Have you encountered some borrowers interested in a cash-out refinance? After the refinance boom of 2020 and 2021, many consumers may be aware of the term refinance. But are they as well-versed in cash-out refinancing?
Considering the low levels of financial literacy across the country, it will not be surprising if they need some extra education. That’s where you can come in. Taking the time to address borrower questions like, “What is a cash-out refinance?” can help inspire, educate, and empower your clients.
Let’s dive into some of the most common borrower questions surrounding cash-out refinances and their comprehensive answers:
Remember: while you’re working with mortgage products day in and day out, the average American just isn’t. Most of your clients are going to need a clear, simple definition to start.
Here’s a sample script you can use:
“A cash-out refinance is when a homeowner replaces their existing mortgage loan with a new home loan that is larger than the current balance. Essentially, the owner borrows more than they owe to convert some of their home's equity into cash.”
It might help to run some numbers in real-time, too:
“For example, imagine a home worth $300,000 with an existing mortgage balance of $200,000. In a cash-out refinance, the borrower would apply for a new loan that exceeds the $200,000 balance; say, $250,000. If approved, the owner would then receive the extra $50,000 in cash, minus any associated costs or fees.”
Interested borrowers might be eager to get started! Clarify that each lender has different requirements, then walk through all the usual sticking points, including:
Explain that borrowers must atleast a certain amount of equity to qualify. Firm numbers tend to build understanding, so communicate that 20% may be about the minimum amount required.
Make sure they understand how a higher credit score means less risk for lenders, which might mean better approval odds, more favorable terms, etc. You might also need to show them how to request their free annual credit report, to check their score, or refer them to a credit counseling service that may be able to assist with improving their score.
Acronyms can be confusing! Be sure to explain that DTI is a comparison of monthly debt expenses to gross monthly income. You can help them run their numbers and, if necessary, provide potentially actionable advice on lowering their DTI before applying.
Clarify that income, payment history, employment history, and more will also be taken into account. A handout or email template with a checklist of necessary documents might come in handy here.
If a borrower decides that a cash-out refinance isn’t quite right for them, you should share other options in clear, easy-to-understand terms.
Explain that this loan also allows owners to borrow money using home equity as collateral but, unlike a cash-out refinance, it doesn't replace the existing mortgage loan. They need to understand that it’s a separate loan with its own terms and repayment plan, particularly if they already have a low interest rate on their existing mortgage loan.
Explain how a HELOC also allows eligible owners to borrow against the equity in their home. It might help to compare it to a credit card, where clients can access funds as needed during their pre-determined draw period.
Make sure that clients understand that personal loans are often unsecured loans, so they may not require collateral like a home. They should also walk away knowing that personal loans tend to come with higher interest rates, but they won’t affect the borrower’s home loan like a HELOC, home equity loan, or cash-out refinance might.
It might help to have a handout ready to go, which compares interest rates, loan terms, and other financial impacts. This can help clients get clear on the similarities and differences before making a final decision on what kind of loan to pursue.
After all that education, this will probably be their final question. Don’t shy away from giving your professional opinion, either way.
Follow up with clear next steps, whether that’s getting started on a cash-out refinance, pursuing one of the alternative options, or just giving them some time to think. Be sure to communicate that this isn’t a decision to be taken lightly!
A cash-out refinance might seem intimidating to many of your clients. They probably didn’t learn the ins and outs in school, and they definitely don’t have the inside, industry expertise that you do.
But plenty of them may have the potential to benefit! That’s why it’s so important you use their questions as opportunities to demonstrate value, grow understanding, and overall champion financial education well after closing day.
Ready to have the latest mortgage insights conveniently delivered to your email inbox? Sign up for the wemlo newsletter.