Despite rate hikes, cash-out refinancing is often a good deal, but many originators are missing the boat
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To many loan officers, changing tax law and spiking mortgage rates have all but killed the refinancing market, but the funeral is premature. A cash-out refinance is still a good choice for homeowners who need to consolidate debt, fund home improvements or get a better deal on their mortgage.
The process allows borrowers to refinance for more than they currently own, and transform the difference into cash. Often there is an equity requirement of at least 20%.
With home prices rising in many markets, the timing is perfect, according to Joe Lam, Area Sales Manager with Planet Home Lending.
“If we monitor from 2012 to 2017, we’ve seen an average home appreciation of about 6%, so most people who bought in the last couple of years have seen a substantial increase in their home values. Therefore, there is plenty of room for a refinance,” Lam said. “Someone who bought a home with a low down payment may now have 30% in equity. That’s a good time to refinance, cash out and pay down higher-interest debts.”
Find out the difference between cash-in refinance and cash-out refinance in this article.
A cash-out refinance could particularly benefit homeowners who weren’t able to qualify for a traditional loan because their credit scores were low or they lacked necessary documents, such as two years of tax returns. These clients could find a better deal thanks to less stringent credit requirements, as well as the abundance of alternative mortgage products like non-QM, which allow for less documentation.
Lam stressed that loan officers should be reaching out to their clients now to discuss refinancing before rates increase, but many haven’t picked up on the opportunity. Refinance originators who work for some companies are locked in by their companies’ priorities, Lam said, while self-gen originators often aren’t well versed on refinancing.
Recent rate increases have also led many originators to believe there is no reason to consider refinance, though borrowers with heavy credit-card debt or other high-interest loans will still benefit, Lam said.
“I think a lot of originators are missing the boat on cash-out in the current marketplace,” Lam said. “I think we need to get more education out. The lenders need to educate their loan originators on looking for this particular market and how to tap into it.”
He recommended that originators who want to get in on cash-out refinancing should go back into their book and look for equity appreciation and borrowers with lower credit grids, indicating higher debt.
At Planet Home Lending, cash-out refinancing has been steadily picked up momentum. Roughly 80% of the company’s refinances are cash-out, compared to 40% to 50% a year ago.
“People see refinance as a dying business because rates have gone up, but if they turn their focus to cash-out and debt consolidation, that opens up a brand new source of business for them,” Lam said.
