Houston Refinance: 3% cash out rules

Houston Refinance:  3% cash out rules

Refinancing a home in Texas has to meet the 80% rule where the borrower can only borrow up to 80% of the appraisal value of the property. This is why ordering an appraisal is so important when refinancing a Texas Mortgage.

Call Frank Zhu at 512-919-0154 if you have specific questions about Texas Cash Out Loans

What this rule states is that the total fees related to closing costs cannot exceed 3% of the loan taken. For example, if a borrower takes a home equity loan of $100K. The maximum closing costs is $3000. Closing costs included are loan origination fee, title escrow, title policy, appraisal, underwriting, processing, doc prep fee, etc. The total of those fees cannot exceed 3%.

Since the closing costs are usually above $3000, a borrower taking out a home equity home will have to pay discount points to pay for the left over closing costs.

For example, if a borrower takes a home equity loan of $80K and the total closing cost is $3000. With the 3% rule, the maximum closing costs allow is $2400.

There is a $600 overage of the closing cost. How do we solve this? The borrower could pay discount points to take out some of the closing costs.

 Going back to the example above, there is $600 over the maximum closing costs.

The borrower could pay $600 discount points to “erase” two of the closing costs, such as the appraisal($400) and doc prep fee($200).

Since this is a cash out loan, the borrower doesn’t really want to pay any cash out. It will defeat the whole purpose of the loan. So there are two options for the borrower to make.

Option one – Roll the discount points and the closing costs into the loan where it still satisfies the 80% rule.

Option two – Roll the discount points plus some of the closing costs and take a higher interest rate. The broker will pay the rest of the closing costs.

Moreover, the borrower has to sign a 12 days disclosure where it states that the home equity loan cannot close until the 12th day after the application had been taken. And of course, like a rate and term refinance, there is also the 3 day recission period after the loan has been closed.

 The borrower has 3 days to cancel the loan before it is funded.

http://news.yahoo.com/s/ap/20100624/ap_on_bi_ge/us_mortgage_rates