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millennial mortgage shopping

Three reasons millennials don’t shop for mortgages

It never fails.  Millennial buys a home, thinks all is good in the world and only then realizes they just got taken to the cleaners on their mortgage.  They are then stuck in a loan with an unnecessarily high payment every month for years to come. How did they end up in that situation?  Why didn’t they take time to explore mortgage options?  Here are the top three reasons millennials don’t shop for mortgages.

1. “I was scared by my real estate agent”

A millennial may never admit it, but they are subject to human emotions just like the rest of us. When it comes to a big purchase, such as a home, it is human nature to want to avoid risk. Some agents take advantage of this and inject questionable statements like this:

  • “Our in-house lender is always the best.”
  • “Her service is great and she’ll be at closing, nobody else ever does that.”
  • “Those online lenders, stay away!  They’ll never close on time!”
  • “Our in-house lender will shop rates for you, you don’t need to.”

Facts: Discouraging a home buyer from mortgage shopping is 100% unethical – and could even be illegal!  There are many incredible loan originators out there and many attend closings regularly. A single lender or broker can’t shop mortgage rates for you (learn why).

To understand why a real estate agent may steer a borrower to a specific lender, let’s follow the money!

The money trail

A real estate agent makes money when a house is sold or bought via commissions. The rate and loan program obtained by the homebuyer is irrelevant to the real estate agent’s income.  Their primary goal is to get the transaction done.  Until that moment, they haven’t earned a penny.

Additionally, many real estate agents have co-marketing agreements with specific mortgage lenders, brokers or loan originators. If these mortgage professionals don’t see an ROI on their investment of marketing dollars, the real estate agent stands to lose at least part of their marketing presence.  Therefore, the real estate agent wants to “feed” the mortgage professional to continue the financially beneficial co-marketing arrangement. 

With these in mind, is it any wonder that an agent will aggressively push you to a specific lender or mortgage broker?

Not all agents are the same

While many tech disrupters offering flat fees or “no-commissions” on real estate sales solves some of the problems, one major money problem remains.  Despite the removal of commissions, real estate agents may still be receiving funds from a mortgage broker or lender in the form of a co-marketing agreement or “MSA”.  This means they will still push a homebuyer to a specific lender, robbing them of the opportunity to shop for their mortgage.

How can this problem be solved?  You simply need to find an ethical real estate agent who isn’t “hooked” on the money coming from one specific lender.  Before you legally engage with any real estate agent, simply ask this question: “Do you receive money from any specific mortgage broker or lender?”

If the answer is “yes”, walk away and find someone else who will be just as interested in helping you save money on your mortgage as they will in finding you the house of your dreams.

2. “I used an app”

Every lender claims to have the tech to close your loan faster than you can say “mortgage transaction.” Can they really?  And if they can, who is actually the winner of this perceived huge investment in technology?  Do lenders make these massive investments purely for the consumer experience?

No, they sure don’t.

Fact: The shorter your loan is in processing, the lower the likelihood you’ll shop around or be solicited by other lenders and brokers.

Avoiding competition is a good thing for mortgage lenders and brokers, but not consumers.  When a millennial decides to not consider alternatives, voluntarily or involuntarily, the lender or broker wins.  The government has been fighting to help consumers shop for years, instituting more robust disclosure time periods and new documents – but the tech industry has quickly outpaced any government intervention.

Tech helps you shop too

Fortunately, the digitization of mortgages has made mortgage shopping easier provided you can avoid the common pitfalls.

Pitfall 1: Sharing your name, email and phone number with shopping sites who send it to multiple lenders.  This will get you bombarded with calls and you’ll wish you never uttered the words mortgage.

Pitfall 2: Shopping over the course of several days.  Rates change every day, so an apples-to-apples comparison is always essential.

Pitfall 3: Shopping while uninformed.  We tend to consider the use of a mortgage concierge a good thing but hey, we may be biased 🙂

Solutions to mortgage shopping

So, how can this problem be solved?  Fair warning, the answer may require that you have a conversation with an actual human at some point who isn’t your parent or friend who doesn’t know a lick about mortgages.

