The Right Question: “How Much Do I Want To Spend On Housing Each Month?”

By Todd Abelson NMLS #180858 on .

By focusing on a home's payment instead of its list price, home buyers exert more control over their short- and long-term financial goals.

One of the most popular questions that home buyers ask real estate and mortgage professionals is “How much home can I afford?”

It’s a normal question to ask, but it’s not the most effective way to plan your finances. 

Banks will almost always approve you for a home loan in excess of your household budget.

The more appropriate question is: “How much do I want to spend on housing each month?” 

By focusing on a home’s payment instead of its list price, home buyers exert more control over their short- and long-term financial goals.  List price is only one piece of the monthly payment puzzle. 

The cost of owning a home month-after-month is the sum of multiple expenses:

  1. The mortgage payment
  2. The real estate taxes on the property
  3. The condo/management fees to an association (if applicable)
  4. The cost of homeowner’s insurance
  5. The cost of mortgage insurance (if applicable)

In other words, because monthly payments are combination of costs, buying a home based on its list price does very little to help plan a budget.  A home selling for $300,000, for example, may cost a homeowner anywhere from $1,800 to $3,000 monthly.

This is why “How much do I want to spend on housing each month?” is a better starting point than “How much home can I afford?”. 

Home affordability comes from more than just the list price.

Recession or Inflation? Even Fed Members Don’t Know For Sure.

By Todd Abelson NMLS #180858 on .

With Friday's jobs report looming, mortgage markets are especially skittish about whether the economy is in a recession, or facing inflation.

With Friday’s jobs report looming, mortgage markets are especially skittish about whether the economy is in a recession, or facing inflation.

Four Fed speakers Tuesday did little to quell the debate:

  • 9:00 A.M.: Fed Chairman Bernanke stayed on message that foreclosures and falling home values are dragging down the economy.
  • 10:00 A.M.: Fed Vice Chairman Kohn said that banks will “face challenges” but will not fail en masse.
  • 1:00 P.M.: Federal Reserve Governor Mishkin said that deflation is more concerning to him than inflation
  • 1:00 P.M.: Dallas Fed President Fisher said fighting inflation is more important than fighting recession.

Four speeches, four different perspectives. 

The speakers’ mixed messages confused market participants and, as a result, mortgage rates varied wildly from hour to hour.

The confusion was so great that several mortgage lenders had to shut down their rate lock desks on three separate occasions Tuesday to re-price rates to the “new” market.

That’s a highly unusual occurrence and the market’s volatility underscored the uneasiness exiting in mortgage markets lately.  Without a clear picture of where the economy is headed, investors are left to guess (and they’re not very sure of themselves).

Friday’s job report may add some clarity, but until Friday comes, consider locking a mortgage rate if you see one you like — it probably won’t stick around for very long.

What High Oil Prices Mean To Mortgage Rates

By Todd Abelson NMLS #180858 on .

Oil closes at an all-time high, creating inflationary pressures

After briefly exceeding its all-time high, oil closed Monday at $102.45. 

Rising energy costs can lead to inflation because American Business eventually passes on its higher costs to American Consumers.

When consumers have to spend more money for the same amount of product, it’s called “inflation”. 

Another way to look at inflation is like an erosion in the value of a dollar.

The presence of inflation causes mortgage rates to rise because mortgage debts are repaid in dollars.  If those dollars are losing their value, the rates tied to those debts have to increase to “cancel out” the erosion.

This is why mortgage rates spiked Monday.  As oil prices rose, the fear of inflation grew larger.

Over the next few weeks, expect mortgage rates to be highly sensitive to oil prices.  As oil prices rise, mortgage rates should, too.  As oil prices fall, mortgage rates should follow.

(Image courtesy: New York Times)

As The Fed Funds Rate Falls, 30-Year Fixed Mortgages Rise

By Todd Abelson NMLS #180858 on .

Since the Fed began cutting rates five months ago, mortgage rates on 30-year fixed mortgages are higher, as are jumbo mortgage rates.

Federal Reserve Chairman Ben Bernanke testified to Congress Wednesday, alluded to further rate cuts to support an ailing U.S. economy.

Already, the Federal Reserve has lowered the Fed Funds Rate by 2.250% since September 2007.

