Solving the mortgage refinancing puzzle

It’s mortgage season once again—and it could be a good time to help customers examine their refinancing options. What are the considerations for both borrower and bank?

By Katie Kuehner-Hebert

Interest rates are set to move higher again this year, which means mortgage rates are also likely to rise. Banks that make mortgages should take the opportunity now to refinance adjustable-rate loans into fixed-rate loans, as well as tout their home equity lines of credit (HELOCs), experts say.

But rates aren’t the only reason customers choose to refinance their mortgages, they emphasize. Even as rates rise, bankers should still market their refinancing capabilities, as customers may prefer shorter loan terms or want to cash out some equity in their home to pay for their kids’ college tuition or taxes.

Greg McBride, chief financial analyst at, expects three interest-rate hikes from the Federal Reserve this year. While the interest-rate increases will translate into similar increases for HELOCs, it doesn’t necessarily mean the same for mortgage rates.

“Mortgage rates are moved based on long-term interest rates, so the drivers are the outlook for the economy and inflation, and the level of nervousness that may elicit in the financial markets,” McBride says.

It’s not going to be a straight line, he says. Rather, mortgage rates may be volatile this year, depending on if there is a stock market correction.

“If the markets get nervous about geopolitical issues, mortgage rates could fall pretty quickly, but if we get an uptick in inflation, mortgage rates could rise pretty quickly,” McBride says.

With interest rates on the rise, the mortgage bankers at First Federal Savings and Loan Association in Pascagoula, Miss., see an opportunity to serve customers by taking a look at their mortgages to determine which options will provide the greatest benefit, says Samuel T. Stauter, assistant branch manager and loan officer at the $302 million-asset bank.

“Many of our customers have adjustable-rate mortgages, and some have adjustable-rate home equity lines of credit,” Stauter says. “Refinancing to a fixed-rate loan gives the customer security knowing their interest rate won’t change, making them feel more confident budgeting and preparing for their financial future.”

Marketing smarter
A challenge facing community banks looking to launch a refinance campaign is knowing the size of the pool of potential borrowers. Interest rates have been low for so long that many borrowers have already obtained fixed-rate financing, Stauter says. However, whether the purpose of refinancing is switching to a fixed-rate loan or pulling equity out, it’s still smart for a bank to market refinancing.

Since First Federal is a portfolio lender, refinancing mortgages the bank already holds is beneficial in several ways, Stauter says.

“We can earn fees through the origination, possibly increase our assets by doing cash-out refinances, and sometimes retain our customer by keeping them from going to a competitor,” he says. “By refinancing a loan from another lender, we not only add a new customer to our family of customers, but we’re then able to cross-sell our other financial products, which reaps benefits for the bank, financial and otherwise.”

Merchants Bank in Winona, Minn., also retains the servicing of its mortgage loans. Adding new customers who refinance out of their mortgages from other lenders enables Merchants to earn more interest income and possibly more business from cross-selling, says Arlene Schwerzler, a vice president in the mortgage loan department at the $1.6 billion-asset bank.

It’s not always cost-effective to refinance existing customers if the bank ends up lowering the interest rate it currently charges, she says.

“However, it’s still important we do this service, or the borrower has the choice to go elsewhere, and we not only lose the rate and loan, but we don’t replace it, even with a lower rate,” Schwerzler says. “Lower rate is better than nothing.”

There are always challenges with refinancing, she says. The approval requirements the bank used when a customer first took out a mortgage are usually not the same as the current approval requirements, or the customer’s employment income may have changed or their credit may have deteriorated. Consequently, they may not always be approved for a refinance, even if they have not missed any payments or were planning to lower the payment.

“Certainly, this is unfortunate and is a big challenge,” Schwerzler says. “There are so many unique things that come into the picture and … it’s not a simple transaction.”

The $204 million-asset Willamette Valley Bank in Salem, Ore., has a robust residential mortgage lending platform, but it’s mostly conducted outside of its bank and depository locations in home loan centers in the greater Salem market, says Dan King, executive vice president, residential lending. The community bank’s 12 loan centers are located as far south as Medford, Ore., north to Vancouver, Wash., and east to Coeur d’Alene and Boise, Idaho.

Willamette Valley’s primary focus is home purchase financing, which represents about 80 percent of its mortgage business, while refinancing represents about 20 percent, according to King. Last year, the bank logged $626 million in overall mortgage residential production, and about $125 million of that was refinancing—about $10 million per month or about 40 loans.

“A good percentage of refinancing clients are past mortgage clients, and some are new folks who heard about us in a variety of ways, including from our marketing campaign,” King says. “We sell our loans in the secondary market, so when borrowers come back to the bank looking to refinance, the bank can generate a new loan, which brings in new fees to the bank.”

But customers may refinance even if the rate is higher than their existing rate, King says. It could be that they want to shorten the term from 30 years to 15 years. Alternatively, they might want to consolidate their mortgage and an existing HELOC into one fixed mortgage or a second fixed-trust deed, as under the new tax law, people can no longer write off the interest on their HELOCs.

It could also be that they need to consolidate revolving debt, or they need cash out to pay for their kids’ college tuition or taxes, King says. Pulling equity out of their home in a cash-out is a higher-risk loan, so the rate actually might be adjusted slightly higher.

The takeaway: “Don’t just focus completely on rate,” says King. “That’s not the only driving factor for refinancing.”

Why the bigger picture matters

What does Arlene Schwerzler of Merchants Bank in Winona, Minn., tell borrowers when they ask for her advice on whether or not to refinance their mortgage? She shares her personal views:

“Factors to consider with a refinance: Is it due to a need to get a lower payment or reduced term? Is it that there is sizeable equity in the home, and does the customer have other debts that are a much higher rate? That could allow for the home loan to be refinanced to accommodate an overall lower payment and/or shortened home loan term.

“Another very important piece of the refinance puzzle to consider: How long does the borrower expect to be in the mortgage? Are they expecting or hoping to sell in the near future—five years or less? Lots of things to consider when looking at a refinance, including their income versus their monthly debt obligations.

“I want to make sure to take a ‘bigger picture’ approach, one that challenges the borrower to consider not just their current financial situation but also their future, and then give the facts for them. I care deeply about the financial well-being of each of my customers and want to make sure that considerations are made.”
—Katie Kuehner-Hebert

Katie Kuehner-Hebert is a writer in California.