Loan Officer Training - 12/04/2024 - Structuring and Explaining the Benefits of a Refinance

Refinancing can be a game-changer for borrowers, but how do you effectively structure a refinance and communicate its value? In this episode of Loan Officer Training, we break down the steps to crafting a winning refinance strategy that aligns with your client's goals.

Discover how to calculate savings, highlight benefits like lower monthly payments, reduced interest rates, or access to cash for other financial needs. We'll also explore how to address common borrower concerns and present refinancing options in a way that's clear, relatable, and actionable.

If you want to confidently guide your clients through the refinance process and build lasting trust, this episode is packed with insights you can’t afford to miss.

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mortgages and thousands more!

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Dec 04, 2024 • 05:01:23 PM: 0:13

So, um, basically we all know what a refinance is here. We're talking about a refinance of a real estate loan, right? On a property. Now, What would be the key reasons to refinance a real estate loan? These are just general reasons. And then we're going to get a little bit more into it, but key reasons to refinance or a real estate loan would be, uh, to lower interest rate would be one. Reduce the monthly payments would be another and remember lowering, uh, reducing the monthly payment isn't necessarily aligned with lowering the interest rate because, uh, when we're talking about monthly payments, we're not necessarily just talking about the monthly payment on the real estate loan. We could be talking about the monthly payments, uh, the borrower's monthly outlay, right? The, what they pay out on all of their debt. The borrower may want to access home equity or they may want to consolidate debt. Right? So those are some of the more popular reasons. Why borrower may want to refinance now, if this is probably the most important point that we're going to make in, in today's training, and I state this because, um, just yesterday I was in our live support, uh, zoom room, uh, giving some, uh, quote structure assistance to one of our team members. And excuse me. And he, uh, was trying to structure some loans, some quotes. To send to a borrower. And I asked him, you know, I mean, we know the borrower wants access to money. That's that's why they want to do this cash out refinance. But have you spoken with a borrower and asked them, uh, What is the objective of the refinance? What are they actually trying to achieve here? Um, and, um, yeah, the, um, the, our team member had spoken with the borrower, confirmed the borrower wanted to cash out refi, talk to the borrower about the property, their income, I mean, their credit, all that good stuff, but didn't ask them what was the purpose of the cash out? Why? You know, what was the borrower's objective with the money? Right? What was he trying to do? Was he trying to buy another investment property? Was he trying to consolidate debt? What, you know, what was the purpose? Because if we don't really know the purpose, Of the cash out refinance. It's going to be difficult for us to determine the borrower's motivation, uh, for the different options that we're going to, to send. And then it's going to be difficult for us to explain the benefit of the cash out refinance, which it was in this case, a cash out refinance, if, um, the borrower hasn't told us what they're going to use the money for. All we know is they want money. So definitely you, when you are speaking with the borrower, you definitely want to confirm, uh, what it is that they're going to use the money for, right? Because, uh, refinancing makes sense. Like I have stated there, refinancing makes sense. When it aligns with the borrower's specific financial goals and circumstances, and I have that there in red catches your eye because, you know, if we knew, for example, this borrower, um, is hot and heavy for a property, they need the money. They really aren't so concerned overall with the interest rates on the cash out. They're more concerned with how much can I get? I need to get the most possible because I need to make sure that I get, um, 300, 000 cash on hand. So I have money for the down payment, closing costs, or maybe they want to buy the other property outright. Cash so we we don't know what the scenario may be. Uh, so, you know, we definitely got to confirm that point because, um, some of the, uh, scenarios that you see, there are the interest rates may have dropped borrow may want to lower his interest rate. Um, maybe the borrower's credit score is improved and now he wants to take advantage of his improved credit score to get, uh, maybe a better rate on the, uh, or rate and term or cash out. Um, there could be a change in their financial situation, right? There is, there may, there may be a family emergency. Uh, somebody's hospitalized. They need a couple hundred thousand dollars for medical expenses. Um, uh, somebody died and they need money to bury them. I mean, I've actually had that situation, um, here where I'm at in South Florida. We get a lot of people that are from other countries and all of a sudden they get the phone call, your, your grandmother just died. We don't have any money to bury her. Can you please help? Right. I mean, that's actually happened on a few deals that I can speak up. Maybe they're looking to eventually be able to retire and they want to pay the house off at some point. And they want to reduce the loan term from a 30 to a two from a 30 year to a 20 year from a 30 year to a 15 year. Or maybe they want to pay off high interest rate consumer credit. Right. Whereas. That could be a 25, 28 percent interest rate. So they may not be so concerned that they're refinancing into a higher interest rate than they currently have. If they're being able to resolve their financial situation of