Loan Amounts

• Generally, the amount of a refinance mortgage cannot exceed the total value of the home being financed. Freddie Mac, a government-sponsored entity that finances mortgages, allows people to take out term and refinance loans on their primary homes, with balances equal to 95 percent of the property's value. Freddie Mac also allows borrowers to finance up to 85 percent of the value of a secondary residence. Cash out refinance loans are capped at 85 percent loan-to-value on primary homes and 75 percent on secondary homes. Most lenders write loans using the same guidelines as Freddie Mac.
  
  

Benefit Of Refinancing

• People who take out rate and term refinance loans usually do so to lower their interest rate or to move from a variable rate loan into a fixed rate mortgage. Homeowners who sign on for cash-out refinance loans can benefit from a lower rate or the change to a fixed mortgage, but there are other benefits. People can use equity in their home to pay off high interest rate debts or extract cash to use for home repairs or renovations. A cash-out refinance usually results in a higher overall mortgage payment, whereas term refinances result in lower payments.
  
  

Interest Rates

• Interest rates on rate and term refinance loans are lower than rates offered on cash-out refinance loans. Borrowers who consolidate high interest debt with cash-out refinance loans can potentially run up balances on consolidated credit cards again after using mortgage funds to pay down the debt. This increases the risk that the borrower may run into financial difficulties and default on the loan. Cash-out loans are priced accordingly.
  
  

Documentation

• Lenders require full documentation for cash-out refinance loans, which means among other things, full appraisals. Lenders order an appraisal to ensure that the loan amount does not exceed the maximum LTV ratio. However, under rate and term refinance programs, borrowers can refinance without paying for a new appraisal. The Federal Housing Administration insures term refinance loans that use the appraisal for the original loan. The reuse of the appraisal speeds up the underwriting process and eliminates some of the cost of refinancing.