mortgage mistakes Tag

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.

There are so many details involved in the process of securing a mortgage, and this is what a mortgage company like City Creek Mortgage is here for. We can help you with everything from mortgage rates to determining the best type of loan for you and your family.

As our expert brokers will tell you, knowing the pitfalls to avoid is just as important as knowing the right buttons to push during this process. What are some of the mistakes to avoid during the mortgage process?

Hidden Costs

A big mistake many people make is failing to account for the additional costs that will come with home ownership. They’ll budget for their mortgage payments, but won’t leave any left for maintenance and other expected yearly costs.

In general, it’s recommended that you lay out 1 to 2 percent of your budget for expected maintenance. If you get lucky and you never need this one year, that’ just a boon to your end-of-year finances. If you do end up needing it, that’s a worthwhile precaution you took. Also keep in mind property taxes and any special insurance you may need to purchase.

Ignoring APR

There are lenders who will show you a flashy interest rate figure, but then crush you with huge hidden fees. For this reason, you need to be sure you’re looking at APR costs – these include lender and any other fees, so you’ll see the final, out-the-door price of your mortgage.

No Money Down

It’s typical for lenders to require a 20 percent down payment for most mortgages, and the alternative can be very damaging financially: Mortgage insurance. Mortgage insurance is to protect the lender in case you default on the loan, but you’re the one who has to pay for it if you can’t meet a certain down payment threshold. This can add significant amounts to your monthly payments.

Too Large a Commitment

It’s tempting to make a big investment in a mortgage, which is often your life’s largest expense. This is a legitimate aspiration, but be sure not to take it too far. Spending too much on a mortgage can take away from other vital areas like a car, retirement planning or college education for the kids.

The general rule is this: Don’t spent more than 28 percent of your yearly pretax income on your living situation, including your mortgage. If your costs will well exceed this number, consider whether a smaller mortgage might be the better route.

Credit Issues

Credit score goes a long way to determining the types of loans and interest rates you’ll be approved for, and it’s a mistake to go searching for a mortgage without proper credit management already in place. Try to check at least six months in advance, so you’ll have time to move some things financially and raise the credit score if it’s too low.

Our brokers at City Creek Mortgage are here to answer any further questions you have on this or any part of our mortgage services.