I’m not going to rehash it all here, but for a little history, you can visit this post for the back story.
Now, many months later, I can finally follow through on my promise.
Followers of this Primerica saga know that I had a SMART loan myself. I have an update to that little side story that I will post soon. But until then, the following is an article that Ken wrote last October or November to accompany the above slide presentation. And so now, without further ado: The SMART loan, broken down to all its nitty-gritty glory. The devil is indeed in the details. If you’ve been given a SMART loan proposal by a Primerica rep and you’re trying to figure it out. You’re going to want to read this and crunch your own numbers.
A SMART loan guest post
By Ken,
This is a SMART loan solution, one from October that I evaluated:
Pay close attention to a few things on the second page:
Subsequent payments $718.25 * 26 payments =18674.50 divided by 12 = 1556.21 (This is the true monthly outlay on this loan)
Now, go to any loan calculator on line…
Type in that loan amount $212,685.70 and tell the computer you want it paid off in 20 years at let’s say 6% (actually a pretty high rate for the timeframe this SMART loan came out.) What’s the required payment? $1523.75/month
At this point, you should be saying “Oh no, this can’t be true”
Next, look at the total projected timeframe the loan should be paid off on the SMART solution page: 22 years, 4 months.
Wait, The conventional loan will have a monthly savings of $30+/month and be paid off 2 years, 4 months sooner? Can’t be, the SMART loan is the best thing since sliced bread!!!
Let’s take this a step further. You see where it says subsequent payment $718? Look to the left. At closing, the client is required to pay $1436. Really, that should be taken off the balance on the conventional loan we just calculated because we’re borrowing that much less. Also, the loan costs on the 1st page includes more than $5600 in fees (Loan amount minus “debt included in proposal”). This is arguably $3000 more than a broker would charge. So in theory, the loan could be $4400 less if the client simply got a conventional loan.
Let’s type in a loan amount of $208,285 (212,685 – 4400 in extras)
Now the payment drops to $1492. So, the comparative payments from SMART loan vs. conventional loan is $64, again the loan is paid off 28 months sooner.
Let’s take it another step further, shall we? Let’s tell the conventional loan to be done in the same time frame as the SMART loan…22 years. The conventional loan payment is $1422. Oh my goodness, that’s over $100/month less than the SMART loan (and 2 months sooner to be paid off)
Hey, we like to talk numbers, right?
Let’s take that $100/month savings for 22 years at Primerica’s conservatively quoted 8% return. Using this calculator http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx you will see that this client could’ve saved over $71,000 by not being SMART.
Ok, now let’s see what happened to this client if they sell their home in 10 years. The SMART solution says they’s have a balance of $153,000 (Ending balance in 2018)
Let’s see what the amortization chart says for the 20 year loan ($208285 @ 6%)
http://www.lenderhomepage.com/calc/calc10.php
See month 120 and notice a balance of $134,409, in a better equity position in 10 years by only $19,000.
In month 180 (15 years), SMART loan balance: $126,000, 20 year conventional $77,185 (Only $50,000 better).
So, there’s never one SINGLE MOMENT the SMART loan puts you in a better position. This is no surprise to full-time financial service professionals. We also know Primerica’s term insurance can cost upwards of 50% more than equally ranked companies that have been in business 3 times as long as Primerica. Not to mention, the insurance product lacks serious features, convertibility to permanent insurance just to name one. Also, the investments through Primerica charge the client nearly 5% before the money even hits the market. Invest $1000, $950 hits the market.
One final laugh…look who the “big bad bank” is that is being paid off in this proposal. Look under “Current Debt Listing” on the 1st page. This must be one of those banks that “wants everyone to be in debt forever”. Primerica, a division of Citigroup is only charging nearly $5,700 for this “gem” of a loan.
Related posts:
19 comments
1 ping
Chris H
October 20, 2009 at 7:01 am (UTC -6)
Chris,
I have been reading your blogs long enough to know that you are smarter than this. I knew you to be a fair guy and I am rather disappointed. First of all, You compared the Smart loan at 7.15% to a conventional loan at 6% and was surprised that the conventional loan was cheaper? Secondly, at the bottom of the first page is a line called “Estimated Cash to you” That is not closing costs. That is cash that you get in your pocket. A fact I am sure you are well aware of, since you surely cashed the check. If not, then criminal charges need to be field against someone. Thirdly, that $1436.49 is your first payment not closing costs an dis typically due the first of the month after closing, not upon closing. There are many other errors in your understanding of Primerica products, but having kept track of the earlier post and now seeing this, one can only surmise that you don’t want to know, so I won’t waste my time.
