Your Next Loan Officer is... YOU!

Welcome to The Show! - https://youtu.be/yiVnxNBikFU

The Future of Mortgage Lending

The mortgage industry is experiencing a seismic shift that could fundamentally change how Americans finance their homes. What if I told you that the next best loan officer you'll work with might be staring back at you in the mirror?

Welcome to the new era of mortgage lending, where industry consolidation is creating unexpected opportunities for consumer empowerment, and where the traditional role of the loan officer may become obsolete. This isn't science fiction, it's the reality that's unfolding right before our eyes.

The Great Consolidation: When Giants Merge

The mortgage industry has always been competitive, but recent developments have taken this competition to an entirely new level. In a move that sent shockwaves through the industry, Rocket Companies, already a dominant force in mortgage lending, acquired Redfin, one of the nation's leading e-real estate platforms. But that was just the beginning.

In an even more surprising turn of events, Rocket Companies also acquired Mr. Cooper, the nation's largest mortgage servicing company. This double acquisition has created what industry insiders are calling an "800-pound gorilla" that now controls significant portions of the home buying, lending, and servicing ecosystem.

Think about the implications: one company now has unprecedented control over multiple touchpoints in the homeownership journey. From helping you find a home on Redfin, to securing financing through Rocket Mortgage, to servicing that loan through Mr. Cooper, it's vertical integration like never seen before.

This rapid consolidation isn't happening in isolation. It's part of a broader trend that's reshaping the entire mortgage landscape, leaving smaller players scrambling for relevance and traditional loan officers questioning their future in the industry.

Why Self-Service Lending is the Next Big Thing

As these industry giants consolidate their power, an interesting paradox is emerging. While companies like Rocket are building massive, centralized operations, technology is simultaneously making it easier than ever for consumers to take control of their own lending process.

The rise of self-service lending isn't just about cutting out the middleman. It also builds empowerment, transparency, and efficiency. Here's why I think this trend will continue to gain momentum.

Technology is Leveling the Playing Field

Modern lending platforms have democratized access to the tools and information that were once exclusive to industry professionals. Automated underwriting systems, real-time credit monitoring, and sophisticated loan comparison tools are now available directly to consumers. What once required a loan officer's expertise can now be accessed on your smartphone.

Reduced Friction Benefits Everyone

When you eliminate layers of intermediaries, the cost savings are significant. Traditional loan officers typically earn commissions ranging from 0.5% to 2.75% of the loan amount. On a $400,000 mortgage, that could mean $2,000 to $11,000 in additional costs. By becoming your own loan officer, that equals less overhead and better pricing for the end user.

Speed and Convenience

Self-service lending platforms operate 24/7, without the need to schedule appointments or wait for callbacks. You can research rates, submit applications, and track progress on your own timeline. This is particularly appealing to younger homebuyers who have grown up expecting instant, on-demand service in every aspect of their lives. The portal to research real estate is unlimited and it is time we level up home financing.

Greater Transparency and Control

When you're managing your own loan process, you have complete visibility into every step. No more wondering what's happening behind the scenes or feeling pressured by missing out. You can compare offers from multiple lenders simultaneously and make decisions based on your own research and priorities.

The David vs. Goliath Scenario: You vs. The Giants

This brings us to what might be the ultimate David and Goliath story of our business. On one side, you have conglomerates like Rocket Companies with their billions in revenue, army of employees, and sophisticated technology platforms. On the other side, you have individual consumers armed with nothing more than curiosity and control of the same digital tools. I call it a fair fight but lean that the advantage is to David.

Agility and Personalization

Large corporations, despite their resources, often struggle with bureaucracy and the ability to adapt to the future market. As an individual managing your own loan process, you can pivot quickly, explore creative solutions, and tailor your approach to your specific situation. You're not bound by corporate policies or sales quotas that might not align with your best interests. My clients are more informed and we connect for details on how to make deals work.

Direct Relationships

When you work directly with lenders, you eliminate the telephone game that often occurs when working through intermediaries. I appreciate fresh info right from the source, not tainted limitations. Lenders sell only the solutions and often do not act as fiduciaries. As questions get answered directly and concerns are addressed immediately, and that is a winning combination. May the best lender win!

