I’m asked frequently when does it make sense to refinance. The answer is almost never cut and dried. There are many reasons why a refinance might make sense and just as many as it may not make sense. It really does depend on the individual person and their specific situation. But, for the sake of this article let’s talk about my approach when talking with someone.
The Long View:
If they are looking only to lower their interest rate I usually recommend a savings of 1/2% in the rate that usually makes the most sense, but even in this case, it might not make sense. It also depends on the loan amount. Here are a couple of examples:
Both examples assume the following. They are two years into a 30 year fixed mortgage, their rate is going from 3.50% to 3.00%, they have 25% equity, or 75% loan to value. We are only going to consider savings on principal and interest payments. For the sake of this demonstration, their credit score and debt to income (DTI) are not a consideration.
The first example is a property worth $400,000 and the new loan amount for a 30 year fixed mortgage would be $300,000.
Although only saving $82.32 per month over 30 years they will save $29,635.91 in payments and $29,361 in interest. Not insubstantial numbers. If they invested that $82.32 savings per month over the next 30 years in an S&P 500 fund, averaging 10% annual return, over thirty years you would have invested a total of $29,635.20 and earned $157,998.86 in interest for a final balance in 30 years of $187,634.06. Even if they don’t invest the monthly savings of $83.32 per month they will save $29,535.91 in out-of-pocket monies.
The second example is a property worth $150,000 and the new loan amount for a 30 year fixed mortgage would be $112,500.
Although only saving $30.87 per month over 30 years they will save $11,113.46 in payments and $11,010 in interest. Also, not insubstantial numbers. If they invested that $30.87 savings per month over the next 30 years in an S&P 500 fund, averaging 10% annual return, over thirty years you would have invested a total of $11,113.20 and earned $59,249.57 in interest for a final balance in 30 years of $70.362.77. Even if they don’t invest the monthly savings of $30.87 per month they will save $11,113.20 in out-of-pocket monies.
A note about the numbers. There is a slight rounding error in my two systems which accounts for a difference of under a dollar out of pocket in both scenarios over 30 years.
In summary, the math tells the story of these refinances. In almost any scenario, if you look at the long view, you end up coming out far ahead by a refinance. Obviously the greater the difference between your current rate and the new rate the more you stand to save or save and earn, over 30 years if you choose to invest. It also goes without saying that just because the S&P 500 index has an average return of 10% over the last four decades, there’s no expectation that will continue, or won’t, for that matter. Investing comes with risk. Savings, don’t.
If you’d like me to run specific numbers for you don’t hesitate to reach out at email@example.com or if you are ready to get your refinance started go to https://www.approvedbycharles.com/apply
Whenever you put less than twenty percent down on a home purchase, or anytime you use an FHA mortgage regardless of down payment, you must pay for Mortgage Insurance. There are multiple types of mortgage insurance and their costs vary dramatically.
Let me start by making the following statement. Mortgage insurance is in place to protect the lender’s investment. If you were to default on the mortgage the lender can sell the home and if it takes a loss they can make a claim against the mortgage Insurance for any loss.
Using the example of an FHA (Federal Housing Administration) mortgage first there are always two components to mortgage insurance. There is a 1.75% upfront mortgage insurance premium. This is calculated as the purchase price minus the down payment multiplied by 1.75%. This is paid upfront at closing, hence the name, and is usually rolled into the mortgage. Thus on a $400,000 home purchase where the borrower is putting the minimum of 3.5% down their upfront mortgage insurance premium would be $400,000 minus 3.5% gives an amount due of $386,000. Taking this number and multiplying by 1.75% gives an upfront mortgage premium amount of $6,755 and adding this to the amount due after the down payment would bring the actual loan amount to $392,755.
The second component is the monthly premium. With an FHA mortgage that monthly premium is .85% of the loan amount if the borrower puts down less than 5% and .80% of the loan amount if the borrower puts down 5% or more. If you put down more than 10% on an FHA loan the monthly mortgage insurance premium drops off after 11 years, otherwise, it is the life of the loan. (Note all numbers are based on a 30 year fixed mortgage. If you have a term other than 30 years these numbers vary)
To calculate the monthly mortgage insurance premium you take the loan amount, using our example of $392,755 and multiply it by .85% if the down payment is less than 5% and .80% if the down payment is 5% or more, and then dividing that number by 12 to get a monthly premium amount. Again using our example of 3.5% down and a $392,755 loan amount the monthly mortgage insurance premium would be $392,755 times .85% or $3,338.42 per year or $278.20 per month.
