A Simple Example

Let’s look at a simple example.   Suppose you are attempting to purchase a home worth $250,000 and need a home loan for $200,000 to go with your down payment of $50,000.   You may have a loan officer that will strain and search for the best possible rate he/she can find with a variety of lenders.   This effort may be admirable, but ultimately a waste of your time and to your detriment.

The Numbers Don’t Lie

Let’s look at some numbers.    A $200,000 loan at 3.5% will cost you $898 a month, not including taxes and insurance.    The same 30 year fixed loan at 3.75% will cost you $926 per month, a difference of $28 dollars per month.    While you loan officer searches for the lower rate, which they may or may not find, what are you losing?    First, you are delaying the closing or your loan, and risking a possible change in lending regulations, an altered underwriting decision, and a variety of other surprises that are possible because your loan rate is not locked and you are not moving toward the loan closing date.

Does It Really Make A Difference?

Some may say that $28 makes a lot of difference in a monthly payment, and they would be wrong.   $28 dollars can be saved by any family or individual by paying the slightest bit of attention to money outlays that happen during any day, week or month.    The cases where loans not locked lost their reasonable rates while a loan officer searched for an even better rate are endless.    Even if the rate of the loan jumped to 4.0%, the payment would only rise another $28 dollars.

Focus On The Right Things

It’s simply not worth it financially to have your loan officer, or even yourself, search and search to save an extra 1/8th or 1/4 percent on your mortgage loan interest rate.    If you want to really reduce your monthly payment in a significant way, don’t concentrate on the rate, pay some attention to increasing your down payment.    The payoff for a lower loan balance is much greater than sweating over a small percentage increase in your loan rate.   It’s not always about the rate, which is not what you will be told in most cases by those helping you find a loan.    Look at all the advertisements for lenders that you hear on the radio and other media everyday.   What are they stressing?    Rate, rate, rate.    That’s all they talk about is the rate.   don’t be fooled, and pay more attention to getting a loan with a smaller principle balance, make a larger down payment, or just secure a competitive rate and concentrate and getting it closed.

Young Adults Move In With Parents In Increasing Numbers

According to a press release by the U.S. Census Bureau last Thursday, the number of young adults living in their parents’ houses has increased between 2005 and 2011.    This actually goes beyond the number of strictly college kids and represents a proportion of those who may have been struggling for a few years.    Data saw a rise from 14 percent in 2005 to 19 percent this year for the proportion of men between age 25 and 34 that are living with their parents.    Respectively in that period, a rise from eight percent to ten percent for women in the same situation also occurred.

The Census Bureau reportedly discovered the statistics from America’s Family and Living Arrangements: 2011, a study based on the 2011 Current Population Survey that focused on national socioeconomic and household conditions.

“The increase in 25 to 34 year olds living in their parents’ home began before the recent recession, and has continued beyond it,” said Rose Kreider, who wrote the study and is a family demographer at the Fertility and Family Statistics Branch.

As for those young adults who are likely in college, 59 percent of men between the ages of 18 and 24 are living with their parents this year, an increase from 53 percent in 2005, with both percentages including college students living in a dorm room.   So ladies, please don’t dump or insult your man for living at home with his family, he’s only in the majority for other guys his age.    Women aged 18 to 24, on the other hand, have seen a rise from 46 percent to 50 percent through the time period.

Lawrence Yun, the chief economist for the National Association of Realtors, suggested that these trends could eventually gather some rust for realtors looking to sell.

Demand For Rentals Could Spur Housing Purchases

“If more young adults were in the market for rentals, rents would rise and higher rents can tip some households into buying homes”, he said in a story carried by CNN Money, rather implying that young people living with their parents has stalled the market for households and will cause further decline in home prices.    Similarly, Doug Duncan, who is chief economist for Fannie Mae, argued that the long-term unemployment of these young adults will damage their earnings and put them off of buying a home for a long time.

Making the Decision

So I asked him why he’d made such a decision.  He said a friend of his had just finished school and gotten her real estate license.  She’d told him that it was a buyer’s market and that he was wasting his money paying rent.

