Cash-In Refinances: An Opportunity in 2010
If you are looking for more refinance volume in today’s market, targeting cash-in refinance borrowers may help you generate additional volume right now. For many of these borrowers, getting a lower mortgage rate is only part of their motivation for refinancing.
A cash-in refinance is a transaction where the borrower brings additional funds to closing in order to pay down the loan amount. This is not a new concept, but has become increasingly common in a time of decreasing equity due to plummeting home values. Homeowners lost nearly $7 trillion dollars worth of equity between 2005 and 2009.
Many loan officers do not realize that cash-in refinance growth has been significant. Market reports show that in 2006, 90% of all refinances were cash-out, and only 5% were cash-in. By 2007, cash-in refinance totals increased to 9%. Almost a third of refinances in the fourth quarter of 2009 were of the cash-in variety, only 27% of refinances were cash-out, the lowest figure on record.
Loan officers who want to successfully market cash-in refinances to borrowers need to be familiar with the profile of the typical borrower and the reasons these borrowers execute these transactions. The typical borrowers will generally qualify in every way for a refinance except that they do not have sufficient equity in their home. Equally important, these borrowers do have other financial resources that they can use to pay down their loan balance if it makes financial sense.
Long-Term Benefits of Cash-in Refinance
If a loan officer can show borrowers that a cash-in refinance can offer long term benefits (do we want to use the term investment? Sounds like investment advice. Does legal say OK? – maybe we can say – will offer long-term economic benefits), then they will be more likely to move forward with a refinance. While mortgage interest rates are near all-time lows right now, so are savings, checking and CD rates. In addition, many home owners have turned away from the stock market as a source of investment returns due to the excessive volatility of the past few years. So when borrowers choose to pay down their mortgage they are actually investing in their own mortgage instead of a savings account or CD.
For example, if a borrower refinances at 5%, any money paid to reduce the mortgage balance has been invested to save 5% in annual interest payments. The actual savings is the 5% interest saved less what the borrower would have earned from a savings account of about 2% - about 3%. At a time when other investments vehicles offer volatile returns that are far from guaranteed, a homeowner can lock in a fairly decent rate of return by paying down their mortgage.
Cash-In Refinance and LTV
Aside from a straight investment allocation decision, borrowers have several other reasons for a cash-in refinance. With the recent decline in home values, a major reason borrowers pay down their loans today is to avoid paying for or to get rid of private mortgage insurance (PMI). A borrower who has a loan to value (LTV) ratio over 80% who brings enough cash to refinancing to get the LTV under 80% will eliminate their monthly mortgage insurance payment. Try Cash-in Refinance Calculator
Borrower’s Debt-to-Income Ratio (DTI)
Another reason to do a cash-in refinance could be to improve the borrower’s debt-to-income ratio (DTI). With today’s stricter DTI limits, reducing the loan amount may be the only option for some borrowers to qualify for a refinance at all. Many borrowers may also find that they are just over the maximum loan limit or maximum loan-to-value (LTV) limit for the program that best suits their refinancing needs. In each of these cases, a cash-in refinance transaction can solve a specific qualifying issue.
The last reason someone might bring cash to refinancing would be to qualify for a government refinance program such as HARP (the Homeowner Affordability Refinance Program). People who are slightly underwater on their mortgage may be able to qualify for HARP refinancing if they can bring their LTV below 125% (the threshold is sometimes lower depending upon the underwriting guidelines of a given lender). Some borrowers may need to pay down second mortgages to qualify for the new FHA refinance programs as well.
HVCC and Cash-in Refinances
The implementation of the Home Valuation Code of Conduct (HVCC) also ensures that cash-in refinances are here to stay. The HVCC has had significant impact in the way homes are valued. There is more regularity in the appraisal process and the mortgage industry has seen increased uniformity in home values. There has been substantial downward movement in home appraisals, which reduces the equity people have in their home and causes more people to bring cash to improve their LTV or DTI.
It is fair to say that most homeowners are not enthusiastic about the prospect of bringing cash to closing. At the same time, there has been a shift in the financial behavior of most households. The savings rate is near its highest level in years and consumers are in general deleveraging by reducing debts. As a result, the cash-in refinance is part of an overall trend toward reduced financial risk and less debt. When marketing these transactions to borrowers, loan officers can close more deals by catering to this new trend.
John Walsh is the President of Total Mortgage Services, an expanding mortgage banker. Mr. Walsh founded Total Mortgage Services in 1997 with a customer-centric approach and a mission of responsible lending. Today, the Company offers a range of mortgage solutions, from FHA to jumbo loans, with some of the lowest mortgage rates in the industry. Total Mortgage Services recently launched TMS Funding, a wholesale lending business, to complement its very successful retail lending platform and offer mortgage brokers and borrowers better service, choice, knowledge and efficiency in the mortgage lending process. For more information on Total Mortgage Service please visit http://www.totalmortgage.com.