Market Knowledge

Ironically, in an age of information abundance, motivated consumers often become more knowledgeable about current market conditions than busy loan officers juggling dozens of clients. There is so much information out on the market, it is hard to avoid it. Real estate is your own reality show and you are the star of it. You may as well form the best supporting cast for your creation. You can dedicate focused time to understanding rate trends, program changes, and new opportunities that might benefit your specific situation.

Negotiating Power

When lenders know they're dealing directly with the end consumer—someone who has done their homework and is comparing multiple options it forces their hand to to negotiate on rates and fees. You're not just another lead in a loan officer's pipeline; you're a informed customer making a direct business decision.

What This Means for Traditional Loan Officers

If you're a loan officer reading this, you might be feeling a bit uncomfortable right now and feel hopeless. As the traditional role fades, and new opportunities will form. Between now and then the best way to manage the business is to be the educator to your clients. If you are providing honest, credible advice your title may change but you will never go out of business. Trust in the ingenuity of the free market. The best has yet to come.

The Changing Landscape

The mortgage industry is following the same path as many other sectors that have been disrupted by technology. Just as travel agents were largely replaced by online booking platforms, and stockbrokers gave way to self-directed trading apps, loan officers are facing their own evolution.

It may work to "niche down." Here are a few prospects:

1. Specializing in complex scenarios that still require human expertise. Believe it or not, some mortgages are still handmade.

2. Focusing on education and consulting rather than transaction processing. It is all about being the authority and building your brand.

3. Developing technology skills to work alongside automated systems rather than being replaced by them. The fast lane of creating new tools to give market insight have just begun. Build what you would like to see in the market.

Practical Implications for Consumers: Are You Scared?

If you're excited about the prospect of becoming your own loan officer, that's great, but are you prepared for what it actually entails? Self-service lending isn't just about filling out online forms; it requires developing new skills and taking on responsibilities that were previously handled by professionals. Right now you are probably your own CPA, CFP, so you it makes sense to be your own LO.

Skills You'll Need to Develop

Financial Literacy: You'll need to understand concepts like debt-to-income ratios, loan-to-value ratios, and how different loan programs work. This isn't just about knowing the definitions—you need to understand how these factors affect your specific situation and loan options.

Shopping Skills: With hundreds of lenders and dozens of loan programs available, you'll need to become proficient at comparing offers that may have different rate structures, fees, and terms. This requires attention to detail and the ability to calculate true costs over time.

Organization: Mortgage applications require extensive documentation. You'll need to gather, organize, and submit financial records, employment verification, and other supporting documents without the guidance of a loan officer.

Communication: You'll be responsible for maintaining your own lending narrative It's your closing and your earnest money on the line. It's a lot to ask, but you have the goods!

Conclusion: Your Next Loan Officer is in the Mirror

The mortgage industry is at an inflection point. Massive consolidation is creating powerful corporate giants, but the same technological forces enabling this consolidation are also empowering individual consumers to take control of their own lending process.

The future belongs to those who are prepared to adapt. Whether you're a consumer looking to save money and gain control over your mortgage process, or an loan professional seeking to remain relevant in a changing landscape, the future guarantees a different business.

Build a Home with a Construction Loan in 5 Steps.

Construction loans are very useful, however, not every lender or loan officer can help you with these requests.

Considering constructing your dream home from scratch? The construction loan process might appear daunting, but today, I’ll simplify it into 5 straightforward steps, so you’ll know what to anticipate and how to proceed confidently.

Step 1: Find a Construction Lender and Get a Lending Commitment

To begin with, there's never just one method to accomplish something. However, if you're new to building a home and your project depends on a construction loan, it's essential to find a lending partner first. Secure this aspect before consulting builders, architects, or designers. Understanding your borrowing capacity and the type of construction loan that suits you is crucial.

Understand that not all lenders provide construction loans. Many banks or mortgage brokers are unable to offer these loans because they either lack the product or choose not to offer it. Construction loans require more time than most loan officers can allocate and are too complex for most lenders to handle.

