Top 4 Tips to Help Your Clients Choose Loans Better Than ARMs!Jul 08, 2023
Get ready to unwrap the mystery of the 2-1 buydown loan! It's not just any loan, but a secret you might want to have in your financial toolbox and share with your clients. And while we're at it, we'll also be decoding some tips to sell this idea to your clients.
Who knew financing could be this fascinating, right?
Stating The Not-So-Obvious
This is a product I sold a lot of back in the early 2000s. I know how to market it. I know the scripting around it. I know how to sell it against other products. But, before I get into strategy, it's important to understand the biggest difference in this product now versus 20 years ago; in most cases, the borrower receives the money back from the lender, even if they're not in the loan for the entire two years of the buydown.
Many of you may be competing against credit unions with an interest rate of five and a half on a 5-1 ARM. That's tough to compete against with a 2-1 buydown.
Let's say I'm at five, six, and seven on that buydown of the seller subsidies; why would they take that over a 5-1 ARM?
The New Position
I want you to consider this program an adjustable-rate mortgage, even though it isn't. Think of it as an ARM with a very low-life cap.
We know that the guaranteed average for those first two years is five and a half percent. Regarding the 5-1 arm the client is considering taking… where will that be after five years?
The problem is many banks and credit unions want to hold on to those loans in their books for as long as possible. The loan originators in those institutions don't have any incentive to manage the debt for their clients.
My fear is that the client takes the loan, the fixed period goes by, and they now have an 11-and-a-half percent life cap. So which one is the inferior product now?
Rates will not stay this high, mainly because of the cyclical nature of interest rates. From what I'm hearing, they should start to come down sometime in the next 12 to 24 months. So, the most important thing a client can do right now is to align themselves with a debt strategist, a financial advisor specializing in debt management—pretty much my sweet spot as an originator.
It would be my strong recommendation to a client to take the seller's subsidized buydown at five for the first year and six for the second year but then allow me to watch for opportunities on an ongoing basis in the future.
If I get them off that loan in less than two years, they'll get some money back that they can use toward their refinance. I would remind the client that would not happen with a 5-1 ARM product.
But more importantly, I'd ask them if they feel comfortable with the intentions of the bank or credit union loan originator they're talking to. I can safely guarantee - that originator does not have the same incentives as I do to move them into cheaper money.
WATCH THIS BUSINESS & LIFE TIP
Watch Tim Explain this Business and Life Tip: Top 4 Tips to Help Your Clients Choose Loans Better Than ARMs!
Remember that while numbers are quantitative, a good loan officer can also make them relative.