Mortgages Part 2

5 Things You Should Do When Getting A Mortgage

(If you haven’t read the previous post you may want to refer back to it for definitions of some of the terms you’ll find in this post.)

1. Buy What You Can Afford

Step one is to choose a home you can afford to buy. Invariably buying whatever home you choose will cost you more than you first thought in fees and charges you didn't know about or in maintenance, etc. that you can't avoid. If you stretch your budget to the brink to afford a specific house, you can't afford the house. Either choose another one or keep renting. Owning a home is great, but not worth bankrupting yourself or creating debt (beyond the mortgage) and stress in the process. If you're using a realtor to help you find a house, be very specific about your price range. They paycheck is dependent on the sale price of what you buy - so it is good for them if you buy more. Don't talk yourself into something you can't afford. It won't be worth it.

I'll stop short of telling you not to buy a house you can't put 20% down on, that simply isn't realistic for most first-time buyers unless they are getting some help doing it. Be aware that buying a house without putting down that percentage of the purchase price will result in additional costs (called PMI - Private Mortgage Insurance - which protects the lender in case you default on the loan). I will say this, many of the problems people are running into right now with foreclosures, etc. are stemming from the purchase of houses people couldn't afford and didn't put anything down on. Adding insult to injury are those who were sold Adjustable Rate Mortgages (ARMs) that are now adjusting to a much higher rate that pushes their payment beyond what they can afford. Please think twice before you decide to buy, there are pros, but there are also cons.

2. ARMs

Adjustable Rate Mortgages aren't all bad. The house we're selling was financed on a 5/1 ARM. That means that the rate is fixed for 5 years (which would expire in July 2009) and then can adjust each year. I knew going in we would sell this house within 5 years, so it made sense to take the lower rate offered on the ARM.

Some ARMs adjust after 1 or 3 years and you need to read the fine print to make sure you understand how, when, and how much the rate can and will change. In particular, you need to know what the adjustments are tied to - are they tied to the prime lending rate, which is generally higher than typical mortgage rates? What is the maximum it can adjust from one year to the next? What's the max it can adjust ever?

The ARM should have a lower interest rate (usually by .5%-1.0%). If it doesn't have a lower rate than a fixed rate loan, don't go with the ARM (that advice might change if we ever get to a point that rates are so high they can only go down - but even in that case I'd probably recommend going fixed and refinancing when the rates bottom out).

3. Use Someone You Trust

When it comes time to choose a lender and "lock-in" a rate go with someone you trust and who will get stuff done. Brokers will tell you that they can beat local banks by .25%-.5%. I inquired of several brokers, locals, even some on the internet. What I found was that Arvest Bank here in Joplin was very competitive (actually they had the best rate and closing cost combination throughout my search) and actively sought my business. Why they were able to match brokers and the internet I don't know, but by going with them we are able to deal directly with a person located here in Joplin who has repeatedly proven willing and capable of getting things done. Oh, and Arvest only sells the servicing on 2% of their loans. That means that while Fannie Mae will be the underwriter, Arvest will continue to service it - so if there is a problem or we need something we'll still be dealing with someone locally. May not seem like a big deal now, but in a pinch is a nice perk when you're getting as a good of a deal as anyone else had available anyway.

4. Shop Around

Shop around. Some lenders will compete, some can't, but don't be afraid to compare GFE's and show one lender what another is quoting. Be aware only GFE's from the same day are comparable.

Scrutinize the projected closing costs carefully and ask questions. Ask each prospective lender for a "GFE" (Good Faith Estimate). They will do a quick pre-approval and then can provide you with a written estimate of the costs associated with the loan you're interested in. Ask questions about what each fee is. Some are fixed amounts charged by third-parties (appraisals, closing fee, title search, etc.), but the variability is really seen in what the lender is really getting. It could be anywhere from $400 to $1000 (and generally isn’t labeled “lender’s profit margin”). Make sure that the GFE shows the right amount of "pre-paids". What that means is that you have to set aside amounts to cover certain insurance, interest, and taxes. The amounts vary by when during the month and the year you close. Some lenders will put a default amount in place for these - and it tends to be low. The net result is going to be that when you get to closing you're going to owe the actual amount which may be hundreds higher (or you’ll get an unexpected bill when your escrow is underfunded later in the year). This is one way a lender may try to make their costs look lower - don't fall for it. Make the lender explain the pre-paids to you (especially if they're setting up an escrow account for you, you want this done correctly because it'll cost you all at once when the error is discovered - either at closing or when the taxes/insurance come due).

