The Veridian Blog

A cash-out loan, more than ever, is a red-flag risk that demands higher returns for lenders and their investors.  Thus, mortgage rates are usually higher and/or more expensive for cash-out loans. 

A loan is characterized as cash-out whenever the borrower receives more than 2% or $2000 (whichever is lower) from the loan transaction.  This may not always spell disaster in the form of higher rates for the borrower, however.  As long as the LTV is under 80%, there is usually no additional add-on in fees or rates for conforming cash-out loans of $417,000 or less.  When you start to borrow beyond $417,000, then loan-to-value (LTV) ratio and credit FICO scores determine what the add-on is, if any.  The guidelines become most severe when the loan amounts increase beyond $729,750 and become Jumbo loans.  Not only could there be an add-on, but you may be completely precluded from taking cash out under high LTV or low FICO profiles.  LTV Is so critical these days and this is just one example of the importance of having significant equity.  In any scenario, the lender may also impose cash out limits of anywhere from $200,000 to $500,000.

Another factor that will affect your interest rate is occupancy.  Loans for second homes will most likely receive the same treatment as principal residences, with the possible exception of a lower, stricter, loan-to-value of 75%.  Cash-out loans for non-owner occupied (rental) properties are, by far, much more scarce and for those lenders that do allow it, the penalty is typically at least 1.0 point, in addition to the 1.75-2.0 points already added on for investment properties.  If your home is located in a typical vacation/resort destination (ie. Tahoe, Wine Country), it will be considered a second home.  However, if it is also income-producing with rents shown on Schedule E of your tax returns, then the loan will likely be characterized as an investment property.  Note that the characterization of a second home for tax purposes and allowable deductions are more lenient under IRS regulations, but that's a whole other story.