Do You Get Money From Refinancing Your Home?

Mortgage interest rates have dropped significantly during the COVID-19 pandemic, with rates for 30-year, fixed-rate mortgages currently available at 3.3%. These record-low rates have spurred interest in some homeowners to refinance their mortgage and get cash out.

Are you considering a refinance of your mortgage to a new, low rate? It is essential to understand the differences between the types of refinances that are available. Some mortgage refinances involve getting cash (equity) in your pocket, while others do not.

Rate-and-Term Mortgage Refinances

A rate-and-term refinance changes the interest rate, term, or both of a current mortgage without giving cash to the homeowner. It also is called a no cash-out refinance. This is different from a cash-out refinance that provides equity to the borrower at closing in the form of cash. Rate-and-term refinances usually have a lower interest rate than cash-out refinances.

Rate-and-term refinancing is often driven by a reduction in market interest rates. Cash-out refinances tend to be driven by rising home values.

Benefits of Rate-and-Term Mortgage Refinances

You may be able to get a lower interest rate than you are paying today. For example, if you have a $200,000, 30-year mortgage at 4.5% and refinance to 3.5%, you could save approximately $115 in your monthly payment.

Refinancing to a lower rate can be a good move because it reduces the amount of interest you pay over the life of the loan.

You also can refinance the mortgage to a different term. Some people refinance their mortgage from a 30-year to a 15-year. This means the loan is paid off much faster and the borrower saves tens of thousands of dollars in interest. Fifteen-year mortgages carry lower interest rates too because shorter terms are less risky for lenders.

Another benefit of a rate-and-term refinance is that you can usually qualify for the loan easier than when pulling out cash. A cash-out refinance increases the mortgage balance and is a higher risk for the lender.

Finally, a rate-and-term refinance does not increase your mortgage balance. Taking on a higher mortgage payment is riskier for the borrower because you can lose your home if you cannot handle the higher payment.

Requirements for Rate-and-Term Mortgage Refinances

For a rate-and-term refinance to be worth it, there must be lower interest rates in the current market. Mortgage interest rates can go up and down at any time. Many experts say that you should be able to reduce your mortgage interest rate by at least .5% for the refi to be worth the cost.

It also helps to have decent credit to be able to access the lowest interest rates. Some mortgage companies have tightened their lending criteria during the current economic downturn.

For example, JPMorgan Chase is raising borrowing standards for all mortgages, with a 700 credit score required for new mortgages. These changes will affect the requirements for refinances, too.

Cash-Out Mortgage Refinances

A cash-out refinance replaces your current mortgage with a new one with a higher mortgage balance. The purpose is to convert some of your home equity into cash for home renovations, paying off credit cards, funding a college education, etc. Most cash-out refinances also have a lower interest rate than the current mortgage.

The borrower receives the difference between the two loans in tax-free cash, so it is not considered income. This is possible because you only owe your lender what is left on your original mortgage. The additional loan amount of the refinanced mortgage is usually paid at closing, which is 45-60 days after you apply.

Benefits of a Cash-Out Refinance

Cash-out refinances offer advantages over other types of financing, such as home equity lines of credit (HELOC) and home equity loans. Borrowers can often get a lower interest rate on a cash-out refinance than a home equity loan or HELOC. That is because the cash-out refinance is a first mortgage and not a second mortgage; lenders assume less risk with a first mortgage.

Cash-out refinances also are easier to qualify for than a second mortgage. Cash-out refinances are similar to an original purchase loan and are the primary type of mortgage offered by lenders. More lenders are likely to offer cash-out refinances than HELOCs or home equity loans.

If you are using your equity to improve your home, you may increase its value, which will be a benefit when you sell your home someday.

Requirements for Cash-Out Mortgage Refinances

As with any refinance, you need to have decent credit. But taking out cash requires even better credit than a rate-and-term refinance. You also should only refinance with cash out if you can lower your interest rate, so interest rates need to be lower than your current rate.

Considerations for a Cash-Out Refinance

The primary consideration for a cash-out refinance is that you increasing your mortgage balance. You will be paying a higher payment each month unless you can drop your rate so much that your payment does not change. If you cannot make your mortgage payment, the lender can take your home.

It also is more difficult to qualify for a cash-out refinance during the COVID-19 pandemic, and this could be the case for the foreseeable future. Some lenders, such as Wells Fargo, are not even allowing cash-out refinances at this time, so qualifying could be an issue.

Final Thoughts on Getting Money From Refinancing Your Home

Refinancing your mortgage for cash out can be a great idea if you have a good reason for tapping your equity. Paying for home renovations or a college education can be smart moves with your hard-earned equity.