A game that lenders like to play is the rate game. They like to advertise rates without telling you that to get that rate you have to buy it down ("buy points"). What that means is you pay an amount based on the loan amount to receive a lower interest rate over the life of the loan. If you plan to be in the home for a long time (10+ years) and the resulting rate you're going to get is low enough you won't be likely to have the chance to re-finance to a lower rate later this can be a smart move. For instance, a few years ago when 30-year fixed rates dipped near 5.0%, buying a point to get a .25% reduction in the rate for home you planned to live in forever might have been smart. But if you are financing at a time when rates are higher (say in the 8.0%+ range) I wouldn't do it. Why? Because there is a fair chance that in the next few years rates will go down enough to make it worthwhile to refinance to a much lower (like a full percent or 2 or 3) rate. Depending on the lender, the cost to refinance may actually be less than buying a point. By the way, a "Point" is equal to 1% of the loan amount. So for a $100,000 loan, one point would cost you $1000. In general, buying a full point (they can be bought in fractions as well) will reduce your rate by about .25% (though it can be a little more or less than this).

Rates change daily, sometimes more than once. Why, you ask? Well, to a large degree because the rates move as a complex function of things happening in the stock and bond markets as well as movements within large lending institutions and the federal reserve. Changes in the Federal Funds Rate (the rate that banks are charged for overnight lending and the rate that is most often affected when you hear that "The Fed" is going to raise or lower rates) is not tied directly to mortgages - and especially not fixed rate loans. The reason is that a mortgage isn't usually tied to the "Prime" lending rate and is over such a long horizon that the short term fed funds rate isn't a primary driver. That said, movements in that rate can have short-term effects on the rates you'll get quoted by your lender. For example, this week I picked up a 5/8% cheaper rate than they were last week just ahead of the drop in the Fed Funds Rate. Shortly after that rate change by The Fed, mortgage rates went up (though I don't know specifically how much, I made my lender promise not to tell me where rates were at from now until closing because I can't do anything about it at this point). My advice is not to get in a huge hurry to grab a rate unless there is a compelling reason to think they are getting ready to spike. Most days if they move it will only be .125 (or 1/8th of a percent) - though sometimes they'll move .25% from one day to the next. In real terms, on a $100,000 loan, each 1/8th they move will change your payment about $10 (or a little less) per month depending on what the rates are. Over time that $10 is worth something, but month to month that alone probably isn't going to bankrupt you (and if it is, you can't afford the home you're buying).

5. Know What You Need Before You Call

Lenders, like lots of businesses out there, are in the sales business. Yes, they are providing a service, but there are some services that are more profitable for the lender than others and they may try to sell yo u those. And while you’d like to think they have your best interests at heart, that’s not their job and if you assume they do you do so at your own risk. In some cases the things they offer might make sense for you, but you have to know your needs and limitations in order to make good decisions. Don't agree to a mortgage if you started the conversation with that lender not knowing what you really needed.

As I’ve mentioned, there are literally dozens of types of loans and options within those loans. We haven’t even talked about things like FHA loans – which is a government backed program. There are incentives in some cases for first-time buyers. Some loans will allow you to put nothing down or 3% or 5%.

Before getting serious about applying for a loan you need to know what your needs are and what you can afford. My suggestion would be to look first at a 30-year fixed rate loan. You may find that your income will support a 15 year loan – and if you’re comfortable with it, go for it. You’ll have to determine what you have available to put down, where cash for closing costs will come from, and make sure you’ve still got sufficient cash reserves to pay moving expenses and anything unexpected that may come up.

Ask the people around you who have bought a home who their lender is. See if you can find one you go to church with. While it is a little perilous to not do your homework before talking to lenders, they are the people who can generally best explain thing to you. If you can find a loan officer at a local bank who will work with you without being pushy let them explain your options to you. You may find that you want to use that lender, certainly their investment of time in educating you is worth something.

Once you feel confident you know what you need in a mortgage start making phone calls and finding out what is available.

Mortgages Part 1

This is the first installment in a multi-part series on mortgages (it’s been on my mind). First we’ll look at key terms. We’ll get into specific advice later.

Key Terms

Rate – The percentage of interest that you will pay on the loan. The higher it is, the more you’re paying, so low is good. Thankfully with mortgages interest is not generally compounding and rates tend to be much lower than on things like auto loans and credit cards. This is the key term that people generally talk about when shopping for or selling a mortgage. Rates change daily and vary widely from lender to lender and year to year.

