I write many columns, generally 3 or 4 a week, and I do my best to give you information that can help, if you will take it to heart. But I am also a pragmatist. I truly believe people will do what they have to do, not what they need to do, or even what they want to do -- just what they have to do. I am writing this column based on my experiences and my knowledge of the financial markets to show that I realize that everything I say may not be the absolute best solution, but it will be the solution most people will adopt. So let's get into it.
I wrote a column last week called "How Important is the Right Mortgage", and talked about what a $354 per month additional loan payment could do for you. I received some correspondence that said I should have taken another approach, where the borrower who kept their 30-year loan and didn't pay the extra $354 per month for the 20-year loan would instead invest that $354. It is a good point, but not a realistic one, as people simply won't do that. How do I know? Because I see it with the clients who tell me what they are going to do, and yet years later, still haven't done it.
I also know that we have a negative savings rate in this country because people don't save.
A number of people tell me they don't need a shorter mortgage, as they are going to make the additional payments on their longer amortizing loan. These people actually do give me a caveat by saying, "If I don't have any calamities". But you probably guessed it… there is always a calamity. When it is time to refinance, their balance is exactly where I thought it would be -- not where they wanted it to be.
Those who tell me they want to refinance and pay off their credit cards and burn them, somehow never do. I know they won't because they missed the key ingredient to the refinance: reserves. Without reserves you cannot withstand the urge to go back to your old ways of credit cards.
A good number of people look for a “miracle” solution for their financing, and they have no problem suspending reality to find that solution. Obviously, telling yourself you will invest that $354/month is one way of doing this. But other areas where this happens include rate shopping and looking for loan products such as the “so-called” no-cost loan.
People shop loans all the time and never realize that loan rates change every day, sometimes 2 or 3 times a day. Loan rates are dependent on the following items: size of loan, type of loan, type of qualifying (i.e. full doc, limited doc, stated income), type of property, and the use of the property. Add to that list the credit of the borrower and you see why shopping a loan might be good in principle but generally ends with a comparison of apples and oranges.
Last but not least, the idea of a no-cost loan permeates me to the core…back to suspending reality and going for a solution that may be more expensive than the everyday solution. What people really are asked to believe is that not only are we not making any money on the loan, but we are actually losing money to pay your costs for you. And believe it or not, people accept that premise. How long could any company last under that premise?
I know a lot of people think the costs are superficial and really don't exist, but have you ever seen the size of a title company's buildings? Do you know real estate appraisers who live in abstract poverty? Do credit companies perform a public service without any compensation?
If you really believe there isn't any cost or profit, then who pays for the underwriting and processing of the loan? I haven't seen anyone working in the document department who doesn't get paid to produce a set of documents for your signature. Heck, even the notary makes money to attest to your signature.
Do you work for free? If so how did you qualify for the loan?
The main way these companies operate that offer the "no-cost loan" is simply raising the rate to a point where the rebate is big enough to pay the costs and make a profit. Your no-cost scenario is being paid for with a higher rate for as long as you have the loan.
I could go on for a lot longer, but I do not wish to be redundant. People do what they have to and maybe some day they will begin to do what they need to, but for the most part it isn't happening yet. Hopefully it will, but even if it doesn't, I will keep making suggestions that help. They may not be the absolute best, but generally better than they are doing now.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom. Roger is the President and founder of Manhattan West Mortgage.