Remember this important piece, unless you put down more than 10% on an FHA mortgage the monthly mortgage insurance premium is for the life of the loan. This means it stays required until you sell or refinance. Once you get to 20% equity or more in the home you should seriously consider refinancing to a conventional loan to remove that monthly mortgage insurance premium.
With conventional mortgages mortgage insurance is actually classified as PMI or private mortgage Insurance. And you guessed it, this Insurance is not standardized by the feds, and their costs, and flexibility can vary widely. One of the main ways that PMI differs from MI like put in place on an FHA loan is that there is no upfront mortgage insurance premium it is just a monthly payment. It also drops off once you reach 78% equity by payments of principal or if your value has increased to the point you have that much equity. There are processes in place to allow you to call the servicer and have the PMI removed.
Additionally, PMI is usually lower cost per month, depending on numerous credit and qualification factors. It also has the flexibility to pay a partial upfront payment at closing to lower your monthly MI payment or you can pay a single premium for the entire policy at closing which may make sense for you.
In the end, while mortgage insurance only protects the lender the fact that it exists allows you to put less than 20% down and purchase a new home. It is a means to an end and serves an important purpose in helping people own real estate.
As usual, if you’d like to talk with an honest and transparent lender or to start your mortgage application go here: www.approvedbycharles.com/apply
One of the things I hear from clients who get frustrated with house hunting is, maybe I’ll just rent and start again next year when the market calms down. While I agree that house hunting and not getting your offers selected can be exhausting, both emotionally and physically, and demoralizing. Here’s why you should take a mental health break, albeit short, and then get on the hunt.
Real Estate is always increasing in value.
And the sooner you buy the sooner you will start adding that wealth to your family and not adding to someone else’s wealth.
A Disclaimer and What we will be used for numbers: The disclaimer is that I will be using historic numbers, and historic being a 40-year moving average, for the Denver metro area. Denver does have a unique real estate market due to our climate, our three hundred plus sunny days, and our amazing outdoor, sporting, and cultural activities. Not to mention shopping, shopping, and shopping.
For numbers I will be using a purchase price of $425,000 and that you paying $2,350 a month in rent. Also, as the sample borrower, you make $67,000 a year and have no debt other than your rent/proposed mortgage payment.
If you wait 12 months to purchase you will have thrown $28,200 in rent towards someone else’s wealth and mortgage.
Currently, the debt to income with this sample income and rental debt is 42.09%.
At today’s common interest rate and putting 20% down as well as averages for property taxes and homeowners insurance gets a potential mortgage payment of $1,861 a month. In this first year of homeownership, you will pay $22,232 in total mortgage payments. Straight away you’ve saved $5,868 or $489 per month. Of these total mortgage payments, you will have paid $6,807 towards your principal loan balance. Add this to your year of savings with the lower mortgage payment and you are at estimated savings of $12,675 for the year or $1,056.25 per month towards your total long-term wealth. Of course, your new home has also appreciated in value over this time. Our forty-year appreciation average in the Denver metro is 7.25%. Over the 12 months you have owed your new $425,000 home it has appreciated by $30,812.50.
Property Appreciation over months
In summary, in the 12 months, you have owned this home you’ve added $43,487.50 worth of wealth to your family. (Assuming, of course, you don’t spend your monthly savings). Now, you could just spend the safe $28,200 in rent or you can get your long-term wealth on track.
Finally, and this is an important piece, your debt to income went down from 42.09% to 33.33% so they would be living much more comfortably.
Now, let’s wait 12 months and see where you would stand.
Interest rates will probably be 1/2% higher.
The purchase price will now have increased by $30,812.50 so the new purchase price will be $455,812.50.
The required cash down will have increased from $85,000 to $91,162.50 (keeping 20% down)
On the upside your income would probably increase from $67,000 to $69,345, assuming a 3.5% rate of inflation raise.
Your DTI on the mortgage now would be 34.92% which is higher than the 33.33% if you would have purchased last year. Your monthly mortgage went from a proposed $1,861 if you purchased last year to $2,018 this year or a difference of $157 per month more. Not a lot on a monthly basis but over 30 years that’s $56,520 more plus the $30,812.50 of equity that you lost by waiting is a difference of $87,332.50.