A construction loan is generally a hybrid loan, consisting of a single loan divided into two phases: a temporary loan that transitions into permanent financing. Within this structure, there are various nuances regarding when borrowing actually starts. The first phase, the temporary portion, is divided into stages. For instance, the first disbursement might occur after the foundation is completed, the second after the framing, the third following the installation of mechanicals, then the exterior and interior, followed by the trim, and so forth. It's crucial to understand that the bank will not provide all the funds upfront; they will release the loan funds based on the work completed or materials installed. This highlights the importance of having a draw schedule, along with a budget and cost breakdown.

Leverage a single close construction loan to simplify your project. While construction loans don't have to be a single loan, they can follow a similar format but may require two closings: one for the temporary loan and another for the permanent loan. This setup can sometimes have benefits, but consider that you are qualifying for two loans that could be separated from a year or more apart. Two loans means double the paperwork, double the closing costs, double the appraisal evaluations, and double the hassle. Although this might work in some situations, for most people, it is inconvenient.

As the funds are distributed gradually, the loan balance grows throughout the construction period. Consequently, anticipate interest-only payments during the temporary stage, as the balance will rise the following month, resulting in a higher bill. Regardless of the term you choose, the payments exclude any principal. Principal payments are postponed until the permanent stage.

If this all makes sense, once the temporary phase ends, the loan functions like a standard mortgage where you repay the debt. Aim for a credit score of 680 or higher to qualify for maximum financing and secure the lowest rates. Construction loans are considered riskier, so anticipate higher market rates compared to a traditional mortgage.

Similarly, lenders prefer to see a 2-year history of income and the capability to document it. Additionally, since your dream home won't be finished for another year, you'll need a temporary place to live. If this involves a mortgage, you might have to qualify for two homes simultaneously, which can be challenging at this point.

Similar to any other loan, having sufficient reserves can assist you in finalizing the deal or staying adaptable in the event of cost overruns during the construction, which is a frequent occurrence.

Step 2: Finalize Plans & Pick Your Builder

Next, following the approach of contacting the lender first, you will need a set of plans and specifications. Some companies provide a design and build service, acting as a one-stop shop where you can complete all your architecture, design, and engineering needs in the same place as the construction. Some builders may not offer specialty services but are happy to provide recommendations, including for a lender. Before you can finalize your loan, there will be a builder's checklist that includes all the design elements of the project and a description of the materials you will use. Your lender is not funding a dream—they're funding a detailed project.

In addition to the budget, the lender will need a detailed cost breakdown that lists all project expenses item by item. Allowances are acceptable, but lenders prefer not to have estimates for any part of the construction. They want to ensure that the figures in your cost breakdown align with those in the contract to determine the capital required for closing and the appraisal value of the home.

I've noticed many requests in the past year for "owner-builder" construction loans, which can be accommodated by some lenders. However, this is often not a viable option. Lenders prefer that you are licensed and experienced, and if you are applying as an owner-builder, they have additional income stipulations, deposit requirements, or consider it an exception to their credit policy.

Reputation is important in all things. Ask for past projects, references, and timeline adherence because your investment is at stake. The builder's reputation is crucial, including their relationship with suppliers, and ability to balance a number of contracts the same time.

Below is a list of essential builder documents you should have ready for your lender.

• Fully Executed Contract, signed by builder and owner

• Detailed Cost Breakdown for a total project cost that matches the contract

• Copies of the complete plans & specifications

• Description of materials

• Copies of invoices and proof of payment for any soft-costs

Step 3: Close the Loan

After receiving all necessary builder needs, you can submit them to your lender for approval and proceed with the appraisal. Depending on the amount of your loan request, the lender might require one or two appraisals. The value of the construction is determined by comparing it to similar homes in the current market, not based on future value.

The appraiser must evaluate your home by comparing its design and materials to similar homes that have recently sold and closed. The appraisal should include several comparable homes to determine the market value. Expect to see at least one with larger square footage, and one with smaller square footage and home of higher and lower value. This method of comparable selection is known in the industry as bracketing. Similar to traditional mortgages, lenders will base their loan on the lower amount between the construction costs and the appraised value. However, this can vary depending on the equity you have in the land and when you purchased the property.

