Mortgage Banker vs. Mortgage Broker

Mortgage Banker
The mortgage banker is the lender; the one making the loan directly. A mortgage banker will present you with only that lender's program of mortgages, so you need to speak with several lenders to do comparative shopping. Usually banks will be competitive in a few products, and will encourage their sales agents to sell these products to the consumer. Many times banks will not even necessarily try to be competitive in rate, but will instead try to fill a niche, such as quick approvals or flexible underwriting of loans. Going directly to the bank or source was probably the way that your parents obtained their home loan, but the trend is clearly away from such direct establishments towards the brokerage. If you walk into your local bank they'll usually take your application there, perhaps underwrite your loan there, and lend their own money. If your loan is declined for whatever reason, you will need to begin the process again with another source. With a broker, you have another chance if one lender doesn't approve your loan.

Mortgage Broker
You can think of a mortgage broker in the same terms you think of an independent insurance agent. When you go into that agent’s office, you present your needs and the agent searches for the insurance companies that can provide you with the best coverage at the best prices. This is the same basic service provided by a mortgage broker. When you choose a mortgage broker, you’re asking this person (or company) to search through mortgages offered by various lenders for those that would most closely suit your needs, and to provide the options with the best prices. The benefit is that these brokers know details about the banks, credit unions, and other lenders that you may not know and which ones are most agreeable to financing homes for people in your particular situation. A mortgage broker serves as a matchmaker between the home buyer and the lender. The broker draws from a pool of lenders to find the right match. The broker has access to the products of hundreds of lenders, not just one lender's programs. In scanning the mortgage market, both nationally and regionally a broker knows a lender's specialty. The broker can identify what lender might fit a borrower's special needs, such as the first-time home buyer, investment purchases, second homes, etc. The broker does everything the lender would do. A Broker checks your credit and work record, arranges for title search and hires the property appraiser. Once all of this information is compiled, the broker selects a mortgage lender that will most likely accept your application based on your financial data and personal information. Brokers represent a number of lenders and offer these lender's products through a wholesale arrangement. So the broker can offer wholesale rates, as opposed to retail rates. By offering wholesale rates, a broker can in fact be more competitive than the retail side of the same bank. This is happening more and more as brokers are moving their services to the Internet and reducing their costs of distributing loans to the consumer.

Bankers make their salary whether you take the loan or not. Brokers only get paid when the loan closes. Who has the most motivation to get you a loan?

In Summary
The advantages of working with a broker are substantial and account for the shift away from banks and direct lenders. Understanding the loan process can minimize the likelihood of frustration during the loan transaction. Remember to work with a source that has established itself as a company with integrity that cares for the borrower throughout the experience. The majority of people find that better deal with mortgage brokers. About 65 percent of home loans are originated through brokers. Borrowers who have trouble qualifying, or want to finance tricky deals will often get turned away at banks. So for these people, using a broker is often the best option. And pricing with brokers can be just as competitive as a bank. Wholesale prices are actually much cheaper than retail interest rates you’ll get with banks.

Pros of working with a broker:
- They do the legwork for you, comparing the wholesale rates of a large number of banks and lenders
- Wholesale interest rates can be lower than bank interest rates
- Brokers must disclose the yield-spread premium
- Can finance tricky deals

Cons of working with a bank:
- Conservative loan programs
- Do not disclose the yield-spread premium
- Lengthy process, very bureaucratic

Homeowners Insurance Part II. Lower your premium!

In a post last week we discussed Homeowners Insurance. We focused on the parts of the home insurance policy and how it works. Today's post is part 2 of this segment. As we mentioned last time, you get what you pay for so don't focus solely on price. While this is true, there are ways to keep your premiums as low as possible. Everybody wants to keep their house payment low and if you escrow your insurance premium plays a part in this.

