BLOG VIEW: Talk about a perfect alignment: The U.S. economy is improving and housing prices continue to rebound. That much we knew. But what about mortgage rates? Instead of rising in 2014, as was expected, rates continue to hold at the lowest level in six years.
That means it's time for mortgage lenders to start promoting conventional mortgages again, right? Well, yes and no. Bound by a series of new regulations and leery of repeating the mistakes that led up to the 2008 crash, many mortgage lenders are still playing it safe when it comes to the purchase market.
However, this understandable caution regarding new mortgages does not mean consumers can't take advantage of the rising-equity/low-rates situation. As such, lenders are and should be promoting home equity products that allow borrowers to tap into that rising equity.
Given the still-historically-low rates, refinancing is an obvious choice. But lenders should also keep in mind those clients who need an injection of cash that a refi can't provide, such as second mortgages and, especially, HELOCs.
Many of the big lenders have already started moving in this direction. Bank of America, for example, increased its HELOC loan volume by 75% in the first half of 2014, while JPMorgan has seen a 45% increase in HELOC originations.
While some of this increase is being fueled by borrowers who are nearing the end of an existing line of credit and are looking to refinance, a larger percentage is coming from customers who are new to the home equity product market.Â Â Â Â
It's time for lenders to put themselves into the heads of their borrowers, anticipating their questions and educating them on two frequently misunderstood products: HELOCs and Home Equity Loans.
Given that education plays such a critical role in the marketing of these products, the following ‘mock Q & A’ should provide direction, both for your messaging and for your sales team.
Borrower: I would like to take advantage of my home equity but have recently refinanced in the past 12 months. Am I out of luck?
Lender: Absolutely not! Two excellent options for taking advantage of rising home equity are a second mortgage (also known as a home equity loan) and a home-equity line of credit, or HELOC.
Borrower: I need capital to start up my new business. Which of these options makes the most sense for me?
Lender: If you need a line of credit that you can draw on over time, that's just what HELOCs are made for. The lump-sum payout of a second mortgage makes more sense for a one-off expense, such as a home renovation project.
Borrower: Is the interest on both of these options tax-deductible?
Lender: For second mortgages, the answer is yes. For HELOCs, the answer is a qualified yes: The deductibility only applies to home-related expenses, and you'll have to take a test to prove it. Having said that, the freedom to spend the money on whatever you want is a major HELOC selling point. And whereas interest rates for second mortgages tend to be fixed, the interest on HELOCs is adjustable.
Borrower: I'm worried about my credit score. Will these options hurt my score?
Lender: A second mortgage has less of an impact on credit scores, so if you are worried about your score, that might be the right option. A HELOC can affect credit scores by upward of 80 points – not to be taken lightly if you have a major expense coming up that's going to require the use of your credit. Good credit, on the other hand, can be leveraged to get a HELOC at a better rate than a second mortgage.
Borrower: What are the costs involved?
Lender: The closing fees on a second mortgage tend to be greater than those of a first mortgage due to the greater risk involved, typically 3% to 6% of the amount of the mortgage. HELOCs, for their part, tend to have monthly amortizing payments in the $20 to $75 dollar range, although some allow for these payments to be deferred.
Lessons For Mortgage Marketers
The alignment of rising equity and rock-bottom interest rates has been the golden, unexpected opportunity of 2014. Although it's always important to seek out new clients, home equity products are the perfect choice for existing customers – especially those frequently overlooked clients who have recently taken out or refinanced a first mortgage.
Often, a little education is all it takes to nudge a homeowner into the market for a secondary product. And for those clients with particularly good credit who are shopping for other options, consider giving a little on closing costs or monthly payments in order to close a deal. Why? Clients holding multiple products in your portfolio are more likely to stay with you for the long term. And more than ever in today's voluble economic environment, it's the long-term relationship that counts.
Kesna Lawrence is senior vice president for client strategy at Datamyx, a provider of data-driven technology solutions for direct marketing in the financial services, automotive and insurance industries.
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