I got to tell you a story about a client I talked with this week. But before I do, I want to remind you and make it clear that when I discuss the POA, I usually talk in generalities, nothing Lender specific. Well, this week I'll deviate just a tad. I won't mention any specific Lender, but I'll be talking about the way one particular Lender does stuff, in terms of the inner workings of the POA.
I won't mention the Lender because I'm not here to "pimp" any particular Lender. Also, I'm sure there are other Lenders that do the same thing, so it's not fair to mention just one. My point is, and this is something I've ALWAYS said, make sure you understand the parameters to the specific Lender's POA program, DON'T ASSUME THEY ALL DO THE SAME THINGS in regards to the inner workings of the POA.
OK, now on with the story. This guy is purchasing a new home. Let's just say the purchase price is over $500k, he's putting down 80% so he's only seeking a 20%ltv mortgage. The dude has some massive cash he's dealing with.
Of course my first goal is to find out why he's putting down so much to begin with.
His goal is to pay off the mortgage as quickly as possible while at the same time pay as little interest as possible.
At this point, we could have gone into "investment mode", where I mention to utilize a lesser down payment and invest the remainder and have it grow... bla, bla. (which is NOT what I'm licensed to do, by the way)
BUT, my number one job, if you remember reading what I wrote last week, is to convince the guy to get his mortgage with ME. After he knows, likes and trusts me (I got that philosophy from my coach, thanks Jeff!), then we can go on. But for right now, I'm focused on my number one job.
So, he wanted nothing to do with anything but a 30 yr fixed. "No problem," I said, "But I wouldn't be doing my job properly until I find out a few things about what you're trying to accomplish." I found out his number one goal was to pay off the mortgage as quickly as possible by paying extra $$ towards principle each month.
From this, I asked "would you rather pay a lower interest rate or the least amount of interest?" Which, by design, triggered a conversation about the difference between those two concepts.
*Tip: understand the basics of this statement before you mention it*
As I was explaining how this particular POA actually can accelerate the amortization by paying extra towards principal, he said "so it's kind of like reverse compounding, right?"
I never thought of it that way, but that statement made sense. When you're investing, you can compound your interest. When you're paying down equity, you're reversing the potential negative equity.
BUT, that cannot happen with a fixed rate mortgage, because it stays FIXED, nothing changes. With certain POA's, since the rate changes and the interest is figured on the remaining balance, guess what? You are paying interest on a smaller dollar amount, which means more and more of your payment goes towards principle, which can accelerate the time it takes to pay off the mortgage.
Most people think of the POA as a way to generate cash flow, so this concept is almost counter intuitive. Think about it for a while, it really does make sense.
Now, my point is, if I would have started off by trying to convince him to put less money towards the house and invest the difference, I wouldn't have done anything at all to set myself apart from the next mortgage person, which is my goal to begin with.
Just another way to use the "inner workings" of the POA in your favor.
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