Fannie Mae & Freddie Mac – Refinancing to Pay Off a HELOC

Question:
Our client purchased his primary residence at the end of July 2024. He closed with a 1st and 2nd lien (concurrent piggyback HELOC). The HELOC funds are being used for home improvement projects for the new home.  Would a refinance paying off both loans for the new loan be considered a cash-out or rate/term?

Answer:
I can confirm that if the HELOC was not used in its entirety to purchase the subject property, anytime you combine the original first mortgage and the 2nd mortgage into one new loan, it would be considered cashout.

So even though the HELOC is being used to enhance and improve the property, that does not change the fact that it would be considered cashout when paying it off with a new first to combine both mortgages.

Important reminder: Fannie and Freddie released a new rule that requires the underlying loan (on a cashout refinance) to be seasoned one full year, so this means the earliest you could do a cashout refinance to pay off the current first and the HELOC that was not used to purchase the subject property) would be July 2025.

You could, of course, do a rate/term on the first and resubordinate the 2nd to avoid the cashout timing of one year.