The Mortgage Minute
Sr. Loan Office Brian McCauley shares insights and perspective on the current state of the home mortgage
Julie and I have a home that has hit the 10-year mark. As many of you know, for whatever reason, homes begin to have issues and start to look a bit dated around that time. A few weeks back I solicited feedback from local realtors around what updates provide the most impact for resale purposes. While many of the changes we'd be looking to make wouldn't be done solely for resale, we always like to consider what would give us the best return as one never knows what may happen in the future.
Brian White
of Coldwell Banker says, "Most people are aware that kitchens and baths impact value the most but also cost a lot of money." Instead, Brian recommends considering what you can comfortably do yourself to help control costs. Since labor is often a major component of kitchen and bath work, the more your willing to do (e.g., demolition, tile) the more you can save. He also suggests looking for things that have the most "space coverage" such as paint, new flooring or anything that will impact a substantial amount of visual space or square footage in your home.
Brian also offers words of wisdom to home owners on things that don't add value that one might think do, including:
*Highly specialized or taste specific items that would be highly valuable to a few but not to most home buyers. Brian's examples, which made me laugh, included things like fancy wallpaper, Australian Coastal sea shell sinks, rare Botswana bathroom tile or gold lame curtains from Micheal Jackson's wardrobe. While these might be highly valuable items to the current owners, they are likely to have no value for home buyers.
*Items such as new roofs, HVAC, hot water heaters (especially tankless), although completely necessary, are seen as maintenance items rather than things that increase the value of your home. Home buyers expect these to be present and in good condition on any well maintained home.
*Pools are also something that typically does not give a good return on investment. If home owners are lucky, they might get 50% back on what they spent. It also doesn't make your home worth more the way one might think. If there is a similar house down the street, with a better lot and no pool, they can get as much or more for their home because the lot is better.
Given Brian's advice, my take-aways are that home owners should consider the general appeal of any updates they make. This doesn't mean you should not make your house your own, but it's important to recognize that the more specialized, and personal, your updates are they more likely you are not to receive a good return on your investment or turn-off potential buyers should you have to sell.
Typically, the first words I usually hear from a new client are 'What are your rates' or 'What is your fee'. I learned early on that clients treat a mortgage as they do any commodity-- anything that you pull off the shelf - laundry detergent, jeans, a shirt.
All mortgage fees depend on many factors: what is your down payment? what does your credit look like? what is the size of the loan? Lenders typically judge a loan on three parameters. Your FICO score, your debt to income (DTI) and what your loan to value (LTV) is.
When I work with a lender there are always fees that are set and not subject to change such as underwriting and legal work. The title company, the survey fee, the appraisal fee etc., are also set fees. As I thought about it I began to see the merit of using a set fee for my services, also. Why could I not use a flat fee vs. a percentage for my business?
When I started in the business I was told to charge 1% and never to come off that number (smaller loans we were told to add to that 1%). Still today when I look in the business section of the Dallas Morning News on Friday there is information from Bankrate.com showing the different lenders that participate in the program, their interest rates, their fees, their percentages, what amount down and the APR - what amount of money it is going to cost you to get that interest rate. So 1½ years ago I launched my flat fee lending program. I do the same amount of work whether the loan is for $70,000, $700,000. It's the exact same process, the steps are exactly the same every time. Every product needs to have a margin and the margin in this business is based on what the cost is to handle that transaction and see the loan successfully closed.
The next thing about loans is something called a Yield Spread Premium (YSP). It has been around for a long time and is an amount of money on the back of a file that the lenders pay to the brokers for sending in the loan. Bankers make YSP, lenders make YSP, brokers make YSP, loan officers make YSP. I've never been comfortable taking a large amount of yield spread from the back but when I first came into the industry, I was taught that it was one and one: you made 1 point on the front and 1 point on the back and that was the only way to price your loan. There was not an alternative. I found that as the industry changed and the internet became more popular for doing loans, people began bypassing the traditional way of lending which was to walk into a broker's office and fill out a loan application. There is a great deal more shopping around so the '1 point on the front and 1 on the back' slowly eroded. It got way too competitive and many companies went out of business because they were not as profitable as they needed to be. When you hear a company advertising over and over, you know that they are adjusting their fees to afford that advertising. So when I look through the Dallas Morning News and I see all the brokers and look at their interest rates and points, the points are one way the broker is going to get paid. Typically, a broker will charge an origination fee and a processing fee. Some brokers will also add a credit report, a lock fee and an application fee. My company just has a flat fee origination of $1850 and a processing of $495.
