Mortgage Mysteries need to come clean

Do people trust mortgage consultants? Or do we just go with one because it’s a necessity? ( I was one many years ago) As a consumer, we spend almost all our time making sure a certain bank has the better rates compared to another, then we need to dedicate all of our time after that making sure that we will actually get that best rate they were promoting to begin with. Who wants to chase the bait, only to get hooked? No one.

Mortgage experts let us know our debt, credit score, assets and income are factors to getting the best rate possible. But today, people need to know, you either qualify or you don’t. It’s a conforming loan or an FHA loan. That’s it. Many consultants give off the illusion that the rate or fees are higher because of your shortcomings. After the bubble popped, mortgages went back to basics. Common sense. Just know what you can afford and commit to it, like anything else. If you are confident in the payment, everything else should work out.

First off, it is not that hard to write, submit, sell and close a loan. It may require some sales skills, basic math, knowledge of the market, trust from the customer and a good relationship with underwriting. That’s it.

The big mystery is:

1) how consultants get paid.

2) how you link all these different products to your financial goals

3) And how amortization works. http://en.wikipedia.org/wiki/Amortization

When I was a consultant, one of the biggest factors in winning a customer’s business / trust was telling them flat out how and why I was charging them, instead of secretly increasing closing costs before the loan closed. It’s called the “bait and switch.” Banks do not do loans for free but consultants are capable of overcharging at the end. If you are in an adjustable rate, your payments are going up and you are refinancing into a fixed mortgage, take your new, expected monthly savings and compare them to the consultant’s fees. Maybe you are saving $400.00 a month and the fee is $3,000.00. Will you break even in 6 months? 1 year?

The secret to the magic trick is…  the more volatile or higher the rate they sell you on, the more the bank will pay out to the consultant. Look up yield spread. Some banks don’t allow it. Some do. And then they can charge whatever they want up front in closing costs. Remember pay option Arms?

Learn how and why they get paid. Do their charges/fees match to the value of the loan? If a consultant is giving you cash out, fixing your rate and saving you money… do his up front fees sound reasonable? Or should you get a 2nd opinion? A consultant does need to make money, but is the cost transparent?  1) Always get a time frame in place as to when the loan is closing. 2)  hold them accountable to what they are selling you on. ( rate, fixed, savings, fees 3) Are they educating you on the loan?

Why the bubble didn’t get everyone?

Five, six years ago, their was a housing bubble. Everyone was buying with cheap credit. The people that got screwed got into Arms and crossed their fingers while pursuing the American Dream. They had lots of debt already, got a mortgage w/ no money down, values went down and eventually drowned in rising interest. The smart and truly qualified buyers did get fixed rates and some opted for adjustable rate mortgages too. They had very low fixed rates for a short amount of time,  had good credit, had minimal debt,but put money down BUT used their ARM as a vehicle. As a tool.  The smart, qualified buyers paid down their loan with least amount of interest,  knew their budget all along,  improved their credit more …all before their rates went up. NOW, they are most likely in a 30 year fixed mortgage, maybe  in their second home or dream house and can see themselves living there in the long term. That’s how you use an Arm. That’s how you transition into a 30 year mortgage. An Arm will get you where you want to go, but it has a time frame. You need to know when it’s up.

Where are you? What are the next steps? How do you envision your housing situation withing 5 years? What do you need to do to leverage your first house or existing home to get to Point B ? Maybe it’s putting a kid through college, adding an addition to your home or simply to save lots of cash.  After you achieve those milestones… are you ready to start actually owning your home? Maybe a 30 year fixed mortgage is the right time. Maybe you don’t want to go back to another 30 years after being in a mortgage for 10 years ( that’s 40 years) ..maybe you refinance and are more focused on paying more money to the principal and roll into a 20 yr or a 15 year fixed mortgage, closer to owning your home free and clear.

Understanding Interest/ Amortization

Paying interest on a loan is very tricky, personal and complex. That’s the most complex thing about mortgages. Why? Because “they” want it that way. Lots of interest and complexity.

amortization_schedule

Educate yourself on where your money goes the first 5 years of a mortgage. It’s mainly interest. No principal. ( look at chart) Do you want to refinance back into another 30 year after NOT paying off any of your mortgage balance for the last 5 years? Educate yourself on bi- weekly payments too. You can knock off the life of the loan by doing so. Understanding and extending or reducing the terms to your mortgage and the effects it will have in the long run can save you cash.

Commission/Fees

One of the best ways for indecisive buyers to make decisions on financing is to understand the incentive of the consultant and what the bank secretly wants us to do. Do they want us to keep refinancing? Do they want to see no loan depreciation at all? Just to keep paying interest? Do they wants us to keep going back to a 30 year mortgage?

Maybe all of the bank’s fees and costs are still existent, because of manual/paper labor and lack of efficiency.  Processing, originating, documenting, verifying etc is all work. When will be the day, when we can stick our ATM card in a machine, hit a refinance button, choose a rate, term and estimated closing cost fees and be done with it. Right now, we can call or go to any cellphone/mobile store, cable company, internet provider and have them compete for our business. We can upgrade, change our accounts, cancel or continue our services with no hassle.

What makes them more timely?

Maybe bank financing won’t get more efficient as time goes by. Complexity is their “secret sauce,” and having, lightening, quick technology to make choices visible and easy to understand will go against their real agenda. Choosing a bank, consultant and loan are all inter-twined together. The bank is the brand, the loan is their product and the consultant is the price. Once we overestimate and misunderstand the value of work of somebody else… we get screwed. Any profession.

**** I just want to say I have worked and know some credible, trust worthy mortgage consultants. Their agenda is not always aligned with the bank. This is not to bash all consultants..everyone needs to make a living. The first step toward choosing better decisions when it comes to finance is understanding the whole process. Low rates and cheaper closing costs doesn’t mean there is value. And the complexity of banks and finance doesn’t mean they are working any harder for us.

http://money.usnews.com/money/personal-finance/articles/2012/03/29/are-you-in-over-your-head

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3 thoughts on “Mortgage Mysteries need to come clean

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