The loan closing feels like any other mortgage loan, except that you might already own the property. At signing, your builder might request a draw if they haven't received a deposit or if they need an advance for custom materials or to prepay for specific window packages.

If you have a draw at closing, it means you will make your first interest-only payment a month later. If there is no draw, you might not have a payment until the first inspection is completed after the funding of the initial draw.

Step 4: Build the Home & Draw Process

Construction begins — but the money isn’t handed over all at once. It’s released in draws that are progress based.

Funding is organized according to stages, such as the foundation, framing, mechanicals, drywall, exterior, then the cabinets and finishes. Usually, the lender does not conduct the inspections; these can be carried out by the title company or the appraiser. Before the builder receives funds, the property must pass inspection. Lien waivers are collected, the title is updated, the builder is paid, and this process is repeated with each stage.

Sounds simple, so why are they deemed high risk? One major reason is the cost of building a home. Since the pandemic, most builders have opted to work on a cost-plus basis, meaning the builder charges the actual cost plus a margin. This means that if costs rise, your budget will increase, potentially requiring additional capital from you, not the lender. If you lack the funds, the project might stall. It's common for change orders to be requested during the process, which can increase costs or force you to reduce another part of your budget. During the pandemic, extensive material backorders and significant cost increases resulted in many homes not being completed on time, which added to or increased costs, compelling owners to make difficult decisions.

As with any business arrangement, effective communication between the lender, builder, and title company is essential. While lenders and builders have more specialized roles, title companies are indispensable partners due to their expertise. They are managing the project every step of the way, relaying updates from the builder to the lender, coordinating the payments, and keeping clean title. They ensure the project progresses smoothly and help prevent delays. Do not overlook the importance of these duties to your project.

Step 5: Convert to a Permanent Mortgage

Finally, all the dust settled, it's time to move in and turn that temporary loan over to your forever mortgage.

If your lender provides a single close construction option, it is ideal because it requires no additional action. Your loan will seamlessly transition from interest-only to principal and interest payments. In this scenario, there is no need to requalify or appraise the property because the draws are completed. The original note is modified and recorded with the county. However, if you have a two-time close, you will need to refinance the remaining balance of the temporary loan into a permanent loan. This step carries significant risk, as interest rates may have risen since the temporary loan began. Home values should be equal, or higher, but a lot of change can happen in a year.

If the completion and delivery of the home is delayed or postponed, that will make scheduling the second loan more challenging. This adds to the complexity of the double close. Securing a rate with either the same or a new lender can be difficult. Or if the updated appraisal results in a lower value than at the beginning, you might need additional funds. If there were cost overruns that demanded more money than initially planned, this situation could become problematic.

Lastly, another reason I favor the single close is that the ending balance is converted for principal and interest payments. If you included a contingency in the budget and didn't need the extra funds, or if you stayed under budget, the final balance would convert to the permanent loan amount. Likewise, the principal and interest payment will adjust to the final loan amount. Similarly, if you self-funded the last draw or sold your home and have capital to roll over, you can reduce the balance of the permanent loan during the conversion phase.

Building your dream home doesn’t have to be intimidating — especially if you break it into steps. If you’re thinking about building or have questions about getting started, let’s talk!

The Root Cause of the Housing Affordability Crisis

2025 Housing Market: Battle of the Haves and the Have Nots

When did housing morph from American Dream to American Luxury? The fundamental need for housing, whether renting or owning, has become unaffordable. This issue has spread across the country; high housing costs are no longer confined to places like Los Angeles or New York City. The term, affordable housing, is an oxymoron. Perhaps it’s better to define it by what it is not, unaffordable.

From a loan originators perspective, we quantify an affordable housing through two figures, 28 & 36 percent, known in the business as front-end and back-end ratios. These numbers signify max allowances for your monthly housing and total debt respective to your gross monthly earnings. Studies show that these ratios provide long term success in the repayment of the loan. Keeping your budget within those limitations is a greater challenge today. Higher debt service ratios are the number one reason for a mortgage decline today.