Chris,
The first thing you need to understand is that I did not write this. Ken did. I only published it. Please feel free to pick it apart and provide clarification.
The second thing readers need to understand related to percentage rates is that the SMART loan always has a higher percentage interest rate than what is offered at your local bank. They justify this with the simple interest calculation, explaining that even though the rate on the SMART is higher the cost of the loan is lower.
Please don’t go away. Let’s get this straight. Let’s get to the truth. Let’s help people make the right choice.
Chris
X-Primerican
October 20, 2009 at 4:17 pm (UTC -6)
Chris H,
The belief that “it’s not the rate, but the rate in which you pay” is flawed. If the $mart loan offered competitive rates and still offered the “equity builder” they would have an unbeatable loan. It seems like a simple solution to me, but then again that’s why I left Primerica. It’s easy to say we do what’s right 100% of the time, it’s another thing to mean it.
As for rates here are the 30yr mortgage rates for Oct 2008. As you know 20yr rates are lower than this. 6% is a very conservative guess. I would have went with 5.5% – 5.875% for a 20yr loan during Oct’2008.
10/3/2008 6.10
10/10/2008 5.94
10/17/2008 6.46
10/24/2008 6.04
10/31/2008 6.46
Ken – on this example it looks like this is a refinance of a current $mart loan. Do you know if that is the case?
The numbers on the conditional loan worksheet doesn’t work if it’s not a refinance of a current $mart loan.
Regardless the facts are very simple – 100% of the time a person is better off going with a 20yr conventional loan. Not only will it be cheaper to close, it will be paid off faster, and cost less monthly!
Ken
October 20, 2009 at 7:33 pm (UTC -6)
First of all, this is not Chris’ loan and I don’t know if it was a SMART loan being paid off, although I’m not sure it matters.
As for the rate, 6% is actually conservative for that time, which I mentioned in the post. I concede the cash back of $4,000 and potentially the first payment due at closing (which is how it looked on the paperwork). However, since the real rate of a comparative loan is closer to 5.5-5.625% for a 20-year loan, the $5,000 Chris H. is complaining about is completely negated.
I challenge him to USE NUMBERS to challenge the post I made. He can’t. He’s made valid points on about $5,000 toward the side of the SMART loan, hardly a dent in the savings that the conventional loan earns.
X-Primerican
October 21, 2009 at 5:02 pm (UTC -6)
Ken,
Thanks for the info & I am 100% with you on the $mart loan; as you already know.
The reason I asked about it being a refinance of a $mart loan is that those loans are not charged the full closing costs. Here is an example.
If a client has a current $100,000 $mart loan and is doing a cash out refinance to get $25k out, they are only charged the broker fees on the $25k not the whole $125k. So when you see a $mart loan being refinanced as another $mart loan the closing costs are a little cheaper. (Of course you can’t get away from doc stamps & intangible tax, title work, and stuff like that). They reason this has to be a $mart refinance that the closing costs would be significantly higher! (Typically the $mart loan closing costs are close to 5% of the loan amount)
I did a refinance last month with a client who had a $mart loan and the PFS rep basically accused of being “part of the problem” and convinced the client we should have a “broker” confrontation. I gladly accepted! Basically he was jumping up and down on how cheap his closing costs were and then I realized it was a rate/term refinance compared to my C/O FHA refinance. Even with the higher loan amount and MIP the client was still paying approximately $600 year cheaper and paid off his house 19 months sooner than the $mart. I had the client go fact me the HUD & TIL the following day to see what her total closing costs. The closing costs were $11.025 with a loan amount of $210,000. That is 5.25% for closing costs!!
I will see if I can get all of the numbers from here again and I will gladly put the full set of numbers on here!
Ken
October 25, 2009 at 9:12 am (UTC -6)
I forgot to mention my favorite quote from Chris H:
“You compared the Smart loan at 7.15% to a conventional loan at 6% and was surprised that the conventional loan was cheaper?”
This is EXACTLY our point. If the borrower has 2 options presented to them, it’s obvious which one is “smart”. It’s not the Primerica loan.
You see, the 6% rate I used was very conservative. Look up the rates for a 30 year loan back in October of 2008 and then subtract around .375 – .5% off that rate to find the TRUE comparison to a SMART loan of that period. If the 6% is cheaper, obviously the 5.5% conventional would be even better.
