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The Brokerage Brawl

August 28, 2023 admin

From left to right, E Mortgage CEO Joseph Shalaby, West Capital Lending CEO Daniel Iskander, NEXA CEO Mike Kortas facing off against Equity Smart CEO Pablo Martinez, and NMP Head of Engagement & Outreach Andrew Berman to the far right.

The Battle Every Originator Has Been Waiting For

There’s only one mortgage conference in the nation that would invite the top five brokerage owners in the nation on stage to battle head-to-head over who has the best brokerage model, and that’s Originator Connect.

In classic MMA fashion, the heavyweight broker champions emerged from each corner of the room with hype music blaring over the loudspeakers, inspiring rambunctious cheers and even some boo’s from originators in the audience. Of course, gathering five of the top CEOs of the broker world on stage would encourage excitement in the crowd, as did many of the provocative questions from host Christine Stuart, News Director at National Mortgage Professional. But the Brokerage Brawl event wasn’t merely for entertainment.

The Contenders:

Pablo “The Determinator” Martinez, Equity Smart Home Loans CEO
“Tenacious” Thuan Nguyen, Loan Factory CEO
“Electric” Joe Shalaby, E Mortgage Capital CEO
“Dynamic” Dan Iskander, West Capital Lending CEO
Mike “The Bull” Kortas, NEXA CEO

In 2023, the broker community is showing who’s boss. Statistics from the NMLS shows retail originators switching to wholesale at an increasing rate, and in 2022 over 20,000 loan officers joined the wholesale channel. More can be expected to transition this year because brokers can offer borrowers more competitive rates and lower fees on their loans. With high rates, unreachable home prices, and scarce inventory, the mortgage business is as dry as a bone. In these desperate times, originators from retail and banking are looking for salvation in the wholesale channel, and broker owners are ready to capture them with a wide net.

The transition from retail originator to broker can be shaky if one does not know what they’re looking for. The decision to work with one brokerage over another is largely up to individual preference. Does the originator want the freedom to choose their own software? Does the originator need training to become self-generated? Are they looking for access to specific resources or tools? And, of course, do they want to work with Rocket or UWM?

Really, it comes down to what kind of leadership style the originator is attracted to, and here we have a very different assortment.

West Capital Lending CEO Iskander speaking on stage, with Loan Factory CEO Nguyen looking over his shoulder. On the right, E Mortgage Capital CEO Shalaby holds the microphone.

Training & Retention

Working in the brokerage channel means loan originators need to be proficient at generating their own leads. That could present challenges for some retail originators who have been working in call centers and had their leads handed to them. So each brokerage’s training and recruitment process matters greatly, as well as their retention. Some companies are willing to nurture originators with support and training, while others expect them to hit the ground running.

Looking at overall monthly volume numbers can be deceiving, since 10% of originators could be carrying out most of the production while many others are floundering. It’s one thing to be able to recruit top producers in the industry, but quite another to be able to create top producers. Iskander, CEO of West Capital Lending, claims his company does it best.

“We’re funding 550 units compared to, I think, last month they [NEXA] funded 1,560. So we’re funding one third of their production, yet we have only 16% of the LOs that they do,” Iskander said.

Some brokerages, such as West Capital Lending and Loan Factory, are more in favor of a nurturing approach when it comes to training their loan originators. They care about retention, because after providing training and doing the hard work to get those new recruits acclimated, it could be a blunder when most of them end up leaving.

Nguyen’s latest comeback story helps illustrate the challenges in recruiting, training and retaining loan originators. Seven months ago, Loan Factory had only 20 LOs on staff producing 50 loans per month. Since then it has aggressively been able to recruit 300 more new and experienced LOs. But that’s come at a cost to overall productivity: for the company, production has risen to 167 loans per month. But on average, individual production has dipped from 2.5 loans per month to one funded loan every other month per loan officer.

Nguyen recognizes the slippage, but argues that problem can be solved with enough time and training. “Recruiting is important but retention is even more important. It’s difficult to provide them with support and training to help them grow their production. We focus our attention on the support they need; the marketing, the underwriting, the technology, the training, and the coaching,” Nguyen asserts. “So give us a few months and we’re going to be way better.”

On Your Own

NEXA, on the other hand, has more of a sink or swim mentality. Its onboarding process is expedient, putting loan originators on the payroll in as little as four hours, its training process is an ongoing weekly class. Kortas said NEXA has an academy program for newer originators, but they must honor a commitment to fund at least two loans a month.

“You have to commit to doing at least 2 loans a month… but if you don’t do that, we’ll let you go,” Kortas said. “Out of 400 new loan officers who join the academy, probably 300 of them wash out. But that’s the reality of this industry.”

That eventually prompted Nguyen to slam Kortas in an interview after the Brawl, saying, “I don’t think he really cares for the loan officers… The loan officer that joins NEXA has to pay a lot. They take a lot of money out of their commissions to pay the recruiter… at the same time he charges other fees: software fees, academy fees, and all that.”

Nguyen even said that he receives calls from NEXA loan originators who complain that their company is taking too big a cut out of their paychecks. At Loan Factory, Nguyen said LOs don’t have to pay for anything, including software.

The ultimate flaw with NEXA’s model, according to Nguyen, is that it centers around recruitment. Bring a ton of fish in and only hold on to the big ones. That may mean constant staff turnover, but the end result for NEXA is clear: the company came in with the highest dollar volume overall for the past 12 months, $4.5 billion, according to Modex.

Tools & Software

In order for brokers to fund loans efficiently and fund more loans per month, they need to have access to the right tools and technology. Of course, that may vary between loan originators so many may have the desire to choose their own systems.

Although most of the broker owners on stage accept employees’ suggestions when it comes to the technology and tools they use, Nguyen believes his proprietary technology is the best, leaving no room for suggestions.

“They don’t have a choice,” Nguyen said.

The audience burst into laughter at his frankness, but Nguyen justified his stance by saying loan originators have no business making technology decisions. They must only concern themselves with the front end of the process.

Not everyone in the crowd reacted negatively to the statement, since Loan Factory’s software and technology is impressive. Nguyen claims Loan Factory is the only mortgage company that provides a free system for loan originator assistants (LOAs). That has become especially useful as originators have had to turn to more complex offerings – such as Non-QM and reverse mortgages – and LOAs are the support team that lets the originator move on to more production. Having free access to tech makes the whole process easier for everyone, Nguyen argues.

On top of that, Loan Factory also has proprietary tech that provides its originators with online application generation, rate alerts, a borrower portal, CRM and Cloud-based document management.

As previously mentioned, Nguyen boasted that his originators don’t have to pay any fees for software, marketing, assistants, training, underwriter support, or a desk at the office. However, the Loan Factory website does note that brokers have a $595 flat fee off their commission every month and have a $500 processing fee per loan.

“Why would you waste time trying other software?” Nguyen asked the audience. “It’s all free at Loan Factory.”

Loan Factory CEO Thuan Nguyen speaking on stage at the Brokerage Brawl. To his left is West Capital Lending CEO Daniel Iskander and to his right is Smart Equity Home Loans CEO Pablo Martinez.

Iskander disagreed, saying not providing originators a say in the technology they use is a bad decision.

“We encourage them to go out there and find their own technology… as long as it’s compliant,” Iskander said. “LOs are the ones out there exploring new technologies, testing them, so I think it’s important for them to have a choice. Thuan’s software might not suit a certain LO’s desire for how he wants to approach his business.”

Kortas likewise shot back at Nguyen for his response, saying that it’s “insane” to not allow originators to have a say in what technology they use. At NEXA, Kortas said originators get to voice their opinions every Tuesday in a company-wide video conference, where suggestions and criticisms are welcome.

Bringing on more than a thousand loan originators to Zoom their suggestions and criticisms seems like its own kind of brawl, but Kortas said that it is an organized meeting with a Q&A session at the end.

In a followup interview, Kortas was a bit more complimentary of Nguyen, but believes he did lose the Brokerage Brawl because of the software question.

“Contrary to popular belief, people think I don’t respect Thuan, but I do,” Kortas said. “I thought his opening music ‘don’t call it a comeback’ was appropriate. But I do think he came in last place… you don’t get to tell loan officers software is more important than you and think loan officers don’t care about that.”