Principle – This is the amount actually owed on the loan. A portion of your payment each month will go toward paying the principle off – and when it’s all gone, you actually own the home and can stop paying. In the early years, the bulk of what you pay each month goes toward paying the interest on the loan, but with each passing month the amount applied toward the principle gets slightly larger. With most loans you can make additional payments that are applied directly to the principle. If you can afford to make additional payments this is a good way to shorten the amount of time you have to pay on your loan and the amount of interest you’ll pay over the life of the loan.

Interest – The cost of having someone else buy something for you that you then pay them back for. As stated above, each month a portion (thankfully a declining portion) of your payment goes to pay interest on the loan. The good news is that under the current IRS tax code you can deduct the amount of home mortgage interest you pay each year from your taxes (this is one of the advantages of home ownership over renting) – and this is only guaranteed for your first mortgage, some home equity and second mortgages will not be deductible. On most 30-year fixed rate loans you’ll pay as much or more in interest over the life of the loan than the original purchase price. This can be depressing and is a good incentive to pay it off early. If your rate is extremely low and/or your loan amount is relatively small compared to your purchase price you might manage to pay less in interest over the life of the loan than the purchase price was, but probably just barely (and this is tough to pull off).

Term – Number of years to pay off the loan. These range from 10 to 50 years. Thirty years is fairly standard today. I don’t recommend going longer than that. While the house will likely last longer than 30 years (assuming it was built well to begin with and is fairly new), but you need the payoff window to be realistically within your lifetime and preferably within your working lifetime so that if you stay in the home and pay it all the way out you’ll do so before you retire (hence reducing your expenses in retirement).

Points – Points are things you can buy in order to reduce your Rate. If you’re going to stay in the home for a long time (10+ years generally) and you have the cash on hand to do it, buying a point may pay off. Ask the lender to show you a payout comparison to see if it makes sense. Buying “a point” means you’ll pay 1% of the loan amount at closing to reduce your interest rate (and thus your monthly payment) usually by about .25% (sometimes a little more or a little less). That 1% you’re paying doesn’t go toward the principle amount of the loan, you’re essentially pre-paying interest in exchange for a reduction in the interest over the life of the loan. On a $100,000 loan one point will cost $1000. If that point reduces your interest rate by .25% (on a $100,000 loan with interest rates generally between 6% and 8%) you’ll pay about $20/month less. The equation to determine if this makes sense is to see how many months of paying that $20 less it will take to make up for the amount you put up initially (in this case $1000 up front would take 50 months or just over 4 years). After that you’re actually saving money each month. Points can be bought in fractions as well as wholes.

Closing Costs – There are significant costs to purchase a home – beyond the price of the home. How loosely or narrowly a lender defines closing costs will have a lot to do with the quality of the GFE (see next paragraph) they give you and how much they claim their closing costs are. Many of the costs included in closing costs are set by a third party and aren’t really negotiable (appraisal fee, closing fee, survey, etc.). The ones to watch for are the ones that the bank is charging you for writing the loan. These can range from about $400 up to about $1000. Each lender lists closing costs a little differently, so it can be a challenge to compare one GFE to another, ask for help or make the prospective lender do it for you. Look for total closing costs to be between $1500 and $2500 depending on the size and cost of the home, the lender, type of loan, etc. This doesn’t include the “pre-paids” (see below).

GFE – Good Faith Estimate. This is a document a lender will send you showing the terms of the loan in short form and the estimated costs associated with it. The GFE makes it easier to compare one lender’s offer to another – particularly as it pertains to closing costs and the validity of their pre-paid estimates. Don’t be afraid to show the GFE of one lender to another – sometimes they’ll ask to see it – this may help in getting them to shoot straight with you. A lender who will look at the GFE of a competitor and tell you to go with that lender because he or she can’t touch it is probably worth calling the next time you’re in the market, because they’ve just proven they’re honest (or at least given evidence of it). I’ve got a couple I can recommend based on that.

Pre-Paids – In purchasing a home with a mortgage you have to pre-pay for taxes, interest and insurance to make sure those requirements will be met. The time of month and year you close (see next paragraph) will have a significant impact on the amount of pre-paids you’re dealing with. Generally, if you’re setting up an escrow account you’ll have to pre-pay a full year of homeowners insurance, a reserve amount of insurance payment (3 months is common), as well as the portion of the property taxes and that should have accrued by the point in the year you are closing on the home (this is so that there will be enough in the escrow account when they come due to pay them). In addition, you have to pay interest on the loan for the days from closing until the end of that calendar month (so closing on the 15th will result in about 15-16 days of interest to pay at closing). This is something to watch carefully in the GFEs you get, because some lenders will plug in a standard set of numbers that may not reflect your actual costs. The result will be that you’ll either have to pay more at closing when the real numbers surface or you’ll get an unwelcome letter in a few months when your escrow account is terribly underfunded and the taxes/insurance are due. If you’re short on cash, it would be best to close at the end of a month and just after property taxes in your area are due, this will reduce your pre-paids significantly. FYI in Jasper County, Mo. Property taxes are due in November.