paying off high interest rate. Consumer credit. So many different reasons why again, uh, a borrower, we want to refinance either as a rate and term refinance, which is only to reduce the interest rate or as a cash out refinance, which is the option that we have. That's going to give them cash above and beyond what they owe on their property. But again, it all goes back to when you're having that call, that initial phone call, and you're just, you're assessing the deal, make sure that you ask all the necessary questions, including when it's a refinance, what is the purpose? You know, what are you going to use the proceeds? If it's a cash out refinance for what's going to be the purpose of the proceeds. So now once we do, uh, have a firm grip on their situation and why they're wanting to refinance, then that's going to make it. a lot easier and much more effective for us to analyze the benefits from the transaction, right? Now, some of these are going to be pretty obvious and some a little bit less obvious, but you know, it's always good to dot your I's and cross your T's, right? So, uh, first section we have there is lower the interest rates. Now, when you lower the interest rates, There are certain things that are going to occur. Obviously, you're going to have a, you know, reduce monthly payments. Um, if you lower the interest net now, um, that again, lower interest rates could be you're, you're going to have one rate on everything, for example, consolidating debt. But I'm going to jump, I'm jumping a little bit there, but assuming we're only low, only looking at the payment on the home. Right? Well, lower interest rate is going to give you reduced monthly payment. It's going to give you, this is something that, uh, a lot of MLOs may not bring up. But this is very important too. It's going to give you a more favorable loan amortization because when you do reduce the interest rate on a loan, the amortization table is going to change. The amortization table, uh, details, the breakdown of a payment. Of principle to interest, right? You could have a 1, 000 payment on a loan. Let's say, you know, 8 percent that could be 125 principle and 600. Interest and the same loan amount at a 5% interest rate. And these are not exact numbers, this is just illustrative purposes. Could be paying$200 principal and um, you know,$500 interest, whereas you could have maybe only a 50 or$75 reduction or a hundred dollars reduction in the overall payment. But then when you go to the amortization table and you analyze how much is going to principle and how much is going to interest, They could be amortizing more principal within that same payment amount, which is an additional benefit. So if you're only noting the net benefit, which is the difference in the overall payment from prior to refi, To post refi and you're not also bringing up the amortization benefit, then you're leaving money on the table, so to speak, because you're not fully explaining the benefits of having a lower interest rate to the borrower. So this is a very important one that I can tell you. Probably not many loan officers are speaking to their borrower about, and if you are one of the MLOs that does bring up this part of the, uh, Benefit, you're going to have an upper hand. And obviously this is all going to lead to long term savings overall. So you're going to note the net benefit on the payment, the amortization table benefit, you're going to be paying that much less interest and that much more principal within each payment, and then the long term savings. So that covers lower interest rates. Now, debt consolidation, which is combining high interest rate debts like credit cards into one lower interest rate loan. And in this case, the lower interest rate loan we're talking about is the residential mortgage loan. Debt consolidation is a very good reason. To do a cash out refinance, because like I mentioned earlier, those credit card interest rates could be 25, 28 percent interest, uh, percent versus, uh, currently on the residential side, you could be getting anywhere from the upper, upper fives to the lower sevens for like an FHA, USDA, VA, or conventional type loan, and even for some non QM options as well. So, you definitely want to bring up, uh, the reduced monthly payment benefit, right? You're gonna list, here's the total of your payments. Uh, here's your current housing expense. And this is, uh, the total of your consumer credit and you're paying for it. 5, 000 a month, uh, versus maybe they're going to be at 3, 000 a month on the new one. Obviously, it's probably going to be a higher payment than their current housing payment, but we're looking at the net benefit here in terms of reduced monthly payments. overall to the borrower. Now, one additional benefit that, uh, most MLOs leave out when discussing debt consolidation is the fact that consumer credit interest, uh, is no longer a tax deductible expense and has not been a tax deductible expense for quite a few years now. You used to be able to write off, uh, consumer credit. interest, but now you cannot. Whereas the interest from your residential mortgage, whether it's a first mortgage or a second mortgage or third mortgage, anything tied to your, to the property is tax deductible. Any, you know, the interest on that loan is tax deductible. So that's an additional benefit where you're going to bring up, right? So assuming they pay in, they were paying. Uh, 6, 000 in interest on those credit cards, getting no benefit for it. And now they're going to have a newer, higher payment and the interest amount that, um, pertains to that new loan that pertains to the new loan, uh, um, the increase in the loan. So let's say they were at 200, 000 before now they're at 300, 000. So they're paying a hundred thousand, you know, they got a hundred thousand more loan, whatever interest. That they're paying on that loan is the additional interest expense tax deduction that you're going to have on their