Joseph Shalaby, E Mortgage Capital CEO, said his company endorses several pieces of technology. But it stays firm against allowing loan officers to have complete control over which technology they use, over concerns about borrower data protection.

“We encourage loan officers to keep their ear to the ground and find new solutions because technology is changing so quickly,” Shalaby said. “We want to be at the forefront of any innovation that can help take our business to the next level.”

Likewise, Martinez encourages collaboration and suggestions when it comes to the technology and tools they provide.

Business Growth

Mortgage market blues – how to weather the storm

June 16, 2023 admin

Those in the mortgage industry are painfully aware of the doldrums in which the industry now finds itself. While platitudes may ring hollow in lifting spirits, insights from others might prove a better salve.

Take Eric Hines (pictured left), co-founder of West Capital Lending, for example. An industry veteran who went through the Great Recession, he said preparation in overcoming a down market is key.

“You have to just plan for the ups and downs and expect the unexpected,” he told Mortgage Professional America during a recent interview. “It’s kind of unpredictable. What’s known is it definitely goes through cycles. A lot of loan officers will fall flat on their face the first time they hit a down market, but those who have been around for a while know it’s just part of the game. You need to be able to prepare for the bad market because it’s just a matter of time.”

It shouldn’t be about the profit motive

Tied to Rocket Mortgage, Hines pointed to the company’s corporate values – a series of 20 philosophies dubbed ISMs representing the firm’s core principles – in offering further advice to those enduring the tough market.

“One of my favorite ones is that money and numbers don’t lead, they follow,” he explained. “I don’t think they should be your first priority – money and numbers. I think you should try to focus on other people. If you help enough people get what they want, you’ll get what you want in life. That should be more of the focus rather than money or compensation.”

Focusing on the process and helping people

His colleague and fellow co-founder, Danny Iskander (pictured center), agreed. “Focus on your process,” he told MPA. “Figure out how to help more people. The more people you help, the more you’ll be successful. Your income isn’t always going to remain constant or stable – that’s not why we’re in this business.”

Still feeling morose about the market? Consider the case of Alec Hanson (pictured right) for inspiration. Despite a heady charge after his recent appointment to senior vice president and divisional manager of loanDepot’s Pacific Southwest division, Hanson was palpably excited about his new role.

But here’s the rub: His task of helping the company’s originators optimize their volume comes on the heels of significant losses for the company – revenue of $207.9 million, down 58.7% over the same period last year for the fourth quarter ended March 2023. Total revenue declined from $3.7 billion during 2021 to $1.3 billion during 2022, largely attributable to lower market volumes and an exit from the wholesale channel.

Undeterred, he is determined to help achieve a turnaround for the company – market conditions notwithstanding: “All of us are pulling on the same side of the rope when it comes to dealing with this market,” he told MPA in a recent interview. “Some stuff is just the wave you own. That’s the ocean that we’re all in – every mortgage company – and they need to figure out their strategy in terms of how to navigate expenses to revenue, etc.”

Learn how to start a mortgage company in this article.

Bringing in business like riding a bike

Understanding the assignment, Hanson is intent on righting the ship “I am going to move the needle, and I believe in significant ways,” he said. “I’m going to help our loan officers become more productive. I’m going to help them market in unique and new ways that attract new customers and bring new business to our company. I’m going to help our brand, loanDepot, do the same thing.”

It’s like riding a bicycle: “Even when I was a loan officer, my job was to bring loans for the company,” he said. “I haven’t forgotten that. Our job is to make human connections and help people have homeownership. We’ve got great originators here who are hungry for it and great people joining every day who see the same thing. So this is just part of the ecosystem I get to support.”

Which is all to say the storm will eventually subside. In extending such meteorological analogies, one might remember the words of British author Vivien Greene: “Life isn’t about waiting for the storm to pass. It’s about learning to dance in the rain.”

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Business Growth

Brokerage co-founder triumphs after leaving “militant environment” at lender

May 26, 2023 admin

“I spoke up a little too much at meetings and it didn’t work out for me”

Danny Iskander (pictured) was supposed to be a doctor or lawyer before being led into the mortgage industry. Today, he helps lead West Capital Lending Inc., the Irvine, California-based brokerage shop he co-founded two years ago – this after a tumultuous period at loanDepot where he felt it was “my way or the highway.”

Pivoting from law school to mortgages

“I come from a family of physicians,” he told Mortgage Professional America during a telephone interview. “Both my parents are physicians – my dad is a physician and an attorney. It was always the path – you were either going to be a physician or attorney.”

So he was prepared to go to law school before visiting with his older brother. “He got my head around this idea of being a loan officer, and he told me about all the money that was in the mortgage industry at the time.”

Find out if being a mortgage loan officer a stressful job with this article.

Right after graduation, he would land at Home Loan Center as a production assistant in a call center environment. before being transferred to retail loan officer some eight weeks later. “And that’s how I got started,” he said.

From there he would go to Lending Tree, where he worked from 2004-09. By then married – to a physician no less – his wife accepted a medical residency in Ann Arbor, Mich. “And I’m here dealing with a financial crisis,” he said, referring to the Great Recession then well underway. “I had bought a house in California and was about $300,000 to $400,000 upside down on and had a wife moving to Michigan.”

He opted to follow his wife off to Michigan, where he continued to excel. “I decided to move to Michigan after being a California guy my whole life,” he said. There, he would take a job at as a retail loan officer at Lending Tree. “I ended up being on the top team,” he recalled.

Once his wife ended her residency, the couple would move back to California where their families were. He would find work at Green Light, which later became Nationstar Mortgage. “I ran a team for 18 months and then moved to loanDepot where I ran a specialized division – redistribution and retention, a top-producing team, for 14 months, and I got promoted to vice president of sales in direct lending.”

But then things took take a turn.

“2018 happened, and we lost about 25% of our sales staff and our top producers,” Iskander recalled. “We had three cost cuts and things really changed. loanDepot was challenged and the environment became very difficult for loan officers – the hours, the expectations. It just became a very strict, militant-type environment that I didn’t really appreciate. So I spoke up a little too much in meetings, and it didn’t really work out too well for me – they ended up demoting me. I believe I called it like I saw it, but that doesn’t work too well at loanDepot, where it’s ‘our way or the highway.’”

He was given the option of running a developing region, but he thought of his growing family. “We had just had our third child, and the time requirement of that position would’ve been even worse. So I debated it and decided to go to the independent side at the time.”

Starting over

He got his license sponsored by E Mortgage Capital. “That was the pedestal that I needed to start working again,” he recalled. It would also prove to be the launching pad to start his own business after teaming up with Eric Hines, a friend and colleague, who would create West Capital Lending.

“We literally locked ourselves in an office, licensed up that company and started onboarding our agents – 50 or 60 people – and from there we ramped up until the end of the year.” Inside of five months, the fledgling firm would post some $2 billion in volume, making it the top firm tied to Rocket Mortgage, he said. The next year they would top $2 billion in volume, working with 90 different lenders as a non-delegated correspondent lender as well. “That’s the wave we’ve been on,” he said.

Having been through the good and the bad, Iskander is now in a position to dispense advice to those just entering the field: “Ignore the noise,” he said in the way of a suggestion. “You might be entering a market where rates are 7%, and that’s very, very difficult. It’s a roller coaster ride, and you have to focus on your process and building relationships and focus on taking care of your clients. The noise can be distracting – the challenges, the market, the rates, economy – and those just entering the industry can fall prey to this mentality. You have to have mental toughness, grit and tenacity to be successful.”

Business Growth

West Capital Lending founder on paying his dues

May 24, 2023 admin

From call center work to co-founder, it’s been a tough climb

Eric Hines (pictured), co-founder of West Capital Lending, knows all there is to know about paying one’s dues.

“I initially got into the field by bumping into some different sales jobs,” he told Mortgage Professional America during a telephone interview. “I liked the idea of doing sales and liked working with finances. The first few jobs I had in that kind of realm were working with businesses and doing financing for business that needed funds to pay for inventory – like short-term loans called merchant cash advance.”

