For those of us who are complete nerds and sat on the edge of our seats to see if The Fed would decide to raise the overnight lending rate again in their most recent meeting, we were both let down and excited –no change, of course. For those of us who aren’t quite so nerdy but do, in fact, care about what interest rates are doing and will be doing, I wanted to take this moment and interject a little . . . calm. Let’s take a look at a handful of things, okay?
While interest rates today are creeping in the upper 4s to lower 5s, please remember that back in 1981 (yes, I realize many of you were not even born, but I’m not asking for a show of hands) interest rates peaked just over 18.5%. Yes, you read that correctly –about FOUR TIMES the rate we’re dancing with at the mortgage disco today.
The average price of a new home back in 1981 was $83,000. On a fixed-rate, 30-year mortgage for such a house, the principal and interest payment at 18.5% would be approximately $1,285/month. (I went straight off $83K as my loan amount –I didn’t account for a down payment.) Using a handy-dandy app on my phone, I see that $1,285 in 1981 would be equal to approximately $3,485 today. Using a 30-year fixed mortgage at an interest rate of 5%, anyone want to take a guess at the loan amount that $3,485 (principal and interest) in today’s dollars would get you? Anyone? Bueller? The correct answer is approximately $650,000. Yes, you read that correctly, too. Let’s look at all this from another direction.
Using that same nifty app on my phone, I see that $83,000 in 1981 is equal to approximately $225,000 in today’s money. That amount –$225,000 –isn’t going to buy you a mansion (or a moderately sized cardboard box on the beach), but it will certainly start you off in the right direction in building equity, not paying rent to pay someone else’s mortgage, and give you a nice tax deduction. On a 30-year fixed mortgage at 5%, anyone want to guess what the principal and interest would be on a $225,000 loan? For anyone who said $1,208, you’re correct –big gold star on your forehead!
There are two takeaways from this little exercise:
- Rates ARE going to go up. How high? No one knows, but there’s A LOT of room between 5% and the 18.5% seen back in 1981. You can afford a lot more house these days –revel in that and relax!
- Because rates are primed to rise rather than fall, when you get the chance to lock the rate on a current mortgage, you’re usually better off to do it at that time than to “wait and see if it’ll come back down.” Like body weight, it goes up much easier than it comes down.
And remember, 1981 wasn’t ALL bad –it was the year that first gave us MTV, a cable channel that played actual music videos –we needed something to distract us from rising interest rates!
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.
With my friend’s permission, I’m including an excerpt from a humor column he wrote a few years back. I have a point, I promise, and I’ll make it below.
All told, I believe there are at least 764 shades of the color blue that are completely indistinguishable to my eyes, but my wife has the innate ability to differentiate each and every one. Stranger still, when I tell her that Cerulean and Celestial look identical to me, she’ll say things like, “Oh, come on. The Cerulean has way more red in it, and the Celestial tends to be more yellow.” How can “blue” be red or yellow? Aren’t we talking about the three primary colors, the basic building blocks of all other colors?
I would like to say that this truly shouldn’t matter to me, but I just spent my afternoon painting an entire wall Blue #429 – it has a name, I’m sure, but I dare not mention it for fear that one of you out there will send back to me a twelve-page thesis on the distinguishing characteristics of this particular shade of Blue. Exhaustion has overtaken me, and I just couldn’t take that. I’m not so exhausted from the physical labor involved; my arms are a bit fatigued, but that’s most likely due more to my personal lack of muscle. The exhaustion, quite honestly, stems from my watching a non-stop virtual tennis volley between my wife’s two minds on the subject of the color. “I think that will go really well with the couch and the black chairs.” “That’s way too nautical blue.” “It really softens up the room.” “I was going more for the color of that pillow.” Just when it seemed like one side had smashed it over the net to decide the match, the other would make an unexpected comeback that seemed just as devastating. AmI rooting for the side that likes the color as it is? Of course! More to the point, though: I just want it over. As I write this, I believe my wife’s in bed right now muttering pros and cons in her sleep.
Earlier today, before the paint was purchased and ushered into our home, I went on a hike with our oldest son. While we were out communing with nature and swatting at mosquitoes, I decided it was a good time to spring “the Birds & the Bees” talk on him. AsI finished the short discourse, I asked him if it made sense, and he said, “Sort of.” I could tell from his befuddled response that I had taken him completely by surprise and that he thought I had been out in the sun too long. I got that. So, I gave us both an easy out and said, “Well, when you start having questions along those lines, just ask me.” His response to this was calculated and well delivered: “You wannathrow rocks at that flower on top of that cactus?”
I can honestly say that the details of my explanation were pretty straightforward but limited to fit the audience. However, maybe the approach was all wrong. Granted, I don’t want my children getting this type of information from other kids at school, television, or a former President of the United States – so I do need to get them the facts. But while I’m preparing them to embrace the responsibilities of adulthood and married life, I should begin the discussion with the question: “How many shades of blue do you think there are in the world, son?”
Earlier today, I overheard one of our office veterans give one of our newer loan originators a great piece of advice: don’t let the borrower tell you in the beginning what type of loan is best for them. He went on to explain that doing this is a disservice to the borrower because it limits what the loan originator is going to search for and provide. Instead, the LO should gather as much information as possible from the borrower, even if it seems unlikely it will ultimately be needed. It’s okay to have too much; it’s not okay to have too little.
If you get off the phone with your lender and feel slightly exhausted from all the questions, that’s a good thing: it means you’re going to have more options –maybe almost as many as there are shades of the color blue.