I admit that inside I grimaced a little.  Why?  Because buying a home can be right for a lot of folks, but it can be a less-than-perfect idea for others.    Before you decide to purchase a home, you need to ask yourself these questions to determine whether or not it is better to buy or rent:

Can You Afford It?

1. Can you afford it?   This seems basic, but there’s a big difference between qualifying for a home and actually affording it.  A $2000 loan payment might work on paper, but not in real life.   If you’re paying $1900 in rent now, an extra hundred bucks won’t make much difference.  If you’re paying half that…you may want to think twice.

What Is The Lifestyle Cost?

1. What is the lifestyle cost?  Have you ever heard of being “house poor”?  Essentially, it means that buying a house means you don’t have the money to do the things you may enjoy, like traveling, dining out, attending sporting events or engaging in other activities.   Giving up your morning latte’ is one thing; giving up everything but air is another.   Make sure that you can have your home and have at least a little fun, too.

Can You Handle the Responsibility?

1. Are you prepared for the responsibility?  Being a homeowner means giving up calls to the landlord when something goes wrong.  Do you feel comfortable making repairs yourself, or having the funds needed to make repairs?

Will You Stay Put?

1. What are the odds that you’re going to stay put?  In the current market, buying a house one day and selling it six months or a year later at a profit is pretty hard to do.  If you’re thinking about moving in the next year or two, you might want to reconsider buying right now.

Ultimately, my friend decided that doubling his housing payment, giving up his annual “big trip” and having to deal with potential repairs was a little too much to consider right now.  Instead, he’s opting to put the difference between his current rent payment and the house payment he qualified for into his savings account during the next year to build his reserves and get used to the higher payment.   And when he does decide to buy instead of rent, he’ll get all of the benefits that come with home ownership, like a significant tax deduction and the chance to build equity as a long-term investment.

So is it better to buy or rent?  Only you can make that decision.

Okay, so I admit it—the article isn’t ACTUALLY about transparent mortgages, per se.   It’s about how to reduce the amount of closing costs that homebuyers have to pay.   But one of those suggestions?  To shop and negotiate all of a loan’s terms, not just the rate.

Finally!  Folks are starting to get it!  There is more to a mortgage loan than just an interest rate…a lot more.  And if there’s one thing that the past few years has taught us, it’s important to take a look at all of the details before making a decision as big as the one to buy a home.

Here’s an example that’s pretty close to home for me.   A friend of mine—we’ll call her Janice—was looking at buying her first home.   Now, in the interest of full disclosure, I have to tell you that Janice has worked in my office for about 10 years or so, so she was pretty familiar with the mortgage process.  But this time it was different, because it was her name on the mortgage.

Now, she was bound and determined to get absolutely the lowest rate she could possibly find.  Weeks went by as she considered loan option after loan option, debated whether to lock her rate or let it float—to tell you the truth, she was making us all a smidge nuts.  (Sorry Janice.)  But one day, when she was going through everything that she would have to bring to the closing table, she took a closer look at the rate sheet.   And what did she realize?  That by taking a rate that was just 0.5% of a point higher, she would receive a credit of almost $2,000 that she could use toward her closing costs.   That made a huge difference in her budget.  But the difference in her monthly payment?  $9 a month.

Now there are those folks who would start protesting and saying how when you multiply that $9 a month over the term of the loan, you’d pay thousands more than the credit you received.  Yeah.  So again in the interests of full disclosure, I should tell you that after Janice has paid on the loan for 217 months—almost 18 years—she will indeed be “upside down” on that $9 a month payment.  It is also likely that by then she’ll be making more money than she is now—at least more than $9 a month more—or that she will have long since sold the house.

Listen, the point is that everyone who is buying or refinancing a home needs to look at all of the loan terms—including asking to see the back-end (transparent) pricing that the loan officer sees—before making a decision that will impact their budgets now and in the future.   And yes, requiring lenders to be as competitive as possible in every aspect of the loan programs they’re promoting.

Congratulations, Washington Post.  You got this one very, very right.