Mortgage Planning
By Randall A. Luebke, RFC
The buzzword mortgage planner has been growing throughout our industry over the past few years. The title mortgage planner is starting to appear on more and more business cards and other marketing materials. It sounds impressive enough, but what does it really mean? Can someone actually plan a mortgage? After all, don't the lenders simply establish the terms of their various mortgage products, the consumer selects one and life goes on? What planning can actually occur?
I have written this article to all of you in the mortgage industry who are looking into the future and wondering how you are going to continue to survive and thrive in the years ahead. Reading this article, understanding its concepts, and implementing the basics of mortgage planning in your businesses will provide the genesis needed to not only benefit yourself, but the countless others that you will assist by effectively managing their mortgages for many years.
Definition
Mortgage planning is not a marketing ploy, a ruse, angle, or another meaningless title. Over the years we have observed such misuse of many titles in our industry. To avoid the appearance that we truly are salespersons, we have labeled ourselves as account executives, loan officers, or originators. Of course senior can be added to any of these titles to make them appear even more officious.
Nonetheless, the titles mortgage planner and mortgage planning are likely to be similarly misused. After all, none of these titles are professional designations that are managed by an association or organization. As a result, they are fair game for anyone to use or misuse. Adding a label to one's business card does not change the way they conduct their business and therein lies what mortgage planning, or what I have termed professional mortgage planning is all about.
That is, how one professional conducts their business as it relates to mortgages. Quite simply, it is a system that incorporates the borrowers 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 associated with their liabilities and maximizing the benefits.
Breaking It Down
Following is an overview of the essential steps involved in mortgage planning:
Step 1 Needs Assessment: The process of professional mortgage planning begins when the planner and the client become very clear about the client's personal values and financial goals. What is important to understand is that the distinction between a professional mortgage planner and a loan salesperson, regardless of their title, is that the professional mortgage planner begins the process by learning about their client's wants and needs. Once that is clear to all parties, a strategy can be developed and finally applied.
During this step you will learn about all of the client's financial goals, not just about those related to owning real estate. You will learn about their retirement goals, their need for college funding, or maybe about their goal to own a boat or motor home. The point is that you clearly identify all of their long and short-term goals and needs, establish the approximate amounts of money needed to obtain them, and when those funds need to be available. This is a fun and exciting process as you and your client get to wave a magic wand and create their financial future. It also puts you in a position of great responsibility, which must be taken very seriously. Your client is placing their future in your hands.
Another term that is rapidly becoming misused today is that of trusted advisor. Many have taken these two meaningful words and used them so carelessly as they again try to mask their selling in a more professional sounding term. The good news is that consumers can quickly and easily distinguish the difference between a sales person and a bona-fide trusted advisor. All a consumer need ask himself or herself is, was I provided with a solution before I provided the problem? As the saying goes, prescription without examination is malpractice and it applies as much in the financial services industry as it does in the medical field.
Step 2 Historical Analysis: At this point, you understand what is monetarily important to your clients and you have clearly defined their financial goals. Unless your clients are purchasing their first home, you need to understand their homeownership history. How long have they lived in their current residence? Did they ever refinance their mortgage? When? When they refinanced, was it to reduce their interest rate, pay off debts, or to access equity for other reasons? What were the terms of that loan? Did they own a pervious home? For how long? Did they refinance it? Continue to ask this series of questions over and over until you have reviewed every home and every loan that they have had and most importantly, the frequency and the motive behind their getting a new loan.
What you and your client will learn through this historical analysis will likely be most profound. I have met with people owning homes for 5, 10, 15, 20 or even 30 years who are considering another 30 year fixed rate-loan. It's sad, it's crazy, and quite frankly, it's frightening. Unless your client has a clear strategy to go into retirement servicing mortgage debt (which, by the way, can be a valid strategy), then your client needs to plan to become debt-free at some point in the future. Ironically, many in our industry believe that they are doing their clients a favor by always providing them with a 30-year fixed-rate loan.
