What is Mortgage Planning?

Step #1: Initial Conversation Our initial conversation will focus on these questions:

• What are your housing obectives and why?
• What does your current cash flow situation look like?
• What large expenses should we take into account as we help you develop a budget for the future (college funding, retirement planning, elder care needs, etc.)?
• What can I do to help?

Step #2: Analyze & Evaluate Your Options

The next phase of our relationship will focus on:

• What are your housing, debt planning and cash flow options?
• What, if any, mortgage products and strategies would be useful to you?
• What is the likely short and long-term impact of these mortgage options on your overall financial situation?

Step #3: Develop & Implement Your Personal Mortgage Plan

Once we've discussed your options, and how these various options may impact your overall housing and financial situation, it's up to you to decide on which plan of action works best for you. I'll be here to answer any questions and be a resource to you in any way I can. I'll also coordinate the whole process with you and other professionals such as CPAs, CFP® professionals, attorneys, Realtors, builders, insurance professionals and other qualified advisors.

Step #4: Monitor Your Mortgage Plan Through an Annual Mortgage and Housing Review

Mortgage planning is a life-long process because your financial situation is likely to change from time to time. As your mortgage planner, it's my role to help you monitor these changes as needed and through an annual conversation. Most often, this process involves periodic assessment of:

• Your fluctuating cash flow needs
• Changing interest rates and housing market conditions
• Family changes and life events including job changes, college funding, retirement planning and elder-care needs

Here's how mortgage planning is different than the traditional "shopping for a mortgage" experience:

"Mortgage Planning" with a Certified Mortgage Planning Specialist (CMPS®)	"Shopping for a Mortgage" with any of the 500,000 + Mortgage Salespeople in the US
5-Star Experience	Overwhelming and/or Confusing Process
Focus on Which Mortgage Options Fit into Your Life, and Why	Focus on Whether You Fit into the Mortgage Lender's Box, and How
Consider the Mortgage Transaction in the Context of Your Overall Financial Situation & Objectives	Consider the Mortgage Transaction "In a Vacuum"
Customized Options for Your Scenario	One Size Fits All
Mortgage Salesperson Who Puts His/Her Relationship With You Ahead of the Transaction	Mortgage Salesperson Who Puts the Transaction Ahead of His/Her Relationship With You

How to Understand the Annual Percentage Rate (APR) on Your Mortgage Loan

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The federal government requires mortgage lenders to disclose the "annual percentage rate" (APR) whenever they advertise a loan program. But what is APR, and does it really matter to you?

Here's the thing: APR lumps all your "finance charges" into your interest rate. As you can see from Figure 1, some of your closing costs are considered "finance charges".  APR is calculated by adding all these finance charges to the total interest that you'll pay over the life of the mortgage, and then calculating an annual interest rate based on that total number.

Figure 1: APR Costs (Finance Charges) vs. Non-APR Costs

APR Closing Costs & Prepaid Items (Finance Charges)	Non-APR Closing Costs & Prepaid Items
Origination Charges and Points	Application Fees
Processing and Underwriting Fees	Appraisal Fees
Mortgage Insurance (monthly and upfront)	Credit Report Fees
Closing Agent Fees Retained by Mortgage Company, or Closing Fees in Excess of What You'd Be Charged if You Paid Cash	Title Fees & Title Insurance
Tax-related Service Fees	Pest or Flood Hazard Inspection Fees
Administrative and Wire Transfer Fees	Stamp and Transfer Taxes
Pre-paid Interest	Pre-paid Escrows for Taxes and Insurance

Here are three little-known facts about APR:

#1 - All Seller-Paid Points and Closing Costs Are Excluded from APR

This means that your APR will be lower if the seller is contributing funds toward your points and closing costs.

#2 - The APR on an Adjustable Rate Mortgage (ARM) Follows a Different Formula

When you have an ARM, the APR is calculated by looking at your "fully indexed rate".  This is the interest rate that you would pay if the loan adjusted today.  For example, if you have a 5 or 7 year ARM, the APR on your loan is not calculated based on the rate you pay for the first 5 or 7 years of your loan.  It's based on what your interest rate would be in 5 or 7 years if the index remains the same as it is today.  See Figure 2 for an example of a fully indexed rate.

