1/2/03  - Fannie Mae has announced a change to their definition of a limited cash out mortgage. 

Credit risk research has shown that cash-out mortgages carry a higher risk of default than no-cash out, or limited cash out/rate and term refinance mortgages. 

Note: No cash out mortgages require the borrower to bring cash to closing to pay for closing costs.  Limited cash out mortgages are much more common, when the closing costs are refinanced in the loan amount.   Both have the same rates.  A Cash Out Mortgage is when extra cash is taken out, perhaps to consolidate debt or for home improvement. 

To compensate the lender for this risk, the definition of a "limited cash out" refinance mortgage (often known as a rate and term refinance) will include only those loans that involve:

• the payoff of the outstanding principal balance of an existing first mortgage
• the payoff of the outstanding principal balance of any existing subordinate (2nd) mortgage that was used in whole to acquire the subject property
• the financing of the closing costs and prepaid expenses like taxes and insurance
• cash back to the customer in an amount no more than 2% of the balance of the new refinance mortgage or $2000

This means that those refinance mortgages that include the refinance of any 2nd mortgage, that were not used to buy the property will be considered a cash out mortgage.  Previously, and 2nd mortgage that had been open for over a year could be refinanced with a 1st mortgage, and would not be considered a cash-out refinance.

Key points: If you are refinancing and paying off a 2nd mortgage that was taken out after you bought the home, the loan is considered cash out.

If you are refinancing, and your loan is a cash out mortgage, and your Loan-to-Value is over 70%, your rate will be just slightly higher that you used to be able to qualify for (about 1/8th of a percentage point higher).

If your loan to value is below 70%, rates are the same for cash out, limited cash out, and no cash out mortgages.

If you are not taking cash out when refinancing, you get the same low rate up to 95% of the value of your home.

If you are not touching your 2nd mortgage when refinancing your first, again you qualify for the same low rates.  The 2nd mortgage will be subordinated during the loan process.