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Happy Mother's Day this weekend!

May 11
Category | General

Happy Mother's Day

Understanding Mortgages

Which generation buys more homes than any other

The cost of living has turned the typical family household construct on its head.

According to a recent survey from the Pew Research Center, approximately 15 percent of millennials age 25 and 35 years still live with their parents. Compare that to the 10 percent of 25- to 35-year-old Generation Xers who were living with their parents in 2000 or the 8 percent of 25- to 35-year-old baby boomers who did the same in 1981.

So it may come as a bit of a surprise that, contrary to what the polls suggest, millennials represent the largest group of individuals who are in the market to buy a house.

Millennials run the real estate market

That's according to a recent survey from the National Association of Realtors. In its Home Buyer and Seller Generational Trends study, the NAR found that 36 percent of residential real estate transactions during the past year involved 18- to 35-year-old men and women. This includes all housing types - townhouses, co-ops and condominiums - and not just single-family residences. That's up from 34 percent over the corresponding period in 2017. These figures are well ahead of Generation X buyers, who made up 26 percent of all home purchases in the past year.

What drives millennial homebuying?

Why are millennials accounting for a larger slice of the homebuyer pie? It's partly due to their spending capabilities. The typical millennial household makes around $88,200 per year, up from $82,000 in the 2017 version of the NAR's Generational Trends analysis.

For about 1 millennial homebuyer in 5, these purchases represent their introduction to homeownership. In other words, buying a home means leaving the nest for the first time.

Millennials are loath to move as a rule, but are also living with their folks for longer periods than their older contemporaries. In fact, 91 percent of the 25- to 35-year-old respondents in the aforementioned Pew Research poll who are currently living with their parents had lived at home for at least 12 months. The same was true for 86 percent of the same demographic of Generation Xers in the 2000s.

Everyone's situation is different, but if nothing else, the numbers suggest more millennials are proving their fiscal mettle and learning that the American dream is still alive.

Mortgage Speak

What is a mortgage LE?

Apr 27
Category | Mortgage Speak

What is a mortgage LE?

What is a mortgage LE?

For most Americans, the third of October in 2015 was just another ordinary day, no different than any other. But for lenders, as well as people applying for a mortgage loan, that October day fundamentally changed the way mortgage requests are handled to increase transparency.

As you may know, lawmakers passed a number of regulatory measures to reduce the likelihood of another Great Recession. One of them was what is formally known as a Loan Estimate (LE). So what exactly is a mortgage LE, and why are they so important to the borrowers and lenders alike?

LEs come in threes

According to the Consumer Financial Protection Bureau, a mortgage LE is a document that's usually about three pages in length. Roughly 72 hours after a lender receives a prospective buyer's application to take out a mortgage, that borrower is given an LE, which includes all the essential elements that are important for them to know about their loan.

Most notably, an LE provides details on the estimated cost borrowers can expect to pay should they decide to move forward with the loan application. This includes the loan amount, the interest rate, closing costs and a ballpark figure of their monthly mortgage payment. An LE also has other specifics that you'd expect to find on this type of document, such as the borrower's name, address, Social Security number and their annual salary. In addition, an LE frequently contains particulars on certain fees or penalties incurred if borrowers miss their payments or pay off their loans in a timeline contrary to what was originally agreed upon. For example, some lenders issue a prepayment penalty, which triggers if the loan is paid off before what was determined at the closing table. Prepayment penalties, however, are not customary.

In short, LEs contain both necessary information as well as other details that the lender deems noteworthy to mention.

How does it differ from a GFE?

For those who've been through the mortgage process before, an LE may sound awfully similar to a Good Faith Estimate. As part of the Know Before You Owe mortgage disclosure rule, the LE replaced the GFE. Industry experts acknowledge LEs are better than GFEs because they're easier to comprehend. LEs aren't usually full of financial jargon, and they encourage borrowers to weigh all their options and compare loan costs and fees against those offered by other banks or mortgage entities.

No one likes to be surprised by hidden expenses, especially when it comes to mortgage payments. LEs aim to prevent this from happening. Loan origination expert Jonathan Dyer told MagnifyMoney that, under the changes implemented by Know Before You Owe, whatever fees loan originators originally discuss with borrowers often remain as they are, something that wasn't necessarily true under the GFE system.

"Regulatory agencies have now prohibited any increase of disclosed fees without a significant change in the loan purpose or loan amount," Dyer said.

An LE is not a mortgage approval

It's important to understand, however, that an LE is not a formal indication that a loan has been approved, according to the CFPB. Rather, an LE is a complimentary service that lenders are required to provide, giving applicants an idea of what they can expect if everything checks out.

Applying for a mortgage can seem like quite the ordeal. If you're someone who is new to homebuying, the paperwork alone can feel like an insurmountable challenge. An LE is designed to simplify the process, not to mention provide and protect borrowers seeking financial support at a sensitive time in their lives.

Mortgage Speak

mortgage points

What's the purpose of mortgage points?

When would-be buyers apply for a mortgage, it's safe to say no two home hunters are alike. This is true both of their financial profile and the type of house they'd like to buy.