Solution 1: Our particular solution is to use MortgageCS’ concierge program which is free and provides education and insights from day 1 of your shopping through your loan closing.

Solution 2: Other options are becoming a mortgage expert by holding numerous conversations with many banks, lenders, and brokers all while resisting the urge to have your credit pulled numerous times and getting bombarded with follow-up calls and emails.  Grow thicker skin and don’t be afraid to say “no” and you’ll be all set here.

3. “I am subject to advertising”

It may be hard to admit, but marketing messages can impact everyone – even tech-enabled millennials.  From TV spots to billboards and creative event sponsoring, mortgage companies are investing more and more each year to maintain scale and keep their operations growing.  After all, they have an investor base or shareholders to keep happy.

Remember this: A mortgage is a single transaction, creating a predetermined amount of income. It follows that a company with lower costs and all else equal could deliver a better mortgage rate and fee structure.  While company size and other factors can sometimes influence this, you should read this first: Do mortgage brokers act in their customers best interest?

Now that you know the three reasons millennials don’t shop for mortgages – you can ensure you don’t fall victim to the same influences!

Share this to help your friends – they can use their savings to take you to a nice dinner one day!

Compare HELOCs using a margin

Why margins matter in a HELOC

Let’s take a look at what a margin is and why margins matter in a HELOC (Home Equity Line of Credit).  For the purpose of this post on April 20th, 2018, we’ll be using the HELOC page found here.

HELOC margins range

What we see on the HELOC page is that margins can range quite a bit. In some cases, margins are as low as -1.25.  Other margins show as high as +1.00.  What does this mean when it comes to a HELOC and why is it important?

A real-world HELOC example

Let’s take a look at an analysis for a client that may be interested in obtaining a $100,000 line of credit.  Here it is:

 

In this particular analysis, we will be comparing a “High Margin” and “Lower Margin” line of credit.   In both cases, the Prime Rate is the same because it is not set by the bank.  The margin, on the other hand, is set by the bank offering the line of credit.  This is where you see a range of options.

The High Margin HELOC

The High Margin HELOC shows a margin of 0.50 percent.  When we add this number to the prime rate, we can see that our effective interest rate is 5.25%.  This interest rate will be charged until the prime rate moves up or down.  Any movement in the prime rate will simply move the Interest Rate by the same amount.

In this specific case, a client borrowing $100,000 at a 5.25% rate will need to pay $437.50 each month.

Lower Margin HELOC

When we compare the lower margin line of credit, with a margin of -1.25%, we see that the same client may end up paying just $291.67 per month.  This lower margin results in a savings of nearly $146.00 each month.

2018 Tax Rules may make this more important

Historically, any interest associated with a line of credit could be written off against income. Said another way, a homeowner who obtained a line of credit wasn’t “really” paying the interest rate they were given.  This is because they were able to deduct the interest payments from their earned income and receive a tax refund as a result.

The new tax laws starting in 2018 have changed the laws for HELOCs.  Now, there are many instances where the interest paid towards a HELOC may no longer be tax deductible. Due to this, it is more important than ever to consider savings that may be available from a HELOC with a lower margin.

HELOCs for Wealth Management Clients

Next, let’s examine a $250,000 Home Equity Line of Credit.

 

 

The same margins from above show that a savings of $364.58 is possible between a high margin HELOC and lower margin HELOC.

Cost and Shopping HELOCs

Home Equity Lines of Credit are easy to obtain and the costs to obtain them are either $0 or less than a few hundred dollars.  All else equal, it is important to understand how shopping the margins between HELOCs can have a substantial impact on monthly free cash flow.

If you’d like to evaluate lines of credit in the Philadelphia area, go here.

Home Equity Line

How does a Home Equity Line Of Credit work?

When it comes to home finance, it pays to know your options. Homeowners looking to access cash often use a Home Equity Line of Credit (HELOC, for short). How a Home Equity Line Of Credit works is different than a traditional mortgage.

Let’s take a look at how they work and what they can do for you.

