mortgage

Cash-out mortgage refinancing: How it works and when it’s the right option

May 23, 2022 by Realty411 Team

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By Zach Wichter
Special Submission from Bankrate.com

What is cash-out refinancing?

Cash-out refinancing replaces your current home loan with a bigger mortgage, allowing you to take advantage of the equity you’ve built up in your home and access the difference between the two mortgages (your current one and the new one) in cash. The cash can go toward virtually any purpose, such as home remodeling, consolidating high-interest debt or other financial goals.

How a cash-out refinance works

The process for a cash-out refinance is similar to a rate-and-term refinance of a mortgage, in which you simply replace your existing loan with a new one for the same amount, usually at a lower interest rate or for a shorter loan term, or both. In a cash-out refinance, you can do the same, and also withdraw a portion of your home’s equity in a lump sum.

“Cash-out refinancing is beneficial if you can reduce the interest rate on your primary mortgage and make good use of the funds you take out,” says Greg McBride, CFA, Bankrate chief financial analyst.

For example, say the remaining balance on your current mortgage is $100,000 and your home is currently worth $300,000. In this case, you have $200,000 in home equity. Let’s assume that refinancing your current mortgage means you can get a lower interest rate, and you’ll use the cash to renovate your kitchen and bathrooms.

Since lenders generally require you to maintain at least 20 percent equity in your home (though there are exceptions) after a cash-out refinance, you’ll need to have at least $60,000 in home equity, or be able to borrow up to $140,000 in cash. You’ll also need to pay for closing costs like the appraisal fee, so the final amount could be less.

You tend to pay more in interest after completing a cash-out refinance because you’re increasing the loan amount, and like other loans, you’ll have to pay for closing costs. Otherwise, the steps to do this kind of refinance should be similar to when you first got your mortgage: Submit an application after selecting a lender, provide necessary documentation and wait for an approval, then wait out the closing.

How to prepare for a cash-out refinance

Here’s how you might prepare for a cash-out refinance:

1. Determine the lender’s minimum requirements

Mortgage lenders have different qualifying requirements for cash-out refinancing, and most have a minimum credit score — the higher, the better. The other typical requirements include a debt-to-income ratio below a certain percentage and at least 20 percent equity in your home. As you explore your options, take note of the requirements.

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2. Calculate the exact amount you need

If you’re considering a cash-out refinance, you’re likely in need of funds for a specific purpose. If you aren’t sure what that is, it can be helpful to nail that down so you borrow only as much as you need. For instance, if you plan to use the cash to consolidate debt, then gather your personal loan and credit card statements or information about other debt obligations, and add up what you owe. If the cash is to be used for renovations, consult with a few contractors to get estimates for both labor and materials ahead of time.

3. Have your information ready when you apply

Once you’ve shopped around for a few lenders to ensure you get the best rate and terms, prepare all of your financial information related to your income, assets and debt for the application. Keep in mind you might need to submit additional documentation as the lender evaluates your application.

What’s the point of a cash-out refinance?

Considerations before cash-out refinancing

You can’t tap 100 percent of your equity: Most lenders require you to maintain at least 20 percent equity in your home in a cash-out refinance. One exception is a VA cash-out refinance, which allows you to withdraw all of your equity.
You could end up with a very different loan: Since you’re replacing your existing mortgage with a new loan, the terms of the loan could change. For instance, you might have a higher or lower interest rate (and monthly payments), or a longer or shorter loan term.
You’ll need to have your home appraised: Lenders typically require an appraisal for conventional cash-out refinances, since the amount you can borrow depends on how much equity you have.
You’ll pay closing costs: Like with your first mortgage, cash-out refinances come with closing costs, which cover lender fees, the appraisal and other expenses. It’s important to consider what a cash-out refinance could cost you because the fees might not be worth it, especially if you’re not borrowing a large amount.
The cash won’t land in your bank account right away: Lenders are required to give you three days after closing to back out of the refinance if you want to. For this reason, you’ll need to wait a few days before you receive the funds.

How much money can I get from a cash-out refinance?

