Artisan Mortgage Blog

Why should you use a mortgage broker

With the media frenzy surrounding the mortgage industry, I’ve been seeing more and more articles being written in the financial publications about mortgage brokers and the mortgage industry as a whole.  These journalists have been glossing over the details of our industry.  While they’ve been putting out correct information they have also been omitting some of the key aspects in the role of mortgage brokers.

The number one notion people have of mortgage brokers is that all they do is shop around for you, so if you are a person who likes to shop around themselves, they don’t need a broker.  This is false.

The most important feature in dealing with a mortgage broker is the difference between retail and wholesale.  As a mortgage broker I have access to hundreds of loan products offered by various banks and mortgage lending institutions.  These products are also offered to me at a wholesale discount!!  An example would be to look at the rates a large national lender is offering directly to the public and then be able to see the rates that this same bank offers me as a mortgage broker. There is a substantial difference in the wholesale price we are offered.  A good mortgage broker should shop around, find out who is offering the lowest price on a mortgage, take a portion of the wholesale discount as a profit margin and pass the rest of the discount on to the consumer, resulting in a cheaper mortgage than would have been available through a retail outlet.

While big banks don’t mind the negative press mortgage brokers receive, they realize that a good portion of volume is originated through brokers. Big banks love brokers because we deliver mortgages to them at no cost and that is the reason why they offer us a wholesale discount. In order for a large lending institution to write mortgage loans they need to lease a space, furnish it, set up communication systems and hire employees which all cost a lot of money. In order to make this business profitable for them, they then need to charge you the consumer a retail rate that builds in enough profit to cover these costs.  Here is where the mortgage broker comes in to play.

We the brokers incur all the costs with originating mortgages. We lease the space, buy the phones and pay for all the marketing costs associated with our origination business.  We bring in the customer, structure the loan and deliver this loan to the designated bank without them paying a dime( except maybe the marketing money they spend to attract wholesale business).

Big lending institutions realize we are not their competition, rather we are business partners.  The big banks fight one another to attract our business because the wholesale side of the industry can be very profitable. If times slow down they don’t need to worry about laying off employees or paying rent on spaces that are no longer in use because they have no overhead in conjunction with wholesale business.  Voila, wholesale discount to brokers.

A good mortgage broker is able to set a fair profit margin that allows them to make money while still offering a discount on the mortgage being offered directly to consumers.  If a mortgage broker was greedy, their profit margins would be too high and would result in a mortgage that was more costly than if you just went directly to a retail outlet.

This wholesale Vs. Retail scenario is probably the most important aspect to using a mortgage broker. There are many other advantages to using brokers and I will be detailing them in my upcoming posts. Just remember this, go to you local convenience store and look at the price of ketchup, then go to one of those large wholesale food discounters and compare prices.  You now understand the difference between retail and wholesale.

In Today’s Market You Need a Mortgage Broker

In the past year the mortgage industry has bee turned upside down and rolled over a few times. Many banks and loan programs that were readily available to consumers have now disappeared. This makes it very difficult for the mortgage professional in the business to navigate through the many restrictions and limitations placed on borrowers.

For these very reasons it is more important than ever to make sure you are dealing with a broker who can navigate you through all the complexities of today’s market. Like anything else you can try to do it yourself but more than likely if you don’t know what you are doing your not going to get the result you were looking for.

It is my advice that you speak to a loan professional, I repeat a loan professional and make sure that you are being guided in today’s market properly.

Rates are Down! Now What? Buy!!!!

Our wholesale 30 year fixed rate dropped to about 5.5% this week, with 15 year fixed mortgages a tad under 5%.

Now what?

I think this is the best time to be a buyer in the market. The old saying simply states buy low and sell high.  Home prices have definitely fallen over the last 18 months and with rates as low as they are, now is the time.

It’s a simple idea, but I still see many people selling when they should be buying.  If you can wait it out, now isn’t the time to sell your home. Maybe you should consider renting your current home and moving forward with the purchase of the house you’ve been eyeing for years.  Renting a home and becoming a landlord does have its risks, however you may even want to consider hiring a professional property manager.

 Rates are down, should I refinance?

