Finance 101 Tag

When it comes to growing money, time is your best friend. Unfortunately, the biggest problem most people who are saving for retirement face is that they start too late in life to achieve a comfortable retirement lifestyle. As a result, the cycle of beginning late continues from one generation to the next.  As parents, we can end the pattern and set our kids up for success. But it starts with education and action.

The Power of Compounding Returns

Compounding interest is essentially earning a return on your past returns. Having this process continue year after year is what creates most of the wealth from people who have a lot of money in their retirement accounts.

The Rule of 72 is a method for estimating an investments time to double. In its simplest term, an investment growing at 7.2% will double every ten years. As an example, $100,000 becomes $200,000 in 10 years, $400,000 in twenty years and $800,000 at year 30. This assumes no additional monies invested.

It is through compounding interest and the power of money growing exponentially over time that you can make the greatest impact on the financial future of your children.

An Example

Assumptions:

10-year-old child

Goal:  Retire at age 65 (55 years from today)

Have $48,000 per year retirement income (in today’s dollars) at the time he / she retires

(This means he / she will need $11,887 per month in future dollars to equate to what $4,000 buys us today – based on a 2% annual inflation rate)

Investment averages 7.5% annual return

Needs investment to last until age 100 (35 years) – Balance will be $0 at age 100

To meet this goal, all that you need to commit to is investing $232 per month until the child retires at age 65. By starting young, this achievable goal can be accomplished. You will set your child up for financial success in a way that he / she can easily sustain. This is how legacies begin.

The Hardest Step is the First

A two-inch piece of metal can hold a train back from starting down the tracks. However, once in full motion, a train has the strength to break through a steel wall. Both good and bad habits are generally difficult to start. However, once in full motion, they are hard to quit. Saving is nothing but a habit that needs to be developed. Once mastered, the pain of breaking the habit of saving is greater than the pain of maintaining the discipline.

I encourage you to make room in your budget to help start the habit for your children. Once they are old enough to earn money, encourage them to continue to the habit. It will be much easier for them to continue growing a retirement account than it will be for them to start one.

Even if it’s only $40 per month, it’s much better than nothing at all. Over time, increase the amount contributed. Watching it grow and knowing that you are helping to build a legacy that will out-live you will inspire you to maintain the habit and increase the amount you contribute as time goes on. Once your child makes enough income to continue this goal, pass the responsibility on to him / her. It will be one of the greatest life lessons they will be taught.

What to do Next:

I encourage you to visit our website at citycreekmortgage.com, click on “Tools” and then “Retirement Calculator”. Run a scenario for yourself and then do one for your kids. By playing with longer timelines, you’ll clearly see the benefit of starting early. Then, call your bank or a trusted financial planner to help set up the accounts and get rolling!

One of the greatest injustices of the mortgage industry is the high commission some loan officers receive for originating a home loan. In many cases, it equates to 1.5% (or more) of the total amount of the mortgage. That’s a $4,500 paycheck for closing a $300,000 loan! And where does the money for those high commissions come from? Through an increase in your interest rate. This is wrong and unjustified, in my opinion.

My personal mission for City Creek Mortgage is to eliminate the over-compensated loan officer by educating consumers about why most companies charge such high interest rates. A loan officer on salary or a lower commission rate can save the consumer money—in most cases, a lot of money.

I’m NOT saying loan officers shouldn’t have the opportunity to make a great income. I believe that the ethical model is to earn a little off a lot of loan closings vs. a lot off a few. A higher-volume team with salary-based loan officers can provide a great living for employees as well as lower interest rates for borrowers.

If you’re shopping for a home mortgage, don’t be afraid to ask your loan officer about their personal commission rate. If they stumble over their answer, be careful. Look for a salaried loan officer and I bet you’ll find a better deal.

As a bit of a contrarian, whenever things start to look too good, I begin to question the future. And given the strength of the market since the housing meltdown reversed, now is a prudent time to begin closely watching home value appreciation for any signs of a bubble.

