Mortgage Brokers and Refinances

As a homeowner you should periodically review your personal financial position. For most people, their mortgage is their largest, long-term liability and therefore carries substantial weight in the review.

A meeting with a professional mortgage broker is the most efficient way to do this. He brings his knowledge of the current market conditions to the meeting; you bring the details of your current financial situation. During this discussion not only will an analysis of your finances be done but also your short and long term goals will be addressed. From here you will be able to make an informed decision. Should you refinance now? Should you wait until a later date? Maybe this is the time to trade-up or downsize to another property. This meeting will help you organize your thoughts and improve the focus of your goals.

Why can’t you have this discussion with a banker? Why is the mortgage broker a superior source of information? Before I can answer these questions you need to understand the differences between a broker and a banker. A banker is an entity that provides money to the public meeting the various individual needs of the consumer.

The organizational structure of a bank typically works like this. They have staff that actually meets with the consumer; they are responsible for the actual loan origination. The bank will then have an underwriting department that is responsible for the decision to approve or deny the application for credit. After the approval process is completed then the file would move to their closing department whose responsibility is to finish the transaction and distribute the proceeds of the loan.
Because of the high level of regulation in the banking industry as well as the risk of litigation, banks restrict the freedom of the Loan Originator to voice opinions or make recommendations. The originator is not working in a decision-making capacity and a consumer may interpret statements made by the originator incorrectly. If the consumer walks away from the discussion feeling he was denied credit, the bank could be facing a lawsuit. Because of the expenses both in money and reputation, banks try to avoid this problem. The bank originator’s job description limits his scope of responsibility to explaining the banks products and taking the application.

The mortgage broker is working for the consumer, not the bank. The broker’s obligation is to the applicant and therefore is free to talk openly and make the recommendations that are in the best interests of his client. This makes the broker better suited for this discussion.

Not all mortgage brokers are created equal. It’s important that you choose one that is both knowledgeable and ethical to meet with. Professionals in this field depend on referrals for the majority of their business. Their reputation is their primary tool in generating future business.

Any reputable mortgage broker will welcome the opportunity to have this meeting with you and do it free of charge. He will use this meeting to prove to you how valuable his services are. It doesn’t matter to him if refinancing is not in your best interests at this time, he knows you’ll be back when the time is right, or recommend others to him.

These are the factors that will be considered in determining the feasibility of refinancing:
The current market value of your home
The current outstanding balance of your mortgage
The current interest rate on your mortgage
The type of mortgage that you currently have (fixed, ARM, etc)
The remaining term of your mortgage
The current interest rate environment
The current underwriting standards
How long to you plan on keeping your home
The amount of outstanding loans you have and the details of those loans
Are there any upcoming expenses you will be facing (college, renovations, etc)
What does your current credit profile look like
Your current family income
Your anticipated future income (are you retiring soon, expecting a promotion, etc)
What is the total of your current liquid assets

This is not an all-inclusive list. The unique conditions of your personal financial position will bring up additional considerations. Every item on this list needs to be addressed for the analysis to be truly meaningful.

Most people don’t pay enough attention to their personal finances. The only person you can depend on for your future financial well being is you. Don’t let yourself down!

Mortgage Brokers and Purchases

You’ve decided to begin the process of purchasing a house. If you elect to utilize a mortgage broker, what services should you expect to receive?

Purchasing a home is not something you do every day. You are dealing with one of the largest purchases of your life. All your friends, family and co-workers are trying to help out by giving you advice. Although they have the best of intentions, you have no idea how accurate that advice is. You do some research on the Internet and find an overwhelming amount of information that will range from being accurate to totally wrong.

The role of the mortgage broker is to supply the facts you need to make an informed decision, analyze your personal financial position to see how this purchase fits into your life, help you in prioritizing and organizing your ideas. A competent mortgage broker will allow you to make decisions through a logical analysis of available information, minimizing the stress involved in the home buying process.