Before that, he dabbled in debt consolidation. “Helping consumers who had personal debt to help them consolidate it so they could manage it,” he explained. “There were pros and cons,” he said of his past jobs. “It helped me get my feet wet in doing sales on the phone and taking about people’s finances.”

For a young man in his early 20s, he recalled the money was pretty good: “It worked for me as a single young guy where I was able to make more money than I’d made in any prior jobs and be able to learn some things as I went along.”

The novelty begins to wear off

But the novelty soon began to wear off, particularly after working in the merchant cash advance field he likened to a payday loan for businesses. “I didn’t really find a way of moving up in my career by continuing in that path,” he said. “The industry had a bad reputation. Some unscrupulous companies ruined it for the rest of them. Even if you wanted to do good business, the companies didn’t have the best interest of the consumer in mind, in my opinion.”

He decided to move on to other things: “It was 2007 when I ended that that part of my career,” he said.

By 2012, he found himself at Green Light Loans as a loan officer. “The mortgage business was hot again,” he recalled hearing from friends in the Orange County section of California. “There was a lot of buzz. Green Light in Irvine, California was my introduction to the mortgage business.”

It was something of a defining moment, he suggested. “It was a motivating experience because it was the first time I was introduced to heavy competition and compared to my peers with metrics in a really big way. I’m a competitive guy, and the competitive side in me came out and that made me push myself to the next level and work hard.”

Stints would follow at Nationstar Mortgage and New American Funding before spending more than two years at E Mortgage Capital Inc., where he was leader of the independent branch – hiring and supporting more than 80 loan officers while originating around 30 loans each month as a loan officer.

Growing family proved to be a career motivator

Getting married proved to be another powerful motivator, as he longed to spend more time with family after his wife gave birth to their first child. Seeking more flexibility and a healthy work-life balance, he launched West Capital Lending Inc. with co-founder Danny Iskander in 2021.

Although he has been able to make it in the industry, he acknowledged being hard-pressed to recommend it to others – at least for now with mortgage rates in the 7% range and inflation stubbornly refusing to go away.

“It’s hard to recommend getting into the industry,” he said. But for those still intent on doing so, he offered advice: “You must have a plan for the ups and downs, and plan for the unexpected,” he said. “It’s a rocky road, unpredictable and goes through cycles.”

Mortgage

A Complete Guide To Different Home Loan Programs

November 28, 2022 admin

Every prospective home buyer needs to research the types of mortgages to find the best loan for their needs. Applying for a home loan can be complicated, and deciding which type of mortgage could be best for you ahead of time will help you focus on the correct type of home.

When you buy a house, there are numerous loans to choose from. Your rate, terms, and the lender will differ depending on your mortgage. Selecting the appropriate mortgage for your needs may lower your down payment and reduce overall interest payments throughout the loan term. Understanding the different types of home loans available and how they can help you achieve your goals is essential. There are many home loans, each with distinct features. This article will explore some of the most common ones.

Requirements To Get a Mortgage

Many types of mortgages are available to homebuyers but the best mortgage for you will depend on several factors. Some of these include:

Estimated Down Payment: The size of your down payment can determine the interest rate lenders will offer you.
Monthly Mortgage Payment: A mortgage lender will review your income and assets to determine your entire loan obligation. Consider the principal amount, interest, and taxes in addition to mortgage insurance, housing costs, and any homeowner’s fees when determining your monthly mortgage payment budget.
Credit Score: The interest rate you get on your loan is based mainly on your credit score.

Types of Home Loans

Types of Home A Complete Guide To Different Home Loan Programs

Conforming and non-conforming loans are the two categories of mortgages. Conformity versus non-conformity is decided by whether or not your lender keeps the loan, collects payments and interest on it, or sells it to one of two real estate investment firms — Fannie Mae or Freddie Mac.

Conforming Loans

A conforming loan refers to a conventional mortgage that Fannie Mae and Freddie Mac can buy. For one of these organizations to purchase the mortgage from your lender, it must adhere to essential criteria established by the Federal Housing Finance Agency (FHFA). The following are some of the requirements for this kind of loan:

Below The Maximum Dollar Limit: In most parts of the United States, the maximum amount allowed is $647,200 in 2022. In Alaska, Hawaii, and certain high-cost areas, the limit is $970,800. Higher limitations apply if you acquire a multifamily unit. Your lender can’t sell your loan to Fannie or Freddie unless you qualify for a super conforming loan.
Not A Federally Backed Loan: The loan can’t already have received government backing, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs. Several government organizations provide mortgage insurance. Fannie Mae and Freddie Mac may not purchase your mortgage if you have a federal-backed loan.
Meets Lender-Specific Criteria: Your loan must adhere to the lending party’s criteria to qualify for a conforming mortgage. For instance, you must maintain a credit score of no lower than 620. Besides that, when applying for a conforming loan, other property guidelines and income limits may come into play. A home loan expert can guide you through this process and help determine if you qualify based on your financial standing.

Conforming loans have strict criteria, but the requirements for borrowing are more consistent. Conforming loans are less risky because the lender can sell them to Fannie or Freddie. As a result, you might get a lower interest rate if you take out a conforming loan.

Non-Conforming Loans

Non-conforming loans have more relaxed guidelines than conforming loans. With a non-conforming loan, you may be able to borrow with a lower credit score, get approval for a larger loan, or avoid the need for a down payment.

A non-conforming loan does not follow the traditional criteria for loans. If you have a blemish on your credit report, such as a bankruptcy, you might be able to get a non-conforming loan. The government or jumbo mortgages will back most non-conforming loans.

Understanding Different Types of Mortgages

There are various pros and cons regarding the different types of home loans. Whether you’re a first-time home buyer, downsizing, or refinancing, think about the kind of applicant you are before selecting a mortgage type.

When comparing various loan alternatives, you should also consider how much you’ll need to borrow. If you’re unsure, use a mortgage calculator to determine that amount.

Conventional Mortgages

The most common type of mortgage is the conventional mortgage, which has stricter regulations on your credit score and debt-to-income (DTI) ratio.

You can acquire a house with as little as 3% down in the case of a standard mortgage. To qualify for a conventional loan, you’ll need a credit score of at least 620. If you have a down payment of at least 20%, you may opt-out of purchasing private mortgage insurance (PMI).

However, you’ll have to pay PMI if the down payment is less than 20%. Mortgage insurance premiums are usually cheaper for conventional loans than other financings (such as FHA).

This is the right choice for most borrowers if you’re looking for a conventional loan with lower interest rates and larger down payments. If you can’t provide at least 3% down but are eligible, consider applying for a USDA or VA loan.

Pros of Conventional Mortgages

The cost of borrowing after fees and interest is often lower than with an unorthodox loan.
For qualifying loans, your down payment could be as low as 3%.

Cons of Conventional Mortgages

Pay PMI if your down payment is under 20%.
Stricter qualifications demand a credit score of at least 620 and a low DTI.

Home Buyers Who Might Benefit

Borrowers with a solid income and good credit put down at least 3% of the purchase price.

Fixed-Rate Mortgages

Fixed-rate mortgages have the same interest rate and principal payment for the life of the loan. The amount you pay each month may fluctuate based on property tax and insurance rates, but generally, fixed-rate loans provide a relatively stable monthly cost.

Choose a fixed-rate mortgage if you think you’ll live in your house for a long time. With this type of mortgage, your monthly interest rate stays the same. You can plan your expenses with more ease with a set monthly payment amount.

If interest rates in your region are high, you may want to avoid fixed-rate mortgages. You’ll be stuck with your interest rate for the duration of your mortgage unless you refinance. If rates are high and you close in, you might pay thousands of dollars in overpaid interest. Contact a local real estate agent or a home loan expert to learn more about current market interest rates.

Pros of Fixed-Rate Mortgages

Monthly payments are the same for the duration of your loan, making it simpler to budget.

Cons of Fixed-Rate Mortgages

You may pay more interest over time if the rates are high.

Home Buyers Who Might Benefit

Buyers purchasing or refinancing a primary residence that will serve as their forever home.