I’m not saying I believe a correction in home values is imminent in the near term. It will happen at some point, but no one can say when with any certainty. But any time you see unsustainable growth in the housing market, you are witnessing a bubble, and as I’ve heard it said, “Whatever can’t continue must end.” I would rather consider the prospects of a housing bubble forming within the next two to four years than ignore the potential impact entirely. But I’ll let you gauge the risk yourself.

As part of the last housing crisis, indicators of our downfall began in 2005. However, consumers continued to purchase homes at a rapid pace until 2007—and even into 2008—before it was abundantly clear that we had a big problem. Had people known what to look for in 2005, many could have avoided a disaster.

I monitor five key points relative to the ongoing strength of the housing market:

  1. The median home price in relation to consumer confidence.
    • In 2006, consumer confidence hit an all-time high, and we’re at a similar point right now. Historically, when consumers feel confident, housing prices increase. However, as the recent trend in consumer confidence has not led to a relative increase in home values, we can anticipate either a drop in consumer confidence or an increase in housing prices.
  2. The number of people purchasing homes with cash.
    • When the market is hot, more people pay cash for their homes. We’ve recently seen a drop in the number of cash buyers, indicating a potential slowing in the housing market.
  3. The housing affordability index.
    • With both mortgage interest rates and home values on the rise, the housing affordability index has taken a sharp dive to a level unseen since 2009. Homes have become less affordable.
  4. The percentage of homes that increase in value month over month.
    • Although residential housing values have increased, there are many areas where prices are flat or even declining. The peak of a housing cycle is generally reached once the percentage of homes rising in value ceases to increase. The peak in our current cycle was reached in February 2017, and although this indicator could turn positive once more, it is reflective of the situation in 2005–2006.
  5. The percentage of household income that goes toward housing expenses.
    • Growth is no longer sustainable once the average percentage of household income spent on mortgage or rent payments exceeds 25%. Currently, in 20% of the major housing markets, payments average more than 25%. This is the highest percentage we have seen in a long time.

I’m not predicting a housing crash. I believe now is still a great time to buy a home, especially if you plan to live in it for a while. The relative price difference of owning versus renting overwhelmingly supports buying a home. Markets will always go through cycles. My intention is to educate and point out some of the indicators of a bubble. Maybe my thoughts will help deter buyers whose sole objective is to own a home for its appreciation value; at some point, this kind of short-term investment will no longer be an attractive option. However, the long-term reasons to buy remain firmly in place, especially with the average 4.5% growth rate on real estate. When you do the math, owning a home is a no-brainer.

With home prices moving a great deal higher in recent years, some are worried that we are now on the verge of another housing bubble. Although this could be true, it certainly doesn’t appear likely in the near term. In fact, housing prices are projected to continue to grow over the coming years. However, many millennials are using this fear as rationale to continue to live with their parents or rent.

Real estate used as a primary residence has proven over time to be a wise investment, regardless of the timing of the purchase. Although some built up significant equity by purchasing when prices were at their lows during the recent housing crisis, even those who bought at the peak of the market in 2007 should once again be in a strong position of equity.

Homeownership is one of the greatest determining factors that contribute to wealth accumulation. In 2015, the average net worth of a homeowner was $195,400, compared to just $5,400 for a renter. Not only is a homeowner able to better weather a financial storm by borrowing against accumulated equity, homeowners are also able to reach a point where they no longer must make a mortgage payment once the home is paid off. Further, with rents rising as rapidly as they have in recent years, a homeowner who purchased their home years ago is likely paying far less than a renter who is leasing a similar priced home. In addition, the homeowner will receive a tax break that isn’t available to those who rent.

Although inching higher, the current home-ownership rate is well below where it should be. We need to see a bigger push for millennial home buyers to help ensure a strong economy in the decades to come. If they fail to buy at a reasonable age, they could be missing out on a significant opportunity.

The Hidden Truth about Interest Rates

I recently made the decision to care less about being liked by people in the mortgage industry and more about transparency surrounding what I believe. For the sake of this article, I’ll focus on how much a mortgage loan truly costs an average consumer at most mortgage companies vs. what it costs at City Creek Mortgage. Further, I’ll dive into where I see the future of this industry as well as the people who work within it.

First, I want to make clear this is not a dig at my competitors. I believe most mortgage lenders are wonderful people who work for great companies. Just because I have fundamental differences in beliefs about how much companies and people in my industry should earn, doesn’t make my competitors wrong.

