Loan Officer Training 10/09/2024 - Properly Structuring the Refinance: A Guide for Loan Officers

In this episode of "Loan Officer Training," we delve into one of the most impactful skills a loan officer can have: Properly Structuring the Refinance. Knowing how to set up a successful refinance deal is crucial to helping your clients achieve their financial goals—whether it's lowering their monthly payments, accessing cash, or paying off their mortgage faster.

Join our expert hosts as they guide you through the essential steps of structuring a refinance that works for both you and your clients. We'll break down key strategies, best practices, and common pitfalls to avoid, ensuring that you’re equipped with the knowledge to craft tailored solutions that make a difference.

🏠 How to determine the best refinance option based on client needs.
🔍 Key factors to consider, including interest rates, closing costs, and loan terms.
📊 When cash-out refinancing makes sense—and when it doesn’t.
📝 Tips for presenting refinance scenarios clearly to clients for better engagement and understanding.

From analyzing client goals to selecting the ideal loan program, this episode covers everything you need to know to structure a refinance successfully. With real-life examples, expert insights, and actionable tips, you’ll be able to provide your clients with optimal refinance solutions, ultimately enhancing their financial well-being and building trust.

Whether you’re a seasoned loan officer or just starting out, mastering the art of refinance structuring will give you a competitive edge in the industry. Tune in to "Loan Officer Training" to learn how to properly structure refinances, maximize client satisfaction, and take your career to the next level!


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Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

