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Jan 24, 2022

For borrowers with credit card or other debt, or who wish to upgrade and improve their home, a cash-out refinance may be the perfect lending solution. For first-time buyers, now is a good time to consider an adjustable-rate mortgage (ARM). Explore more about these loan types and how borrowers can benefit from each.

Two transactions to remember in 2022 are cash-out refinances and adjustable-rate mortgages (ARMs). Several factors make these options attractive for the right borrowers this year. Homeowners can take advantage of historically low interest rates and rapidly increasing home equity through cash-out refinancing to renovate or pay down debt. Additionally, current, low interest rates are making adjustable-rate mortgage (ARM) loans increasingly attractive for a variety of home buyers, including first-time buyers. Caliber recently released a podcast covering the topics and the necessity to grow familiar with both in the current market. Below, we’ll examine both cash-out refinances and ARM loans, including the types of borrowers who may benefit.

The Mechanics of a Cash-Out Refinance

A cash-out refinance is similar to a standard refinance in its mechanics. The primary purpose of a cash-out loan is for a homeowner to turn the equity in their home into cash for the purposes of paying down debt, investing, or home improvements. Here’s an easy example to share with borrowers: If a homeowner’s initial mortgage was $500,000 and they have paid it down to $200,000, they can replace their amount owed on the current mortgage, $200,000, with a new, higher loan (perhaps $250,000), and then pocket the difference in cash ($50,000).

The cash-out refinance comes with standard fees and credit requirements like a refinance. Although guidelines can vary by lender, often it is required that the homeowner has had the home for at least 6 months. Cash out is limited to 80% of the home’s value for Conventional and FHA loans, but borrowers can finance as high as 100% of their home’s value on a VA cash-out refinance.

Why Cash-Out Refis are on the Rise

There is currently $21 trillion in equity in homes in the U.S. Conversely, there is also a high level of student loan and credit card debt. In today’s market, mortgage interest rates remain near historic lows, and many homeowners who refinance are reaping the financial benefits of lower rates. A cash-out refinance is becoming an increasingly popular option to pay down high interest debt. Some are even paying off second mortgages with high interest rates, using a lower rate cash-out refinance.

Cash-out refinancing can also be a solution to a housing market with low inventory. Homeowners can take money out to improve and/or renovate their home and, ultimately, transform their property into their dream home. Often, homeowners find that achieving their homeownership dreams with the help of a cash-out refinance is more convenient and, at times, more affordable than pursuing a new home purchase. For borrowers desiring more space and square footage who are unable to find a home in a seller’s market, again – with scarce inventory, a cash-out refinance can be the best answer to their small space woes.

No Equity? Try an ARM Loan

If a borrower wants to take advantage of lower rates but isn’t a homeowner yet, an adjustable-rate mortgage (ARM) may make sense for their homeownership goals. An ARM is a loan term option with interest rates that are fixed for a period of time, then change periodically. After the fixed-rate period begins, a borrower’s monthly payments may increase or decrease (typically every 6 months or annually) based on market (rate) fluctuations. Generally, introductory terms are more competitive compared to conventional loans, especially when rates are low.

Additionally, ARMs are especially beneficial for homebuyers who don’t expect to be in their home for very long, whether it’s a temporary place of residence, starter home, or someone who may move after a short period of time, including members of the military. Nowadays, it’s becoming more common for homeowners who wouldn’t be viewed as traditionally transient to spend less time in their homes. Millennials in particular only spend ten years in their homes on average. With an ARM, homebuyers with a short-term homeownership plan in mind can take advantage of lower interest rates for several years, then sell the home before the rate adjusts to avoid a potential increase to the monthly mortgage payment.

While rates are subject to increase with an ARM, it’s important for homebuyers to understand that ARMs come with a lifetime cap. For instance, just because the market is experiencing extremely high rates does not mean homebuyers will be responsible for paying interest from astronomical rates. Most ARMs have a cap of 5% to 6%. This means the interest rate cannot increase more than 6% over the life of the loan. If the introductory rate is 3%, the max interest rate a borrower could pay, in this scenario, would be 9%. For a homebuyer or homeowner to make the most informed decision regarding their financial future, it’s important to be cognizant of current caps and terms, especially as they pertain to this versatile loan.

Keep Educated with Caliber

Our podcast mentioned at the beginning of the article is an additional resource that serves as a quick refresher on ARMs and cash-out refinancing – for you and your borrowers. For more in-depth education, become a Caliber partner. As a Caliber partner, you gain access to extensive educational, marketing, and networking resources to help you grow your business. If you’re not yet a partner with us, now’s a great time to join. We can help you reach your goals and get the best loans for your clients in the current market.