Loan Officer Training 08/27/2024 - How to Structure Blended Rates for 1st & 2nd Mortgages

In this enlightening episode of Loan Officer Training, we dive deep into the complexities of structuring blended rates for 1st and 2nd mortgages. Whether you're a seasoned loan officer or just starting out, understanding how to effectively blend rates can significantly impact your clients' financial outcomes and your own success in the industry.

Join our expert host as they break down the essentials of blended rates—what they are, why they matter, and how to calculate them with precision. We'll cover the basics of blended rates, including what they are and how they can be used to combine the interest rates of primary and secondary mortgages for optimal financial results.

Additionally, get tips on how to clearly explain blended rates to clients, helping them understand the benefits and make informed decisions. This episode is packed with actionable insights and practical advice designed to enhance your skills and boost your confidence in structuring blended rates.

Tune in and take your mortgage expertise to the next level!

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About The Mortgage Calculator:

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Aug 27, 2024 • 11:03:41 PM: 0:13

So, welcome everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our President Nick Hiersche and our CSO, Jose Gonzalez. We are a lender that specializes in non QM loans and what we do every. Tuesday, Wednesday and Thursday evening at 7 PM. Eastern is this loan officer training where we go through an in depth loan officer training topic and tonight's topic is going to be how to structure blended rates for 1st and 2nd mortgages definitely was something that's becoming more prevalent over time and the times that we are in. So, Jose, why don't you talk about that? Uh, how this works, why we would be looking at blended rates and sending blended rates to customers and what we are discussing. Good evening, everybody. Thank you for joining us for tonight's training on how to structure blended rates for first and second mortgages. Uh, as you all know, we're having A lot of volatility in the industry, right? So there is a lot of motivation for borrower borrowers to do some type of refinance, maybe consolidate some mortgages, some debt, some credit cards, maybe buy some additional, some additional investment properties, but definitely. Uh, there are opportunities and motivation to do so and a lot of products and that's where we come in as loan consultants, right? Properly consulting our borrower so that they pick the lowest cost option to meet their objective. A situation that we're facing now is we have a lot of borrowers that may have refinanced in 2021. Right. Maybe the beginning of 2022 or, and they may have a 3%, 3. 5%. I'm hearing even cases of 2. 5 percent and 2 percent interest rate mortgages, which mortgage has only been around 2, 3, 4 years, but still it's such a low rate. Uh, that's going to be hard to beat, uh, with all of the products that we have here for our HELONE as well as HELOC, but we definitely like the HELONE to combine with this. Cause it's a more stable product, um, with a lower payment than the HELOC is, even if it's a fixed rate HELOC, it's the payment is going to be calculated differently. So for a more long term hold, the HELONE is a great option. But you need to be able to properly break down the investment that the borrower is making, uh, and why it would be or wouldn't be a better option, whichever may be applicable. For there to either refinance the first or keep the existing first and get a new second. Uh, so that's basically what this is about here. We're going to, uh, teach you how to be the ultimate loan consultant so that you can break it down for your borrower. And like we like to say, add value to the transaction. So what are some blended rate basics? What exactly is the blended rate? The blended rate is the weighted average of the interest rate on two or more loans. It is a calculation used to determine the effective interest rate on the combined loan. Debt and the second mortgage is usually smaller than the first mortgage. So the impact on the total payment, AKA the blended rate is less than a new first mortgage for the total amount. And that's what we're going to break down here. So you see there are proportionate share in our pie chart where the first mortgage is a lot bigger than the second mortgage. So Right now, we're still, I guess now we're in a volatile environment, maybe not exactly rising, but not exactly coming down, but the interest rates on those second mortgages are very attractive. They're, they're certainly dropping a bit and the interest rates on the first mortgage are still probably twice as high as your borrowers may have on the existing first mortgage. That's why I do that. Current rate environment may discourage buyer or borrower refinancing out of low interest rate first mortgages. Our second mortgage, he loans and he locks. Obviously do not require refinancing the first that's