Some people bounce around from company to company searching for the lowest price at their renewal date. I am not a big fan of this. You don't develop any loyalty here and this could come back to haunt you if you have a large claim. Many times there is a reason why 1 company is drastically cheaper that all the others. State Farm, Allstate, etc. have been pricing their business for a very long time and have it figured out. You'll find a company come out with a super low price one year and then they run into financial trouble. You want your insurance company to be financially sound. After all, you are counting on them to be there for you. With this being said it is ok to shop occasionally, especially if you think your price is getting out of hand. This will keep them honest.

Here are some tips on keeping your home premiums down:

1. Multi-Policy Discount - Insure your auto, home, and life insurance together. By doing this you will earn a multi-policy discount.

2. Raise your Deductible. - Go with a $1000 deductible. This keeps your premium down.
Just make sure you are comfortable with the $1000. Also see what a $500 deductible costs .
The larger the home the more difference it makes, therefore a higher deductible may not always make sense. Home claims are fairly rare and usually if something is claimed , it is a high dollar amount. Therefore, the $1000 is small relative to the damage.

3. Home security system - By having an alarm you are eligible for a discount. It is best to
have a full-reporting alarm to maximize the discount you receive. Keep in mind the cost of the alarm is more than what the discount will save you. If you already want an alarm, just realize this helps justify the price you pay for it.

4. Affinity Marketing Discounts - Ask your insurance company if they offer any Affinity
Marketing discounts. Liberty Mutual is the leader in this field as they offer over 8500 different
group discounts. In Columbia The University of MO Alumni Association and Missouri Credit
Union are big ones. BMW and Onstar are a couple others. If your are a member or affiliated
with these companies you can get a discount through Liberty Mutual. Met Life is another
company that does this and there may be others, just ask. This can save you up to 15% on
top of any other discounts you already receive!

5. Loyalty counts - I mentioned loyalty earlier. Some companies offer loyalty discounts or
loss forgiveness programs for your years of continued coverage. Ask what programs they
have in place.

Keep all of these things in mind when looking to improve your premium.

If you are looking to buy a new home, here are a couple things to be aware of that can potentially cost you money and give you a headache!

1. Location of the nearest fire hydrant and fire station. - If you are in the city limits
this won't be an issue. If you are not, then pay attention. If you are over 1000 feet from
a hydrant or over 5 miles from a station, you will pay significantly more for home insurance!
Some companies won't even insure you!

2.Dogs - If you own a Pit Bull, Doberman, German Shepard, or other dangerous breed you may
have some issues obtaining home insurance.

3. Prior claims on the residence - If the home has a history of water problems or claims,
you will want to know. You will need special approval and this can affect your future rates.
Insurance companies have different rating policies, so get all the information available to help
avoid surprises in this area.

Hope all of this information helps!

Your comments are welcomed!

Seller Paid Closing Costs

Back in the day, you would have to hike up hill, both ways, in the snow, barefoot, to the bank carrying a 20% down-payment and a 12 year old Scotch (just to butter up the president of the bank). Then we saw the introduction of ARM's, Interest Only and No Money Down Loans. But soon, buyers realized that No Money Down did not equal No Closing Costs. So, with increasing property values we see more and more buyers/sellers using "Seller Paid Closing Costs". So lets take a little time to look at "Seller Paids"

Call 'em what you want: Seller Paids, Seller Concessions, Seller Contribution, Allowances, etc. Good or Bad, they have become another tool to get home buyers into houses with little or no money to contribute to the transaction. By using Seller Paids in the purchase agreement, the seller is basically just allowing the borrower to roll closing expenses into the loan against the house. It works like this, You're buying a home for $100,000.00 and the seller has agreed to allow for $2000.00 in concessions. That allowance can, unless otherwise stipulated in the purchase agreement, be used toward any expense of the transaction. In the event that the total costs don't use the whole $2000.00, it can be used to reimburse the buyer for any cost which were Paid Outside of Closing (POC), for example the appraisal or earnest money. And vice versa, if the costs of the transaction exceeds the $2000.00, the buyer is then responsible for the difference. Most lenders will cap these concessions at 4%-6% of the loan amount.

