This piece originally appeared in the August 2024 edition of MortgagePoint magazine, online now.
At their best, Loan Officers (LOs) should act as financial guides to their customers, helping them see and help surface opportunities that they did not know existed. To serve this role, LOs need to have a deep understanding of various products in the market, as well as the state of market conditions themselves. Essentially, the idea is to proactively connect the customer to the right opportunity at the right time on their financial journey.
The year 2021 brought historic lows to mortgage rates, with the average 30-year, fixed-rate mortgage (FRM) bottoming out in January at an all-time low of 2.65%, before bumping back up to the high single digits just a few years later.
The upshot was that many customers who thought they were buying starter homes are now realizing that the rates they locked in will never be seen again. With 80% of mortgage-holding Americans locked in at a rate of under 5%, homeowners are often finding themselves in golden handcuffs: in a home they are not quite happy with, but unwilling to leave.
This is a good time for LOs to key in on how their customers can leverage home equity to make the improvements they want to their home—or reach any other financial goal they want. There is a measurable appetite for these loans as well as online searches for home equity lines of credit (HELOCs) went up by 305% in 2023, according to BankRate.
Some customers (and by extension LOs) can be a bit skittish about tapping into their homeownership stake to achieve other goals. Again, the best approach here for LOs is to make sure they really have a handle on what home equity can do in general, and more importantly, what it can offer your customers.
So, consider this your primer on home equity use cases: covering five of the most likely ways customers may want to use their equity: Reverse mortgage, cash-out refinancing, mortgage insurance removal, annual home equity check-up, and home equity products like HELOCs, and home equity loans.
The Power of Reverse Mortgages for Seniors
Reverse mortgages can be a great way to help seniors improve the quality of life in their sunset years. With a reverse mortgage, which a customer typically will not qualify for until they are older than 62, a lending institution gives a set monthly amount to their customer that they can live on. Once the customer moves, or passes on, the house gets sold and the monthly amount gets repaid from the proceeds of the sale. This injects a sometimes-much-needed boost of cash to help with anything from medical expenses to unchecked items on the bucket list.
Although a reverse mortgage can narrow the inheritance left behind to children and other loved ones, they can ultimately help seniors live a more flexible lifestyle—especially amid the rising concerns related to the high costs of inflation. Exploring these options can open pathways to access cash, supplement retirement income, and flexibility in fund usage.
Consolidating High-Interest Debt With Cash-Out Refinancing
Cash-out refinance is pretty much what it sounds like. It allows homeowners to access the equity they have built up in their homes by refinancing their mortgage for more than they owe and pocketing the difference.
Let us say you bought a home in 2021 for $280,000. You put 20% down, leaving you with a mortgage of $224,000. With a cash out refinance, you would be able to replace your old mortgage with a new one in an amount greater than $224,000—this is usually possible because property value appreciates over time, and you are also paying down the unpaid principal balance with each payment. The $224,000 of the new mortgage would pay off the old one—and the difference would be yours in cash.
This is a good option for customers wanting to consolidate high-interest debt or finance home improvements. But LOs should ensure that they educate their customers on potential downsides too: obviously, it entails taking on a greater debt load and putting their home up as collateral, which may not be the best choice for all customers.
Building Client Trust
This one is just an unqualified win. As home equity grows, homeowners are often eligible to remove private mortgage insurance (PMI) from their mortgage payments—but it is not a widely known point and customers are not often aware of when they become eligible and how to apply for removal.
LOs looking to build some credibility and trust with their clients can proactively let their clients know when they are eligible to remove their PMI. This often saves them hundreds of dollars and leads to a better relationship between the LO and their customer.
The “Home Equity Credit Card”
Home equity products comprise home equity lines of credit (HELOCs) and home equity loans. The former amounts to a credit card tied to your customer’s home equity. Not literally, of course—but it functions in much the same way—a replenishable loan that your customer can borrow from and pay back as needed, and usually with a much better rate than they would get from a credit card company.
Home equity loans are more straightforward. It is much the same principle, but instead of a revolving amount of credit they simply get the loaned money as a lump sum.
These are good options for cash-poor customers that still want to make essential renovations—particularly those who bought during times of low-interest and want to protect their investment through home improvements that they cannot currently afford.
Preventive Financial Care of the Annual Home Equity Check-Up
This last one is more of a recommendation than a product you can offer. Just as preventive healthcare is the best healthcare, so is preventive financial care the best. LOs should be inviting their customers into their office at regular intervals to do a “home equity checkup”—letting clients know how much equity they have, what they can do with it, and all the previous advantages and disadvantages we’ve gone over in this article.
Becoming a Financial Guide
Every period of life calls for different expenses—whether it be paying for a wedding, hospital bills from a newborn, college, or retirement—and each can come with a hefty price tag, which can be even more difficult for clients to navigate.
But what can help them is at least knowing their options—which can all start with leveraging the untapped potential of home equity options.
And that is exactly where LOs can guide the conversation and educate clients—acting not just as a LO, but a long-term advisor for clients and the financial guide to be right by their side at every turn and every milestone. All LOs can do, and all they should do, is be prepared to put the options in front of their customers—as clearly and transparently as possible—and from there, let them decide what best fits their financial goals and life’s objectives.
