Getting the Right Loan

In my experience, people go through the following phases in their economic lives:

20–30     Young people, first-time home buyers

30–40     Maturing people, often with growing families

40–50     Approaching middle age, perhaps with children in college

50–60     Approaching retirement, building equity and investments

60+        Retired or close to it, in their last home

Each of these groups has different considerations when seeking a loan. Furthermore, people at every stage of life suffer the ups and downs of the economic cycle; things are either getting better or worse; rates are either up or down and are heading one way or another. Those factors, too, influence what constitutes the proper type of loan for people at any given point in time. Perhaps that sounds obvious to you, but the opinion of most people in the mortgage business, most people get the wrong loan.

This is especially true if you’re dealing with a one-size-fits-all lender.    You can see that the groups above have different goals, so why should they have the same loan? They shouldn’t, but it ‘s easier to deal with customers this way. It’s also easier to teach a sales force how to sell one product than it is to teach them how to be counsellors.

Without realizing it, most people blindly do what the lenders want them to do, which is to talk about programs.   I call it programitis.   Lenders realize that most borrowers are susceptible to a sales pitch, and so they prepare marketing spiels for their reps to parrot to customers, telling them about their programs. It may be called sales training, but what management is doing it getting sales people to memorize sales pitches that have been shown to be effective in the past, hoping that you, too, will be mesmerized.

So the first step is getting the right loan is to forget about programs.   There is time for that later in the process.   The first step should be to talk about your goals, and this goes beyond, “I want to reduce my monthly payment.” No one wants to pay more than they have to but your more specific goal is to minimize the amount of money you pay for interest – not the same as monthly payment – over a defined period of time, say 5 years.   You also want a loan that is consistent with your propensity to accept risk. If you are a go-go entrepreneur, you are in a better position to accept some risk, compared with a minister or retired teacher, for example.

Next, when rates are low, as they are now, you ought to get interest rate protection for as long as you are likely to be in the home. For most people this is NOT 3 years.   The average homeowner seems to own his home for about 7 years.   That doesn’t mean that you will, it’s just that you ought to ask the question, “How long are we going to be here?”

If the answer is five years, then you ought to be looking at one of the loans that is fixed for only five years, not 30. These loans are about one percent cheaper than a 30-year fixed rates loan.   On a $150,000 loan, that means saving $7,500 in interest over that five year period. Another way of saying that is that if you get a 30-year loan instead and are only there for five years, you spent $7,500 for interest rate protection that you didn’t need. I think that you have better uses for $7,500 than a lender.

There are other factors to be considered in getting the right loan, but they all revolve around thinking about and discussing your goals. We’ll talk about other money saving strategies in future articles.