When shopping for a mortgage loan to purchase or refinance a home, if the loan officer begins the application process asking "What payment are you comfortable with?", don't walk away... Run!
Most of us know that the #1 rule of negotiating for a car is to NOT answer the "what can you afford" question. Otherwise, when we answer $350 per month we end up driving off of the lot with a $350 per month payment for 36 months... and a 10 year old Ford Escort. Once the salesman knows what you are willing to pay, there is no incentive to give you the best deal and the difference between what you can qualify for and what you are willing to pay, equals BIG PROFIT.
Did you know however that it works the same way with mortgages? Some loan officers want clients to believe that it doesn't matter what the interest rate is, as long as you are comfortable with the payment. Therefore, if you are comfortable with a $2000 payment, then it shouldn't matter if you are charged 20% interest on the loan. But the simple fact of the matter is that it does, and used car salesman tactics like this have no place in a mortgage transaction. Why? Because again the salesman pockets the difference between the rate for which you qualify and the rate for which you are willing to pay. Now, don't get me wrong, I am not expecting anyone to work for free, but it seems to me that when a salesperson asks how much you are willing to pay it is not because he is taking your best interest into consideration, he is only trying to figure out how much he can charge. Not only that, but most first-time homebuyers and even some more experienced buyers have no idea what they realistically can afford and it is the responsibility of the mortgage professional to help walk them through the process so that they can figure out together what is in the best interest of the customer.
In his blog Jeff Belonger attempts to make a case that we shouldn't get too excited about a potential drop in interest rate to 4.5% based on his belief that we should focus on payment not rate. Now I do believe there is some validity to the point, but these reasons are not addressed in his post. I have previously written about why we should not focus solely on rates when I wrote about adjustable rate mortgages which were being deceptively marketed and about a customer who missed out on refinancing because she wanted a lower rate than what she qualified for. And of course, the lowest rate in the world doesn't mean anything if you have to pay loads of fees and points in order to get it. However, in this case, the sole argument against the lower rate seemed to be that the potential savings were "not that spectacular", which is a short-sighted argument at best.
I will use the example of the payment differences with a lower interest rate for a $120,000 loan even though I do think the $200,000 loan example is more accurate because it is closer to the median home price in the US. When you look at the real advantages of a lower interest rate on a $120,000 loan you will realize that the savings are significant and will be even more so as the loan amount increases.
EDIT: These are the same numbers that Jeff Belonger used in his blog which I linked to above. I thought this was OBVIOUS due to the fact that I referenced Jeff's blog, linked to it, referred to it as "the example" instead of "my example" and made it clear that I didn't think using a loan amount of $120,000 was the best example due to the median home price in the US being much higher. However, Jeff has accused me of plagiarism so it case it wasn't clear before, these are Jeff's numbers not mine!!!!
Furthermore, the point of this post was not to attack anyone professionally or to imply that anyone was less than honest or professional. I was merely pointing out that applying for a mortgage loan, much like buying a car, buying a house, shopping at a flea market etc. involves the art of negotiating. While negotiating , the person who speaks first and lets the other know what he is willing to pay usually loses. I prefer to use a consultative sales approach, where the client and I determine together what best meets their needs. If you reference the chart below (again Jeff's numbers), if a client tells you initially that he is looking for a $720 payment on a $120,000 loan that would give him a 6% rate. What incentive does the loan officer have to offer him the 5.5% rate should he qualify for that if he already knows you would pay $720?
|
Mortgage Amount |
$120,000 |
$120,000 |
$120,000 |
|
Interest Rate |
6.00% |
5.50% |
4.50% |
|
P & I Payment |
$719.00 |
$681.00 |
$608.00 |
|
Difference in Payment |
-- |
($38.00) |
($111.00) |
As you can see in the above chart, the difference in payment on a $120,000 loan with a 6% interest rate and a 4.5% rate is $111.00 per month. Now some might say this savings is minimal or "nothing spectacular" but I beg to differ:
- First, with the economy the way it is, $111 per month is a huge savings for those on a tight budget and could possibly make the difference between someone being able to afford a home and continuing to rent.
- Second, discounting the savings as only $111 per month ignores the effect of compounding interest over the life of the loan. At 6% you will pay $139,005 in interest over the life of the loan, at 4.5% $98,888. That is a savings of over $40,000 in interest alone!
- Third, let's look at the difference in purchasing power. Assuming our borrower only qualified for a $720 monthly payment (I am ignoring taxes and insurance). At 6% they would qualify for a $120,000 loan, but at 4.5% they would qualify for $142,000, a difference of $22,000. That may mean the difference between buying a fixer-upper and a home that has been completely remodeled, or a 3 bedroom home instead of 2.
- Last, one of the things I try to do whenever I refinance a loan is try to show the client how to take the money they are saving, and pay the loan off early. In this case our client is comfortable with the $719 monthly payment and the 6% interest but we take advantage of the 4.5% interest rate and take the $111 savings and apply it as an extra principal payment each month. By doing this, the client can pay the loan off 7 years and 11 months earlier and save $30,000 in interest over the life of the loan.
You can see from the examples above that the potential savings with a drop in interest rate are far greater than the $111 per month. Let's not forget that it is rate that brings customers through the door and makes our phone start ringing. People love to get a bargain. That's why we buy things at Walmart for $9.88 instead of $10.00 at other stores and while we'll drive 2 miles down the road to the $1.77 gas station instead of the one that charges $1.83, even though if you don't drive an SUV the real price difference on a full tank of gas is less than a buck.
It puzzles me why someone in the real estate/mortgage business would think that this proposed 4.5% rate program is not a good idea, especially after all the bad news we've been hearing lately, this may finally be what we need to get the housing market back on track. Keep in mind that this was only a proposal and it is too early to know if or when this will actually occur or the specifics of the program. I do however think that with or without the 4.5% rate that interest rates are still considerably low and if you are looking to buy a new home or refinance your existing loan that it is a great time to get the ball rolling. Contact me today to set up a consultation, or visit www.aboveallmortgage.com. I can promise you professional service, the best programs to meet your needs, and no used car salesman tactics!
(Photo courtesy of Flickr user riverspring)
Written by Michelle Chamberlain, Above All Financial Services
Homeowners, get the mortgage loan you need at www.aboveallmortgage.com and www.mortgage411center.com.
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