Closing – This is the date you actually take “ownership” of the home. This is when the buyer and seller (along with their entourage of lenders and agents) go to a pre-arranged meeting with very specific, large amounts of money from specific sources in specific forms to sign papers agreeing to buy or sell and all that comes with it. Until you close, you don’t own it. Once you close, you definitely own it and there’s probably no going back.

Cash To Close – Total amount of cash (generally a cashier’s check from your bank) you are required to produce at closing. This will include any down payment you are making, the closing costs, and pre-paid amounts.

Lock Period – Mortgage offers come with a specific amount of time that the rate quoted will be honored from the time it is locked-in until the closing date. The typical is 30 days. So if you have a contract to buy a house and the closing date is going to be more than 30 days from the signing of the contract you’ll either need to get a lock period that is long enough to include your closing date (they can be 45, 60, or 90 as well as 30 – all in days) or wait until your closing date is within 30 days to lock in your rate. Talk to your lender about this to see how a longer lock period will affect your rate. It may make sense to select a lender, sign the papers, but hold off on locking in the rate. The purchase contract on the home will generally give you a fixed period of time to secure financing (generally about 14 days). If you are closing say 35 days from contract signing you can just wait a few days and then lock your rate once the closing date is within the 30 day window. But if you are closing 60 days after contract signing you won’t have that option and still be able to meet the contract requirement to show evidence of financing within 14 days. My advice if you have a longer time period until you close is to shop around and figure out which lender is going to give you the best deal when you’re ready to lock it in, apply for the loan, but wait to lock until you’re within 30 days of closing. When you get a longer lock period the rate will not be as good because that is a longer time period of uncertainty for the lender. Unless there is a good reason to think rates will go up between contract signing and when you are within 30 days of closing it’s generally not in your best interest to lock in a rate more than 30 days out (with a longer lock period).

Escrow – I mentioned this above. This is an account the bank keeps on your behalf to set aside money to pay your homeowners insurance and taxes that come due usually once a year. It is not required that you have an escrow account – and most lenders charge a small fee for doing this for you. But this helps you budget for these larger expenses and avoids having to have cash available at a specific time to pay for all of them at once. If you choose to escrow your taxes and insurance then a portion of your payment each month (which is sent to your lender) will go toward those items (essentially they’ll divide the estimated yearly amount for insurance and taxes by 12 and you’ll pay that each month). Pay attention to this amount when looking at the payment on the mortgage you’re considering. If you’re just looking at the P&I (Principle and Interest) amount you may be surprised when you get your payment slips and they are $150/month higher as a result of the insurance and taxes being included. Most GFE’s will show you the payment amount including the escrow, just make sure you are looking at the right number.

Fixed v. Adjustable – Loans can have a fixed interest rate that won’t change over the life of the loan. Or they can be an Adjustable Rate Mortgage (ARM), which will have an initial rate that begins to change at some point. All things being equal, if you’re planning to own the house very long (more than 5 years) go with a fixed rate, that way you’re not subject to the fluctuations in interest rates. This is especially true at a time when rates are low compared to historical averages (i.e. it’s more likely that in 5 years they’ll be higher than they are now and very unlikely that they’ll be a great deal lower). There are times when an ARM can be a good choice. If you know, for instance that you will own a home less than the fixed period on a specific ARM loan then it might make sense to take the lower initial interest rate (anywhere from .5% to 1.0%). In general would not advise anything with a fixed period of less than 5 years (usually called a 5/1 ARM – meaning the rate is fixed for 5 years and then can adjust each year after that). ARMs with a longer fixed period won’t have a significant rate advantage and ones with shorter fixed periods are going to reset so soon that unless you know for sure you’re selling inside that window it can be a risky venture.

Update on the Move - and Utility Tips

Usually when I take some time off I do a better job of blogging. But I guess not this time. But here's the update.

The sell this house / buy that house process is ongoing. We've gotten past the inspections (termite and home), loan processing is on-going, but both parties are pre-approved. Closing times are set for 9am and 10am on April 11th (pending approval from the purchasers of the McCoy house).

I spent a couple of hours yesterday morning calling the utilities to schedule the changes. Learned something, if you have an AT&T cell phone you'll save $4/month by having it bundled with your local home service (and in our case our DSL as well). Not huge, but it will help offset the $6/month hike we're about to incur on our DSL (thanks Ma Bell).

