Home purchases have seen a dip in April-May 2020 due to the economic crisis caused by the pandemic. The Mortgage Industry was also similarly affected by the financial crisis. However, there has been a slight increase in borrower demand in terms of loan size. The uncertainties caused by COVID-19 such as loss of incomes, lower interest rates, are making homeowners look at the possibility of using relief options like cash-out refinancing and forbearance. We have discussed forbearance at length in our previous blog.
Image source - https://www.mba.org/news-research-and-resources/research-and-economics/chart-of-the-week
In this blog, we will look into the different facets of cash-out refinancing in the Mortgage Industry. Cash-out refinancing is a lucrative option as it helps homeowners to replace the current loan with a new one having different terms and lower their overall mortgage rate. It gives the homeowners’lump sum payout.
Refinance rates are low at present and is considered the best time to refinance the borrowers’ mortgage. According to Black Knight Inc, nearly 45 million homeowners have tappable equity in their homes.The Refinance Index has increased 8 percent and the refinance share of mortgage activity has increased to 65.4% of total applications, from the last week of September 2020, according to the latest MBA Weekly Survey, October 7, 2020. Cash-out refinancing is usually approved for homeowners if they have significant equity in their homes. The process involves the assessment of the previous loans and the balance to be paid by the homeowner. There is considerable amount of paperwork involved in the conventional way in which an underwriting analysis has to be done by the lender to make an offer to the homeowner.A reliable and efficient way for Mortgage loan officers is to use inflooens Mortgage CRM software handles all processes, from Mortgage LOS to Post-close services, including cash-out refinance.
The requirements for a cash-out refinancing are:
- A credit score of 660 and above
- Debt-to-income (DTI) ratio to be equal to or less than 36%
- Loan-to-value (LTV) ratio not to exceed 80%
There are government-backed options for cash-out refinance. These options are:
The alternative to Cash-out refinancing is Home equity loans, which are like second mortgages. They also use homes as collateral for loan repayment. They are of fixed interest rates and fixed monthly payments.
Limits to cash-out refinancing
These limits are:
- Maintenance of a minimum credit score
- Ownership of the home for at least a year
- The Loan-to-value ratio to be around 85%
- Risk of losing the home if the loan is not paid in time and in full
Managing customer information can be a challenging job. With digitization of the mortgage industry and tools like inflooens Mortgage CRM software, tracking of leads and evaluation processes become more efficient.
Costs involved in cash-out refinancing
Depending on the loan size, location, and home price, the closing costs for a cash-out refinance is about 2% to 6% on an average. These costs involve mortgage origination fee, appraisal, credit check, title search, title insurance, a recording fee, attorney, and escrow fees.
With the pandemic onset, in-person appraisals would have been a health risk. Keeping this in mind, the Federal Housing Finance Agency in March 2020, directed Fannie Mae and Freddie Mac to grant flexibilities for appraisal and employment verifications on loans to be purchased. It also allowed appraisal waivers for cash-out refinances and some purchase mortgages.
Since March 2020, the share of mortgages with appraisal waivers has increased.
GSE=Government Sponsored Enterprises (Fannie Mae and Freddie Mac) Image source - https://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-finance-glance-monthly-chartbooks
Refinancing a mortgage is a way to change the financial conditions of the borrower’s mortgage. It helps in using home equity and converting it into cash. As mortgage interest rates are low, a refinance will also be at a low rate, which can save thousands of dollars. The main purpose behind cash-out refinancing is lowering the mortgage costs and breaking even on the payment in a reasonable time.
Given the current pandemic situation, it is difficult to keep track of an ever-changing market. In such a scenario, the best bet for lenders is to depend on a convenient and superior Mortgage CRM software that will transform the mortgage lifecycle. Inflooens is the best Mortgage CRM software that makes it easy to share information across markets to keep your loan officers updated.
inflooens is the world’s first “Loan Team Optimization Platform”. This next-generation, cloud-based, integrated mortgage platform aims to transform the entire Mortgage Process and enhance the customer experience. Learn more about the platform on www.inflooens.com