7 striking similarities between Mortgage & Home Air Conditioner Shopping

If you have ever shopped for a new home air conditioner, you know how time consuming the process can be. Likewise, if you have recently shopped for a mortgage, you probably spent a good deal of time learning and considering your options.

On the surface, these industries are far and apart. After all, a mortgage is a financial product and air conditioners are physical products used to increase home comfort.  Upon closer look, the process of shopping for these two products is strikingly similar.

Here is a toe-to-toe comparison detailing the shocking similarities.

Looking for tips on how to get the best results when mortgage shopping? Check out this recent post.

 

Purchase Mortgages Part 3: What goes into a mortgage payment?

When it comes to buying a home, it isn’t just the loan amount and interest rate that will impact your monthly payment. Additional items such as property insurance and taxes can increase a required monthly payment by as much as 35%.  If you are planning to put down less than 20%, you’ll also want to factor in paying for mortgage insurance each month.

What goes into a mortgage payment?

The good news is that virtually every mortgage payment is made up of the same key ingredients. They are principal, interest, taxes and insurance. These four items are typically referred to as PITI – which, when spoken, sounds like “pity”.

The bad news is that certain factors of your monthly payment will not be within your control.  Namely, the property taxes and property insurance. These factors can change (likely increase) over time and will usually be paid each month along with the principal and interest on your loan.

When you are shopping for a home, keep your eye on the amount of property tax required each year.  Property tax amounts can vary between properties and across state, town or county lines.

Now that you are armed with a better understanding of PITI, be sure to understand the basics of a mortgage and learn about debt ratios.  Once you have a handle on these three topics, you’ll be well on your way to becoming a savvy mortgage shopper and homeowner.

Looking to get your mortgage shopping started (or double check your rate and program)?  Ask your Realtor for access to MortgageCS so you can shop your mortgage terms without the requirement of giving up your personal contact information (and save 90% of the time it takes to shop elsewhere!).

Related Posts in this Series

Part 1: What is a mortgage?

Part 2: What is a debt ratio?

 

Purchase Mortgages Part 2: How much can I afford?

When a mortgage lender qualifies a borrower, they will examine income and monthly debts to establish a debt ratio. If you are wondering what a debt ratio is, and how it is calculated, take a look at this graphic and read on.

Mortgage Debt Ratios

A debt ratio compares monthly debts to income and then generates a number that is usually converted to a percentage. If your debt ratio is too high, you may not qualify for certain loan programs…or worse, may not qualify for a loan at all!

Lenders will typically run two different debt ratio calculations. The “front-end” ratio will examine all debts except for your housing payment. The “back end” ratio will examine all debts and include a soon-to-be housing payment.

For the purpose of this introduction, the graphic below considers only the “back-end” ratio which includes the soon-to-be mortgage payment in the calculation.

Let’s also take a look at an example. Assume you earn $5,000 each month and have a student loan payment of $400 and a car payment of $250 each month as well.  Your front end ratio will be $650/$5,000 = 13%.  This number is far below the typical requirement of 31% for FHA loan front end ratios.

Now consider adding in your new housing payment (including the mortgage payment, taxes, insurance, and mortgage insurance) of $1,500.  Including this debt will generate a back end ratio of ($650 + $1,500)/$5,000 = 43%, the limit for most FHA back-end ratios.

Tip: Remember to use gross income when it comes to calculating a debt ratio. Gross income is the amount of income BEFORE taxes and other items, such as health insurance or 401k contributions, are taken out. 

In part one of this series, we learned a bit about the relationship between the purchase price, down payment and loan amount of a purchase mortgage. Now that we have a better understanding of debt ratios, we will take a look at what actually makes up a mortgage payment – and it may be more than you think!

Related Posts in this Series

Part 1: What is a mortgage? 

Part 3: What makes up a mortgage payment?

Purchase Mortgages Part 1: What is a mortgage?

If you are looking to purchase a home this spring or summer, you may be searching for an easy way to learn about your mortgage options. Or, you may be wondering what a mortgage is and know nothing about them at all!

Regardless of your current knowledge base, a quick primer on purchase mortgages can save time, money and quite a bit of frustration!  

In this series of posts, we’ll cover three concepts using real numbers and supporting images. The goal is to give you a clear understanding of purchase mortgage basics – so you can easily apply new learnings as you continue your journey! Now, let’s get started!

What is a mortgage?

