Answering Common Borrower Questions: “What’s a Cash-Out Refinance?”

wemlocustomer satisfaction, customer service

Two women are mid-discussion and sitting at a table.

Because your work doesn’t necessarily end on closing day.

As a mortgage loan originator (MLO), you’re likely talking with borrowers about building home equity on a regular basis. But what about when it comes time to tap into those funds? Educating, empowering, and assisting borrowers throughout their homeownership journey is a key part of your job, which doesn’t always end on closing day. That’s why, eventually, you might find yourself explaining the cash-out refinance.


If you’ve heard your fair share of questions like:


“How can I best tap into my home equity?”


“What exactly is a cash-out refinance?”


“I could get how much?”


… Then this guide is for you. Particularly if you’re looking to increase business.


Think about it: Do you have previous clients with substantial home equity? You could reach back out about a potential cash-out refinance, bring them in to discuss options, and you might just get a client for life.


So, let’s dive into some of the most common borrower questions surrounding the cash-out refinance and their comprehensive answers:

“What is a Cash-Out Refinance?”

You’re probably quite familiar with the basics of a cash-out refinance already, but many borrowers might be clueless. Explain that a cash-out refinance refers to the act of reconfiguring a mortgage by taking out a home loan that is larger than the current balance. Essentially, the owner borrows more than they owe to convert a portion of their equity into cash.


Here’s a simple example you can pass along:


Imagine a home worth $300,000 with an existing mortgage balance of $200,000. In a cash-out refinance, the borrower would apply for a new loan that exceeds the $200,000 balance; say, $250,000. If approved, the owner would then receive the extra $50,000 in cash, minus any associated costs or fees.


Do I Qualify for a Cash-Out Refinance?”

Your borrowers may be eager to determine whether they qualify. Be sure to explain that each lender has different requirements and cover typical sticking points, which include:


  1. Sufficient home equity. The exact amount of required equity varies by lender, but 20% might be a good number to shoot for.


  1. Decent credit. Higher credit means less risk for lenders. This might lead to better approval odds, more favorable terms, etc.


  1. A relatively low debt-to-income ratio (DTI). Help borrowers compare monthly debt payments to gross monthly income and, if necessary, work to lower their DTI before applying. Explain how a low DTI can demonstrate the ability to take on additional debt.


  1. Favorable financial history. Income, payment history, employment history, and more will also be considered.


Clarify that the weight placed on each factor will likely vary depending on the lender. Borrowers may need to explore a few different providers to find the one that fits. With your help, of course!

“How Much Can I Get from a Cash-Out Refinance?”

The exact amount a borrower might be approved for will depend on a few different factors, including their home’s appraised value, their choice of lender, and more.


Do your due diligence when shopping around and bring the borrower a few different options. Make sure to explain the benefits that usually come with each type of loan, whether that’s more cash on hand, a lower interest rate, or some other perk. Clarifying the many factors that go into determining just how much they could get from a cash-out refinance is critical in building financial education and developing trust.



“What Are the Cons of a Cash-Out Refinance?”

The benefits of a cash-out refinance a relatively easy to see — cha-ching!


Despite the flexibility and fast access to cash, though, they’re certainly not for everyone. Be sure to cover some of the drawbacks as well, which can include:


  • Increased debt. After a cash-out refinance, the borrower will likely have money on hand, but they’ll also likely have a larger home loan. They should ensure they’re able and willing to pay this amount back.
  • Closing costs, fees, and refinancing at a higher interest rate can all cost borrowers in a cash-out refinance. Be sure to review how these charges might all add up before they sign on the dotted line.
  • Reduced home equity. Of course, as they convert some of their equity to cash, they’ll have less invested within the property. Declining property values or other financial stressors could potentially become catastrophic.


A stellar MLO will help clients weigh the pros and cons, whatever they may be. Don’t be afraid to express your expert opinion, either. After all, increased trust can come with each new transaction and hopefully generate more repeat and referral business down the line Honesty, integrity, and education can help create a client for life while simply pushing them into a new home loan could spell disaster.

“Are There Alternatives to a Cash-Out Refinance?”

If a borrower decides that a cash-out refinance isn’t quite right for them, there are a few comparable options:


  • A Home Equity Loan. This loan also allows owners to borrow money using home equity as collateral. Unlike a cash-out refinance, though, it doesn’t replace the existing mortgage. Instead, it’s a separate loan with its own terms and repayment plan. It may be a good option for clients who would prefer to keep their current mortgage intact or already have a low-interest rate.
  • A Home Equity Line of Credit (HELOC). A HELOC also allows owners to borrow against the equity in their home. It functions like a credit card, where clients can access funds as needed during a pre-determined draw period. A HELOC might be right for borrowers with ongoing expenses, like home renovations, tuition costs, etc.
  • A personal loan. Personal loans are unsecured loans, which means they don’t require collateral like a home. They do tend to come with higher interest rates but won’t affect the borrower’s home loan like a HELOC, home equity loan, or cash-out refinance might. Personal loans may potentially be best for clients in need of smaller amounts, or those who would prefer to leave their mortgage intact.


Of course, borrowers must carefully compare interest rates, loan terms, and any other financial impacts before making a final decision. No two options are the same, and the right program will depend entirely on the borrower’s needs, goals, and financial situation.

“Should I Get a Cash-Out Refinance?”

So, would you suggest a cash-out refinance? Every borrower is different, and the right decision for one could potentially spell disaster for another.


Cash-Out Refinance Basics

Now, are you ready to share your expertise with the many borrowers who could potentially benefit from a cash-out refinance? Look at it as an opportunity to demonstrate value and champion financial education well after closing day. Your clients will thank you!


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