What is a Freddie Mac Cash Out Refinance?
When it comes to getting a cash-out refinance on a home, borrowers have a lot of options-- including FHA cash-out refinancing, Fannie Mae cash-out refinancing, and, for those who qualify, VA cash-out refinancing. However, many people may not know that there’s another excellent option out there; the Freddie Mac cash-out refinance. In this post, we’ll review the terms and eligibility requirements for the Freddie Mac cash-out refinance loan in order to help borrowers determine whether this is a good option for their individual needs.
What are the Terms for the Freddie Mac Cash-Out Refinance?
Like most other types of cash-out refinances, the Freddie Mac cash-out refinance loan is offered in a variety of term lengths, including 15-, 20-, and 30-year fixed-rate mortgages, 5- and 7-year balloon/reset mortgages and a wide spectrum of standard ARM options. This refinance option permits borrowers to roll all down payments, closing costs, and pre-paid fees or points into the loan itself, so they won’t have to put down any cash at closing-- which is likely a relief for many borrowers out there.
When it comes to LTV ratios, Freddie Mac cash-out refinances are relatively lenient as well. For one unit primary residences, LTV is capped at 80%, for 2-4 unit primary residences, second homes, and one unit investment properties, LTV is capped at 75%, while for 2-4 unit investment properties, LTV may not exceed 70%.
Credit requirements vary for Freddie Mac cash-out refinances based on the exact type of loan, but are generally somewhat higher than the minimum Freddie Mac and Fannie Mae credit score of 620. Riskier loans (such as loans for 3-4 unit investment properties) will usually require higher credit scores.
How Does The Freddie Mac Cash-Out Refinance Compare to FHA and Fannie Mae Cash-Out Refinancing?
In many ways, the Freddie Mac cash-out refinance is very similar to the Fannie Mae cash-out refinance. Both Fannie Mae and Freddie Mac allow borrowers to get cash-out to refinance loans on second homes and investment properties. In addition, both of these loans have the same maximum LTV requirements.
For Fannie Mae cash-out refinances, credit requirements become more strict as the loans get riskier (in the eyes of the lender). For instance, required credit scores vary between 620 and 700, though they are lesser for limited cash-out refinances (in which the borrower receives the lesser of $2,000 or 2% of the loan amount), and for primary home purchases, and higher for 2-4 unit properties, second omes, and investment properties. Credit score requirements can also vary based on whether the loan is fixed-rate or variable rate, and are also based on a borrower’s DTI (debt-to-income ratio).
Unlike the loans mentioned above, FHA loans, including FHA cash-out refinances, may not be generally be used for second homes, vacation homes or investment properties. They can be utilized for 2-4 unit investment properties, but the borrower must live in one of the units in order to make the property eligible for FHA financing. Second homes may be allowed, but only in exceptional circumstances, such as a very large family that has outgrown a borrower’s original home, or a new job that is unreasonably far away from a borrower’s original residence.
And, unlike Freddie Mac and Fannie Mae loans, which require a borrower to pay private mortgage insurance (PMI), FHA loans require a borrower to pay a mortgage insurance premium (MIP). This comes in two parts: a one-time, upfront payment, and a recurring annual payment. Unlike PMI, which is automatically canceled when a borrower reaches 22% equity in their property, MIP continues for the entire life of the loan, until a borrower decides to sell or refinance the property (FHA MIP, however, is not required of a borrower contributes a down payment of at least 20%).
However, FHA cash-out refinancing does have some benefits that conventional cash-out refinances do not. For instance, cash-out refinances from the FHA allow borrowers to qualify with LTVs up to 85%, whereas the maximum LTV for conventional cash-out loans is 80%.
Borrower Uses for The Freddie Mac Cash-Out Refinance
There are a variety of reasons why a borrower might wish to get a Freddie Mac cash-out refinance loan. For one, they may currently have an FHA loan on a property and might want to get rid of their monthly MIP payment, which could save them thousands of dollars over the remaining life of their loan-- in addition to taking out some cash in order to rehab the property or pay personal expenses. In other cases, they may own a 2-4 unit property currently being financed with an FHA loan and might want to move out of the property for good. Since they must live in the property as long as the property has an FHA loan on it, a Freddie Mac cash-out refinance could allow them to move out, and potentially give them some cash to put a down payment on a new home somewhere else.
Even if a borrower already has a Fannie Mae or Freddie Mac home loan (and therefore may not have to worry about onerous mortgage insurance or owner-occupation requirements), getting a cash-out refinance from Freddie Mac may still be beneficial. Borrowers may want cash for all sorts of reasons, such as healthcare and education costs, home remodeling, or even a vacation-- and this is a loan that can certainly meet their needs.