It’s Mortgage Principal, Not Principle

Principal vs. Principle

  • Attention loan officers, mortgage brokers, real estate agents, and so on
  • The words “principal” and “principle” are two very different words
  • They are constantly used incorrectly by those working in the housing industry
  • Even by major mortgage companies and journalists that should know better!

Allow me to get testy about grammar for a minute (moment). I know I know, it’s lame to be a member of the grammar police and go after folks for using a word incorrectly.

I’m sure I use words incorrectly all the time.

In fact, maybe I should have used a synonym of incorrectly that second time around to mix things up.

But in this particular case, we’re talking about two completely different words that sound exactly the same but have entirely different meanings.

And they often get confused in the mortgage world, with the word “principle” typically used in place of the correct “principal.”

The scary part is that mortgage professionals and high-ranking journalists make this mistake all the time. Perhaps that’s why I have a bone to pick.

What Is Mortgage Principal?

principal vs principle

  • The word principal means first or primary
  • But it has a different meaning when it comes to money
  • It is defined as the original amount invested or loaned
  • In other words, it’s your loan amount if we’re talking about a mortgage

Well, the word principal generally means “first.” That’s why the head of a school is known as the principal, because they’re basically the one in charge (just watch out for the superintendent!).

When it comes to money, the word principal takes on a different meaning; the original amount invested or loaned.

So in the case of a mortgage, the principal balance would be the loan amount, which declines over time as it is paid off.

If you were to take out a $200,000 mortgage, that $200,000 would be the principal balance.

And each month you would make a payment with some portion going toward the principal and some going toward interest.

Assuming you’ve got an impound account, the payment would be split four ways with money also going toward taxes and homeowners insurance (there’s also PMI in some cases).

Now if the interest rate on our hypothetical, let’s say 30-year fixed mortgage, were 4%, the first payment would be $954.83.

Of that amount, $288.16 would go toward the principal balance, lowering it to $199,711.84. The rest of the payment, $666.67, would go toward interest.

Each month, the principal balance of the mortgage would fall, assuming fully-amortized payments, and not interest-only payments, were made.

For those who want to get a head start on paying down their mortgage, you can make an extra payment to principal, which means the excess amount goes toward principal once the interest is covered for the month.

So you can pay an extra $100 or $500 or round up your payment. Often you’ll need to tell the lender or loan servicer that you want the additional amount over your payment due to go toward principal so they know where to apply it.

The amount of equity you have in your home is the difference between your remaining principal balance and your current appraised value.

As a Matter of Principle

  • What about the word principle, which is often misused?
  • It’s something completely different that has nothing to do with mortgages
  • Defined as a rule or code that governs one’s behavior
  • For example, you might have principles to live by like always telling the truth

What about the word “principle?” Well, for starters it’s always a noun, whereas principal can be both a noun or an adjective (principal vs. principal balance).

It can mean a variety of different things, but perhaps the best definition is a rule (or code) that governs one’s behavior.

For example, someone might do something out of principle because it aligns with their moral beliefs. A vegetarian may not eat meat as a matter of principle.

Or someone may not do business with a large corporate bank out of principle because they disagree with their lending practices.

I suppose someone could decide not to pay their mortgage out of principle, or do something else money-related based on their principles, but that might be a stretch.

In the end, if you’re talking about your home loan, the word “principal” is likely the version of these very similar words you’re looking for.

Of course, in principle it may not matter, the bank will probably send your money to the right place even if you write “principle” on the check.

(photo: Roberta Romero)


It’s Okay to Rent Until You Find a House You Really Like

When deciding between renting and buying, individuals often fret about missing out on home equity if they do the former.

In other words, for all those years they choose to rent instead of own, they’re not gaining any sort of ownership, and their money is simply being thrown out the window.

Of course, that rent money is providing shelter and a roof over their head, so it’s hard to say it’s all for nothing.

And while the argument has some truth to it, it’s often blown out of proportion. Or skewed in favor of buying as opposed to renting.

Imagine if someone bought a home and prices went down. Would they still be talking about throwing away money on rent?

Has the Housing Market Gotten Ahead of Itself?

  • When things start to feel bubbly prospective home buyers seem to get even more desperate
  • This can lead to bad decisions, especially when it comes to a major purchase
  • Make sure you’re buying a property for the right reasons and not throwing out your own rules
  • It should never be a rushed decision or one in which you make too many sacrifices

Lately, there’s been a lot of talk about bubbles and a potential housing market crash. But home prices have only surged due to a lack of inventory, not because of bad mortgages.

The low mortgage rates on offer have also made the housing market hot, perhaps too hot.

And after some really stellar home price gains, they’ve begun to moderate a bit, or at least decelerate.

Now there’s even talk that home prices could pull back in places where appreciation got a little ahead of itself. Or a lot ahead of itself, depending on how you look at it.

So is it possible to rent for a while during this period of uncertainty and still come out ahead? Let’s break it down.

Buy Now, Even If Prices Drop

Say home prices in the area where you want to buy are hovering around $250,000. You pull the trigger and get your offer accepted, pledging to put down 20%, or $50,000.

That leaves you with a loan amount of $200,000. Let’s also assume your mortgage interest rate is 3% on a 30-year fixed-rate mortgage.

Your monthly mortgage payment would be around $843, not including property taxes and homeowners insurance.

After five years of on-time payments, your loan balance would fall to around $177,813.

Put another way, you would have paid roughly $22,187 toward the principal balance, which is one of the great benefits of owning a home. The accrual of home equity! Wealth building!

But what if home prices fall in the next couple of years, even slightly. Would it actually be better to rent for a couple years and then buy a property at a marginally lower price?

Rent Now, Buy a Home Later?