I USED TO get this question a lot, "Well, if the property appraises at $110,000.00, can I just get that $10,000.00 out to do improvements?" The answer is always "nope". The lender will only loan the lesser of the purchase price or the appraised value. The reason I say USED TO, is because in the last few years, property values had been going up and up. And buyers/sellers found creative ways to roll many expenses, including closing costs, into the loan amount against the home. What we're experiencing now is a correction or slow down in the market. Property values are not increasing as quickly as they have in the recent past. So many of the people that rolled closing costs into their purchase, could potentially owe more on their home than the market will bare. So instead of just "rolling it in", many buyers are finding out that "Seller Paid Closing Costs" aren't available because of equity issues. In contrast, it is a buyers market, so many sellers are getting more creative and aggressive to sell their homes. So, some sellers will take a 2 or 3 thousand dollar hit by including Seller Paid's, just to sell the property.

Are these closing costs really paid by the seller? Technically yes, but theoretically no. Yes, some costs may be listed under the sellers expenses on the settlement statement. But no, because in the big picture, what is passed to the buyer as a concession, could have been used to negotiate a lower price. As a buyer, your paying more for the home.

So, what are your goals as a buyer? Does it make more sense for you to put those costs into the loan? In the short term? In the long term? Or, does it make better financial sense to pay those up front and not finance those costs for 15 or 30 years? Do you, as a buyer, have the ability to pay closing cost in cash?

Again we arrive at a reoccurring theme in these discussions. A good mortgage professional will look at the goals of their client, the conditions of the market place, and the tools (loan products) they have in order to extend financing options.

Whats the Difference in FHA and VA Loans?

All mortgages fall under one of two classifications; Conventional or Government. There are several distinctions within Conventional; Conforming, Non-Conforming, Jumbo, Sub-Prime, etc. But, with Government loans, there are only 2 distinctions FHA or VA. Both FHA and VA are funded by private lenders, not the government. But because some of the risk is shifted away from the lender because of government programs, they offer opportunities where conventional products might not
FHA is a loan that is insured by the Federal Housing Administration. Meaning, that the borrower will have mortgage insurance, however it is usually a lower rate than that of conventional mortgage insurance. Some features of an FHA loan would be:

1. Low down payment requirements


2. Lenient credit, debt, and income guidelines


3. Down Payment and closing costs can be in the form of gift funds or can be rolled into the loan amount.


4. Fixed and Adjustable rates are available

VA Loans offer many of the same benefits as FHA with a couple very significant differences. The biggest is that the VA guarantees the loan. This does not mean you are guaranteed a loan. This means that, if you meet the eligibility and qualification guidelines, the VA will guarantee the lender against a certain portion of loss in the event of foreclosure, etc. Why is that important? Because of that guarantee, the lender feels all warm and fuzzy and will extend some features like:

1. No down payment required


2. VA loans are assumable loans


3. No Mortgage Insurance


4. Lenient credit, debt, and income guidelines


5. Fixed and Adjustable rates are available

Government loans aren't the answer for everyone, but they do offer significant advantages for home buyers that meet certain criteria. There are a lot of misconceptions from realtors and banks about the processing and underwriting for these loans, but any reputable mortgage broker can easily guide your loan through so you can maximize the benefits available to you.

Homeowners Insurance. What Coverage's are Worth Buying?

I'm sure we all can remember the process we went through to buy our first home. It was an exciting time for me, but I bet we can all agree that securing an insurance policy on our new home was not a memorable occasion! Actually, nothing about insurance is exciting. In a perfect world you buy a good policy, pay over time, and never have to use it. To most people this is a big waste of money! Deep down we really know this isn't the case. Insurance is very critical to your family's financial well-being. We all take for granted that if we lost everything, "the insurance company will pay for it". Just imagine the family that doesn't have this luxury. They just lost a $150,000 home and all of their belongings! What a nightmare! All because they let their policy lapse! The reason that I feel strongly about this is because I was an insurance agent for 5 years. I saw how having or not having insurance affected many people. I have compiled a few tips and coverage explanations to look for when looking for your home insurance policy.

