Two Consumer Mind Sets
When it comes right down to it there are basically two consumer schools of thought presently within the loan financing public. I must admit that there are a few more, however; not as prevalent as the two we encounter on a daily basis. The key is to know and understand the differences.
There is the “Old School” and there is the “New School” mindset of purchasing a home and two differing views on the utilization of equity. The following is sample of the two mindsets, old school first, followed by new school on various financing subjects.
The old school says: Pay your home off so that you will not worry about losing it. During the Great Depression, consumers could lose their homes even if they were current with their payments. Consumer protection acts were put into place in the 1930s so that only delinquent payments initiate default and foreclosure. The new school understands current laws.
The old school says: My equity is already giving me a great return on investment. Equity in the home provides no return on investment unless you utilize the equity by drawing it out say the new school. Inflation depreciates equity in the home. Appreciation is the same on a home that is free and clear as the home that is financed to the maximum allowance.
The old school says: paying off the mortgage worked for my grand parents, it will work for me. The new school takes into accounts several factors for this position. Prices back then were more in line with borrower’s wages, people worked for one company all of their lives and had their retirement mapped out, and appreciation has grown faster than incomes.
The old school people stay with one loan for the entire term where new school people change loan programs every 7 years, or even less. The new school people refinance frequently to utilize equity for investment purposes. While the old school people relax with one loan the new school people are tapping into various loan programs to return interest to them.
The old school says that all debt is bad debt. They want to pay off their mortgage as quickly as they can. The new school people develop debt management so they can use debt to create wealth. The tax Reform Act of 1986 restricted deductible interest to mortgage interest only. The new school people structure debt through mortgage interest for the tax-deduction of income.
The old school people want a 30 year fixed loan. The new school people elect for a cash-flow maximizing loan such as an option or intermediate Adjustable Rate Mortgage, (ARM). The new school people wish to capitalize while rates are on the rise. The increase improves return on their investments.
The old school mind set thinks that negative amortization is bad and they stay far from it. The new school types understand this concept thoroughly. Rolling in closing costs or consolidating consumer debt is actually creating deferred interest. In reality Old school uses it without knowing it. New school people plan with negative amortization.
The old school is conservative with debt and do not take risk or opportunity with mortgage loans. The new school people want to maximize return on investment and use mortgage loans as part of their financial planning. Opportunity and risk are completely different ends of the spectrum between the two schools of thought.
It really comes down to how an individual defines risk. Risk can be not having enough for retirement or banking on the markets to create better than average returns over a period of time. Old school and new school look at risk differently and probably somewhere in between the two mindsets is the resolve.
However; do not attempt to close a loan program that the borrower does not like or does not fit within their mind set. Times have changed since our parents and grand parents bought their first homes and started their financial planning for their latter years. Prior to 1972 there were basically three loan programs.
With a plethora of loan programs available be sure to evaluate the borrower’s mind set and school of thought before explaining programs that will be frightful to hear about. The old school does not want to know about short term options and the new school will walk out of your office if you preach thirty year fixed rate loans to them.