What is a HELOC?

A HELOC is a common type of second mortgage. Homeowners obtaining a HELOC often have a need for additional cash.  Typical uses are debt consolidation, home remodeling or accessing cash to purchase another property.

A unique structure

HELOCs are different because they have a unique structure. For the first 10 years, the loans are in a draw period.  During the draw period, homeowners can access any portion of the available cash on demand and pay only the interest on the funds in use each month.

During a draw period, homeowners can also pay back funds at any time.  If more cash is needed, the funds which were recently paid back can be accessed again.  In this sense, a HELOC is similar to a credit card.  Different from a credit card, however, HELOCs come with relatively favorable interest rates (only slightly above traditional mortgage rates).

Adjustable rates

HELOCs also come with adjustable rates that follow the prime rate published in the Wall Street Journal. Rates can vary each month and will be impacted by the prime rate and the margin (more on margin in a moment).

When the draw period ends after 10 years, a payback period begins. During the payback period, funds can no longer be accessed from the HELOC. The outstanding balance is converted to a regularly amortizing loan spread over 20 years.  Said another way, the balance is converted to a “normal” 20-year mortgage.  At the start of the payback period, the interest rate is typically fixed and will remain so during the next 20 years.

Shopping a HELOC

Virtually all banks, lenders and credit unions will use the prime rate as the core component of determining the interest rate during the draw period.  This is called the “index.”  A bank will also set a “margin” for the draw period. Banks may offer a promotional margin for an initial period.  For example, a bank may offer “Prime minus 0.50% for 6 months, then Prime plus 0.25% onwards.”

In this case, if the prime rate is currently 5%, the initial rate will be 4.5%.  It is important to note that if prime increases, so will the effective interest rate.  The promotional margin simply reflects a relative adjustment to the published prime rate.

Why a HELOC?

There are several reasons why you may consider a HELOC over a traditional refinance.

Maintain your great interest rate

It is no secret that mortgage interest rates have increased since their historic lows.  While they may still be low, rates in the 3% range aren’t coming back anytime soon.

Homeowners looking to access additional cash may be hesitant to refinance out of their low rate – and rightfully so!  The HELOC, as a second mortgage on the property, is a great option to maintain your first loan and still gain access to cash.  As a second mortgage, the loan operates independently of any first mortgage on a property.

Low costs to obtain

The transaction costs associated with a HELOC are significantly lower than a traditional refinance. The costs of a HELOC are typically limited to an appraisal (around $350).

In contrast to a traditional refinance that involves an appraisal, title charges, lender charges and other fees, HELOCs come out as a far less expensive option.

It is worth noting that many banks offering HELOCs will also require a borrower to open a checking account. If it is not a requirement to obtain a HELOC, it is often a requirement to obtain the promotional rate.

Flexibility

The flexibility provided by a HELOC during the draw period makes them extremely advantageous. In addition to the flexibility of taking money on demand, the flexibility to pay it back and draw again is unique. This is in stark contrast to “closed-ended” mortgages (like your first mortgage) where payments are made and funds cannot be withdrawn.

Flexibility also comes in the form of lower monthly payments.  For most HELOCs, the minimum required payment is equal to the interest accrued during the prior month. In contrast to a traditional mortgage that requires interest and principal, HELOCs provide for a significantly lower payment.

HELOCs also allow some or all of the principal balance to be paid off at any time with no penalty (unless stated otherwise in their terms). This feature allows HELOC borrowers to use them for short-term cash needs – such as cash to purchase and flip a house or buy a car.

Qualifying for a HELOC

Qualifying for a HELOC is similar to most traditional mortgage products.

A homeowner looking to obtain a HELOC will need to have good credit, documented income and some type of assets for reserves. Additionally, banks will require that the total amount borrowed against the home does not exceed 80% (or in some cases 90%) of the home value.

HELOCs can be a flexible way to obtain cash without disrupting a current first mortgage. With mortgage rates inevitably rising in the future, HELOCs will certainly maintain their place as a viable home financing product.