The graph at right comes from the Wall Street Journal and it highlights a very important correlation between the Fed Funds Rate and mortgage rates.

The correlation is that there is no correlation.

Since the Fed began cutting rates five months ago, mortgage rates on 30-year fixed mortgages are higher, as are jumbo mortgage rates.  ARMs, however, are lower.

Especially noteworthy is how 30-year fixed rates started to spike as the Fed cut rates through January.  Another half-point cut in March could have a similar impact.

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By Todd Abelson NMLS #180858 on .

The EyeOnMyLoan concept was developed by Tyler Ford and Doug Olson. EyeOnMyLoan was the first web-based status reporting tool for loan officers to communicate to the borrower, Realtor®, escrow officer and mortgage team. It allows everyone involved with the loan transaction to be informed about the progress of a loan. Anywhere. Anytime.

Email updates and alerts are sent to all those involved throughout the loan process.

Tyler and Todd use EyeOnMyLoan. Our clients and agents save time and are continually updated in regards to the status of their mortgage from start to finish by accessing

EyeOnMyLoan allows Tyler and Todd to live up to our Missions and Values which you can read by going to

How Is Housing Doing? It Depends Who You Ask?

By Todd Abelson NMLS #180858 on .

The OFHEO paints a different picture from the Case-Shiller Index

Yesterday, the Office of Federal Housing Enterprise Oversight released its fourth-quarter housing data. 

The OFHEO report color-coded each state according to its annual price changes.  The states shown in red lost value, and everyone else gained.  Overall, the OFHEO measured a 0.8% national increase.

Also hitting the wires yesterday was the Case-Shiller Home Price Index. 

This report focuses on the 20 largest metropolitan statistical areas in the United States and painted a much more grim outlook for housing.  According to Case-Shiller, prices declined 8.9% nationally.

Both reports are imperfect but one notable difference is that the OFHEO report measures all 291 MSAs in the United States and its data showed that two-thirds of them appreciated last year.

Once again, this just reminds us: real estate is a local phenomenon.  Every market is unique with its own price trends, independent from the rest of the country.

Real Estate Term: Earnest Money

By Todd Abelson NMLS #180858 on .

When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account.  This up-front deposit is more commonly known as earnest money.

When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account. 

This up-front deposit is more commonly known as “earnest money”.

A sales contract’s earnest money requirement will vary from contract to contract.  It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Some factors that can influence earnest money amounts include:

  • Market conditions: Stronger markets often call for more earnest money
  • Buyer economics: First-time buyers often give less earnest money
  • Seller psychology: Skeptical sellers often ask for more earnest money

No matter how large or how small, however, earnest money is supposed to give the seller a sign of good faith that the buyer wants to purchase the home. 

To this end, earnest money can be forfeited if the buyer later “backs out” of the deal, or breaches the terms of the purchase agreement. Breaching, however, is infrequent. 

This is because most purchase contracts are written with buyer-focused “outs” called “contingencies”. 

A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.

If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.

When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer’s bottom line at settlement.  If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.

Earnest money customs vary from state to state, city to city, and even locale to locale.  Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts. 

The earnest money you save may be your own.

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Looking Back And Looking Ahead : February 25, 2008

By Todd Abelson NMLS #180858 on .

The biggest story this week is Fed Chairman Ben Bernanke's Wednesday testimony to Congress.
It’s a big week for mortgage markets (again) and that should cause rates to fluctuate wildly (again). 

The volatility we’ve seen since December has not been for the faint of heart.  Even this past Friday, as mortgage rates were poised to end the week lower, a late-afternoon stock market rally reversed it. 

In the last 45 minutes of trading, the Dow Jones Industrial Average swung 225 points.  Mortgage rates rose, too, peeving Americans who planned to go house-hunting over the weekend.

This week, mortgage rates will take direction from a handful of economic reports including the Federal Reserve’s preferred inflation marker — the Personal Consumption Expenditures report.  PCE is a Cost of Living index.

The biggest story, though, is Fed Chairman Ben Bernanke’s Wednesday testimony to Congress.

While he’s not expected to say “the economy is in a recession”, or “the economy is doing just fine”, markets expect Bernanke to give guidance about how far the Fed would cut the Fed Funds Rate to stimulate the economy.