This is how it ALWAYS works. Primerica offers a high-rate magical loan that pays off faster. If you compare the “quicker” payoff time of the SMART loan to a conventional loan of a SHORTER duration, the conventional loan will have a LOWER PAYMENT AND be PAID OFF SOONER.
It’s obvious after seeing replies like “You compared the Smart loan at 7.15% to a conventional loan at 6% and was surprised that the conventional loan was cheaper?” that Chris H. still doesn’t get the comparison. Pretty scary as it’s been explained countless times on this blog.
Ken
October 25, 2009 at 9:14 am (UTC -6)
Meant to say:
“Look up the rates for a 30 year loan back in October of 2008 and then subtract around .375 – .5% off that rate to find the TRUE comparison of a 20-YEAR LOAN to a SMART loan of that period.”
Dale
November 23, 2009 at 11:36 am (UTC -6)
I would like to see SMART loan amortization schedule compared to a bank amortization schedule with the same numbers. Example: $100,000 at 7.15% with same term.
Dale
November 23, 2009 at 12:02 pm (UTC -6)
Moreover, cash flow considerations are important. ie. lower payments with longer terms may be advantageous until a refi with better terms are available. Ususally 3 to 5 years later. Personal lifestyles directly impact any debt considerations. There is a market for Primerica products. It’s in that strata of credit scores of poor to fair.
Ken
November 28, 2009 at 11:16 am (UTC -6)
Dale,
If the term is the same, the SMART loan wins! But it’s NEVER the same term, that’s the exact point I’m making. The rate/term is ALWAYS higher with the SMART loan, that’s where the smoke and mirrors come from.
On your second post, it seems like you thing the shorter conventional loan has a higher payment, it DOESN’T. When comparing amortization schedules, the conventional loan puts the client in a better position, year after year.
Once again, conventional loan = Shorter term AND lower monthly payment, no crazy closing costs and no pre-payment penalty.
motz34
July 21, 2010 at 1:34 am (UTC -6)
Let’s look at this again:
1. The payment on the loan IS 1436.xx. Those were the original terms being offered to the client. And the true monthly cost of the Biweekly IS as you stated 1556.21 if you did your math correctly. This is the clients choice and was represented as such in the Financial Needs Analysis. The Analysis takes into consideration the true monthly cost IF the client opts into the Bi-weekly plan and compares THAT number to their current outlay of debts. We are not able to do anything but check the box when creating the analysis, thereby making it IMPOSSIBLE for us to change the number that would appear. We simply choose – a. monthly, b. semi-monthly or c. bi-weekly. The computer then autofills based on the input of the terms of the loan. It also then auto populates the other related fields in the Analysis. Even if I WANTED to fraud my customer – which I don’t – let me be clear – I can’t.
Step 2 in closing a SMART loan – a 3 way call with the solution center is DESIGNED to make SURE that the cliet was presented with the correct info. The solution center will not order an appraisal or title work, or go one step further without this call.
Step 3. After all is done with underwriting and all final numbers are in (appraisal, etc), there is ANOTHER 3 way call with the client to confirm once again, that there is no confusion on the part of the agent OR the client.
So, between the responsibility that CitiCorpTrust takes in ensuring the clients understanding and the EXACT terms and payments and closing costs, etc, and the Analysis, I would be hard pressed to hoodwink my client – again, that’s assuming I wanted to, which I dont.
After closing loans for 8 years now, at most, I have seen at the closing table that we were off by more than 3 cents from our last 3 way call with the client.
If you get with a more recent picture, CitiCorpTrust eventually dropped the pre payment penalty, I could name many other fabulous differences, but am done for now. Our process has always been tight. I have sat with hundreds of families that were hi-jacked by the industry – life insurance also – that we were able to make a difference for in a profound, positive way.
I think if we were to chase every possible option, there will always be companies we beat, and companies that beat us when it comes to making a difference. I am proud tho to say that I have never had to “sell” a family something that hurt them to “sell” something. The numbers are the numbers, and I have seen millions upon millions of dollars saved in families pockets.
As to your statement that Primerica takes a 5% cut of all investments, that is incorrect. What you would be referring to is an A share mutual fund with an upfront sales load (which is what an A share is). Any A-share fund has a similar load – wether you bought it in your 401k, thru a brokerage or straight from the fund company. That wasn’t Primerica’s fee. Please look at your facts there. You can google “mutual fund A share” and find that info. It will be listed in the expenses part of any prospectus of an A share fund. Good luck with that.