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Refinance when rates are up

Refinance when rates are up? Maybe.

Refinancing when mortgage rates drop is usually an easy decision.  A reduction in payment and the advantages of paying less interest can make great sense.  What happens when rates increase?  Does it ever make sense to refinance when rates are up?  The answer is “maybe.”

Let’s take a look at how amortization can be used to win when rates are up.

Amortization

In addition to the interest rate and loan amount, the loan term impacts your monthly mortgage payment.  Most mortgages are spread over 30 years or 360 months.  In these cases, the loan is amortizing across 360 payments.  The shorter the amortization time, the higher the payments will be when all else is held equal.  This is because the same debt will need to be paid off in a shorter period of time.

For an extreme example, assume you pay $100,000 in 10 equal payments.  Without any interest at all, you will pay $10,000 per payment.  Whoa. When the payment schedule is set to 360 months, the amount drops to just $278.  This, again, is without factoring in interest. The same loan amount spread over more months results in a lower payment.

Amortization can benefit you

When it comes to understanding how amortization can benefit you, an example speaks mountains of truth.  Let’s examine the pros and cons by looking at the Smith family’s options.  (Note: the Smith family is fictitious in this case).

Amortization Example

The Smith’s purchased their home ten years ago.  At the time, the home was valued at 300,000 and they put $60,000 down.  As a result, they started with a $240,000 mortgage.  Their mortgage broker was able to obtain a rate of 3.5% for a 30-year mortgage.  Their monthly mortgage payment has been $1,078 for the last ten years.  This amount does not include real estate taxes or homeowners insurance.

The Smith’s have been making regular payments without contributing extra on a monthly basis. As a result, the Smith’s have $185,000 remaining to pay in the next 20 years.

Increasing cash flow with a refinance

The Smith’s have decided it may be time to refinance. They wonder if reducing their monthly mortgage payment is possible.

They learn a new mortgage at 4.375% is available. The new mortgage doesn’t require the Smith’s to pay anything out of pocket but will increase their loan to $187,000 to cover some closing costs.

If the Smith’s obtain this new loan, they’ll reduce their mortgage payment to $933, saving about $145 each month.  While the Smith’s are interested in freeing up $145 each month, they wonder what else they have to consider when increasing cash flow in this way.

Extending the loan term

In the example above, the Smiths have determined they can save nearly $150 each month if they were to refinance.  They wonder if any issues exist with extending the loan term.

Each family’s timeline and needs are unique.  As a result, there is not a single answer to this question.  Let’s examine the Smith’s again to see what they come up with.

The Smith’s have lived in their home for ten years.  Now, with children in 3rd and 4th grade, they realize they’ve got just 12 years left until they are “empty nesters.”  At that time, they plan to move to a smaller home on the coast.  In light of this family plan, the Smith’s elect to continue with the refinance transaction.

Regardless of being in their old loan or a new loan, extending the loan term is not a major concern.  This is because they plan to sell their home prior to either mortgage being paid off in full.  The Smith’s elect to save $150 each month today because that was the best choice for them.

For more on saving money on mortgages – take a look at this recent post.

 

Purchase Mortgages MortgageCS

3 keys to understanding purchase mortgages

Wondering how to buy a home and don’t know where to start?  You aren’t alone in your quest to understand the home-buying process.  Those looking to buy a home can quickly become overwhelmed resulting in burnout.  The best way to avoid information overload is to walk before you run.  Here are the 3 keys to understanding purchase mortgages.

Key 1: What is a mortgage?

A mortgage loan is a loan that is used to purchase a home.   A borrower will obtain a mortgage from a bank or other lending institution in lieu of using all cash to purchase the home.  Just as someone could finance the purchase of a car, would-be homebuyers can finance the purchase of a home.

When a mortgage is used by a borrower, the bank or lending institution will place a lien on the property’s title.  This is not a bad thing! When mortgages are secured by a home’s title, they become less risky.  Lower risk means the banks will offer more favorable interest rates when compared to personal loans that are not secured by any property. Lower interest rates will translate into lower payments, and that is a great thing!