#3 - The APR Does Not Take Into Account How Long You Will Keep the Mortgage

Most people only keep their mortgages for 5-7 years.  Chances are that you'll refinance or sell your home at some point before the loan ends in 15 or 30 years.  Therefore, when you compare your mortgage options, it's probably smarter for you to look at what your total costs will be over 5, 7 or even 10 years vs. focusing entirely on comparing the APR.  Remember, APR is simply one measurement of the cost of your loan... and it may not be the most accurate measurement for your purposes.
As a Certified Mortgage Planning Specialist (CMPS®) I'd be happy to review your situation and help you compare your options.  Contact me for more information!

How Low Housing Inventory Impacts You

Here's a chart illustrating the supply of homes for sale as reported by the US Census Bureau. This illustrates how many months it would take to sell all the houses currently listed for sale, at the current pace of home sales. For example, if there are 500 homes currently listed for sale, and an average of 100 homes are selling each month, there would be a 5-month housing supply. This is because it would take 5-months to sell all the homes currently listed for sale.


More than a 6-month housing supply is a buyer's market.  Less than a 6-month supply is a seller's market.  Housing supply is running at less than four months locally. THIS INDICATES A SELLER'S MARKET. Here's how this impacts you:

1. You're Competing with Multiple Offers on a Home.   In some cases, there have been dozens of offers on the same house.
2. You're Competing With Cash Buyers. In many cases, you are bidding against cash buyers who don't need to wait for financing approvals.  Look at it this way:  if you were the seller, would you prefer to do business with a buyer who needs to wait for financing approvals, or a cash buyer who can close the deal quickly?
   

There are three main strategies that my clients are implementing right now to beat the competition and avoid getting outbid on their new home. Contact me for more details!

WINTER 2018 GUIDE TO MORTGAGE RATES

House prices are determined by housing supply, housing demand, and housing affordability.

HOUSING SUPPLY: WHAT'S THE OUTLOOK?

Housing supply measures how many months it would take to sell all the houses currently listed for sale, at the current pace of home sales. For example, if there are 600 homes currently listed for sale, and an average of 100 homes are selling each month, there would be a 6-month housing supply. This is because it would take 6-months to sell all the homes currently listed for sale.

A buyer’s market is anything more than 6 months. A seller’s market is anything less than 6 months. In this case, sellers would have greater negotiating power, and buyers may have to bid higher than list price in order to compete with multiple offers.

Housing supply has been running below 6 months across the US since 2012. This indicates a seller’s market. In many parts of the country, buyers are competing with multiple offers… in some cases dozens of offers on the same house. This tells us that house prices are poised to continue going up in the next several months.

HOUSING DEMAND: WHAT'S THE TREND?

Housing demand tends to slow down in the winter because most home sales occur during the spring and summer. Even so, housing demand is expected to remain strong because the economy is doing well and people have jobs in most parts of the country. The chart to the right illustrates how there are more jobs available today than at any point in the past 15 years as measured by the Job Openings and Labor Turnover Survey (JOLTS) report.

 

HOUSING AFFORDABILITY: CAN BUYERS AFFORD HOUSES AT CURRENT PRICES?

The National Association of Realtors (NAR) publishes a "Housing Affordability Index".

While housing affordability for move-up homebuyers is still near record highs, housing affordability for first-time homebuyers is a challenge. Today's index value of 99.7 on the National Association of Realtors First-time Homebuyer Affordability Index means that a family earning the median family income is right on the borderline of being able to qualify for a home loan. While this situation is not nearly as bad as it was for all homebuyers throughout the 1980s, there is still cause for concern. 
Potential solutions for these buyers to consider could include the use of gift funds from relatives for a down payment, and/or the use of a low-down payment program. Also, keep in mind that recent statistics show that buying a home is still more affordable than renting a home for many first-time buyers.  While house prices and mortgage payments may be higher than what many first-time buyers would like to see, the monthly payments are often on par with what they would otherwise pay in rent.

Of course, housing affordability in your situation could be higher or lower depending on the amount of your down payment and the mortgage strategy you choose.

CONCLUSION: WE ANTICIPATE AN INCREASE IN HOUSE PRICES OVER THE NEXT SEVERAL MONTHS BECAUSE HOUSING SUPPLY IS LIKELY TO REMAIN LOW, HOUSING DEMAND IS LIKELY TO REMAIN STRONG, AND HOUSES WILL CONTINUE TO REMAIN AFFORDABLE FOR MOST BUYERS. PLEASE CONTACT ME FOR SPECIFIC INFORMATION ON HOUSING SUPPLY, HOUSING DEMAND AND HOUSING AFFORDABILITY IN YOUR LOCAL MARKET.