The Fed Chairman won’t say outright, “The Federal Reserve intends to lower the Fed Funds Rate to 1.000%”.  Therefore, it will be the guessing of how low the Fed will go that should cause markets to buck.

But remember: Cuts to the Fed Funds Rate do not necessarily lead to lower mortgage rates.  To the contrary: Since the Fed started cutting the Fed Funds Rate in 2008, mortgage rates have moved higher.  As they cut, though, ARM interest rates should become more attractive versus fixed-rate mortgage rates. 

This is because additional cuts the Fed Funds Rate will fan inflation fires longer-term and inflation erodes the value of long-term mortgage bonds.

(Image courtesy: West Linn Tidings)

Spreadsheet Formulas: Calculating Home Payments

By Todd Abelson NMLS #180858 on .

For a lot of homebuyers, calculating a prospective mortgage payment is an online experience.  For example, a search on Google for “mortgage calculator” returns 39 million options.

Some people, however, prefer to plan on their local hard drive using spreadsheets.  For these people, the hardest part is often figuring out what formulas to use.

Interest Only Payments

The spreadsheet formula for principal + interest home loan payments

Home loans with interest only payments are much more simple to calculate than amortizing loans.

Using the graphic at right as a guide, enter your loan size and your interest rate into two separate spreadsheet cells.

Then, create a third cell and input the following formula that calculates the “Monthly Payment”.  The formula is:

= (Loan Size) * (Interest Rate) / 12

Principal + Interest Payments

Spreadsheet showing P+I formula

For a home loan with (principal + interest) payments, the formula is a little bit more complicated than with an interest only home loan.

Using the graphic at right as a guide, enter your loan size, your interest rate and the duration of your home loan into three separate spreadsheet cells.

Then, create a fourth cell and input the following formula that calculates the “Monthly Payment”.  The formula is:

= – PMT(Interest Rate/12, Loan Term in Months, Loan Size)

For additional spreadsheet formulas and more in-depth reporting, explore your software’s “Help” feature to see what you can find.

6 Things To Avoid While Waiting For A Mortgage Approval

By Todd Abelson NMLS #180858 on .

6 Things To Avoid While Waiting For A Mortgage Approval

When buying a home, there are two stages in the home loan approval process.

Stage 1 starts when a homebuyer submits a mortgage application to his loan officer for a pre-approval. 

A pre-approval is a “walk-through” mortgage approval that says — at a given purchase price and downpayment amount — the home loan application will very likely be approved.

Stage 1 ends when the buyer signs a purchase contract on a home.  At this point, the “walk-through” approval is useless because the buyer now needs a real home loan approval from an underwriter and not a loan officer.

Thus begins Stage 2.

During the second phase of the approval process, a mortgage underwriter is reviewing income, assets, credit, job history, and other items, too; the underwriters job is to make sure that the buyer meets the bank’s criteria for lending.

If the loan officer did his job in Stage 1, Stage 2 is just a formality.  And most times, it all goes according to plan.

Occasionally, though, a homebuyer sabotages his own mortgage approval by inadvertently changing his “risk profile”.  It doesn’t happen on purpose, of course — it just happens.

So, consider this a quick primer of what not to do while you’re between Stage 1 and the completion of Stage 2 of the home loan approval process.   Following these pointers will help keep the risk profile consistent.

  1. Don’t buy a new car (or take on a larger lease payment)
  2. Don’t quit your job or change industries (and certainly don’t switch to a heavily commissioned role)
  3. Don’t transfer large sums of money into or out from your bank accounts (and remember that “large” is relative)
  4. Don’t miss a payment to a creditor (even if you don’t think you owe it)
  5. Don’t open a new credit card (even if you’re getting 10% off your new bedding)
  6. Don’t accept a cash gift without talking to your loan officer first (because there’s rules on how to accept them)

There’s other items, too, but this a good start. 

Now, avoiding these mistakes may not be practical for everyone.  Therefore, if you know you’re going to violate a “rule”, check with Tyler Ford or Todd Abelson first. 

There are a lot of “gotchas” in mortgage lending and it helps to have professional guidance for your individual questions.