Mortgage Planning, Part II - How It Is Done
By Randall A Luebke, RFC
This is the second of a two-part article about Mortgage Planning . In Part I, we learned the difference between a “Mortgage Planner” who serves the client as their trusted advisor, and the “salesperson” that simply provides their client with a loan. In Part II, I will demonstrate the Profession Mortgage Panning process to you in detail.
The following is a quick overview of the Professional Mortgage Planning process that incorporates a borrower’s long-term needs and financial goals into a strategy that will help them to more quickly and easily achieve those goals by minimizing the expenses and maximize the benefits associated with their liabilities. The steps are as follows:
Step 1 – Needs Assessment
Step 2 – Historical Analysis
Step 3 – Credit Review
Step 4 – Plan Development
Step 5 – Plan Implementation
Step 6 – Plan Maintenance
Needs Assessment: How do you learn what your client truly needs? Ask! However, be sure to ask the right question. The question is not, “What type of loan would you like?” That is a question a salesperson would ask. Instead, you want to become very clear on the “why” and then the “what” they want. Let me explain.
The “why” is the motivation behind the “what”. Understanding your client’s motivation is critical. Ironically, I have found that most borrowers have no idea what their motivation is beyond the immediate need of lowering a payment or purchasing a new home. As a true advisor you and the client need to have a very clear understanding of the bigger picture. That is, what is important about money to them? What is its value to them? So, I ask the question “what is important about money to you?”
The question is so simple and their answers are so profound. By asking the client this question repeatedly you will learn “their” why. After hundreds of interviews I have learned that everyone’s “why” is different and as a trusted advisor you need to understand it. So does your client. This interviewing process is described in more detail is Bill Bacharach’s book, Values Based Financial Planning.” This is a must read for all of my clients.
The “what” is the use of the loan by the borrower. Although the borrower may have come to you for a loan to purchase or refinance a home, the fact is that neither of you actually know all of the reasons that the loan could be used. Again, as their trusted advisor, you need to help your client see the bigger picture and identify all of their long-term goals. Everyone wants to retire. Many borrowers want to purchase a move-up home, vacation home or rental properties at some juncture. Will their children attend college?
For each goal identify the following:
GOAL: The exact amount of money needed to attain the goal
FINANCIAL INDEPENDENCE: $5,000 per month
GOAL: The exact day they want to attain the goal
FINANCIAL INDEPENDENCE: June 15, 2015
GOAL: One or two words describing what it will feel like once they attain the goal
FINANCIAL INDEPENDENCE: Awesome! Relief! Feeling of Accomplishment!
Do not experiment with this goal defining process. This works! When you help your clients to identify their goals with this much clarity and allow them to experience the emotion of achieving the goals today, you have already dramatically increased their chances of realizing them. Help you client to identify all of their goals and show them what the financial future that they are dreaming of really looks like.
Historical Analysis: In this step you and your clients are going to learn about the frequency they have demonstrated in past home ownership and loan retention. As mentioned in my first article, the 30 year fixed rate mortgage is the loan most people want because it provides such security and peace of mind to the borrower. However, that security has a price and banks love charging for it. The truth is that most borrowers will never benefit from the 30 year loan and would save significant amounts of money if they were timing their loans to their borrowing patterns.
The experienced “salesperson” originator might ask their client about how long they intend to stay in their home. My experience shows that, unless there is an impending event like a corporate relocation or they know exactly when they are going to get a substantial raise or have the next baby, borrowers generally have no idea how long they plan to stay in their home. They may know how long they would like to stay in their home before buying a move-up home, however, they will not likely have a plan to attain it.
So while looking into the future can be useful, looking into their past is enlightening. Once your clients can clearly see that they have never had a loan for more than five to seven years, you can now show them how much money they have wasted and will continue to waste applying that strategy. Again, it’s great strategy for the banks but not for your borrowers!
I use a tool that our company, First Reliance Mortgage, has developed to demonstrate this to our clients. We call it the “Loan Term Selector” and it provides a simple visual analysis for the client to not only see the relationship between their current loan and their past borrowing history (a gap that can cost your clients hundreds of thousands of dollars over the life of their loan), it also evaluates their investment risk tolerance in relationship to interest
rate risk.
