I did a thing!
I decided to get my mortgage license and just this past week I took the exam and I passed!
Next thing I need to do is find a brokerage to work with and put my new license to good use.
But I didn't just want to skim over getting my license and not share some of the things I learned while studying for my exam.
There was a lot of valuable information but today I want to share how mortgages are much more than just interest rates and cut and dry math. In fact, mortgage agents can, and should be a little creative when looking at the various mortgage options available to you!
What you probably think about mortgage agents
I'm going to go out on a limb and take a guess that you think mortgage agents simply follow a formula that determines whether you qualify for a mortgage or not, and if you do, how much you qualify for.
And while that is partially true - of course there are some standard calculations and ratios that are used to determine if you will qualify - there's actually one really important piece that isn't talked about very much!
So what's THE thing?!
Well, the thing is, a good mortgage agent needs to be creative!
Yes, you heard that right.
Now I don't mean they need to be into the arts.
But they need to understand how all the various terms of a mortgage work together.
And they need to understand how to work with the terms available to them (NOT just the interest rates!), to satisfy their clients needs AND their risk tolerance.
Wait, what does this all mean?
Okay. Let's go back to basics.
What are the terms of a mortgage anyway?
Terms are things like: Interest Rate, Length of loan (term), Amortization, Payment Frequency, Prepayment penalty and Down payment
Mortgage brokers have access to many different lenders, and every lender has their own mortgage products all with terms that vary from one to the other.
While most people think of interest rate as the most important term, it really shouldn't be prioritized more than the other terms. Because it's how the terms work together that ultimately determines how much your mortgage payments will be!
So where does the creativity come in?
Bare with me.
If interest rate should be considered alongside the other mortgage terms, it's how a mortgage agent chooses the right combination of terms to satisfy your needs, meet your risk tolerance and meet the lender's requirements that makes what they do creative.
Without creativity, an uneducated mortgage agent may reject your mortgage application.
But a creative mortgage agent will be able to show you why it might make more sense to go with a higher interest rate amongst other terms, to help you qualify for your mortgage.
Let's look at an example
A couple is looking to obtain a mortgage on a $600,000 home. Their mortgage agent has determined that the most they can afford to pay toward their mortgage is $2,700 per month.
Let's make some assumptions about the other terms of their mortgage:
They have 20% down payment which means they will require a $480,000 mortgage
They will amortize the mortgage over 25 years
And, they will be making monthly payments
Interest rate seems to be the term that most people focus on, so let's look at the impact changing the interest rate only has on their mortgage.
Mortgage 1 5.25% interest rate
Monthly payment $2,860
Mortgage 2
4.15% interest rate
Monthly payment $2,564
From this example, we can see that a 1.10% interest rate difference on a $480,000 mortgage where all other terms are the same, results in a $306/month difference in monthly payments.
And assuming there was a lender that offered a 4.15% interest rate, then our couple should be happy because their payment would be under $2,700/month.
But what if the lowest interest rate available to them is 5.25%? Does this mean they are out of luck?
No. Not necessarily.
What can our mortgage agent do to help bring down their monthly payment?
Option 1: See if the couple has more money to put toward their down payment
Assuming they are able to put down another $30,000, their monthly payment would come down to $2,682/month. This could be a viable option then!
But maybe our couple doesn't have an extra $30,000.
What other term can we adjust that will help to lower the payment?
Option 2: Adjust the amortization from 25 to 30 years on the original $480,000 mortgage
The new payment with a 30 year amortization becomes $2,634/month - another viable option to meet the $2,700/month payment requirement.
Neat eh?
Mortgage calculations aren't as cut and dry as maybe you initially thought!
In Summary
In summary, a knowledgeable and creative mortgage agent understands the various mortgage products available, the impact of changing one term on the rest of the terms, and how to play around with various term combinations to find the best solution for you.
So, when looking for a mortgage, don't just focus on interest rates – find a creative mortgage agent who can help you navigate the complex world of mortgages.
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