What is the dif between a mortgage and a cash out refi?

Question

Hey everyone,So my question is, what is the difference between a cash out refi and a traditional mortgage. Now, I know that a refi is when you pull cash from a property you already own and have equity in, and that a mortgage is a note that you pay on when you dont own a property outright. What I am really trying to find out is from a bank's perspective. Do they consider a refi essentially the same as a mortgage, meaning you can only accumulate 4 or 10 (whatever the number is currently) before you will be unable to do anymore, or is the refi considered something else entirely and not subjected to that limit?Also, Im sure it ranges from lender to lender, but what are the general term lengths on a refi? The properties I am interested in would have an ARV of around 40-60k. Can you do a 30 year term like a regular mortgage, or are refi's generally shorter in time?

Tony Nguyen · Answer

Cash-out refinancing is processing a new loan (with better terms/repayment structure/etc.; Not always but typically) to "pay off" your current loan and take money out of the property to use for whatever situation you need the money for (pay off HML, new investments, helping out a family member who is in a financial crisis, etc). This process won't count against your "10 properties limit" because although you're getting a new loan to supersede your old one; the loan is still tied to a single property address. You can refinance to 10,15, 20, 25, or 30 year terms (depending on what you're trying to accomplish) and you can cash out up to 75% LTV (for 1 unit) and 70%(2-4unit)[if it's an investment property]. Hopefully this help.

Melissa Kirchhoff · Answer

@Robert Ferrell

I'm not a lender, but in my understanding, yes, it's like a mortgage with the bank and yes, same terms as traditional (could be 15 or 30 year). Generally, it's the same-ish LTV or less though for refi, so prepare for that (I see 75% a lot), also, I've heard many say the appraisal is tougher for refi versus sale. So something to keep in mind.

Tony Nguyen · Answer

@Robert Ferrell  Most banks sell them off to the secondary market after servicing them in house but some banks do service and keep them in house. The cap only refers to whether you're purchasing/converting a property into an "investment or second home". The amount of refi's (IE mortgages) you can have on a single property doesn't count against that limitation as defined by Fannie/Freddie. You can have 5 mortgages on a property if you'd like but it would still only be considered 1 property. And No, whether the banks keep the mortgages in house or sell them off to the secondary market is entirely up to the bank. Typically they sell the mortgages off to the secondary market because that frees up more "money" to be able to circulate back to extend more loans and repeat the process.

Robert Ferrell · Answer

@Tony Nguyen So are these banks keeping the loans in house rather than selling them off to Fannie and Freddy? Is that why there is not a cap on the amount of refi's you can accumulate?

Melissa Kirchhoff · Answer

@Robert Ferrell - I don't know off hand the amounts (between 4 and 10) but I think that's something you could ask and I'd imagine that depends greatly on the lender.

As for out of state, I've never heard that here, that seems extreme to make not that much money on an appraisal and travel that far? However, here, we get most out of area (like a hour or so away) and since our area is so different and that market so different, yes, it does hurt. Usually with sales in comes in at or close to sale price (I've only had one issue and that's because it was a split level and here, they can't count that bathroom and sqft below grade, so know your local rules!) but remember that if it comes back way off, you can ask for a different one, and you can request one from someone local!

Steve K. · Answer

@Robert Ferrell,

They're both "mortgages". When you apply at a lender, they merely ask you "are you purchasing a new home, or do you seek to refinance your existing property".

In REI, you sometimes refinance (refi) to extract a portion of your equity. The "cash-out" refinance.

Robert Ferrell · Answer

@Melissa Kirchhoff Thanks for the response! So if the banks are considering them essentially like a mortgage, does that mean that the number of refi's a person could be eligible for are capped between 4 and 10? I too have heard the same about LTV and appraisals. I plan on doing the BRRRR strategy, so and LTV of 70-80% would work just fine. Also, I've heard that some banks are now starting to use out of state appraisers who don't possess a strong understanding of the local market, thus creating appriasals that are way too low and have to be disputed.