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Multiple Ways Borrowers Can Benefit From A Cash-Out Refinance Including Debt Consolidation

A cash-out refinance is a great way for borrowers to optimize the value in their home to obtain cash to achieve various goals. Get the word out to borrowers that they can tap into the equity in their home in order to pay down or consolidate debt, fund a business, pay college tuition, or renovate their home.

This is a great way to add to your bottom line and close more loans! The equity line of credit that is available to homeowners today is significant. CoreLogic reports that homeowners in the U.S. gained over $60,000 in equity per borrower. This is due to historic home price growth across the country over the past few years. CoreLogic’s National Home Price Index indicates that home prices increased 20% in March year over year. The result is the largest one-year gain in average home equity for homeowners, and based on their report, expected to spur a record amount of home improvement spending in 2022.

In fact, most homeowners have substantial equity at this point in 2022. HousingWire stated that almost 45% of homeowners are now equity rich. This is why it makes practical sense to get the message to borrowers that now is the time to put the equity to responsible use.

There are many ways for responsible use of cash obtained from cash-out refinancing:

  • High-interest debt consolidation: Refinance rates are typically lower compared to other lines of credit such as credit cards. The funds from a cash-out refinance allows borrowers to pay their debts off and pay the loan back with one, lower-cost monthly payment instead.
  • Home improvement projects: Homeowners who use the funds from a cash-out refinance for home improvements could have a benefit at tax time. They can deduct the mortgage interest from their taxes if these projects substantially increase the home’s value. Advise borrowers to talk to a CPA or tax preparer for more details.
  • Real Estate Investment purposes: Cash-out refinances can be used to help build their retirement savings or purchase an investment property. Two loans in one – the refinance and then the loan for their second home or investment property! Let your real estate investors know they can do a cash-out refinance to grow their real estate portfolios.
  • College education: Education is expensive and using equity to help fund it is a good use for these funds.
  • Start a business: According to the U.S. Census Bureau, applications for new businesses totaled more than 420,000 in April 2022 alone. That can get expensive! Market to self-employed that their equity can help with those expenses at a lower interest rate than other means.

Aside from a cash-out refinance, the other option is a rate-term refinance. What is the difference between a cash-out refinance and a rate-term refinance? If your borrower asks if a rate-term refinance can help to lower debt, the answer will depend on if they can secure a lower interest rate. A rate-term refinance would allow borrowers to get a mortgage with a new loan term and a new interest rate. The old loan is paid off, and they make new payments with possibly a lower mortgage payment. Then they can use the savings to pay off their debt. However, in a time when interest rates are increasing, this is less likely to be the case. The best bet to pay down debt would be a cash-out refinance.

With a cash-out refinance, your client is getting a new home loan for more than they currently owe on their house. The difference between the new mortgage amount and the balance on the old mortgage is given in cash at closing. The borrower will now pay a different mortgage amount with a new loan term.

Now that you are pumped up and ready to help with cash-out refinances, it’s important to understand that these borrowers might need mortgage loan options outside of Agency. The share of borrowers requiring a non-QM loan continues to grow. For instance, many self-employed borrowers cannot qualify using tax returns due to write-offs. As well, many self-employed borrowers who might need cash to fund their business might not have the required two years of self-employment behind them. Newer business owners may need the cash versus more established business owners. There are mortgage loan product options just for specific borrower types. Understand what they are and how to utilize them to get your borrower’s refinance closed quickly! It is crucial that you choose a lender with the right products and services to protect your earnings and referrals. Angel Oak Mortgage Solutions has many resources from our account executives, mortgage products, and quick technology to do just that.

Here are examples of non-qualified mortgage loans (non-QM) for borrowers who cannot qualify under Agency guidelines:

Bank Statement: Specifically for self-employed borrowers who cannot qualify using tax returns. Angel Oak allows 12 or 24 months of personal or business bank statements. This loan can be used for cash-out or rate-term refinancing. Loans go up to $3 million and includes owner-occupied, non-owner occupied and second homes. Among the benefits of this loan is that it allows just two years out of a foreclosure, bankruptcy, deed-in-lieu or short sale. Up to 80% LTV. Non-warrantable condos are accepted. No tax returns required!

Non-QM Platinum Jumbo: More Jumbo borrowers are not meeting Prime guidelines. Angel Oak Mortgage Solutions has a non-QM Jumbo option other lenders and banks do not have. Platinum Jumbo allows non-warrantable condos and just four years out of bankruptcy, foreclosure, short sale and deed-in-lieu. Cash-out and rate-term refinancing is available. This mortgage loan product has a one year tax return program that comes in handy for those borrowers with declining income over the past few years. Non-warrantable condos allowed.

Investor Cash Flow: This loan is one of the easiest and quickest loans to close. As well, this is a great option for real estate investors to do a cash-out refinance on one property and then use the cash to purchase another real estate investment property. Two deals with one borrower! And a repeat client that will come back for other loan needs. No tax returns, income or employment information required. This mortgage loan is a debt service coverage ratio (DSCR) loan that qualifies on the cash flow of the property. Non-warrantable condos allowed. LTV up to 75%. Angel Oak Mortgage Solutions allows short-term rentals with our Investor Cash Flow loan.

Asset Qualifier: This is an excellent loan product solution for borrowers that does not require tax returns, DTI or employment information. Self-employed borrowers with significant assets, but less than two years self-employed, might have success using this loan for their refinance. Cash-out refinance or rate-term refinancing is available. Allows non-warrantable condos. Five years seasoning required for foreclosure, bankruptcy, short sale, or deed-in-lieu.

Portfolio Select: A full doc loan option for those borrowers with credit events. A recent foreclosure, short sale or bankruptcy does not have to keep your borrower from qualifying for a refinance. As well, a cash-out refinance could help if debt consolidation is needed for these borrowers. One year seasoning for foreclosure, short sale or deed-in-lieu and two years for bankruptcy. A 40 year fixed interest-only option is available.

The credit score for these loan types vary, with some starting at 680. Offering non-QM is a great way too add to your product and service offerings. Delivering the message to homeowners as to why NOW is the time to capitalize on their equity also adds to the value you bring to your clients.

We look forward to helping you close loans for more borrowers through our cash-out refinance program!

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