Correspondent Lending

Best Practices of Cash-out Refinancing

Woman looking at paint swatches

One side effect of today’s low housing inventory is a growing interest in home renovation, a trend that aligns well with growing home equity. In fact, the majority (83 percent) of American homeowners have more than 20 percent equity in their home.1

So rather than move, some homeowners are opting to tap into this equity to make improvements or expansions to their existing property. But for many, the prospect of refinancing can feel as intimidating or complex as beginning a new home search. That’s why it’s important for homeowners to fully understand if a cash-out refinance to fund renovations is the right step.

Before someone jumps into the process, it’s crucial to help them think holistically about their goals. “The financial goal is incumbent to any cash-out refinance,” says Joshua Feldman, senior mortgage loan officer at SunTrust Mortgage. “It’s about what someone’s life goals are right now, whether that’s paying for a kid’s college or putting an addition on their home.”

A main benefit of a cash-out refinance is that customers may be able to secure a more favorable interest rate in addition to the cash received.

But a refinance might not be the right approach for financing renovations if:

  • The first mortgage is almost paid off. The more mature a loan is, the less a refinance makes sense, as it could result in a loss of equity and potentially add more debt.
  • The homeowner already has a second mortgage or Home Equity Loan. If there is a second mortgage or Home Equity Loan, the home’s equity has already decreased.
  • The homeowner expects to move within five years. If a move is expected in the short term, a Home Equity Line of Credit (HELOC) is probably a better choice for financing improvements.

“I never try to talk a client into refinancing when it’s really not in their best interest,” Feldman says. After determining if a cash-out refinance is the right move to fund updates, work with your customers so they follow these three tips. 

  1. Consider the home equity
  2. It’s important to discuss the ROI of any renovation plans with your clients before they commit any funds, as financing short-term expenses with a long-term loan isn’t necessarily the best approach. Make sure clients know how the improvements are likely to affect their overall financial goals.

  3. Estimate the property value
  4. Many homeowners overestimate the value of their home by a modest amount.2 One way to quickly assess a home’s value before hiring an appraiser is to look at comparable home sales in the neighborhood. Of course a home’s true value depends on many factors, like recent upgrades and lot size.

  5. Factor in the needs for closing
  6. When closing on a refinance, the charges will be similar to those that were paid to secure the first mortgage. These costs may include an appraisal, mortgage broker fees, underwriting, application and administrative fees, title fees, settlement fees, document fees, etc.

“I want people to be prepared with right the knowledge before they talk about a refinance. That’s important,” Feldman says. 

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“CoreLogic Homeowner Equity Insights,” Q4 2017, CoreLogic

2 “Owners Overestimate Value By Lower Margins,” July 12, 2017, The National Association of Realtors

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