A proud Primerican.
motz34
July 21, 2010 at 1:38 am (UTC -6)
oops – a typo – corrected as follows:
After closing loans for 8 years now, at most, I have seen at the closing table that we were NEVER off by more than 3 cents from our last 3 way call with the client.
Thanks.
motz34
July 21, 2010 at 1:44 am (UTC -6)
X Primerican – one more comment to post – No, its not a refinance of an existing SMART loan. CitiCorpTrust never doule dipped our clients – in other words, if it was an exisitng smart being refi’d, there were no discount fees associated with the “old money” already once paid for. Therefore, the only discount/origination fees charged would have been on “new money” coming in – for example, paying off debts that were not already paid off in the original SMART. The client would still have to pay appraisal costs, title costs, etc, but not discount/origination fees for “old money.”
motz34
July 21, 2010 at 1:53 am (UTC -6)
X-Primerican, I have never seen closing costs that high in our loans. Please post documented evidence. I had those kinds of closing costs in a $450k loan, but never that high with a lower loan. I always counted on roughly $2500/100k. And no junk fees… and no yield spread…. and and and….
Perhaps Yield Spread would be a good conversation to start? Our clients always got our lowest rates – with full disclosure that thats what they were getting…. Not raised rates with the client having no way to know that happened – as happens in yield spread. If the industry wishes to use yield spread, fine, but the consumer should know about it… not find out by me because I looked at their docs.
No One
August 5, 2010 at 8:02 pm (UTC -6)
“Perhaps Yield Spread would be a good conversation to start? Our clients always got our lowest rates – with full disclosure that thats what they were getting…”
One of my favorites, LOL. You sold clients a 20-YEAR loan at rates that far eclipsed standard 30-YEAR rates. Of course there’s no YSP, it was a bank issuing the loan, not a broker.
So, you’re saying it was okay to SCREW people with rates more than a point over advertised broker 30-YEAR rates (which by the way earned them a YSP) for a 20-YEAR loan, but since there was no YSP on the settlement statement, you did them a good deed?
Thanks for the laugh.
No One
August 5, 2010 at 8:09 pm (UTC -6)
“A proud Primerican.” also said…
“1. The payment on the loan IS 1436.xx…”
“Step 2 in closing a SMART loan – a 3 way call with the solution center…”
“Step 3. After all is done with underwriting and all final numbers are in (appraisal, etc), there is ANOTHER 3 way call…”
“So, between the responsibility that CitiCorpTrust takes in ensuring the clients understanding and the EXACT terms and payments and closing costs, etc, and the Analysis, I would be hard pressed to hoodwink my client – again, that’s assuming I wanted to, which I dont.”
So, verifying with them at: FNA presentation, pre-closing and closing (3 times) that your [30 paid in 20] loan is more expensive in EVERY facet than a 20 year loan makes it ok?
I guess that’s sort of like a contractor telling his client 7 times that the $40,000 he’s charging for the work others would charge $25,000 validates his gouging. That makes sense
)
tammy
August 9, 2010 at 11:18 am (UTC -6)
I have daily simple interest with Citi and it is a headach. My payment is due on the 6th of the month, if I pay it on the 1st this month but on the 6th next month, they charge me interest from the 1st. That is 5 more days of interest they get . This is a rip off to me. They do not tell you this when you apply for loan. What is this?
Math primerica potential
August 5, 2011 at 11:05 am (UTC -6)
Ken:
The reason why the amount paid is more than exactly 1436.50 per month is because the client has decided to pay biweekly. There are more than exactly 4 weeks for each month. So, there are 2 extra payments each year. If you add these 2 extra payments, the total for the year is 18,674.50. I would hope that this would be made clear by Primerica, but even if it is not, it is very easy to figure this out.
Ken
August 9, 2011 at 8:49 am (UTC -6)
I’m fully aware of how it works. Re-read the original post, specifically under the last PDF where it says:
“Subsequent payments $718.25 * 26 payments =18674.50 divided by 12 = 1556.21 (This is the true monthly outlay on this loan)”
Brian
October 11, 2011 at 3:09 am (UTC -6)
While looking at this, I do agree that it is more intelligent to take the Local bank loan over the Smart loan, but the point of Primerica Financial services is to find you outs (not even the cheapest outs). If Bank of America offers you a lower rate and Primerica offers you a higher rate then you should take the Bank of America Loan. This is obvious =P
Primerica showed you a loan number and broke down your financial report for you, that is all =P
Primerica and the end of the SMART loan | Chris Wondra . com
October 25, 2009 at 7:39 pm (UTC -6)
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