338: The Mortgage Coach, Dave Savage

This show is produced by the Hartman Media Company. For more information and links to all.

Our great podcasts, visit hartmanmedia.com.

Welcome to the AIPIS Show. For accredited income property investment specialists and those who aspire to be if you're a real estate, mortgage or financial professional, this is the place for you. We'll explore innovative investment analysis, sales, marketing and income generating strategies for the most historically proven wealth creator income property. Learn from the experts as they show you how to build a better business and a better life.

It's my pleasure to welcome a very old friend of mine. No, he's not that old. We've just known each other for a long, long, long time. That is Dave Savage. He has a software company called the Mortgage Coach and oh gosh, about 20, 25 years ago I was using his project, his product I should say. And it really helps people analyze a very important component of their investment and that is the mortgage. You know, I've said to you before that many people consider the property the asset and the mortgage the liability. But played right, the mortgage is a big part of the asset. And I love these beautiful, incredibly cheap, low rate, 30 year fixed rate mortgages. They are just a phenomenal asset and the only way you can acquire that asset is to attach it to a property. And then an income property is the most debt favored asset class in America. So we're going to talk today about a couple things and if you're watching on our YouTube channel on video, we'll show some slides for you and some visual examples. If you're just listening to the audio, we're going to explain those to you so they can come alive. But if you want to refer later to the video, you can find it on my YouTube channel. And let's go ahead and dive in. Dave Savage, welcome. How are you?

Hey, I'm great. Thanks for having me on your show. I'm looking forward to it.

It's good to have you. And you're coming to us from Oregon, is that correct?

I am. I'm coming to you live out of Lake Oswego, Oregon, just outside of Portland.

Fantastic. Well, we're looking at a quote from Simon Sinek and I love his video, his TED talk start with why and his book with the same title. Tell us a little bit about that.

Well, it's something I've been kicking off a lot of the keynotes that I do in a lot of the presentations and I just think this quote is just so on point. It doesn't matter how much we know. What matters is how clearly Others understand what we know. When I founded mortgage coach over 20 years ago, that was my why it was. I believe that if I could communicate mortgage strategies to families more clearly and more comprehensively, it would be a competitive advantage. So I think that's never been more true. And it's just a quote that I like to kick off a lot of messages with right now.

Yeah, what do you want to start with? Do you want to start with a refi analysis?

Well, why don't before we jump on the refi, let's cover some of the fundamentals and the essentials. Now I realize the audience I'm speaking to are a lot of mostly real estate investors and buying to hold. But whether you're a real estate investor buying a hold, you're also probably own your personal residence and sometimes you're not holding, you're selling. And these are the four essentials we believe at Mortgage Coach that every family should make when getting into mortgage debt. And part of the Mortgage Coach why is to help families go beyond buying debt. You know, monthly payment, cash to close, interest rate. Those are the three data points that most people consider and compare and go beyond that. And so, you know, essential number one is every time a family buys a home, they should be very intentional and strategic about hey, do I have cash reserves? And I do think this is going to be very different going forward. Now that we've gone through six, eight plus weeks of quarantine, people are going to be thoughtful about I need to have the cash reserves to not only weather the storm but for the opportunity. I think you're going to see a lot of families, given all the equity they have in personal residence, where they're going to sell that home, take some chips off the table, buy another home and build wealth with real estate faster. So essential number one, we teach mortgage professionals go beyond qualifying and cover that. Number two, and I think this is true whether you're buying a single family residence for your home or whether you're a long term investor, always compare your other options over time. So if you're buying to hold for at least seven years or 10 years, it's not only important to look at the monthly payment and what it costs you to get the debt, look at what's the cost of that debt over 5 years, 10 years, 20 years. Jase, anything you want to ask or add to those things before I cover.

The other two, these are good fundamentals. We always say for every property you purchase, you should have at least 4% in cash reserves. So if you buy 10, 1, $100,000 rental properties, you should have 4% of the value of that portfolio, $40,000 in cash reserves for vacancies, unexpected repairs, et cetera. And definitely consumer debt is a complete ripoff. Looking at your step number three here. So you want to pay that off and you want to have good debt, which is the mortgage debt. The mortgage debt, as long as it's cheap, fixed rate debt, which it pretty much is nowadays, that is very good debt that can help you grow and you can make a lot of money from it. So good stuff.

Yeah. So, and then number four is just how can we become debt free faster or invest the difference? So let's kind of put those four fundamentals and let's put them into play in a sample of a total cost analysis. So this is a mortgage coach total cost analysis, where a mortgage professional is providing, call it a quote, a proposal to a family for a single, you know, family, occupied home. But these principles apply for anything. So you'll notice that it's always got the loan officers logo photo. He could stream a video through that. But let's look at these principles in play. So if you look at this particular strategy, he's saying, hey, here's your current loan. Here is actually I pulled up a seller buy down. I did not do the.

