“Hello, I’m calling about those 4.5 percent mortgage rates I keep hearing about. Wait a minute … are you serious? You want me to pay points?” Yep … you’ve probably heard that gasp on the other end of the phone at least one too many times! One of the biggest frustrations in today’s market is unrealistic borrower expectations when it comes to mortgage interest rates. After all, we’ve been living with loan level price adjustments and diminishing premium pricing for a while now. However, our borrowers still expect to get that ever-elusive 4.5 percent mortgage. They don’t realize that although those rates do exist, they need to pay points in order to get them—especially if their FICO score is below (gasp) 740! This begs the question, how does a mortgage professional handle unrealistic borrower expectations?
Here’s an idea for you. Try to reframe the “points” discussion with unique market knowledge and insight. This example is taken from a conference call I recently conducted for CMPS (Certified Mortgage Planning Specialist)-certified mortgage professionals:
You: Mr. or Mrs. client, this is not a typical shopping for a mortgage experience. The industry has changed … it’s kind of like a giant hurricane swept over the housing, mortgage and financial markets. There’s all this carnage and damage lying all around. My role is to help you navigate this financial and housing crisis, explain the choices available to you and your family, and help you evaluate and manage the risks involved in this dangerous environment … kind of like your own personal risk manager.
Client: No kidding, this market is … did you say dangerous? Tell me about it … I just lost half my retirement savings in this market and all I want to do right now is take advantage of the low mortgage rates I keep hearing about. What kinds of risks can there possibly exist with refinancing? I’m just trying to save some money here, not exactly rocket science …
You: Well, take for instance this issue of points. Points are kind of like making an investment. In the past, the rate of return on this investment hasn’t really been all that attractive. In fact, I’ve traditionally advised my clients not to pay points. However, with the way the market conditions are today, the rate of return on paying points has become much more attractive. Not only that, but the risks are slanted in such way that paying points could really make a lot of sense in your situation.
Client: What exactly do you mean?
You: Well, there are three questions I think you should consider as you evaluate
whether or not to pay points:
Question #1: What is the return on my investment? [This is where you illustrate cost versus savings using a spreadsheet program.]
Question #2: What is the risk associated with this investment?
Risk #1: Interest rates rise. If this happens, you win because you’ve locked in the low interest rates at what turned out to be the bottom of the market! What is the likelihood of this happening? Near term, rates are unlikely to rise much from current levels due to the Fed’s continued intervention in the markets to keep rates low. However, it is probably very likely that rates will rise in the long term due to potential inflation and the Fed’s reversing of their decisions. In other words, the Fed will begin selling mortgage bonds instead of buying them, and they will increase interest rates instead of lowering rates. This will drive up mortgage rates in the future; probably 12 to 24 months from now, depending on what happens with the economy.
Risk #2: Interest rates go down. If this happens, you lose because you paid points for an interest rate that would have been available to you anyhow without paying those points. What is the likelihood of this happening? It is probably not too likely that rates will go down further because the Fed has already intervened in the mortgage markets and they are constantly bragging about the great success of their interventions! In fact, in nearly every speech made by Fed Chairman Ben Bernanke and the other Fed governors (as well other government officials), they claim that their interventions in the mortgage markets are successful due to mortgage rates being a full percentage point lower today than they were before the interventions. Why would they continue to throw money at a problem that doesn’t exist? In other words, government intervention in lowering conforming and Federal Housing Administration (FHA) mortgage rates have been successful enough; so now the government is refocusing their interventions on other areas of the economy that still need a lot of attention (such as commercial mortgages). With this in mind, mortgage rates on conforming and FHA loans are probably as low as they are going to get.
Risk #3: Interest rates stay the same. In the near term, I think this is very likely to happen because the Fed still has some ammunition left to buy mortgage bonds and they are likely to continue doing so whenever rates start to rise again over the next few months. Therefore, rates are likely to remain about where they are now (at least in the short term) because the government is likely to keep rates at this level until the market stabilizes. This means that the deals available in six months are likely to be the same exact deals available today. If you could save money by refinancing (and paying points), the longer you wait, the more money you lose. You see, every month is a lost opportunity to save money. By doing nothing, you are actually losing money each month and paying not to refinance!
Question #3: Which decision would I regret the most?
Financial decisions have long-term implications. Your decisions today will not only impact your life now, but also your life in the future. Imagine looking back at this decision in say five or seven years from now when higher rates and inflation will likely become reality. Do you think you’d look back at your decision today and regret that you paid points when rates were artificially low due to government interventions? Or, is it more likely that you’ll regret a decision not to pay points because you missed the chance to lock in the historically low interest rates at what turned out to be the “bottom of the market?”
Client: Well, this certainly makes a lot of sense to me … I’m so glad you took the time to explain it all! How many points do you think I should pay and what else should I be aware of?
You: Are now jumping with joy because you’ve successfully converted a misinformed rate shopper with unrealistic expectations into a client that values your insight and advice!
Whoever said our job as mortgage professionals shouldn’t be a fun and rewarding experience? You can have the time of your life if you spice up your client discussions with unique knowledge and insights—especially in this age of loan level price adjustments, nonsensical rate sheets, Home Valuation Code of Conduct (HVCC) madness, and 4.5 percent mortgage rates (with points)
Gibran Nicholas is the founder and chairman of the CMPS Institute, which administers the Certified Mortgage Planning Specialist (CMPS) designation. The CMPS Institute has enrolled more than 5,500 members since its founding in 2005. Gibran is also the chairman of Published Daily, a customizable online magazine, newsletter and marketing service that helps professionals transform their clients and prospects into a referral-generating sales force. He may be reached at (888) 608-9800, ext. 101.