The $ Behind a Mortgage

Few consumers realize how much money is made in the process of a mortgage. For many well-known local mortgage companies, a $300,000 mortgage loan generates $12,000 of revenue. What consumers should understand is that this “standard” cost of originating a loan is substantially higher than the actual cost of doing so. The result is needlessly higher interest rates and closing costs for the consumer. Although “it’s just the way things are done,” I believe once people understand what is happening, this practice will come to an end.

In total transparency, a $300,000 mortgage loan closed at City Creek Mortgage will generate up to $6,000 in revenue on average. Although still a healthy income, it is significantly below what most companies make on the same loan. By choosing to make less money on each loan, we save our borrowers in both interest rate and closing costs compared to many of our competitors. Plain and simple, that’s the truth.

As I consider the future of the mortgage industry, I see what many in the industry don’t want to face. Some may disagree with my assessment. I see a time in the coming years where a computer will be able to replace most of the work done by mortgage loan originators. I will explain my thoughts below.

The Impact of Technology

Technology is making the mortgage process significantly easier, faster & more affordable. We are already at the stage where technology can automatically retrieve taxes, bank statements or pay stubs. Since this is most of the supporting documentation required for a loan, the effort required by the consumer and loan originator is decreasing. Further, many loans no longer require a physical appraisal. Once again, expediting the loan process. When combined with digital signing and instant loan approval, it’s not difficult for one to perceive a day when a mortgage loan originator is only needed on more complicated loans. It could even be that a human is needed on only 25% of all loans closed.

A Mortgage Loan Originator’s Income

In truth, the individual mortgage loan originator is usually able to set their own compensation levels. I know many that get paid 2% of each loan they close. This is in addition to what their respective company makes on each loan. For this to work, mortgage companies roll that super high commission into the interest rate they charge borrowers.

So for a $300,000 loan, not only does the company make money, but the loan officer gets $6,000 in commission. For that same $300,000 loan at City Creek Mortgage, $6,000 is the total revenue. No additional charges, or rolling commission into the interest rate like other companies. We use $6,000 to pay 30 staff members, and all our overhead. That’s why (in other companies) you can often get a lower rate by walking through an office and asking individual mortgage loan originators what their level of compensation is. Once you find the lowest plan, you can choose that mortgage loan originator and be offered lower rates and fees. Or you could do it…

The Right Way

You may be wondering how it is possible for City Creek Mortgage to make half of what our competition make on each loan. It is simple. We have a volume-based model. We have to do more loans, because we make less on each loan. We provide our loan officers with the stability of a salary and since they don’t do any marketing themselves, they can do substantially more loans per month than the typical loan originator.

I believe most mortgage loan originators who work for companies eventually will be paid a salary. An individual loan originator will no longer be able to make hundreds of thousands of dollars a year at the expense of the consumer for closing a handful of loans each month. The current system, where borrowers are paying a luxury tax each month for 30 years for overcompensated loan officers is flawed. Further, the real estate agents who claim to want the best for their clients are often the ones feeding the business to these highly compensated mortgage loan originators. It’s just wrong. Consumers shouldn’t be footing the bill for extravagant lifestyles of over-compensated mortgage loan originators. Trust me, it will change.

And that, my friends, is my explanation as to why our rates at City Creek Mortgage are so much lower than our competitors.

 

WB

Warren Buffett’s famous quote “Be fearful when others are greedy, be greedy when others are fearful,” seems to be applicable to today’s stock market environment. With the US stock market recently setting new all-time highs, confidence in the market has reached a peak not seen since 2005. This strong sentiment may be reaching a point of “irrational exuberance.”

History shows that a contrarian outcome is often the result of an extraordinarily high level of faith that the market will continue to improve. A look back on previous market corrections shows that confidence generally peaks just prior to the downturn. Given the current political, economic and global uncertainty, it seems that circumstances may be ripe for a correction later in 2017.

Any attempt to foresee the direction of a market should be taken with a grain of salt. There are strong arguments to suggest the stock market will continue its climb higher well past 2018. The level of confidence however, is a concern.