When it comes to purchasing a home, you’ll need to pay the current property owner for the home and cover the related costs associated with the sale transaction. Understanding how the closing costs, down payment and loan amount are related to the home sale price is an important first step in understanding purchase mortgage options. 

If you are looking for a more technical definition, please read on.

A mortgage is legal document that creates a lien on a property after an agreement is reached between a lender and a borrower. The mortgage is recorded as a public record document at the local county’s office and secures the subject property as the collateral in consideration for a loan. 

Now that we know a bit more about the cash needed to buy a home and how those funds will be allocated, it is time to examine home affordability by taking a look at something called a debt ratio.

Next Up

Part 2: How much can I afford? 

Part 3: What makes up a mortgage payment? 

Prequalification letters: How they help you, your Realtor and the seller

If you are searching for a home this spring, you’ll need a prequalification letter to prove you have your finances in order. Without one, your offer to buy a home is likely to fall flat, very flat.

So, what is a prequalification letter (aka “prequal”) and why is it so important? Let’s take a look at three different perspectives to understand how this one document can play such an important role in kicking off a real estate transaction.

Prequalification letters guide the mortgage borrower

The term “mortgage borrower” refers to you. When you purchase a home, you will likely require a mortgage and therefore, you will become the mortgage borrower. So how much can you actually borrow?

While we could break out the calculators and scratch paper (or Excel), there is no need to because the lender handles it all. Said another way, the lender that prequalifies you will ask a series of questions and obtain your credit report. This process allows the lender to create a prequalification letter that includes, among other things, your maximum loan size.

Note: While the maximum loan size is great to know, please do not confuse it with being anything other than just that – a maximum. Be sure to budget your own finances to ensure you can comfortably manage your new monthly mortgage payment.

In summary, a prequalification letter for a mortgage borrower provides the confidence to know (preliminarily) that they can qualify for the mortgage amount needed to purchase a particular home.

Realtors identify serious shoppers

Having a prequalification letter in hand when first connecting with a Realtor indicates you have done your homework and are a serious shopper. Without a prequal letter, there is virtually no way for a Realtor to confirm (or deny) your ability to purchase a home.

This is important because a Realtor has just 24 hours in a day and 7 days in a week (just like you and me). Despite the fact that the best Realtors make us feel like we are their only clients, they are often juggling multiple transactions simultaneously.

Realtors need to be selective with their time. Home shoppers that show up with a prequal in-hand will always get more attention than those that show up empty-handed.

Sellers look for prequalification letters

We are currently in a seller’s market, where high competition exists for a limited supply of homes. Based on this, home sellers will likely receive multiple offers from a range of prospective buyers.

When a seller receives multiple offers simultaneously, one would think that the highest priced offer always wins. While that may typically be the case, other factors, such as down payment amount, loan program selection and other contingencies are also compared to determine the likelihood of a smooth transaction.

Tip: Contingencies are conditions that must be met prior to the sale of a property.  While many contingencies are negotiable, standard ones include a buyer’s home inspection and the buyer successfully obtaining a loan or financing to purchase the property.  

When a seller is evaluating a range of offers, any offer lacking a prequalification letter will be devalued regardless of the purchase price offered. As a matter of fact, it is virtually a requirement these days that an offer to purchase a property include a prequalification letter.

Related posts:

Wondering if all Lenders offer the same interest rate? Look here.

Concerned about increasing interest rates? Look here.

“It’s a sellers market!” What does that actually mean?

If you are looking to buy a home this spring, there is a very good chance you will be fighting an uphill battle.  That’s because we are in a “seller’s market” where homeowners looking to sell their property typically have the upper hand in negotiations. But what does it actually mean and how can you prepare for it?  Here’s a practical definition and a few key points to keep you sane while you search for your dream home.

What is a Seller’s Market?

By definition, a seller’s market is one where the number of homes sold during a period of time is equal or greater than 55% of the number of homes listed during that same time. Said another way, for every 3 homes sold in a given period of time, there are 5 new listings added. If you feel like you need to go back to your high-school statistics class to get a grasp on that, we have your covered. Here is a simple example that should put it all in perspective.

Let’s take a trip to Newtown, USA. This particular town is booming because there are great jobs close by, lots of shopping, restaurants and social life. Plus, there are great parks, schools, hospitals and activities for families. Not that many people want to move away from Newtown, USA these days. As a matter of fact, there were only 10 homes in Newtown, USA listed for sale in March of 2017.  

