Julian Hebron is the Founder of The Basis Point. His views are his alone and do not necessarily represent the views of Blend.
In early 2018, home equity started hitting record highs in America, but few homeowners tapped equity until rates dropped in 2019. The latest available third quarter 2019 data show homeowners withdrew the most equity in 12 years, but surprisingly, only one in five customers stayed with their existing lender. So let’s explore how you can responsibly engage and retain these customers as they tap their record home equity in 2020 and beyond.
Why has record home equity remained untapped until now?
Black Knight defines tappable equity as the amount available to homeowners before their mortgage balances equal or exceed 80% of their home’s value.
This is a responsible definition because it leaves 20% of home equity as padding for potential home price declines, which helps protect homeowners and our economy.
Thanks to stable and rising home prices, tappable home equity in America was in record territory of $5.7 trillion to $6 trillion in 2018. Now $6.24 trillion in equity is available to 45 million homeowners, and equity grew in 97 of the 100 largest markets in the past 12 months.
So homeowners are starting to take action.
Four of five borrowers use a new lender when tapping equity
For now, most of the action is with cash-out refinances of first mortgages, rather than home equity lines of credit (HELOCs) or home equity loans (HELOANs).
Black Knight said 52% of all third quarter 2019 refinances were cash-out as homeowners withdrew $36 billion, the most in almost 12 years.
There are three important things to note here.
First, HELOCs and HELOANs are 2.5% to 3% higher than today’s rates on first mortgages. Since 65% of tappable equity holders have first mortgages of 3.75% or higher, they can retain or improve their current rate using a cash-out first mortgage refi.
Second, this current rate environment levels the playing field between banks and nonbanks. Banks typically have the advantage with HELOCs and HELOANs since they’re mostly balance sheet products. But banks and nonbanks are equally competitive on first mortgage products. All players have an opportunity as most tappable equity goes into first-lien cash-out refis.
Third, this even playing field intensifies the fight for first-mortgage cash-out refi opportunities. Black Knight said servicers lost 81% of cash-out borrowers in third quarter 2019. This means four of five borrowers are going to a new lender when they tap equity right now.
So how do you retain these customers?
Blend the right product with the right market conditions
Having the right technology to confidently market the right products at the right times is a huge part of customer retention.
Historically, first liens go more smoothly than HELOCs and HELOANs.
Today, cash-out first mortgages are hot, and you have the option to be explicit about that with messages like:
- Refi and repaint without rebudgeting
Or you can keep the message focused on trending homeowner goals like:
- 4 of 5 homeowners think their homes need work. Let’s get it done!
Then, if rates rise on first liens and HELOCs/HELOANS become the more mathematically favorable product for tapping equity, you can remain confident your technology will deliver the same seamless customer experience that your messaging suggests.
Home improvement spending preserves collateral
As the record home equity trend continues, it’s also worth noting that home improvement spending rises when you provide financing.
This helps customers achieve home improvement goals and preserves your collateral — which is important since 80% of the nation’s 137 million homes are now at least 20 years old and 40% are at least 50 years old.
Spending on home improvement averaged $3,300 when using credit cards, rose to almost $7,500 if homeowners used a cash-out refinance, and rose to $9,300 if owners used a HELOC.
Here is how specific projects break down:
- Average kitchen remodel cost jumps from $15,000 if funded with cash to $26,000 if funded with home equity
- Bathroom remodels jump from $9,000 to $15,000
- Room additions jump from $22,000 to $43,000
While these figures don’t advocate customers using homes as ATMs, they do show how homeowners spend with cash versus home equity.
Wake up call on responsibly engaging cash-out customers
This cash-out trend will remain a key theme as 2020 progresses.
Tappable equity is still growing (to its current $6.24 trillion mark) even as cash-out refis are rising. So cash-out is serving homeowners while not adding undue risk to the system.
Cash-out first liens are hot right now, and the fact that four of five borrowers currently use a different lender on cash-out refis should be a wake up call. But HELOCs and HELOANs will be hot later when rates rise and first-lien cash-outs wane.
You must be able to support it all for your customers.
They don’t know the nuances of the loans like you do. They only know they have equity and want to tap it easily.
Ready to foster lifelong relationships? Read more about Blend’s Digital Lending Platform.