But here's something all applicants have in common: They want the most bang for their mortgage buck.

One way to help lower your monthly mortgage payments is through mortgage points. But when the rubber meets the road, are they worthwhile? Like the home buying process itself, that all depends on the circumstances of the moment. Here's a brief rundown of mortgage points so you can determine what they are and whether they're valuable to you.

What are mortgage points?

Otherwise referred to as discount points, mortgage points are upfront fees that you, a current or potential borrower, pay to your lender. They can ultimately reduce how much you spend in interest. Each point is the equivalent of 1 percent of the overall mortgage. For instance, with the current median for all housing types at $228,200, according to the National Association of Realtors, 1 percent of that total is $2,282. So, if you were to buy one mortgage point, roughly $2,300 is the amount you'd pay for it.

The "point" of mortgage points is reducing how much you spend each month in interest on your home loan. Essentially, they allow you to buy your way to a lower rate.

How much do you stand to save?

As someone who's new to the mortgage shopping process, you're no doubt aware that rates are subject to change. They're influenced by the Federal Reserve, loan type and the borrower's credit situation. The amount you can save by buying one or several mortgage points varies as well. For example, buying a mortgage point worth $2,000 can shave a quarter of a percent off how much you spend in interest, reducing what you pay monthly by about $25 to $30 or so. Sometimes it's less, sometimes it's more. The more points you buy, however, the greater the discount tends to be.

So how do you know when it makes sense to buy mortgage points? If you intend to stay put - the house you're buying isn't a starter or transition home but one you'll be in for the long haul - buying one or several points can pay dividends, as savings will appreciate over time. Someone with a 30-year fixed-rate loan stands to save more than those with a 15-year FRM. Your lender can help you figure out what move is best, but you can determine how long it will take you to reach that break-even point by dividing your total mortgage point(s) with how much those points save you per month. The quotient is how long it will take you to recoup what you spent upfront.

There are choices aplenty when you're in the housing market. Weighing the worth of mortgage points is yet another financing option you ought to consider.

Understanding Mortgages

First time home buyers moving in to their new home

Most renters want to own a home

Just about everyone who's been in the market for a home has addressed the age-old question of whether it's better to rent or buy. A family's circumstances often tell the tale of which is the better bet, but generally speaking, buying beats renting, especially from a dollars-and-cents perspective.

Even today, when a dearth of supply and a glut of demand has caused asking values to increase, most renters still want to own a home, so says a recently released poll. According to new findings from the National Association of Realtors, approximately 75 percent of "non-owners" say they have every intention of buying a house at some point in the future.

The homeownership rate has gone up and down over the years and is still below the all-time high of 69 percent in 2004, according to data compiled by Trading Economics. Currently, about 64 percent of Americans own a home, based on the most recent quarterly figures available from the U.S. Census Bureau.

Cost, limited supply leaving some renters in limbo

If around three-quarters of the country seeks to purchase a house and apply for a mortgage, why isn't the homeownership rate higher? It's largely because of the economics of it. On average, for the whole year, just over half of respondents in the NAR survey said they couldn't afford to buy a home, slightly lower than the 56 percent who indicated as much during the fourth quarter of 2017 alone.

Driving the price increases are the relatively few options would-be buyers have to choose from, noted NAR chief Lawrence Yun.

"A tug-of-war continues to take place in many markets throughout the country, where consistently solid job creation is fueling demand, but the lack of supply is creating affordability constraints that are ultimately pulling aspiring buyers further away from owning," Yun said.

How problematic of an issue dry real estate markets are is a function of where you happen to be looking, as some regions have more properties in listings than others. From a national perspective, however, choices are slim. In January, total housing inventory actually increased to 1.52 million, based on existing-home sales numbers from the NAR. But even with an increase of 4 percent from this past December, inventory is still down 9.5 percent from January of last year.

"These extremely frustrating conditions continue to be most apparent at the lower end of the market," Yun said, "which is why the overall share of first-time buyers remains well below where it should be given the strength of the job market and economy."

Renters feeling the pinch

But the rental situation isn't much more accommodating. To the contrary, 51 percent of the participants in the NAR survey said they anticipate paying more for rent in 2018 than they did in 2017.

As it stands, the average worker today has to earn more than $21 per hour to afford a two-bedroom apartment, according to the National Low Income Housing Coalition. Given that renters currently make an average of $16.38 per hour, this means that many renters are spending more than 30 percent of their income on rent. Because of these affordability pressures, it's time for developers to kick things into high gear.

Speaking of affordability, many renters or would-be buyers operate under the belief that they can't afford a down payment, under the assumption that they have to put down 20 percent of the property's value up front. Based on a separate poll conducted by the National Association of Realtors, 37 percent of millennials believe a 20 percent down payment is required. Not only is this inaccurate, but it's also far above what the average actually is (5 percent).

Regardless of what the supply situation looks like, renters are looking to buy, primarily because they're running out of room. In a poll, nearly 93 percent of respondents said they wanted at least two bathrooms in their future home.

With the inventory situation showing some improvement, prospective buyers should be able to get exactly what they're looking for in the not-too-distant future.

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