Bright Idea

Are you a realtor who wants a reason to make that call to your former clients? How about a loan officer who wants to find a way to add value to their favorite real estate professional?

You likely know mortgage rates have dropped by nearly 1% since last August but you would be surprised how few of your clients are aware of the significant drop in rates. I recently heard rates are the lowest they have been in three years. So I researched it and last year the average Freddie Mac 30 year Rate was 4.55 with .55 Discount point. By contrast today rates are according to Feddie Mac is 3.6% with a .6 discount point (Freddie Mac published average on 8/8.

So maybe you are thinking – how does this help me if you are an agent? Well, we mentioned this to one of our many favorite agents, who has only been in the business 3+ years, and suggested she reach out to her clients and share the following idea. So often I hear my agent friends tell me they have “call reluctance” so we wrote a script for making the call:

“HI _______, did you know rates have dropped nearly a point since last year alone while values throughout metro atlanta have continued to rise. The result is this is a great time to contact a mortgage pro and have them review your current mortgage with you. You may be able to save significantly each month or go from a 30 year mortgage as example to a 15 year term and shave many years and much interest expense from your financial future. Please let me know and I can reconnect you with the loan officer I referred originally or introduce you to one of the many great pros I work with.”

This new agent did this and reconnect her buyers and lenders. In just 1 week, the results really were incredible:

  1. Out of approximately 30 closings, approximately 6 persons refinanced saving hundreds of dollars monthly in some cases with little to no cost.
  2. All of the clients were happy to hear from the agent.
  3. The loan officers appreciated her redirecting her clients back to them.
  4. And here’s the kicker, a couple of the people wanted to look at possibly buying another home due to the low rates.

Talk about a win-win win for the owner, the lender and the agent!

What an easy call to make. I encourage every loan officer to take this idea to their database of agents and agents to take the message to their clients. Of course we are here to help you get them closed but we would love to hear any success stories from this idea.

Good luck!

What Is The Debt-To-Income Ratio (DTI)?

 

Measuring your existing debts against your existing income is one part of a lender’s required assessment of your ability to repay a loan.

Like the video says:  debts are existing financial commitments; a car payment is a debt a grocery bill is not.

To calculate your debt-to-income ratio add up your monthly debt payments and divide them by your GROSS monthly income. (Gross income is generally the amount of money you earn BEFORE taxes and other deductions.) The Federally-established debt-to-income target is a maximum of 43% for Qualified Mortgages.

If your ratio is higher there may be other loans available  – however, there may also be additional questions to establish your ability to repay, and the rates may be different than those available for Qualified Mortgages.

Studies suggest that a high debt-to-income ratio puts a homeowner at greater risk of challenges making monthly payments. So consider your situation and risks carefully before exceeding that suggested ratio.

What Does Ability To Repay Mean?

 

What are the “Ability to repay” rules about?

In a nutshell, as this video shows, new laws require lenders to make a good-faith assessment of a borrower’s capacity to pay back their loan over time.

It’s a longer-term view that goes beyond immediate income, debt and credit rating.

These new Federal laws- supervised by the CFPB – require lenders to ask more questions –

about income, assets, employment, credit history, and monthly expenses –

as they relate to the proposed loan.

For example, a lender offering a mortgage with a low initial rate must try to assess how a borrower will handle the later, higher rate as well.

If you’re applying to borrow ask whether the program you’re considering is a Qualified Mortgage

Ability-to-repay rules are built in to loans that meet Qualified Mortgage guidelines.

 

What Is A Qualified Mortgage?

 

As this video explains,  Federal laws put into effect in 2014 and  supervised by the Consumer Financial Protection Bureau define lending practices and loan terms for a new category called “Qualified Mortgages.”

They provide stable loan features for consumers and improve legal protection for lenders who follow the guidelines.

These guidelines require lenders to assess each borrower’s ability to repay their mortgage loan.

As of 2014, guidelines require that a borrower’s monthly DEBT – including mortgage – be no higher than 43% of their monthly gross INCOME

The laws also define unacceptable loan terms:

  • interest-only loans
  • terms over 30 years
  • negative-amortization loans that increase principal over time
  • most balloon loans

do not meet the Qualified Mortgage guidelines.

The laws aim to provide consumers with objective guidance  about reasonable debt from the CFPB and in return, to grant lenders who follow that guidance with higher levels of protection from lawsuits.

Ask your lender about Qualified Mortgage options for your home purchase.

 

What Is Equity?

 

Equity is the value YOU own in property such as a house. It’s the difference between what’s OWED and what the property is WORTH in the current market.

The example this video shows – you have a house worth $300,000 today and you owe the bank $200,000.  Your equity would be $100,000.

If the house is valued at $500,000 in five years, and you still owe $150,000 your equity will be $350,000.

Equity grows if the property value goes up or if the amount owed goes down.  The key thing to remember, simple as it sounds, is that you “own” increases in value. The bank’s loan doesn’t go up if the home’s value goes up.

Equity in a home can be used as collateral for loans but a house is not a piggy bank. Home equity can become a key financial asset over time; treat it wisely.

What Is “Prime”?

 

The Prime Lending Rate – sometimes just called “Prime”  – is the interest rate that banks charge each other for overnight loans. Some consumer rates – like ARMs – are set in relation to Prime.

In the US, Prime is affected by the Federal Reserve lending rate to banks; historically, Prime is about 3 percent above the Fed rate.

The video shows  an example.

  • The Federal Reserve loans to Bank A at 1%
  • Bank A loans to Bank B at 4%
  • Both banks – A & B – will recalculate variable-rate loans like ARMs on that 4% Prime figure.

ARM rates are frequently defined as “% above Prime” – that gap is usually called the “margin” or “spread.” Just remember those 3 layers in Prime: Federal Reserve Bank A Bank B And finally, YOUR rate.

What Are Discount Points?

 

Discount points allow you to lower your interest rate. While this video simplifies things to help you remember, “points” are essentially prepaid interest with each point equaling 1% of the total loan amount.

Generally, for each point paid on a 30-year mortgage the interest rate is reduced by 1/8 (or.125) of a percentage point.

When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid.

Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment.

Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

What Is A Mortgage?

 

The original phrase “mort gage” translates as “death pledge”! But as this video explains, a mortgage is a loan obtained to purchase real estate.
The “mortgage” itself is a lien – a legal claim on the home or property that secures the promise to pay the debt.

All mortgages have two features in common: principal and interest.

The principal is the amount you are borrowing which is “secured” by the lender’s claim on the property.

The interest, usually stated as the percentage rate is the additional amount paid for borrowing. Mortgage interest is ‘compounded’ – interest on interest, over time.

Can I Pay Off My Loan Ahead Of Schedule?

 

Usually, Yes. Like the guy in the video says, by sending in extra money each month or making an extra payment at the end of the year you can accelerate the process of paying off the loan.

When you send extra money, be sure to indicate that the excess payment is to be applied to the principal and keep records.

Remember that payment applied to loan principal is not tax-deductible. Most lenders allow loan prepayment, but some loans may have prepayment penalties.

Ask your lender for details.

What Are The Advantages Of 15- And 30-Year Fixed-Rate Mortgages?

 

For both, as we show you in this video, compared with other options,  with fixed rates, housing costs won’t be affected by interest rate changes and inflation.

With A 30-Year Term: In the first 23 years of the loan more interest is paid off than principal meaning larger tax deductions. As inflation and costs of living increase mortgage payments become a smaller part of overall expenses.

With A 15-year Term: Loan is usually made at a lower interest rate. Equity is built faster because early payments pay more principal. And the loan is paid off earlier.

Compare payments, principal and interest totals to make a decision.