My average loan size last year was $275,000. Technically, a 1% should net me $2700 every time I do a loan. Right there, every person who did a loan with me saved $850 by working with me. As I looked at the interest rates that the other lenders were showing and I know that, for the most part, brokers see the same rate sheets from about the same lenders. In other words, when I look at a rate sheet from Wells Fargo and one of my competitors looks at a rate sheet from Wells Fargo, each of us has about the same idea of what our cost structure and yield spread premium is going to be. I have worked my company up to what Wells Fargo calls 'Tier 1' status which means that I get better pricing, I get better turn times and I get better underwriting because of that. To be at Tier 1 status means we are doing something right!
The other day I looked at one of the highly advertised companies and found that I was showing an interest rate of 4.875% with my flat fee and they were showing an interest rate of 5.25% with 1%. Right there they were more than .375 higher than my interest rate and $850 higher based on a loan of $275,000.
My hope is you appreciate the flat fee and that this helps you understand why I chose to use it. When you are referring me to your friends and co-workers I hope this will make it easier to explain that we do things a bit differently here. We are very transparent, very aboveboard and our goal is always to give you the lowest possible rate with the lowest possible fees.
I have been fortunate to do loans for some wonderful people in Frisco and the State of Texas. I look forward to continuing to meet great people in the coming year and help them as I help them realize their housing dreams.
Your feedback would be greatly appreciated. I always enjoy hearing from you.
When I first began working as a mortgage broker the more lenders you were signed up with the more rate sheets you received. A rate sheet is a PDF document from the lender you signed up with - Chase, Wells Fargo or Bank of America, etc. These rate sheets used to be 8 or 10 pages long. There were a variety of transactions and way too many options and programs. To be honest, I don't think the loan officers or brokers even knew what some of the programs were. There was a day when account reps would come to your office about every two or three weeks or so to talk about new programs.
Again, I think that was - and it has been proven - the demise of some of our mortgage industry because with those programs, when their risk category got too aggressive some of those ARM (Adjustable Rate Mortgages) programs were just not as attractive for anybody - the mortgage market or the homeowners. Now when I get rate sheets, they are between two and four pages long. I think it is great! It has gone back to the days of "would you like a 30 yr. fixed or a 20 yr fixed or a 15 yr fixed?' Rarely do I talk about ARMS unless I have a client who is buying a home for an investment property and might sell. Or perhaps my client is going to graduate school or they have a contracted job for only a 3 year term. Then that program might be a viable option.
To recap, the mortgage industry has become pretty boring! As Dave Ramsey says, he would much prefer that you come in with 20% down and do a 15 year fixed but some of us do not have that capability. We also are not certain that we will not be moving, so why get a 15 year fixed when you can spread those payments out and make it a little cheaper each month. If you look at the amortization of that loan over 15 and 30 years and see the difference in the finance charges over the life of the loan, the benefit of doing a 15 year fixed becomes pretty obvious.
I'd like to close with one of my favorite stories. When NASA first sent astronauts into space, they realized that a ball point pen would not work in zero gravity. A million dollar investment and two years of research resulted in a pen that could write in space on almost any surface and at temperatures ranging from well below freezing to over 300 degrees Celsius. When confronted with the same problem, the Russians used a pencil.
Sometimes we can make things just a little too complicated when the easy side is where we need to stay! My thanks to my former boss at Specialized Bicycle for the gift of a Russian space pen and the story! I had no idea you could buy the Russian Space Pencil.
Do you think that the last day of the month is the best day to close on your home purchase? It may not be true. Closing on the last day does not allow for any unforeseen circumstances. What about selling a home in the morning and buying one that afternoon? Very common but boy is that one a gamble. Let me illustrate this by relating a true story.
A client of mine was closing the sale of their home at one Title Company in the morning. Immediately following that closing they were to go to a second title company to complete the purchase of their new home. A problem developed when the folks buying my client's home could not get their loan papers to the title company on time. We were set for a Thursday closing. We moved it to Friday and still no papers. We moved it yet again to Monday but still no papers. We finally heard on Tuesday that the client was officially withdrawing their offer due to their inability to arrange financing. They went through three different lenders with no success (wish they would have called me).
What that did was leave my clients high and dry. Without the sale of their present home, they were unable to close on their new home and were forced to withdraw their contract.
So now you have a couple with three children and a fourth on the way in a house that is completely packed up ready to move. They must now unpack and prepare their house to be relisted for sale. They must also decide whether or not to go through with the purchase of that new home and try to handle two mortgage payments or to wait and see if their present home sells quickly and avoid the double mortgage.