Adjustable-Rate Mortgages

A variable-rate mortgage or adjustable-rate mortgage (ARM), is the opposite of a fixed-rate loan. ARMs are 30-year loans with interest rates that fluctuate based on market conditions.

An ARM always has an introductory fixed-interest period. For example, a 5/1 ARM loan has five years of a fixed interest rate. This makes your monthly payments more manageable during the beginning phase of owning your home.

Your interest rate varies according to market interest rates after your introductory period. Your lender will utilize a particular index to calculate how rates change. If the index’s market rates rise, your rate will go up. If they fall, your rate will decrease.

ARMs have rate caps that determine how high or low your interest rate can fluctuate in a set period and over the lifetime of your loan. Rate caps defend you from quickly inflating interest rates. For example, interest rates might continuously go up yearly, but when your loan reaches its rate cap, your rate will stop increasing. These rate caps also work vice versa and restrict the amount by which your interest rate can decrease.

Adjustable-rate loans can be a good choice if you plan to buy a starter home before moving to your forever home. If you don’t plan on living in your current home for the entire loan term, you can take advantage of lower interest rates and save money.

If you plan to contribute more money toward your mortgage early, ARMs can help you save on interest payments. Paying additional installments on your loan sooner might save you thousands of dollars in the long run.

Pros of Adjustable-Rate Mortgages

You may obtain lower interest rates for the first introductory period if you bid based on this feature.

Cons of Adjustable-Rate Mortgages

If the rates rise, your monthly payments could skyrocket.

Home Buyers Who Might Benefit

People looking to buy their first home with the understanding that they likely won’t stay there until the mortgage is paid off.

Government-Backed Loans

Government-backed loans are those that government agencies insure. Three main types of government-backed loans are FHA, VA, and USDA. These loans are less risky for lenders because if you default on your mortgage, the agency responsible for insuring the loan will pay out. If you can’t get a conventional loan, you may still be able to qualify for a government-backed loan.

Depending on your qualifications, you may be able to save money on interest or down payments when you take out a government-backed loan.

FHA Loans

FHA loans are attainable for individuals with a credit score as low as 580 who only have to pay 3.5% down, thanks to being insured by the Federal Housing Administration. An FHA loan may enable you to buy a home with a credit score as low as 500 once you pay at least 10% down on the property.

USDA Loans

The United States Department of Agriculture insures the USDA loans. USDA loans have fewer mortgage insurance requirements than FHA loans, enabling borrowers to acquire a house with no down payment. To qualify for a USDA loan, you must satisfy certain income standards and buy a property in a suburban or rural area.

VA Loans

The Department of Veterans Affairs insures VA home loans. A VA loan allows you to buy a house with $0 down and lower interest rates than other forms of borrowing. You must fulfill military or National Guard service standards to qualify for a VA loan.

Pros of Government-Backed Loans

Reduced interest rates and down payments could save you money on your closing costs.
There are fewer stringent qualification requirements than with traditional loans.

Cons of Government-Backed Loans

To be eligible, you must fulfill certain conditions.
Borrowers must pay upfront costs (also known as funding fees) on many government-backed loans, resulting in increased borrowing expenses.

Home Buyers Who Might Benefit

People who do not qualify for standard loans or have limited cash savings.

Jumbo Loans

A jumbo loan is worth more than the amount you could get with a conforming loan in your area. To purchase a high-value property, you generally require a jumbo loan. Jumbo loan interest rates are usually comparable to conventional lending rates, but they’re more challenging to acquire than other forms of financing. You’ll need a better credit score and a lower debt-to-income ratio to qualify for a jumbo loan.

Pros of Jumbo Loans

The interest rates on jumbo loans are comparable to the interest rates of conforming loans.
You may borrow more money for a more costly house.

Cons Of Jumbo Loans

Frequently, you need a credit score of 700+, many assets, and a low DTI ratio to qualify for this.
You’ll need a significant down payment, usually between 10% and 20% of the purchase price.

Home Buyers Who Might Benefit

Those who need a loan larger than $647,200 for a high-end home, and have a good credit score and low DTI.

The Bottom Line

Your specific preferences and circumstances determine the most acceptable mortgage loan. To figure out how much you’ll need to borrow from your mortgage lender, calculate your anticipated purchase and refinancing expenses ahead of time.

When purchasing a new house, consumers should consider several factors, including the rate of interest, risk-free investment options, and the ability to pay off the mortgage in a shorter period. When buying a home for the first time, there’s a lot to think about. Your credit score, income, debt, and property location all influence which mortgages you qualify for. To obtain a tailored answer that best suits your circumstances, start filling out an application for a mortgage.

Do you have any questions about different home loan programs? Leave a comment below or contact us for a free consultation.

Mortgage

How Do I Calculate How Much Home Equity I Have?

November 22, 2022 admin

Many people are still confused about home equity, even though it’s a widely-discussed topic nowadays. As a homeowner, you need to understand how home equity works — especially if you’re looking into refinancing your mortgage or borrowing money from your residence.

Home equity is the difference between the appraised value of your house and the amount you owe on your mortgage. The amount of equity in your property has many ramifications for your finances, from whether or not you require private mortgage insurance to what financing alternatives are accessible to you. The value of your home equity can go up or down depending on market conditions in your area. Here’s a quick guide to help you calculate how much equity you have and some tips for increasing it.

Key Takeaways

The difference between the current value of your house and its outstanding mortgage is known as home equity.
Lenders will usually not allow you to borrow against the total value of your home equity.
Under average economic conditions, you could potentially borrow up to 90% of your equity.
During the 2020 financial crisis, lenders restricted access to home equity and raised credit score requirements, particularly for HELOCs.

How Much Home Equity Do You Have?

The difference between the current market value of your property and the total amount of debts (particularly your primary mortgage) recorded against it is known as your home equity value.

The current equity determines the amount of credit you can access as a borrower through a home equity loan. Let’s say your house is valued at $250,000, and you still owe $150,000 on your mortgage. If we subtract what you owe from the home’s total value, that leaves us with $100,000 in home equity.

How Big a Home Equity Loan Can You Get?

Only some lenders will let you take out a loan for the total value of your home equity. They usually allow loans worth 80% to 90% of available equity based on the lender, credit score, and income. So, if you have $100,000 in home equity, as seen in the example above, you could qualify for a HELOC of $80,000 to $90,000.

Here’s another scenario that incorporates a few more elements. Assume you have a 30-year mortgage on your home and are five years into it. Furthermore, a recent appraisal or assessment valued your property at $250,000. You also still have $195,000 outstanding on the original $200,000 loan. Keep in mind that the vast majority of your early house mortgage payments go toward reducing the principal balance.

If no other obligations are tied to the house, you have $55,000 in home equity. That equals the $250,000 current market value minus the $195,000 debt. You can also divide home equity by the market value to determine your home equity percentage. In this case, the home equity percentage is 22% ($55,000 ÷ $250,000 = 0.22).

Suppose you also took out a $40,000 home equity loan in addition to your mortgage. The total indebtedness on the property is $235,000 instead of $195,000. That changes your total equity to just $15,000, dropping your home equity percentage to 6%.

Start With a Baseline Calculation

To calculate how much equity you have in your home, subtract the amount of all loans attached to your house from its appraised value. This would include primary mortgages, home equity loans, or any unpaid balances on a home equity line of credit. For example, homeowner Caroline owes $140,000 on a mortgage for her recently appraised property at $400,000.

Next, Take a Look At How Banks Calculate Equity

Mortgage, refinancing, and home equity lenders may utilize different methods to determine how much they’re willing to lend you and whether or not they’ll even offer you a loan. The loan-to-value (LTV) ratio is one of the metrics they look at. If you have a mortgage, your LTV ratio is determined by your outstanding loan balance. If you don’t have a mortgage, the LTV ratio is calculated based on the amount of money borrowed against the value of your property. The LTV ratio is essential when determining whether or not you qualify for a mortgage refinance.

Private mortgage insurance might be required if your LTV ratio is too large. A professional appraisal is needed to correctly calculate your LTV ratio. That’s why your lender frequently wants an on-site appraisal during the loan application process. To determine your LTV ratio, divide your present debt (found on your monthly statement or online account) by the assessed value of your home (you can find this number on the official records). Convert this figure to a percentage by multiplying it by 100. Caroline’s loan-to-value ratio is 35%.

