Are your clients being urged not to refinance?

by Justin da Rosa16 Sep 2015
The refi boom could come to an end sooner than you think if consumers take the advice of financial planners and others offering a list of bad reasons to tap into home equity.

With the threat of a Fed move to raise rates this week and with home prices on the ascendency in so many US markets, originators have seen a flurry of refi activity this month. But how much of that tapping into home equity represented a sound financial move? And how much represented a misstep?

Here’s a list, courtesy of HSH, of dubious reasons to convert some home equity in to cash. Originators, beware.
 
1 – “Guaranteed” investments
Taking cash out of home equity to buy into the stock market is risky. The money homeowners put up can disappear as the market fluctuates – and your clients will be left with a larger home loan to pay off.
 
2 – Monthly expenses
Repeatedly chipping away at home equity to cover monthly costs, like groceries, utilities or transportation, could be a sign that clients are living beyond their means.
 
3 – Expensive gifts
Holidays and special occasions are tempting times to splurge on gifts for loved ones, but home equity can cause clients to overspend unnecessarily.
 
4 – A wedding
It’s easy to fall for an expensive designer gown and an exotic honeymoon, and home equity can seem like a great source of cash to cover those costs, but it’s important that your clients establish priorities: a one-day wedding, or a home they can truly call their own.

COMMENTS

  • by Bob Schwab | 9/16/2015 11:57:54 AM

    Leaving equity in a home can also be risky. Property values are determined by external forces that homeowners have no control over. They can and do rise and fall based upon a number of economic factors. The equity in a home is not safe, not liquid and provides no rate of return.

  • by Ryan W. | 9/18/2015 4:04:04 PM

    I wonder what a financial advisor would say if their client/borrower were to ask them should they cash out refi OR pull out some low earning investments to fund something? Something tells me that the financial advisor would change their position on this because they're making money on the assets their managing. At the end of the day financial advisors are not licensed mortgage professionsals and may not know the entire scenario as it relates to the mortgage transaction specifically. Every situation is uniquely different. What if the borrower is 100% guaranteed a settlement, inheritance or payout but the funds will not be accessible for 12 mos and but the funds are needed? I'm an MLO and would advise against all of these as well in general for being reason to extract equity from their home but there are valid circumstances where it is a smart move to do a "cash-out" refi. Home improvement obviously being one. Another being that in some situations using equity to payoff other high interest debt and "consolidate" can in certain situations be a smart move if the borrower is drowning in revolving debt and leaving off cat food in order to service that debt and not likely to have income increases and no true assets, tangible or paper, to liquidate or sell, and will close those revolving accounts out than saving a borrower $500 a month on a cash-out consolidation mortgage can be a lifesaver for some. The mortgage pro has to clearly advise the homeowner that this is the last opportunity to change their habits and make a new responsible path after the mortgage closes. Then this option can be a financial lifesaver for many. Not to mention the interest is now tax deductible under a mortgage debt vs. revolving debt. Situations like cash out refi's should not all be generalized on "do" or "don't" and should be analyzed by each individual case.

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