You need to get the mortgage broker involved in the process as soon as possible in order to maximize his usefulness. Arrange a meeting with the mortgage broker before you do any serious house hunting. At this meeting you will decide what price range you should be focusing in on. This decision will be based on what range you can financially afford as well as what price range you feel comfortable with. This is also the time to discuss anything you should be addressing now to improve your ability to obtain a mortgage. There may be some credit issues you need to work on, maybe some debts you should be paying off or property that needs to be sold. If there is anything that needs to be done, the earlier you address it the easier it is to repair.

This meeting will also get you familiar with the whole process. You will know what to expect and when to expect it. You will also gain useful insight into how to negotiate the sale. There are several details that go with an offer besides the price. Knowing this will make you a stronger negotiator. You will learn how to enhance your strong points and minimize your weak points when making an offer. Each meeting or telephone conversation you have with your mortgage broker increasingly strengthens your confidence in what you’re doing and enables you to negotiate a better deal with the seller.

Once the negotiations are satisfactorily completed, you can begin to focus your attention on the details of the financing. You’ve already had some general discussions regarding mortgage programs and market prices. Now those discussions get more specific. You will be deciding on the mortgage amount, the mortgage product, whether you want to pays points, when should you be locking in, etc. Now that you have chosen a property being purchased at an agreed upon price, that is going to close within a specific timeframe, you can now concentrate on the details of the mortgage.

As you move through the signing of the contract you are now ready for the mortgage broker to assemble and submit your mortgage application for approval. Because of all the preparation work that’s been done up to this point the mortgage application process becomes an exercise in organizing paperwork and submitting it to underwriting. The mortgage broker can easily answer any questions that the underwriter has because by this time he knows as much about your finances as you do.

You can then expect to smoothly move towards closing after the lender commits on the mortgage. All the preliminary work that was done between you and the mortgage broker takes the stress and aggrevation out of the commitment and closing process. That frees you up to concentrate on any work that you plan on doing on the property prior to moving in as well as arranging for the move itself.

The initial reason that you considered using a mortgage broker was to make sure you would be paying no more for your mortgage than you are entitled to and you would be closing on the mortgage product that best suits your needs. A competent mortgage broker not only meets these needs but also provides you with a bundle of services. He not only arranges for the best mortgage for you but also empowers you to make the best deal you can on the purchase.

There is no doubt you are making the right decision utilizing a competent mortgage broker when buying a house.

Why use a mortgage broker?

There are three general reasons why a person decides to use the services of a mortgage broker. The first reason is necessity. A person may have complications in their financial profile or possibly credit issues that will make the application process more involved. By utilizing a professional mortgage broker, the applicant will have access to the tools and the advice necessary to arrange the best financing. The mortgage broker is hired by the applicant and will present the applicant in the best possible way. The mortgage banker, on the other hand, is looking to originate the highest quality mortgage but at the same time yield the bank the highest possible profit . A professional mortgage broker is focused on doing the best he can for his client, the applicant. The more unique the applicant’s profile, the greater the need to hire a professional.

The second reason that consumers utilize the services of a mortgage broker is for “peace of mind”. Applying for a mortgage is not something most people do on a regular basis. Most consumers will apply for a mortgage only a few times in their lives. They don’t feel confident that they have the necessary knowledge to make an informed decision on their own and feel better having access to professional advice. Many Americans hire accountants to file their income taxes each year instead of doing it themselves. They rather hire a professional because it’s not reasonable to expect to do something once a year and do it right. This same attitude applies to hiring a mortgage broker. There is a “peace of mind” in utilizing a professional instead of going it alone.

The third reason is convenience. The person does not have the time or the inclination to deal with the mortgage process. They don’t want to deal with the details, the phone calls, voice mail hell, etc. They want to deal with one person who handles everything for him and is conveniently accessible. He can go on with his everyday life knowing his mortgage needs are being addressed professionally.

Working with a mortgage broker that is both ethical and professional in the manner in which he conducts business is by far the most efficient way of arranging for your mortgage. However, not all mortgage brokers conduct business in the same manner. Working with the wrong mortgage broker can be more of a problem and potentially cost you extra money than doing it on your own. So, how do you find the right mortgage broker to work with?
Ask people whose opinion you value. If your attorney, accountant or a close friend used the services of a mortgage broker and was satisfied with the level of service he received, then this is the broker to hire. There is no better way to choose a professional then through a personal recommendation.