Possible Effects on Insurance

Pay close attention to your LTV ratio if you have private mortgage insurance (PMI). If a home’s LTV ratio falls below 78%, federal law requires lenders to cancel the PMI. This is typically done when the loan balance reaches that percentage, but if extra payments cause the LTV ratio to drop below 80%, policyholders can request the cancellation of their PMI.

What About Home Equity Loans?

Another critical calculation to make is your combined loan-to-value (CLTV) ratio, which compares the value of your house with the total of all the loans secured by it, including the loan or line of credit you’re looking for. If Caroline wants to acquire a $75,000 home equity line of credit, she will calculate her CLTV ratio. She will likely be prepared if most lenders demand a CLTV ratio below 85% to qualify for a home equity line of credit.

Ways to Potentially Increase Your Equity

One way to reduce your loan-to-value ratio is by paying extra on your mortgage principal each month. This will help reduce the balance of your loan quickly. Check if there are any penalties for prepaying first, though some loans don’t have this problem.

An excellent approach for protecting your home’s value is to keep it clean and maintained. A messy, unkempt home is a waste of money. It looks unprofessional and can also make you liable for costly cleanup costs, especially if you have water leaks or have had floods on your property. Also, be sure to regularly check for mold. Remember that not all mold is the same; some types are more hazardous than others.

If you believe your house’s value has slipped below the purchase price, try removing unnecessary items to increase its appeal before selling it. Do any necessary home improvements.

However, be sure to contact an appraiser or real estate professional before making any improvements if you hope will raise the sale price of your house. Remember that economic conditions — as well as the regular dips in the real estate market — might impact your house’s value no matter what you do. If home prices rise, your LTV ratio could go down; however, falling home prices may negate any improvements made to them.

Transaction Costs

Because real estate is one of the most illiquid assets, there is generally an additional cost associated with using your home equity. The overall closing costs are usually between 2% and 5% in the United States. Buyers frequently cover a large portion of these fees but keep in mind that they might use them as a pretext to negotiate a lower sale price. If you take out a home equity loan, factors such as an origination fee and higher interest rates will reduce the amount of home equity available.

The Loan-To-Value Ratio

The loan-to-value ratio (LTV) is another way to express equity in your home. You calculate the remaining loan balance by the current market value. In the second example described above, your LTV would be 78%. Including your $40,000 home equity loan would make the total 94%.

Lenders dislike high LTVs since it indicates that you may be unable to repay your loans and might tighten their lending standards during economic turmoil. That was the case with the 2020 recession. Banks increased credit score requirements for HELOCs, lowering dollar amounts and the percentage of home equity they were willing to lend.

LTV and home equity values are vulnerable to fluctuations in the market price of a house. Hundreds of millions of dollars in purported home equity were destroyed during the subprime mortgage crisis of 2007–2008, and the long-term effect of 2020 on homeownership is still unknown.

Indeed, worldwide house prices rose through 2021 as a result of the stay-at-home policy and individuals searching for bigger homes to accommodate their career, education, and family life. In addition, the increasing number of companies offering work-from-home policies incentivized many families to move from cities to suburbs. Overall, we are at a historic moment regarding the pandemic and its impact on homes. It’s yet unclear what the future holds.

How Loan-To-Value Ratio May Affect Your Loans

The loan-to-value (LTV) ratio is one way that lenders may choose to finance or deny a loan. This equation compares the amount of money you’re asking for in a loan to the home’s value. If you already have a mortgage, your LTV ratio will be based on how much you still owe. The LTV ratio can affect whether private mortgage insurance (PMI) is required and if refinancing might be an option.

To calculate your LTV ratio, divide your current mortgage amount by the appraised value of your home. To convert it to a percentage, multiply that number by 100.

How To Cancel Private Mortgage Insurance

If you purchased your home with less than a 20% down payment, your lender probably required you to get PMI. However, it’s only required if your house LTV ratio is above a certain point. The Homeowners Protection Act requires lenders to automatically cancel PMI when a home’s LTV falls below 78% — as long as other requirements are met.

Your loan is automatically canceled when the balance reaches 78% of your home’s appraised value. If, however, you have made extra payments and your LTV drops below 80% before that time, you can request that your lender cancel PMI.

How to Account for a Home Equity Line of Credit

Another factor to consider when taking out a home equity loan or line of credit is your combined loan-to-value ratio (CLTV). This compares the value of your home to the amount of all loans secured by it, including the one you’re requesting.

To qualify for a home equity loan or line of credit, your total CLTV must be less than 85% (though this number may be higher or vary from lender to lender). On the other hand, your property’s value may swing up and down over time, so if the value drops, you might not qualify for a home equity loan or line of credit, or you could end up owing more than the current market value of your house.

The Bottom Line

If you have enough equity in your house and can afford to repay the loan, using a home equity loan to pay for a significant home renovation or to consolidate debt may be a good idea. Because they rely on your house as collateral, home equity loans generally have lower rates than other choices. To do so, first, see if you qualify and get an estimate of your interest rates.

Do you have any questions about home equity? Leave a comment below or contact us for a free consultation.

Refinance

How To Refinance Your HELOC (Home Equity Line Of Credit)

November 15, 2022 admin

There are several options for refinance your HELOC, which is basically a second mortgage loan on your home. Read on to learn more. A home equity line of credit (HELOC) is a loan that uses your home as collateral. With a HELOC, you can borrow against the value of your home at a low-interest rate and repay the debt over time. If you’ve built up equity in your home, a HELOC can provide access to cash when you need it.

When you use a HELOC, you pay interest only until the draw period is over. This means that you will make payments on your principal amount and interest after the draw period. If you’re finding it difficult to cope with this additional expense, refinancing your HELOC may help you reduce your monthly payment.

You can refinance your HELOC terms to reduce this payment by using various refinancing alternatives. Examining the advantages and disadvantages of each will help in determining which HELOC refinance strategy is best for you.

What Is a HELOC and How Does It Work?

A HELOC is a type of loan that allows you to borrow against the value of your property. Lenders may approve you for a specific line amount, which you can draw from as you would a credit card. Depending on your agreement, you are responsible for interest-only payments during the draw period (which can last anywhere from 10 to 30 years). However, you have the option to reduce your HELOC by making larger principal payments.

If you have a HELOC that you’re repaying, refinancing it might be a good idea, especially if the draw period is almost over. After your draw period ends, you enter a 10 to 20-year repayment period during which you pay off the interest and the principal. At this point, you can’t borrow any more money.

A HELOC is secured by using your home as collateral, meaning that if you cannot make payments, the lender has the right to foreclose on your house. Even though this seems like a high-risk venture, it often has a lower interest rate than other types of loans, such as personal ones. Homeowners with equity in their homes can take out a HELOC for emergencies, large purchases, or home renovations.

An Example of a HELOC Refinance

Let’s assume that your house is worth $300,000. You have a first mortgage obligation of $190,000 and a HELOC balance of $50,000. This totals $240,000 in loans against your home. If you divide $240,000 by $300,000, you get an 80% CLTV ratio. This indicates that your home equity is 20%.

Assuming that you only want to refinance the existing HELOC balance and do not wish to borrow more, you should be able to locate a lender who will work with you, especially if you have good credit. To receive the lowest rate, some lenders demand a CLTV ratio no greater than 60% or 70%.

Can You Refinance a HELOC?

Since it’s a second mortgage on your home, a HELOC can be refinanced similarly to other mortgages. You’ll need to qualify and apply for a HELOC refinance like you did when you first took out a loan and established your HELOC. The lender will evaluate several criteria during the initial application.

Why Should You Consider HELOC Refinancing?

If you opt to pay only the interest on your HELOC for the first ten years, beware of a big shock when you reach the end of the draw period, especially if HELOC rates have increased since you took out your loan.

If you think the payment increase is unmanageable, or if there are other projects you want to finance, consider refinancing your HELOC. Even though the new interest rate may be higher than what you have on your original loans, this might still be the best option because it could give you leeway on repayment timing.