While you may have to wait due to your specific situation, if you are waiting just because you are emotionally exhausted by looking and coming up short, you are losing out on your long-term wealth.
Finally, and for the most depressing number of all, if you take the $30,812.50 of property appreciation and average a 7.25% equity gain over thirty years you’ve lost out on a total of $251,559 in long term wealth and increased equity.
Add the extra twelve months of rent you paid and the additional $157 per month over the life of the mortgage and you have cost your family $336,279 in total wealth at the end of 30 years.
The moral of the story. Don’t wait another day, if you can buy today, buy today.
Most lenders have an online portal to apply for a mortgage and upload documents that are required securely. My online portal is here:
I get asked a lot about how I get paid. The answer is both straightforward and complex at the same time. I’ll give it my best shot here.
It is important to state that Loan Originators, the person you are working with on your mortgage, is considered a Sales Person. As with most sales positions a Loan Originator is paid, usually, on a commission basis. Sometimes that commission is a simple dollar amount per loan closed, sometimes that commission is a percentage of the loan amount. That percentage can vary wildly between mortgage companies and even Loan Originators within the same company or branch. It’s not uncommon for two Loan Originators working for the same company or same branch of a company in cubicles or offices next to each other to be compensated very differently.
Often branch managers and more experienced Loan Originators make substantially more than more junior Loan Originators.
Loan Originators paid on commission are paid as a percentage of the loan amount. It is important to note that lenders are paid on the loan amount and not the purchase price. The terminology for how a commission is calculated are basis points, or bps (pronounced bips). A bp is 1/100th of a percent. So, 100 bps (bips) is 1 percent of the loan amount. As an example, if you are purchasing a $500,000 home and are putting 20% down ($100,000) the loan amount would be $400,000 and if that Loan Originator makes 100 bps on the loan their compensation would be $4,000.
The higher the loan amount, the more the Loan Originator makes. Period.
The only way a Loan Originator can make more off of your loan is to have a higher loan amount. Now, this could be by you purchasing a more expensive home, or it could be by talking you into putting less down. A good Loan Originator will always talk you through the pros and cons of putting more or less down and give you examples that personally apply to you so you can make an informed decision. It is often true that putting less down can make sense to the buyer.
Using the above example let’s say you are still purchasing a $500,000 home but you decide to put 10% down instead of 20% down. Perhaps you realize that the extra $50,000 can help you furnish the home, pay down some bills or buy a new car. As long as it makes sense you can do this. In this example, the lender would make 1% additional off of the $50,000 higher loan amount, meaning their compensation would increase from $4,000 to $4,500 for your loan.
Most Loan Originators will also show you different programs that may make sense for your situation. You may have the option of an FHA loan, a VA loan, and thank you for your service, or a First Time Homebuyer Conventional Loan. The actual loan amount between these programs make has small effects on the loan amount, but the compensation for the Loan Originator will not change, normally. As an example, if you are choosing between the 3.5% minimum down of an FHA loan or the 3% down of a conventional First Time Homebuyer program that difference is a difference of $2,500 in the loan amount or $25 to the Loan Originator.
Thus, with one Loan Originator working in a call center they may make $500 for originating a $400,000 mortgage or you might work with a Loan Originator who makes 250 bps on the same loan meaning they will pocket $10,000. In either scenario, you may have the same rate, same closing costs, and your disclosures might be identical. When a Loan Originator makes less, the company makes more along with the converse. It is not uncommon for a mortgage company to make 350 bps, the maximum allowed by law, on a mortgage. Thus, using these two examples, the company stands to make somewhere between $13,500 and $4,000 on the same loan based solely on how they pay their Loan Originator.
Finally, if your Loan Originator works for a branch and has a branch manager and/or sales manager they may receive an override or part of the commission. Essentially if your Loan Originators’ company takes 50 bps off the top of each loan for-profit and services then the difference between 300 bps and what your Loan Originator makes is what the branch, branch manager and/or sales manager might make. Regardless, none of this changes what your closing costs and fees associated with the loan are. This is just what the lender is paid to originate the loan, remember this is all just sales.
Most lenders have one goal. Close your loan. How they get there, and how they do their job, varies from Loan Originator to Loan Originator, but in the end, and here’s the brutal truth, they will do anything to close your loan. If your loan doesn’t close… they don’t get paid.