More than a couple of years ago, I witnessed something that makes me laugh and cringe at the same time. Having lunch at a local restaurant, I spied a real estate agent and a loan originator having what I would characterize as a “first date”. I couldn’t help but overhear little snippets of their conversation, and as far as I could tell, things were going relatively well . . . at least until the agent asked the LO this question: “So, do you like to sit at open houses with agents?” I immediately looked to the LO’s face awaiting the response. I didn’t need to hear another single word coming out of the LO’s mouth because his face said everything: you would have thought the agent had asked him if he enjoyed bobbing for apples in a pool of acid judging by the look on his face. While his face was communicating complete revulsion, his lips said, “Yes, of course.” And that’s when I looked over at the agent’s face to see, with absolutely no doubt, that she didn’t believe a word he said. And yet, he was so close!
Speaking of open houses, I recently had the chance to sit at one with an agent, and between the pop-ins from various interested parties, fellow agents, and curious neighbors, we got to know each other a little better and swapped stories, professional and personal. The one I remember most vividly was when she had graduated from high school, she joined the military –a heartfelt thanks to her and all others who serve!!! –and when she arrived at her first overseas assignment, she noticed that a very large number of her fellow female soldiers were pregnant. Thinking she might have missed something in her recruitment paperwork, she asked someone who had been stationed at this particular installation for a while for an explanation. Turns out the hospital at this military base had been dispensing outdated birth-control pills . . . and that’s not a good thing.
I’m going to give the medical staff at that hospital the benefit of the doubt and say they were most likely operating in completely good faith –I certainly don’t think they were sitting around the break room at the hospital thinking up ways to “prank” their female patients. However, it wouldn’t surprise me if there was a soldier working in the local supply depot or maybe a general back at the Pentagon (my money’s on both of them being male) who saw that there was old inventory of this medication at that base and even had an inkling that this could lead to less-than-positive things but did nothing about it. It would just be easier (for them) to let it go and deal with the results.
I’ve met a lot of real estate agents who tell me story after story of how they have a favorite LO, but this LO’s company is fairly regularly messing up their transactions, which results in MUCH LONGER closings, tons of mistakes, and understandably irate clients –their clients. Oddly enough, most of the agents who share these stories with me admit that they stay with the LO and just put up with the headaches caused by the LO’s company. What?!!!! That’s like going back to same doctor who dispensed the outdated medication KNOWING THAT THE HOSPITAL IS STILL STOCKING THE OUTDATED MEDICATION because you liked the doctor’s bedside manner. That’s cuckoo for Cocoa Puffs, folks! Just as it would be wise for the lunching agent to avoid referring business to the LO who lied to her face, it would be equally wise to find a new mortgage company who didn’t make YOU look like a liar, right?
Some time ago, in a science class I was required to take, I learned something that I actually remembered. Here in the United States, manufacturers of food and other consumer products are required to list the ingredients in the order of their quantity in said substance, largest to smallest – and that’s the reason that when you look at the ingredient list of a lot of products you see “water” listed first. And on those items that enter the health-and-wellness category like shampoo, you’ll see another listing on that back label that reads “Active Ingredient”. In essence, even if the item is, say, 90% water, the active ingredient is the thing that makes the product do what it says it does. For example, the active ingredient in Head & Shoulders shampoo is Pyrithione Zinc, and its job is to control and eliminate dandruff. Here’s another way to look at it: if H&S had ALL the other ingredients EXCEPT Pyrithione Zinc, it would probably clean your hair, but the shampoo would be ineffective as a dandruff fighter. (Dandruff Fighter: good name for an ‘80s cover band.)
In a mortgage, the active ingredient is the appraisal. You could have ALL the other “ingredients” in a mortgage ranging from financial verification and assets to proper debt-to-income ratio and dead-on LTV, but without the appraisal you wouldn’t have a benchmark – no benchmark, no loan, no sale/purchase.
This little exercise bears some attention for both the veteran agents and people who are buying or selling a home for the first time. When an appraiser comes out to do her/his job, they classify the condition of the home with one of six grades, and this factors into the overall value they apply to the home – yes, I know many of you already know that, but let the others catch up. From the Uniform Appraisal Dataset on Condition Ratings and Definitions, I give you the six grades with my English version of each definition:
C1: Brand new – no one has lived in this house
C2: Full remodel – virtually all building components are new or have been recently repaired or rehabilitated
C3: Partial remodel – improvements are well maintained and feature limited physical depreciation due to normal wear and tear
C4: Never been touched – some minor deferred maintenance/physical deterioration due to normal wear and tear
C5: Breaking – obvious deferred maintenance and in need of some significant repairs
C6: Broken – substantial damage/defects that affect the safety, soundness, or structural integrity
Now, think of these grades as the concentration of the active ingredient: C1 and C2 are going to be at full strength, while C5 and C6 are going to dilute significantly the effectiveness of the active ingredient, the appraisal. As I said earlier, everything hinges on the appraisal. If you’re an agent getting ready for a listing appointment, take those six definitions with you and bust them out when you start talking about the price point at which the home should be listed. This will give you more credibility when you tactfully point out that, yes, the neighbor’s home did list and sell for $350,000, but they had fully remodeled bathrooms and new windows – your potential client’s home has the original pink bathtub from 1968 and a window that’s using a plywood sheet instead of a pane of glass. (That’s a LITTLE extreme, I know, but you get the point.) Potential buyers and their agents, when armed with the same information, are going to be better prepared to make offers – the door swings both ways.
Of course, in a mortgage, the biggest ingredient is money – it’s the “water” of the formula, but it’s not going anywhere without the proper amount of the active ingredient (just like many single guys on a Friday evening if they don’t use enough Head & Shoulders during the week).