Remember, I am a Mortgage Broker, not a Realtor, so I what I tell you is of my opinion and you should always trust the advice of your Agent!
What most lenders will tell you is that closing both homes on the same day is normal and it should always be done that way. I would like people to consider closing on the sale of their house on a Monday or Tuesday. Then negotiate a 'lease back agreement'; this simply means that you would lease the home you just sold from the new owners for two days. You would then close on your new home on Wednesday or Thursday of the week before the end of the month. This gives you ample time for the proceeds of the sale to reach your bank; it also makes sure you have time to gather all of the documentation you need for the next closing. Should anything go wrong with the sale of your home, you now have a few day window to work out any problems. It also enables you to leave your home intact until the sale is final....then you can pack up your house.
Again, I am a Broker and am not paid to give you real-estate advice; a Realtor is, so this is just my opinion.
Do you think that the last day of the month is the best day to close on your home purchase? It may not be true. Closing on the last day does not allow for any unforeseen circumstances. What about selling a home in the morning and buying one that afternoon? Very common but boy is that one a gamble. Let me illustrate this by relating a true story.
A client of mine was closing the sale of their home at one Title Company in the morning. Immediately following that closing they were to go to a second title company to complete the purchase of their new home. A problem developed when the folks buying my client's home could not get their loan papers to the title company on time. We were set for a Thursday closing. We moved it to Friday and still no papers. We moved it yet again to Monday but still no papers. We finally heard on Tuesday that the client was officially withdrawing their offer due to their inability to arrange financing. They went through three different lenders with no success (wish they would have called me).
What that did was leave my clients high and dry. Without the sale of their present home, they were unable to close on their new home and were forced to withdraw their contract.
So now you have a couple with three children and a fourth on the way in a house that is completely packed up ready to move. They must now unpack and prepare their house to be relisted for sale. They must also decide whether or not to go through with the purchase of that new home and try to handle two mortgage payments or to wait and see if their present home sells quickly and avoid the double mortgage.
Remember, I am a Mortgage Broker, not a Realtor, so I what I tell you is of my opinion and you should always trust the advice of your Agent!
What most lenders will tell you is that closing both homes on the same day is normal and it should always be done that way. I would like people to consider closing on the sale of their house on a Monday or Tuesday. Then negotiate a 'lease back agreement'; this simply means that you would lease the home you just sold from the new owners for two days. You would then close on your new home on Wednesday or Thursday of the week before the end of the month. This gives you ample time for the proceeds of the sale to reach your bank; it also makes sure you have time to gather all of the documentation you need for the next closing. Should anything go wrong with the sale of your home, you now have a few day window to work out any problems. It also enables you to leave your home intact until the sale is final....then you can pack up your house.
Again, I am a Broker and am not paid to give you real-estate advice; a Realtor is, so this is just my opinion.
Last Updated on Monday, 20 July 2009 09:28
PMI vs. Mortgage Insurance: When you are buying a home and putting less than 20% down the lender will require you to carry mortgage insurance. This insurance is sometimes called PMI (private mortgage insurance) or MIP (mortgage insurance premium). Whatever the acronym, it is money that is going to the lender or financial institution instead of to the principal on your loan. Those whose credit scores are 700 or above have the option of taking out a second mortgage. Eighty percent would be borrowed from the first lender; the second mortgage account would depend on the amount of the down payment. Five percent would require a 15% down payment; 10% down would require a 10% second; 15% down would require a 5% second. The lowest rate will still only be obtainable with 20% or more down. Lenders are beginning to judge loans much more guardedly because of the current credit crunch. Their experience tells them that borrowers who put 20% down on home loans are more likely to stay current on their loans.
As you speak with your mortgage planner and find that your credit score is favorable, you should run your numbers with both mortgage insurance and a second loan. The second loan interest rate will always be higher than the first. Sometimes it is one point; sometimes it is even two points + but when you run the payments side by side you will usually find that they are almost identical. When you run an amortization schedule on the payments for both plans you will find that you will always be ahead by using the second mortgage since you are paying more toward the principal every month. Mortgage insurance is based on risk factors: the down payment amount; your credit score and the amount of coverage requested by the lender.
It is important, however, not to deplete your reserve account. Dave Ramsey, a financial writer and talk show host, suggests that we should have a minimum of six months cash reserve at all times to cover any possible job loss or loss of income for any other reason. (And he is also going to have you wait to buy till you do that that emergency fund and the 20% down)
Thanks for your questions and keep them coming!
Geoffrey Davis
214-529-9622
Davis Family Lending, LLC
