#WhackedOutWednesday – Rule of 36! Too bad many are not taught some of these finance 101 philosophies or should I say standards. There’s a common misconception to finance we (all in mortgage industry) should help consumers understand. The rule of 36 is that you recoup your costs, or gain an ROI in 36 months or less. This pretty much goes with everything.
If you take money out of your 401k and have to pay it back, then make sure you are done with that payback in 36 months. If you have to pay costs inside of a loan or out of pocket, you should see some ROI or recoup-ment of costs inside of 36 months. Weather that comes from appreciation and equity position, or that comes from saving money monthly. That savings should help you recoup the costs inside of 36 months.
General rule of thumb, is that you should not be including the escrow/impound account you get back from your old lender, nor should you be counting the monthly payment that you skip when you refinance. (interest is paid in arrears people). However, all of that should be part of your “benefit sandwich” that is explained to a client. This concept, standard or philosophy of the rule of 36 applies to a lot. If you put your money “into” something you should see a return on your investment inside of 36 months. (3 years) In the mortgage world this is standard in many cases to prove a worthy and justified case to refinance. Called a net benefit.
In some loans such as VA IRRRL’s (VA loan – Interest Rate Reduction Refinance Loan) and FHA streamlines these loans enforce a net tangible benefit for the client. They must lower rates by a certain percentage, save x dollars or recoup costs inside of 3 years. For the average consumer this concept may not be understood. But in the mortgage world it happens all the time where LO’s attempt to complete loans that make no financial sense for the consumer. Make sure your loans make sense and do the right thing. Otherwise it’s called equity striping.
As Always –