Broker’s Clients Should Know about Refinancing

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The Mortgage Bankers Association, and Orion’s lock volumes, show that applications from borrowers seeking to refinance their existing home loan are much higher than they were last April and May. We thought it would be a good time to cover the basics of this type of loan, especially as it impacts your clients.
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Brokers know that borrowers who withdraw cash when they refinance are viewed as riskier than those who don't, because the cash withdrawal indicates possible financial distress, and that perception can raise a borrower's costs. This sometimes causes the rate on cash-out deals to be higher than on no-cash deals that are otherwise identical. The price difference is particularly large when the borrower's credit score is low.
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Brokers also know that refinancing borrowers can increase their loan balance by enough to cover their settlement costs without the loan being classified as "cash-out." The borrower must literally walk away with cash for the transaction to be "cash-out." Whether or not cash is withdrawn is entirely within the borrower's discretion, but often the cost of the money they take out of there finance is underestimated as they view the cost as the rate on the new mortgage, ignoring the higher cost on the existing loan balance.

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Our brokers tell clients to remember that a cash-out deal raises the LTV. If the borrower must pay a higher mortgage insurance premium at the new LTV, the cost of the cash taken out would be raised even more.

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The mortgage interest rate is not usually affected by the LTV, but if the ratio is above 80 percent, the borrower must pay for mortgage insurance. The insurance premium rises with the LTV and is also subject to the same risk factors as the mortgage rate. Borrowers with low credit scores, for example, will pay higher mortgage insurance premiums. If they intend to finance their closing costs, and especially if they intend to take cash out, they should make sure that this will not breach a notch point and raise their cost. Brokers are good at working with clients on this. If they find that their loan-to-value ratio is just above a notch point - say, 85.1 percent - they should beg or borrow the amount needed to reduce the loan amount to the lower price bracket. It would be a very high-yield investment.
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Make Sure Your Clients Aren’t Overpaying for Mortgage Insurance

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Borrowers with LTVs above 80 should make sure that they are not paying more than necessary for mortgage insurance. Check the premium quoted by your competitors, if you have it, but be aware most lenders only quote monthly premiums, even though in some cases the single premium plan would be less costly to the borrower. Ask your Orion AE if you have questions.

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