an additional mortgage and income and adding this new second mortgage then what we do is we proportionately calculate the interest rate which is the blended rate. To let the customer know what their effective payment rate is, and it allows them to maintain then a nice low interest on their first mortgage. And especially allows them if that first mortgage has been around for a couple of years, it's going to be paying a lot more interest. than it did at the beginning. So you definitely don't want to lose that favorable existing amortization schedule. So how exactly do we calculate the blended rate? Now I will let you know there are blended rate calculators, right? You can go to blendedrate. com. dot com and you have an online calculator there that you can figure this out. But you need to know the theory, uh, to be able to explain it. You need to know the mechanics of how you arrive at the number so you explain the benefits to the borrower. Because essentially you're going to be calculating the proportionate share of the interest rate for each loan. So let's assume here In our example, uh, which we're going to be using now in the next couple of slides, our, our rate on our first mortgage, which is our existing mortgage, is 3. 5%. And we have a balance of 350, 000. And the rate on our second mortgage, which that we're going to be able to get our fixed rate. He loan product for this primary borrower is 9. 75%. You know, his credit's a little bit, uh, not, uh, 800, probably 720, but still 9. 75. And the balance is 150, 000. Now, how you calculate the blended rate now is we need to determine the proportionate share interest for each one interest expense for each one. Add those up. And then we divided by the total loan amount. So blended rate for the first mortgage, 3. 5 percent times 350, 000. We would be paying 12, 250 on the first mortgage. Beautiful low rate. Our second mortgage, he loaned fixed rate. He loaned 9. 75 times 150, 000. That's 14, 625 interest expense for a total interest expense.$26,875. Now we add up the first mortgage of three 50 and the second mortgage of one 50 for a total of$500,000. Divide 26,875. Total interest expense by 500, 000 total loan amount to reach 5. 375 percent interest rate on our blended rate, right? So, uh, that's, uh, definitely going to be lower than if somebody were to. Refinance, uh, into a new loan, you know, best case scenario. If you're a conventional loan, maybe high fives, low sixes, depending on the credit score, and if we're talking about a bank statement loan or some other out doc loan, you know, maybe, uh, low to mid sixes, maybe a little bit higher. So definitely, um, you're going to have. a higher interest expense overall, which we're going to show you in the next slide. Right. But you see, we're at 5. 375 blended rates. So you can know now when you're sitting with your borrower or speaking with them on the phone and trying to explain to them the benefit of that second mortgage, if they have a low interest rate first, this is how you can drive home the value. Of this transaction. And obviously in that scenario, you're also adding value for yourself, but here's where we really seal the deal. Right? So in our, our, our new first mortgage, let's assume a borrower, 8. 75%. Interest rate on their new first mortgage resulting in 43, 750. Uh, the blended rate we know is 5. 375%. And the second mortgage, 9. 75%. So does the new second mortgage save the borrower money compared to a new first mortgage and, or is it better to add a second mortgage or refinance the first? The answer is yes. Definitely the borrower will benefit from the new second mortgage as the blended rate payment of 26, 875 on that total loan amount of 500, 000. It's 14, 625 lower than if the borrower were to refinance with a new first mortgage at 8. 75. So we're assuming this is an alt doc borrower Going with some type of a cash out bank statement loan to get that that kind of a rate And we're taking it to the max here. Uh, 80 percent LTV. We're assuming for our example. So you see big savings on, um, you know, depending obviously what the objective of the borrower is, but a big savings here to get the money with a new second mortgage. Now, if that's not enough, now, what are some additional considerations here? Now that's a blended rate. Calculator there. That's the image of the blended rate calculator where you just input your existing first, your closed end second, notice it says closed end second, it doesn't say HELOC, which a HELOC is an open ended second, which does not have a fixed amortization schedule and then your new first lien. That's the example that I just did, but additional factors to consider here. First one, closing costs, right? The new second fixed rate, and that's a typo should say helo mortgage has much lower closing costs. Then the new first mortgage, right? Cause you're looking at 150, 000 loan versus a 500, 000 loan. You know, a lot of these costs are fixed and other costs are based on the loan amount. So definitely going to have some additional fees there. Um, the new first mortgage, if