Well, I do want to talk to you about that buy down analysis because a lot of our investors, when they're purchasing, when we recommend a buy down, a lot of times it's not a bad deal at all. It usually has a payoff horizon of around three years. And for a buy and hold investor, that can be great.

There's no doubt. And I'll cover that in just a second. So let's take a look at this refi strategy. By the way, the loan officer that you see here, his name is Jeremy out of Petaluma, California. He's the kind of loan officer that does about 300 loans a year. And as you can see, there's a current loan, there's a 30 year fixed rate refi, and then you'll look the loan officer saying, hey, what if we took that $265 a monthly savings and prepaid the mortgage, you could pay off that house in 25 years. So again, just practicing those principles of always showing strategies or always considering a strategy to accelerate debt reduction and then showing it over different windows of time, going beyond just the monthly difference between the different strategies, show the different strategies over different time periods. So that's, that's just an example.

Okay. Yeah, A lot of our investors they love that debt, they want to keep it, they don't want to pay it off. It's such cheap debt. So you understand the game, how that works. But one question they always face is, you know, should they refinance the property? And Dave, you can speak to this better than I can and you can show awesome graphs and charts and really help people understand the numbers specifically through your software. But one of the things I think a lot of people miss when they do a refi analysis, they look at the instant gratification of okay, well you know, I'm seven years into this loan and if I refinance it now, I'm going to lower my payment and save every month. And that's fantastic. But they sort of forget that they're adding seven years to the loan, which is okay again because you know, we like that debt. But they're also re amortizing the loan. So they do lose what we call the big boring idea and we titled it roa Return on Amortization.

Just made that one up. You do get a little bit of return out of that. I think the refi is almost always a good deal, certainly in this market. But like you help people do, they just need to be aware of the overall financial consequences of that. Right.

Well, the thing that we, we talk about when we teach loan officers to become what we call black belt in mortgage advice is, is looking to repay and accelerate debt reduction. Call that the most conservative option. You could also take that savings and apply it into a savings account, an interest bearing savings account and let's evaluate that. And then of course you can also take that savings, sometimes a cash out refi and buy another piece of real estate. And you could do multiple what we call total cost analysis, showing hey, all we're proposing, like when you look at these three steps, the fourth one is analyze strategies to build wealth with real estate faster. Could be debt reduction, could be invest the difference and it could be some type of an investment strategy. And then of course, to your point, every time you look at that debt, you should absolutely know, you know, what path are you on to prepaying the mortgage. Like let's say this was a consumer that had 25 years left. You might want to make sure that this program right here was a 25 year mortgage. But again, I think it's just important to be intentional and to analyze options.

Right. And by the way, this is another point of that of, you know, when you choose how long of a mortgage you want to have on a property, generally speaking, I'm going To say get the longest mortgage available, 30, 40 years if they offer it. But the only time I start to change my thinking on that is if the rate is a lot lower, then you know, sometimes that, that shorter term it could enter into the conversation to where the 15 year mortgage could be a good deal if you're going to save a ton of money on the rate. So, you know, it depends. Mostly I'm going to lean toward the longer mortgage. But there are caveats sometimes. Okay, good. And your software helps.

We have absolutely. Like I did an interview with a top producer yesterday. It was a panel with over 300 loan officers. And column one was a 30 year fix. Column two was like 20 years, column three was 15. And then they did a pick your payment. I would just say look at options and look at different terms and then look at the cost savings over strategic periods of time. And if you're a long term thinker, maybe the, the short term is seven or ten years.

Sure. Yeah. Okay. Do you want to look at that refi analysis? I want to really look at an example. Like does it make sense to refi or not given an analysis?

Okay, well, in this particular case, so current situation, monthly savings was 265. If it was reinvested and they kept making the same payment, it would be 52 or 25.9 years. You look at difference in payment, the refi and not continuing to make the same payment save you the most money. But then when you looked at it over 360 months, it was $125,000 savings. So long term perspective, doing the refi and making the same payment. And then if you look at over 15 years, you can see different windows. And again at Mortgage Coach you could click down into the options and see, okay, at 15 years, what would be the loan balance? One thing they didn't do in this is he could have shown. Well, I think he did. He's showing appreciation in real estate. That's another thing. Always put your assumptions like you can see right here that it's the value is 900,000. And based off of the appreciation rate that he put, which was 4%, you can see it right here. Based off of a 4% appreciation rate, he's going to have a home value of 1.6 million. And you can just look at all those variables.

Right. And of course the listeners and viewers need to understand either of those numbers will be attacked by inflation. So the appreciation is usually offset by inflation. It's just hedges it pretty much. That's historically. But also that savings over the course of the 30 years is also reduced by inflation. So the savings is not in constant dollars or it is in constant dollars, not real dollars, I should say. And so just understand that in the analysis. Okay, go ahead. So the answer on this one, does it give a clear answer, Dave, of you should or shouldn't refi.