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While lenders typically allow homeowners to borrow up to 80 percent of the home’s value, the threshold can vary depending on your credit score and type of mortgage, as well as the type of property attached to the loan (for example, a single-family, duplex or three- or four-unit property). Lenders who offer loans insured by the Federal Housing Administration, or FHA, sometimes offer an FHA cash-out refinance that allows you to borrow as much as 85 percent of the value of your home. As noted, cash-out refinance loans guaranteed by the U.S. Department of Veterans Affairs (VA) are available for up to 100 percent of the home’s value.

What are the fees for a cash-out refinance?

Expect to pay about 3 to 5 percent of the new loan amount for closing costs to do a cash-out refinance. These closing costs can include lender origination fees and an appraisal fee to assess the home’s current value. Shop around with multiple lenders to ensure you’re getting the most competitive rates and terms.

You might be able to roll the loan costs into your new mortgage to avoid upfront closing costs, but you’ll likely pay a higher interest rate. Plus, taking out another 30-year loan or refinancing at a higher interest rate might mean you pay more in total interest. Crunch the numbers with Bankrate’s refinance calculator to gauge whether the math works in your favor.

Pros and cons of cash-out refinance

Before you decide to go through with a cash out refinance, it’s important to consider the pros and cons of cash out refinancing.

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Some of the advantages include:

You can lower your rate: This is the most common reason most borrowers refinance, and it makes sense for cash-out refinancing as well because you want to pay as little interest as possible when taking on a larger loan.
Your cost to borrow could be lower: Cash-out refinancing is often a less expensive form of financing because mortgage refinance rates are typically lower than rates on personal loans (like a home improvement loan) or credit cards. Even with closing costs, this can be especially advantageous when you need a significant amount of money.
You can improve your credit: If you do a cash-out refinance and use the funds to pay off debt, you could see a boost to your credit score if your credit utilization ratio drops. Credit utilization, or how much you’re borrowing compared to what’s available to you, is a critical factor in your score.
You can take advantage of tax deductions: If you plan to use the funds for home improvements and the project meets IRS eligibility requirements, you could take advantage of the interest deduction at tax time.

Some of the drawbacks of cash out refinances are

Your rate might go up: A general rule of thumb is to refinance to improve your financial situation and get a lower rate. If cash-out refinancing increases your rate, it’s probably not a smart move.
You might need to pay PMI: Some lenders let you withdraw up to 90 percent of your home’s equity, but doing so might mean paying for private mortgage insurance, or PMI, until you’re back below the 80 percent equity threshold. That can add to your overall borrowing costs.
You could be making payments for decades: If you’re using a cash-out refinance to consolidate debt, make sure you’re not prolonging debt repayment over decades when you could have paid it off much sooner and at a lower total cost otherwise. “Keep in mind that the repayment on whatever cash you take out is being spread over 30 years, so paying off higher-cost credit card debt with a cash-out refinance may not yield the savings you’re thinking,” McBride says. “Using the cash out for home improvements is a more prudent use.”
You have a greater risk of losing your home: No matter how you use a cash-out refinance, failing to repay the loan means you could wind up losing it to foreclosure. Don’t take out more cash than you absolutely need, and ensure you’re using it for a purpose that will ultimately improve your finances instead of worsening your situation.
You might be tempted to use your home as a piggy bank: Tapping your home’s equity to pay for things like vacations indicates a lack of discipline with your spending. If you’re struggling with getting your debt or spending habits under control, consider seeking help through a nonprofit credit counseling agency.

Cash-out refinancing and your taxes

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A cash-out refinance might be eligible for mortgage interest tax deductions so long as you’re using the money to improve your property. Some acceptable home improvement projects might include:

Adding a swimming pool or hot tub to your backyard
Constructing a new bedroom or bathroom
Erecting a fence around your home
Enhancing your roof to make it more effective against the elements
Replacing windows with storm windows
Setting up a central air conditioning or heating system
Installing a home security system

In general, the improvements should add value to your home or make it more accessible. Check with a tax professional to see whether your project is eligible.

Is a cash-out refinance right for you?

Cash-out refinancing can be a good idea for many people.