  • It’s perfectly okay to rent instead of own until you find a home that suits you
  • You’re not necessarily “throwing money away” despite what people always say
  • You could actually be saving yourself money and headache by renting
  • It’s certainly less stressful to rent than own (though it can be well worth it to own!)

Now let’s consider a scenario where you hold off on buying until things settle down, assuming they do.

Say you decide to rent for $1,000 a month for two years (around the same cost of the mortgage sans taxes/insurance), spending $24,000 during that time and earning nothing in the way of home equity, not to mention any tax breaks.

After two years, you find a house for $237,500 and decide to put 20% down. That leaves you with a $190,000 loan amount and a mortgage payment around $800.

Let’s assume you go with the same loan program (30-year fixed) as our prior example and get the same interest rate (3%).

After three years of holding the mortgage, you would only pay $12,266 toward your principal balance, but in doing so it would drop to $177,734.

This would actually be slightly below the balance of the aforementioned mortgage at that time, which began two years earlier.

So after five years, two years renting plus three years owning, you’d be ahead of the person who decided to purchase a home right away at a higher price.

After 10 years, the early buyer would have a principal balance of $152,039, compared to $144,437 for the renter-turned-buyer.

If we consider the down payment, $50,000 on the $250,000 home purchase and $47,500 on the $237,500 purchase, the renter is even more ahead.

And the late buyer would enjoy a monthly mortgage payment around $50 lower thanks to that five percent home price drop initially.

If they were to make the same monthly payment as the early buyer by putting that extra $40 toward principal each month, they’d actually pay off their mortgage in about 27.5 years, or 29.5 years counting the two years when they rented.

It’s Not About Timing the Market, It’s About Not Rushing In

Of course, my little scenario above banks on mortgage rates staying in place and home prices dropping about five percent. If both go up, the equation changes quite a bit.

And that’s certainly not out of the question. I still believe this housing rally has a few more years left, and with mortgage rates near record lows, there’s mostly only way to go from here.

Still, it’s okay to rent if you can’t find a suitable home to purchase. You won’t necessarily miss out on anything. And you can always make slightly higher mortgage payments to play catch up if need be.

There might also be a better selection of homes in a year or two, once this housing frenzy settles down again.

By waiting, you’re actually not timing the market. You’re taking your time and being prudent as you would any multi-hundred-thousand or million-dollar purchase.

After all, those who rush in often make mistakes, and may also have regrets. But with market conditions so tough right now, I don’t blame anyone for whatever decision they make.

Lastly, let’s also remember that a home purchase is about more than money.


What the Names Zillow, Redfin, and Trulia Mean

Nowadays, just about everyone looking to buy or sell real estate begins their search online.

And a small handful of websites seem to be dominating the home buying space, including oddly-named real estate tech companies.

I use these websites all the time when researching real estate, but never actually knew the details behind their names. So here goes.

Zillow Is a Play on the Word Zillion

  • The name Zillow is a made up word that is a combination of existing words
  • It relates to the zillions of data points used to come up with their famous Zestimate
  • And also happens to rhyme with the word pillow, which appears to the emotional side of homeownership

First up is Seattle, Washington-based Zillow, which got its start by offering free house values using an algorithm.

Before they came along, it was hard to know what your home was worth without getting an appraisal done.

As for their unique name, it rhymes with popular words like willow and pillow. And while willow trees are certainly homey, the word pillow is actually part of the name.

They note that a home is more than just data; it’s also a place to lay one’s head, hence the word pillow.

But primarily, Zillow is a play on the zillions of data points the company digests to come up with home values (Zestimates).

The company was founded back in 2005, and since then has become a major player in both the real estate realm and the mortgage world.

They have since launched Zillow Home Loans and are also an iBuyer of homes via their Zillow Offers subsidiary.

The publicly traded company’s stock is currently valued at a whopping $23 billion. Well done Zillow, well done.

Redfin Is an Empty Vessel, Among Other Things

  • While the name might evoke images of birds or fish, it’s actually an anagram and an empty vessel
  • If you shuffle the words around you can make the word friend or finder
  • But it seems the company just liked how it looked and sounded

Another growing superpower in the real estate space is Redfin, which has an even stranger name.

While the name sounds like a fish, species of shark, or some other deadly predator, it’s actually an anagram.

Yep, jumble the letters around and you come up with words like “finder” and “friend.” Taken together, you’ve got a friend to help you find your perfect home.

Back in 2004, company founder David Eraker noted that the name Redfin was also a “great empty vessel.”

By that, he ostensibly meant a rather arbitrary yet memorable and unique name that would eventually win the hearts of everyday consumers.

After all, empty vessels make the most noise, so if anything, it’s a talking point that may spark some initial curiosity.

Redfin is big in the real estate game, with perhaps the most up-to-date listings and tools like the Price Whisperer, and the Redfin Estimate.

It’s also getting involved in the mortgage sphere via its Redfin Mortgage entity, and is an actual real estate brokerage, unlike the others.

Like Zillow, they also got into the iBuying craze after launching RedfinNow, pitting them against arguably their biggest rival in just about every space.

The company went public in 2017, and is currently worth about $5 billion, considerably less than Zillow.

Trulia Means Truth

  • This company’s name actually has a historical context
  • It’s based on an old-timey first or last name that means “truth”
  • All large companies want to exude this virtue to their loyal customer base

Last on the list of weird real estate company names is Trulia, which sounds more like someone’s name than it does a company.

In fact, it is (or was) a baby name, albeit a rare one back in the day. It apparently means “truthful” or “trustworthy,” something the company founders wanted to exude.

I’m pretty sure the name was around before the company was, perhaps as a surname and maybe randomly as a first name.