How to Understand Your Home Appraisal

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A home appraisal is an estimate of your home's value.  It's simply a professional appraiser's opinion of what he/she thinks your home may be worth.

Why Do Appraisals Matter?

Mortgage lenders base your loan amount on the LESSER of the appraised value or the purchase price. Here's an example:

• You sign a contract for a $500,000 home with a $100,000 (20%) down payment.  Your loan amount in this case would be $400,000 (80% of the purchase price).
• The appraisal comes back at a value of $480,000
• The mortgage lender is no longer willing to lend you $400,000, because that would represent 83.3% of the appraised value.
• The lender reduces the loan amount to $384,000, which represents 80% of the $480,000 appraised value.
• You have three options:
  • Make up the difference yourself (purchase the home for $500,000 and come up with a down payment of $116,000); or,
  • Ask the seller to reduce the purchase price to make up the difference (purchase the home for $480,000 instead of $500,000, and use a down payment of $96,000); or,
  • Ask the lender if there options available to make up the difference (e.g., change loan programs, add a second mortgage, add private mortgage insurance, etc.)

What if You Don't Agree With the Appraiser's Opinion?

Tough luck!  No, seriously.  Although you and I are entitled to our own opinion on the matter, the mortgage guidelines require the loan amount to be based on the LESSER of the appraised value or the purchase price.

How Does the Appraiser Determine Value?

Appraisers are usually required by the lending guidelines to compare your home with similar homes that have sold within the past 6 months.  Then, they make adjustments based on the differences in the comparable sales (see illustration below).

In this example, Comp 1 sold for $440,000, but it didn't have a finished basement.   So the appraiser adjusted the sales price up by $50,000 to $490,000.  This means the appraiser thinks Comp 1 could have sold for $490,000 if it was more like your home.  Comp 2 had a 50% finished basement, and it only had a 1 car garage.  However, it's a little larger than your home.  All things considered, the appraiser adjusted the sales price up by $19,000 to $469,000. This means the appraiser thinks Comp 2 could have sold for $469,500 if it was more like your home.  The major differences between your home and Comp 3, are that Comp 3 is a little bigger than your home and it has a 3-car garage. So, the appraiser thinks Comp 3 could have sold for $477,000 if it was more like your home.  In this example, the appraiser thinks your home is worth $480,000 based on the comparable sales (and all the adjustments outlined above).

What does this mean for you?

Here are three things you may be able to do if the appraisal comes back different than your purchase agreement:

• Option 1:  Renegotiate the sales price if permitted in your purchase agreement.  The benefit with this option is that you may save some money on the purchase price of the house.  The drawback is that you risk losing the deal because the seller may not agree to renegotiate.
• Option 2:  Increase your down payment.  The benefit with this option is that you close the deal without worrying about renegotiating with the seller.  The drawback is that you'll need a larger down payment and you may be paying more for the house than it's worth.
• Option 3:  Talk to your lender.  There may be options available to help you make up the difference (e.g., change loan programs, add a second mortgage, add private mortgage insurance, etc.).

This is probably one of the most important financial transactions of your life. My commitment is to communicate and strategize with you every step of the way.  Contact me for more info!

Four Questions to Ask About Your Home Equity Line of Credit (HELOC)

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1. What will cause the Prime index to go up?  The interest rate on your HELOC is determined by adding a margin to the Prime rate.  This means that your interest rate will go up when the Prime rate goes up.  The Prime rate changes whenever the Federal Reserve change their Federal Funds rate.  The Fed has kept its Federal Funds rate at or near zero percent for the past several years.  The Fed has indicated that they'll be increasing the Fed Funds rate as the economy recovers.  This means that as the economy continues to get better, the interest rate on your HELOC is likely to go up.
   
2. What happens after the initial draw period?  Some HELOCs turn into amortized mortgages after the initial draw period.  This means that your monthly payment would probably go up dramatically from where it is now if you are currently making interest-only payments.  Other HELOCs must be paid off after the initial draw period because a "balloon" payment will be due.  It's important to find out if you can keep the HELOC (albeit with a much higher payment), or if you'll be forced to refinance or pay off the HELOC at the end of the initial draw period.
   