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Transcript

Restream recording Oct 09, 2024 • 04:03:54 PM: 0:13

So welcome everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our President Nick Hiersche and our CSO Jose Gonzalez. We are a lender that specializes in non QM loans. And what we do every Tuesday, Wednesday and Thursday at 12 p. m. Eastern is our loan officer training series where we do a deep dive into a loan officer training topic. Today's topic is very crucial, which is properly structuring a refinance. So I'll let Jose go ahead and take it over. Let's get into it. Good afternoon, everybody. Thank you for joining us for today's training. On properly structuring the refinance, we taught, uh, not necessarily teaching you the equations, but how to properly assess. The borrower's objective, right? What is the lowest cost and most direct path to the objective that the borrower has for the refinance, right? We cannot make any, we cannot have any preconceived notions of what the borrower may be looking to achieve with the refinance. We have to listen To what their concerns are and, uh, with our knowledge and experience as the licensee, uh, offer them the best solutions to the refinance. That's the key here, because are we looking at full doc traditional? Are we looking at all doc with bank statements? Are we looking at CDFI? What is the route that is attainable? That is the one that is going to be the lowest cost option and the best option. for the borrower. Uh, when we are structuring these refinances, remember, we're not talking about the easy button for the MLO. We're talking about the best option for the borrower. So, when we are, um, discussing refinance, we are talking about the process of basically taking out a new loan on a property. either to pay off an existing loan and preferably, you know, reduce the rate or whatever other objective may be, which would be a rate in term refined or tap into the equity in the form of a cash out refined. So it's either going to be rate in term or it's going to be cash out. Now, there are many key reasons why a borrower would be looking to refinance. Now, the the obvious, right? Lower the interest rate, reduce the monthly payments, reduce the loan term, right? From 30 to 15 years or the amortization on the loan, the shorter the amortization term, you're going to have a more favorable amortization table where there's going to be more interest, more, excuse me, more principal and less interest within the payment amount. Another key reason could be they want to access home equity for a number of reasons, right? It could be home improvement. It could be a crisis, such as a hospitalization, sick family member. It could be educational expenses, like, uh, your, the kid's college tuition or the college tuition that's coming up maybe, uh, in the following year. Or maybe they want to consolidate some debt To improve the cash flow, get all those higher interest rate, uh, consumer debt, maybe at anywhere from 14 percent or 28%, whatever they're at on those credit cards and bring them down to, let's say, whatever the interest rate they're going to get on their refi. And on top of that, those are tax deductible, but we're going to get into those when we discuss the benefits. Of the refinancing. Now, one of the things definitely that has to, you have to be aware of as the MLO is, uh, when does the refinance make sense for the borrower? Uh, is, is this the right time? And they may ask you that question. And Jose, is this the right time to refinance in order to be able to properly answer. The borrower, you need to find out the details, the objective, the motive, right? Uh, because refinancing makes sense when it aligns with the borrower, specific financial goals and circumstances. And that's what you have to delve a little bit deeper into and find out as your loan consultant. What are their financial goals and what are the circumstances now again, I touched on this in the prior slide, uh, scenarios. You can normally be looking at is interest rates on mortgages have dropped now. We know we've had a lot of volatility lately in the market. Some of the customers may think that they've dropped. They may be reaching out to you and that's what you're going to explain to them. Actually in the last week or so since the reports came out, since the Fed said, sure, let's drop a half a point off of the short term rates. Uh, we've had jobs reports that have come out and other reports that have come out to indicate that we're not gonna, we're not in any recessionary mode right now in the economy. So, That's, uh, not, you know, it has resulted actually in the 10 year bond or 10 year treasury going up about almost a quarter point since they announced, uh, their reduction in the short term rate. So two different dynamics, and I'm just getting into that right now, just to show you how I would explain it to the borrower. If that's a scenario that comes up in the conversation. Uh, but we have, but we do have actually improved rates in the non QM for sure. Okay. Now, another scenario where they're looking to refi could be their credit scores have improved, right? They paid off some accounts, they're zeroed out, they're sure, they looked at their credit karma, they looked at the Experian app, their scores are up. Let's go right change in financial situation. You know, my wife lost her job. My husband lost his job or I'm on halftime or whatever it could be that there's a reduction in income or have happened like hospital bills, you know, all the stuff that could result in you needing access to funds quickly. Uh, they could be looking to reduce the loan term. Maybe they're, you know, thinking about, I eventually want to pay this property off so that when I do retire, I don't have to, uh, move because I can't afford the monthly payment, so they may be looking to go from a 30 year to a 15 year term. Uh, or you could have a scenario where interest rates on consumer credit have risen. So even though you may be thinking, why do they want to refinance if they have a four and a half percent? And maybe it's because they've incurred an additional 100, 000 to 150, 000 in high interest rate type, uh, unsecured consumer credit. And now they need to, um, refinance out of that to improve their cashflow. So these are all different scenarios where, uh, unless we get all the information from the customer, we could very easily have some preconceived notions that would not, um, benefit. in assess, properly assessing the situation of if this is a good time for the borrower to refinance. Again, we have to see what their objective is, properly analyze it, and then that's when we would be able to discuss and offer them potential solutions. Right now, if we're going to analyze the benefits, right, what are we actually going to analyze here to be able to provide solutions? Again, we have to delve a little deeper and we have to, um, as