Use A Cash-Out Refi To Stay In Touch With Clients
Lauren Bowling6 minute-read
March 17, 2022
A home is many things, but it is most importantly an investment. In real estate any equity a homeowner holds in a property isn’t usable until the home is resold. That is, unless a buyer leverages a unique mortgage tool called a cash-out refinance to turn their home equity into cash by borrowing against their home’s value.
Real estate agents with clients in need of cash for certain real estate related expenditures should study up on the impact this type of mortgage loan can have for both buyers and sellers.
Why Would You Want To Recommend A Cash-Out Refi?
In any real estate scenario, “cash is always king.” Unfortunately, such cash can often be hard to come by. For real estate agents with buyers and sellers without cash savings who need liquidity for items such as closing costs, home improvements or debt consolidation, a cash-out refinance on their current home could make financial sense.
What Is A Cash-Out Refinance?
A cash-out refinance, or “cash out refi,” is a type of mortgage refinance loan that allows borrowers to take the equity in their current home and turn it into cash. With a cash-out refinance, your clients can borrow more than they owe on their current mortgage (up to 80% of the equity in the home) and then pocket the difference in cash.
It’s also important to note that cash-out refinance isn’t a second mortgage. When you take out a second mortgage (typically against the equity you have in the home), there’s two payments: the one on your primary mortgage and the one on your second. A cash-refinance is a brand new loan that replaces your initial mortgage, meaning it is just one payment each month.
How Does a Cash-Out Refinance Work?
The cash-out refinance process is nearly identical to the initial home buying process: homeowners shop interest rates with multiple lenders, pick the best one, go through underwriting with the lender, and attend a closing where new documents are signed and a brand-new loan is issued.The new loan from the refinance lender pays off the loan homeowners took out when buying the home.
Here’s an example: Say you have a client with a home valued at $400,000, but you know they only have $200,000 left on the mortgage (Pro tip: most multiple listing software has this type of mortgage/loan information on a property readily available to agents.)
With the cash-out refinance, buyers get the new loan at $400,000 and start paying it off each month. The only difference is that they get to keep up to 80% of their $200,000 in equity as a lump sum of cash after closing on the new loan.
Why Might Your Client Consider a Cash-Out Refinance?
A cash-out refinance can be a simple solution to many problems homeowners face, which is why they are so popular in today’s low interest rate environment.
A cash-out refinance for home improvements can benefit your clients in one of two ways:
1) It can provide cash to make strategic improvements so their current home will sell/appraise for more. Often, the difference between a quick sale at a higher price and a lower price offer after many months on the market is a few, much-needed home renovation projects.
2) It can provide the cash necessary to rehab a potential future home. In a tight market with low inventory, many sellers may need to look outside a move-in ready home. A cash-out refi can provide the peace of mind needed that they’ll be able to buy a home that needs a little work and get started right away.
Having a low credit score can be a big obstacle on the path to homeownership for many buyers. If your clients have less-than stellar credit, a cash-out refinance may provide an opportunity to turn their home equity into funds to pay off debt, which will in turn increase their credit score and enable them to obtain a loan or garner an even better interest rate on the loan for their potential future house.
Free Up Cash
Buying and selling real estate can be an expensive proposition. There’s closing costs, potential home upgrades, and an expensive down payment to consider. A cash-out refinance may provide your buyers and sellers with an opportunity to turn their house equity into a liquid asset. Not to mention, many lenders will offer better terms to a buyer if they have a sizable nest egg saved up in the bank.
What Your Clients Should Know Before Getting a Cash-Out Refinance
While a cash-out refinance is popular for many reasons, there are a few things to make your clients aware of before they start the loan refinance process.
Their Terms Will Change
A cash-out refinance is a brand new loan, which means the day the loan closes starts a new 30- or 15-year pay off period. Their interest rate will also change, which depending upon the interest rate received when your clients bought the house, can be a good or a bad thing and make the amount borrowed “more” or “less” expensive. Depending on the need for cash, taking out a large loan at a slightly higher interest rate may be worth the refinance.
They’ll Pay Closing Costs
A cash-out refinance is a brand-new loan, which means they will have to pay closing costs again. Often, these costs can be rolled into the new mortgage loan, but not always. Advise your clients to run the numbers of the refinance factoring in the closing costs, as this will impact the total cost of the loan.
Bear in mind that after factoring in closing costs, doing a cash-out refinance may not make sense if your clients are looking to sell their home soon after. Encourage your clients to thoroughly run all the numbers to see if a cash-out refinance makes sense for their financial situation.
Appraisals Are Still Necessary
Again, because a refinance is a brand-new loan, many steps of the loan origination process are the same, such as closing, closing costs and a home appraisal, which does cost the borrower an out-of-pocket fee, which they may or may not be expecting. Guide your clients in how best to prepare for an appraisal so they can show off the best aspect of their home and easily appraise for the needed amount.
The Money Doesn’t Come Immediately
A cash-out refinance is not the same as taking out a personal loan, meaning that the money doesn’t come overnight or even in a matter of business days. If your clients are in a true financial jam and seeking the equity in their home as a fix, advise them that a cash-out refi takes time.
Because this is a brand-new loan, mortgage underwriting will take place in the same fashion as it did when purchasing the home. It will likely take 30 – 90 days for the lender to underwrite the loan, have the home appraised, and schedule a closing.
You Usually Can’t Use All Your Equity
In most instances, homeowners are allowed to borrow up to 80% of their home’s value. Lenders still want homeowners to retain some stake in their home and capping the amount they’re able to borrow on a cash-out refinance is one way to do this.
As an example, your buyer can have $300,000 on a mortgage but after several years in the home and large price jumps in the area, now have a home worth $450,000. In a hypothetical cash-out refinance scenario, your client could borrow up to 80% of that $150,000 in equity, for a cash sum of $120,000.
There are exceptions: most notably VA loans, which do allow homeowners to take out all their equity, but the ability to do this varies by lender. Typically, most lenders cap the amount of a cash-out refi at 80% of the current home’s value.
The Bottom Line
Here’s what is most important for your clients to know about a cash-out refinance:
- They can borrow up to 80% of their home’s value for important expenses such as home repair, debt consolidation or to have cash on hand for a potential future sale or purchase.
- A cash-out refinance is a brand-new loan which means the process is the same as buying a home and involves underwriting, an appraisal, and a closing.
- After factoring in closing costs, it may not make sense to refinance if a home sale is in the near future, but depending on the math and equity involved it could still make financial sense.
Know of a current client who may need a cash-out refinance? Log into your Rocket ProSM Insight account and refer clients who you believe could benefit from a cash-out refinance today. Don’t have an account? Create your free Rocket Pro Insight account to get started.