Mortgages currently have among the lowest interest rates of any type of loan. The collateral involved — your home — means that lenders take on relatively little risk and can afford to keep interest rates low. This is especially true in today’s low-rate environment.

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That means that cash out refinancing is one of the cheapest ways to pay for large expenses. Most homeowners use the proceeds for the following reasons:

Home improvement projects: Homeowners who use the funds from a cash-out refinance for home improvements can deduct the mortgage interest from their taxes if these projects substantially increase the home’s value.
Investment purposes: Cash-out refinances offer homeowners access to capital to help build their retirement savings or purchase an investment property.
High-interest debt consolidation: Refinance rates tend to be lower compared to other forms of debt like credit cards. The proceeds from a cash-out refinance allow you to pay these debts off and pay the loan back with one, lower-cost monthly payment instead.
Child’s college education: Education is expensive, so tapping into home equity to pay for college can make sense if the refinance rate is much lower than the rate for a student loan.

Cash-out refinancing vs. home equity loan

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Both a cash-out refinance and a home equity loan allow borrowers to tap their home’s equity, but there are some major differences. As noted, cash-out refinancing involves taking out a new loan for a higher amount, paying off the existing one and obtaining the difference in cash. A home equity loan, in contrast, is a second mortgage — it doesn’t replace your first mortgage — and can sometimes have a higher interest rate compared to a cash-out refinance.

Alternatives to cash-out refinancing

In addition to a home equity loan, consider these other options:

HELOC

A home equity line of credit, or HELOC, allows you to borrow money when you need to with a revolving line of credit, similar to a credit card. This can be useful if you need the money over a few years for a renovation project spread out over time. HELOC interest rates are variable and change with the prime rate.

Personal loan

A personal loan is a shorter-term loan that provides funds for virtually any purpose. Personal loan interest rates vary widely and can depend on your credit, but the money borrowed is typically repaid with a monthly payment, like a mortgage.

Reverse mortgage

A reverse mortgage allows homeowners aged 62 and up to withdraw cash from their homes, and the balance does not have to be repaid as long as the borrower lives in and maintains the home and pays their property taxes and homeowners insurance.

Learn more:

ZACH WICHTER
Mortgage reporter

Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.

3 Ways Mortgage Loan Officers Can Grow Leads Without Spending Money on Ads

March 26, 2021 by Realty411 Team Leave a Comment

By Luke Shankula

The coronavirus pandemic has affected virtually every aspect of our daily lives, from schooling to socializing to business. Since lockdowns commenced nearly a year ago, I’ve had mortgage loan officers, long accustomed to building relationships and generating leads through in-person networking, asking me how they can generate new business.

Sure, spending money on advertising is one strategy. But in a brave new world where people are spending huge amounts of time online, my advice to loan officers is this: go social like you mean it. These are my top three ways that loan officers can grow leads organically—that is, without spending a dime.

Be strategic with social media engagement.
Create quality content that people want to consume.
Present yourself in a genuine manner—i.e., be the “real you.”

Choose your platforms strategically

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Unless you’ve got a monstrous amount of time to devote to social media or the budget to pay someone else to do it for you, it’s difficult to have a huge presence across several different platforms. Instead, I tell my clients to choose one, two, maybe three social media platforms, and get really good at using those. This comes down to researching which audiences you’ll reach on different platforms and honing in on those that can be the most fruitful. Here are just two examples of how I tell clients to use the many platforms out there:

LinkedIn: While LinkedIn isn’t exclusively a B2B platform, it is the place where you’re more likely to network with referral partners, such as real estate agents and other loan officers. It’s a great place for work-related content, but posting links to shared content will actually reduce your engagement here, since LinkedIn (and Facebook) wants to keep people in the site. Instead, create short, original posts that talk about your business. This doesn’t have to be “hard sell” stuff. Try posting video or screenshot testimonials from happy clients, or you celebrating closing a loan in record time. This is called “social proof”—it’s what establishes you as a leader in your field and attracts potential colleagues and referral partners. Also, be sure to congratulate colleagues who post about promotions or job change. But go beyond a simple “Well done!” with substantive, sincere praise. “Congratulations Jan! I’ve been following your career since we worked together at ___, and it’s no surprise you’ve been so successful.”
Facebook: If LinkedIn is your office, Facebook is your living room. Use your personal Facebook page—yep, that’s right; your personal page, as it’s amazingly difficult to generate organic traffic on a business page—to share your original content on mortgage news, career wins and challenges. Intersperse these with normal Facebook stuff, whether it’s family photos or funny animal videos. When you sprinkle in the work-related posts, always think about engagement: “The Fed is threatening to raise interest rates again: do you think it’s too soon for another rate hike?” Make your non-personal posts public so that they can be shared with anyone. Accept friend requests that don’t seem sketchy or stalkerish. And engage, engage, engage.

