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Refinancing: Money Saving Ways To Combine Loans


Refinancing: Money Saving Ways To Combine Loans 

By Scott Sheldon

Do you want to combine your first and second mortgage into one? Here’s 4 smart some money savings tips to be aware of when you submit a loan application.

When you apply to refinance your home with the intent of financing more money beyond the balance of your first mortgage, your total loan amount could fall into being categorized by your lender as a cash out refinance, even if you are not receiving funds at the closing table.

The reason consumers should pay attention to this is because when you do a cash out refinance, the loan costs more. There are two purposes to refinancing a home loan. There is a rate and term/limited cash out refinance which includes, but is not limited to the following:

• reducing mortgage payment

• shortening mortgage term

If your goals for refinancing fall into any one of the above descriptions your loan is generally considered to be rate and term. However, if you are cashing out any equity including a second mortgage you obtained after you bought the home or are paying off debt or pulling funds out for any other purpose your loan will viewed as cash out.

Cash out refinances cost .375% more in loan pricing which can impact fees and terms and has tighter equity requirements. Take a loan of $400,000 a .375% adjustment to the pricing would mean your $400k loan would cost more specifically, $1,500 more based on the loan amount ($400k x .00375) than if your purpose was rate and term.

*Mortgage tip: you can always change the structure of your loan during the loan process meaning going from rate and term to cash out or vice versa.

Ways Your Loan Will Be a Rate & Term Refinance

Acquisition Indebtedness- aka purchase money debt. If you bought your home with a first and second mortgage, for example with an 80/10/10 loan where you put down 10%, got an 80% first and 10% second mortgage or even got an 80/20 loan, whatever the case may be, as long as the first and second mortgage was used to specifically acquire the home and you are now looking to refinance the first and second mortgage into one, that loan will always be considered to be a rate and term loan as long as your intention is to not extract additional monies out beyond the debt owed.

*Mortgage tip: financing closing costs does not make your loan cash out. You can finance the fees and the loan is still rate and term.

FHA LOAN - an FHA loan does not have any stipulations about acquisition debt when combining a first and second mortgage. Most people who took out second mortgages did so after the fact, i.e. for home improvements, paying off debt, child education, etc. The FHA will allow you to combine a first and second loan into one as a rate and term refinance and will finance up to 97% loan to value on big loan amounts. In Sonoma County, CA the max FHA Loan Limit is $554,300. Depending on your financial circumstances this could be a savvy approach to take especially if your equity is limited. Moreover, paying off one loan in the future is far more simplistic from underwriting perspective than paying two loans if equity is a roadblock.

Combined Loans Greater Than 417k -417,000 is the conforming loan limit in most US counties. If your proposed first and second combination is bigger than $417,000, and is considered to be cash out because the second mortgage was used for some other purpose other than buying the home at least 30% equity in your home is needed, in some cases more depending on your credit score and type of property (condo, single family home, 2-4 unit home). There are some jumbo investors in the market that will do a rate and term refinance all the way down to a loan size at $417,000 or bigger. This could be beneficial so as to minimize the impact a cash out refinance could create depending on your equity position and financial profile. Be sure to check with your mortgage company with their specific jumbo investor guidelines.

Draws On The Second - many lenders will combine a first and second mortgage into one as a rate and term refinance even if the second is not purchase money indebtedness as long as the second mortgage has no draws in the last 12 months. If you fit that requirement, the needed equity position drops to 20%. The devil is in the details. No draws in the last 12 months on your second mortgage could make all the financial difference for you.

Not sure if your loan will be considered? Talk with a mortgage company. You might find a lender, a bank, and a credit union for example to be far different from each other in terms of what can or cannot be done. If you’re looking to save money, you owe it to yourself to check on this continually especially if you’ve been turned down in the past. Check every few months. You might just find you actually can get your loan combination completed after all.

Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages. Call or Text Scott Sheldon (707) 217-4000-Mortgage Lender