rates 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.

 

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.

2016 was a great year for the Utah Housing Market. According to CoreLogic, a well-respected source for housing market statistics, the average home in the State of Utah grew at an 8% annual pace over the last year. Further, it states that home values have nearly recovered all of their losses since the Housing Crisis of 2008. This strong report makes Utah one of the top appreciating Housing Markets in the country, which is great news for those who currently own a home.

With interest rates moving higher over the past few months, some are worried that this will have an adverse impact to the future value of homes. Although there is validity in the concern, the longer-term impact of rising rates has often proven to coincide with high levels of home value appreciation. Let’s take a look back on history to help form a conclusion.

The graph below shows four points in time when mortgage rates experienced rapid rates of increase and compare those times with their annualized rates of home value appreciation over the same period. As you can see, not only did home values remain in growth mode, they often experienced attractive improvements to home values. TRUST E D · R E S P E C T E D · LOVED

Traditional economics support the theory that as the cost of a mortgage increases with higher rates, the value of homes will fall to bring the relative cost back into balance. However, when values are rising because of growing incomes and a stronger job market, home values have room to move higher even as rates increase. Given the current strength of the housing market, the current level of wage growth is more than enough to sustain a reasonable rate of home value appreciation. Utah’s Unemployment Rate is currently at 3.2%, which is considered “full employment.” Further, the outlook on the job market is expected to remain strong for years to come; making Utah one of the greatest places to live.

Utah Home Values 2017

Although mortgage rates aren’t anticipated to experience a significant increase in 2017 (see next month’s 2017 Market Forecast), some experts and media pundits are calling for a drop in home values this year. Although we anticipate a slower pace of growth in 2017, we still see at least a growth rate of 4.5%. This is a healthy rate of appreciation and a level that is sustainable for the foreseeable future.

Of course, there is no way to say for sure what will happen, but it doesn’t appear likely that higher rates will have a significant negative impact to home values here in Utah.

High rates of home appreciation provide a tremendous opportunity to increase net worth. If you plan to move-up in the near future, you may want to make the move sooner rather than later. An extra $100,000 in home value, increasing at a rate of 4.5% could add an additional $14,000 to your net worth over the next three years. This could also be achieved by purchasing an investment property or a second home. Also, if you have millennial children, encourage them to become homeowners early in their adult life. Home ownership is a determining factor of long term financial health and security. Starting early is the key.

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