It is Not About the Amount, But What It Can Do For You

How do you think a client would react when he received a call from me that his loan request for $2,200,000 was approved? It would replace his existing mortgage of $1,200,000 at 5.50%. The new interest rate will be 10.50% and will cost 4 points or $88,000, plus closing costs of about $5,000 to get it. You probably would think that the client, who was very happy for that wonderful news, had lost his marbles.

What I did not tell you is that the client is a contractor. He owns an old house in a prime location. He is planning to rebuild it by adding 4,000 sq. ft. After he finishes construction, the new house could be sold for over $4 million. Now you can do your own math. The interest cost is going to be $231,000 plus the closing cost of $93,000, subtract those numbers plus the loan amount from the sales price. The balance is the profit (minus taxes and real estate commission) and suddenly a 10.50% interest rate is no longer such a big deal—especially since the client is not qualified to get a construction loan from a commercial bank.

The title of this story came from my assistant Samantha, after I shared with her a conversation I had with a friend. He came to me for marketing advice. While listening to him, I was squeezing a yellow rubber ball to increase blood circulation in my fingers to relieve some discomfort in my pinky. I picked up this ball as a freebee at a conference. On one side of the ball, there is a smiling face and on the other is a marketing message. I showed him both sides, pointing out that in a given moment we are both looking at the same ball from opposite sides and getting a different message. But in the end—neither of those messages are important. Since the purpose of squeezing the ball is to relieve stress or to increase blood circulation.

The same goes with getting a mortgage. Borrowers are often fixated on securing a fixed rate and not on improving their cash flow. The result can be like a recent conversation I had with a client. Their current mortgage of $635,000 (They can pay it down to $625,500 to get a better rate), has an interest rate of 5.25% and monthly payments of $4,000 plus $300 for the mortgage insurance. We started talking about refinancing a while back when the fixed rates were at 3.50%, but she never sent me the paperwork. I called her recently suggesting that they send documents to be ready when rates will come down again to which she responded that she was only interested if the rate was 3.50%.