Now, some lenders make an hourly wage but most of those are draws against commission. Meaning they get paid an hourly wage but, essentially, have to pay it back when they close a loan. There is nothing more demoralizing as a lender than to have a nice closing and all of the commission go towards paying off your draws. And they will do anything, and say anything, to make sure that doesn’t happen.
The other piece most people don’t know is that in most lending organizations the Loan Originators are salespeople. They are paid like salespeople. They are (dis)respected like salespeople and they act like salespeople. If you have ever purchased a used car then you’ve met the cloth most Loan Originators are cut from.
Of course, no mortgage company would exist without their ‘sales’ staff. The money that is brought in to lenders on these mortgages is the fuel that runs the entire organization. The Loan Originators know this and often act like they walk on water. (Note… they don’t)
If a lender has a chance to steal someone else’s deal, from another company, of course, they will do everything they can. Up to and including making outrageous and morally flexible claims.
As an honest and transparent lender, I always estimate fees high. I find it always best to set the expectations for the worst-case scenario and have the costs of the fees come in lower. Morally flexible lenders trying to steal a deal will tell you that they have no fees, they do, that there are no closing costs, there always are and that their rates can’t be beaten, they can. If you are shopping between lenders, which I totally encourage, and one lender sends you a Loan Estimate with actual fees and rates that are expected and the lender you are shopping with is unwilling to do so, they are not being honest. If you are the type of person who shares information from an honest and transparent person with someone trying to steal a deal, and you don’t give the original person a chance to meet what is being proposed, then the moral flexibility is on you.
I work very hard on behalf of my clients. I can compete, I always do and I always win. I always win on honesty and transparency and I always win on going the extra mile and working hard on your behalf. When there is a tangible and authentic loan estimate that I cannot compete with or is a great deal, I let them know. I know what I can do and I know what I am willing to do.
I recently lost a deal to a client I had been working with for over eight months. I spent countless hours on the phone with them, talking to listing agents and sellers on their behalf and being available virtually every day at virtually every hour. Once they went under contract I did my required duties and sent them a proper Loan Estimate. They promptly sent that to another lender and never gave me the opportunity to meet or review the other lender’s loan estimate. They never gave me the courtesy of a phone call informing me that they went with another lender. They used their moral flexibility. They used my services and time and efforts for the better part of the year to get them their dream home and when the rubber met the road they weren’t willing to give me five minutes.
I, of course, wish them the best of luck but in the end, treating people who have invested so much on your behalf as a commodity is an insult.
Those lenders who actively employ Loan Officers who act differently are not the ones you want to do business with. Find a partner who you can trust. Find a partner who is willing to invest their time and best efforts in you and your financial future. Find a partner who is honest and transparent. And if you do shop in the end, give them the opportunity to see what they are up against and let them see what they can do to match or beat rates, fees, etc…
Otherwise, you might be the reason why that honest and transparent relationship-based lender becomes a salesperson in the end. Regardless, I remain unswayed. Mine is the best way to be a Loan Originator. That of being a mentor, being available, and being honest and transparent.
Why is it painful to use a cubicle-based mortgage professional? Well, most often, they are in a call center. So, perhaps, I could have titled this “The Pain of using a Call Center based Mortgage Professional” but, alas, I did not.
Mortgage Professionals who work in call centers, and in cubicles, in my post-work primarily off of leads. By definition, this means that they are transactional lenders. It’s all, and only, a numbers game. A lead comes in. The lender calls, or answers the call, gets an application going, or doesn’t, it doesn’t matter. They don’t care. If the person on the line is unsure about putting in an application they are either pressured to do so, just put in an application so we can see where you are at, or they are dismissed and hung up on.
Why does this matter? Well, here’s the rub, if you put in an application and if you provide your social security number and if you click submit if on a website, or simply give someone your social security number you are authorizing them to pull your credit. If someone is worried their credit is too low to qualify and they give someone their social security number then they just approved a hard pull on their credit and its’ associated 4 point cost against their credit score.
If they were too low to qualify then they are now just that much further away.
If the call center mortgage professional hangs up to move on to their next lead from this one that will be too much trouble then the interested party is set adrift. They have wasted their time and they have no answers. They are no closer to a home than when they started and they might be discouraged. And this is bad and not fair.
As I’ve commented already the mortgage process is very complex and borrowers, especially first-time homebuyers and people who might have not gone through the process for an extended period of time, might not be comfortable or familiar with the process. And to simply be dismissed is a disservice. Cubicle and call center mortgage professionals are not incentivized to be mentors and partners through the loan process. They are about volume and production.