First you need to run the numbers. The rate difference has to be enough to repay the cost of your refinance within a reasonable time period. If the numbers work, my suggestion is to lock in on a rate and proceed ahead. Don’t try to time a bottom on rates because you might miss them. The markets have been very volatile and unpredictable over the last several months, so if the numbers work and you feel comfortable with the interest rate, lock it and get it done.  Many times consumers don’t understand that rates do indeed move everyday just like stock prices and it’s not just a line you’re being given to attract your business.  The price on your mortgage can fluctuate throughout the day. Seek counseling from a true mortgage professional and let them guide you, but in the end make the decision yourself.  If you are unclear, ask as many questions as it takes to clarify your position.  In today’s world, we need to be educated consumers that do homework and understand what we are being sold.  I have many clients who spent more time shopping around cell phone plans then shopping their mortgage loan.  Your home can be your largest asset, so show it some love.

Mortgage Rates Are Up Now What

Mortgage Rates Are Up Now What
 
Currently the national average for the 30 year fixed rate is near 6.5%. Some people out there may think that these rates are too high and are still waiting for rates to come down. In my opinion 6.5% for a 30 year fixed rate is still a great deal considering that in the 1980’s rates ranged from 9% to almost 15%. When you consider where rates were 20 years ago, rates today are a steal. Unfortunately, over the past couple of years consumers got use to consistently seeing interest rates in the 5% range and even a couple of times rates have dropped below 5%.  
 
My advice to you is that if you can refinance to a fixed rate where you are able to drop your interest rate by at least one full percentage point more than likely it will save you thousands of dollars over the life of the loan.

New Conforming Loan Limits

New Conforming Loan Limits
 
In recent weeks there has been much discussion in the Mortgage Industry as to how much the conforming loan limits for Fannie Mae, Freddie Mac and FHA (Federal Housing Authority) will be. Currently the conforming loan limits for Fannie Mae and Freddie Mac are $417,000 for a single family home. FHA loan limits are a little more complicated and varies based upon the county in which the home is as well as a few other factors which I will not be going into. Currently, in New York the maximum loan limit in the highest priced counties is $362,790.
 
The 2008 stimulus package signed by the President in February looks to push the loan limits as high as $729,750 for a single family home but this $729,750 will not be a national standard. Either way any way to increase loan limits in any part of the country will help new buyers as well as existing home owners. It may not be a perfect plan but at least it will be something more than we already have

Pay Option Arms-The Real Mortgage Killer

Pay Option Arms-The Real Mortgage Killer

Pay Option Arms are probably one of the trickiest and least understood mortgage programs available to consumers.  Let me Stress to you at the very beginning, your Payment Rate is not your Interest Rate. This is how many of these loans are sold to consumers and this is where most get confused. Your Interest Rate is how much interest you will pay on the money borrowed. The Pay Rate is the minimum payment you need to make on the loan to the bank. Payment and Interest are two totally separated issues.

For Example:

I borrowed $200,000 with at an Interest Rate of 7% and my Payment Rate is 2%. The difference between the interest on the loan and the pay rate is then added to my mortgage balance. Since you are adding to your mortgage balance each month your loan is negatively amortizing. 

Once again your Pay Rate is not Your Interest Rate. So when you are told you only need to pay $333 per month on a loan for $200,000 that is just the pay rate the lender requires. My Interest per month is $1167 per month so the difference between the two is then added to my balance.

Sound confusing? Well it is!!!

Please follow up with me next week to see why these loans spiral out of control for consumers.

How Do I know If Interest Rates are going to Drop?

So many times in the news you hear that the Federal Reserve has cut interest rates. Shortly thereafter clients begin calling and ask me how much the interest rates on mortgages have dropped.
 
First point, the Fed rate is the rate at which member banks may borrow short term funds directly from a Federal Reserve Bank. The discount rate is one of the two interest rates set by the Fed, the other being the Federal funds rate.
 
So what does this mean? Very simply when the Fed Rate drops the interest rate at which banks borrow money drops as well. Therefore when the Fed’s cut rates the banks can borrow money cheaper.
 
Now the real measure of how interest rate will change with respect to mortgage rates is the yield on the 10-yr Treasury Bonds. When these bonds go up the yield goes down (it is an inverse relationship for those of you who understand some basic mathematical principles). When the yield drops the rates on mortgages generally drop. One thing I would like to point out from my observation of the markets, sometimes the Fed cuts rates and the stock market begins to rally. This rally brings the prices of stocks up and people begin to sell bonds. When the price of bonds begins to drop their yields go up and as a result the interest rate on mortgages goes up as well. I have also seen times when the Fed has cut rates and the interest rates on mortgages have dropped.
 
So how do I know if interest rates will drop? The general rule is to track the yield on the 10 yr treasury bonds and if I really knew how to track bonds each day maybe I would be a bond trader on Wall Street.

