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The natural inclination is to say that renewals and refinancing are exactly the same thing, and I know what you’re thinking; semantics. That there really is no difference between the two, and there are certainly enough similarities to mix them up. To you and your client though, they are, and deserve to be, very different.
Let’s begin with a practical definition. A renewal occurs when the lending institution provides the next term of the mortgage amortization period at substantially similar terms. The rates may change, and the remaining balance different, but the client does not need to re-apply or requalify to initiate the next term period. Provided the client has been making their payments, a renewal can just happen. It’s convenient and easy for the client. But it’s that lure of convenience that is the selling point, and unfortunately it’s often not the best financial deal for the client. Because of the simplicity of renewals, they often happen very quickly and in just a few months prior to the expiration date of the mortgage term.
A refinance occurs when a borrower alters the terms of the mortgage substantially enough to require re-evaluation and approval. The primary terms that would trigger a refinance are changing of the principal amount, adding in a line of credit, or switching lending institutions. Even though this is more work, this is often beneficial for homeowners if the mortgage broker is taking a more holistic approach with the client.
So why should a client refinance instead of renew?
As mortgage brokers it can be tempting to think that your job is simply to get the lowest monthly payment amount or the lowest mortgage rates available for the client, but that isn’t thinking holistically. By definition, refinancing isn’t occurring for first time homeowners, it’s happening for individuals that now have equity in their property, an established history of payment reliability, and who have already gone through the process of applying a down payment from their savings. In other words, they aren’t the same people you may have helped to get a mortgage for in the first place. Their goals 3+ years ago might have been just to save up enough money to buy a home, today things will have definitely changed. Your job is to find out what has changed for them and assist them in utilizing what is probably their highest value asset, their home, to help them achieve their next set of financial goals.
How do you think holistically for your client?
First off, let's be clear about one thing, you need to provide advice that is in your client’s best interest. Leveraging a person beyond their ability or comfort is not in their best interests, but frankly neither is just taking the renewal presented to them without evaluation or forethought. Just because it’s easy doesn’t mean it’s the right thing.
To begin, you need to be speaking with your client well before the renewal ever comes into view. By well in advance that can mean being six months, 18 months or even a few years before the renewal date. If rates are rising you need to be discussing with your client how they are coping. Are they having to make sacrifices to afford their mortgage payments? Do they have other payments like cars, vacation homes, tax payments, or credit card debt that they need to cover in addition to their monthly mortgage payments? Have other costs changed for them like the arrival of children, supporting elder family members, or just a general increase in household expenses?
Understanding these elements are key so that you can help to craft the right mortgage for them. Although mortgage rates might be up, those rates are still probably better than other rates that they would be paying on credit cards or other forms of debt. The right move for your client might be to consolidate those debts together and refinance them within their mortgage. Even though their monthly mortgage payments might go up, you may be able to put together a financial structure that reduces the total amount that they are paying every month in aggregate. Refinancing might be the pressure relief that literally puts more food on their table.
It also might be that the client should be accessing the accumulated equity in their homes for a purpose that could earn them money. This might be the time that they should add a rental suite to bring in some income, purchase a rental property to build secondary equity, or establish a HELOC to give them additional peace of mind that they will have capital available if they ever have inconsistent monthly cash flow. Maybe they’ve even saved up some additional capital or had a windfall and they should be considering applying a bunch of that cash to principal under a new structure?
And regardless of whether rates are rising or falling, there is always an opportunity to evaluate basic rate options. Would a 2-year term fixed rate mortgage make sense for now until we see rates falling again? If they have a mortgage with a fixed payment amount and a variable rate, would it make sense for them to change out of that product so that more of their payments are going to principal?
As a mortgage broker you know you don’t get paid when a client renews, but you do get paid when you refinance your clients. There will be many of your clients that it will just make sense to have them do an easy renewal, and you should encourage them to do that when that is the case. But there will be many situations where it makes much more sense to refinance, and you need to understand all of your clients well enough to spot those opportunities and assist them like they hope you will.
Remember that for an established Mortgage Broker, there are always more refinancing opportunities than there are mortgage origination opportunities. It’s in everyone’s interest to find those, refinance them where they make sense, and then repeat!
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