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Derek Bissen, September 1 2021

​Maximize your Cash Out Refinance with a COMBO Loan

Are you considering refinancing your home to save money, do some home improvements or consolidate bills?  These days, it can be a really smart move, especially with home values trending upwards.  

Putting your home equity to work requires financing, and usually the first choice for most homeowners is a fixed-rate Conventional mortgage.  The advantages are pretty clear—you get the cash-out you need, and if your current loan has Mortgage Insurance (PMI or MIP if your loan is a FHA loan).  

For many homeowners, their payments tend to decrease or are nearly the same as their existing loan, thanks to today’s lower interest rates. 

HOW DOES REFINANCING WORK?

A refinance is when you create a new mortgage loan to pay off the existing financing on the home.  

THERE ARE ESSENTIALLY TWO TYPES OF REFINANCES:

All Conventional cash-out mortgages are limited to 80% of the home's current market value. That means that the new loan amount is capped at 80% of the value from a real estate appraisal.  (Example: a home with a value of $300,000 would have a maximum loan amount of $240,000.  $300,000 X 80% = $240,000)

From this new loan, the existing loan is paid off, the settlement charges are rolled into the loan…and the excess funds are given to the homeowner when the new loan funds.   

HOW MUCH IS MY HOME WORTH?

One of the first things to consider when refinancing is to figure out how much your home is worth.  There are plenty of online resources for this, including Zillow, Realtor.com, Trulia and many more. These sites are a good starting place, but keep in mind, they are not a substitute for a real estate appraisal performed by licensed real estate appraiser.  Sometimes the values found on these sites are accurate, but sometimes they’re not.  

When refinancing, the lender can only use the value on the report.  Because of this, refinancing can carry some risk. 

WHAT IF MY APPRAISAL COMES IN LOW?

If the value comes in HIGHER than your target, it means that you may be able to take more cash out from your home’s equity, but if it’s too LOW, it might mean that there’s not enough equity to complete your financial goals.  

EXAMPLE REFINANCE SCENARIO:

Here is an example of a client that we recently closed.  The homeowner had researched his property value and was certain that his home would appraise for $515,000.  Based on this number, we structured a new loan of $412,000 (80% of the estimated value)…and after his existing loan and settlement charges were paid…he would walk away with about $65,000 in cash out proceeds.  

However when we got the appraisal back, the value came in significantly lower…$486,000.  There were good reasons for this change, but appraisal turned out to be more accurate than the values he found online. Since the maximum loan is 80% of the appraisal value….it meant that our maximum loan size for the new loan was limited to $388,800.  After the existing mortgage and settlement charges were covered, he would only net $23,000.  (less than half of his goal).

He was pretty discouraged, but I told him not to worry. We restructured his financing by splitting the financing into two loans using our COMBO loan.  The first loan was a rate & term 30 year conventional loan with no cash out, and the second loan was a Home Equity Line of Credit (HELOC).  Both loans closed the same day, and he received $89,000 total cash out (over 136% more cash out than he originally wanted).

Here’s what it looked like. 

The best part? Were able to use the same appraisal for both loans, so he didn’t need to incur the cost or the risk of a second appraisal value coming in even lower. 

Also…he has an interest-only Equity Line for the next 10 years that he can tap into whenever he wants—for financial emergencies, unexpected purchases,  home improvement…or anything else the homeowner needs.   

Here in Florida, we get a lot of dramatic weather.  If this client’s home is damaged by a storm, he can simply tap into his Equity Line to get his repairs started right away, while his neighbors would be sitting around waiting for an insurance check.  

How convenient is that? 

HOW IS OUR COMBO LOAN DIFFERENT?

When you refinance your loan with us, our COMBO loan allows us to lend up to 89.99% total combined loan to value (CLTV) of the home’s appraisal value. Most local banks and credit unions here in Florida will only lend up to 80% CLTV, and most of them require their own separate appraisal inspection, which means higher costs and added risk (since another appraisal report might show a lower value). We do not offer stand-alone HELOC financing, meaning we only offer them to clients who are refinancing their new conventional mortgage with us.

If you're considering refinancing your home, be sure to check with your lender to see if they offer COMBO financing.  Even if you don’t end up using it, this offers you greater financing leverage, and may provide you with a built-in ‘fall-back’ plan if your appraisal value doesn’t allow you to meet your original goals.

If you’re looking at buying a home in the Greater Tampa Bay area, it’s surrounding communities…or anywhere in the state of Florida, we’d love to help.  We can help you explore your refinancing options to help you make the most of your home’s equity!   

You can reach us HERE.  

Written by

Derek Bissen

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