Stop Selling the Rate – Start Solving the Problem

Yesterday, a wonderful agent I've worked with for many years called me, frustrated about a client. The buyers are currently living in a home that is about 1,400 square feet, and they want to move up to a home around $1.5 million.
Income is not the issue, as the buyers make approximately $450,000 per year.
The issue was that the buyer refinanced his home in 2020 and now has a mortgage rate around 3%. They could not get that 3% rate out of his head. I understand it, and payment shock is real, no matter how much money someone makes. Instead of continuing to talk about mortgage rates and payments, I started asking questions. 

What Are You Really Paying Today?
Their current home is worth approximately $1.1 million, and they owe about $520,000 on the mortgage.
They also have approximately:

• $70,000 in credit card debt
• $80,000 in auto loans
• Approximately $1,900 per month in car payments
• Approximately $1,400 per month in minimum credit card payments

My next question to him was very simple:
"Do you know what interest rate you are paying on your credit cards?"
He told me there were three large cards and thought they were all under 12%. So, I asked him to go online and look and they weren’t under 12″%!
The balances were approximately:

• $31,000 at 18%
• $16,000 at 24%
• $23,000 at 25%

Those three cards alone are costing him more than $15,000 per year in interest.
Think about that for a minute. He was completely focused on protecting the 3% rate on a $520,000 mortgage, while paying roughly the same amount of annual interest on only $70,000 of credit card debt with no tax deduction! When you carry balances on credit cards, that expensive interest starts working against you as soon as you pay the cashier! That changed the conversation, and I stopped talking about the mortgage rate and started talking about numbers. 

What Happens If They Sell?
If they sell their current property for approximately $1.1 million, after paying off the existing mortgage and estimated selling expenses, they should net approximately $520,000.
From there:
Estimated net proceeds: $520,000
Pay off credit cards: -$70,000
Pay off automobiles: -$80,000
Cash remaining: approximately $370,000
Now we could look at their entire financial picture instead of obsessing over one interest rate. 

What Are They Actually Spending Every Month Today?
Their current obligations are approximately:
Current mortgage/PITI: $3,700
Car payments: $1,900
Credit card payments: $1,400
Total current monthly obligations: approximately $7,000
That is the number we need to compare. Not 3%. $7,000 per month. 

Their proposed new home at approximately $1.5 million with 20% down would have an estimated total housing payment of approximately:
$9,709 per month
So initially the comparison looks like this:
New housing payment: $9,709
Current combined obligations: $7,000
Gross monthly increase: approximately $2,709
And yes, that is still a meaningful increase. But a good loan officer shouldn’t stop the analysis there. So we jumped into the potential tax savings difference. Based on the assumptions we discussed with the buyers, their current mortgage interest and property tax deductions are approximately $25,000 per year.
On the new home, our illustration uses mortgage interest considered in the analysis: $48,750 (only deductible to $750,000) and Property taxes: $18,750 for a total of approximately $67,500.
That is approximately $42,500 more than the $25,000 they are currently using in our comparison. These buyers are in approximately the 32% marginal tax bracket, so $42,500 × 32% = approximately $13,600 per year, which is approximately $1,133 per month in potential additional tax benefit.  

So now our monthly comparison changes:
Gross increase in monthly cash flow: $2,709
Less potential tax benefit: -$1,133
Effective difference: approximately $1,576 per month
Now we are having a completely different conversation.
Of course, every client’s tax situation is different, and we should never act as their CPA. They need to verify their individual deductions and tax benefits with their tax professional. We should help clients understand that the mortgage payment alone may not tell the entire financial story. 

Now Let’s Talk About Appreciation
This was another important part of my conversation with the buyer. They want a bigger house. They are willing to pay more for a bigger house, and if real estate values increase, the more expensive property has the potential to generate more appreciation in actual dollars.
Let’s use a simple 4% appreciation illustration.
Current home – $1.1 Million @ 4% appreciation = approximately $44,000
New Home – $1.5 Million @ 4% appreciation = approximately $60,000
Difference: $16,000 per year or $1,333 per month in additional potential appreciation
Real estate appreciation is obviously not guaranteed. Values can go up or down, but if two properties appreciate at the same percentage, the more valuable property creates more appreciation in dollars, and that needs to be part of the true-cost conversation. 

Look at the numbers again:
Gross additional monthly cash flow: $2,709
Potential incremental tax benefit: approximately $1,133/month
Additional appreciation at 4%: approximately $1,333/month 

After considering those two economic benefits:
The difference is down to approximately $243 per month. 

Now, I want to be very clear. I am not saying the new home only costs them $243 more per month. Their actual monthly cash-flow increase is still approximately $2,709. Tax benefits and appreciation are not the same thing as money sitting in your checking account every month, but when we are helping someone make a major financial decision, we have to show them the entire picture. 

