The bottom-dwellers of the mortgage business.

If you have purchased a house in the past few months, or even had someone pull a copy of your credit report in the process of getting prequalified for a mortgage in the future, you may have noticed something peculiar . . . all of a sudden, you started getting solicited by mortgage people.  Is this some strange telepathic mystery?  or are you just putting out some kind of mortgage-vibe?  coincidence?  No.  Would you believe that your information is being sold!?!  “But,” you exclaim, “my mortgage person said that they would not sell my personal information.  And (you say quietly to yourself), what kind of MBA-flunkie would try to sell me his mortgage services one day only to turn around and sell my information to a competitor the next??”

Well, even though mortgage brokers do get blamed for a lot of things, the business of selling your personal information is to be credited to the credit bureaus — Equifax, Experian and Trans Union.

By having your credit information pulled, an ‘inquiry’ record is created on your report.  This inquiry shows that a company has pulled your credit and will read with the date the credit report was pulled and the company used to obtain the report.  The credit bureaus have started selling this inquiry information to companies for the purposes of “offering product choices” and to solicit consumers for pre-approved and pre-screened offers.  And, unfortunately, as a result of pulling your credit report (and the recent mortgage-inquiry), you will likely be solicited through the mail and/or phone by un-invited mortgage companies . . . or what I refer to as the “bottom-dwellers” of the mortgage business.

You can opt-out of these types of offers by visiting: this website. 

Setting a buget (and keeping it).

“I am going to teach you to hate spending money.”

– Rupert Horn, rich Uncle to Montgomery Brewster (Richard Pryor)

Well, I would imagine that, for most people, even if you did have an insanely-rich (or rather, insane and rich) uncle, and even if that uncle wanted to give you $30 million dollars that you were required to waste in 30 days as some form of sick test, in order for you to earn and to inherit the full-estate of $300 million dollars . . . I just can’t imagine hating to spend money. Losing it? sure. Wasting it? absolutely. Paying taxes on it? probably. But spending it? I think most of us would probably be ok with that.

How about budgeting it? And no, I don’t mean the $300,000 million dollars — just budgeting in general. Most people don’t like writing a budget, keeping a budget, or thinking about a budget, as a matter of fact, a lot of people don’t even like to talk about a budget. I am surprised every time it happens, but every few months or so, I will ask someone this question: “How much were you hoping to spend per month on your mortgage payment (principle, interest, taxes, insurance, everything)?” The (surprising) answer: “Well, I was kind of hoping that you would tell me that.”

Granted, every now and then someone misunderstands the question, but what you can afford in a house payment has little to do with what I can qualify you for in a mortgage payment.  And here is why — generally speaking, mortgage programs allow you to use 28% of your monthly (gross) income on your house payment (housing ratio) and they allow you to use 36% of your monthly income on all of your debt payments (debt-to-income ratio).  The lesser of these two numbers determines your qualifying maximum monthly payment (as you would fit perfectly into the guidelines).  So, for example, if you made $60,000 per year, or $5,000 per month, at 28%, your maximum house payment would equal $1,400.  If your only debt was a $450 car payment, $5,000 x 36% = $1,800 . . . minus the $450 per month . . . so $1,350 would be the maximum payment you could qualify for to keep your debt-to-income ratio at the 36%.

However, with the ability to push the ratios above the guidelines for borrowers with great credit, strong employment, $$ reserves in the bank, etc. and with many loan programs having expanded qualifying guidelines (allowing debt ratios of 41%, 45%, 50% or even 55%), you can see how what you want to spend and what you can spend might be drastically different.  Hence, back to the talk of a budget. 

Here are some helpful ideas to remember when working on a budget: 

1.  start working backwards — go through your check-book or bank statement and first find out where you are spending your money

2.  look for easy places to reduce expenses — excessive dining out, swiping the debit card for small impulse buys, trips to Wal-Mart where you go in to buy toothpaste and somehow end up spending $128.  How does that happen anyways??  A similar phenomenon occurs at Home Depot . . . you go in to buy a hammer . . . $164 later . . . you are now the proud owner of a hammer and a brand-new cordless drill.  Don’t even get me started on Target.

3.  don’t confuse budgeting with being cheap — if you have tried budgeting before, you probably heard  advice like, “if you give up your designer-latte’ two times a week, that would add up to over $300 a year in savings!”, sounds good, right?  NO, it doesn’t sound good.  It sounds like a way to tick-off a lot of hard-working, early-rising people by making them forgo a favorite part of the day and replace it with having to pre-program their Mr. Coffee, loaded with some not-so-similar-tasting Maxwell House.  If you try this approach, you’ll hate your budget and your likely to trash the whole thing in a few weeks (or days).  What if you bought a Starbucks Barista personal brewer and then made your own great tasting coffee?  Hmmm . . . at $120, plus coffee grounds . . . at 2 cups a day (one for me and one for my wife), you’d break even in how many months???  (spoken like a true mortgage broker). 