The exact term “mortgage” refers to a specific document that is created and recorded as a public record:

A mortgage is a legal document creating a lien on a property after an agreement is reached between a borrower and lender. The mortgage becomes a public record document at the county’s office and secures a property as collateral in consideration for funds borrowed.

How does a mortgage help homebuyers?

Without mortgage loans, buying a home with cash would be the only option. Yikes!

With mortgage loans, buying a home is much more manageable. Would-be buyers will use cash to pay only a portion of the home’s purchase price.  This is called the down payment.  It is also typical that a buyer will pay at least a portion of the closing costs out of their cash.  Take a look below for a simple example regarding a $200,000 home purchase.

Purchase mortgages

 

In the example above, purchasing a $200,000 home results in a $160,000 mortgage and $50,000 cash required at closing.  This $50,000 includes $40,000 for a down payment and $10,000 as closing costs.

Key 2: What is a debt ratio?

Debt ratios matter a great deal when qualifying for a purchase mortgage.  The bank or lender requires proof that you can manage your soon-to-be housing payment. They’ll look for this proof by comparing your monthly debts to your monthly income and establishing a debt ratio. Your monthly debts will be obtained from your credit report and your monthly income will be calculated using paystubs and recent W2 statements.

Once a debt ratio is calculated, it is typically converted into a percentage. A debt ratio that is too high will either restrict the loan programs you may have access to or disqualify you completely. Yikes!

Two different debt ratio calculations?

The front-end debt ratio examines all debts except for those associated with the new housing payment. The back-end debt ratio will examine all debts and include a soon-to-be housing payment. A back-end debt ratio below 43 percent is typically low enough to have access to virtually all loan programs. Once a debt ratio exceeds 43 percent, loan program availability will be reduced drastically.

 

MortgageCS Debt Ratio

Debt Ratio Example

Assume you earn $10,000 monthly and have a car payment of $400 and student loan payments of $400 each month.  Your front end ratio will be ($400+$400)/$6,400 = 12.5%.  This number is far below the typical requirement of 31% for FHA loan front-end debt ratios.

Add in a new housing payment of $1,600 and the back-end debt ratio becomes ($800 + $1,600)/$6,400 = 37.5%.  This ratio is approaching the limit for of 43% but still within a reasonable range to obtain access to most loan programs.

Important Tip: When calculating a debt ratio, mortgage lenders will use gross income (income before taxes). 

Key 3: What goes into a mortgage payment?

A monthly mortgage payment is typically made up of four key components: principal, interest, taxes, and insurance. These four items are commonly referred to as PITI.  Phonetically, PITI is pronounced “pity.”

PITI explained

Principal and interest will be calculated based on your starting loan balance and the interest rate associated with your loan.  Taxes refers to the real estate taxes associated with the property.  Insurance refers to the cost of the homeowners insurance required to protect the property. Homeowners insurance is a requirement when a mortgage is used to buy a property.  This is because the mortgage lender needs to ensure the collateral (your home) is protected.

 

Mortgage PITI

 

If you put down less than 20 percent of the purchase price when you buy a home you may need to add mortgage insurance to this number.  You also may need to add monthly association dues if you purchase a condo, townhouse or any property included in an association.  Since you know the basics of PITI now, these are simple to add to your monthly required payment.

What’s next?

You now have a firm understanding of mortgages, debt ratios and the components of a mortgage payment. Armed with this information, you can now continue your learning with ease – good luck!

save on your mortgage payment

Reduce your mortgage payment in 2018: 3 options

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Taking steps to improve financial wellness is a resolution for many of us. Families want to save more and spend less. Between student loan debt and cell phone bills, it can be challenging to find opportunities to save. Homeowners, however, may have several options within reach.  These are the three ways to reduce a mortgage payment in 2018.

Reduce your mortgage payment: 3 options

Want to spend less on your mortgage each month? Sure, who wouldn’t!?  There are a few ways to obtain relief.  Each option has important short and long-term considerations.