you can see there in the illustration, it's way, way out. It's basically a cost benefit analysis, right? At what point does it still make sense depending on the cost? Well, it really depends again on what is the objective. Now, the most obvious one, Uh, lower interest rates scenario. Obviously that one's going to equal lower monthly payments. That one's also going to equal a more favorable loan amortization because at the lower interest rates, the loan is amortizing more favorably. Now this one's really important to latch on to, because what that means is that if, if 800 payment. at 8 percent and you have an 800 payment at 5%, right? Without looking at the actual amortization table, assuming you did have the same payment amount, at 5 percent within the 800, you would be paying more principal and less interest within the payment. At 8%, again, this is just hypothetical because it's not going to be the same payment amount and it's the same loan amount at the higher interest rate, but what is definitely going to change is the amortization. Is that the distribution going to be more interest and less principal if analyzing the same payment amount. So even if you had the same payment amount at the lower interest rate, they are advertising more principle within the payment. Hence, there's an additional benefit there beyond the payment difference from a before refi and B. After refi, that's just the net difference, but there's an additional benefit to do the lower, uh, more favorable amortization and then lower interest rates. Then are also going to equal long term savings. Again, if they tell you they're only going to be in the property for a year or two longer, maybe long term savings isn't the one that's really motivating them here, but these are, uh, The items that you really want to focus on when considering lower interest rates as one of the potential scenarios. Debt consolidation. Now this is one where if you don't really probe deep, especially if you don't have a credit report already where you're seeing the extent of their debt, this is one where we don't probe deep. You may miss the true motivation here of the borrower because again, if they have a bunch of debt, it's high interest rates. Like credit cards. And if they're combining that into one lower interest rate loan, which is going to have a reduced monthly payment. So it's definitely going to check that box. And then it's also going to be tax deductible interest because consumer credit is no longer tax deductible. Hasn't been for years, but, uh, Interest on your home is still tax deductible. So that's an additional, an additional benefit. And depending on how much interest you're paying could be a big benefit because the deduction is equal to your tax rate. Uh, When you shorten your loan term, going from 30 years to 15 years, for example, even if the rate is the same, or maybe even if it's a little bit higher, cause you know, we do have inverted yield curve right now. So the shorter terms are actually higher interest rate than the longer terms. Keep that in mind. But even then shortening from 360 payments to 180 payments on an amortization, Definitely going to save on the interest expense because on the 15 year term, you start at almost 50 50, uh, principal and interest. In your payment. The only reason the payment is higher than the 30 years because you're dividing it into 180 payments, but the interest expense is a lot lower from the onset, so you save a lot on interest, build that equity up faster on the shorter term loan. And then the last, uh, benefit we're talking about there is home equity access. Now this. Would be a number of ways. Either you're either refinancing the first or you're getting a second mortgage, maybe a HELOC fixed rate HELOC, variable rate HELOC, or maybe a HELO. Remember on the HELOCs, you only pay interest on what you owe. Uh, but in, uh, For discussion here, when we're talking about home equity access, we're talking about for an objective that we have to find as much information about so we can know how to properly consult the borrower. Is it for a renovation of the property? Is it for investment? Possibly some type of business or additional properties? Is it some type of an emergency, right? Whether it's a sick family member or somebody died in another country and you got to go bury them and you have, you need 30, 000 ASAP. So a lot of different reasons why a customer would need access to the funds. So we have to make sure we understand their objective to be able to properly consult them. So, and now once we do No, and have been able to properly assess their objective. This is where we really, as the licensee, as a loan consultant, have to provide the guidance to the borrower throughout the whole decision, you know, through the decision making process of, is this going to be the right moment for them to refinance, we're going to discuss the solutions and, uh, definitely you need to have communication, right? open, honest, clear. Uh, with the borrower, properly assess their needs by understanding their financial goals and the reasons for considering refinancing. Once we do, uh, assess the need, we have to, uh, present multiple solutions. If multiple solutions exist. If it's only one solution, provide the only solution and explain why it's the only solution. But if there are multiple solutions and maybe we're categorizing them as this is the preferred and this is the backup. Definitely want to compare costs, uh, fees, potential savings when we're talking about lower payments, more favorable amortizations, right? The stuff we just covered on how to analyze the benefits because that's what we have to empower our borrower with. As we are pre educating them so that they can make an educated decision and decide which is the best option to meet their objective. And then we definitely want to evaluate the risks, uh, and discuss potential downsides such as prepayment penalty, longer, shorter loan terms, and possible negative amortization on arms. And is an arm a good product now or not? Because we're, we're getting people just calling now on arms. But what we have to always empower our borrowers and let them know is that the arms are based on an index. All of those indexes tend to be short term indexes like the one year, 30 day, six months. Those are all going to have a high value right now and it's going to be an index plus a margin. So once the loan starts adjusting, depending whatever the margin is at that moment, plus the index is going to be the rate. There's really not a lot of benefit right now. For the arms, they're, they're pricing about the same as the, uh, fully amortizing 30 year loans. So we have to be very careful. Explain now. I had a customer the other day, for example, said, okay, after we discussed, his objective was to be able to capitalize when the interest rates go down. So I suggested a 3 year arm, then he was looking at like a 1 