Rate Vs Plan

A History of How We Shopped For Loans and the Lessons Learned

Helping people find the right mortgage for their current situation is the most important and satisfying part of my job.

We are in a unique time where the markets are reeling from the ploy of overextension in qualifying for Mortgage Lending. The programs that were made available over the last four years were very flexible, to say the least.

It worked for a while as long as the market kept a rapid rte of appreciation, but when that paused, more than a pause took place. The result, an complete crash and a nightmarish situation was made for many who utilized these flexible loans.

Here is the twist to the story, not everyone caught up in this mess was a first time homebuyer who had no business in a Mortgage. Not everyone was completely over their head. Some of the people feeling the pinch are very qualified individuals who got stuck in adjustable rate mortgages. They chose to take a Hybrid ARM for the wrong reasons and, until recently, they were stuck.

This is the group of individuals that we call Rate Chasers. They were blinded by the rate, caught up in a number that led them down a road that cost them more money than they every saved by focusing on rate.

So quickly the finger is pointed at the mortgage professionals who write these loans as to why these problems exist. I agree that there were and, maybe, still are some unscrupulous individuals in our industry that have utilized unfair practices, but that is true of every industry.

We also have the client or borrower who played a pivotal role in this creation as well. More times than I care to count, I counseled a prospective client that the home they were going to buy was going to put them over their head. I told them that the payments were going to be too much even though they swore up and down that they would be able to fit it into their budget. I turned the loan down and what did the client do?  They went to another Mortgage Lender or Broker who would do the loan. The point is that when people came to us wanting to buy these homes, they were going to do it no matter what they were told.

Same is with the rate chasers. In 2004 when rates hit an all time low, we were advising our clients to take the 5% 30 year fixed programs that were available. Instead I can say that over half of our clients chose a Hybrid-Adjustable ARM product for 3.75% for a 3 year fixed product. WHY?  Because they were too focused on the rate. I think it was for bragging rights at the club.

So now that we have seen the result of these loans, one might think that we learned our lesson and are ready to focus on the Loan Program first and then the rate. Well I am here to tell you that the same mistakes are being made again. When a prospective client comes in and makes it know that all they care about is rate, then that is the conversation they are going to have. RATE. Rate is not the most important issue when taking out a loan. It is the easiest number for the armature to gauge their ability of negotiation on.

The real deal is trust first, then plan, then rate.

I am not a mechanic and I don’t pretend to be one. I love cars, but if mine breaks I let the mechanic do his job and don’t get in his area of expertise because I have already established a level of trust with him which allowed me to deliver the car to him in the first place. When I get my car back I know the right things were done and the best deal was delivered.

The same MUST hold true for Mortgage Financing. We spend everyday in the trenches of the mortgage industry. We have a much better knowledge of our products because we LIVE them. 

It is when our clients TRUST us to do our job that the most magical situations are created. This is why our referral base is so large and makes up most of our business.

The hard core rate shopper is like a day trader. They always know about the better deal but they rarely ever get it.

As people are leaning now, the low 3.75% 3 year fixed rate are costing a lot more now as 7% adjustable rate loans and many of them cannot get out of them at any rate close to what was available in 2004-2005 when they took out the loan.

What do you think?  Was the lesson learned?

We’ll see in the next year or so.

Greg Plummer

Contributing Author to Creative Lending Solutions