BLOG VIEW: Loan officers are always looking for more opportunities to advance their customers’ financial goals, and leveraging home equity is often a useful way to do so. But some homeowners don’t want to touch home equity with a ten-foot pole. It makes sense.
Homeownership is very emotional: it’s a cornerstone of the American dream, and to many, it’s a stand-in for financial security. But the truth is, most of the time, customers don’t even really understand the products on offer — and how those can help them build toward a more complete vision of financial wellness.
This is where LOs need to step up and become trusted advisors. Home equity has vast untapped potential, and LOs should be able to convey the various benefits of leveraging equity to build long-term financial success. As such, here are five ways loan officers can use home equity to surface more opportunities and serve their customers.
Cash-Out Refinance
One of the most common and straightforward ways to tap into home equity is through a cash-out refinance. A cash-out refinance allows homeowners to replace their existing mortgage with a new one, borrowing more than the outstanding balance and receiving the difference in cash. In a nutshell, it’s mortgaging their current equity.
In describing this to customers, a cash-out refinance should be framed first and foremost as a potentially useful strategy to increase cash flow, allowing them to consolidate high-interest debt, pay off growing student loan balances, make investments in additional real estate, finance home improvement projects, and cover other unexpected expenses.
This might not be always the best option for all customers though, and its particularities should be clarified here too. For example, when interest rates are high (like they are now) customers might end up increasing the amount of interest they would pay relative to other solutions. And there are often not-insignificant fees associated with offering a straight-up cash-out refinance. Which is where other home equity products come in.
Home Equity Products
Lines of credit or home equity loans can also put home equity in service of customers’ broader financial goals. And of course they’re structured differently from a cash-out refinance. And, with more than 80% of homeowners currently holding a mortgage loan of 5% or below, many are hesitant to affect that low interest rate, making home equity products a great option to still leverage their equity.
Home equity lines of credit, or HELOCs, for instance, offer a revolving line of credit that’s tied to the home’s equity. But even terminology like this might be too technical for some of your customers. One might simply say that it’s like a credit card, secured by the amount that you’ve already paid off on your house — except that its interest rate is usually way more favorable than a typical credit card.
Home equity loans can be described as a simpler product — a traditional loan, just secured by the amount you’ve already paid off on your mortgage.
To get the benefits across, for HELOCs, LOs could emphasize the convenience of accessing funds as needed, and the ability to keep borrowing as long as payments are made. This makes HELOCs an excellent option for ongoing expenses or unpredictable financial needs. Home equity loans, on the other hand, provide a lump sum amount, making them ideal for specific, one-time expenses such as a home renovation project or a child’s education.
Reverse Mortgage
For eligible homeowners aged 62 and older, a reverse mortgage can be a powerful tool to access home equity. There are some eccentricities to this product that LOs should be prepared to explain to their customers.
The advantages to a reverse mortgage are simple and easy to describe. Essentially, seniors that own their homes can tap into their home equity, receiving cash either in lump sum or in monthly payments. When they die, the lender either needs to recoup the loan amount or is entitled to sell the house and profit.
This should be framed as a good option for seniors who are struggling to make ends meet and could spend their golden years more fruitfully with more cash on hand. It’s excellent for supplementing low retirement income or rising healthcare costs. On the downside, it means that their property, often a source of wealth-building for their descendants, then becomes the property of the bank after death.
LOs should discuss these intricacies transparently with their customers, empowering them with information to decide for themselves whether a reverse mortgage is right for them.
Mortgage Insurance Removal
This one is a no-brainer without any significant downsides, and it helps build trust between LOs and homeowners. Essentially, as homeowners pay down their mortgages and the value of their property appreciates, they may become eligible to remove private mortgage insurance (PMI). But many homeowners are unaware of this possibility, and loan officers can play the role of an advocate for their customers’ interests, simply by letting them know when they are eligible and helping to guide them through the process.
Not only is this a solid favor to the customer, but it also shows them that the LO is regularly reviewing their clients’ mortgage terms and property values. The net result is a deeper relationship between LOs and their customers.
Annual Home Equity Check-Up
Developing this theme of relationship building, LOs can encourage their customers to realize that financial health, much like physical health, involves preventive and proactive measures. Scheduling regular home equity check-ups with your customers is another way of building trust.
Check-ups like this could involve sharing information on how your customers’ home value has appreciated and also allow for regular opportunities to explore products that might be relevant to their ongoing financial needs.
Home Equity is One of the Biggest Tools
Home equity products don’t have to be scary. By laying out their advantages and disadvantages clearly, LOs can help homeowners see that they’re sometimes extremely helpful means to achieve specific financial goals.
Through effective communication and a commitment to ongoing support, loan officers can enhance their clients’ financial well-being, build long-term relationships, and solidify their reputation as trusted advisors.
Dan Catinella is chief lending officer at Total Expert. With over 20 years of experience in mortgage technology, he is a seasoned technology executive focused on driving digital transformation through all channels of lending.