Create quality content

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I say it all the time and I’ll never stop saying it. When it comes to growing organic leads, it’s about quality, not quantity. Posting 60 pieces of shared content a day, regardless of the platform, is going to turn people off and make them reach for the dreaded “mute” button—and it might also get you flagged as a spammer. Instead, post original, quality, shareable content that people can use. Here are just a few ideas:

A short video (60-120 seconds is ideal) of you explaining how the mortgage pre-approval process works, or telling folks how they can improve their credit score
An attractive infographic showing the steps from loan application to closing

Remember, most first-time buyers—and a lot of second- or third-time buyers—have no clue how this stuff works. By creating content that explains the process, you establish yourself as an expert. Just don’t forget to add links to your email address and business website!

Just do you

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They say that all business is personal, and that’s truer now than ever before. There might have been a time when prospective loan applicants could choose from just a handful of loan officers. Now, there are more than 300,000 loan officers in the US, most of them reachable with the click of a mouse. So how do you stand out in a crowded field? Just by being you—and social media is the place to do it.

Be genuine. Share your kid’s stellar report card and your spouse’s new promotion just as readily as you do mortgage industry news. You’re a lot more than just your job, and your clients want to know that.
Engage actively, but naturally. Make a concerted effort to share and comment more on social, but don’t fake it. If you’re interested in a topic, try to generate lively discussion around it. If you’re happy for a friend or colleague’s positive news—express it!
I tell my colleagues to be themselves online and in-person, with one caveat: stay as apolitical as possible. Mortgage loans aren’t red or blue!

Building a social media presence that generates organic leads won’t happen overnight. It takes months, if not years, to create and curate quality content, build your followings and raise your profile. But when it all starts to click, it’s some of the most rewarding business you can land—and not just because it’s free. For loan officers, marketing and lead generation through social media enables you to really create a trusted brand. And the satisfaction of knowing you did it yourself, using your own initiative, creativity, and industry knowledge? That’s priceless.

Trust Deeds vs Mortgages: What’s the Big Difference?

December 17, 2020 by Realty411 Team Leave a Comment

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If you are planning to invest in turnkey real estate development collateralized by real property, one of the top items on your due diligence check list should be to determine which mortgage theory the state follows per the location of the subject property. This understanding can be detrimental to your recovery strategy if your borrower is unable to uphold their end of the deal and defaults on the loan. Each state adheres to either title theory or lien theory, though there are a few states that follow both. In title theory states, Deeds of Trust are the binding agreements utilized between lenders and borrowers, and Mortgages are the agreements utilized in lien theory states. Both documents serve the same purpose in a real estate deal between a lender and borrower, but how they affect the relationship between the parties involved and the subject property is what makes the big difference.

What are some similarities between Trust Deeds and Mortgages?

Mortgages and Trust Deeds both secure repayment of the loan by placing a lien on the property, and are considered, by law, evidence of the debt as they are generally recorded in the county where the property is located. If the borrower defaults on the loan and the lien is in first position, the lien gives the lender the right to take the property back through foreclosure and sell it. In other words, both Mortgage and Trust Deed documents are used as leverage to ensure the borrower pays back the loan in full. The ability to sell the property gives real estate investors and lenders the potential to recoup the original principle lent on the loan. Depending on the value of the property, there is the potential for the recovery of back due interest, late fees, and even capital gain.

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What are the main differences between Trust Deeds and Mortgages?