You should absolutely refi. You're looking at saving in term $100,000 over the life of the potential life of loan. And at a minimum, you're talking about an extra $250 and $265 in cash flow. So, yeah, I would say that it makes sense to refi.

Let's look at a buy down now.

All right.

Okay. And let me explain buy downs to people just in case not everybody knows. So understand that when you pay points on a loan, you know you'll pay an interest rate and then a point is 1% of the loan amount. And when you pay points, all points are is prepaid interest. That's what a point is. So you can pay interest in advance or you can pay it monthly. And I've had a couple mortgage businesses over the years and as Dave well knows, but maybe the audience doesn't. They have what they call the par rate, which means if you're paying zero points, this is your interest rate. It might be, for example, 5%, just as an example, not quoting any of today's rates, I'm just giving you an example. But if you pay two points, that might buy that rate down. It's a buy down to 4.5%, just as an example. And if you pay 4 points, maybe you can buy it down to 4%. But if you pay no points, it's going to be 5%. So the question becomes, when is it economical? When is it smart to pay points or prepaid interest, extra points? Because what you do when you pay those extra points, that extra prepaid interest is you buy down the interest rate on that mortgage. So here is an analysis of it. This is a $500,000 property and it's a $400,000 loan amount.

Yeah. And let me jump in here because to do a pure points analysis, typically when acquiring a piece of real estate or refinancing real estate, you would just like you said, look at paying the points and when do you break even on those? Now this is a little more of a creative use of that strategy. And this particular use case that I'm showing you, you had a, a loan officer tried to help a realtor sell a home that, let's just say had been on the market to the point where they were considering a price reduction.

Right.

And so what he was with, what this loan officer was showing this realtor and this seller of a home is that, hey, here's your, your house right now. And I know you're, you're thinking about, hey, we need to reduce the price to sell it. It's not selling. And what he is going to present to the, to the seller of the property is, you know what, instead of lowering your price, lowering that price would lower the payment by $220. What if we did a permanent buy down? And so for literally a fraction of that, you could buy down the rate, get the same payment as the $50,000 price reduction with a much smaller investment. And so that's what they're showing here is that they're buying the rate down. My guess is it looks like about two points. It's a two point buy down. And that two point buy down. So let's just say it's going to.

Cost you $8,000 in this example because it's 2% of the loan amount.

Exactly. And you're going to get the same rate. And so it's just a way to avoid a price reduction. And now the seller is going to NET an extra 30, $40,000 and the buyer is going to get the same payment or better and they're going to get the tax reduction or the tax benefits of those points by now. So it's just a win win.

So here's the thing. Almost everybody buy on a payment, not a price. Unfortunately though, the way our systems work, whether it be Zillow or the MLS or whatever platform someone is shopping on, they're shopping by price. So sadly that is the way it works. Now if you get the chance to show something to a buyer or a seller, then yes, you can go through this. And that's why the software is a fantastic tool because it helps you analyze this stuff and it really helps people understand it on either side of the equation. So in this example, the seller could essentially give an allowance of $8,000, whereas they might have to lower the price, the listing price in that market to attract a buyer by $15,000. So that's where the buy down can become economical for the seller, but it's also economical for the buyer. Because as long term buy and hold investors, you usually have about a three year give or take horizon on where a buy really starts to make sense. And almost everybody listening, Dave, is going to own their properties for much longer than three years. So it would make sense to do the prepaid interest and to pay the extra points to get the lower rate.

Exactly, exactly. Here's another example of the number one producer in Bozeman, Montana, number one loan officer, and she packaged this for a listing agent to help sell that home and is using the buy down as a strategy to help sell the home and avoid the price reduction.

So what do you want people to know about this? I mean, drill down and talk some numbers.

Well, I want people to know that whenever you finance a home and part of the Mortgage Coach mission is to go beyond monthly payments and look at the cost of different strategies over time and always be strategic. So I'm talking to investors and I think too many people get in deck and they do not look at the scenarios and they do not forecast different debt strategies over different periods of time and they do not run different scenarios to accelerate their wealth with real estate. So that's the. Hopefully the takeaway is go beyond the rate sheet. If your loan officer just gives you a fee worksheet and says, hey, here's your payment, cash to close and your interest rate, that's not enough.

Go.

Hey, we need to model this out over some time, right? That's what I want.

Yeah. And that, that is a good message. I love it. Dave, where can they find you?

So, Dave Savage pretty much on any social media, LinkedIn, Facebook, Instagram, and for anybody that is a mortgage professional listening to this, we have a Facebook group called Mortgage Coach Productivity Mastermind and we've got a YouTube channel just put in Mortgage Coach.

Sounds good. Dave Savage, thanks so much for joining us.

Thanks for having me on.

Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out this show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own and if you require specific legal or tax advice or or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.