4.  give yourself some cash — I would guess that the downfall of a lot of budgets is the debit card.  It’s convenient to use a debit card for ’small-things’ but 15 ’small things’ can quickly add up to $150 and multiply that by two (15 for me and 15 for my wife = $300) and you almost have a car payment in off-budget expenses.  My advice, pull out a set amount of cash each month for discretionary spending.  This money is for anything not on the budget — a McD’s breakfast, a sushi lunch or a smoothie at the gym.  Once the cash is gone for the month, if it’s not on the budget, you’re done until next month.

5.  review your mortgage — taking 20 minutes to review your current mortgage may free-up extra cash per month and pull that budget closer to balanced.  Make sure you review all of your options:  full-closing costs, 0% origination, or even no-closing costs.

When shopping for a mortgage, I hope that you will do your homework before starting the loan process so that you have a good idea of your comfort range in terms of a monthly payment.  Having that piece of the puzzle together before you start shopping for a mortgage will save you time, energy and anxiety — because looking for houses in the wrong price-range is hard to un-do.  I can promise you . . . you will like the more expensive houses better . . . that’s why they’re more expensive.

US Economy — too hot, too cold, or just right?

When reading about the US economy, and as I look through different articles from various websites, one thing is certain — Democrats (leaders and followers) are never happy with Republicans and, Republicans are never happy with Democrats. Both sides would likely say, “They are not doing a good job managing/fixing/improving _____ (blank)” insert any political-type issue here – the economy, health-care, education, the war in Iraq, etc; “but we could do much better.” Or they’ll at least say that until they lose the election, and then they’ll smile for the camera, act like friends and say that they are “looking forward to working together for a better _____ (blank).”

So, in light of this week’s election, I thought it would be interesting to post some information relative to the U.S. economy — is it too hot? (the Feds might say it is, and hence, the possibility of an 18th rate-hike), too cold? (the Democrats might say, but I would argue mainly because they are pushing the ‘we could do better’ theme), or just right? (which is what the Republicans might say, partly to justify the job that their people are doing in office and to combat the whole ‘we could do better’ thing). And, because of election dynamics (spin) and because the White House has proven to be a miserable judge of who is and who is not doing a ‘heckuva job’ (see: Browny, Snowy, and Rummy), any real information about the strength or weakness of the US economy can not be gathered through political statements, newspaper headlines or television personalities (spin or ‘no-spin’).

Here is the problem — pick up the newspaper (or click to any favorite news website) and you will find an article that convincingly shows how poorly the economy is doing (the housing-bubble bursting, unemployment issues, etc.), turn the page (or click the mouse), and you’ll probably find another article discussing numbers and facts that would point to the US economy growing so strongly that additional Fed rate hikes may be necessary to slow things down.

So which is it? too hot? too cold? or just right?

Let’s take a look at two indicators that seem to tell the story best.

employment numbers: for last month, unemployment fell to 4.4% (it’s lowest in 5 years) and average hourly-earnings were reported up 3.9% for the past year. Seemingly, this would mean that more people are employed, and, on average, people are making more money than they did a year ago. But, the employment market has slowed down more than anticipated — still growing, just not as quickly as some ‘econo-guessers’ had hoped. So is this good news? or bad news? Well, it depends on where you read it . . . according to cnnmoney.com the “disappointing job growth” number was bad news. But, according to fox.com, the same data “[flashed] a picture of a strong labor market as midterm elections [drew] near.” So, which is it? good or bad?

the housing market: The media has hyped for more than a year over the issue of a bursting real estate bubble. While apparent (and somewhat obvious, I think) in some parts of the country — have you seen what kind of house you have to settle for in California if you can only spend $1 million?? — the reality of a recession-inducing nationwide housing bubble seems to have been avoided at this point. Although one reporter at newsweek.com claims we are “at the endgame for housing,” while others, as you might guess have a different view. Kendra Todd (winner of the Apprentice), claimed that “the housing bubble [was] a myth . . . [and that] bubbles are for bubble-baths.” Now, of course, the term is no longer bubble, but ‘measured moderation’, a ‘cooling market’, ’soft land’, etc, and across the country, the housing market seems to be doing exactly what the Fed Chief Bernanke predicted, it is slowing down in an “orderly” fashion. So which is it? bursting-bubble? or an orderly slowing? Is there such thing as an orderly-bursting???

