If you need cash for home repairs, transportation costs, medical bills, education, or any of life’s major expenses, a cash-out refinance can be an excellent choice. These loans allow people to not only enjoy better terms on their mortgage, but also get a fast injection of cash that can be used for practically any purpose.
Self-employed professionals, however, may experience trouble with these loans. Without the “traditional” income documents like paystubs and tax returns, entrepreneurs, investors, and self-employed contractors often meet difficulties when applying for a loan. This is true when they are making a purchase, as well as when they want to refinance their mortgage.
But there are solutions. Bank statement loans are especially useful for people who don’t work a typical 40-hour job. They help people purchase a primary residence, and they can even be utilized for a cash-out refinance.
Cash-out Refinance for Self-Employed: Utilizing the Bank Statement Loan Program
If you are self-employed and need to refinance your home while turning equity into cash, the bank statement loan is a perfect option. Even if you don’t use this program, you should understand why it’s so useful. But first, you should understand why, regardless of professional background or loan type, it’s still a great time to refinance your mortgage.
Why it’s Still a Great Time to Refinance
People refinance mortgages for a variety of reasons. In general, there are two reasons why a cash-out refinance is still a great idea, even in the current marketplace.
Interest Rates are Low, Could Be Going Up
One of the top reasons for refinancing your loan (cash-out or otherwise) is that interest rates are still relatively low.
Admittedly, we have been a little spoiled by low interest rates over the past few years. According to Freddie Mac, average interest rates in 2018 for a 30-year mortgage were 4.54%; they dipped below 4% in 2019 and fell to just above 3% in 2020. In 2021, they fell further, dropping to 2.96%.
Interest rates are climbing upward.
Here is the trend for the previous six months:
- Dec (2021): 3.10%
- January: 3.45%
- February: 3.76%
- March: 4.17%
- April: 4.98%
- May: 5.23%
That’s a sharp climb in only half a year, but it could go higher. It could also stay steady. It most likely (at least according to most sources) won’t go down soon.
In a move to help lower inflation, the Federal Reserve recently increased rates to help stave off record inflation. But there is a good chance that the Federal Reserve will further increase interest rates, especially if job growth continues to be positive.
There’s a lot of data, and multiple sources, that we could reference when discussing interest rates. But as of right now, all you need to know is that interest rates will (likely) either go up or stay (more-or-less) the same. There is little chance that interest rates will go down.
This means that if you are looking for a cash-out refinance, it’s still a good time. If you have a strong credit profile and have made steady payments on your current mortgage, you can likely find an affordable, low-rate refinance program that would be perfect for your needs.
Your Home Has Likely Gained in Value
A cash-out refinance for self-employed professionals is heavily dependent on the amount of “equity” in your home. (Equity simply means the percentage of the home that you own.) Because home values have significantly increased, there is a strong chance that your equity has also increased. Therefore, you can likely access a larger cash-out payment when you use a cash-out bank statement refinance.
Usually a home-value increase of 5% to 10% is fairly typical. According to Redfin, the average home price has increased by over 15% in the past year. While this increase has created headaches for aspiring buyers, if you currently own your home and want to refinance you have access to more cash, all because your home value has increased.
Suppose three years ago you purchased a home for $300,000, using a 10% downpayment, which totaled $30,000. At the time of the purchase, you had 90% equity. Over the past three years, however, your home has increased in value to $425,000. If your loan balance (somehow) stayed the same, you would now owe $270,000 on a home worth $425,000. Without doing anything, your equity has skyrocketed to roughly 36 %. Considering that, in reality, you would have been making payments, your equity may be somewhere around 40% to even 50%.
Thanks to the increase in home values, you now have more equity that, through a cash-out refinance for self-employed homeowners, can be utilized for investments, business expenses, or emergency costs.
Bank Statement Loan Program a Great Option for a Cash-out Refinance
A bank statement loan program is usually used for the purchase of a new home, but it can also be utilized for a cash-out refinance.
The same challenges that face self-employed individuals seeking a purchase loan, namely the lack of typical income documents, are faced by entrepreneurs and investors when seeking a refinance.
Once again, a bank statement loan can come to the rescue by providing information on a borrower’s income and expenses, all without paystubs, which are nonexistent, or tax returns, which can be inaccurate because of write-offs and other tax strategies.
Self-employed people face may need cash for their business. Perhaps they need a loan to purchase new equipment, move into a new space, or expand their real estate holdings. A cash-out refinance can come with better terms, as the loan is backed by the house as collateral, thereby reducing the overall risk to the lender.
If you are self-employed and need a cash-out refinance, contact our team today. We’ll show you the details of a cash-out refi based on bank statements, and help you make the right choice for your unique financial needs.