How To Qualify To Refinance Your HELOC

To be eligible for a HELOC refinance, you must fulfill your lender’s particular conditions. These include:

Home Equity: Because your home equity is used as collateral to secure the HELOC, the equity in your house must be at least modest. Your lender might let you borrow up to 85% of your equity. The actual HELOC amount is determined by the other requirements outlined above.
Debt-To-Income (DTI) Ratio: To be approved for a HELOC, lenders need to confirm that you will have enough income left over after paying your other debt. A lower DTI ratio increases the chances of approval. For example, Wells Fargo prefers a DTI of 35% or less but may work with someone whose DTI is between 36 and 49%.
Loan-To-Value (LTV) Ratio: The loan-to-value (LTV) ratio is the measure of a loan compared to the home’s value. To calculate it, lenders add the requested HELOC amount to the balance of your current mortgage, then divide that number by the house’s market value. An LTV below 80% is ideal from a lender’s perspective, but some may allow for a higher percentage.
Credit History: Your credit score and history reflect your ability to pay your HELOC refinancing as agreed. If it’s low, lenders may be hesitant to grant you a favorable rate. Additionally, if your FICO Score is good, your HELOC refinance rates will be lower. Lenders usually demand a FICO Score of at least 700.
Home Value: Lenders will need to know your home’s appraised value before determining how much you can borrow. In most cases, they will require that you submit a home appraisal with your application.

To avoid interest rate penalties, you’ll need to submit the following documents when applying for a HELOC refinance with your lender:

Your personal information, along with that of any co-applicant.
Employment and income information.
Mortgage details, including your payment amount and the remaining balance.
Property information, including details on your home, property taxes, and home insurance premiums.
Information on all outstanding debt.

There are three ways to refinance your HELOC and one fallback option. Here is an overview of each, including their respective pros and cons:

1. Open a New HELOC

How It Works

By starting over with a new 10-year draw term and a new interest-only repayment period, you can put off dealing with the issue for a while longer.

Pros

For another ten years, you won’t have to repay the total amount of your loan. You might be able to improve your financial situation if you’re in a bind and don’t want to default on your loan by refinancing your HELOC.

Cons

You’ll have to repay the loan eventually. The longer you delay it, the more interest you’ll accrue over time. With a variable interest rate, which most HELOCs have, it’s hard to predict your monthly payments or total borrowing costs.

Additionally, starting a new draw period is easy and tempting to keep doing. If you’re refinancing because you fear not being able to repay your existing HELOC, adding debt will only worsen your financial situation.

2. Refinance Into a Home Equity Loan

How It Works

You can take out a home equity loan to pay off your HELOC.

Pros

You can repay your HELOC loan in nearly half the time if you take out a home equity loan, which allows you to repay it over 20 years rather than 30. The interest rate on your new loan will be fixed, and each monthly payment will be the same. The longer term will make your monthly payments more affordable as well as more predictable.

Cons

If you extend your loan term, you will likely pay more interest in the long run. In addition, home equity loan rates are frequently greater than HELOC rates. If market rates rise, your rate will not change. However, if they fall, they will not decrease.

3. Refinance Into a New First Mortgage

How It Works

Refinancing your HELOS and keeping two mortgages isn’t your only option. Instead, you can combine both your HELOC and your first mortgage into a single loan.

Pros

You can obtain the lowest fixed interest rates available. Because your first-mortgage lender prioritizes the proceeds from selling your foreclosed property, mortgage rates are generally lower than home equity loan rates (although this is not always the case). When you refinance with a fixed-rate first mortgage, you’ll gain the predictability of regular monthly payments and a known cost for all your borrowing.

Cons

Taking out the first mortgage may result in significantly greater closing expenses than refinancing into a new HELOC or equity loan. Refinancing costs can range from 2% to 5% of the amount borrowed, whereas some lenders will pay your closing charges on a second mortgage.

If I Don’t Qualify To Refinance My HELOC, What Should I Do?

If any of the following are true, then a loan modification may be your only option:

You are underwater on your mortgage.
Your credit score has dropped below 620.
Your income is too low to make the monthly payments on a new loan.

If you struggle to make home payments, you can apply for a loan modification from your lender. This will change the terms of your loan so that the new monthly payment is a better fit for your budget. The sooner you contact them, the better — aim to reach out before missing a single payment.

A home equity loan may be a good solution for those who need long-term financing to purchase or renovate their homes. For example, Bank of America has a home equity assistance program that provides qualifying homeowners with a longer period, a lower interest rate, or both if they have experienced financial difficulties, such as an unexpected loss of income or a divorce.

If modification is an option for you, and it might not be since lenders aren’t required to do so, know that you may have to go through a three-month trial period first. This entails making the modified payments on time before your servicer can officially change your loan. However, keep in mind that your lender reporting the modification to credit bureaus could cause your score to drop.

Although it may not be ideal, refinancing your mortgage is a small price to pay compared to a foreclosure.

Can I Get A Personal Loan To Pay Off My HELOC?

Yes, you can pay off your HELOC with a personal loan if you can obtain an unsecured loan that is large enough to cover the balance. Because your home isn’t used as collateral, a personal loan may be ideal since the rates can be surprisingly low. Shop around for the best rate using several lenders. The disadvantage is that the period may be shorter — perhaps only seven years — resulting in a higher monthly payment (but less interest over time).

Although you may only qualify for a smaller personal loan that will pay off part of your HELOC, it might be worth considering. This is because the personal loan will give you a fixed monthly payment, meaning budgeting becomes easier. You’ll also have less variable-rate debt and fewer uncertain payments each month.

What Happens If I Can’t Repay My HELOC?

Your HELOC is your house’s collateral. This implies that your loan servicer can foreclose on your home if you can’t repay the loan. Foreclosure may be pricey, and if the HELOC is a second mortgage, the first mortgage investors will get repaid before the second mortgage investors do as a result of a forced sale of your property by the second mortgage investors. If you have little or no equity in your home, the second mortgage investors may not receive any money from the sale.

Because of this, lenders are not typically quick to foreclose on borrowers who are unable to pay their HELOCs. They may work with you on a loan modification if that’s what you want, but you may still lose your house if you don’t have the money. Depending on your state’s laws, the second lien holder might sue you if the foreclosure sale does not generate enough cash to reimburse your HELOC.

Refinancing Alternatives

Although the options to refinance a HELOC are provided above, there are other alternatives to get help with payments:

Fixed-Rate HELOC: If you see a low rate, some lenders may offer the option to convert your HELOC into a fixed-rate HELOC. This could be beneficial if you want steadier payments.
HUD Assistance Programs: Several programs offered by the Department of Housing and Urban Development aim to assist homeowners who are having difficulty covering their mortgages.

Additional Considerations

Consider all of the expenses and benefits before deciding whether to refinance your HELOC so you can get the most out of your finances.

For example, if you use a home equity loan to pay off your present HELOC, you may save money on closing costs as well as have a lower interest rate than your HELOC. That interest rate, however, might be greater than the one on a regular mortgage. If you try to refinance a HELOC into a new one, you could face more stringent qualifying requirements.

Also, it’s important to know that a HELOC’s tax benefits have also changed. According to the IRS, the only way you can deduct interest with a HELOC is by using those funds towards buying, building, or substantially improving your home. So if your new HELOC is just paying off an old one, you won’t be able to deduct any interest from taxes.

As with any other form of credit, it’s critical to shop around and compare loan terms, interest rates, and fees to determine which one is right for your budget.

The Bottom Line

If you own a home and are getting close to the end of your draw period, be prepared for higher payments when the repayment phase starts. Not being able to tap into your home equity line of credit (HELOC) during the repayment phase may come as a surprise, but it isn’t the only reason you might want to refinance. You may also need additional funds for things like home improvements or debt consolidation. By refinancing, you would be able to access that equity and potentially save on your HELOC rate in the process. Make sure to compare all of your options and shop around for the best rate before committing.

Do you have any questions about HELOC? Leave a comment below or Contact us for a free consultation.

Mortgage

Home Buyers Are Finding Ways To Take The Sting Out Of Rising Mortgage Rates

November 7, 2022 admin

Home Buyers Are Finding Ways To Take The Sting Out Of Rising Mortgage Rates.

