Michael Creed's Blog

First off, before we get into this week's post, I wanted to thank my friend and colleague, Jason Rosen, owner of Highland Appraisal Group in Alpharetta, Georgia, for helping with the content of this post; I figured he would be a great person to consult because appraisals are his "thing" day in and day out. Jason's comments, directly from his website, are as follows:

A home purchase is the single largest investment most people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.

Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.

So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.

This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receives - for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.

The Inspection
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the house.

Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.

Cost Approach
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.

Sales Comparison
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.

Reconciliation
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.

If you would like to learn more about appraisals, you can watch this video on Jason's website or post a comment below and I will be sure we get it answered for you.

Thanks for reading!

Refinancing a mortgage is currently the most brought-up topic for many homeowners that I speak with on a daily basis. With interest rates lower than they have been in some time, many want to know what to do. Below you will find a couple common themes that I have heard as well as my answers to those concerns.

Theme One: How would I determine whether it makes sense for me to refinance?
 

To figure out whether it's in your best interest to refinance now or later, you need to calculate the point at which you would break-even.

This is the point in time where you make up the amount of you paid in fees for the new mortgage through your monthly savings you realize by refinancing. This is done by dividing the mortgage fees by the monthly savings. For example, let's say you would save $125 a month by refinancing, and the closing costs would be $3,500. Your break-even point for this example is 28 months ($3,500/$125=28). NOTE: Be sure to not count "pre-paids" in this calculation because those costs will be washed out when you get your refund from your current account holding your pre-paid items such as taxes and insurance.

In this example, if you plan to live in the house for more than 28 months, you should refinance because you would save money in the long run. If you intend to sell the house before 28 months, well, you can see that you should sit tight with your current loan.

To figure your monthly savings, you can call me at 800-627-1925 x1923 to get an estimated rate for your scenario. Then either consult a mortgage calculator like this one or ask me to calculate your break-even point for you. Then, look at your current payment to find out what your current monthly principal and interest amounts are so that you can compare them with the new option; you do not need to consider taxes and insurance because they are going to be the same for each loan.
 

Also, keep in mind that you do not need to start over with a 30-year note - assuming you started with a 30 year note to begin with. For instance, if you entered in to a 30 year fixed rate note four years ago, and you want to refinance now, but still pay off the loan in 26 years, that can be done. This is known as amortizing the payments over 26 years instead of 30 and I can easily help you figure out what your payments need to be to make that happen.

Theme Two: How soon is too soon to refinance?

Really, this is not a concern at all; if your break-even point is acceptable to you, refinancing can be done at any time.

Have questions about this?  Give me a call at 800-627-1925 x1923 or email me.

This posting was originally made on 12/07/2007 but the link was having trouble when being emailed; I have reposted it under a new link so that all users can read it easily. 

And We're Off! I applied for credit and now my phone is ringing non-stop - HELP!

Loan Trigger Leads Can Be Very Annoying-

Have you ever applied for a mortgage and then shortly thereafter found yourself wondering how in the world so many people got your phone number? This happens regardless of whether you inquire through an online source like LendingTree.com, LowerMyBills.com, GetSmart.com, or your local bank because of a little known, yet widely written about, mortgage marketing tactic called "Loan Trigger Leads."

What is a Loan Trigger Lead?

After you submit a loan request, the first thing that many lenders will do - some online companies will do this before they even talk to you - is pull a credit report that includes information from the three major credit bureaus Experian®, TransUnion®, and Equifax®. This request for a credit report will then "trigger" an alert to these credit bureaus that the borrower whose credit they are checking is in the market for a loan.  These alerts are then packaged along with the applicant's private information (contact data, select loan criterion and credit score range) and sold to other lenders, typically those that are far less established/reputable than the lenders that actually pulled the credit to begin with. I imply that the buyers of the trigger leads are "lower quality lenders" because there is no criteria other than money required to get those leads.  Many other sources, such as those websites listed above, require the lender to be approved and to agree to strict standards before they can purchase your inquiry from the application supplier. Yahoo! Finance does a great job of explaining the entire trigger lead system in detail.

There are Two Ways of Looking at This-

Competition is good! You are correct, competition is good. In fact, it's great!  The problem is that there is too much competition and many borrowers simply get tired of the phone calls and they drop the subject of getting a mortgage altogether.  Think about this; you apply online and your legitimate loan request made through, say, LendingTree.com, is sold to five lenders as most of LendingTree.com's applications are.  Beyond that, three of those five lenders that bought your loan request pull your credit through each of the three credit bureaus.  You now have 14 different lenders/brokers calling you (the original five, plus the nine trigger leads that were generated when three of the lenders pulled your credit from the three bureaus) YIKES, it's time for a new phone number!!

Hey, what happened to my privacy? This argument is fairly self-explanatory; your information is being sold, without your consent, to anyone and it is completely legal, per the FTC,  unless you chose to opt out several days before you applied for the mortgage.

