Refinancing Mortgage in New York and Pennsylvania: Rate-and-Term vs. Cash-Out Option

When you are looking to refinance mortgage in New York and Pennsylvania, the potential transaction will be defined by one of two types.

Refinance mortgage is categorized as either Rate-and-Term or Cash-Out. Don’t let the plain language titles mislead you as there are some unique and distinct differences between the two. There are many fine details that will differentiate the rate & term and cash-out mortgage refinancing options.

What is Rate-and-Term Refinance Mortgage?

A Rate-and-Term is for someone who is simply looking to refinance mortgage to better terms, without cashing out any money in the process. Under this transaction your can redo your current mortgage and receive no more than 2% of the loan amount or $2000 (whichever is less) and be considered a rate and term. Rate and term transactions come with slightly better interest rates and more expanded equity guidelines. You can borrow up to 95% conventionally or 97.75% FHA. Although cash out is not allowed (above maximum thresholds) there is a way to do what I call "shot in the arm Refi". I will get into that one later.

Is a Cash-Out Refinance Mortgage Right for you?

A cash-out can encompass a few different refinances structures but is mainly designed for someone looking to pull equity from their home. Cash-out is limited to 80% financing conventionally or 85% FHA. You can use the proceeds to pay off bills, do some house improvements or simply stash the cash in the bank or shoebox whichever you prefer. This transaction will come with stricter underwriting requirements and slightly higher interest rates.

However, there are some finer details that can cause your rate and term transaction to be considered cash-out. The main one is paying off a 2nd mortgage. If you are looking to consolidate a 1st and 2nd mortgage and the 2nd was not part of the original purchase, this transaction will be considered cash out on a conventional product. Under FHA guidelines, you can consolidate the 2nd mortgage with a rate and term refi, but only if the 2nd mortgage has been open for more than one year. If your 2nd mortgage was used to purchase the home both FHA and conventional guides will consider it a rate and term.

If you use equity in one home to pay off the mortgage of another house, that is considered cash-out. If you purchase a house with all cash and the look to recoup your funds later by refinancing that will also be considered cash out. Don’t let the term "cash out" fool you. If you refinance to payoff your mortgage and a credit card but don’t receive any cash, the funds used to pay the credit card or any other debt will qualify as cash out transaction.

Now let’s talk about the "Shot in the Arm refi". This is the normal way big banks do rate and term transactions. For those looking to simply save money by getting a lower interest rate, you will want to pay attention here. When I do a rate and term for my clients I will typically offer them a true "Net Refi" or the "Shot in the Arm refi".

This is where Loan officer knowledge of loan structure can mean a lot more than you think. With a standard "Shot in the Arm refi", we can take out a new home loan to cover the balance on the existing lien and enough funds to cover all settlement charges including escrows. You make September 1st payment, we close September 15th and your first payment due date is November 1st. You skip October’s payment and then in about 30 days you get refund of your previous escrow account. The amount of escrow can vary by location and timing, but here in my Long Island market it can be quite large. So when you factor in the missed payment and escrow refund ($2000-$8000) you actually cashed out a signifigent sum. And no, that missed payment wasn’t free, you borrowed it and are now paying interest on it. On these transaction clients see there balances go up quite considerably. If you can use the funds to pay off a credit card or other unwanted debt, this can be a great way to sneak out some funds under a rate and term. You could even sometimes find a way to miss 2 payments. It’s all about loan structure.

Many times what I like to offer my clients is a true "Net Refi". Clients may be scared at first but when I explain the numbers it makes clear sense. Under a true net transaction I will keep your loan amount as low as possible and will have you bring funds to the closing. I don’t want to put more capital into your mortgage but rather contribute the funds that you be getting backing. In example, I expect you to miss 1 mortgage payment ($2000) and get an escrow refund of $3000. I would structure your loan so that you are bringing $5000 to closing. I would explain to you that you are simply loaning the money to yourself rather than borrowing more than you need. You skip the payment and get the escrow refund 30 days later and you are all even. Except you now are not paying interest on this money for the next 30 years. This is not always an option for everyone as they may not have the $5000 available to loan themselves but it’s important to know you have options.

I can’t tell you how many times I discuss with my clients the differences about refinance mortgage structures. Seek out a true professional and let us explain the details and options to you so you can make the best decision for yourself.

— Jim Barry, CMC

When you're ready to refinance mortgage in New York and Pennsylvania, contact one of our loan experts today at (833) 844-0141.