Case Study #1

Recently prospective clients, John and Tracy, were referred to me for a loan they needed to purchase a house. They had already made an offer of $520,000 for a house they were interested in and the offer had been accepted. Up to that point they had lived with John's parents, rent free, which allowed them to save $37,000. John and Tracy intended to put 5% down on the house and obtain a first mortgage of 80% of the house value and a second mortgage for 15% of the house value. They had already decided, based on Tracy's father's advice, that they wanted to put a 5% down payment and get a 30-year fixed rate first mortgage and a 30-year fixed rate second mortgage. They did not come to me for advice. John and Tracy had already met with another lender who offered them exactly what they stated they wanted. They simply came to me to see if I could do the same loan structure cheaper than the other lender.

I invested about 45 minutes discussing their situation and addressing their concerns. I presented them with two scenarios. Scenario A was the 30-year fixed rate loans they desired, which had a total monthly mortgage payment of $3,180. This required a $26,000 down payment and $9,000 to cover their closing costs and initial escrow account setup, which left them with only $2,000 in the bank.

Scenario B was a 10-year fixed rate (30-year term) first mortgage with an interest-only minimum payment and a 30-year fixed rate second mortgage and a total monthly mortgage payment of $3,040. On the surface, not much of a difference, but besides saving $140 per month, they would keep their $26,000 in the bank because no down payment was necessary, which would give them a total of $28,000 in a cash cushion. John and Tracy were going from paying no rent to greater than a $3,000 mortgage payment and were only going to have $2,000 in the bank as a cushion. They were first-time homebuyers and were not used to a $3,000 monthly payment. Scenario B saved John and Tracy a great deal of money and put them in the best position to handle their new mortgage payment. 

Case Study #2

Not long ago long-time clients, Bill and Mary, returned to me because they were frustrated by their lack of cash flow. The high mortgage payment associated with their Jumbo 30-year fixed rate mortgage left them unable to save any money. Bill figured there had to be something better they could do with their money than give it to the mortgage company. When they took out the loan a year and a half earlier, Bill and Mary thought a 30-year fixed rate was the best loan program around, as most people do.

Our conversation revealed that they had four IRAs: one for Bill, one for Mary, and one for each of their two children. Up to this point each account had only $2,000 in it, which was the initial deposit he provided to open the accounts several years earlier. By restructuring their mortgage Bill and Mary were able to reduce their monthly mortgage payment by $1,140 per month, or $14,680 per year. Bill's plan for the following five years was to add $1,000 per month ($250 a month x 4) to the IRAs instead of sending that $60,000 to the mortgage company. This would allow Bill and Mary to earn compound interest on $68,000 and still retain his tax deduction on both the mortgage and the IRA contributions.

What Bill and Mary realized was that the lowest interest rate on the wrong loan program is not as good as a great interest rate on the right loan program and that the right loan program is the one that best suits your current situation and helps you accomplish your goals.

Case Study #3

Just last week a client named Tara, who was referred to me 11 years ago, returned for a new loan. Only this time she wanted to buy a house instead of refinance. The current state of the housing market got her thinking that maybe now would be a great time to buy a larger home. She found a great bank-owned foreclosure that was worth about $375,000 and made an offer, which was accepted at $315,000. The lender even agreed to pay $10,000 toward Tara's closing costs and initial escrow account setup. The real issue was figuring out how we were going to pull it off so she could afford the payment on both houses.

To buy the new house Tara would need to put 20% down. She didn't happen to have that much lying around. We decided to do an equity line of credit for $90,000 on her current house. The first mortgage payment on her current house was $1,480. The new payment on the equity line would $400 for a total mortgage payment on the current house of $1,880. Tara could rent the property for $1,800, which would result in an $80 monthly loss.

The reason we did the equity line of credit for $90,000 was so we would have enough money to put 20% down, pay off a car loan for $20,000, which had a monthly payment of $455, and put the balance of the money in the bank as reserves. Because we paid off the car, we were able to use $80 of the $455 to offset the rental loss and apply the remaining $375 to the property taxes and homeowners insurance of the new house leaving Tara with a $1,593 monthly payment. She also retained a 30% equity position in her now rental house and secured a 20% equity position in her new house.

Case Study #4

A few years ago Jeff and Samantha called me because they wanted to buy a piece of investment real estate. I had already done multiple loans for them over the preceding ten years but now it was time for the daughter to go to college and they wanted to purchase a condominium for her to live in. I reviewed all of their assets and determined that Jeff and Samantha had a great deal of equity in their primary residence that wasn't earning them anything. House equity accounts or a large percentage of most homeowners' wealth and tends to make homeowners feel secure but it has no rate of return and, consequently, adds nothing to your future wealth. We decided that the dead house equity could be extracted from their house and used as a down payment for not one, but two, investment properties.

Jeff and Samantha were able to leverage $60,000 of house equity to purchase two condominium units totaling $380,000. If they had decided to purchase stock instead they would only own $60,000 worth of stock because no leverage was employed. When Jeff and Samantha decide to sell the two condominium units they will likely make enough money to cover the real estate commissions as well as the cost of the college education, and possibly more. In the meantime, their daughter acts as a property manager for both units and is learning valuable lessons about business that will pay her dividends for years to come.  She rents rooms in both units to her friends and the rent collected covers the mortgage payments so it costs nothing for Jeff and Samantha's daughter to live off campus.

Case Study #5

Curt and Tammy called me about a month ago because they were interested in buying a house together. They each owned a house already but needed something larger to accommodate the combining of two families. Curt & Tammy wanted to keep their respective houses and rent them out but lending guidelines were changing rapidly and there was a strong possibility that they would not be allowed to do that. Due to market trends lenders had to be concerned about people buying a new house and walking away from their old house.

While waiting for me to resolve the rental house issue Curt & Tammy were strongly encouraged by someone else to speak with another lender and they did. The solution offered by that lender would have cost them an additional $515 per month for as long as they held that mortgage plus an additional 7,250 in closing costs. Over 10 years, the period of time Curt & Tammy felt like they would live there, they would spend an extra $69,050, which doesn't include the interest they would have earned on that money if it had been invested monthly, not to mention the benefit of having that money available to them should circumstances arise that left them needing access to the money.

In the meantime, I was able to solve the rental house issue and get them a mortgage with an interest rate 1% lower than the other lender offered, saving them the $515 per month, plus the additional $7,250 in closing costs.

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