Key Points

The average interest rate on a 30-year fixed mortgage is 7.04%, up from 3.33% at the start of the year.
While home prices have eased over the last couple of months, they are still up 13.5% from a year ago.
This combination has created an affordability challenge for homebuyers.

Even with signs that the housing market is cooling down, homebuyers are still feeling the sting of elevated prices and higher interest rates.

Mortgage rates are at their highest level in more than a decade, but home buyers are fighting back. More and more borrowers are paying fees to lower their interest rates. According to lenders and real estate agents, people can do this by making higher down payments in order to lower the amount they have to finance. Some people are even buying homes under construction and choosing to lock in today’s rates rather than risk even higher ones later. Also, more home buyers are considering home loans that carry lower rates in their early years.

“I think the major problem is payment shock,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker based near Philadelphia. “When I sit down with clients and the rate is in the 6s, their payment is outrageous sometimes.”

The difference that interest rates make can be substantial. For a $300,000 mortgage at 6.5% over 30 years, the monthly principal and interest payments would be $1,896. That same loan at 3% would produce a payment of $1,264 (a $632 savings). Other charges, such as property taxes or mortgage insurance, would be added to those amounts.

However, there are ways to reduce the cost of buying a house. While there’s no one-size-fits-all approach, you can evaluate the various options available and consider whether any of them make sense for your situation.

Here are some options to relieve homebuyers’ payment shock.

An ARM Could Be A Short-Term Answer

Home Buyers Are Finding Ways To Take The Sting Out Of Rising Mortgage Rates

An adjustable-rate mortgage (ARM) may be worth considering. With an ARM, the initial rate is lower compared to a traditional fixed-rate mortgage.

That rate is fixed for a set amount of time — say, 7 years — and then it adjusts up, down, or remains the same, depending on where interest rates are at the time.

There’s a limit to how much a rate can change. However, experts recommend ensuring you’re able to afford the maximum rate if faced with it later on. As illustrated above, a few percentage points can significantly affect the monthly payment.

Keep in mind that you may be able to refinance your mortgage at any point before the rate adjusts.

If you anticipate moving before the initial rate period expires, an ARM may make sense. However, since it’s impossible to predict future economic conditions, it’s smart to consider the possibility that you won’t be able to move or sell.

Additionally, the savings may not be worth the uncertainty if the ARM rate isn’t much lower than a fixed rate. Rinaldi said that while some lenders aren’t offering much of a discounted rate, he’s finding some that are at about one percentage point or lower.

15-Year Mortgages Reduce What You Pay In Interest

While the typical mortgage is for 30 years, a shorter loan with a more favorable rate may be attractive. According to Bankrate, the average rate for a 15-year loan is 6.43% as of Friday, October 14. Additionally, you save a lot in interest over the life of the loan, and you build equity in the house at a faster pace.

For example, a 30-year, $300,000 mortgage with a fixed 6.5% rate would mean paying $382,786 in interest over the life of the loan. On the other hand, a 15-year mortgage at the same rate would translate into paying $170,438 in interest during the loan.

“It’s not just the rate difference, but the equity buildup, too,” said certified financial planner David Demming, president of Demming Financial Services in Aurora, Ohio.

At the same time, he said, it may not be the best route if the higher payment squeezes your budget too much.

First-Time Homebuyer Programs Can Help With Costs

If you’re a first-time homebuyer with limited means, you could qualify for one of the federal programs available that provide assistance to homebuyers by offering a lower down payment and reduced closing costs. Additionally, state and local governments (city or county) often offer grants or no-interest loans to help buyers cover their down payment and closing costs.

Rent-To-Own Works In Some Cases

Sometimes, a potential homebuyer might not qualify immediately for a mortgage due to credit score issues or insufficient work history. Additionally, they might need more time to save for a down payment but still want to buy a house.

In cases like this, it makes sense to consider a lease or rent-to-own contract. These contracts arrange for a portion of the monthly rent to go into an escrow account until the date of purchase a couple or few years down the road, at which point the escrowed amount goes toward closing costs or a down payment. If the buyer walks away or can’t meet the contractual obligation, the money is forfeited.

If you’re considering going this route, it’s essential that you do the due diligence and ensure you understand the contract terms — including the type of mortgage the property is eligible for and how the purchase price will be set.

Save By Buying Points And Trimming Closing Costs

You may be able to negotiate closing costs, such as the fees you pay for various aspects of the home-buying process, or by using a lower-cost title company. Moreover, the seller might be willing to pay some of your costs, depending on the competing offers.

You may also be able to buy extra “points” — one point is worth 1% of the loan amount — to get a lower interest rate.

However, Rinaldi cautions that it may not be worth it because it can take years to break even when you go this route.

“You don’t want to pay extra origination charges because if you refinance, that’s lost money,” Rinaldi says.

Bottom Line

Rising mortgage rates aren’t good news for home buyers. But unfortunately, today’s higher rates likely aren’t going anywhere. However, that doesn’t mean it’s time to panic or rush prematurely into any choice. So rather than giving up, borrowers need to adapt their strategies to the new mortgage rate market.

Luckily, you can do plenty to fight the market and lower your rate. Keep your finances in order, know your loan options, and don’t be afraid to compare lenders and make them compete for your business.

Lowering your rate by even just a fraction of a percent can lead to huge savings. So any additional work you put in to find a lower rate should be well worth the effort.

Do you have any questions about mortgage loans? Leave a comment below or Contact us for a free consultation.

What Do Demand And Supply Tell Us About the Current Housing Market?

Mortgage

What Do Supply And Demand Tell Us About the Current Housing Market?

October 31, 2022 admin

Real estate is a tangible asset made up of property and the land on which it sits, and while it is unmovable, real estate, like other assets, is also subject to supply and demand. This means that the prices of homes, like those of stocks and bonds, depend heavily on the law of supply and demand. With more demand, prices tend to rise; with more supply, they tend to fall.

But what kind of relationship does the housing market have with this law? Learn more by reading below about how this economic theory works and how it impacts the real estate market.

Key Takeaways

The housing market is a good example of how supply and demand work within an industry.
When the demand for housing is high but supply is low, home prices often rise.
When there is a glut of housing available in a market, homeowners may lower their prices due to less demand in the market.

The Law of Supply and Demand

The law of supply and demand is a basic economic principle that explains the relationship between supply and demand for a good or service and how that interaction affects the price of that good or service.

When there is a high demand for a good or service, its price rises. The price falls if there is a large supply of a good or service but not enough demand for it. The reason is that people will bid up the prices when there is relative scarcity, and there will be unsold items when there is an oversupply.

The theory of supply and demand is one of the most basic principles in economics. Supply and demand work against each other until the point at which the equilibrium price is achieved—that is, the price where supply is equal to demand in the market. That happens, of course, when all other factors remain equal.

Demand

The law of demand dictates that people will have lower and lower demand for a good as its price rises ever higher. Similarly, lower prices drive demand, meaning consumers value and purchase something more when it’s cheaper.

Supply

The law of supply says that a higher price will induce producers to supply a higher quantity to the market. Likewise, prices will rise when supply is low as people scramble to buy up scarce resources.

Real Estate Supply And Demand

The housing market, too, relies heavily on supply and demand, which is why it is a much-looked-at indicator in the industry. Each housing transaction, of course, involves a buyer and a seller. The buyer offers a property, leaving the seller to accept or reject the offer.

The law of supply and demand dictates the equilibrium price of a property. A low supply or housing inventory may drive prices up, which is what tends to result in bidding wars. A specific property may be in demand by multiple parties who all try to outbid each other by increasing their purchase price offer.

The bidding war ends when the seller accepts one of the offers, which then also removes a unit from the available supply. When there is a high demand for properties in a particular city or state combined with a lack of supply of quality properties, the prices of houses tend to rise.

On the other hand, when a weak economy and an oversupply of properties lead to low or no demand for housing, the prices of houses tend to fall.

Factors Affecting Housing Supply And Demand

The precise values attributed to the supply and demand in a market are not easy to measure in the real estate market. This is partly because it takes a long time to construct new homes or fix up old ones to put back onto the market.