For Example:
A 30 year fixed loan = High rate, lower risk and lower cash flow
Requires high investment risk
A 1 month ARM loan = Low rate, higher risk, higher cash flow
Allows for lower investment risk
An important concept for both you and your clients to grasp is the relationship between investment risk, interest rate risk and cash flow. The bottom line is that all of these need to be optimized if you client is to achieve their financial goals. As a trusted advisor specializing in Mortgage Planning you have a responsibility to demonstrate this relationship to your client. Our unique “Loan Term Selector” makes it easy for everyone to understand this relationship helps our clients to make smart choices as a result.
Credit Review: This article will not allow me to develop this step in detail. However, it goes without saying that as a Mortgage Planner you need to counsel your clients in this area. Most consumers have little understanding as to how credit scores can be improved. Be sure to become trained in this area. Your good advice to pay their charge-off can actually backfire on you and cause your client’s credit score to drop! Good credit is the key the best rates and programs. As their Mortgage Planner you will have a life-long relationship with your client. Don’t rely on quick-fix credit schemes. Do teach your clients how to remove errors and establish better habits to improve their credit over time.
Plan Development: Finally, armed with your client’s values, their goals, a clear understanding of their past borrowing habits and the relationship between investment and interest rate risk tolerance, you can develop your professional mortgage plan. Because you have done such a detailed job obtaining the facts you have an opportunity to make a huge impact in your clients’ lives. I use “The Mortgage Coach” and “The Move-Up Home Buyer’s Analysis” as my primary tools. These packages provide a simple but powerful view of your client’s current situation and your proposed solutions. Going forward, they also provide you with a means to help monitor and, thereby, manage the mortgage. This is not simple
pre-qualification or debt consolidation. This is true Professional Mortgage Planning. You can show your clients how to attain the life they really dream of with these tools.
Plan Implementation: This is where you act on the advice you have provided. It may be to obtain a new loan. It may be to implement a bi-weekly payment program. It may be to fund a College 529 plan or a Long-term Disability policy. It may be to do nothing. Fundamentally, we always try to accomplish three things in the following order:
Become debt free (paying off all consumer debts)
1. Establish a slush fund (6-12 months of readily accessible funds for cash flow management)
2. Establish a plan for financial independence
Once we have accomplished these three things we try to work into our plan a strategy to accomplish all of their goals. Regardless of the outcome both you and you client know that you are making smart choices about their money and that they will never have to worry about their debts again, because their competent Mortgage Planner, their trusted advisor, is doing that for them.
Plan Maintenance: Clearly, we have left the loan “salesperson” in the dust as we’ve moved down the road to Professional Mortgage Planning. That being said, a good plan has a much higher probability of success if there is vigilance and accountability.
We address this in several ways. On a daily basis, we use “My Rate Alert” to monitor interest rate changes. Once rates move either up or down and hit a pre-determined trigger point, both the client and I are notified automatically via email that it may be time to take some action. Talk about “peace of mind!” We also use The Mortgage Coach’s module called “Rate Watch” to provide a written update to our clients. This provides them with a quarterly statement showing “real” loan data about their loans relative to other loans in the current market.
We also are implementing a group accountability gathering called the “Diamond Club”. As part of our service, our clients are enrolled in the club free of charge for the first year. The Diamond Club meets quarterly and has two components. The first part is educational, where we teach our clients about their money. Here they learn about Trusts, real estate investments, tax strategies and so on. They also have the opportunity to learn about themselves and what they can to increase the probability of achieving their goals. The second part is about score keeping, where our clients measure their results against their goals. Remember this, “What gets measured gets done!” Lastly, we have an annual review with our. This is generally done over the telephone and we re-address any changes in their goals, their income, their debts and their assets.
Follow these steps and you will serve your clients well and become their advisor and coach. If you learn one thing as a result of this article let it be this, “it’s all about them, not you!” Your client’s best interest must come first. Take care of your clients and they will take care of you. This is “Professional Mortgage Planning” done by a Mortgage Planner.