After being featured in a few home and community magazines, word has gotten out about how great Newtown, USA is for all types of people and families.  This has caused a large number of would-be homebuyers to consider settling down in Newtown, USA.  As a matter of fact, 8 homes in Newtown, USA were sold in March of 2017!

In this example, 8 homes were sold when only 10 homes were listed during March 2017 in Newtown, USA.  This makes the “sales-to-listing” ratio 80% (well above the 55% needed to establish a “seller’s market”).

(Note: Newtown, USA is a fictional town as far as we know.)

Best Practices in a Seller’s Market

As a would-be homebuyer, you can certainly be at a disadvantage in a seller’s market. A bit of planning and determination can help you through any short-term frustration.

Know your numbers first – While you are not on an episode of Shark Tank, you do need to know what you can afford and stick to it. Getting the best deal on a mortgage loan and working with an experienced mortgage professional will help you put in all in perspective. Using MortgageCS for mortgage shopping means you can easily compare loan terms and get your questions answered before committing to a single lender.

Go for the gold when you find the right property – When demand for property is outpacing the supply, there is no time for low-ball offers. Starting out with your first and best offer can win you the opportunity to purchase the home.  Remember that during the home buying process, you’ll have the opportunity to review a home inspection and will have certain “outs” if there are any issues.

Coincidentally, when mortgage loan originators offer you rates and loan programs at MortgageCS, they too will provide their best offer first. This saves you the hassle of any mortgage negotiations and drastically speeds up the mortgage shopping process.

Be ready to act quickly – By the time an open house is over, multiple offers may have been submitted by other real estate agents. Getting “your team” on the same page going into a weekend of open houses or showings ensures you can act when needed.

Stay focused on your end goal – Chances are that you will experience some disappointment during the home shopping process.  Remember that you will eventually find the property that best fits your needs and keep your head up as it’s the only way to see where you are going!

In a seller’s market, an experienced Realtor can truly help. Realtors who offer MortgageCS are up on the latest technology and ensure they offer the most advanced tools to their buyers. Ask for access to MortgageCS – or contact us and we’ll direct you to a local Realtor who can help.

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About MortgageCS: MortgageCS enables Financial Advisors, Realtors and their clients to compare mortgage offers from top national lenders for free, monitor market rates and shop with confidence – all without sharing personal contact information. Learn more.

All mortgage companies offer the same interest rate…RIGHT?

TRUE or FALSE: There is “one rate” that all mortgage companies offer on any given day. 

Today I met with an owner of an insurance agency. After seeing that interest rates varied by as much as 0.375% between lenders for the same loan, he said “I thought there was one rate for mortgages on any given day?”.  He admitted that he knew fees could be different, but had no idea that the actual interest rate could vary as well.  

Surprisingly, he’s not alone.

While interacting with financial advisors, insurance agents and even real estate agents, we have learned that there is a great opportunity to provide education in this space. For one reason or another, professionals outside of the mortgage industry tend to have surprisingly little knowledge of the mortgage market & process. This may make sense as they don’t “do” mortgages, nor do they receive compensation on them, but it is hard to argue that mortgages are not relevant in the world of financial planning….or real estate for that matter!

The truth is that rates WILL vary between mortgage lenders (as will fees, the personality of the loan originator, the speed at which they can close your loan and the technology in place).  What remains consistent in all mortgage situations is this:  

Your choice in a mortgage lender will have a lasting impact on your finances.  

The few weeks it takes to complete a mortgage loan will result in a new debt payment – one which is determined based largely on the interest rate you select (in addition to loan term, loan amount and other factors).  When all else is equal – a higher interest rate means a higher payment for the same mortgage amount. So consider the long term impact of a loan’s rate – not just a perceived “ease” of transaction in the short term.

If you are looking for some helpful hints to keep you sane as you wrangle the mortgage shopping process, here are two suggestions:

Don’t fall victim to technology

Ask yourself: Would you complete a paper application if it meant saving $50 to $100 every month for as long as you owned your home? If so, then don’t let an “app” guide you astray. Despite what certain companies want you to think, the mortgage process isn’t really that hard (it’s more of an inconvenience). Regardless of how you obtain your loan, you’ll be left with a monthly mortgage payment for 120, 240 or 360 months. The mortgage process, itself, is a short-term inconvenience at most.   