3. What would be my blended interest rate if I keep the HELOC?  Your blended interest rate is determined by your total interest expense on all of your loans.  For example, assume you locked in a very low mortgage rate on your first mortgage.  Is it really worth it to have two loans instead of one if your HELOC will be re-amortizing and the interest rate is likely to go up?  You may want to consider whether you can combine the two loans into one and walk away with a lower blended interest rate on both of your loans combined.
   
4. What would be my total monthly payment if I keep the HELOC?  There will likely be a cash flow difference one way or another if you keep the HELOC or if you combine it into your first mortgage.  The extra cash flow can be used to invest or pay down principal.  The only way to find out is to ask the question!

Contact me so that we can further explore any/all of these ideas together.

30-Year vs. 15-Year Mortgage: Four Questions to Ask When Comparing Your Options

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Here are four questions that can help you make a more informed decision when comparing a 30-year fixed rate mortgage vs. a 15-year fixed rate mortgage.

1 - What will I do with the difference in cash flow?

There are two main benefits that a 15-year mortgage has vs. a 30-year mortgage:

• 1 - Fifteen year mortgages often carry lower interest rates vs. thirty year mortgages. This could save you some money over time. (See Figure 1 that illustrates what would happen if the interest rate on a 15-year mortgage was 0.5% less than the interest rate on a 30-year mortgage.)
• 2 - Fifteen year mortgages are paid off in half the time of thirty year mortgages. This results in less interest over time and no monthly payments after 15 years.  (See Figure 1.)

Even so, you could accomplish similar results by investing the extra cash flow experienced from the lower payments on a 30-year mortgage. (See Figure 2.) Therefore, the main issue here is: what will you do with the difference in cash flow if you choose a 30-year mortgage? Here are three options:

• Option 1: Invest the extra cash flow. This could be worth consideration if you're looking to build your retirement account or a child's college fund.
• Option 2: Spend the extra cash flow. This could be worth consideration if you're looking to enhance your lifestyle or create more life experiences.
• Option 3: Use the extra cash flow to bid higher or buy a more expensive house. This could be worth consideration if you're facing tough competition from other buyers in your market and if home values are likely to increase.

2 - What's the outcome in 15 years?

As you can see from Figure 2, you'll probably come out ahead going the 30-year mortgage route if you invest the extra cash flow.  Further, you'll have access to the funds after 15-years as they'd likely be in a liquid investment account vs. being trapped in your home equity.  The bottom line is that you are in more control of your cash flow with a 30-year vs. a 15-year mortgage.

3 - What's the outcome in 30 years?

See Figure 3 for an illustration showing a comparison over a 30 year timeframe.  With the 15-year option,  we are showing what would happen if, in years 16-30, you invest the entire monthly payment that you no longer have with the 15-year option.  With the 30-year option, we are showing what would happen if you simply invest the extra cash flow each month for 30-years.  As you can see from Figure 3, you'll probably come out ahead going the 30-year mortgage route if you invest the extra cash flow.

4 - What's the risk with either option?

The main risk with a 30-year fixed rate mortgage is that you may not be disciplined enough to use the extra cash flow in a productive way that improves your life.  As with any other choice in life, it's up to you to stay the course.
The main risk with a 15-year fixed rate mortgage is that you may find it difficult to make the higher monthly payment if you run into financial challenges down the road.  So it really boils down to this: would you rather obligate yourself to a higher monthly payment with the 15-year option, or would you rather bet on yourself that you'll make smart choices with the extra cash flow you experience with the 30-year option?
In either case, this is probably one of the most important financial transactions of your life. My commitment is to communicate and strategize with you every step of the way.  Contact me for more info and I'll be happy to run the numbers for your specific situation!
*PLEASE NOTE: This article is provided for educational purposes. The examples and interest rates used in this article are for illustrative purposes only. The US government requires me to disclose that this is not a commitment to lend you money under Regulation Z, this is not an advertisement for a particular loan program or for particular interest rates, and you are not pre-approved or pre-qualified for any of the options illustrated in this article. You are welcome to complete a loan application to find out if you qualify and what loan programs you may qualify for. Also keep in mind that these illustrations don't take into account the additional tax advantages that may be available with the 30-year option vs. the 15-year option. Finally, the scenario would be impacted by the rate of return you are able to earn on investments. We are using 6% in our example, but your actual return will vary depending on the type of investment you choose. Please see a CPA or financial advisor for more details.