The San Francisco-based company was founded back in 2005, and acquired by Zillow in 2015 for $2.5 billion in stock.

They’re pretty similar to their parent company Zillow, though they’re also big on the rental business and specialize in unique insights about neighborhoods, not just the properties themselves.

(photo: Jack Dorsey)


What Is Lender-Paid Mortgage Insurance? First Of All, You Still Pay For It

Mortgage Q&A: “What is lender-paid mortgage insurance?”

Several years back, a rule went into effect that made mortgage insurance permanent on most FHA loans for the entire life of the loan. Ouch!

Before this game-changer, FHA loans were the cat’s meow because of the low mortgage rates offered, coupled with mortgage insurance premiums that were not only more affordable, but removed once the loan amortized to 78% LTV.

But in an effort to reduce losses, the FHA ended its so-called easy money policies and clamped down on borrowers taking advantage of a program originally intended for the underserved.

As a result, borrowers began giving conventional loans a lot more attention, seeing that private mortgage insurance (PMI) automatically terminates at 78% LTV.

Homeowners with these types of loans can also request PMI removal at 80% LTV (based on original amortization schedule) or even sooner if the home appreciates in value.

And even better, there’s a thing called “lender-paid mortgage insurance” on conventional loans where borrowers don’t have to pay for their own coverage!

That certainly sounds too good to be true, but there is a catch.

Lender-Paid Mortgage Insurance Isn’t Free

lender paid mortgage insurance

  • The phrase “lender-paid” is somewhat deceiving/confusing (it’s not free coverage)
  • Your mortgage lender isn’t doing you a favor out of the goodness of their heart
  • The borrower still pays for this insurance coverage, just not directly out-of-pocket
  • Instead the lender will pay the premium on your behalf, which should increase your mortgage rate

When you see the term lender-paid mortgage insurance, your first impression might be that the mortgage lender pays for it, and you don’t. Hooray!

The reality is that the lender does indeed pay for the mortgage insurance (on your behalf), but so do you, in the form of a higher mortgage rate.

So instead of securing an interest rate of say 3.75% on your 30-year fixed, you agree to a rate of 4% with no mortgage insurance costs paid out-of-pocket.

This is similar to a no cost refinance, where the lender pays all the closing costs, but you wind up with a higher interest rate.

Simply put, while it sounds like you’re getting something for free with lender-paid mortgage insurance, it’s more about how you pay for this coverage.

Lender-Paid vs. Borrower-Paid Mortgage Insurance

Now let’s look at lender-paid (LPMI) vs. borrower-paid mortgage insurance (BPMI) to see how they stack up in the real world.

This is just one example to illustrate the difference, so do your own math with real numbers if and when it comes time to make this important decision.

Loan amount = $100,000
Loan-to-value ratio (LTV) = 90%
Monthly MI premium = $52

Veterans may qualify for a $0 down VA loan

Option A (Borrower-Paid Mortgage Insurance):

30-year fixed @3.75%
Monthly mortgage payment = $463.12 + $52 = $515.12

Option B (Lender-Paid Mortgage Insurance):

30-year fixed @4%
Monthly mortgage payment = $477.42 + $0 = $477.42

As you can see, the option with lender-paid mortgage insurance is actually cheaper in terms of total monthly payment, despite a higher mortgage rate.

This is the beauty of a long mortgage term – you can absorb upfront costs quite easily by paying them monthly instead.

However, the borrower-paid option will eventually become cheaper once the monthly mortgage insurance premium no longer needs to be paid.

But that would only be the case if you keep your home loan long enough to see that benefit.

Tip: How long you plan to keep the mortgage matters a lot when it comes to deciding between LPMI and BPMI.

Advantages of Lender-Paid Mortgage Insurance

  • You don’t pay mortgage insurance directly (no out-of-pocket costs)
  • May equate to a lower total monthly housing payment
  • May qualify for a slightly larger loan amount
  • Higher tax deduction possible if you itemize

One of the biggest advantages of LPMI is that you don’t have to pay mortgage insurance premiums.

As we saw from the example above, this can equate to a lower monthly mortgage payment in some cases, which is generally a good thing.

Of course, if you go with borrower-paid mortgage insurance (BPMI), your monthly mortgage payment will be lower once the mortgage insurance is no longer required.

So LPMI is generally only a money-saver if you don’t plan to stay in your home that long, or if think you may refinance sooner rather than later.

[Homeowners move every six years on average.]

If you elect to go with LPMI, you may also be able to qualify for a larger loan amount (or be able to purchase a more expensive home), seeing that the monthly payment can be lower.

A lower payment means a lower DTI ratio, which means you can get more loan for your income. While it may not be a huge difference, if things are close, the LPMI option could come in handy.

Another pro for LPMI is that there is the potential for a larger tax deduction, seeing that you’re paying a higher interest rate each month.

It’s a bit counterintuitive, but it should still be mentioned – this was especially pertinent before mortgage insurance premiums became tax deductible in 2007.

Tip: For those who earn more than $100,000 annually, the deductibility of mortgage insurance begins to diminish after that point, making the argument for LPMI even stronger.

Disadvantages of Lender-Paid Mortgage Insurance

  • You can’t cancel LPMI since it is built into your mortgage rate
  • Your mortgage rate will be higher as a result (maybe around .25% higher)
  • You will pay more interest to the mortgage lender over the full loan term
  • It’s non-refundable because it is paid for by your lender upfront

The clear disadvantage to LPMI is that it cannot be canceled, ever. Kind of like the mortgage insurance on most FHA loans nowadays.

Because LPMI is built into the interest rate, the “cost” is there forever, or at least until you sell your home or refinance the loan.

