What Is a Cash-Out Refinance and Is It the Right Choice for Your Client?

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May 23, 2019 | By RGR Marketing Blog

When a Cash-Out Refinance Makes Sense

A cash-out refinance is something many of your clients might be interested in, but it’s your job as the loan officer to make sure the product makes sense for their needs. A lot of homeowners aren’t fully aware of what this type of refinance entails, so being able to explain it is important for building trust with your clients and ensuring they walk away satisfied.

What Is a Cash-Out Refinance?

A cash-out refinance is like a regular mortgage refinance with the exception that this type of refinance replaces a client’s current mortgage with a new home loan for more than what is owed on the current loan. The difference between what is owed on the old loan and the full amount of the new loan is given to the homeowner for use as they see fit. To be eligible for this type of refinance, the client needs to have equity built in their home.

Cash-out refinances also tend to have higher interest rates due to the increased loan amount. There are also limitations included. For example, your client can only take the cash equivalent to 80% or 90% of their home’s equity, not the entire amount.

Benefits of a Cash-Out Refinance

Compared to other types of equity loans, such as a home equity loan or a home equity line of credit, a cash-out refinance will have the lowest interest rate of the three. In fact, while it is most common for the interest on this type of loan to be higher than the original loan, if the original was purchased during a time when rates were high, the new rate could possibly be less.

Reasons to Apply for a Cash-Out Refinance

There are a few instances where a cash-out refinance might make good sense for a client. These include:

Paying for home improvements: Home repairs and renovations are very expensive to have done. By taking out a cash-out refinance, your client will be able to use the money to improve their home.
Debt consolidation: If your client has a lot of credit card debt, they can use this type of loan to pay their cards in full. If they have high-interest cards, this could save them thousands of dollars per year, granted they don’t continue to use the cards.
Improve credit score: By taking care of their debt with the funds they get from their home’s equity your client can use this type of refinance to help improve their credit rating because it will reduce their overall credit utilization rating.
Tax deductions: Because mortgage interest is tax-deductible, your client will be able to enjoy a larger tax refund. The amount of interest paid on the larger loan will reduce their taxable income by that amount.
Medical bills: If your client had an unexpected hospital stay and racked up a lot of medical debt, then getting a cash-out refinance can help them pay those bills, which can get very expensive.

The Risks of Cash-Out Refinances

While cash-out refinances can be helpful in taking care of stressful financial difficulties, they don’t come without their share of risks. Some of the things your client needs to keep in mind include:

Risk of foreclosure: The payments are most likely going to be higher and new terms will be applied with this product, so your client needs to be sure they can afford the new payments, or they will risk losing their home to foreclosure.
Private mortgage insurance: If your client wants to borrow more than 80% of their equity with the new loan, then they will have to pay private mortgage insurance, even if they weren’t paying it on their original loan.
Closing costs: Every refinance has closing costs and the larger the loan, the higher the closing costs. Your client needs to factor in these costs to ensure they have the savings to pay them.
Risk of future financial problems: It can be liberating to have their debt paid off, but if they aren’t careful, your client could find themselves in trouble again. They need to be aware of what caused their previous credit problems and take the steps necessary to avoid them again. Using credit cards that were finally paid off is a bad habit that is difficult for many people to overcome, so your client needs to stick to the plan and not fall back into their old habits.

Is a Cash-Out Refinance Right for Your Client?

This question can only be answered on a client-by-client basis. The most important thing you can do is to educate your client about the pros and cons of this type of mortgage product and provide guidance when necessary.

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When a Cash-Out Refinance Makes Sense

What Is a Cash-Out Refinance?

Benefits of a Cash-Out Refinance

Reasons to Apply for a Cash-Out Refinance

The Risks of Cash-Out Refinances

Is a Cash-Out Refinance Right for Your Client?

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When a Cash-Out Refinance Makes Sense

What Is a Cash-Out Refinance?

Benefits of a Cash-Out Refinance

Reasons to Apply for a Cash-Out Refinance

The Risks of Cash-Out Refinances

Is a Cash-Out Refinance Right for Your Client?

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