Every customer should receive a written analysis; it helps take emotion out of the equation. I do it for all my purchases and refinances. Yes, we have lots of long discussions, but hearing and seeing are two different things! The point of an analysis (particulary for refinances) is for a consumer to know the interest costs and principal reduction between a new loan and the original loan at it’s current balance. (you may need to zoom your screen.)
So what are the four pieces of information you need to help consumers decide?
- What is the current interest rate, balance and remaining term?
- How much is the cost of NOT refinancing vs. the cost to refinancing?
- What is the current principal reduction vs principal reduction with a new loan?
- What is the Net Tangible Benefit your customer believes they are getting? Is it real?
In the above analysis the original note was taken out in June 2018 on a 30-year fixed at 4.75%. To simply compare the current mortgage to a proposed, new mortgage would not be fair because principal reduction would not be considered from the point of original loan date. To be fair and accurate the current loan balance, current term and current payment should be compared to the new proposed loan amount, rate, term and payment. (this analysis disregards the original mortgage insurance.) The difference clearly demonstrates a Net Tangible Benefit, but the actual savings is different! And there are still closing costs to consider.
The bottom line: for $97 more per month, this borrower can save $79,914 with a 20-year term, which will be paid off 8 years sooner. If they were to sell in 5 years, they still would have saved $13,433 in interest and would have $11,453 more equity. This type of analysis helps retain borrowers. It is unlikely they will shop you for an .125% when you bring this kind of value to the table. Assuming the LTV of 80% or lower, eliminating mortgage insurance is an added savings.
The path of least resistance is too easy! Just go from a 30-year to 30-year and call it a day! But, many people who have held mortgages for 3-5-10 years at higher rates, might not realize the savings until it is provided to them. They think it’s all about the rate, we know it’s really not, and it’s our job to prove it!
Closing loans in this environment will be a challenge for a while. Refinances will take a back seat to any purchases in process. Rates are going to be volatile on a day to day basis. Having said that, lenders will keep lending even if credit tightens temporarily. If consumers are not getting accurate, up to date information, they are guessing and hoping! If you haven’t done the analysis, how can you make the recommendation? I know, it’s time consuming…but that’s why they need us!
During a financial crisis job losses and drops in income occur at a rapid pace. It may seem counter-intuitive to offer benefits from a higher payment. Going from a 30-year to 20-year loan may make sense. And then again it may not! The unfortunate reality is that if a borrower loses their job and does not have enough reserves, they will most likely default anyway. Having a slightly lower payment may not help.
Locking is tricky these days, but if you’re not discussing these concepts with your customers before they make a decision, you miss an opportunity to improve their financial situation and to show off your skills! Loyalty and brand building at its best!
So please, do the math! Change the way you talk to consumers, differentiate yourself, discuss how you may be able to help in the short and long term. Start really educating them. They need to see it on paper. You need to be proficient in the math. The numbers don’t lie. Analysis needs to be real and accurate.
Once the market settles down rates will most likely continue to drop. Life may resume some semblance of its Pre-Covid normalcy…and there may very well be a tsunmai of refinances. It is time to up your game. We are the experts! What have you done to make you an expert? Prepare to improve your skills!
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