A rate-and-term refinance can be the way to go if you want to lower your payment and/or reduce your loan term. Talk to your mortgage lender today to determine which is the better option for your situation.

References

All You Need to Know About Bank Statement Loans

The COVID-19 pandemic has caused upheaval in the mortgage market as millions of Americans have lost their jobs. Lenders have tightened their standards for Fannie Mae, Freddie Mac, FHA, and VA-backed loans. But what about bank statement loans? If you are self-employed with an unstable income, you may need to rely on bank statement loans to get a mortgage.

Bank statement loans are still available, but you can expect lower loan-to-value (LTV), meaning higher down payments, higher credit score requirements, and more reserve requirements. The higher your credit score, the higher the LTV ratio will be permitted by your lender.

Below is everything you need to know about bank statement loans in 2020.

Bank Statement Loan Overview

Bank statement loans, also called self-employed mortgages, allow a consumer to get a mortgage without documentation usually needed to verify income, including W-2s and tax returns. These special loans are also sometimes referred to as alternative documentation loans. They are used by entrepreneurs and others who may not have a single employer or consistent income to prove their salary.

These loans are not qualified mortgages, so lenders can apply their own qualification standards to loan applicants instead of applying a standard set of requirements used by all mortgage lenders.

As the gig economy has taken off in the past five years, there are an estimated 15-27 million Americans who get some or most of their income from self-employment.

There are some lenders in 2020 that still offer bank statement loans, which offer more flexible options to prove income and assets.

Bank statement loans tend to be portfolio loans. This means that the lender is not selling the loan to a larger bank and will service the loan for its full term. So, the lender can establish its own criteria for lending and not what Fannie Mae, Freddie Mac, or FHA require.

How Do Bank Statement Loans Work?

Conventional mortgage lenders usually require you to submit the following documents to prove your income:

  • Tax returns
  • W-2s
  • Pay stubs
  • Employer verification loans

On the other hand, bank statement loan applicants can use business or personal bank accounts to prove cash flow and income. You will still need to provide some of the same documents as you would for a standard mortgage loan, and perhaps more.

Requirements vary by lender, but typical standards for a bank statement loan for 2020 are:

  • 12-24 months of personal or business bank statements.
  • A business profit and loss statement may not be required, but you could provide one to provide support for your application.
  • LTV of no more than 75%; some professionals with lower credit scores may be limited to 65% LTV.
  • Two years’ work history as a self-employed professional. You will need to show that you have been in the same business for at least two years, and some lenders may now require longer work histories.
  • Acceptable credit scores, which now are in the high 600s.
  • Sufficient cash reserves to cover several months’ mortgage payments.
  • Verification of liquid assets, such as mutual funds and 401(k).
  • Business license, if required by law.
  • A letter from your CPA that validates your company’s business expenses and confirms you file tax returns as an independent contractor.

These loans are riskier for mortgage lenders, so you may need a bigger down payment and have a higher interest rate. Rates may be .5% to 1% higher than a standard mortgage.

Exact bank statement loan requirements vary by lender. For example, some lenders may accept lower FICO scores than others. If you do not meet the requirements for the lender, be sure to check with others.

Who Can Benefit from a Bank Statement Loan?

Bank statement loans are popular with clients who have irregular cash flow or cannot obtain income documentation from an employer. The most common professionals who seek bank statement loans are:

  • Consultants
  • Freelancers
  • Small business owners
  • Doctors
  • Attorneys
  • Real estate investors
  • Real estate agents

If you work in one of the above professions, you might not be able to qualify for an FHA or conventional loan because the income shown on your federal tax returns may not reflect your true income; many self-employed workers adjust their taxable income with deductions and tax write-offs.

A current homeowner can use bank statement loans when refinancing their mortgage. If you are not working in the regular job market but still want to refinance, talking to your lender about a bank statement loan could be a smart choice.

Other Mortgage Loan Options

Not every self-employed professional need a bank statement loan. Some can be approved for conventional or FHA loans. Most lenders will check your income by verifying your tax returns for the last two years. If you have been working for yourself for years and have a steady income, you may be able to get a conventional home loan.

In the uncertain COVID-19 economy, you can bet on needing a higher credit score and bigger down payment, whatever type of mortgage you get. Also, most mortgage companies are requiring at least a 660 or 680 credit score to get an FHA loan, and conventional lenders may require a 700 or higher FICO score.

Summary

Bank statement loans are still an option in 2020, even with all of the financial upheaval from the coronavirus. However, you can expect to need a higher credit score, bigger down payment, more reserves, a higher interest rate, and more scrutiny of your income.

Your odds of approval are higher with a higher credit score and years of self-employment. Lender requirements vary for bank statement loans, so talk to several lenders to see if you can qualify for a bank statement loan.