No, I’m not pushing a deferred-interest loan. I don’t “push” any loan program. As you probably do in your business, I evaluate the client’s full financial picture, goals, etc. before advising on a particular loan product. I make the same whichever product I place them in and, since my business has been pretty much 100% referral for years, I’d rather make a point on 20 closes a month, and receive glowing praise from the client (as well as their realtor who’s used to seeing considerably higher points) then 2 points on 10 closes a month, with only half or less referrals from these transactions.
No, I’ve not been listening to “conference calls” or reading strategy books. I have a background in financial planning, and recognize, after much research on my part, the role that particular financing vehicle plays in property purchases.
You also assume the start rate will climb every month. That’s a tragic fallacy, as you can see by studying the historical index rates. Three years ago, when the index was very low, I was cashflowing like a geyser. And when the index is up, I can review my options. Nevertheless, in a hold position, my experience is my overall return is higher than playing the short game, or especially the refi game. Too often the client loses more in the refi costs than the savings that were realized, often because his mortgage consultant didn’t run a break-even analysis. Some of my deferred loans I’ve had without refinancing for over 6 years, and I’ve not had any of them re-cast due to the 110% being reached. In a market of approximately 3% annual increase in value, your deferred interest is usually covered. If this is a concern, one could, I suppose, apply invested funds to avoid this re-cast situation, however I’ve never had to do this.
You state the smart thing is to do a mid-term ARM interest-only for 10 years. That may be a sound strategy however, in light of the current negative yield curve on short to long-term funds, fairly often one can recieve the same rate on a 30-year fixed as on a 3 or 5-year ARM, and have greater protection on a potential long-term hold.
Also, you state that if they refinance, they don’t have the equity to cover the costs because the neg-am has eaten their equity. A number of factors would have to occur in this scenario. The first is the market values would have to plummet approximately 15% in a 5 year period of time, their investment would have to have realized an ROI of less than the accrual rate on the loan, and they would somehow realize a monetary benefit to refinancing.
It’s been a rare case in this country when a market experiences a continual drop in property values over a mid-term period of 5 or so years. Even in SoCal a few years ago, it took 7 years to dip 20%, with ups and downs during that period, following by a sustained surge in corrected value. And this loss of market value was impacted and created by outside forces that were, at the time, unlikely in the extreme. The first was LA and OC governments either going bankrupt through extreme mis-management (or nearly so in OC’s case), the second was a sustained recession at the national level, and the third was a negative immigration into SoCal from outlying states. In the foreseeable future, one could argue it, again, unlikely in the extreme for all these events to occur at the same time.
This is not a product I “push”. In certain cases it makes sense, just as, in certain cases, other products make sense. It does me a professional disservice to place a client into a loan product that isn’t the proper one for them, in light of my being able to rely on referral and repeat business.
Finally, there is a software product I use that runs all scenarios in an equal and logical manner that assists me in better understanding the potential of differing vehicles to place my clients into, as well as my real estate portfolio. It also hasn’t hurt that my last 10-year rate of return on my investment pool has realized a 13% yield through diversification of my funds, and I’ve experienced a steady increase in the value of my real estate holdings values.
HELOC’s have been volatile in the past 18 months, as anyone with one during that time can attest to from the large jump in their monthly payment.
I hope this clears up the idea that I choose to advise anyone on any one way of financing real estate. That would be foolish in the extreme.
Thanks!
