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Similar to previous mortgage question, but related to the amount that is financed. If one owes 200K on a home worth 400K, what value does the lender use for the amount you have to borrow? In other words, can one refiance an existing mortgage with a 200K balance by only borrowing enough to pay off that note, so that the new note will be for the previous balance - or do they force you to borrow at the appriased value?

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I am basing my answer on the United States.

Before you apply for the new mortgage:
- Estimated House value: 400K
- Current mortgage: 200K
- Estimated equity: (400k-200K) or 200K

Most lenders will put a maximum limit on the new mortgage of 80% of appraised value. What you borrow depends on your income, your credit history, and what you want to do with any cash out.

The 80% rule means the most you can borrow is 80% of 400K or 320K. This assumes that the appraisal equals the estimate. If the appraisal is different the maximum loan will change.

So if you want the whole $320K that is fine. They will take $200K to pay off the old loan and send it to the old mortgage company. If you only want to borrow $200K to pay off the old loan, because the new rate is lower than the old rate that is fine also. You may decide to only borrow $250K to pay off the old loan and upgrade the kitchen.

Note that in late 2017 the rules changed about destructibility of interest in cash-out refinancing. How you use the extra funds impacts if it is deductible interest.

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The limit you can borrow will be based on the home's current value, but they do not force you to cash out equity (borrow more than you owe).

In your example you could refinance for just the 200k remaining balance, you'd typically do that if your only goal was to benefit from lower interest rates. You could also borrow up to ~80% of the home value if you wanted to trade some of your equity for cash on hand, maybe to pay for renovations.

Similarly, the duration/term of your new mortgage is flexible, some people choose to lower payment amount but extend the payment duration, others take a shorter term to further reduce interest rate and pay off their home faster than originally planned.

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Lenders, have what's called Loan to Value- and they used this for creating loan decisions on refinance. The loan to value affects the interest rate, and usually the lower the LTV with best credit, income, etc will yield you the best rate and options to better loan programs.

Loan programs have specific lending criteria; for example minimum fico score 780, Full documentation- and verifiable income/taxes, loan; more importantly in your question is loan amount, and you guessed it- loan to value.

The LTV is simply the loan amount / value. So a 100,000 loan amount (20K debt + an original loan debt of 80K) and an appraised value of 300K the LtV would be (100/300 = 33%). A 33% LTV can now be used to loan on. A lender may have a specific criteria that say's don't go over 70%, 80%. So they lend on the appraised value and the loan debt as a ratio, and as a criteria to the max allowed LTV in that loan program.

In terms of the loan, you (the borrower) can cash out for anything reason but a lender will use the max LTV in the criteria to determine if you are allowed to refinance, the goal is to be under that LTV to meet the program criteria, else if this doesn't work out you as a borrower has to find a new program with a higher LTV- which means finding another investor (lender) who is comfortable with taking on more risk. This is why mortgage brokers exist, they find you the best deal based on your scenario, opposed to a cookie cutter lender who will only work on easy credit loans such as good fico, low LTV, low loan amount, straight cash out refi- or low LTV purchase.

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