Cash out mortgage refinancing is a less expensive option for tapping into your equity than home equity lines of credit or second mortgages. Here is the basic definition of a Cash Out Refinance.
Suppose for example, your home is valued at $350,000 and you owe $150,000 on your existing 30 year, fixed rate mortgage. It is possible for you to borrow as much as 90% of your home’s Loan-to-value ratio (LTV). This means you could borrow as much as $315,000 when cash out refinancing and put $165,000 in your pocket.
There are closing costs and some fees you’ll be required to pay when refinancing; also, because you are borrowing against the equity in your home you’ll get a higher mortgage rate than if you weren’t taking cash back at closing. There are also other considerations you’ll need to keep in mind when considering cash out refinancing. Because your mortgage rate will be higher when you take cash back, any amount of Yield Spread Premium on your loan will raise your monthly payment amount unnecessarily.
The difference between what you owe and what you borrow is paid to you at closing.
Yield Spread Premium is the unnecessary markup of your mortgage interest rate for the person arranging your mortgage loan. If you’re not already familiar with how Yield Spread Premium works, here is a simple example to illustrate how it drains your wallet unnecessarily. Suppose you are borrowing $350,000 to refinance your home mortgage. The broker quotes you a mortgage rate of 6.5% and charges you a loan origination of 2.0%.
In this example you will be required to pay your mortgage broker $7,000 at closing for their part in arranging your loan. What you don’t know is that you actually qualified for a 6.0% mortgage rate and the broker marked it up to get a commission from the lender…on top of the $7,000 you’re already paying them! Your monthly payment at 6.5% on this loan will be $2,213. If you had the mortgage rate you deserve at 6.0% your payment would only be $2,090. That’s a difference of $1,476 you’re overpaying every year!
The good news is that you can avoid Yield Spread Premium when refinancing your home loan. You can learn more about this and avoiding other mortgage junk fees by checking out my Underground Mortgage Videos.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
