If you have a second mortgage on your home you need to be aware of the rules of when a refinance is considered “cash out”. When an application is considered a cash out refinance, the maximum Loan to Value will be limited to 80% for Conventional financing and 85% for FHA financing.
The presence of a second mortgage can often cause an obstacle to a successful refinance if not handled properly. In some cases, a second mortgage will prevent an applicant from having enough equity to qualify under the stricter cash out guidelines.
80/10, 80/15 and 80/20 mortgage programs, also called Combo Loans or Piggy Back Loans, were readily available a few years ago for both purchase and refinance transactions.
Which type of transaction you used this program for dictates your refinance options today. Some of the these programs were advantagous to those who were looking to payoff other debts such as credit cards or high interest consumer loans or take out cash for home improvements. These programs combined an 80% first mortgage with a second mortgage . By limiting the first mortgage to 80% loan to value (LTV), customers were able to avoid paying Mortgage Insurance (MI). By avoiding monthly mortgage insurance premiums, these Combo loans were able to structure lower total payments as compared to one payment with MI. When it comes time to try to refinance these Combo Loans, questions arise….
Is paying off these Combo loans considered cash out?
It depends on whether this Combo loan was used for a home purchase or was obtained through a refinance.
If the second mortgage was used for a purchase, it is not considered cash out and this account can be paid off with a conventional rate/term refinance.
If the second mortgage was obtained through a refinance, paying it off will be considered a cash out refinance and the LTV will be limited to 80%.
Is there anyway to refinance my second mortgage and get a higher LTV than 80%?
Yes. An FHA refinance will allow the payoff of second mortgages that have had no withdrawal activity in the last 12 months. So… if you have fixed installment second mortgage or a Home Equity Line of Credit (HELOC) and have not had any draws against the balance in the last 12 months, you would be able to included this in an FHA rate/term refinance up to 97.75% of your home’s value.