If you’ve ever met with a trusted Financial Advisor, one of their favorite questions is, “What is your risk tolerance?” It just so happens that this is also where we begin our strategic planning and advice for homeowners when using our custom 7-step process to making SMART financing decisions when getting a mortgage.
What makes this thinking and planning process so unique is that we transform each critical step in obtaining the right mortgage into a powerful financial planning question for our clients that help them really understand their choices and decisions as they relate to their overall financial goals.
The first step is PRODUCT. Put simply, people must first determine what type of loan they need to meet their goals. What this step really involves is answering the question, “How do I manage risk?”
A fixed-rate mortgage comes with less risk than an adjustable rate mortgage. That seems obvious to most. But what about a loan product that is fixed for the first five years, and then converts to an adjustable rate mortgage (ARM) in year six? What about a 15-year fixed rate product compared to a 30-year fixed rate product?
It comes as a surprise to many when I explain that a 30-year fixed rate mortgage comes with a price. While you’ve ensured the lowest risk possible, having a bank guarantee you an interest rate and payment that never changes for 30 years, means you are paying a premium on the rate up front.
When it comes to risk, though, some people just can’t sleep at night knowing their rate might change four or even six years from now. This is fine. It’s great to know your risk tolerance!
But what if your last child is about to graduate from high school in two more years, and you and your spouse have every intention to sell your house and downsize to a nice condo on the river? Would it make sense to take on a bit more potential “risk” with a 5-year fixed rate mortgage that is much cheaper than a 30-year fixed rate mortgage?
These are important talking points during our custom BorrowSMART Consultation™. Our clients quickly realize that we act much more like financial planners that just happen to specialize in mortgages and liability management!
It’s all about helping our clients enjoy greater clarity, confidence, and peace of mind when it comes to their money, mortgages, and financial future.