't fool yourself - she would most likely sell your place and move in with him, therfore you 30 year mortgage will be paid off. Are you in the morgage business? I tend to agree with NY morgtage - he sounds like he is in the morgage business and is closer to reality than you.

Someone in the cyanide business told me cyanide is better for you than papayas.

NY Mortgage - what are the 7/1 and 10/1 ARM rates right now compared to the 30 year fixed? Whichever loan I go with I would like to take some cash out. Let me know your thoughts.

Johnjents, oooooohhhhh. That's so hot, my wife with another guy. Be back in ten minutes.

Obtw. Johnjents. My wife and I structured our estate so that the bulk of the money goes to a trust. The 'home' goes into a living trust with surviving spouse living in apt till death, then splitting into 2 kids. If either of us remarries, my 2kids are protected regardless of what kinda gal/guy she shacks up with.

W 67th - I have a similar set up - btw - is your house titled in both of your names?

John,
Have you spoken to your accountant? Does he approve this refi? If the value of the property has increased & you want to pull some cash out & your accountant approves, then go for it, but shop around for a good rate & no points. Whether you do 30 yr fixed, 15 yr fixed, 10 yr arm or 7 yr arm depends on your cash flow. But please do not do an interest only.

Dwell - spoke to my accountant and he approves. Trying to find the best rate with no points. As NYMortgage said - most likely will not be in the property for 30 years so maybe a 7 or 10 year arm would be best.

What's odd about all this is the language we still use. E.g., "cash out" rather than "borrowing" or "adding to debt." What the collateral is doesn't matter, right?

> The 3 c's of underwriting(credit, capacity, collateral), some include a 4th(character) but that really can't be quantified.

it's actually like this: the 3 Cs to consider when giving credit: character, capacity and collateral. FICO is a proxy for character, but other things are too, like being a convicted criminal. during the bubble collateral was over-represented (home prices always going up, so no defaults are the homeower can always sell or refi out of trouble)... hence the lack of importance of character and capacity during the underwriting process. now they are beginning to be taken into account again.

> E.g., "cash out" rather than "borrowing" or "adding to debt."

totally, still bubble-speak. it should be called "over-leveraging" Refi or "never free & clear" Refi instead of cash-out Refi.

The cash-out gives the impression that finally the homeower is milking it, and the house is making good on the promise of being a good investment.

No, FICO IS A PROXY FOR CREDIT(NOT CHARACTER). BUT DURING THE CREDIT CRISIS WAS MISCONTRUED AS CAPACITY.
CHARACTER IS HAVING YOUR MOM WRITE YOU A NOTE SAYING YOU ARE A NICE GUY.

AND CREDIT IS NOT AS IMPORTANT AS IMPORTANT AS CAPACITY AND COLLATERAL.

typing in caps means that you are angry. are you?

Capacity, collateral, and character represent the three C's of credit for generations now. Riversider, no matter how many caps you use, you cannot force your imprint into it.

Let's call your circular version the "Riversider 3 Cs of Credit that include Credit", ok?

67: I don't quite understand the point you're trying to make. Regardless, I'm stating that 7-13 years is indeed enough time because by that point most in NYC will have either sold/moved, refinanced, or paid off their loan. Obviously there will be plenty of exceptions but a 30yr Fixed is hardly the most suitable loan for most people.

And I would argue that the bigger the loan, the less the BK risk. Underwriting guidelines get tougher as loan amounts increase so in order to be approved for a larger loan you need to be a much stronger borrower with more income, more equity in your home, more liquid assets, etc...

NWT: There are two types of refinances: Rate and Term (where you simply swap rates) and a cash-out (where you borrow more than your existing loan). The collateral actually matters a lot, especially in NYC because the building has to meet all of the bank's guidelines as well. If you live in a co-op they actually have the final say on your refi application.

i understand Riversider that finance/econ is not your thing, but maybe you are better at math, so here it goes another explanation of where you are mistaken. think for the 3Cs as variables that determine supply of credit. credit is the result of the function called underwriting:

Underwriting (character, capacity, collateral) = credit.

you are confusing an independent variable with the result of the function, hence making it circular. GET IT?

> CHARACTER IS HAVING YOUR MOM WRITE YOU A NOTE SAYING YOU ARE A NICE GUY.

wow, nononono Riversider, you are very confused.

character is not trying to get away with something you shouldn't do just cause you can. Riversider, this is not the way you like it to be, it's the way it is. guess that's the problem with aficionados. they think everything is easy and interesting, so they think they know it all by just following a couple of blogs, to the point of using CAPS when lecturing a couple of sentences that contain mistake after mistake. why oh why?

> And I would argue that the bigger the loan, the less the BK risk. Underwriting guidelines get tougher as loan amounts increase so in order to be approved for a larger loan you need to be a much stronger borrower with more income, more equity in your home, more liquid assets, etc...

during the bubble, weren't banks more lax with Refis also when it comes to big loans? ok, maybe strict co-ops didn't allow for that, but what about condos?

Jj. Both our names.

Mortgage dude. Inonada did a great analysis of what the incremental cost of going from conforming to jumbo is. It's like huge for that extra $50k ( which bumps you into jumbo). Now if the buyer is so so sophisticated, and wants to borrow right past $1mm, and into $2mm and has the sophistication and wherewithal to feel comfortable that having said liquidity is 'profitable' for him/her, then it begs the questiOn why not 3yr arm? Heck why not 1yr reset? So unless buyer has an 'investment' with a 7 yr lockup and it matches the duration of his mortgage, well I guess I'm old fashioned. Just pay the fk off on a 'home'. Same as don't go to Vegas with your grocery money.

Notadmin: Underwriting guidelines were certainly more lax than they are now for all loans. But even from '03-'08, the requirements were still more stringent for jumbo loans than conventional loans. Even during the bubble days you still had to put down at least 10% and have good credit, assets, etc...You just don't

Since co-ops represent somewhere around 70-75% of the available housing inventory here there was very little chance of a sub-prime borrower getting by the board. That means only 25-30% of the available properties in Manhattan could even be eligible for the riskiest class of loans (0% down, sub-prime). Since the majority of those loans would have been jumbo (the jumbo threshold was $417K at the time) very few NYC borrowers could've even taken out sub-prime loans even if they wanted to.

The foreclosures in the city are still very low because the riskiest loans never really made their way here in large numbers.

> Since co-ops represent somewhere around 70-75% of the available housing inventory here there was very little chance of a sub-prime borrower getting by the board.

that's not what Jonathan Miller says. he thinks htat's the thinking of co-ops as monolithic conservative entities doesn't hold in reality. there might be good co-coops in park avenue, but he claims that a ton of them behaved bubbled-like. so instead of 70-75% reasonable behavior, if Miller is right one should think about 30% at the most?

hey, kind of off-topic. but this article regarding math skills (and hte lack of it in USA) reminded me of Riversider and his inability to realize he's into a circular thought and confuses independent from dependent variable (isn't that middle school/high school basic math?)... anyway, the chinese are kicking ass badly:

http://www.nytimes.com/2010/12/07/education/07education.html

> Since the majority of those loans would have been jumbo (the jumbo threshold was $417K at the time) very few NYC borrowers could've even taken out sub-prime loans even if they wanted to.

agree on that one. not sub-prime, but maybe Alt-A and ARMs with crappy underwriting nonetheless. also there's been tons of HELOCed properties in fringe areas like Harlem, purchases made taking into account common costs temporarily reduced by tax abatements... smells like teen spirit