You don’t get to call your lender once your LTV hits 80% and ask or a refund or a lower interest rate.

And even if your monthly payment is lower to start, it will eventually be higher than the BPMI option, as we saw in our example.

Additionally, you’re stuck with a higher interest rate for the life of the loan, which means more interest must be paid to the lender.

Using the $100,000 loan amount example, you’re looking at an additional $5,148 in interest paid over the full 30 years. On a larger loan, it’s an even more significant cost to consider.

If you hold your mortgage for the full term, you will likely pay more with the LPMI option, even with the tax deduction factored in. Of course, how many people do that these days?

So that’s that – be sure to compare all mortgage insurance options with your mortgage broker or loan officer to determine what’s best for your personal situation.

Don’t just assume one is better than the other without actually doing the math and laying out a plan.

Read more: FHA loan vs. conventional loan


6 Ways to Snag a Low Mortgage Rate Even If They Suddenly Jump Higher

Over the past year, mortgage rates have been relatively steady near their all-time lows.

This has continued to benefit existing homeowners who wish to refinance their mortgages. And has exacerbated an already too-hot housing market.

But there has been increasing talk of rate increases, with the Fed eyeing a possible taper to its bond buying program.

If they do announce such a plan, it could lead to an interest rate spike, especially if the economy improves and COVID gets under control.

Of course, the jobs report released last Friday was very poor, with blame being tied to the more infectious Delta variant.

In short, reopenings and tourism/hospitality have been struggling once again as more folks stay at home.

However, if and when that does change, you need to be prepared. I’ve compiled a list of ways to keep your mortgage rate down if we do see another taper tantrum and mortgage rate fiasco.

Just Buy It Down by Paying Points

  • Want an even lower mortgage rate than what’s being offered?
  • Simply pay discount points at closing and you’ll get one
  • This is a surefire way to get your hands on a discounted rate
  • It’ll cost you a little more upfront, but your monthly payment will be lower for the life of the loan

One tried and true method to push your mortgage rate lower is to buy down the rate. Simply put, you pay interest upfront in the way of discount points for a lower rate long-term.

Yes, your closing costs will be higher, but your rate will be lower for the duration of your mortgage term.

If 30-year fixed rates rise, you might be able to buy the rate back down below 3%. Just be warned that chasing a certain psychological threshold might not make good financial sense.

For example, it may cost an arm and a leg to get a rate below 3%, but very little to get the rate to 3.125% or 3.25%. And the difference in monthly payment could be negligible.

Lower Your LTV to Improve Pricing

  • Another trick is to come in with a larger down payment on a home purchase
  • Or pay down your mortgage balance a bit before refinancing
  • This could help you avoid some unnecessary pricing adjustments
  • Which means you’ll actually qualify or those low advertised interest rates

Another way you can bring that mortgage rate down is by lowering your loan-to-value ratio. This means either putting more money down on a home purchase or borrowing less for a refinance.

So instead of going with 10% down, maybe see what rates are like with a 20% down payment, assuming you can handle the cash outlay.

Or when refinancing a mortgage, maybe bring money to the table or avoid cash out to keep the interest rate at bay.

A lower LTV equates to fewer pricing adjustments, which means you can qualify for the lowest rates available with a given lender.

Improve Your Credit Before You Apply

  • Work on your credit scores months before applying for a home loan
  • Even simple things like paying down credit cards can help
  • Or simply avoiding new lines of credit in the lead up to your application
  • This will ensure you qualify for the lowest mortgage rates possible

While you’re at it, you might want to see if you can spruce up your credit. A low credit score will increase your mortgage rate, sometimes significantly.

If you’re able to improve your scores before applying for a mortgage, you should qualify for a lower interest rate.

Simple things you can do include paying down credit card balances and avoiding new lines of credit. Also avoiding new charges on your credit cards will help lower your credit utilization.

It might take some time for these moves to reflect in your scores, so take action early. But if you need the changes to apply immediately, ask your loan officer about a rapid rescore.

Go with an ARM Instead of the 30-Year Fixed

  • If fixed mortgage rates are too high check out alternatives
  • It’s OK to look beyond the default 30-year fixed-rate mortgage
  • There are hybrid ARMs that offer a fixed rate for 5-7 years or longer
  • These could be a good alternative if you don’t plan on staying in the property for long

There’s also the ARM option. If you feel fixed mortgage rates have risen too much, you can expand your horizons and look at adjustable-rate mortgages.

There are plenty of hybrid-ARM options that offer a fixed-rate period for five, seven, or even the first 10 years of the mortgage.

Most people move or refinance before that time anyway, so it’s worth at least considering an ARM if you can handle the potentially higher rate once it resets.

You will enjoy lower monthly payments during the initial fixed period and pay down the mortgage faster thanks to a lower rate.

When the rate is close to resetting, you can refinance again, sell the property, pay it off, etc.

Yes, there’s risk here, but it’s one option to at least consider.

Shop Your Mortgage Rate More

  • Here’s a no-brainer that most consumers fail to do
  • Just shop around at more than one bank or lender to improve your rate
  • Many borrowers obtain just one quote, which sounds cliché but is sadly true
  • Put in a little more time and you’ll increase your chances of saving money on your mortgage

If and when mortgage rates move higher, you’ll need to be a lot more picky when it comes to lender selection.

At the moment, you can’t really go wrong (to some extent). But if rates worsen, you better pay a lot more attention to what’s going on and shop accordingly.

Not all lenders react to the market the same way, so the spreads can widen significantly from mortgage company to mortgage company.

Some may have increased rates more than necessary out of an abundance of caution, while others may still be offering aggressive pricing to bring in customers and stay competitive.

It could pay to get a few quotes just to see what’s out there.

