Opinion: Millennials are unnecessarily missing out on refinancing their home mortgages
Baby boomers are aptly named. Many baby boomers choose to refinance their mortgage, lower their monthly payments and ultimately save money for the longer term. With interest rates falling, it’s fair to say that the mortgage industry is itself experiencing a “refi boom.”
Yet millennials are notoriously absent to take advantage of this opportunity. According to loan consultants at the mortgage company I run, many millennials don’t have the funds to cover the costs of refinancing their mortgages. As a result, they cannot benefit from lower rates, which is unfortunate because young Americans need debt relief the most.
First, the data. Most millennials don’t earn as much as older Americans. We looked at our customer demographics and found that millennials represent a higher percentage of our customers who fall into the low-income segment: 42.7% are millennials earning between $50,000 and $75,000 per year , while 38% are millennials earning between $75,000 and $100,000 and more. These clients don’t have as much money to refinance a mortgage, which can often cost thousands of dollars.
Many millennials already had to rely on “Mom and Dad’s Bank” to provide funds to cover a down payment or ongoing payments on a home. These young Americans have more pressing needs, like paying off their student debt. Despite being the largest generation in American history, millennials are not as likely to be homeowners as older generations.
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Of course, not all millennials are alike. The group also represents 25% of our clients who earn more than $200,000 per year. These higher income earners are aggressively seeking to refinance their mortgages, on par with baby boomers who enjoy lower rates. Indeed, these higher-paid millennials want to save money when rates are low — it’s just that many young Americans don’t earn enough to have that choice.
In fact, 78% of our millennial and boomer customers who refinanced opted out in 2018, and 58% have done so so far this year. Among our direct-to-consumer segment (such as in out-of-branch or in-person services), about half of our customers use the money for home renovations, college fees, wedding expenses, etc. The other half chooses to pay on other debt instruments that carry higher interest rates. In other words, refinancing helps our clients reduce the overall cost of their debt. “It puts after-tax money in the pockets of Americans, which helps stimulate the economy,” said Chad Smith, executive vice president of our company. It’s a virtuous circle.
Baby boomers and millennials both have something else in common. Our millennial customers who refinance prefer to do so at our retail branches. This may of course be due to the composition of our sales channel, as we have thousands of loan consultants across the United States. But because refinancing can be a big (and sometimes complex) financial event, millennials like to meet with our loan counselors in person to go over the details.
How mortgage companies can meet the needs of millennials
How can mortgage companies better serve millennials? Some solutions:
• Reduced fees: By lowering refinancing fees, mortgage providers can entice younger Americans to take advantage of lower rates.
• Higher debt-to-income ratio (DTI): By allowing millennials to have higher DTI ratios, buyers will be able to put less money down for a home and therefore have more funds available if rates improve.
• Financial Literacy: Loan counselors can impress upon their millennial clients that lower rates will pay off in the long run. Because millennials prefer face-to-face meetings, our credit counselors take the opportunity to explain the virtuous circle of refinancing to you.
As a parent of a millennial, I know firsthand that the only thing young Americans can love less than refi fees is FOMO: Fear of Missing Out. More young Americans should be offered ways to take advantage of lower rates so they don’t miss out on improving their long-term financial security.
Sanjiv Das is CEO of Caliber Home Loans, one of the largest housing companies in the United States. He was CEO of CitiMortgage from 2008 to 2013.
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