Observations from a Loan Officer – #1 In a Series

michael nelson equity primeI talk to a lot of people about mortgages, loan programs, interest rates, finances, and other related topics of interest.  It is true that every customer is different and has different mortgage needs. Candidly, that is the fun part of the job – helping people get their piece of the American Dream using the right mortgage.

From time to time, some recurring themes come up from my conversations with different buyers.  I have decided to share my thoughts on these themes as they arise. Thus, this post will be the first in a series of Thoughts & Observations from a Loan Officer.  I don’t know how often I will write these posts but the hope is they will help customers navigate the confusing world of mortgages.

Term will be the first topic of the series

michael nelson equity prime loan

Term – Often overlooked but always important

Customers always want to talk about interest rates.  It is the first question I get – how low are your rates?  My answer is this: the interest rate is important for sure, but the term of the loan should get equal consideration.

Term is the length of the loan – common examples are 15 years, 20 years, 30 years, and  7 year adjustable.  I can’t tell you how many times I have worked with borrowers who are so fixated on the lowest possible interest rate that they will finance $5,000 in points to have a rate discounted by 1/8 or 1/4 – without considering the term of the loan.  Seriously, it is as if they will finance big sums of money so they can brag about their low interest rate to the neighbors.  This brings me to my first point.

Don’t Get Emotionally Invested in the Lowest Possible Interest Rate

Michael Nelson Equity Prime loanLook, if you are sure you will purchase the house over the course of the next 25 to 30 years – spending thousands of dollars on discount points can be a financially sound decision.

However, if there is a possibility that you will sell or refinance a 30 year mortgage in the first 7 to 10 years of the loan – have your loan officer do the math and calculate the “actual” cost of the $5,000 discount.  Most of the time you will be surprised at just how much more money that “low” interest rate actually costs.  Which brings me to my second point.

The lowest monthly payment is not necessarily the cheapest loan

The general rule is this: a longer term results in a lower monthly payment AND more interest paid.

michael nelson equity prime loanJust for fun, the next time you shop for a mortgage have your loan officer calculate the total interest paid for a 15 year loan versus a 30 year loan.  I guarantee you will be surprised at how much more in interest a 30 year loan costs.

I understand you might not be able to afford the monthly payment on a 15 year loan, but do the math anyway.  You need to know just how expensive a 30 year loan really is.  Which brings me to my last point.

Pay More Principle Every Month If You Can

For a 30 year fixed loan, you will pay approximately 60 to 75% of the interest in the first 15 years of the loan.  If you can pay a little extra every month in the first years of the loan you will save thousands, if not tens of thousands, of dollars over the course of the loan.  Even if you sell the home before the loan reaches full term, you will receive the equity at the sale (assuming the price of the home stays the same or increases).

My last thought.  Always ask your loan officer to calculate the cost of interest and fees for the various loan options presented to you.  Make sure you understand just how expensive discount points are over the course of the loan.  If your loan officer does not want to, or worse yet, does not know how to calculate the interest expense on a loan – find another loan officer.  Loan officers with your best interest in mind will always search for the shortest appropriate term with the lowest overall expense.

Please feel free to send me a note or give me a call if you would like to discuss in further detail.

As always – Happy House Hunting!

Skype: michael.nelson2014
NMLS: 1314188
Licensed in CA, CO, & FL
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