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Refinance to pay off a HELOC => cash out refinance risk premium

2 10 October 3, 2017 at 02:52 PM
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Last Edited by gleeward October 3, 2017 at 04:45 PM
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I'm trying to refinance a first and a HELOC. I would have thought it would be easy to refinance with a low loan to value (LTV).

First mortgage: 300,000
HELOC: 170,000
Value: 1,100,000

I'm told that:
1) Any refinance to pay off a HELOC is a cash out loan.
2) Paying off the full HELOC creates a $470,000 loan, and since that is above the nationwide conforming limit of $424,000 it puts me into a "high-balance cash out" category, with a 1% premium on the rate. (Even though the loan limit for my county is over $500,000.)
3) I could have a lower rate at the $424,000 limit, but would have to pay off the HELOC at closing.

The LTV is only 43%, even at the higher loan amount. I have excellent credit.

If this were a purchase, there would be no question about the $470,000 loan amount. If I did this loan and came back after 12 months, they'd refinance all of it with no question.

How do people ever refinance out of HELOCs cost-effectively?


UPDATE:

Some links that partially confirm and answer questions, in case it's useful to anyone. The first one confirms the idea that loans above the national limit but below the local high cost limit are subject to a Price Adjustment based on credit score.

Table 3 of the LLPA matrix seems to say that any subordinate debt (Consolidated LTV > LTV) will lead to a 0.375% premium, regardless of LTV.

High balance loan matrix:
https://www.fanniemae.com/content...matrix.pdf

Fannie Mae Loan Level Price Adjustment (LLPA) matrix:
https://www.fanniemae.com/content...matrix.pdf

Fannie Mae guide to cash out refinance:
https://www.fanniemae.com/content....2/03.html
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Joined Nov 2009
Old Hippy & Mortgage Pro
612 Posts
#2
OP, you have correctly stated that refinancing a 1st and 2nd mortgage where the 2nd mortgage was not purchase money is indeed underwritten as a cashout refinance. However, you are not correctly explaining the Loan Level Price Adjustments and your comment regarding any subordinate debt is misinterpreted as it is not related to your scenario.

Loan Level Price Adjustments are to the pricing of the loan and not the rate. (Price and Rate are very different.)

The reference to subordinate financing is for piggyback loans. For example, when a 1st and 2nd are closed concurrently there is a .375 price adjustment to the first mortgage (which is approximately .125%, generally speaking).

In your case you would have the .375 price adjustment for a cashout refinance (unless your HELOC was obtained simultaneously as purchase money). Plus, as you are now looking for a loan amount exceeding Standard Conventional Loan Limits and falling into High Balance, the High Balance Loan Product Pricing will apply, however, that is not a 1.00% higher rate than Standard Conventional; and if you have excellent credit scores the High Balance pricing can be as little as .125-.25% higher in rate than Standard.

You ask how do people ever refinance out of HELOCs cost-effectively? I am biased, but an experienced Mortgage Broker can easily provide you accurate answers as to the best options available to you (as all this internet research you have pulled up is a waste of energy as you spin your wheels and potentially misinterpreting the facts.)

As you can see, each scenario is unique and there are a variety of factors that need to be taken into consideration. A good broker is a tremendous asset and can provide competitive mortgages for usually less fees (and their broker compensation is from the lender).

Good luck!
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-Adam
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Original Poster
#3
Quote from tiedyed1
:
OP, you have correctly stated that refinancing a 1st and 2nd mortgage where the 2nd mortgage was not purchase money is indeed underwritten as a cashout refinance. However, you are not correctly explaining the Loan Level Price Adjustments and your comment regarding any subordinate debt is misinterpreted as it is not related to your scenario.

Loan Level Price Adjustments are to the pricing of the loan and not the rate. (Price and Rate are very different.)

The reference to subordinate financing is for piggyback loans. For example, when a 1st and 2nd are closed concurrently there is a .375 price adjustment to the first mortgage (which is approximately .125%, generally speaking).

In your case you would have the .375 price adjustment for a cashout refinance (unless your HELOC was obtained simultaneously as purchase money). Plus, as you are now looking for a loan amount exceeding Standard Conventional Loan Limits and falling into High Balance, the High Balance Loan Product Pricing will apply, however, that is not a 1.00% higher rate than Standard Conventional; and if you have excellent credit scores the High Balance pricing can be as little as .125-.25% higher in rate than Standard.