Re-cast your mortgage loan

Re-casting a mortgage restarts the mortgage term. Imagine for a moment that you have paid the first ten years of your 30-year mortgage. You will have just twenty years remaining. A recast would spread your remaining balance over thirty years rather than the current remaining term of twenty years. The result is a lower monthly mortgage payment.

Re-casting is different than refinancing.  A re-cast can only be done by the lending institution currently servicing your mortgage loan. It may involve a pre-paid interest fee or “re-cast” fee. The charge is typically far less than the cumulative fees associated with a traditional refinance transaction. Another important difference is that a re-cast will typically not require an appraisal.  For those that purchased a home at the peak of the market, this may be an important consideration.

Re-casting a mortgage loan will reset the mortgage amortization schedule.  [Why this is important] Using the example from above, you would extend your mortgage payments for ten additional years. Rather than paying your slightly higher mortgage payment for twenty years, you’ll pay a lower amount for thirty years. This can make sense for many, particularly those who are likely to move in less than twenty years.

Eliminate mortgage insurance

Mortgage insurance can be required on conventional mortgages or FHA loans. Homebuyers who currently pay mortgage insurance may be able to eliminate the requirement, saving money each month.

Homeowners interested in removing mortgage insurance must meet certain criteria. Depending on the type of loan, the current balance must be equal or less than seventy-eight or eighty percent of the home value. Said another way, homeowners will need to have at least twenty percent equity in their home. Because mortgage insurance can cost $100 or more, this can be a great way to free up cash flow.

The process of eliminating mortgage insurance involves interaction with your current servicing company. By speaking with them, you’ll learn what is needed and how much it may cost.  Your loan servicer may require an appraisal to confirm the current value of your home.  Your loan servicer may also use the value of your home at the time of purchase. Eliminating mortgage insurance is a simple way to save money each month.

Refinance your mortgage

Reducing a mortgage payment is most commonly achieved with a rate and term refinance. Homeowners will often reduce interest rates and extend loan terms providing for substantial monthly savings. Refinance mortgages are also flexible, allowing many goals to be achieved in one transaction.

The most common way to save money with a refinance is by lowering the interest rate.  All else being equal, a lower interest rate will require a lower monthly payment.  Since 2007, rates have remained relatively low which means most mortgages are already in the 3.5% to 4.5% range.  If your mortgage is in this range, you may not save money by reducing the interest rate alone.

Similar to a re-cast, refinancing into a longer term may also save you money each month in the short term. Similar to the example above, a loan extended from twenty years to thirty years will have a lower monthly payment with all else being equal. Extending the term of a mortgage can save you money each month even when the new interest rate may be higher than your current rate.

When refinancing a current mortgage, it is important to factor in the costs of the transaction as well as the long-term impacts. For example, those within twenty years of retirement may not benefit by obtaining a new 30-year mortgage loan. Additionally, a monthly savings of $50 or $75 may not be enough to warrant a rate and term refinance.  Each mortgage scenario is different, and several variables can impact the options available.

There you have it! Three ways to reduce a mortgage payment in 2018.

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Mortgage Down Payments

Mortgage down payments

At first glance, it may seem as though large mortgage down payments and short loan terms are the key to saving money on a mortgage, but each of these decisions has its own benefits and shortfalls. We can help you put them in perspective so you can make the best choice with respect to your circumstances.

Deciding on a loan and mortgage down payment amount for your upcoming home purchase isn’t always easy. Several factors can impact which loan program you can, or should, use. Understanding options early on is a great way to save time and be sure you start the loan process in the right direction.

Review Your Finances And Credit

With so many types of loans and down payments available, how do you know which one is right for you?

Start by being honest with yourself about your finances.

How much money do you have for the mortgage down payment and closing costs?

Keep in mind that you need to save about 3% of the cost of the house for closing expenses. While you won’t need a down payment for VA and USDA loans, you will typically need a 3.5% down payment plus closing costs for FHA loans, and 5 to 20% down plus closing costs for conventional loans. A recent report from Ellie Mae found that the median mortgage down payment amount is 5% today, compared to 20% just 10 years ago!

