Why a closed-end loan might be best for high-debt customers
With many homeowners either holding onto low-rate mortgage notes or unwilling to sell their home right now, one of the biggest sources for mortgage transactions right now is an equity loan or line of credit.
Home equity lines of credit (HELOCs) are one of the go-to products because they give homeowners a revolving credit line they can use or pay down when needed. This can be helpful in case of emergencies or for paying for renovations to the home.
However, for customers who normally would consider a cash-out refinance to pay off consumer debt, a HELOC might not be the right product for them, especially if they tend to have trouble managing revolving debt. That’s why two mortgage executives believe brokers should consider another product to help those customers.
John Brumund (pictured top left), senior vice president, and Peter Pavlakos (pictured top right), vice president at Quontic Bank, suggest that a fixed-rate, closed-end home equity loan (HELOAN) may be the better option when a customer is unwilling to part with a low-rate first mortgage.
“First of all, they're closed, fixed-rate second mortgages,” Brumund told Mortgage Professional America. “There's consistency in the payment. You can't go back and redraw once you pay it down. But the biggest differentiator, and the reason why they’re gaining so much traction, is because we offer our light product underwriting guidelines on those products.
“It doesn't mean that we're not qualifying the borrowers with income. It just means we're making it less rigid than the banks are.”
Doing right by the borrower
One concern brokers should have about recommending a HELOC to a borrower is how they’re going to use the line of credit. If they are paying off high-interest credit cards with the HELOC, that could improve their financial situation. However, Brumund notes it could also be setting them up to max out their HELOC.
“Every borrower you have to look at individually,” Brumund said. “So you have to look at their spending patterns. How are they using credit cards? If you give them a HELOC, they’re probably going to abuse that. They're probably going to pay off all their credit card debt and then go back out and max out their HELOC.”
A HELOAN, like a fixed-rate first mortgage, comes with a consistent monthly payment and a set number of payments. This provides cost certainty for the borrower. Brumund said it is important for brokers and lenders to look out for their customers.
“We have a fiduciary duty to our borrowers, to do the right thing and to give them the right information,” he said. “If I saw a client who had been abusing their credit card debt and they want to get a HELOC to pay it off, I would say, ‘You know what I think, I think the better solution for you is to do a loan that you're going to pay monthly, that's going to be paid off over a period of time.’ Because if they're abusing a credit card, they may abuse a revolving line of credit that's tied to their home.”
That’s not to say there aren’t times when a HELOC would be the right call. Brumund said it simply depends on the needs of the customer.
“If you have a client who's responsible with their credit and they just want to tap into their capital occasionally and pay it off, that's probably a better fit for them on a HELOC,” he said. “But other than that, I would say a HELOAN is a better option for everybody. You're never going to get a 2.5% rate again. Let's do a fixed-rate second, where you know that you're going to pay off your debt.”
The changing borrower
As the equity loan has moved into the non-QM space from the traditional bank space, the profile of the borrower has changed as well, according to Pavlakos.
“We’ve seen the borrower evolve,” Pavlakos told Mortgage Professional America. “Over the last five years, we've seen a big influx of gig workers and people working multiple jobs. People have not only their regular nine-to-five, but they're also going to have this self-employment business that they might run.”
Brumund said these borrowers often have investment properties as well, adding another income source. It’s important for brokers to be able to find the right lending source for these borrowers who might not traditionally qualify for an equity loan.
“There are a lot of borrowers who aren't on a W-2 job,” Brumund said. “They've got multiple businesses, they've got income, investment properties, and those types of things. We just make it easier for them to get the loan.”
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
This article is part of our Monthly Spotlight series, which in February focuses on HELOCs. Full coverage can be found here.