Another approach would be to visit the UpFront Mortgage Brokers Association website and search for a broker in your State. This is an association of mortgage brokers that agree to conduct business in an ethical and transparent manner. Important attributes you would want to have in the person you are trusting with your mortgage application.

You can also utilize the services of the Better Business Bureau (BBB). A broker that is accepted by the BBB agrees to abide by their code of ethics. Consumers can file complaints with the BBB and the broker has agreed to utilize the BBB as the arbitrator.

The mortgage industry is evolving rapidly in addressing the current economic problems. This evolution is making it much more difficult to arrange for financing and the process is taking much longer. It is more beneficial now, than ever before, to have an experienced, professional mortgage broker working for you.

Inflation

Inflation is damaging to many areas of the economy but there are certain situations where inflation is helpful. Many of the problems we are currently facing originated in the housing market. Without going into the details, we can summarize the 2 core issues. The cost of housing got too high and many borrowers are carrying more mortgage debt that they can comfortably afford.

Over the last few years there were many mortgages that were granted to people who couldn’t afford the payments. These are the sub-prime mortgages that are currently in trouble, with many of them destined to go into foreclosure. This represents 20% of the mortgages that were written over the last few years. I want to look at the other 80%.

Most of these homeowners have fixed rate mortgages in the 5 to 6.5% range. Soon the inflation rate could easily be higher than this range. But even if the rate of inflation only grows to the 5% range, these borrowers are paying the bank with dollars that have lesser value than the dollars they borrowed in the first place.

Currently, housing prices are depressed throughout the country. Some areas such as Florida have seen major drops in value while other like New York have seen minor drops. As the effects of inflation move through the economy, the price of everything goes up, including houses. The homeowner who presently, has little or no equity in his home, will begin to build up equity simply due to the influence of inflation.

The current price for housing is either at its lowest point or close to it. This means that today’s renters will see their rents increasing and will be motivated to purchase a home. Why? If for no other reason than to stabilize their cost of rent. Rents move up with inflation but a fixed rate mortgage payment doesn’t. This brings us back to why most people buy their home in the first place; to own a place where they can raise their family. It’s only over the last few years that a residence was viewed as an investment vehicle first and a place to live second.

The housing market is currently in a transition period. As we approached the peak in market prices last year the spread between paying rent and paying a mortgage increased to the point that owning became unaffordable without some form of exotic financing. The carry costs of ownership became too much for many owners and mortgage defaults began to pile up. This brought housing prices down and forced the disappearance of the exotic mortgage programs. Now we’re beginning to see the cost of renting going up in response to the increase in the number of renters.

Currently inflation is affecting everything except wages. We are now dealing with a higher cost of living (especially housing costs), tighter credit standards and a lack of confidence in the price of real estate. As time progresses we can expect to see housing prices stabilize (due to the increase in rent), credit guidelines becoming more realistic (a direct response to the stabilizing of housing prices), wages rising (since inflation will eventually impact labor costs) and consumer confidence increase (a natural response to all of the above).

Individually we won’t be better off financially when the economy comes out of this transition period but we will feel like we are. This is what a moderate level of inflation does for you. You make more money; it costs you more to live yet psychologically you fell wealthier. The more money flowing through your hands, the richer you feel.

There will be one group of people that will actually be richer, those homeowners who bought their homes with pre-inflation dollars and fixed rate mortgages. Inflation drives the cost of everything up except for the mortgage payment for these individuals. The buying power of every dollar earned by these people has dropped except for the dollars used to make the mortgage payment. Inflation will drive the cost of borrowing money up, it will drive up the yield paid on savings accounts but it has no adverse impact on the fixed rate mortgage payment.

These borrowers entered into a long-term contract with their lenders. This contract obligates the borrower to write the same monthly payment to the lender for as long as it takes to retire the loan. The contract obligates the lender to a specific interest rate; regardless of how much the lender’s cost of funds increases.

The inflation cloud does have a silver lining, but only for those who had the foresight not to buy more of a home than they needed and used a conservative fixed rate mortgage. If you’re a member of this group don’t get discouraged by all the bad economic news. It is only temporary and you will be in a stronger financial position when the economy emerges from this transition period.