Number of Parties

A Mortgage involves two parties: a borrower (the Mortgagor) and a lender or investor (the Mortgagee). A Trust Deed involves three parties: a borrower (the Trustor), a lender or investor (the Beneficiary), and the title company or escrow company (the Trustee). The Trustees main functions are to hold the title to the lien for the benefit of the Beneficiary and to initiate and complete the foreclosure process for the Beneficiary in the case of default by the Trustor.

Property Title & Foreclosure Processes

The main difference between Trust Deed and Mortgages is who holds the title to the property encumbered by the loan for the duration of the loan term. In a Mortgage State, the borrower holds the title of the property. Therefore, if the borrower defaults on the loan, the lender must go through the courts to take back the property through foreclosure. This is known as judicial foreclosure and this process involves the lender filing a lawsuit against the borrower. This can be a costly and time-consuming process for both parties involved.

In a Trust Deed State, court can be bypassed because the Trustee holds the title to the property. You would follow the non-judicial foreclosure process, which almost always results in faster execution and resolution for all parties involved, especially for the lender. The speed of foreclosure can be detrimental to minimizing carrying costs and getting the property on the market quickly to sell in what may be a more promising market than one met at a later date.

What are First Trust Deeds?

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A First Trust Deed is as it implies, is recorded first before any other financial liens on the subject property, whether they be secondary mortgages, trust deeds or even mechanics liens placed by subcontractors. This means the First Trust Deed holds a priority or “senior” position, making all other liens encumbered by the loan subordinate or “junior” to the senior loan. Obtaining first position is important because in a foreclosure scenario, all outstanding subordinate liens are eliminated. This makes it so the lender does not have to worry about reconciling those other debts on top of their own.

Why invest in First Trust Deeds?

Hard money lenders like Ignite Funding, tend to operate more in Trust Deed states. First Trust Deed investments offer an attractive yield with relatively low risk to Ignite Funding investors due to their senior lien position on the property and the foreclosure process that is more conducive to the investors who are the Beneficiaries on the loan. This allows investors to earn double digit annualized returns paid as a monthly fixed income with REAL property as their collateral.

If you are interested in becoming a Trust Deed investor or want to learn more, you can schedule a FREE consultation with an Investment Representative, please click here.

Mortgage Note Investing: Institutional vs. Seller Financed Notes

November 27, 2020 by Realty411 Team Leave a Comment

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Navigating Hurricanes For Mortgage Note Investors

November 2, 2020 by Realty411 Team Leave a Comment

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The Effects from Covid on Reverse Mortgages

September 10, 2020 by Realty411 Team Leave a Comment

By Edward Brown and Mary Jo LaFaye

With the Covid crisis still looming, much attention has been focused on conventional loans where monthly mortgage payments are required. Recently, laws have been passed on both local and national levels to ensure homeowners are not evicted for non-payment on FHA loans.

Relatively little attention has been geared toward reverse mortgages during the Covid virus. Why is that? At first glance, the simple answer is that no monthly payments are required for reverse mortgages; thus, there is no risk for a foreclosure for non-payment of a mortgage. However, one needs to go deeper to understand that there could be a potential risk to the homeowner of losing their house in certain circumstances but for the foreclosure moratorium.

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Under normal circumstances, the borrower on a reverse mortgage does not have to worry about foreclosure by the lender because no monthly payments are required; the loan balance just keeps increasing as interest accrues over time and is only required to be paid back upon the death of the last remaining borrower, move out by the borrower, or death of the non-borrowing spouse if the borrowing spouse predeceased them. The borrower’s only requirement for yearly payments are real estate taxes and insurance, HOA dues if applicable, plus maintenance and utilities. If the borrower fails to pay these, technically, they are in default and the loan may be called. This could lead to a foreclosure. In addition, the house may not be left vacant or abandoned.

For those borrowers who take a lump sum reverse mortgage and whose income is estimated to be too low to maintain the real estate taxes and insurance, they may be required to have a Life Expectancy Set Aside [LESA]. LESA is similar to an escrow account that is set aside for future real estate taxes and insurance and is based on the life expectancy of the borrower. These future expenses are deducted from the lump sum provided by the reverse mortgage company and held by them. The funds in the LESA become part of the loan balance once the lender disburses them to pay the property charges on behalf of the borrower. Thus, those borrowers who have LESA, for all intents and purposes, would not typically face foreclosure during their expected lifetime.

