CMG Home Ownership Accelerator WebEx Training Session

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CMG Home Ownership AcceleratorWebEx Training
Session 3Selling in a rising rate environment
Kern Lewis CMG Marketing [phone] klewis_at_cmg
mortgage.com V1.0 live6.23.06
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The Fear of Rising Rates

• Clients may view rising rates as a reason not to
  switch into the Accelerator
• Ive got the concept
• It makes sense
• But should I leave my 6 fixed-rate loan?
• Give up my secure, predictable payment?
• Does that make economic sense???

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The Answer

• Yes. If your clients particular situation (cash
  flow, expenses) puts them in a position to
  aggressively pay down their loan balance and save
  interest, it makes sense to trade a lower loan
  rate for a higher one.
• Rate is not the only driver of loan cost. You
  can have a higher rate, but if you lower your
  balance at the same time, you still come out
  ahead.
• Rates do not only go up. They also go down.
  Over time the cycles even out.
• The simulator remains your best tool to sell rate
  vs. balance.

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The Three-Legged Stool

• When assessing the cost of financing real estate,
  you must consider all factors involved

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The Three-Legged Stool

• Most people focus solely on one leg, interest
  rate.

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The Three-Legged Stool

• Our loan focuses on balance, which can more than
  offset rate, if the cash flow is strong enough.

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The Three-Legged Stool

• Term can be reduced only indirectly (unless you
  sell the house).
• But, if balance can be reduced aggressively, term
  automatically shrinks.

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Your best friend piles holes

• Prepaying isnt attractive
• Might need that money
• Cant get it back

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Lend your money to yourself
Home loan 6

• Prepaying is attractive!
• Funds available when needed

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Will it work for me? PROVE it!

• Use the Calculator on www.cmghome.com

• Solve the rising rate objection by modeling their
  situation again.
• 1) Stress-test interest rate scenarios
• 2) Go for low margin (dont forget to factor in
  the fees!)

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Rate vs. Balance Reduction

• Dont miss the main point
• ITS NOT ABOUT THE RATE!
• The rate is only 1/3 of the equation.
• Aggressive balance reduction can more than offset
  increasing rates.
• Compounding interest savings can negate the cost
  of increasing rates.

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Its all about cash flow!

• All deposits are principal payments
• Lower balances drive lower interest charges

• Rate only drives how much interest you pay (the
  green slice).
• Your income affects the whole pie, driving down
  your balance and reducing the size of the green
  slice over time.

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Its all about cash flow!

• As interest charges decrease, principal reduction
  increases.

• Rate only drives how much interest you pay (the
  green slice).
• Your income affects the whole pie, driving down
  your balance and reducing the size of the green
  slice over time.

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Another Rising-Rate Objection

• I will pay more in interest in the first few
  years of the loan.
• Yes, if you are trading a low fixed rate for a
  new Accelerator.
• Interest charges are front loaded, as are your
  tax deductions. You pay more interest in the
  early years, but much less later.
• Use the simulator to go year-by-year and find the
  point where interest paid equalizes.
• Balance reduction can offset extra interest
  charges, setting you up for savings fairly quickly

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Another Rising-Rate Objection

• I will pay more in interest in the first few
  years of the loan (cont)
• In addition, depositing rainy-day money into the
  loan account gives the client the head-start they
  need on principal reduction and interest savings.

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Keep Focus on Financial Goals

• The key figure is total interest cost, not the
  first years interest cost.
• Real estate is a long-term investment.
• Dont make long-term decisions based on
  short-term considerations.
• Match your financing decisions to the time you
  plan to own the property.

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Maybe Ill just wait a bit

• 3 reasons to act now!
• If you have the cash flow to make this work,
  waiting costs you money
• If you are going to save money, why not act now?
• Why continue to let the bank earn profits on your
  money?
• No prepayment penalty
• Even stable rate scenario is now conservative
• LIBOR is above its historical average.
• Rates are as likely to stabilize over the next
  two years as they are to rise.

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The Bottom Line

• If the fundamentals are right for the client,
  waiting wastes money.
• For such clients, a low-interest-rate fixed-rate
  loan might be a false friend!
• The Accelerator is not a static obligation. It
  is an dynamic financial tool that helps the
  client maximize the return on their personal cash
  flow.
• Its not magic, its just math.

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Thank you!