Similarly, real estate is not like other industries in that it takes a lot of time to buy and sell homes and other properties. This means that transactions can take a long time to consummate, making real estate somewhat illiquid.

Some of the factors that will influence housing demand include lower interest rates or borrowing costs. When interest rates are low, people are generally willing to take on more debt because they can afford relatively more debt for the same monthly outlay. Put differently; they may be able to finance the purchase of a home because the amount of interest they have to pay is not as burdensome at low rates.

As more buyers enter the market, the demand for housing increases in turn. And if there remains a limited supply of housing inventory, prices in a low-interest rate environment may rise even more.

Meanwhile, the supply of housing is in a constant state of flux. Inventory may increase when people are moving elsewhere—some may be downsizing, others may try to make more room for an expanding family, and others may purchase their first home. Similarly, there may be an increase in development and new home construction, adding to the existing inventory.

On the other hand, housing inventory decreases during natural disasters such as floods and earthquakes or when existing properties are demolished. Land property is also a finite resource, so the amount of new developments is generally limited.

The answers to a few popular questions about the housing market can be found by understanding the impact supply and demand have on each other.

Is there a reason that prices are rising?
Where are prices headed?
What does this mean for people who are buying a house?

Is There A Reason For The Rising Prices?

Home prices have risen by 18.1% compared to last year, according to the latest Home Price Insights report from Core Logic. But what is causing the increase?

The recent buyer and seller activity data from the National Association of Real Estate helps answer that question. We can see that the demand for homes is much greater than the seller traffic when we compare it to the buyer activity data.

Home prices are going up because of this combination of low supply and high demand. By some measures, house prices seem high, but the recent increases make sense from a supply and demand perspective, according to Bill, author of the Calculated Risk blog.

Where Are Prices Headed?

In the coming months, the supply of homes for sale will have a big effect on prices. According to Keeping Current Matters, prices will likely increase at a slower rate. This is good news for buyers who want to purchase the home of their dreams. It’s important to remember that a moderate drop in home prices doesn’t mean the prices will fall or increase.

Home prices will continue to appreciate through 2022, according to the real estate market forecast of Realtor.

What Does This Mean For Home Buyers?

You may end up paying more in the long run if you wait too long to enter the market because you’re expecting prices to drop. Even if the rate of price increase is slower next year, prices are still projected to go up. The home of your dreams will likely be more expensive in 2023.

Final Thoughts

High demand and low supply are driving up home prices in today’s housing market. Experts still expect prices to rise even though prices may increase at a slower pace in the coming months.

Do you have any questions about the housing market? Leave a comment below. If you want to discuss what that could mean for you if you wait even longer to buy, contact us for a free consultation.

Refinance

The Difference Between a Cash-out Refinance and a Home Equity Loan

October 25, 2022 admin

The equity in your home can help you achieve a number of financial goals. Cash-out refinances and home equity loans are two ways you can get cash from your home to put towards different purposes. Learn the differences between a cash-out refinance and a home equity loan so you can decide which one is right for you.

What Is a Cash-out Refinance?

Most homeowners can do a cash-out refinance when the value of their home increases and they’ve accumulated equity. A cash-out refinance pays off your first mortgage and becomes your new mortgage, allowing you to take out some equity. If you think that your home value has gone up since you bought it, you might want to look into this option if you need cash for home renovations or something else.

How Does It Work?

A cash-out refinance is when you replace your existing mortgage with a new one. After your loan money is disbursed, you get to keep the difference between your new loan amount and your current mortgage loan balance (minus the equity you’re leaving in your home and any closing costs and fees, of course).

Suppose your home is worth $200,000, and you have $100,000 left on your mortgage. You need to leave 20% of the home’s equity in order to take cash out. If you were to refinance your home with a new loan amount of $160,000, you would get $60,000 minus closing costs and fees.

How Much Equity Can You Take Out of Your Home?

You might be able to do a cash-out refinance, but you usually can’t borrow the entire value of the home. Some loans require that you leave some equity in the home, while others do not. Qualifying for a cash-out refinance requires that you have at least 20% of the equity in your home. But for VA loans, you can get a 100% loan-to-value mortgage.

Using Your Cash-out Refinance Funds

The cash you get from a cash-out refinance can be used in any way you like. Most people get a cash-out to refinance for home renovations, but the money is yours to use however you see fit.

What Is a Home Equity Loan?

A home equity loan is a second loan that is separate from your mortgage and allows you to borrow against the equity in your home. Unlike a cash-out refinance, a home equity loan does not replace your current mortgage. This is a second mortgage with separate payments. Home equity loans tend to have higher interest rates than first mortgage loans.

How Does It Work?

The loan term for your original mortgage will not change because your home equity loan is an entirely separate loan from your first mortgage. Once the home equity loan closes, you will receive a lump sum payment from your lender, which you will be expected to repay, usually at a fixed rate.

Certain Restrictions on Your Loan

You will not be allowed to borrow 100% of your equity from a lender for a home equity loan. Depending on the lender, the maximum amount that you can borrow is usually between 75% and 90% of the home’s value. As with a cash-out refi, the amount you can borrow will depend on factors like your credit score, debt-to-income ratio, and the loan-to-value ratio.

Similarities Between Home Equity Loans and Cash-out Refinances

You get your money right away: If you choose a cash-out to refinance or a home equity loan, you will receive a lump sum cash payment within three business days after closing. The waiting period is due to the fact that you have a right to change your mind about a refinance. It’s possible to spend the money on anything you need.
You borrow against your home’s equity: Both of these loans use your home as collateral, which means you can get lower interest rates for cash-out refinances and home equity loans than for other types of loans.
You can’t take 100% of your home’s equity: Most loan types require borrowers to leave some equity in the home.

Differences Between Home Equity Loans and Cash-out Refinance

Home equity loans are the second loan, while cash-out refinances are the first loan. You can use cash-out refinances to pay off your existing mortgage and get a new one. A home equity loan is different from a mortgage and it adds a second payment.
There are better interest rates for cash-out refinances. Cash-out refinances have lower interest rates because they are first loans and will be paid first in the case of a foreclosure, bankruptcy, or judgment.

When Does a Home Equity Loan Make Sense?

It might be a good idea to look at home equity loans if you’re going to be forced to pay a higher interest rate on your mortgage. The higher interest rate on the home equity loan may not be worth it in the long run. If you crunch the numbers, you can determine if a home equity loan is right for you. You might want to look into a home equity line of credit or cash-out refi to see if they make more sense for your situation.

When Does a Cash-out Refinance Make Sense?

If your home’s value has gone up or you have built up equity by making payments, a cash-out refinance might be in your best interest. Cash-out refinancing is a great way to go if you want to borrow money for home improvements, school tuition, debt consolidation, or other expenses. If you have big expenses and you need money, a cash-out refinance can be a great way to cover them while paying little in interest.

FAQs

Which Is Cheaper: Home Equity or Refinance?

Home equity lines of credit and loans typically come with lower closing costs than cash-out refinances. Sometimes, the lender will absorb these costs as well. If you’re only borrowing a small amount of money, a home equity loan may be your best choice, as interest rates on a home equity loan can be comparable to your current mortgage rate.

What Are the Alternatives to a HELOC or Cash-out Refinance?

If you only need a small amount of money for a small project or to pay off a small debt, then you may want to consider a small personal loan or a credit card with low-interest rates. Both options would allow you to avoid the closing costs associated with home equity loans and home equity lines of credit.

Are You Going To Lose Equity When You Refinance?

No, you will not lose equity when you refinance your home. The amount you have repaid towards your home loan and how the market affects your home’s value are some of the factors that will affect your home’s equity. It is possible to increase your home’s equity by pulling from your home’s equity to make improvements or renovations. If your home appraises for $200,000, you will still own a $200,000 home after you restructure your mortgage. Rather than losing the equity, it is just being converted into funds.

The Bottom Line

Homeowners who want to turn home equity into cash can benefit from cash-out refinancing and home equity loans. How much equity you have available, what you will use the money for, and how long you plan to stay in your home are some of the factors to consider when choosing a move.

Do you have any questions about cash-out refinance and home equity loans? Leave a comment below or contact us for a free consultation.

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