How You Can Opt Out-

You can either visit optoutprescreen.com or call 1-888-567-8688.  Your request is to be processed within five days but it may take up to 60 days before all prescreened offers stop; if you choose the electronic option, you are only opted out for five years and if you choose the permanent opt out by mail option, you can print a form, sign it and mail it in for a permanent status.  You can also protect yourself from prescreened calls (not calls from the original source of your application) by putting yourself on the National Do Not Call Registry (donotcall.gov or 1-888-382-1222)

Already Applied; Didn't Opt Out Ahead of Time-

Ask the following questions of the callers as they call you:

• Where did you get my information? If it's not a source you recognize as being the source of your inquiry, go on...

• Do you have my Social Security Number? If so, what is it?  If you provided your Social Security Number when you applied for the mortgage but the caller doesn't have it available to recite, you can be 99% sure that you are dealing with a trigger lead buying company because it is against the law for the credit bureaus to sell your Social Security Number.

• Who gave you permission to call me?

• Why should I be willing to speak with you when you weren't referred to me by someone I trust?

• How are your mortgage rates determined and what impacts the rate you say you can get me today?

• What are all of your closing costs and the closing costs of all third parties? (Lender, title, state taxes and pre-paid escrow items)

Additional Resources

• Trigger Leads: Don't Be Exploited by the Credit Bureaus

• Loan Trigger Leads: How to Avoid Unwanted Calls

• What Realty Agents Need to Know about Trigger Leads

• Applying For a Mortgage Makes Credit Agencies Money

• FTC Says It Can't Protect Mortgage-Seekers From 'Trigger Lists'

With the emergency Federal Reserve rate cut earlier today (01/22/2008), I thought it would be a great idea to explain why your mortgage rates will probably not change because of the latest cut. 

Yahoo! Finance has a great article that you can read here to learn all about it; I couldn't have said it better myself.

If, in the future, the link above doesn't work, you can use this link to access a PDF of the article.

Please let me know if you have questions.

UPDATED 01/25/2008 5:29 AM: Because of this drop in the Fed Funds Rate, the stock market rallied on Wednesday causing a major sell-off of treasury bonds (so that those with their money in bonds could get their money into increasing stocks) and the price of the bonds dropped dramatically.  When the bonds' price drops, the yield of said bond will, in turn, go up.  Mortgages typically follow the same trends as the yield of a bond.  Because of the trading of the bonds late Wednesday and after hours, the mortgage rates went up 0.5%+ from the close of business on Wednesday to the opening of business yesterday.  See this article for a more detailed explanation.

Used wisely, a credit card can help you build a strong credit report and help you reach other financial goals.

Credit cards have become a vital part of financial life. They are integral in helping you to build a credit history that will enable you to obtain other lines of credit such as car loans and mortgages. But for some people, the temptation and instant gratification of “buy now, pay later” is too much. They soon find their debt load spiraling out of control. Don’t let that happen to you. Here are some tips on how to safely use your credit card:

Don’t spend more than you have. Look at your income and your monthly expenses. Deduct how much you have to spend on utility bills, insurance, and other financial obligations to determine how much you can afford to spend on your credit card. Remember that although your credit card is plastic, the money you spend with it is real. Your credit card company will give you a limit on how much you are allowed to spend, but that doesn’t mean you can afford to spend that much. Impose your own personal and reasonable credit card limit and stick to it.

Pay on schedule. In addition to receiving your credit card statement in the mail, you can also request an online notification of when payment is due. Mark this date on a calendar and make a commitment to yourself to pay in full and on time. Late payments lower your credit score and may also incur a late payment fee, yet are easily avoidable. And remember, the longer you carry a balance on a credit card, the more your purchases will end up costing due to the interest you will be charged each month on the outstanding balance. If you need to make a large purchase with your credit card, be sure to create a plan to pay it off as soon as possible.

Build a credit history. It’s important to build a good credit history with your credit card company. One way to do this is to use your credit card, say, for gas purchases only. This way, you’ll be spending your money on something that you have to buy anyway, and will begin to reap the benefits of establishing yourself as having a solid history of regular charges and repayments. This positive credit history will help you get loans and other lines of credit. Using a credit card wisely is one of the first steps in establishing your financial profile.

Start small and spend smartly. By starting small and maintaining a regular repayment schedule, you can stay in control of your finances. Just be sure not to succumb to the temptation of credit cards or you might do yourself more harm than good. Be honest with yourself about what you can truly afford so you can decide how to use credit cards to best meet your financial needs.
 

Courtesy of LendingTree.com Smart Borrower Center (specific article)

One of the most common objections that I hear during the early stages of a mortgage application is in regards to inquiries made by a lender to a personal credit profile.  Many are concerned that their scores will be hurt because of too many inquires being made.

While it is certainly a good idea to be concerned about your credit score, it's important to note that, by law, you cannot be penalized for shopping for a home or auto loan as long as you do not spread your shopping out over several months.  The FCRA (Fair Credit Reporting Act) requires that credit scoring models have a "de-duplication" filter built into all scoring models being used. 

This is best explained by http://www.myfico.com/:

"Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you're only looking for one loan. To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO^® scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO^® scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO^® scoring formula it wants the credit reporting agency to use to calculate your FICO^® score."

Please feel free to contact me or post a comment below if you would like to dialogue about this further.