To put that in perspective, a family buying a $400,000 home would have put down $80,000 10 years ago and just $20,000 today.  Quite a difference!

Have you taken care of your credit?

If your credit score is less than 620, you will not qualify for a conventional loan. If it is less than 740, your conventional loan interest rate will be higher than it could otherwise be. FHA requirements allow someone with a lower credit scores to purchase a home, as do other government-backed loans. Regardless of the loan program, a higher credit score is always better – so do what you can now to ensure you have the highest score possible when it comes time to obtain your mortgage loan.

Look At The Timing Of Loan Processing

Government-backed loans may require more inspections than conventional loans. Because of this, they could take longer to process. If you need to move in a hurry, government-backed loans may present unnecessary challenges. Remember that missing or out-dated paperwork is one of the top reasons for loan delays. So, be sure to stay on top of your documentation to ensure a smooth closing.

Look At Savings And Opportunity Costs

You may have a 20% down payment saved along with closing costs, but do you really want to spend it now? For conventional loans, you can put 20% down and avoid private mortgage insurance (PMI).  But you can also put as little as 5% down with PMI. Let’s look at an example to understand the costs and benefits of these two programs. For this example, we’ll consider these two options when purchasing a $250,000 home using a 30-year fixed rate loan at 3.5%.

Option 1: A $50,000 (20%) mortgage down payment results in a $200,000 beginning mortgage balance. This will translate to a $898 monthly payment in principal and interest.

Option 2: A $12,500 (5%) mortgage down payment results in a $237,500 beginning mortgage balance. This will translate to a $1,167 monthly payment in principal, interest and mortgage insurance.  Mortgage insurance makes up $101 of this total payment.

Many people would want to pay less per month, so they would choose the first option. However, that in order to save $269 a month, you would have to reduce your savings by $37,500! At $269 a month savings, it will take you 139 months—almost 12 years—to recoup this money. That’s a lot of time to live without a substantial nest egg!

Then, you have to look at opportunity costs. Said another way, what else might you want to do with this money? Perhaps you’ll be able to easily agree to a attend a friend’s destination wedding? Or maybe you’ll have the opportunity to buy the sailboat you’ve always wanted.  Maybe you are more practical and the money could be better off in an investment account? Regardless of what you do with it, the $269 a month savings has an opportunity cost worth considering.

Look At Length Of The Loan

Should you apply for a 15-year or a 30-year mortgage?

After looking at the numbers, most people agree the substantial savings in interest makes a 15-year loan an attractive option. In reality, affording a 15-year mortgage is more difficult and may result in being house poor, meaning that you can afford your house but little else.

Think of the opportunity costs associated with selecting a shorter term loan with a higher payment: A higher monthly housing payment results in less funds for investments, smaller retirement accounts and less resources to support a growing family.

Also consider how long you intend to stay in the home.

If you feel confident that you will remain in the home for years to come, then a shorter loan might be worth the interest savings. [See more here] On the other hand, if you plan to move on quickly, it might be better to use the monthly savings that comes with a longer term loan towards other things, even if it means simply saving the money for your next move.

If you aren’t sure, you can always go with a 30-year mortgage and make larger payments to pay off the loan faster.  Following a 15-year schedule by paying extra payments gives you a shorter loan with the flexibility to fall back to a 30-year schedule if needed. Remember that in these cases, once you pay money into your mortgage you need to “ask” for it back by applying for a new loan or second mortgage to access the equity.

With so many options available, it is important to compare rates and programs. In this way, you can determine which combination works best for you. At today’s low rates, you are sure to find many good choices so it is hard to go wrong!

Mortgage Shopping Confidence from MortgageCS

Gain mortgage shopping confidence

Mortgages can seem complicated and intimidating, particularly in a world when we can “one click order” online.   How can you find out what you don’t know…but really should? How can you increase your mortgage shopping confidence?

When consumers shop for mostly anything, they evaluate the item or service they’re considering based on a predetermined set of criteria. Some considerations are easy, while others are more complicated. Mortgages tend to fall into the latter category. This is typically due to the intimidation factor and the perceived complexity of the product.

