While cruising through Instagram recently, I came across a post that indicated 37% of homeowners in the United States THINK they have more than 20% equity while, in reality, 74% ACTUALLY have more than 20% equity. Since this was social media, of course, I accepted this fully at face value. The creators of such services have nothing but altruistic intentions, right?
However, I knew that if I didn’t dig a little deeper into the claims of this cute little post by a very nice real estate agent, I wouldn’t have anything more to write about in this week’s newsletter – and I certainly didn’t want to let anyone down. I quickly found the source of the statistics being quoted – Fannie Mae and CoreLogic– and dug up some other tidbits that you might find interesting. (Let’s be honest: if you’re still reading this, I’ve either captured your interest or you’re sitting at your 7-year-old’s soccer game with nothing to do because the game has been temporarily halted so the goalkeeper can fix the ribbon in her hair.)
In an update to CoreLogic’s report, that 74% has climbed to 79.1%. Please don’t make me do the math on how many people that 5.1% increase represents, but I’m pretty sure it’s somewhere between a “boatload” and “gazillion”. Either way, that’s a lot of people you as real estate agents can help sell their current homes and look for new ones. Let’s do a little trivia here, just to keep things light.
While Arkansas has the lowest percentage (67.3%) of homeowners with more than 20% equity, which state has the highest percentage (91.9%) with more than 20% equity?
If you guessed Utah, your love for the Mormons is duly noted, but you’d be wrong. The folks in Texas are the winners in this one. On their boot-covered heels are Oregon at 89.2% and Washington at 88.0%.
These stats and numbers are fine and dandy, but what’s the point in trotting them out there for all to see? (Warning: shameless commercial is imminent.) We have a system in place to help our real estate agents know when their clients’ homes have reached and exceeded that 20% equity threshold. If you’ve been in the business for a few years, that database of clients is pretty hefty. Rather than your having to go through that list client by client and figuring out whose equity is where, we can do the work for you and let you know when each client has reached that magic number. Isn’t that what a mortgage partner SHOULD be doing for you (you know, when we’re not cruising around on Instagram looking for cat photos and trying to decide if the dress is blue or gold)? Work smarter by letting us work harder for you.
Years ago when the Consumer Financial Protection Bureau was created, we had some wacko thought that part of the job of the folks filling its ranks would be to . . . protect the consumer. In some people’s view, this would mean that builders of new homes would no longer be able to dangle the carrot of “free” incentives if the buyer would finance the purchase through the builder’s in-house or preferred lender. To those same people, it just made sense that the CFPB was created to even the playing field and make it so that the consumer got the very best deal available. Well, we were wrong.
Builders ARE allowed to offer incentives for using their in-house and preferred lenders despite the fact that sort of goes against the idea that the consumer is getting the very best deal available. And for most consumers, all they see is the incentive, and this computes to less money coming out of their pocket at closing – and they’re right (sort of). The purpose of today’s article is simple: demonstrate how much money REALLY IS coming out of their pocket as time goes by.
The first example is a gentleman who is purchasing a new home for a price of $555,331. He’s being required to put 10% down, or pay $55,533 out of his pocket at closing. Enter the builder’s incentive of $5,000 to be credited against closing costs – who can argue with that? In this particular case, he wants an interest-only loan, which means that he’s only going to pay interest for the first ten years of the loan – the principal doesn’t get touched if he doesn’t pay any extra in that 10-year period. The in-house/preferred lender offered him a rate of 5.5%, which means that his monthly payment is going to be $2,290.74 – in one year, he’ll be paying $27,488.88; in ten years, at the end of the term, he will have paid $274,888.80. We offered him a rate of 4.75% on the same type of loan, which means that his monthly payment is going to be $1,978.36 – in one year, he’ll be paying $23,740.32; in ten years, at the end of the term, he will have paid $237,403.20. Yes, you’re doing the math correctly, ladies and gentlemen: for a $5,000 incentive at the front end, he’s going to pay $37,485.60 more over the term of the loan. In one year alone, he’s paying $3,748.56, and in two years, that’s $7,497.12 (which is almost .5 times more than the $5,000 he “saved”)! Believe it or not, he went with the in-house/preferred lender for the “free” $5,000.
Now let’s go with a slightly more subdued example. This woman is purchasing a home for $260,000 with a 5% down payment – $13,000 – for a loan amount of $247,000. The in-house/preferred lender offered a $3,000 incentive in exchange for a rate of 5.375% on a 30-year fixed mortgage. This yields a monthly payment (principal & interest) of $1,376.96. We offered a rate of 4.875% on the same loan type for a monthly payment (P&I) of $1,301.86. So far, that’s not that big of a difference, right? In one year, that’s a difference of $901.20 between the higher rate and our rate. It will take 41 months (just under 3.5 years) of paying the higher rate to cover the $3,000 incentive. In ten years, which is the average amount of time someone stays in a home, our rate would save her $9,012 – and yet she went with the builder’s in-house/preferred lender.
In both of these cases, $5,000 and $3,000, respectively, are sizable chunks of money that could cause some immediate “pain” in having to part with them – no argument there. However, if these borrowers stopped for a moment and looked a relatively short amount of time into the future, they would see that they would easily recoup that out-of-pocket money AND THEN SOME. Obviously enough to afford an eye exam.
Real estate agents and home buyers alike are feeling the squeeze from the lack of homes on the market. Don’t despair! For both real estate agents and home buyers, there’s a great untapped source for finding deals before they ever hit the market: your lender. If any of you are a bit confused by what I mean when I say “your” lender, I mean . . . well, us.
How do we do this, you ask? Two words: equity watch. For the real estate agent who helped their client buy a home, say, seven years ago, we let them know when their client has reached a certain level of equity in their home and prompt the agent to give their client a call with the good news. It’s a good excuse for them to call, catch up, deliver the great news, and see if their client is ready to sell their home and either upgrade or downsize, depending on their station in life. Statistics have shown that almost 70% of people selling their existing homes DON’T call the real estate agent who originally helped them purchase it. If the agent can get out in front of this and be the one bringing this type of news to their clients, that number is going to swing in the other direction, right? And with one call, you’ve picked up a new listing AND the chance to help them purchase another house. You’re welcome!
For home buyers, could help you get a jump on the huge number of buyers vying for just a small number of homes in a certain price range. Before doing anything else, come in and get qualified for a mortgage. Once we know what you’re qualified to purchase, the moment a home comes up on our equity watch that fits your parameters, you can be notified immediately. That sure beats getting three years of spam emails because you entered your contact information on a particular website that shall remain nameless but possibly rhymes with Killow.
If the benefits to real estate agents and home buyers aren’t enough to convince you of the awesomeness of this service we offer, let me give you an example of what this can do for a home SELLER. Recently, we reached out to an agent who sold a home to her client about seven years ago and let her know that her client now how a decent amount of equity in his home. With a bit of prompting (none of us is perfect), she remembered the gentleman and gave him a call to let him know. While the agent was able to pick up an instant listing AND a subsequent purchase for her client (absolutely NOTHING wrong with that!), the client himself did EXTREMELY well: with the money he made off the sale of his home, he was able to use a portion for the down payment on his new (BIGGER) house and use the rest to pay off some debts. Upshot: not only was he able to upgrade to a bigger house, the elimination of debt increased his monthly cash flow by $1700. I’m fairly sure we made it onto his Christmas card list for the next ten years.
In conclusion, let me assure you that there’s nothing creepy or voyeuristic about our equity watch –no matter how nicely you ask.