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Mortgage rates highest since 2014; lenders allowing up to 85% cash-out mortgages
By Jeff Lazerson
What I think: Tappable equity is at its highest dollar amount on record and 10 percent above the prior 2005 peak, according to a recent Black Knight Report. Holy Smokes!
Nationally, residential property values are estimated to be $19.4 trillion, and total outstanding mortgage debt is estimated at $10.3 trillion, according to Ben Graboske, Black Knight’s executive vice president.
Excluding properties that have no mortgages (perhaps 30 percent of U.S. properties are lien-less), Americans have an average combined equity (property value minus any liens) of almost 47 percent.
Excluding paid-off properties, property owners in the Los Angeles and Orange County metropolitan statistical areas average 56 percent equity. Riverside and San Bernardino property owners average 45 percent, and San Diego averages 51 percent, according to Graboske.
So, what are the good mortgage folks doing?
They are working really hard on ways to help you tap into that equity, hoping you won’t tap out down the road.
The killer deal of the decade (so far) is you can now pull-out up to 85 percent of your equity through a conventional cash-out refinance for up to $453,100 on a 30-year fixed rate. Previously, the maximum conventional cash-out was 80 percent loan-to-value. You must have a 740 or higher credit score. This is for single units, owner-occupied only.
Let’s compare to a Federal Housing Administration loan that allows borrowers to cash out up to 85 percent of their property’s value (in high-cost areas like L.A. and Orange counties, FHA will allow borrowers to cash out up to $679,650, so long as that doesn’t exceed 85 percent of the property’s value).
Comparing an equally priced conventional loan to an FHA loan at 85 percent cash out with one point cost shows an FHA loan has an interest rate of about 4.125 percent and conventional at 4.625 percent — about one-half point higher.
Just hold your horses. Even with the half-point in mortgage rate differential, the conventional loan is still a way better deal because the FHA mortgage insurance is incredibly more expensive. The FHA factors 0.80 for your monthly mortgage insurance add. And, FHA charges a hefty 1.75 percent upfront mortgage insurance premium, which is added to your loan balance. The conventional mortgage insurance is factored at 0.34 percent.
Take a $453,100 conventional loan at 4.625 percent and the 0.34 mortgage insurance. That amounts to a monthly payment of $2,458 for principal, interest and mortgage insurance.
The comparable FHA loan with a 4.125 rate starts with a loan balance of $461,029 due to the upfront mortgage insurance. That adds a whopping $7,929 to your loan balance out the gate! The principal and interest portion of the payment with the 0.80 monthly mortgage insurance included amounts to a monthly payment of $2,536.
That’s $78 per month in higher payments in addition to your higher beginning loan balance.
Also, keep in mind, FHA monthly mortgage insurance stays on for the life of the loan, and the conventional mortgage insurance can eventually be removed.
On the big-boy loan sizes, clean borrowers can get an astonishing 95 percent cash out to $1.5 million, be it fixed-rate amortized or a 40-year interest-only loan. And, you can go cash-out, 80 percent loan-to-value to $2 million on a rental.
If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.
Jeff Lazerson - Mortgage Columnist since 2011