I got a call from an old friend of mine shortly after the New Year. He wanted to consolidate his 1st & 2nd Mortgages into one loan at a reduced term, a financially savvy decision for sure. So, onward we went with the process.
Now, this young gent lives in a rather eclectic neighborhood with properties that tend to differ in appearance, size, & condition. His property happens to be one of the nicer ones in the neighborhood, which tends to make its worth not as ideal as one would like. None the less, the appraisal was done and came in at a rock solid 290K. The comparable properties were there, all except for a less than desirable abode across the street that had sold recently for 215K. The appraiser noted it in the report and while it hurt the value of our subject property, the 290K was still as solid as Lou Ferrigno in the movie "Pumping Iron."
Well good old Murphy's Law came into play and the lender came back with their own search saying the value was only 230K. Holy slap in the face Batman! After the initial fury of wanting to briskly walk a few hours and give their Appraisal Review guy an Atomic Wedgie, we stepped back and got the facts.
It seems that another property sold literally right after the appraisal was done. It was just down the street and it sold for 240K. Uh oh.....that's not good:-( So, the appraiser had to re-do the appraisal making note of this new comparable property that just came into play. We went from 290K to 260K. It didn't kill the deal by any means but it did introduce the dreaded PMI.
While it didn't help that they sat on the appraisal way too long for my or my amigo's taste, upon hearing this he became agitated. To a large degree, I completely understood. His payment would be going up $78.90 and he would have that dreaded term attached to him for at least 2 years. That said, the deal was still a no-brainer across the board, making total financial sense. But my amigo, a smart guy but stubborn like me, was going to throw in the towel and forget the whole thing. Our conversation on the phone was relatively brief. Normally, with any other client, I would point out the very reasons it made perfect sense to get it done even though it wasn't as ideal as it was initially on paper. In this case, I didn't do that.....not initially.
After getting off the phone, I noticed the error of my ways. I then sent him the following email.....
Hey (Name witheld to protect from prank calls from other AR members)!
Thought I would shoot you an email to summarize our conversation & the specifics of the transaction regarding the refinancing of your property: This will prove helpful in sitting down with your wife tonight at dinner.
- Because the appraisal of your property came in lower than initially anticipated, the loan to value ration is over 80% (88.8%) necessitating a mortgage insurance premium of $78.90. Once the balance reaches 80% of the fair market value, that premium can be removed. Approx. 24 months, an investment of $1893.60.
- By reducing the term of your loan to twenty years, you are saving over $120,000.00 in total monthly payments over the life of the loan. Additionally, the principle reduction with each payment will far exceed what you are seeing on your current mortgages. In other words, equity in the property will be established faster than in your current mortgage situation.
- The rate of interest is being reduced nearly 2% vs. your second mortgage, and .625% on your 1st mortgage.
- As it stands, you are paying $167.95 on the principal each month on your Second Mortgage and $227.31 on the principal each month on your First Mortgage. Your first payment on your new loan reduces your principal $507.40 off the bat.
As a fellow amigo, I would be doing you a disservice if I were to not outline the facts of the matter. That's my job. Because we're friends, I'm not pushing you as hard as I would most of my clients to have them see the proverbial light, but at the same time it is my job to look out for your best interests from a Mortgage Standpoint. It's unfortunate that the sale of properties in your neighborhood adversely impacts the current value of your property. However, the overall savings to you afforded by this transaction far out weigh the negative impact of a 78.90 monthly payment of mortgage insurance for a couple of years. Let me know what you think.
I made a crucial blunder initially in not imposing my expertise to make sure he made the right decision for him and his wife. Instead, I played the part of a buddy and not a true Mortgage Consultant. If I hadn't stepped up to give him a piece of my expertise, I wouldn't be doing my job. When it comes to dealing with friends, family, former clients or with anyone with whom trust is earned....part of our job is to make sure they don't make bad decisions. No action is sometimes the worst decision of all.
We'll see what happens....