For anyone considering a move, here's are some other things I learned yesterday:

- Empire doesn't charge to switch your service (I was shocked!)
- Missouri American Water charges $20 to switch service over (not terrible, less than I thought it would be)
- AT&T charges $35.30 to switch service - and they have to send someone inside your house and will give you a 12-hour period when they'll be there (no, seriously I'm not kidding, I laughed out loud when the guy said "the only time slot I have that day is 8am to 8pm." I thought, who got the other time slot and what was it? 8pm - 8am?)
- If you're not under contract with DISH, it would be worth considering a switch to DirectTV. I've got some additional research to do on this, but it appears I'm going to save $15/month for the next 12 months with essentially the same programming, a DVR (which we currently don't have), and no cost associated with the move (because I'll just schedule the install at the new place and they do the install free - which DISH didn't). I haven't talked to DISH yet - called twice yesterday, their system was down both times (not a good sign). I'm expecting them to tell me it'll be $50 to switch us over to the new address and that they're not interested in upgrading my equipment for free or cutting me a break on the programming package they "upgraded" me to a few months ago.

Brett Favre's Retirement

Love him or hate him, you've got to respect the way Brett Favre played the game. He holds numerous NFL records as a QB, including games started (a record he may hold for a long time for any player at any position), touchdowns, wins as a starting QB, and most league MVPs (3, which he won in consecutive years). In fairness he also owns the career interception record.

Favre was never one to hide what was going on in his life. That was true when he struggled with an addiction to pain killers, when he lost his dad in the middle of a season (and the next day played a career defining game on Monday Night Football), and even when his wife battled cancer.

He as much as any player I can think of played the game with passion. He is seemingly a simple guy - certainly that is the way he is portrayed and seems to want to be perceived. The humility he projects comes across as sincere and a part of who he is.

I know that my good friend Chase - whose opinion I respect a great deal - is not a Favre fan at all. On this topic Chase and I will have to disagree. Brett Favre played the game and carried himself in public the way I would hope my child would - with respect for those around him, respect for the game, passion for what he did, and an attitude that it wasn't about him.

If you haven't seen Favre's retirement press conference the first 4 minutes or so are definitely worth watching. The guy struggles to get past the emotion of walking away. I appreciate the fact that he very humbly thanks God (in a sincere way) for the abilities he has and the opportunity to use them - which he says he seized. That's a great testimony. I hope that at the end of my life (and I certainly don't intend to suggest that Brett Favre's life is over) I will be able to say that I seized the opportunities that God gave me to use the abilities He blessed me with. I also appreciate the way he makes clear that it was never about the money, nor were his accomplishments his - they were the team's.

Sold!

As some of you have heard, Brittany and I have signed a contract for the sale of our current home! We are very excited, it feels like it took forever, but we trust that God's timing is perfect and excited to move on to the next phase of our life together.

This new development will result in us purchasing the house that we picked out and agreed to purchase back in January - which is located in the Northern Highlands neighborhood of Joplin - on the same day we close the sale our house on McCoy (April 11).

So for the next few weeks we'll be doing all the buying and selling of houses kinds of stuff - securing our mortgage, insurance, inspections, etc. as well as transferring the utilities and packing everything we own.

This move will have several implications - not the least of which is a shorter commute for Brittany and a spot in the garage for her car.

Weekend update

The playoff run of the WC Lady Cards came to a screeching halt Saturday afternoon at the hands of the Bolivar Lady Liberators. The Lady Cards played pretty well for 3 quarters - even taking the lead shortly after halftime - but ultimately didn't have enough firepower to take down the more mature Liberators (what the heck kind of mascot is that?). The Lady Cards will return everyone next season and should be a serious contender in Class 4. They certainly should be proud of what they achieved, they weren't picked to do anything and they did a lot.

The WC guys on the other hand rolled on into the Class 4 semi-finals (to be held in Columbia on Friday the 7th at 2:00pm). To be honest, they didn't play very well, but had enough to put Clinton away in the 4th quarter. In truth, Clinton is a team they should have beaten by 20 or more - certainly had they played as well on Saturday as they did Wednesday night against Branson it would not have been close at all. I don't want to give a negative review of their performance, but will leave it at this: they need to bring a better effort (particularly on defense) on Friday than they did this weekend.

For the first time in several months the weather early this morning was such that I was able to run outside before church. The wind was rough, I mean rough. It was one of those mornings I was glad that my wife didn't get up to run. She'd have been irritated about the wind by the time she got home. I was just glad I was running south first (into the wind) rather than having to face it on the return.

That's all I got for today. Nothing of particular value, just some observations from the weekend.