The interest reserve is a powerful tool that you can use to turbo charge your client’s exit strategy and make their private mortgage more affordable month to month.
The biggest risk for a private mortgage borrower is the ability to pay. Since there are no rules governing debt service ratios with private mortgage lenders, it’s easy for a Borrower to get stuck in a private mortgage with a heavy monthly payment they can’t easily manage. But what if you could get your clients the money they need and customize their monthly payment? You can at Switch.
If your client has the equity to support it, building an interest reserve into their private mortgage makes it easier for them to service the loan while their circumstances improve enough that you can move them back to a bank. They’re easy to put in place and suggesting it clearly demonstrates that you are at another level of professional mortgage brokering.
Here’s a great example of how an interest reserve can make a significant difference for a Borrower in a typical situation.
Let’s assume the property value is $700,000 and there is a 1st mortgage already in place for $400,000 with a monthly payment of $1,830.00. Let’s also assume that the borrower is looking for a 2nd mortgage of $90,000 and that it is approved at 9.00% interest with a monthly interest payment of $675.00.
If the Borrower’s property taxes were 1% of value ($575.00/month), and heat was $150.00/month on average, the Borrower’s total monthly obligation to cover mortgages, taxes and heat would be $3,220.00/month. Even on an income of $75,000 a year, that’s a GDS of about 52%!
Instead of putting the Borrower in such a tight position with their monthly budget (which would clearly make it harder for them to focus on what they needed to do to fix their circumstances and get back to bank financing), let’s see how things change using an interest reserve.
What if we lent the client $100,000 at 9.00% interest instead (which would carry an interest payment of $750.00/month) and created an interest reserve of $7,200.00 from the proceeds? Then, each month we use $600.00 of the reserve fund to pay most of the interest due and the Borrower only has to pay $150.00 out of pocket to service the loan.
It’s a unique mechanism that allows the Borrower to pay less every month even though they borrow more. Doing things this way would reduce the Borrower’s monthly obligations down to a much more manageable $2,620.00 and give them a better chance to pay the private mortgage off sooner, there’s no question about it.
Switch was created to serve Brokers who understand the power of building a bridge for their clients over troubled water that can allow them to keep their home and get back to bank financing faster. The fully customizable interest reserve is a lever that is helping more and more people achieve the goal. Give us a call to learn how to use this powerful tool to help your private mortgage clients get there sooner.