Just Wait It Out for Better

  • If mortgage rates aren’t favorable, wait for the trend to become your friend
  • Rates constantly change direction throughout the year as news happens
  • There are often periods of strength and weakness (don’t panic!)
  • Simply timing your application could be enough to get the rate you want

Lastly, you could just pump the brakes and wait for the dust to settle. We humans have a tendency to panic and buy when we should sell, and vice versa.

If the stock market tanks, folks often hit the “sell” button when it could actually be beneficial to buy at a discount.

Similarly, it might be prudent to wait if mortgage rates jump, as they often reverse course once news is digested.

There’s still plenty of uncertainty out there, and uncertain times usually call for volatility, which is often accompanied by lower interest rates.

This isn’t a sure thing, but it’s also not a sure thing that mortgage rates will continue to stay put at their low, low levels.

The good news is you always have options if things take a turn for the worse.

Read more: 21 Things That Can Make Your Mortgage Rate Higher


Should You Drive Until You Qualify for a Mortgage?

In the mortgage/real estate world there’s a saying: “Drive until you qualify.”

It’s a cute way of saying if you can’t afford a home in a certain (desirable) area, hop on the highway and keep driving until home prices get more affordable.

This could mean driving an hour away from where you work, an obvious negative for someone who has to commute five days a week, especially if traffic is a bear.

This was common during the previous housing boom, with home builders often buying up cheap land in the outskirts of towns to construct their massive new tracts.

Because inventory was either non-existent, or simply out of price range, prospective home buyers would opt to buy in far-out places instead.

We’re beginning to see this phenomenon again thanks to dwindling inventory and higher and higher home prices.

It might explain why prospective buyers are beginning to look where they may not have initially looked for a home.

The difference today is that the work office environment has changed, partially due to COVID-19. In short, you might be able to work from home.

Homes Tends to Get Cheaper the Farther You Drive

  • There’s a good chance home prices are out of your budget in desirable areas
  • As such you might want to consider additional areas further outside your target zone
  • While sometimes frowned upon, the suburbs offer lots of advantages and are back en vogue
  • Benefits include more living space, outdoor features, and better schools (good for families)

The housing market is highly competitive at the moment. Anyone who has thought about buying a home knows that.

Today’s market consists of bidding wars, sky-high home prices, and lots of desperate home buyers. And despite some seasonal slowing, relief doesn’t appear near.

If you’ve been looking and it’s just not happening in your target area, you may want to broaden your search.

Not only are homes cheaper outside of city centers, they also tend to be newer, bigger, and sometimes nicer than the properties in the center of town.

Yes, location, location, location is still king in real estate, and always will be.

But while it can be fun to be closer to the action, the tradeoff might be a cheaper home with a lot more features. What’s not to like, other than the drive?

The Outskirts Can Get Hit Harder During a Downturn

One issue with the outskirts, other than the commute, is the potential for a big drop in property values.

It just so happens that new communities in the outskirts got hammered during the housing crisis because they often attracted the same type of buyer.

Someone who couldn’t afford a home in the city at peak prices and thus had to buy in the burbs or beyond, while still stretching their finances to qualify for a mortgage using the builder’s lender.

Before long, many homeowners in these tracts were underwater because they all bought at or near the height of the market, often with zero down financing and an adjustable-rate mortgage.

In other words, the crop of borrowers in these areas tends to be higher-risk compared with the more affluent borrowers living in the city.

So while that home in the exurbs may appear to be a bargain, there’s a reason aside from the location alone; the heightened risk during a downturn.

Major cities are insulated and constantly in demand, even if the economy takes a hit because many jobs are located in city centers.

It’s also more difficult to build new units. The same can’t be said about a random suburb that was only created to increase affordable housing inventory.

One should also factor in transportation costs to determine if it’s more affordable to buy outside of town. We all know gas isn’t cheap, even if it fluctuates in price.

Potential transportation costs (and perhaps opportunity cost while commuting) should factor in to the price you pay for a home.

The good news is electric vehicles are becoming more common as is remote work.

If You Have to Drive to Buy a Home, Should You Just Wait?

  • You might want to reconsider your home purchase if you can’t afford real estate at today’s prices
  • Sometimes it better to wait and get what you really want than settle and still pay a hefty price tag
  • There will always be ebbs and flows and opportunities in the future (prices won’t go up indefinitely)
  • And you won’t want to be stuck with a home in a faraway place you don’t even like

Let’s forget all the number crunching and just consider the climate at the moment.

If you have to drive to someplace you had no intention of living in, do you think it’s the right time to buy a home?

I’m not just referring to the suburbs vs. the city because there are plenty of great reasons to live in the burbs, as mentioned.

I’m referring to places further out than you intended, which were perhaps only brought to your attention by your real estate agent.

Are home prices maybe just a tad too high? Is it more beneficial to pump the brakes and keep renting where you enjoy living and wait for a better opportunity to get in?

As mentioned, home buyers got burned during the previous bust when they purchased homes in the outskirts.

I don’t see why it would be much different this time around, assuming there’s another major downturn.

This is especially if you’re buying out there for the same reason as everyone else, affordability.

It tells me home prices are getting a little too elevated, and many of your new neighbors will be in the same boat.

The silver lining is everyone will probably have a boring old fixed-rate mortgage, as opposed to a risky option arm, which could limit the damage.

But if you and the rest of your neighbors have a 3% down mortgage, it won’t take much for the first domino to fall.


Neat Loans Will Give You a $500 Discount on Your Mortgage If You Got the COVID-19 Vaccine

This appears to be a first – digital mortgage lender Neat Loans will provide applicants with a $500 discount if they’re vaccinated for COVID-19.