month arm or 6 month and, uh, Those don't make sense right now. So I said, how about the three year arm at the end of three years, if it's according to what you say, then the indexes will be lower at that moment. And if they're at least at 2 percent or under, you'll be at a better position than you are right now. At the start rate. Uh, so he agreed and um, so he's gonna consider that one. But definitely that's an example of when we empower the borrowers where they can make an educated decision on which is the best option of the solutions that we have presented. And finally, in here, once we do go over all that, then they decide which is the option. In this case, our borrower needed access to funds. Um, so now we just have to make sure that we prepare them for the process and this is how we add value as a loan consultant. Remember, you want to add value always to the transaction so that you can receive those referrals from your borrower. From repeat business from them, as well as they can refer us, uh, additional, uh, business from their sphere of influence. So we definitely want to make sure that we explain to the borrower, all of the documentation that they're going to need for the loan program, right? If it's a DSCR program, please make sure that you update your documents requests and don't, uh, continue to ask for income type documents. If it's DSCR, uh, as an example. You want to make sure that you explain the whole application process for, uh, including credentials, if they've ever logged into a portal and e signing of the documents, make that clear so that they don't have any confusion on, okay, the, these are my credentials for the, my borrower portal. And these are my credentials for e signing the loan application. Uh, just simple things like that can can assist in keeping everything flowing smoothly. Um, of utmost importance, prepare the borrowers for the credit check, right? At some point, you're going to have to pull a credit report and you want to make sure you discuss with them the influence of their balances. If they have to make any payments. to any accounts. They should make those payments now and make sure that those payments register in their account before you pull the credit that can make the difference of a 30 40 50 point swing. If you happen to pull to request that credit report before the borrower normally makes his payments, maybe all his payments are on auto debit. And they're going to hit like in four or five days. So, and if the borrower really needs that credit check now, then you would have to let them know, Hey, I think you have to make those payments now. Let me know when they reflect in the account balance in credit karma, for example, and then I'll know that the credit balances are ready. to pull, uh, and we're going to get the scores that we think we're going to need for this loan because I've had it where, hey, I didn't make the payments yet. And the scores are 650, 660 instead of the 720 that we needed because the borrower customarily pays his balances off every month. So definitely discuss with them this scenario, including running any simulations if you've already done so. Explain the need for the appraisal, right? Or for the loan type, right? If it's a HELOC less than 250, 000, it's usually going to be an AVM. So then let them know that it's going to be an AVM unless it doesn't value. The only way to rebut that would be through a full exterior loan. For example, when it's uh, one of the options. So again, um, especially if it's a refi, you want to explain to them property condition, uh, situations that may occur and find out Or even if it's a purchase, find out. They probably seen the property, find out about the property condition, make sure that there aren't things like kitchen cabinets missing and bathrooms under renovation that they didn't tell you about, especially if it's a refi. And they may be thinking, well, I was going to use the money for the refi to finish the renovations. It's like, well, if it's already under renovation now. We're going to have to do it as a renovation loan because we can't close with that, unless it's a loan type that only uses an AVM. Then you wouldn't have an issue, but then you have to structure accordingly. After discussing the scenario of the appraisals with the borrowers, right? And the property condition to make sure you don't get caught off guard. All of a sudden, as it happens, you know, maybe once every so often we get the email from the AMC. Hey, the appraiser just contacted us and he put a hold on the appraisal to see what you want to do because he went there and the bathrooms are under renovation and the kitchen is apparently under renovation as well. And he wasn't aware that this was a renovation low, boom, red flag. Now we've got to reach out to the borrower and to the MLO. It's like, Hey, what happened here? Oh, I borrowed it. Let me know. Okay. So you don't want to be in that scenario where now you have to be going working double. Uh, to actually order what needs to be ordered and, uh, Maybe the files already been sent to underwriting as a regular loan. And now that has to be canceled out and it has to be submitted to the channel. So make sure that you don't get caught off guard by something as simple as property conditions. And lastly, uh, you want to explain, uh, to the borrower, what is the process that occurs after the application is submitted? Uh, and you know, what is the condition of loan approval and just how you all have to work. Together. Uh, to make sure that the loan closes on a timely basis because they're all going to ask you How fast can you close the loan? And you know some of that is going to depend on turnaround time from the service providers like the appraiser and title company Underwriting turnaround time loan officer and processing turnaround time, but also borrower Collaboration and turnaround time when there are document requests made so As long as we set the proper expectations and explain everything clearly and communicate clearly and our, our pre approval and refinance structure was done properly. We should not have any issues and the loan should close, um, meeting everybody's expectations. So do, uh, keep in mind all of the different, uh, analysis, uh, topics that we discussed today to make sure that you have your refinance properly structured to meet the borrower's best interest. Neat. All right. Thank you, Jose. I don't see any questions here, but definitely some great basic info. And remember, this is always up on our YouTube channel. You want to go back and. Uh, check it out at any time, but thank you everybody for tuning in. Remember that we do this every Tuesday, Wednesday and Thursday at 12 p. m. Eastern where we go through a new loan officer training topic So we will see you all tomorrow at 12 p. m Eastern for the next episode of the loan officer training series with the mortgage calculator. Have a great day