If you love being treated like a number, then click that app or log in to that website recommended by a sports professional. If you’d rather have a partner that works with you every step of the way, find a relationship-based lender.
There is another important reason why cubicle lenders are a bad loan partner. Availability. Often their hours are set, forty hours a week and not a minute more. If their hours are nine to five and you need them at six-thirty, they won’t be there. If they work Monday through Friday and you need an updated lender letter Sunday evening at seven-fifteen, you are out of luck. Think about when you will be shopping for a home? The days. The times. Are they during business hours? Monday through Friday, nine to five? Or are YOU looking after business hours, after work, on the weekends, etc…? You will want and need to have your lender available during these non-business hours. If you are using an app, a transactional lender, a cubicle lender, or a call center lender you might very well have difficulty getting what you need to put in an offer outside of business hours. And this will be very frustrating.
Finally, these cubicle, transactional and call-center lenders are paid very little per loan. They have no skin in the game. They have no reason to be available for you when you need them to be available to you. They have no reason to spend more than the bare minimum amount of time on your loan, which, as I’ve already stated, is a very complex process.
Having someone want to spend as much time is necessary for you to make the best possible decision on what is, most likely, the largest purchase and largest debt in your life to date has huge value. Being reassured that a friendly and interested voice is available to you when you need that answer to what escrows are, to why you need mortgage insurance, to do math about how much to put down on the purchase, and to talk through the numerous products and programs available will always prove to be invaluable.
There’s an old saying; “There’s no such thing as a free lunch.” And although millions of students who get free school lunches might argue, those aren’t free either.
As a lender, I frequently get asked if I can meet a builder’s lender’s incentives. Which, to be clear, are incentives the builder is giving to use their preferred lender. Things like upgraded countertops, free basement, lot upgrades, etc… but none of these are free. I’ll get back to this in a few paragraphs.
How about down payment assistance (sometimes referred to by the initials DPA). These are programs, often government-supported or sponsored, that give a portion of the loan amount as a down payment. Some of these are paid back in the future but at zero percent interest. Hey, isn’t zero percent interest-free? No. Some decrease in the balance due over time, usually 36 months, and when that clock hits zero the down payment assistance no longer has to be paid back. Isn’t that free money? No.
OK, my lender promised me $500, $1,000 or more in lender credits, aren’t those free? No.
Nothing is free.
Builders and lenders often play a shell game with costs, purchase price, loan amounts, and upgrades. It’s very common, that the builder will raise the purchase price of the home by the exact amount of their tremendous incentives. Here’s a real-world example I saw. The borrower was purchasing a home for $529,000. The initial contract was for $529,000. The buyer added $30,000 in upgrades, granite countertops, better appliances, etc… bringing the actual purchase price to $559,000. The builder offered $15,000 in discounts and incentives to use their lender. The borrower was specifically told they would not be charged any points, prepaid interest, on their awesome rate. At closing the borrower had to pay $5,590 in points, 1%, and they were informed their purchase price had to be raised to $574,000. So, the borrower not only didn’t get ANY discounts or incentives, they ended up paying $15,000 more for the home plus $5,590 in points for a total swing of $35,590 more than they should have. There were no incentives. The builder just made more. Those $30,000 in free money incentives ended up costing the buyers a total of $35,590. Which, in my book, is money not well spent.
How about the down payment assistance programs. Those are completely free money. They aren’t. Most of them require a 1% origination fee just for doing the program. If you use the previous numbers, just because they are valid home expense numbers, if the borrower had used down payment assistance there would have been an additional $5,740 origination fee. Additionally, virtually all down payment assistance programs, have higher interest rates. Sometimes only slightly, but sometimes tremendously. It depends on the program.
Now, I’m not talking smack about DPA. These are great programs that can get people who otherwise can afford a home but don’t have enough for a down payment to become homeowners. I’m just saying the money isn’t free and there are costs associated with these programs. If it is possible to not use ‘free’ money you should. It’s almost always in the borrower’s best interest to do things on their own.
Finally, lender credits. These are free right? Well, no. Just because the borrower doesn’t see the expense, the lender often does. Often these credits come out of your personal lender’s commission. Sometimes they are branch concessions and sometimes they are company concessions. Regardless someone has to pay for your free money.
My advice is to get all the costs, fees, and information associated with your mortgage and find a personal lender you can trust! Someone who is transparent and honest.