The Boulder, Colorado-based company believes they are the first mortgage lender, and indeed financial services company, to offer a discount for getting the COVID-19 vaccine.

At a time when cases are surging again in many parts of the country following a bit of a lull, it appears they’re putting safety first.

Of course, this move will probably come with its share of controversy as well, like all things COVID do.

As to why they’re doing this, Neat Capital CEO Luke Johnson said, “Mortgage lenders need to have important conversations with their clients about the home-buying process and their vaccine status as it relates to employment.”

Adding that responsible companies have required their employees to get vaccinated to keep workplaces safe, and without a job, it’s tough to get a home loan.

Vaccinated Customers Will Receive a $500 Lender Credit from Neat Loans

Specifically, Neat Loans will provide a $500 lender credit to borrowers if they provide proof of COVID-19 vaccination.

Borrowers may use any digital or electronic picture of a vaccine record to satisfy the requirement. So you can probably take a photo of a paper copy and upload it as well.

It doesn’t matter which vaccine manufacturer you went with, such as J&J, Pfizer, or Moderna, or the number of doses received.

This offer is available to both those purchasing a home and those who apply for a mortgage refinance.

However, the mortgage loan application must be received on or after August 13th, 2021, and the promotion can come to an end at any time.

The company will also provide the same $500 credit to unvaccinated applicants who declare they’re unable to be vaccinated due to health or religious reasons.

And if you weren’t able to get the shot due to healthcare accessibility, cost, childcare availability, or transportation costs, Neat will ensure free vaccine access so borrowers can receive this promotional credit.

But you’ll need to submit a loan application with Neat first to have those costs covered.

Lastly, not all customers need to be vaccinated in order to apply with Neat Loans, to ensure equal access among all individuals. So you can still get a mortgage from them, just without the lender credit.

Neat Loans Provides Real-Time Mortgage Underwriting

This bonus credit aside, Neat Loans says you can get pre-approved for a mortgage in just three minutes, and make cash-like offers in just 48 hours once you receive an official approval.

They’ll even back up their so-called “Platinum Certified” approval for up to $50,000 of your earnest money (5% of the purchase price) if the deal falls through due to financing.

Neat claims to provide “real-time underwriting” designed to close loans 3X faster than the industry average.

And you can even earn $100 to upload required documentation in the first 24 hours, which will all be neatly listed for your convenience.

Another perk to Neat is the fact that their mortgage rates are openly displayed on their website, without the need to sign up first to view them.

They also provide handy estimates of required income and assets you’ll need to qualify for certain loan amounts and loan programs.

Their goal is to provide a “mortgage without the mess,” and close loans quicker with more transparency.

Props to them for having the courage to reward those who are taking their own health seriously and protecting their communities in the process.

At the moment, Neat Loans is only licensed to lend in five states, including California, Colorado, Connecticut, Texas, and Washington.

(photo: Marco Verch, CC)


Is the Housing Market Finally Slowing Down? Not So Fast…

It’s a question a lot of prospective home buyers are asking right now. When will the housing market slow down? When will the bidding wars end and prices fall back to earth?

After an unprecedented year of home price gains, which somehow took place during a global pandemic, would-be buyers are looking for a reprieve.

But is it finally here, or is this just another seasonal fakeout?

It Has Been Very Much a Seller’s Market in 2021

home-sale prices

  • The median home-sale price increased 17% year-over-year to a record high $361,973
  • Asking prices of newly listed homes are up 10% from the same time a year ago
  • Half of homes had an accepted offer within the first two weeks of being on the market
  • 52% of homes sold above their list price, up from just 30% a year earlier

First, the bad news, assuming you don’t own yet. Home prices continue to be on a tear, with the median home-sale price rising 17% year-over-year for the week ending August 15th, per Redfin.

That pushed home prices up to an all-time high of $361,973, and was a much more pronounced climb than what we saw in previous years.

Part of that can be attributed to the COVID-inspired home buying frenzy, while the other underlying drivers have been constant for a while now.

There continues to be a supply glut, with too many buyers and not enough homes. Home builders have yet to catch up and don’t appear to be close to doing so.

At the same time, mortgage rates remain at/near record lows, creating even more demand.

When you throw in the need for more space due to stay-at-home orders, you wind up with the perfect storm.

This has made it very much a seller’s market in 2021, just as it has been in years prior. Ultimately, COVID just exacerbated an already dire situation.

Bidding Wars Fading, Home Sellers Slashing Prices?

bidding wars drop

Now the “good news” for potential home buyers, with a major caveat.

Both bidding wars and listing prices have been falling of late, which could signal an end to the overheated housing market.

Redfin noted that just 60.1% of offers written by their own agents faced competition from other buyers in July.

That was down from a revised rate of 66.5% in June and well below the pandemic peak of 74.1% in April.

However, despite July’s bidding-war rate being the lowest since January, it still exceeded the 57.9% bidding war rate seen in July 2020.

So though it appears as if things are moving in the right direction, they may in fact just be seasonal.

Meanwhile, the average share of homes with price cuts surpassed 5% during the four-week period ending August 15th, its highest level since the four-week period ending October 10th, 2019.

Here’s the problem. It’s all just relative to what has been an incredible period for home prices.

In other words, sure, the gains are moderating, but things like sale-to-list ratios are still above year-ago levels.

It really just tells us that home price appreciation is decelerating, not going away.

And to make matters worse, this can all be attributed to seasonal home price patterns.

Seasonal Patterns May Make It Feel Like the End of the Boom, Again

price drops

If you’ve been watching your local housing market, you might be hopeful that we’re returning to a period of normalcy. But don’t get your hopes up.

It’s normal for the housing market to cool off in fall and winter. It’s normal for homes to sit longer on the market as kids get back in school.

