As I was watching Heartbreak Ridge (probably one of my favorite Clint Eastwood movies) the phrase “Improvise, Adapt and Overcome” was rattling around in my head. The mortgage industry has really become that. While most loan officers are not selling products, they are not even advising customers, rather, they are more like Pez dispensers filled with only 30 year mortgage loans; a select few take the time to profile their clients, determine their needs, and provide them with the mortgage (and liability) management strategy to suit their needs.
In the past 3 weeks I have worked with several customers who were wanting loan products that did not fit their needs. One customer was looking to refinance when it would have been too expensive and impractical for his situation, as he was anticipating moving and selling his home within a few months. I was able to dissuade that customer from his refinance.
Another customer wanted to purchase a distressed investment property that he would hold for no more than 5 years. The cost to rehabilitate the home was half of the sales price, and the customer wanted to minimize his out of pocket cost. The customer asked for a hard money construction loan for the purchase and rehabilitation of this home.
While this type of financing is available, it is generally short term, high cost and high interest rate. This scenario would have cost about 6 points, have a rate over 11% and need to be refinanced in a year at an undetermined rate and with higher costs.
By asking the appropriate questions, we were able to provide the customer with a solution that would meet his needs, and save him significant money. We assisted the customer with a cash-out (home equity) mortgage with a rate fixed for 7 years. By taking this strategy, we were able to save the customer over $55,000 in the five years that he anticipates owning the home.
Lets say that we were speaking to someone who was looking to own a home for five to eight years. The 7/1 LIBOR ARM would still be a better option for the homeowner. If the customer sold the home after only 5 years, they would have saved over$4700. At the 7 year mark (before the interest rate resets), the home owner would save over $6500!!!
Lets look at the downside. Lets say that interest rates rocket up, and the rate resets to the highest possible option (the life cap). Even then, the customer would be better off with the ARM until well into the 8th year, when the savings are equalized.
But if all things were to stay equal, at the end of the 8th year, the customer’s total savings would be over $8,800.
If you, or someone you know, it looking to purchase or refinance a home, or if you would like more information about ways you can appropriately manage your mortgage, feel free to call me at 281.841.1723