Protect your personal contact information

If you have ever entered your phone number on a mortgage shopping site before, you likely received multiple phone calls every hour for days. Chances are you will NOT do that again. There are plenty of ways to learn about mortgages in a safe way.  MortgageCS allows you inquire about specific loan programs and even interact with loan officers directly – without giving out this private information.  As a result, you remain in control of the contact process and once you find the best fit – you can then decide to share these details.

In closing, and just in case it hasn’t been obvious yet, mortgage rates CAN & DO vary significantly between mortgage lenders for several reasons.  To be safe, take your time, and ensure you end up with a great deal by focusing on the end goal. Using MortgageCS keeps it straightforward and simple, so get started today at www.MortgageCS.com.

Increasing confidence when mortgage shopping

Since the early stages of building MortgageCS, we have been interacting with financial advisors to validate the platform features. Throughout this process, the platform’s ability to harness real-time mortgage data has earned and maintained a top value position. In fact, this component addresses one of the “aha” moments we learned of back in early 2015. Here is how we learned of the mortgage confidence problem – and what we did to solve it.

Uncovering the Confidence Problem

In early 2015, we conducted an anonymous survey focused on understanding buying behaviors surrounding mortgages.  We asked respondents to rank the factors they consider important in a mortgage offer.  Perhaps not surprisingly, interest rate took the top spot, followed by bank or lender fees in the second position. The next three positions were inconsistent but included proximity to institution, reputation of institution and personal relationships.

We then asked respondents to rate their level of confidence in obtaining the best loan terms for their given situation. The scale included a 5-point range from Very Confident to Not Confident At All.  Shockingly, only 9% of respondents revealed they were Very Confident. When combined with Confident, the number grew to just 21%.

According to this data, only 1 in 5 recent mortgage shoppers were Confident they obtained the best loan terms – despite it being the top priority when ranked against other factors.

How could this be?  One possible explanation can be found by looking at the existing mortgage landscape.  A fragmented market, with lots of advertising dollars and a perception of a complicated transaction could take some blame. Perhaps consumers are settling early and avoiding “pain” (a human tendency) – rather than continuing on what can be perceived as a long and complicated journey. Or, perhaps there is just no way for consumers to know, given the current tools available to the market.

Solving the Confidence Problem

We looked at what makes people feel confident when shopping. When it comes to many large buying decisions, using prices that other people paid can be a good judge of deal quality.  Anyone that has purchased a car recently, likely reviewed what others have been paying. Based on that, they either approach the car buying process with confidence or, if after the fact, may realize they overpaid. Regardless, the fact remains that access to information can create confidence in approaching a buying situation.

So, we applied this to mortgage shopping when building the MortgageCS platform.  Market Insights will collect proprietary data, harnessed within the platform, to inform consumers of “what others paid” for a mortgage that matches the key terms of their loan. This is part of our magic sauce and routinely generates a “Whoa!” reaction from financial advisors during a demo presentation.

So, will the Market Insights component solve the problem of “lack of confidence in mortgage offers”?  Based on initial reactions from professionals who have witnessed Market Insights in action, it certainly will.    

3 ways to keep your payment the same when rates are on the rise

When it comes to mortgages and the home buying process, interest rates are almost always front and center. This is not a surprising thing, as nothing else impacts the housing market quite like a quick rise (or drop) in mortgage interest rates.  Additionally, mortgage interest rates are one of the most commonly compared terms when consumers shop lenders and loan officers.

For most first time buyers, sticking to a budget is essential. So what is one to do when rates suddenly increase?  Well, there are a few options – some a bit easier to consider than the others.

Look for smaller homes in the same area

If your heart is set on purchasing a home in a particular area, interest rates have recently increased AND you are on a fixed budget, there is little you can do but search for a lower priced home. If you were looking for a townhouse, this may mean you need to reduce the bedroom and bathroom count or perhaps even switch to consider condominium units. You may no longer be able to afford a home with the upgrades you hoped to include or perhaps you can no longer afford the unit with a basement or garage.  In either case, some level of sacrifice will need to be made as the macro-environment of interest rates increases.

Look for homes in a less expensive area

Maybe your heart isn’t set on buying a home in a particular area – but rather the home’s amenities are front and center. If this sounds like you, then it may be easy to consider a home in a different school district, township or even over state lines (if applicable). Keep in mind that the school district can be a very important factor in reselling a property – so a bargain price today may be more difficult to sell in the future (and may appreciate at a slower rate overall).