Each year, as we approach the end of summer and school gets back in session, the housing market tends to slow down.

This is a typical seasonal pattern that repeats itself each and every year, after the traditionally robust spring home buying season.

In short, April and May are the hottest months, then there’s an expected waning in home buying activity.

It’s usually accompanied by lower asking (and selling) prices, price reductions, fewer bidding wars, and more time on market.

While we are seeing some of that, you still need to keep it in perspective. Home prices and bidding wars are only lower relative to the incredible numbers recorded over the past year.

Imagine Tesla stock trading at only $700 versus its $900 all-time high. Sure, it’s lower than it was, but still up something like 1,500% over the past five years.

With regard to home prices, they’re still achieving new highs. The only thing that might be trending down is the pace of appreciation.

And here’s the worse news – expect the housing market to heat up once again in spring 2022.

Read more: When will the housing market crash?


Jim Cramer Thinks the Super Low Mortgage Rates Are Going Bye Bye

The other day, Jim Cramer was talking mortgage rates, even though he’s a self-described “stock person.”

The backdrop was the better than expected jobs report, which jolted the bond market and sent mortgage rates higher.

In short, more jobs and less unemployment equates to a recovering economy, which ushers in inflation and forces the Fed to act (aka raise rates). Mortgage rates typically follow.

Cramer’s main message to The Street’s Jeff Marks was that banks are probably going to start increasing rates, and if you don’t have a cheap mortgage, you better get one fast.

Cramer Believes You Need to Act Now on Mortgage Rates

If you’re not currently the owner of a super cheap mortgage, you better get going on that. At least, that’s what Jim seems to think.

He told The Street that, “I feel strongly that this is it, the train’s leaving the station on mortgage rates.”

In other words, this ultra-low rate environment we’ve all been enjoying could be wrapping up sooner rather than later. And not returning anytime soon, or ever.

Cramer even went as far as to say that if you don’t have a mortgage at all, but own free-and-clear property, you should take out a mortgage.

What! Take on more debt just for the fun of it, while everyone else is rushing to pay off the mortgage early? More on that in a moment.

With regard to his call that the low mortgage rates are gone forever, I’m not so sure.

As I mentioned in an earlier post, I think there are still a lot of lingering issues both for the economy and COVID.

I don’t expect this fall to be a walk in the park, and thus I expect mortgage rates to stay low longer than expected.

That isn’t to say you should sit and wait for better, but you might have a bit more time than Cramer thinks. But it seems COVID is calling the shots, not inflation.

He Just Took Out a 20-Year Fixed Mortgage on a Property He Owned Free and Clear

Now back to Cramer’s message about taking out a mortgage even if your home is completely paid off.

It might sound crazy, but his logic is pretty sound here – borrowing against your home is very attractive at the moment because interest rates are hovering around record lows.

The man isn’t just telling you to go do it, he actually put his money where his mouth is and took out a new home loan himself.

Apparently, he owned a property free and clear and decided to borrow against it, using a 20-year fixed set at a low 3.25%.

That’s actually not that impressive to be honest, though if it’s an investment property then it’s a slightly different story.

Anyway, his point is that you can lock in a really low interest rate for the next 20 or 30 years and invest your money in the higher-yielding stock market.

He threw out PepsiCo stock as an example, figuring it would beat the 3.25% annual rate of return on his mortgage.

For the record, it’s returned something like 12% annually for the past decade, though the Nasdaq has performed even better.

Regardless, I mostly agree with this philosophy, though I don’t know if I’d go as far as to recommend taking out a new mortgage if you don’t have one.

Simply put, you get to borrow cheap money and invest it for much higher returns in the stock market, hopefully.

You just have to be disciplined and actually do that, as opposed to taking out a mortgage (cash out refinance), thinking you’re rich, and buying a Tesla with the proceeds.

One last funny fact to put a bow on this. It was only four months ago that Cramer paid off his mortgage with bitcoin gains.

So he paid off a mortgage and months later took out a new one.

(photo: Phil Leitch)


Are Mortgage Calculators Accurate? Why Some Totally Miss the Mark

Time for more mortgage Q&A: “Are mortgage calculators accurate?”

Just about anyone looking to buy real estate or apply for a mortgage refinance will rely upon a loan calculator to get a better understanding of what their monthly payment might be.

But not all mortgage calculators are created equal – in fact, some totally miss the mark.

For that reason, it’s important to understand what you’re actually calculating to ensure you get the numbers right. Or at least close to right…

The More Stuff That’s Included, the Better…

Let’s start with the basics. Any mortgage calculator worth its salt should let you calculate principal, interest, taxes, insurance, and even include PMI and HOA dues.

Why?  Because these are all very real costs, and ignoring them means underestimating what you’ll owe each month.

If it simply shows you principal and interest, you’re missing a pretty decent chunk of the payment, assuming your mortgage has impounds (which many do).

Or if you’re buying a condo (and will be subject to HOA dues) or put less than 20% down and didn’t opt for LPMI.

I know that many mortgage calculators often ignore some of these costs, or automatically assume they don’t apply to your situation. This can end up being misleading.

I conducted a little research on Google by looking up the first few mortgage calculators that came up in their search.

Mortgage Calculator Results Definitely May Vary

  • Not all mortgage calculators are created equal
  • In fact, many don’t include very important components of the overall payment
  • Such as homeowners insurance, property taxes, and mortgage insurance
  • These items can potentially double the monthly housing payment in some cases

The first result, which was from a generic mortgage calculator website, asked for a home value, a loan amount, an interest rate, loan term, and start date. It also assumed a 1.25% property tax rate and 0.5% for PMI.

