Notes From The Mortgage Insider

There are pricing adjustments to consider when the purpose of a refinance mortgage loan is to take cash out. Adjustments for cash-out loans were increased in 2008 and 2009 as a part of the overall repricing of risk which followed the crash of the secondary market in 2007. During the last few months they were increased again. Here is how these risk premiums affect the cost of a mortgage.

If you applied last week to refinance your existing $400,000 mortgage in order to lower your interest rate you would have been able to get a rate somewhere around 4.875% with no points. But if you also wanted to take cash out (say, for example, to add a deck to your house) you would increase your loan amount to $410,000 which makes the loan a "cash-out." In order to get that same rate of 4.875% it will now cost you 0.375 points (3/8 %). That 0.375 translates to $1500 more in closing costs! Keep in mind that this is just an example and that the actual rate and points will depend on a number of factors including your credit score and the value of your home, but 0.375 is a typical cost differential for a cash-out loan in the current market.

There is one exception. If the purpose of the cash-out refinance is to buy out the interest of a spouse or domestic partner (or ex) pursuant to the terms of a separation agreement or court order, then it is not considered a "cash-out" refinance and therefore the pricing adjustments do not apply. As always, there are rules and restrictions in order to qualify for this exception;for example the property must have been jointly owned for at least 12 months preceding the date of the mortgage application, and the amount of cash taken out is limited to the amount specified in the agreement or order. But assuming those conditions can be met, this "marital discount" for cash-out is very helpful to those of us who work with clients who are in the process of separation and divorce.

Have a wonderful week!  Margie