Dwelling with Expanded Replacement Cost- If every insurance agent and computer property evaluator was perfect, we wouldn't need this endorsement. However, we know this isn't the case. When writing an insurance policy some agents do better than others in estimating how much to insure your home. You do not want to be held to the amount they come up with. Many times people only look at price and not what their home is actually being covered for. Poor agents will also cut coverage to get the premium to look good and land a sale. This can really put a customer in a world of hurt. Just look at the fires in California. $700,000 homes were burnt to the ground and they were only insured for $500,000. That is a $200,000 burden left up to the customer. With expanded replacement cost, the policy will pay up to 120-125% of your homes value. This gives you an extra cushion in the event your home was under insured! (Keep in mind it only pays out if you need it).

Inflation Protection - Most good policies have this. This adjusts your policy each year for inflation. I am sure you have seen your $150,000 insurance policy jump to $154,500 in its second year. This increase is due to inflation protection. This is needed because it will cost more to re-build your home in the years to come than it will today.

Other Structures - This is coverage for any detached structures. If you don't have any, it will stay at 10% of your dwelling amount. If you have more detached structures to cover than the 10% allowed, you will want to make sure it is increased.

Personal Property Replacement Cost - We all know what this is, but believe it or not there are still policies out there that have limited replacement cost or actual cash value! Stay away from these. Full replacement cost is the only way to go! Also look at the amount you are covered for. Some companies cover 75% of your dwelling amount. Others offer less. Just get the most bang for your buck!

Loss of use - If you are unable to live in your home due to a loss, your policy will pay for the expenses you incur while living elsewhere until your home is repaired. Some policies cap the amount here. Make sure you feel the limit is sufficient. Good policies will state "Actual Loss"

Liability - The minimum amount is $100,000. This is too low. $300,000 is the minimum you should have. You can of course have more. If you have an umbrella policy you can keep your liability at $100,000, but if not make sure it is increased. There are too many sue happy people out there and you want to be protected!

Medical Payments - This is not like your car insurance med-pay. This is only for others on your property. Not many people go with more than $1000. Just make sure your liability is high and you should be fine. Make people file suit if they are on YOUR property and try to collect money off of your policy!

Deductible - Your deductible is up to you. Go with an amount that makes you feel comfortable. $1000 is most popular today and makes the most sense. This reduces your premium and will also help ward off small piddly claims that will raise your rates. What good is a $500 deductible if you claim something that is $700? You save $200 and your rate goes up $20 a month. Then if you would happen to have a 2nd loss, you would have 2 claims and are in danger of non-renewal or a huge rate hike!

Earthquake Endorsement - Some people have this and others don't. Make your own decision,but realize that if your home is damaged due to an earthquake or earth movement, you are out of luck! This isn't too expensive so weigh the pros and cons. Earthquake deductibles are typically 10% or so. This equates to $15,000 on a $150,000 home. This may also factor into your decision.

Water or Sewer Backup Endorsement - This is something many people think is included in a policy and it is not! Water damage is covered, but not sewer! Your can purchase specified amounts of protection. Be sure to look into this and ask your agent.

Identity Theft Endorsement - This is a newer item, but is gaining in popularity. If someone steals your identity and causes you harm, it can cost some time and money to clean things up. This will pay for it and provide a representative to help facilitate the process!

Scheduling Items - The most common item to schedule is jewelry. Your policy has low limits for specific items. You will want to schedule valuable or priceless items.

This is a quick summary of the parts of a home insurance policy. Keep all of these points in mind when deciding who you are using and what coverages to include. Just remember you are buying piece of mind and financial security when you pick your coverages. Don't focus solely on price and find an agent that will work hard for you. I hope this helps. Here are a few links to some of the larger insurance companies.