The real issue (aside from the fact that ‘news’ is not really ‘news’, but is instead some strange form of editorialized, politicized, agenda-driven, fake-unbiased information where the line between reality and opinion is hard to find), the real issue is that something like economic strength — whether it be employment, unemployment, house appreciation, house depreciation, or something similar — about the entire US economy is not a great indicator of the health of the same thing on a local level. In order to get an accurate idea of the economy as it relates to you, you need to know the data from your area.

I’ll work on another post for the Georgia-faithful who read “the Mortgage Blog,” to give you some local data . . . until then, the question of the US economy being too hot? too cold? or just right? might ought be replaced with this one . . . the news on the US economy . . . too left? or too right?

Get your money for nothing – $0 closing costs.

So is there really such a thing as a loan with NO closing costs? Can you really get a mortgage for nothing (and your chicks for free)?

You certainly can . . . $0 in fees, but certainly at a price. And, for a lot of people — depending on a few factors — it may actually be the best way to refinance your mortgage.

An example is probably the easiest way to demonstrate a few options. Let’s assume that you have a $194,000 mortgage on a house valued around $250,000. Suppose you currently have an adjustable rate mortgage that was fixed for 5 years (a 5/1 ARM) and now after 4 years, it is soon to adjust. Based on today’s 1 year LIBOR index (and guessing at a 2.25% margin), your rate would adjust up to 7.5%, so you are pretty sure you need refinance.

On a refinance, there are really three ways to pay for the closing costs associated with the new loan. (For the purpose of this post, I’m just talking about closing costs; how to pay for the prepaid expenses and escrow money for the new loan are usually just a matter of personal preference).

One — you could pay for the closing costs in cash at closing. Over the course of my ten years in the mortgage business, I have never had anyone pay for their closing costs this way. At times, people who consider themselves to be hard-core consumer-guru follower-types like to ponder this option, but mainly just for nobility’s sake.

Two — you could increase the loan amount to cover the closing costs. If you financed the closing costs into the mortgage balance, you would end up with a total loan amount of approximately $200,000. Here’s how: the payoff on the old mortgage would be approximately $195,000 (because mortgage interest is paid in arrears, you have to add one month’s interest to your current loan balance of $194,000); and then add the payoff amount to the amount needed to cover closing costs — approximately $4,600 on a $200,000 mortgage. So in total . . . $194,000 loan balance + one month’s interest + $4,600 in closing costs = $199,600. At an interest rate of 5.875% for a 30 year fixed rate loan, the principle and interest payment would be $1,180 per month.

Or, three — you could increase the interest rate on the mortgage in order to cover all of the closing costs. People in the mortgage business refer to this scenario as a ‘lender-paid closing cost’ option or that the closing costs are being ‘paid through premium-pricing’ (on the radio, the guy likes to make it sound like he invented this third option and that he’ll do a loan for you with $0 in costs partly out of the goodness of his heart and partly because everyone else in the world is a ‘racket and a rip-off’ — what a generous fella). Essentially, in this scenario, the borrower accepts a higher-than-market interest rate to cover the closing costs. This higher rate causes the investor to pay the mortgage broker enough money to cover all of the closing costs (or the entire $4,600). The good news is that if you cover your closing costs this way, your loan balance would be equal to your payoff amount only, or $195,000. To continue the example, in this scenario, the interest rate would need to be moved up to 6.625% (better than the soon to be adjusted to rate of 7.5%). And at that rate, the principle and interest payment would be $1,248 per month.

The difference between option two (with closing costs) and option three (no closing costs) is $4,600 in costs and $68 per month. So which is the better option?? Well . . . it depends on your plans for the future. If you do the straight-forward math, in order to break-even on the expense of the $4,600 in closing costs at a $68 per month difference in payment, you would need to keep the loan for 67 months (or 5.6 years).

So, if you are going to be in the house (or keep the loan) for more than 5.6 years, you would be better to increase the loan amount to finance the closing costs and take advantage of the lower rate (option two). If you are planning on being in the house (or keeping the loan) for less than 5.6 years, you would be better off taking the higher rate and the $0 in closing costs (option three). This math will vary based on the size of the loan and available interest rates and is generally only available (because of the way investors price loans) for fixed rate mortgages.

Another advantage of the ‘no cost’ option is that if interest rates move lower, you can refinance again (either with costs or without closing costs) without kicking yourself for having spent the extra $4,600 in closing costs. Of course, if rates go up, and you end up living in the house for more than 5.6 years, you’ll wish you had taken the lower rate, spent the extra $$ in closing costs and saved yourself the $68 per month . . . which by the way . . . over 10 years will cost you an additional $8,160 . . . and over 30 years will cost you an additional $24,480, ouch.

So, I guess you really can’t get your money for nothing . . . but, hey, the clicks (here on ‘the mortgage blog’) are free.