Remember when it was easier to sell homeowners on refinances? Mortgage interest rates were low enough that most owners could save money each month with a traditional rate and term refinance.
That's changed as interest rates have risen. Lenders hoping to boost their refinance business this year need to change the way they sell. Instead of promoting the savings homeowners can get from lower interest rates, they may consider trying a new angle — home values have risen and refinancing can be a good way for homeowners to access the equity in their homes.
They can do this by promoting the benefits of cash-out refinances, a type of refinance that is steadily becoming more important to loan officers hoping to maintain steady business in 2018.
Refinancing is down. The Mortgage Bankers Association reported that for the week ending March 30, refinance loans accounted for just 38.5% of all mortgage applications. That was a dip from 39.4 a week earlier, and the lowest share that refinances had claimed since September of 2008.
When homeowners do refinance, they are more often choosing cash-out refinances, refinancing for more than what they owe on their existing mortgages and taking the balance as a cash payment. They can use that cash for whatever they want, from paying for a major kitchen remodel to whittling away at their children's college tuition.
While refinancing is down overall, cash-out refinances are rising. LendingTree in early April released a study on cash-out refinancing. According to the study, cash-out refinances rose to 62% of all refinancing activity in the first quarter of 2018. That's up from 54% in the first quarter a year earlier.
What's interesting is that cash-out refinancing isn't as popular in all areas of the country. Analyzing refinance activity from March 1, 2017 to March 1, 2018, LendingTree found that Albany, N.Y., had the highest share of cash-out refinances in the country. Cash-out refinances accounted for 73% of all the refinance mortgages funded here.
Portland, Ore., ranked second, with cash-out refinances making up 72% of all refinance activity. Cape Coral, Florida, also had a cash-out refinance share of 72%.
The key is getting this business. Loan officers need to find benefits for borrowers and sell the positives of cash-out refinances.
Many borrowers will come to you and simply ask for a rate and term refinance. Loan officers, though, are the experts, and their job is to recommend the best financial moves for borrowers. The best loan officers ask questions, present options and help borrowers make the best decision. This means looking at borrowers’ credit scores, open tradelines and the amount of equity they have in their residences. It is time for loan officers to take control of the conversations and help borrowers save money and reach their goals!
How to promote this move? Homeowners can access their equity through a home equity loan or line of credit, of course. But only those with high credit scores can qualify for second liens in this market. You can promote the fact that cash-out refinance could come with a lower interest rate because it results in a first loan instead of a second loan. It is also critical to look at overall savings because in many cases their mortgage payment might go up but their debt load will come down as you save them hundreds of dollars per month.
As rates rise, it’s important for loan officers to think one step ahead and be ready to shift gears as interest in rate and term refinancing wanes and more borrowers, with help from expert loan officers, turn to cash-out refis.