As a starting point, there are generally two types of refinance options, either a rate-and-term refinance or a cash-out refinance.
While there are unique qualifying requirements for each type of refinance and different underwriting guidelines depending on the loan program such as Conventional, FHA, VA, USDA, Jumbo Loans, etc., let’s start by reviewing the basics between the two refinance options:
A rate-and-term refinance is a new mortgage loan that pays off and replaces an existing mortgage. It could provide for both a better rate and different terms of the loan. A rate-and-term refinance prohibits cash-out and therefore offers more favorable terms than a cash-out refinance.
On the other hand, a cash-out refinance is a new mortgage that is taken out for the purpose of receiving immediate cash flow to be used for things such as debt consolidation, home improvements, funding investments, college tuition, and meeting divorce obligations. However, because a homeowner is increasing their mortgage amount for the purpose of receiving cash, this is viewed as a higher lending risk which leads to higher rates and lower loan-to-values when compared to a rate-and-term refinance.
On refinance transactions, a loan-to-value (LTV) is calculated by dividing the loan amount by the property value as determined by the current appraised value.
While maximum LTVs vary between loan programs, a cash-out-refinance is typically limited to 80% of the property’s value while a rate-and term refinance can go to 95% or higher in some cases depending on the loan program. One exception to this general rule is under the VA loan program which does allow cash out refinances up to 100% LTV!
For example, if you have a loan amount of $500,000, and the home was appraised for $625,000, your loan to value would be 80% ($500,000 / $625,000 = 80% LTV).
For situations where there is limited equity in the marital home, the maximum LTV is critical because it dictates what loan programs are available and what equity will be available to the ex-spouse departing the home.
However, there are divorce refinance options available which can allow for the best of both worlds. In a future post I will be reviewing what an Equity Buyout is and how that can allow for better loan terms while at the same buying out the equity interest of an ex-spouse.
Whether it’s retaining the marital home, qualifying for an equity buyout, or preparing to purchase a new home post-divorce, the key to successful mortgage planning is preparation and collaboration. Divorce mortgage planning ensures that your agreement works in the real world, not just on paper.
Our dedicated team of divorce mortgage professionals will walk you through the qualifying process step-by-step. Just call, text, or email to discuss your scenario and let our Divorce Lending Practice Group go to work for you.
Call/Text: 813-935-8330
800-806-9836 Ext. 280
SeanS@MPLX.org
P.S. – You can download our “Divorce Lending Blueprint for Success” by CLICKING HERE.
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