Personal Financial Tip 10

We’ve been very lucky over the last few years. Inflation has been very low for some time. Our luck is running out and that means we need to adjust our spending habits to reflect the new reality.

A low inflation rate has made us complacent. Price increases for our day-to-day purchases have been nominal. Any real increase in our spending week to week was mainly due to buying more “stuff” or buying higher priced “stuff”. We could slow or prevent any increasing in our spending with little pain. All we needed to do was to buy less “stuff.”

We are now living in a different world. We are forced to spend more money every week for the same “stuff.” In order to keep our spending in line with our incomes we are forced to buy less. This adjustment is going to prove to be even more painful when you consider the fact that even with a low rate of inflation we were spending more that we earned. The availability of easy and cheap credit made up the difference.

Cheap credit is quickly disappearing. Access to new credit is almost non-existent and existing credit limits are being reduced across the board. Everyone is going to need to make serious adjustments to their spending habits in order to avoid financial ruin.

Inflation has been low for such a long time most of us either don’t remember how we dealt with double-digit inflation or aren’t old enough to have faced it in the past. We’ve developed an instant gratification mentality. We want to live for today, enjoy ourselves now, buy the newest toys now and pay for it later. That’s way the debt load of the average American is at a historic high.

Budgeting hasn’t been one of our strong points but it’s a skill we are going to need to master and master quickly. The price of everything we buy is getting more expensive. Inflation becomes a justification for instant gratification. It subtly encourages us to overspend today. Putting off a purchase not only means that we lose the enjoyment of the product today is also means that it is going to cost more when we do buy. The bad habit of living for today now seems to have a logical foundation. Why wait, it’s only going to cost more tomorrow so I’m actually saving money by buying it today. This attitude is only going to make matters worse.

We are already seeing the effects of inflation on the decisions investors are making. In a low inflationary marketplace investors will focus their investments on paper investments. That is, stocks and bonds. When investors expect a period of higher inflation. They tend to move their investments into hard assets such as commodities.

Look at what’s happen in the stock market for the first half of this year. Every major stock exchange throughout the world has seen a drop in overall value ranging from 15 to 50%. Now look at the commodity market. The cost of all raw materials from oil to food has seen record run up in values. Investor money is moving from paper to hard assets.

Yes, global demand for raw materials has been steadily rising over the years. This is influencing the increasing prices of commodities. This underlying cause for increasing commodity prices has set the foundation for the spiking price increases caused by investors.

Profits are down for most companies. This means they are selling fewer goods. If they are selling fewer goods they need to produce less. In producing less, they will need fewer raw materials. A softening in demand for raw materials should stabilize or even lower the price of these resources. We are not seeing that, prices are continuing to increase. This is the result of investors moving their money into this asset class.

The only sensible assumption we can make is that inflation will increase and stay higher for the foreseeable future. By making adjustments to our spending habits in line with this assumption what’s the worse that can happen? Inflation stays low; we are spending less money with the result that we either end up with less debt or more saving. There’s no downside here.

We could continue on the path we’re on because we’ve assumed that inflation will be kept in check. However, we have a downside with drastic consequences if we’re wrong. We end up deeper in debt, assuming we don’t lose access to credit, or in bankruptcy. We just can’t afford to be wrong. It is too dangerous to make this assumption.

Most of us don’t need to make drastic changes. Getting rid of your SUV and buying a hybrid isn’t necessary. Fuel costs can be reduced without major lifestyle changes. Just by eliminating wasted trips your fuel bill can be reduced. Then when it’s time to replace your vehicle, downsize. This could be a perfect time to quit smoking. There’s a substantial cost saving here in addition to the health benefits. Tie in eating out less with that diet you keep promising to go on. Stop buying you kids every new gadget that comes out. In addition to the money saved your kids will be less spoiled and will grow into stronger adults.

Reducing spending is difficult to do. However, if you make a lifestyle change that improves your life, like becoming more environmentally sensitive or eating healthier, that also reduces spending the process becomes easier.

If we don’t change the way we handle our money today we will be risking financial insolvency tomorrow. Be proactive.