Recently, we had you follow along in a two-part blog about targeting consumers in a high rate market. We wanted to extend that series to part three to touch on the return of cash-out refinances.
Because home values are back on the rise, homeowners can once again use their home as a means to get immediate cash. Interest rates have climbed, yet home market appreciation has allowed consumers to use their home equity as a means to access cash. As home prices begin to increase, mortgage originators need to prepare for the return of cash-out refinances.
As equity rises due to market value appreciation, consumers can draw on their home equity via cash for things such as paying for a child’s education, starting a new business or consolidating debt. This can be done through a cash-out refinance. This type of refinance offers the following benefits:
Immediate access to large amounts of cash
Lower interest rates than home equity loans
Allows for debt consolidation at a more affordable combined payment compared to revolving debt. Its interest payments are tax-free and lower.
Could possibly replace older mortgages with higher rates
Most importantly, the loan origination process is familiar to the consumer and one they should be comfortable with. Here’s an example of how the cash-out works.
Joe has been dating his high-school sweetheart for years now and is ready to take the next step-marriage. He makes enough money to make ends meet, but the hefty ring investment is weighing on him and his pockets. He has been in his mortgage for three years now and the loan’s balance is $70,000. While housing prices have appreciated beyond his initial appraised value of $100,000, he built up $30,000 in equity. Joe decides to refinance his home (worth $130,000) and take $10,000 for the engagement ring.
Joe’s new mortgage must cover the balance of his old mortgage, closing costs and the $10,000 ring cost. With the cash-out option, this is possible. His new mortgage is $80,000 (before closing costs), his loan-to-value ratio has increased to 62 and he now has the capital to buy the ring. The cash-out refinance allows him immediate access to cash, which also means he can propose to the woman of his dreams according to plan.
Mortgage professionals must take advantage of the cash-out strategy and market its benefits to get more business. It’s time to revert back to needs based strategies in your marketing plans, and this is one way to satisfy both the needs of the lender and consumer. Mortgage mailers or direct mail campaigns can help target potential clients in an affordable way.
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