Mortgage loans come with an inherent, internal language the everyday consumer rarely encounters. If you wandered around a mortgage company, you’d hear phrases such as, “Where’s that VOD?” Not surprisingly, many of these phrases would be meaningless to you.

On the other hand, when someone decides they want to go out for a coffee, the choices are a bit more familiar sounding, and the decision most likely boils down to a matter of location and price. It’s pretty simple. While loan officers might wish the mortgage process were as easy as ordering a cup of coffee, it’s typically not.

Due to the varying factors of a mortgage transaction, borrowers should compare lenders based upon quoted interest rates and responsiveness, quality and trust. Consumers should approach mortgage education by explaining their needs and what they are looking to accomplish.

In this manner, they can find out more about the lender’s mortgage process and how loans are issued.

Finding a good mortgage loan officer

There is plenty of material online about how to shop around for the best deal on a mortgage. Certainly you want the best rate at the lowest cost, but you also need to consider the reputation of the companies you’re interviewing. But perhaps the process needs to be reversed.

When you call a loan officer and ask about a rate quote, the loan officer knows there’s competition.  He then provides the best available offering without considering all the details. The loan officer doesn’t have any reason to thoroughly evaluate your situation, so he falls into an all-too-familiar trap.  He provides a quote to win your attention potentially resulting in a bait-and-switch.

Here’s the problem with that: The quote alone doesn’t help lift the veil off the mortgage process or account for long term needs. It won’t ensure consumers make the right loan choice.  It won’t ensure that you come away from the closing with a clear understanding of what’s just happened and why. Yikes!

How can you, as a consumer, know what to ask to gain mortgage shopping confidence?

The surest path to pure mortgage nirvana is by communicating openly with the loan officers to facilitate learning early. This will be the best way to increase your mortgage shopping confidence.

Instead of considering only the interest rates, you should include a description as to what you are looking for.  Here’s an example: “Here’s my situation. I want low monthly payments, but I also want to save on long-term interest. I’m retiring in about 15 years and I want to be mortgage free.”

With this information, the loan officers know to quote you a rate on a program that matches your goals.  Surprisingly, that doesn’t necessarily mean a 15-year fixed rate loan.

A loan officer could suggest a 20-year loan, and set up a payment schedule that allows you to prepay just a little bit each month.  This would give you the security of a lower payment if ever needed. The extra payment would be applied directly toward the loan balance and would not go to interest.

Did you even know a 20-year loan was an option? Probably not, because most information you read is about either 30- or 15-year fixed rate loans. Instead of asking for a 15-year fixed rate and the associated fees, try explaining your current situation and what you want to accomplish.

Experienced loan officers know to include this information automatically, but unfortunately most get into a rate-and-fee game, leaving borrowers confused.

Another mortgage shopping example

“I need a quote for a duplex I’m thinking of buying.”

The loan officer answers and even sends a cost estimate showing how much down payment you will need, along with a list of anticipated closing costs. You get your quote, hang up and dial another mortgage company. Doesn’t that sound like fun? NOT!

Instead, how about saying: “I’m going to buy a duplex and live in one of the units. The current rent for each unit is $1,500 per month. I want the rental income to cover my mortgage, property taxes and insurance plus a little extra cash each month.”

Now, that’s a plan. Your loan officer will explain your options and what your monthly payments will be. He’ll also help structure a prepayment plan to retire the mortgage sooner, saving you long-term interest.

The loan officer in the second scenario will explain why each option is offered and how it meets your requirements. You may not have known how much your payments would be or whether the rental income could cover your mortgage payments.

You also may not have known your interest rate would be better because you plan to live in the property rather than renting it. By the end of the conversation, you’ll know how mortgages work and how they can be crafted around your exact situation.

Mortgage Shopping Confidence

By communicating your goals along with your rate request you’ll WIN at this process we refer to as the mortgage maze. You’ll also end up comfortable with the loan program you’ve selected. Now THAT is a WIN because you’ll increase your mortgage shopping confidence!