Delay buying until next year

No real estate professional wants to see you delay the purchase of a home – and perhaps you don’t want to either. However, if you are set on a certain property type and location for your new home, this may be the most viable option provided that you can save money at a rate that will outpace the appreciation on the home and any subsequent increases in interest rates. Note: This may be a HUGE amount and ultimately be unknown until a time in the future. 

Keep in mind there are some significant risks with delaying the purchase of a home. First, the interest rate environment is largely unpredictable and rates could increase further – actually making the home less affordable next year.  Second, home prices could increase which translates to you spending more over the life of your loan, and missing out on a year’s worth of home value appreciation. Third, there is no way to know what the home inventory may look like.  If there are homes you would consider purchasing today, there is no way to guarantee the inventory will be available next year (Just ask anyone that wanted to buy a house in 2016 and waited until 2017 when inventories were down 40%!).

Common reasons you aren’t shopping for a mortgage – and how to fix it

“I can’t wait to shop for my mortgage!”  Said no one, ever.

When it comes to the tasks associated with buying a home, shopping for a mortgage may win the award for least desirable action. Let’s look at the reasons why some people don’t shop for a mortgage loan and provide simple solutions to improve outcomes all around.  After all, the financial impact of a mortgage loan will last years, perhaps decades, beyond the few days required to identify the best mortgage lender.

Reason 1: You didn’t realize you could shop. If you fall into this category – we’ll save you the embarrassment and get it over with quickly.  You can always shop for a mortgage – even if your Realtor or Financial Advisor has an “in-house” lender or mortgage broker. Generally speaking, any “in-house” lender or mortgage broker is paying (one way or another) for this privilege. This can, and likely does, have an impact on the loan terms offered – ultimately delivering a less than desirable result for you in the form of inflated fees or interest rates.

How to fix it: Great news!  You just did. You now know you can shop – so do it!  You are in charge of your own financial well being and any “pain,” perceived or otherwise, that may come with shopping for a mortgage will be short-lived compared to the consequences of overpaying on a mortgage for 30 years.

MortgageCS is an unbiased mortgage resource, so we can’t help but suggest you use MortgageCS.com to ensure that shopping is efficient and hassle free.  There is no other place where you can easily company mortgage options without a bombardment of phone calls and undesirable credit report inquiries.  

Reason 2: You believe all mortgage companies offer the same rates.  This one is just about “as a matter as fact” as it gets. When it comes to the rates offered by mortgage brokers and lenders, their operational structure does a good deal of the talking.  A few differences to look out for include:

  • Layers of management:  Mortgage companies earn the bulk of their revenue when they originate new loans.  Accordingly, a company with multiple layers of management will have more “mouths to feed” from each loan compared to a mortgage company with less management.
  • Office location(s):  When it comes to overhead expenses for a mortgage lender, just about nothing exceeds the combined expense of banking licenses and equipment for a physical location.  Not only does each physical location need to spend several thousand dollars each year to maintain their banking licenses in each state, but they also need to pay for the office equipment, fancy desks and signs, and all other expenses.

There are several other reasons why rates can vary between lenders, but rather than describe the depths and complexities of the secondary market, we hope you may take our word for it!

How to fix it: Again…you just did. You now know that different mortgage companies offer different rates and fees in order to support their operational structures and overhead expenses.  Accordingly, a rate that may seem “impossible” for one lender, may actually be provided by another lender on an everyday basis. 

Reason 3: You are afraid to shop.  Shopping for a mortgage involves all types of new terms, a market that changes at least once a day and pressure from all directions to meet your purchase agreement deadlines.  Factor in the pressure from a real estate agent telling you that the “only one” that can close on time is their mortgage professional and the fact that we, as humans, don’t like to tell people “no”, and you have an environment which can quickly become overwhelming and scary.  

How to fix it: Remember that you are in charge of your own financial future.  Real estate agents work hard to ensure the property sale transaction goes smoothly- but they are not compensated one way or another based on the terms on your new mortgage loan (and they don’t need to make the payment either). While many mortgage originators stationed inside a Realtor’s office may offer ultra-competitive rates and may have a great reputation for getting to the closing table on time, don’t forget Reason 1 or 2 from above. 

Also know that a pre-qualification doesn’t require that you continue with a particular mortgage lender. Up until the time when you are required to obtain a loan commitment, you have the option of shopping and searching for the loan terms which best suit your financial goals going forward.