cash return. So assuming it's an extra 2, 000 or 2, 500. an interest that you multiply that times their, um, their tax bracket and that's the benefit that they get for additional tax deductions, right? So if they're paying an extra 2, 500 in interest a year now, uh, and they're in the 30 percent tax bracket, they're getting an extra 750 tax write off in the end of the year. So that's an extra benefit there. Okay. Above and beyond the reduction in the monthly payment is the additional tax deductions that they get. Um, next category there is shortening the loan term. Well, we already talked about the amortization table when you go from a 30 year to a 15 year. Your payment is usually going to go up. The interest rate may go down, but you know, right now the shorter terms really are not that much lower than the longer term due to the fact that we still have an inverted yield curve, meaning the short term rates are actually higher than the midterm rates and very similar. An interest rate to the long term rates by short term. I mean, stuff less than 1 year is similar in interest to, you know, 15 and 30 year. Uh, so, but, uh, when you analyze the, the breakdown of the payment, a 15 year loan term, pretty much pays almost 50 percent of the interest. principal and 50 percent interest within the payment. So you're going to have a, you're going to be amortizing a lot more principal within the payment and paying a lot less interest. And then last but not least, they may, uh, when they need to access home equity, they just need money. They need money from the home. Um, that money from the home could be for a needed renovation. It could be for investments that they want to do. Maybe they want to buy another property or need to buy some stocks or whatever. Or they just need the money because they have an emergency, right? I mentioned a sick family, hospitalization, whatever may be the emergency that they need. But you need to, again, this goes back to understanding the objective. Um, because, you know, explaining the benefits Of an emergency is just I'm going to get you the money, right? They need the money. You just got to find a way to get them the amount of money that they need. Obviously, we always want to provide the best rate option for the borrowers. We have great rates at the mortgage calculator, but in this case, um, when they want to access at home equity, they're usually giving you a target, right? I need 250, 000 and you need to come up with, uh, an action plan. That's going to get them. 250, 000. Whether it be for a renovation that they need to do, whether it be for investment, or whether it be for an emergency need for funds. So, um, this, uh, completes the, uh, PowerPoint presentation, but I want to know if there's any questions, uh, from, uh, our viewers today regarding, uh, refinances. It doesn't necessarily have to be about what I went over here. If you have any questions in general about refinances, but definitely if you have any questions about, uh, how do you analyze and explain the benefits of refinance, I would love to answer them. All right, I got a question here. So, uh, Marcy wants to know, can a reason for refinance be to remove a person from the loan due to a divorce if the home is awarded to one of the parties? Yeah, that would be buying out. Uh, a current owner, right? So that I, I guess that would be, uh, one of those life, uh, event situations, uh, that I would probably consider emergency need for funds, right? We have those, uh, actually every now and then, right? Somebody's or, and, and we also have, uh, refinance where not necessarily, they're not necessarily buying. Somebody out due to a divorce or just buying them out, you know, like, uh, we have one right now that, um, borrowers inherited the property. Uh, via life estate deed, uh, cause the parent, the surviving parent died. They had a life estate deed and now three siblings own the property and one sibling wants to buy out the other two siblings. So you would do a cash out refi and buy out the interest of the other two siblings. So I would probably consider that under the emergency need for funds category. Uh, we have another question here. Uh, does a refinance affect the property tax? Uh, no, it does not. The, the, the tax amount, uh, tax assessment, you know, the tax amount on a property is based. On the properties tax assessment, right? Whatever the tax assessor has the property listed for and public records. Uh, the assessed value is going to be multiplied by the millage rate. And that's how you come up with the property tax bill. Uh, refinancing a property doesn't affect anything in the tax assessment, nor does refinancing a property, the proceeds. If it's a cash out, refi are not taxable income. At some point when the property is sold, if there is a, if there's a profit, there may be a tax liability due depending on if it's a primary residence and or an investment property, but that's really going to be based on the cost basis for the property, which is going to be the price you paid for the property plus any money you've spent on upgrades and repairs. It's not, the profit is not going to be based on, uh, what you currently owe, uh, for the IRS. What you owe, uh, could have been, um, affected by you doing a cash out refi, so that now you owe a lot less, you're going to get a lot less proceeds at closing, but the proceeds you get at closing isn't necessarily the profit, because the profit is going to be the cost basis, which is purchase price, plus repairs on the property, you know, improvements, uh, and then you get the purchase, the new purchase price, assuming it's higher, the new sales price, assuming it's higher, Then the cost basis minus the cost basis equals the profit, and that's what they pay taxes on. All right. Good questions. Any more questions out there? All right. So it looks like we're good to go on today's training. I look forward to seeing you all tomorrow. Thank you and have a great day.