You ask how do people ever refinance out of HELOCs cost-effectively? I am biased, but an experienced Mortgage Broker can easily provide you accurate answers as to the best options available to you (as all this internet research you have pulled up is a waste of energy as you spin your wheels and potentially misinterpreting the facts.)

As you can see, each scenario is unique and there are a variety of factors that need to be taken into consideration. A good broker is a tremendous asset and can provide competitive mortgages for usually less fees (and their broker compensation is from the lender).

Good luck!
I appreciate your input and notes about where I might be off track. You haven't really explained what the LLPA is, though. If it's not a rate adjustment, is it in effect a fee that acts like points that are then priced in through an increased rate? That seems to be what you are describing.

I'd disagree about the internet research being a waste of time, for me it was helpful. I was here to ask questions, and am in the middle of an application and trying to figure this out.

Maybe a broker would be helpful, but this is my current HELOC lender who (until now) had been very helpful. And they have very low costs and rates. I'm in the middle of that process so switching to a broker isn't the first option, but it may come to that.

UPDATE:

Note that the LLPA matrix adds another 0.75% of fee if the high balance loan is adjustable.

The fees translate into rates at roughly 1/4th. So a 1% fee should be roughly a 0.25% rate increase (but they will usually round the rate after adding all adjustments).

Bottom line, the high-balance loan isn't very workable for a cash-out refinance (including a HELOC repayment) given the extra fees (which apply to the entire mortgage). In my case, it would add $8,000 of fees to borrow that additional $50,000. (Those fees then get translated into a higher rate.) If you can avoid going over the conforming limit on a cash-out refinance, that's much more cost effective.

An article explaining LLPA:
https://mortgagecalculatorwithpmi...justments/

Quote :
Simply put, LLPAs are added charges for certain risk factors on a mortgage, such as high loan-to-value (LTV), low credit scores, cash out, investment property, etc. They're calculated and assessed as a percentage of the loan amount.

Note that LLPAs stack on top of each other.

Though LLPAs work like points, you won't necessarily pay them as added fees on the loan. The lender may instead absorb all or most of the LLPA costs in exchange for a higher interest rate on the loan.
Leaving a portion of the HELOC outstanding on a fully conforming loan adds an LLPA (0.375% to 1.375%, see Table 3 in the second link in the OP above), with the Combined Loan to Value (CLTV) calculated as follows:

Quote :
The CLTV ratio is determined by dividing the sum of the items listed below by the lesser of the sales price or the appraised value of the property.

the original loan amount of the first mortgage,

the drawn portion (outstanding principal balance) of a HELOC, and

the unpaid principal balance of all closed-end subordinate financing. (With a closed-end loan, a borrower draws down all funds on day one and may not make any payment plan changes or access any paid-down principal once the loan is closed.)

Source:
https://www.fanniemae.com/content....1/02.html
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Last edited by gleeward October 5, 2017 at 10:22 AM.
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Joined Nov 2009
Old Hippy & Mortgage Pro
612 Posts
#4
Yes, it is always good to conduct due diligence. My comment was driven by misinformation where you were stating LLPA adjustments to price as the adjustment figure/amount being to the rate (which you now see price is not accurate) instead of the pricing of the Note Rate.

One last comment I have based on your latest is that while the old rule of thumb was for 1 point to equate to .25% in rate; that is still a good rule of thumb, however, not really accurate at all; as the way wholesale pricing from secondary market works is that each rate is available every day and each Note Rate has a price (which fluctuates based on markets) When evaluating the stack of rates and their respective pricing, at times the .75 adjustment for High Balance may equate to .125% in rate and not .25%.

If your current 1st mortgage rate is competitive and the 2nd is small, no, t does not make sense to pay 8k in fees to refi and roll in your 50k HELOC (and I would suggest paying down the heloc whenever possible).

Again, everyone's scenario is unique and should be analyzed individually as there are a variety of factors that apply to each loan and can affect pricing as well as qualification (and making sense).

Thanks for sharing your research.
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