that's the route you're going to go pre payment penalties is another consideration. Uh, Because the first mortgage may, if it's an investment property and non QM, may have a prepayment penalty as well, which would be another, uh, additional expense, you know, three, four, five, in some cases, 10, 000 additionally. Now, you heard me mention amortization table, right? Now, when we're talking about the amortization table, now we're starting to really split hairs here. But this is where the loan consultant excels, right? Because you're going to bring up, uh, considerations that other application takers didn't bring up, right? Like you're going to talk to them, breaking it down the amortization table. You are in Mr. Smith, you are in year seven. Of the amortization of your loan. So I have here an amortization table of your loan at 3. 5%. And you can see here at year seven, you're paying 550 in principal and 600 in interest. versus the amortization for the new loan, you're going to start in the very beginning and you're going to be paying at a higher rate. So you're going to be paying, this is a hypothetical, right? 250 an inch in principal and 750 or 800 in interest. Any way you slice it or dice it, if you go from a three and a half percent interest rate where they've been making payments for five, six, three, let's say three years even. And now you're going to start again on a new loan at ground zero. So your amortization is going to be less favorable for two reasons. A, you're at a higher interest rate. So off the bat, it's a different principle to interest, uh, ratio. And second of all, You're going back to your zero. So now you've reset the amortization and again, it starts where it starts. And then, you know, with each payment that you make, it's like, you know, 1 more to principal, 1 less to interest or whatever may be the case for that particular amortization table. That's how the amortization table with every payment you make, the next payment pays a little bit more principal and a little bit less interest. So, you know, if you bring that amortization table to the borrower, then they can visualize that and make sure that this is what they want to do. And then obviously the income considerations. That may affect product selection. What may have changed in the borrower's, uh, income or employment since the last time that they applied for loan. But I will let you know that it would, that he loan product, we have. All those options there that you see and more. We have full dock. We have bank statement, P& L, 1099, DSER even. We have HELON. So we have all of those options possible for second mortgages and all at very low cost. Good rates. So last but not least there you see our happy loan consultant there did a good job of empowering his borrower with the knowledge so that he can gain their confidence and be their loan consultant for life. That's how it works in this business. You add value. To the transaction, um, and, uh, you will get referrals. You will get repeat business. You will have a sustainable MLO career. That's that's the way to do it. That's the way to reach 29 years in the business. Like I've been in this business is by adding value. And basically now burning your bridges, having people look to you as a resource, even when they're not going to do alone just yet. You want them to look at you as a resource, reach out to you for information. Maybe they're giving that information to friends and family. Next thing you know, you're getting a referral because you are such. A great consultant. So definitely look to the mortgage calculator, uh, for all of your HE loans, DSCR loans, non QM, Altdoc, agency, and every other loan out there under the sun. Thank you, Jose. Let's see. Let's see here. Let's see if we have any questions. So the question, when would you be allowed to use a blended rate versus the actual rates on the first and second lane? So it's not about necessarily using a blended rate, right? It's about informing people of a blended rate. Yeah, absolutely. The blended rate calculator, or just knowing how to calculate the blended rate so you can properly explain it, whether you use an online calculator or not. It's just about exactly that. Showing the customer the combined rate. Of the first and second mortgage that you are the new second mortgage you're proposing combined with their existing first mortgage. So the data that gets put in there is going to depend on, or the data for your calculation is whatever their existing interest rate is on the first mortgage, what the interest rate is on the fixed rate, uh, second mortgage that you are, that you're proposing, calculate blended rate, and then talk about their objective. I don't see any other questions. So I think we will go ahead and wrap it up and remember that we do this show every Tuesday, Wednesday, and Thursday evening at 7 p. m. Eastern, where we go through a new loan officer training topic. So we'll be back tomorrow with a new topic. We'll see you all tomorrow at 7 p. m. Eastern time for the next episode of the lone officer training series.