My issue with this calculator is that it assumes the user knows a thing or two about mortgages, which just isn’t the reality.

Many people don’t know the first thing about mortgages, and most certainly don’t know what PMI is. Or if it costs 0.5% of the loan amount.

The PMI thing is a problem because borrowers may not actually have to pay it, so including it by default can throw the numbers off in a hurry.

Strangely, when I changed the PMI value, the monthly payment output from the calculator was the same because this calculator doesn’t actually add it to your payment.

It simply displays the monthly cost of the PMI in the details below the total payment.

My guess is most users probably won’t see that, or take the time to add the two numbers up to see what their true monthly payment might be with PMI included.

Homeowners insurance is also ignored here, which is mandatory for all mortgagors, so the chances of this calculator being accurate are slim to none.

It might give you a decent ballpark, depending on your loan and LTV, but people shouldn’t use calculators to get rough estimates.

Zillow’s Mortgage Calculator Includes Everything


  • Look at the difference in monthly payments once everything is included
  • The image on the left is simply the principal and interest payment (mortgage only)
  • While the image on the right is the full housing payment including insurance, taxes, HOA dues, etc.
  • Make sure the calculator you use provides the complete picture to avoid any surprises

Next up in the search results was Zillow’s mortgage calculator, which included property taxes and homeowners insurance by default. To me this one was already superior because it included the full PITI mortgage payment.

One slight difference was that they calculated property taxes at a rather low 0.75%, as opposed to 1.25%. While it seems like no big deal, it could easily make or break a borrower.

Their homeowners insurance estimate seemed fairly accurate for me, in California, but I know other states, like Texas, have much higher rates. So again, the numbers can get thrown off pretty quickly here as well.

However, their calculator was much more intuitive with regard to PMI. If you entered in a 20% or higher down payment, it simply ignored PMI. If you put anything lower, it calculated it at around a half a percent, but also adjusted it based on loan amount and down payment.

Still, actual numbers can and will vary, so these are just estimates once again. Also, you might not have to pay PMI, even if putting down less than 20%, so it doesn’t always apply.

In the screenshots posted above, the first image is from Zillow’s calculator with only principal and interest accounted for.

The second image to the right shows the same monthly payment with taxes, insurance, PMI, and HOA dues included. Once all costs are factored in the monthly payment is nearly 50% higher.

So yes, it’s very important to consider and calculate all potential costs, and to utilize a calculator that gives you the option to include them all.

The third result, which was a loan calculator from Bankrate, simply provided the principal and interest payment. Really bare bones.

This is fine if you don’t have impounds and pay insurance and property taxes on your own, but otherwise it greatly diminishes what you’ll actually have to pay each month, as illustrated above.

It also ignores the possibility of PMI and HOA dues, both of which could be costly expenditures to ignore.

By the way, none of these calculators are geared toward FHA loans, which come with both upfront and monthly mortgage insurance premiums that will completely change the picture.

So if you’re going with the FHA, use a calculator designed for FHA loans.

Zillow’s Mortgage Calculator Might Underestimate Some Costs


All in all, I felt that Zillow’s calculator was the most thorough in that it included all the costs you might incur as a homeowner, though it did leave plenty of room for error if used incorrectly.

Additionally, I should point out that the estimated mortgage payments you’ll find toward the top of individual listing pages on Zillow (click on the star icon directly below the images) seem to be off when it comes to taxes and insurance, and as such, what you would expect to pay each month as a homeowner.

They always greatly underestimate the cost, and I have no idea why. Well, I can think of one reason.

But if you scroll down to the bottom of the listing page you should see a more accurate number that is pulled directly from the county assessor’s office in the “Price and tax history” section.

Remember, if you’re serious about determining what you can afford, don’t just use a loan calculator, get the actual numbers from the source to see where you stand. Even seemingly minor miscalculations can sink your mortgage.

For the record, many of the lower-end calculators or advertisements you see on TV or elsewhere will typically display the lowest monthly payment possible, typically just principal and interest, whether accurate or not. So take those with a huge grain of salt, or the entire shaker!

The same is true of mortgage solicitations you might receive in the mail, which often display the P&I payment only to entice you.

Redfin’s Mortgage Calculator Is My Favorite

Redfin calculator

  • The Redfin mortgage calculator seems to be a solid choice
  • I found that it provided a more accurate estimate of taxes and insurance
  • And it pulls HOA dues from the property listing page into the calculator automatically
  • But it’s not perfect because they may lowball mortgage rates in some cases

I recently revisited this post and wanted to add the Redfin Mortgage calculator to the mix.

I’ve always felt that Redfin had more up-to-date and accurate property listing information relative to other real estate websites.

They seem to factor in recent home sales more quickly than Zillow, which leads to more accurate estimated home values.

And it appears that their loan calculator is also more on point. For example, I ran one home purchase scenario through both Zillow and Redfin and the results were night and day.

On a hypothetical $999,000 home purchase with a 10% down payment, Redfin came up with a total payment of $6,204 per month, while Zillow had a monthly payment of just $5,511.

That’s a difference of roughly $700. Not small potatoes by any means.

Again, the culprit was property taxes and homeowners insurance, which were both way underestimated by Zillow.

Additionally, Redfin automatically pulled HOA dues from the property listing and inputted them into their calculator.

While still not perfect, largely because they seem to lowball mortgage rates, it still feels like the best option out there at the moment from the big players.

To summarize, make sure the mortgage calculator you use includes everything you expect to pay each month, and bases it on a reasonable mortgage rate estimate.

For the record, I’ve created a variety of mortgage calculators using Excel, and there are also several web-based calculators you can use from the drop-down menu to the left, including an early mortgage payoff calculator.

Read more: How are mortgages calculated (lots of math)?