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Many conventional borrowers have requested deferments from their lending institution as they fell on hard times with the loss of income during Covid. The need for deferment requests are all but eliminated for reverse mortgages.

There has been a tremendous push toward applying for reverse mortgages by homeowners. There are many reasons for this; historically low interest rates mean that a borrower can obtain a much larger reverse mortgage, as the interest that gets added to the mortgage every year is less than in a high interest rate environment. Thus, the lower the interest rate, the better it is for the homeowner and, consequently, the less risk for the mortgage company.

In addition, many older homeowners have lost their job during the virus, and their largest retirement asset, by far, is their home equity from which they can draw upon. These same homeowners not only may not qualify for a HELOC [Home Equity Line of Credit], they may not want them after considering the benefits of a reverse mortgage (HECM) vs. a HELOC. For one, HELOCs require monthly mortgage payments. In addition, unlike a reverse mortgage (HECM), the bank can freeze [or reduce] the HELOC line and not allow access to it. This puts the homeowner in a precarious position of having debt against their property [as the HELOC is recorded against the property for the maximum potential draw of the line] without any benefit. Such was the case during The Great Recession in the mid-late 2000s when $6 billion of HELOC credit was frozen in June of 2008, and the freezing continued for some time. Why? The answer lies in the fact that the fastest way for a bank to shore up its balance sheet is to freeze HELOCs, so they do not have to set aside reserves. During The Great Recession, banks were facing write downs and write offs of loans as the loans that they had previously written took a downturn when borrowers, during the credit crisis, were unable to pay their mortgage. When a bank makes loans, they use depositors’ funds. The government requires reserves [loan loss reserves] be set aside to ensure the return of those depositors’ funds. If a bank has existing loans outstanding, they cannot just call in those loans [unless borrowers default]; however, a HELOC is a “potential loan” as the loan technically only exists as the borrower draws upon it. In this situation, if they freeze [or reduce] the line, the bank has not lent the money yet and can stop it before the borrower accesses the money that was available to them.

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Most major banks have seriously curtailed the issuance of HELOCs during the current Covid crisis, and those that continue to offer HELOC’s have imposed stringent qualifications to borrowers.

Many borrowers are realizing reverse mortgages offer advantages over HELOCs in this regard. There are limited income and credit qualifications to obtain a reverse mortgage. Reverse mortgage (HECM) lines of credit cannot be frozen or reduced, and, since there are no monthly mortgage payments, the risk of foreclosure [even after the moratorium] is slim.

A new situation has arisen due to Covid and that has to do with nursing homes. Once considered an alternative to in-home care [which is usually two to three times the cost of a nursing home], many stories have been published about the increase in deaths surrounding Covid and older Americans in care facilities. Most people would like to be in their own home instead of a care facility given the choice, but, unfortunately, many people cannot afford the [around the clock] care required to stay home and be cared for. Loved ones, especially during the virus, are looking for a way to keep their elders in the safety of their own home and receiving the quality and quantity of care they needed. Many are looking toward a reverse mortgage to fill this need. Many people have enough equity in their homes, especially as real estate has tremendously rebounded since The Great Recession, to allow them a large enough reverse mortgage to afford the costs associated with in-home care.

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The National Reverse Mortgage Lenders Association [NRMLA] reports that there have been significant increases in draws [on the HECM reverse mortgage line of credit]. Those retirees who lost their part time jobs and need to make ends meet, helping family affected by Covid, and those who are just generally concerned about their future finances. NRMLA states there has been a 55% increase in the number of draws and 14% in the size of the draws. In fact, they notice that some borrowers who had never previously drawn on their line of credit are fully drawing the line now.

As Covid gets more impactful on the economy and on peoples’ lives in general, we should expect reverse mortgages to grow, and now seems to be the most opportune time to obtain one – before interest rates increase.

Edward Brown

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.