State Farm Insurance - http://www.statefarm.com/
Liberty Mutual Insurance - http://www.libertymutual.com/
Allstate - http://www.allstate.com/
Shelter Insurance - http://www.shelterinsurance.com/
American Family Insurance- http://www.amfam.com/

Your comments are welcomed!

Private Mortgage Insurance is Tax Deductible in 2007

I've been watching the information regarding Private Mortgage Insurance (PMI) and the new bill passed to allow for PMI to be tax deductible. And I have found some interesting limitations to the program. In the past, the way around PMI was through PiggyBack or Combo Loans. By breaking the total loan amount into portions of 80% and 20%, in affect the lender would be loaning you the down payment. There were also lenders that used what is called "lender paid PMI", where the lender would pay the insurance for you, and then recoup that expense in the form of a higher interest rate. And the benefit to these programs was that all of the interest associated with these programs could be used as a tax deduction.

Well now, the government is saying that since PMI behaves in a similar manner as interest rates, why not let the borrowers receive the same tax benefits. BUT, there are significant limits on who and how a homeowner can use this deduction.

First, you can only use the deduction for mortgages closed in 2007. If you began a mortgage in 2006, you won't be able to take the deduction in the 2007 tax year unless you refinance.

Two, you only get the full deduction if your adjusted gross income (AGI) is less than $100,000. The amount you can deduct decreases by 10% for every $1,000.00 over %100,000.00 per year. Meaning, if you make $110,000.00 per year, you cannot receive any deduction.

Third, this is only good for 2007. In order to use this deduction in the future, Congress will have to vote to renew for upcoming years.

Lastly, in order to receive this deduction, you have to itemize your schedule of deductions on your taxes. If you take the standard deduction, this has no benefit for you. And in all practicality, you need to owe $130,000.00 or more for it to be worth your while.

So, you can see that it is a very slim window of home buyers that can benefit from this bill. This was the intent of its creators. They were trying to show the most benefit to those who need it most, lower income borrowers with mortgages under $100,000.00

Rent vs. Own

The big question:

Should I rent or own? What makes the most sense at this point in my life? These are all very frequently asked questions. First, my advice to you if you are considering jumping into the biggest expense of your life. Buy within your means. Stay within your budget and homeownership will be the best choice you have ever made. Next, some pro's and cons of renting vs. owning.

Renting Pros:

Low commitment. Most rental leases are year-to-year and sometimes even month-to-month. If you find you don't like the area you are living in, moving out is just around the corner.

Maintenance Convenience. When something breaks or is not working properly at your apartment you just call your landlord and they send someone out (hopefully in a timely manner) to fix the problem. Also at the landlords expense.

Renting Cons:

No sense of home. You don't get a sense that your apartment is really ever yours. You always feel like a guest paying to stay there for another month or year.

No Tax Benefit: When renting a home you don't receive any tax benefits. When owning a home your mortgage is tax deductible at the end of the year.

Owning Pros:

Home: The word home means something. It just makes you feel all warm and fuzzy inside. You just don't get the feeling of warm and fuzzy when you say apartment, do you? What does home mean? Home means privacy, ownership, and freedom to do whatever you want.

Building Equity: When owning a home you feel like you are not just waisting your money every month or spinning your wheels in a sense. You are paying down your own mortgage not your landlords!!!

Tax Breaks: You can deduct your mortgage at the end of year.

Owning Cons:

Home Maintenance: Owning a home is expensive. The days of calling your landlord for a problem are over. If you have a problem you not only have to fix it but you also have to pay for it. This can get fist time homeowners in a real financial bind if unprepared.

Moving: If you find the home you bought was not the home of your dreams, moving can be a bit more difficult vs. renting an apartment. You can either put your home For Sale By Owner and hope for the best or pay a realtor to do the work for you.

Again, your comments and questions are always welcome.