It’s no secret that mortgage rates are at record lows due to the Federal Reserve’s unprecedented intervention in the mortgage markets. The question is: How do we utilize this information to motivate fence-sitters to buy a home or refinance their mortgage right now? According to the latest numbers available at the time of this printing, the Fed has already purchased nearly $1 trillion in mortgage-backed securities (MBS) since January 2009. Furthermore, they still have more than $250 billion allocated toward their MBS purchase program that they will be wrapping up by the first quarter of 2010. The bottom line here is that the Fed is the single largest purchaser of mortgage-backed securities in the marketplace today. This has resulted in mortgage rates dropping by more than a full percentage point as compared to where they were prior to the Fed’s interventions in the market. After all, it’s not every day that the Fed spends a whopping $1.25 trillion buying mortgages!
While many savvy clients have taken the opportunity to buy a home in this low interest rate environment, there are still a large number of people that are hoping for home values to decline even further before they purchase a home. Here is some scripting that you can use to play the “Fed card” and demonstrate why it makes more sense for clients to buy now.
Paint a picture of “What if you don’t?”
Here is a chart illustrating what would happen if you buy a $250,000 home today, using the Fed’s $1.25 trillion mortgage rate subsidy. The alternative would be to wait 12 months while hoping for home values to decline by another 10 percent.
Buy today
Wait 12 months & prices go down
Purchase price
$250,000
$225,000
Downpayment %
20%
20%
Downpayment $
$50,000
$45,000
Mortgage LTV
80%
80%
Mortgage balance
$200,000
$180,000
180,000
Points paid by the seller %
2.25%
—
Points paid by the seller $
$4,500
—
Mortgage interest rate
4.50%
6.00%
Mortgage payment
$1,013
$1,079
Monthly payment savings
$66
—
Closing costs
$3,000
$3,000
Closing costs paid by seller
$3,000
$0
Buyer's downpayment & costs
$50,000
$48,000
Interest paid over five years
$43,118
$52,249
Savings over five years
$9,131
—
Interest paid over 10 years
$81,783
$100,137
Savings over 10 years
$18,354
—
Interest paid over 30 years
$164,813
$208,508
Savings over 30 years
$43,695
—
As you can see, if you buy right now and take advantage of the Fed’s $1.25 trillion mortgage rate subsidy, you will save more than $43,000 over the life of your mortgage. This is double the amount of money you would save on your purchase price if home values declined by 10 percent over the next 12 months! From a cashflow perspective, you would save $66 per month by buying now, even though your mortgage balance is higher as compared to column number two. Keep in mind that column number one also includes a three percent seller concession because most sellers are very motivated to negotiate in today’s marketplace. Many sellers will likely lose this incentive to negotiate once home values begin to rise again.
The bottom line here is that even if you win the bet that home values may decline by another 10 percent from today’s levels, you would lose the broader financial gamble because you’d be missing out on the Fed’s mortgage rate subsidy. After all, it’s not every day that the Fed spends a whopping $1.25 trillion to subsidize mortgage rates!
But here’s an interesting question: What if you wait 12 months and home values stay the same?
Buy today
Wait 12 months & prices stay the same
Purchase price
$250,000
$250,000
Downpayment %
20%
20%
Downpayment $
$50,000
$50,000
Mortgage LTV
80%
80%
Mortgage balance
$200,000
$200,000
Points paid by the seller %
2.25%
—
Points paid by the seller $
$4,500
—
Mortgage interest rate
4.50%
6.00%
Mortgage payment
$1,013
$1,199
Monthly payment savings
$186
—
Closing costs
$3,000
$3,000
Closing costs paid by seller
$3,000
$0
Buyer's downpayment & costs
$50,000
$53,000
Interest paid over five years
$43,118
$58,055
Savings over five years
$14,937
—
Interest paid over 10 years
$81,783
$111,264
Savings over 10 years
$29,481
—
Interest paid over 30 years
$164,813
$231,676
Savings over 30 years
$66,863
—
As you can see, if you buy right now and take advantage of the Fed’s $1.25 trillion mortgage rate subsidy, you will save more than $66,000 over the life of your mortgage. In other words, if you wait and home values don’t decline, don’t increase, but stay exactly the same as they are today, you would lose $66,000! From a cashflow perspective, you would lose $186 per month by waiting 12 months.
Now Mr. or Mrs. Client, you tell me … with odds like these, does it make more sense to buy now or wait for the Fed’s $1.25 trillion mortgage rate subsidy to expire?
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.