100% Financing

This seems to be a topic that comes up a lot. Many times when I am out attending social events, the conversation turns to the mortgage industry and all the half information that the general public has heard through the media.

 People always come up to me and comment about all the risky mortgages that were done and the reasons for the sub-prime meltdown.  I always hear ” I can’t believe they were doing 100% financing!”

And I always rebut with, they’re still doing 100% financing!

Right now, 100% financing is not a very risky loan to the lenders.  The loans that were done over the last couple of years at 100% financing were risky because they were also No Income verified. The combination of those 2 factors are what made those loans so risky.  A mortgage is as good as the ability of the borrower to re-pay the loan.  Most of the loans that went bad, were the result of highly speculative investors who were getting into homes with no money down, with the hope of flipping them for a profit.  When the market turned, these borrowers were left holding the hot potato and just dropped them.  They couldn’t afford to make the payments and let the homes go to foreclosure.

Today, 75% of all my new purchasers are making down payments ranging from 0-3% down.  These loans have very attractive rates but do require good credit and full income verification.  If you’ve been renting for $1500 per month for over 3 years and you could purchase a home for say $1800 per month why wouldn’t you?  The lenders feel the same way.

Generally, 100% financing were risky loans, because if the borrower didn’t pay, the lenders assumed they would recoup 80% of the loan from a foreclosure sale.  ( this 80% mark is the mendoza line of mortgages, ” baseball reference”).

However, on today’s 100% financing products, the 80-100% equity is insured through the use of PMI ( private mortgage insurance). The borrower pays the cost of an insurance policy that insures the lender that if the loans goes bad, the PMI company will cover some portion of the outstanding loan balance.  The lender can now foreclose, recoup 80% from the sale and make a claim against the PMI company to offset it’s loss.  What a wonderful world we live in!

No matter what, the risk of any given loan is set by the ability of a person or entity to re-pay the loan and the collateral that secures the loan if for some reason the loan is not paid back.  Today’s 100% loans are being checked for the ability to re-pay and are being insured through the use of PMI.  There’s no reason why lenders shouldn’t be offering these loans.  As a matter of fact, they are being offered at better terms than were around 2 years ago.

Don’t be swayed by what you hear in the media, often the information is wrong or being told as partial truth. Consult a mortgage professional and do some research.  And the next time you are at a cocktail party and hear ” I can’t believe they were offering 100% financing”, brush it off as another mis-informed 10 o’clock news watcher.

Mortgage Outlook For 2008

Lenders are continuously tightening guidelines and are restricting many loan programs available to borrowers. With major lenders and investment banking companies still having billions of dollars in bad mortgage debts to write off their books it will be some time before things loosen up. Also, major players such as Fannie Mae and Freddie Mac have implemented many changes to their loan programs which will result in an across the board tightening of  guidelines which will result in fewer loans available to borrowers.

Forget Sub-prime, there are still sub-prime lenders out there in the marketplace but their interest rates are not what they used to be and the loan programs available to the sub-prime borrower will only meet a small select few borrowers. With all this said I believe 2008 will be a year of tighter guidelines, fewer loan programs and a tougher market for mortgage brokers, Realtors and other professionals related to the housing market in general to survive.

 Don’t get me wrong, even in the harshest environments there will be those that flourish but the days of overwhelming prosperity for the broker with a loan application and the borrower with a pulse is such a thing of the past.

What It Means to Be A Mortgage Broker

Being a mortgage broker is something more than quoting a person an interest rate and getting an appraisal done. Too often I hear about people that have worked with other companies and so called “loan officers”. They say to me the guy at the company said I can get a low rate and all I need to do is get an appraisal done. If it was that easy then anyone would get a loan and there would be no need for underwriters at banks and guidelines set by lenders.

Getting a loan is more complex than that and it really takes  knowledge, skill, experience and constant research of the indusrty so that you are aware of all the changes going on. Especially in these times when lenders are falling out of the business and the lenders that are still out there are changing their loan programs it seems almost weekly.

 For myself being a broker is something that is requires dedication, commitment and continuous education. If you want to survive in this market you really need to know what your doing and also know how to get it done. The days of having your account executive structuring your loans and lenders giving exception after exception is a thing of the past.

I truly believe this is a good time for the brokers that have sat on the sideline for the past couple of years and had to deal with competition from uneducated, ill-trained, immoral and unethical individuals who only cared about making a commission. This will now create an opportunity to shine for brokers who know what they are doing and have put their clients first since borrowers have been burnt a few times and are much more cautious to get tricked again  and with lenders having very tight with guidelines only the smart will survive