Yes, it does provide the client with the peace of mind and security of knowing what their payments will be. However, peace of mind comes at a price. In fact, a 30 year fixed-rate mortgage is the most expensive mortgage one can obtain. Most people will never receive the full benefit of this loan as it takes approximately 20 years just to pay down the first 50 percent of the principal. On almost every occasion the historical analysis will point out to you and your client that they paid far too much for the debt in the past and that a 3, 5, 7 or 10 year or monthly ARM would have been a much wiser choice.
Step 3 Credit Review: During this process you educate the client about their credit report and what they can do to improve it. This is another area in which the professional mortgage planner can help their client save significant amounts of money over time. By reviewing their credit you can generally point out many ways to improve it. In addition, you are accumulating more data that you will need to use when developing a strategy to get them out of debt. Lastly, you can teach them how to take measures to prevent credit fraud and identity theft, which has become epidemic.
Step 4 Plan Development: In this step (generally done absent the client) your job as the professional mortgage planner is to finally develop the strategy that will provide your client with the greatest probability of achieving their goals. This is the prescription. Because you have clearly identified the issues, you can now make a proper one. When you think of how many salespeople in our business operate, this step is where they begin. That is, they are quoting rates and terms within a few minutes of speaking with a client and they have no idea if what they are suggesting is in their client's best interest. As a professional mortgage planner, at minimum, your plan should address these three areas:
Becoming debt-free (paying off all consumer debts)
Establishing a slush fund (6-12 months of readily accessible funds for cash flow management)
Establishing a plan for financial independence
Step 5 Plan Implementation: At this juncture you implement. Keep in mind that sometimes implementation may not require a new mortgage. Did you then waste your time or worse yet, your client's? The answer is an obvious one; if you are truly a trusted advisor and a professional mortgage planner for your client. If you only want to sell your client a loan, don't waste your time learning this process or your clients time taking them through it. Just learn some great closing techniques but don't call yourself a mortgage planner. If you truly care about your clients, what is important is to act with integrity and advise and implement appropriately.
Step 6 Plan Maintenance: Used as a debt management tool, the mortgage can help you take your clients to financial independence. However, no diet alone ever made someone lose weight and no matter how great your strategy is , it will take ongoing maintenance to increase the possibility of success. Therefore, you need to have systems in place to regularly update your client, ensure they are on track with your plan, alert them to changes and opportunities as they develop and continue to adjust and fine-tune your strategy to accommodate the inevitable changes that will occur in their lives.
There are three simple and effective systems needed to accomplish this:
A monthly or quarterly rate alert statement (which can be provided by using a product called The Mortgage Coach)
A daily review of all mortgages (provided through a service called My Rate Alert)
Annual debt review
With these three systems you can dramatically increase the probability of your client achieving their goals.
As you have come to understand through this article, there is a world of difference between being a trusted advisor and a salesperson, and equally as much difference between quoting rates and effecting a professional mortgage plan. The choice is yours, however, I would point out one last thing. While January 1, 2000 was celebrated as the turn of the century, what wasn't given much notice was that the baby boomer generation began to hit the age of retirement eligibility.
What is so significant about this fact is that these boomers represent the largest segment of our population in the U.S. and they have driven virtually every major trend as they have aged and moved from Mickey Mouse to the Beatles to Wall Street and, now, to retirement. By positioning yourself as a debt managers and partnering with other asset managers like financial planners, attorneys, business managers, some Realtors, CPAs, stock brokers and insurance agents, you can truly join the ranks of the financial services industry and place yourself right in front of a tidal wave of future business.
The boomers have lived a great life and want to maintain that lifestyle. However, they have done little to prepare for the financial realities of depending on a retirement income. The financial services industry has spent enormous amounts of time and money developing the asset side of the business, but little attention has been paid to the liability side of the balance sheet. This presents a tremendous opportunity to those of us who see this vision and want to ride that wave. By truly partnering with these other asset managers and developing an overall financial plan for your jointly managed clients, you can make a difference to so many. The opportunity is yours.
Randall A. Luebke, RFC, is a registered financial consultant at First Reliance Mortgage Corporation, Newport Beach, Calif. 949/224-4240; email: randylue@rebiz.co