HOEPA and cash-out refinancing: when points and fees make your loan “high-cost”

HOEPA covers consumer refinances and HELOCs on a principal dwelling; a refinance becomes high-cost when its APR, its points and fees or its prepayment penalty cross fixed thresholds, which happens fastest on small cash-out loans.

The thresholds, applied to a refinance

Section 1026.32 tests three things. The APR on a first-lien refinance may not exceed the average prime offer rate by more than 6.5 points (8.5 for a subordinate lien). Points and fees may not exceed 5% of the total loan amount on loans of roughly $27,000 or more, and 8% or a dollar floor around $1,350 on smaller loans (both figures adjust each January). And a prepayment penalty may not run longer than 36 months or exceed 2% of the amount prepaid. Cross any one line and the loan is a high-cost mortgage.

Two features of the points-and-fees test catch refinancing homeowners. First, the denominator is the total loan amount — the amount financed minus any points and fees rolled into the loan — so financing the closing costs on a cash-out loan makes the ratio worse, not better. Second, the numerator includes the prepayment penalty you pay on your old loan when the same lender or its affiliate refinances it, plus any loan originator compensation. A $30,000 cash-out refinance with a $1,500 origination fee, $900 in broker compensation and a $600 penalty on the old note is already at 10%.

What the high-cost label changes

A high-cost refinance cannot carry a balloon payment (with narrow exceptions), a prepayment penalty or negative amortization; points and fees cannot be financed into the loan; the lender must verify your ability to repay regardless of QM status; and you must complete counseling with a HUD-approved counselor and provide the certificate before closing. The lender must also give you a specific HOEPA disclosure at least three business days before consummation stating that you are not required to complete the agreement and could lose your home if you do not meet your obligations. A creditor that made you a high-cost loan cannot refinance it into another high-cost loan within a year unless the refinance is in your interest — the anti-flipping rule written for exactly this profile.

Which refinances actually trip it

Conventional, FHA, VA and USDA refinances are nowhere near the APR trigger, and their fee structures rarely reach 5% except on very small balances. The loans that do cross the line are consumer-purpose private or “hard money” refinances pitched to owners behind on payments, and small cash-out loans from fee-heavy lenders. Most mainstream lenders run the test in their pricing engine and simply refuse to make a high-cost loan, so if yours trips the threshold you will usually see the fees repriced or the loan declined rather than a HOEPA disclosure.

Exempt from HOEPA: reverse mortgages, construction-only loans, loans made by state housing finance agencies and USDA Section 502 direct loans. Not exempt: a HELOC on your primary residence, which has been covered since 2014, and any refinance of a primary residence regardless of who holds the old loan. Ask the lender directly whether the loan tests as high-cost; the answer is a yes or a no, and a lender that cannot answer has not run the test.

What to check

• On a small cash-out loan, divide all points, fees, broker compensation and any old-loan prepayment penalty by the loan amount net of financed fees — if it is near 5%, the loan may be high-cost.
• Ask whether the loan tests as a high-cost mortgage; a mainstream lender should answer immediately.
• If it does, expect mandatory HUD-approved counseling and no financed fees, and compare against a HELOC or a smaller loan from another lender.
• Be wary of a private “refinance to catch up” loan on your primary residence: that is where HOEPA triggers are most often crossed.

Frequently asked questions

Is a cash-out refinance automatically a high-cost mortgage?

No. Cash-out refinances from conventional, FHA and VA lenders normally have APRs within a point or two of the average prime offer rate and fees well under 5%, so they pass. The label attaches only when the APR, the points-and-fees ratio or a prepayment penalty exceeds the HOEPA thresholds, which typically happens on small loan amounts or with private lenders charging several points.

Does HOEPA apply to a HELOC I open instead of refinancing?

Yes, since 2014 open-end credit secured by your principal dwelling is tested the same way, with the subordinate-lien APR trigger of 8.5 points above the average prime offer rate and the same points-and-fees limits. Most bank HELOCs carry few upfront fees and pass easily, but a HELOC from a non-bank lender with a large origination fee on a small line should be checked.

The rule in full: HOEPA and high-cost mortgage rules. The borrower profile: Refinancing homeowners. Related guides: Rate-and-term refinance: when it pays, how to compute the break-even · Cash-out refinance: limits, costs and when it is the wrong tool · HUD-approved housing counselors: free help that servicers take seriously · Foreclosure rescue scams: the six patterns and the federal rule that bans upfront fees.

Other federal rules for refinancing homeowners

TILA / Reg Z · RESPA · TRID disclosures · ECOA · Fair Housing Act · HMDA · SAFE Act / NMLS · ATR / QM · HPA / PMI · Servicing rules · FCRA · Flood insurance · MARS rule · SCRA · LO compensation

HOEPA for other borrowers

First-time buyers · Conventional borrowers · Veterans · Self-employed · Investors · Retirees · Bad credit · Foreign nationals · Physicians · Heroes · Rural buyers · Condo & second home