Then We Talked About the Future
This is where Augusta Financial’s Free Refinance for Life becomes incredibly valuable. The buyer was mentally treating today’s mortgage rate as though it would be his rate forever. It doesn’t have to be, and if rates decline in the future, we want our clients positioned to take advantage of that opportunity.
On a loan of this size, a rough illustration is that every 0.50% decline in rate could save approximately $400 per month, depending on the exact loan balance, term, and market at that time.

For illustration:

• 0.50% lower rate: approximately $400/month savings
• 1.00% lower rate: approximately $800/month savings
• 1.50% lower rate: approximately $1,200/month savings
• 2.00% lower rate: approximately $1,600/month savings

So, if rates eventually improved significantly, the payment picture could change dramatically.
And with Augusta Financial’s Free Refinance for Life, our clients know that if an opportunity presents itself, we are going to be there to help them take advantage of it.
Of course, nobody can guarantee that rates will decline, when they will decline, or where they will eventually settle, but that is exactly why we need to show clients the possibilities instead of making them believe today’s financing is necessarily permanent.
At the end of the day, the client walked away feeling like we listened to what they needed. They no longer feel the payment shock they did when they spoke with the other lender, and they believe they will be able to save more money by refinancing in the future.  

This Is What a Loan Officer Is Supposed to Do
I’m not going to bash the other lender, as that doesn’t accomplish anything. If we only quote a rate and a payment, we are not doing enough. Not in this market or any market!
When a client was excited about buying a home a week ago or a month ago, and suddenly they aren’t interested anymore, we need to ask:

• What changed?
• What are you afraid of?
• What number is bothering you?
• What are you comparing the new payment to?
• What is keeping you from doing something you told us you wanted to do?

Then we need to help them work through it. In this case, the buyer wasn’t really saying:
"I don’t want the bigger house."
He was saying:
"I want a bigger house, but I’m afraid of giving up my 3% mortgage."
Those are two completely different problems. Once we understood the fear, we could address it. We could show them that selling the current home could allow them to:

• Eliminate approximately $70,000 of very expensive credit card debt
• Eliminate approximately $80,000 of automobile debt
• Eliminate approximately $1,900 per month in current car payments
• Eliminate approximately $1,400 per month in credit card payments
• Potentially improve their tax position
• Move into the larger home their family wants
• Own a bigger asset with greater dollar appreciation potential
• Position themselves to refinance if rates improve
• Begin saving more intentionally
• Eventually consider investment properties and other opportunities to build long-term wealth

We discussed that they will likely buy cars again, and we hope that the next time they do, they are in a stronger financial position. We also talked about saving more and potentially owning investment properties in the future so they can continue building assets, generating income, and working with their tax professional on strategies appropriate for their situation. 

Don’t Let the Rate Become the Decision
A 3% mortgage rate is fantastic, and nobody is arguing otherwise. A great interest rate on the wrong house does not automatically mean you should stay there forever. This family wants more space, and they can afford it. They have significant consumer debt that can be eliminated as part of the move. They have the income to consider their options, and once we stopped comparing 3% to today’s mortgage rate and started comparing their current financial situation to their future one, the decision became much easier to understand.
That is our job.
A "Loan Officer" who simply quotes rates and payments is providing information. A true mortgage professional should provide perspective, analysis, options, and advice.
Payment shock is real. Fear is real. Our job isn’t to dismiss it. Our job is to find out where the fear is coming from, put real numbers around it, and help the client make an educated decision.
Stop selling the rate.
Stop selling the payment.
Find the fear.
Run the numbers.
Show the entire picture.
Solve the problem.
That is how we add value.
That is the difference between quoting loans and advising clients.

Interest Rates
In non-war news, PPI came in solid, showing no increase in inflation. Lower inflation is a good thing for rates, and the market is now on a two-day winning streak! YAY! Nowhere near where we were at the beginning of the year and before the war, but we will get there!   

Loan Programs Snapshot

• Government loans (FHA/VA/USDA): in the 5s –
• Conventional (≤ $832,750): low 6s
• High-balance: mid to high 6s
• Jumbo: Mid 6s
• Bridge Loans  7.75-7.99

Additional options:

• Bank statement loans (10% down+)
• P&L loans (20% down, no bank statements)
• 0% down options (620+ score)
• DSCR loans (15% down)
• Buydowns Available (3/2/1, 2/1, 1/0)
• Private Money loans – Hard Money  
• Construction Loans
• 203K loans
• Commercial Loans
• Fix and Flip Loans  

Rates subject to change without notice.

Condo Update
Good news:

• Arroyo West is off the naughty list! YAY!    

Bad news:

• Del Prado – deferred maintenance! Boo!  

We love your Non-Warrantable Condo loans!!
Need help checking a condo? Call me, and we can look it up in real time.
Also:
Full California "naughty list" available here:

https://mikemeena.com/non-warrantable-condos/

Let's Connect
If you or your clients, friends, or family need guidance, I'm here.

📞 661-291-2222 (Direct)

📞 661-714-6258 (Cell)

📞 661-260-2970 ext. 2222 (Office)

📧 Mike@AugustaFinancial.com

Sincerely,