Why does it cost more to refinance if we are paying off a Home Equity Line?
Question of the week: Why does it cost more to refinance if we are paying off a Home Equity Line?
Answer: With mortgage rates low, many homeowners are taking advantage by refinancing their primary mortgage and also including a Home Equity Line of Credit (HELOC). The news to many, most, is that almost always such a transaction is considered a “cash-out” transaction which is subject to higher rates, costs and restrictions.
Fannie Mae and Freddie Mac consider including a refinance that includes paying off a HELOC (or other second mortgage) as a rate and term refinance if the following conditions are present:
- The HELOC being paid off was used to purchase the property
- The entire amount of the HELOC was used for the purchase of the property
- There have been no additional draws taken from the HELOC since it was used to purchase the property.
The difference between a rate and term refinance and a cash-out refinance for a conforming loan (loan amount $510,000 or below) is about one-quarter of one-percent in interest rate (0.25%) for most loan-to-value amounts. For instance, if you are refinancing $500,000 as a rate and term refinance and the rate is 3.75%, the rate for the same loan amount that would include a HELOC that was not used to purchase property would have a rate of 4.00%.
The rate differential for high-balance conforming loans ($510,001 to $765,600) is one-half of one-percent (0.5%) in rate more for a cash-out transaction than for a rate and term refinance.
If you loan amount is above the $510,000 mark and you are paying off a HELOC, there is a possible advantage. Many of our lenders will finance loan amounts down to $510,000 under their “jumbo” programs. As well, many jumbo programs will consider a refinance consolidating a first mortgage and a HELOC as rate and term if it can be shown that there have been no draws against the HELOC for the past twelve months. This can be a great benefit to many homeowners with HELOCs and higher balance mortgages to obtain a much lower rate with a jumbo mortgage product instead of using Fannie or Freddie.
If you have a HELOC and want to see what your options are to consolidate it by refinancing please give me a call so we can run your numbers and discuss your options.
For other factors that can impact the rate and pricing on a loan, read the WR&MU from February 8, 2019 “Why are their different rates or costs for the same mortgage product?”
Have a question? Ask me!
Short week held little news, economic news that is. We did however get housing data for the State of California from the California Associations of Realtors for December, and 2019, home sales. Statewide the median home price increased 4.3% from November and 4.3% from the prior year to $615,090 and the number of sales statewide was up 7.4% for the year. More locally, Los Angeles County saw sales increase 3.3% for the month and 7.4% for the year pushing the median price up 7.8% from November and 9% from 2018 to $641,340. Next door in Orange County prices were up, not quite as strong as LA, by 2.2% for the month and 7% for the year to $840,000. The stunner in the data was total home sales in Orange County were up 32.8% from December 2018.
Not all major counties saw gains. In Northern California San Francisco and San Mateo Counties saw median prices drop year over year, as did the Central Coast counties of San Francisco and San Mateo.
Rates for Friday January 24, 2020: Rates have drifted down this week, the high-balance rate is at its lowest since November 2016, as investors have bled funds out of the stock markets and into bonds and mortgages.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.375% Down 0.125%
30 year high-balance conforming 3.50% Down 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
It doesn’t take long for those becoming acquainted with me to learn I love pie and cookies (one of my favorite ice breakers is to ask, pie or cookie?). So it should be no surprise to those in the know that yesterday was a semi-holiday for me as it was National Pie Day. For many years, we think it started in 2001, my older daughter, who inherited my pie gene, and I would go to Jongewaard’s Bake N Broil near our home for a some pie on January 23rd. Last year we celebrated early as she was leaving the next day to go back to Boston to school. This year we celebrated two weeks early as she was heading to Grenoble, France where she is spending the semester.
Thankfully, my younger daughter works at Bake N Broil a few nights a week and last evening happened to be one of them. It made my heart flutter when she let me know she was bringing home a piece of apple pie for me, knowing it was one of my favorite days and my pie-buddy was not here to raise a fork with me.
I love my kids! Happy Day After National Pie Day!
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
