Importance of Mortgage Planning

By Benjamin Borden

What a past year in the real estate industry! The current turmoil in the financial markets, specifically the real estate and mortgage markets has bought up many questions about the process of home buying and the origination of loans. Instead of reiterating everything we hear on the news and trying to place blame for the current environment, I want to express my views and how it has changed my loan origination business.

There is always going to be questions drawn when things go wrong en masse. I witnessed this during the "internet boom and bust" as a stock broker for a Wall Street trading boutique out of New York City. Then, "investors" were quitting their jobs, mortgaging their homes two and three times to day trade the stock market. Who could go wrong? One could buy a stock in the morning and sell it in the afternoon for 20%-30% or even more! It was truly insane. All a public company had to do then was just announce an "internet strategy" and the stock soared 100%, 200% or even 300% in days. Not months or years, days.

For instance, I remember, Books a Million because I owned it; yes I was inebriated in the hype as well. Books a Million trading in the $3 range and within a month traded in the $40 range. Not long after it was back in the $1 range, 75% less than where it traded pre internet. But hey, at least they are still around right? Hundreds of companies from that era are not. I can not express into words the euphoria during this time. Ring a bell?

What should we have learned?

First and foremost we should have learned the importance of planning and dealing with a professional planner. Whether it's financial planning, mortgage planning, estate planning or tax planning or any other professional service, dealing with someone who looks at the customers overall situation and incorporates that professional planners specific recommendation or product to correlate with that customers overall financial objectives is always the best route and ALWAYS the cheapest in the long run.

Price, Time and Need

It's been my experience that price, time and need have been the top three reasons people do not go the planning route. They feel the service provided was too expensive (they did not see the value), they believe they do not have the time or they think they do not need the particular service. I want to use some real life examples from a broad range of clients why mortgage planning is extremely important. So, over the next few issues of my newsletter I will give real life examples of those that did or did not go the planning route and went with what they thought was the cheapest, best or easiest route.

Down Payment; to put down or not put down

April 2006, I came into contact with a potential client from Northern Virginia that was 1/3 of the way through his purchase loan elsewhere and contacted me because he was seeking a better rate. After spending some time speaking with him and getting the information I needed we scheduled a time to get together. I had planned a guy's night out with my oldest son, Bennie, to see the Washington Wizards play and told him I could stop by pre game. This particular transaction was a condo purchase for $435,000 and he wanted to put down 20% and keep his payment at $2,100.

What I recommended:

A $348,000 first mortgage at 6.875% with an interest only option and an $87,000 second for $2,646 a month total payment. I then recommended he put the $87,000 with my Financial Planning Partner and let it accumulate at 8-10% vs. earning 0% in the home. Now, this payment is $500 more than what he wanted to spend per month but well within his affordability and also I do want to point out that my rate was higher, because of no money down than what he was quoted at 20% down. With my recommendation he would have $110,466.91 accumulated outside of his mortgage and received $2,000 in additional tax savings per year. Needless to say, he was somewhat against the proposal and too far, he thought, in the process with the other lender to make a switch.

Fast Forward 12 months later:

We speak again the following April and he wants to do a refinance. I get all the numbers and call my appraiser in Northern Virginia and the property will only appraise for $350,000 +/-. Wow. So we see in this particular instance, he has lost his down payment and gains of $110,466.91 and $4,000 in extra tax savings. The only known fact is it will take years to recoup that down payment that was lost.

Now, what position would have been better? Having the home mortgaged at 100% would be the best thing. What happens if there is a job loss and payments can not be paid? Who's got more skin in the game? If you were a Katina victim, a California fires victim or a victim of a disability or just a job loss. Would you rather have your home mortgaged to the hilt or have 20%, 50% or more equity? Do you want all your money in your home or in your pocket?

My money is in my pocket.

I want to point out that as you read these examples now and going forward that planning is designed to get you from POINT A to POINT B. Everyone's POINT A and POINT B is different and as with any planning there is a necessity for annual reviews. The economy changes, taxes change, interest rates change, life changes and products change. So it's important to stay on top of YOUR PLAN with the annual review process and make changes accordingly no matter the industry; investments, estate or mortgages.

(c) 2008 Benjamin Borden, III

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