However, the U.S. Department of Housing and Urban Development defines “affordable housing” as a household where the occupant is paying no more than 30% of the gross income on housing, including utilities. It's a comparable number to the front-end ratio of DTI but in a rent equivalent. By limiting the housing expense to 30% it allows the occupant the ability to afford other expenses, food, transportation, and live to spend another day. If you are spending more than 30% your income on housing, you could be tipping the scales of affordability.

The problem with the HUD definition is that all real estate is local. Housing costs vary by geography and where you lives dictate your earning potential. Therefore, the definition what makes housing affordable has a lot of grey area. Limiting 30% of your top line income to housing could be too lofty of a goal. That budget may require roommates, and a few of them. While some may want to give up hope, others want to understand the root cause of the affordability crisis. Clearly, it's easy to shake a finger at it, but today, but this blog looks to put a finger on it. Here are five fundamentals of the housing affordability crisis and how to nip it in the bud!

SUPPLY

Last week the Case-Shiller 20-City Home Price Index rose 4.5% year-over-year. That figure was below expectation, indicating slightly cooler prices. Limited housing stock continues to support price growth as home prices remain elevated across the US. The frenzy of the pandemic has passed, but home prices remain high not because of higher demand but because of limited supply. Resale inventory rests under 4 months supply while new home inventory is about 9 months. Home building is still extremely profitable, just not as profitable during the pandemic. Home builders are still moving inventory through interest rate buydowns and other incentives that have limited the inventory to 500,000 units which is flat over the last six months. Even with a surge in new-home construction, many economists declare the U.S. housing market is at a deficit of 4 million homes. Short supply is one of the biggest challenges impacting affordability. Resale inventory is rising back pre-pandemic levels but with nearly half of all mortgages outstanding are locked in at rates below 3.5%, many of those potential sellers could not qualify to make a lateral move, even if they wanted.

The number of new homes built plummeted since the great financial crisis, the aftermath of Dodd-Frank, and the imposed limitations on the financial sector. The mortgage industry is more concentrated, and the home loan programs are limited, reducing opportunity for creative financing. Further, zoning and land-use regulations have also increased steadily since the mid-20th century. Additionally, the “Not In My Back Yard” cohort is complicating the process for increasing the housing supply.

So, if there is low supply, let's just increase the supply. Make builders build more homes, and problem solved. Last year home completions reached the highest levels in nearly two decades, finally surpassing the rate of new household formations for the first time since 2016. Housing is still feeling the impacts of the great recession when home building was limited for years. Production costs have increased for builders, likewise, forcing construction of new communities into chunk pricing models. This means less detached homes and more townhomes and properties with attached walls to control costs. If the deficit of 4 million homes is true, this is a problem that could take decades.

PRICES

I was told trees don’t grow to the sky. Do home prices?

The high prices of homes today is a widely acknowledged factor. Over the past 50 years, home prices have risen significantly, so it's reasonable to expect this trend to continue, right? Like any asset, home prices are influenced by economic conditions that can either depress or boost their value. The 2020s are set to experience the most substantial increase in home prices seen in five decades. In the 1970s, home prices rose by 43%, which pales in comparison to the 1980s when growth remained under 10%. Still higher prices persisted through the 1990s and peaked during the Great Financial Crisis, following the largest decline in home prices since the Great Depression. Even in the strongest housing markets, prices dropped by low double digits. In some of the hardest-hit areas, such as Phoenix, home prices fell by nearly 50%.

Since 2020, home prices in Phoenix have risen by over 50%, making it challenging to determine is 2025 will be anything other than a seller’s market. Buying a home is a choice, and if the financials don't add up, renting is always an alternative. Purchasing at current market prices isn't affordable when you combine the prices with interest rates between 6 to 7 percent. From the sellers' perspective, considering all those 3.5% fixed-rate mortgages, can you blame them? Approximately 40% of homes in the USA are mortgage-free, creating less urgency to sell. Increasing your income by 10% per year is very difficult, yet unfortunately, that is the pace of home price increases in many markets.

In 1964 the average home price was $18,925, while the median income stood at $6,569. From the mid 60’s to 2022, home prices increased at twice the rate of wages, according to U.S. Census data. Escalating home prices are keeping rentals from being the affordable alternative. By renting for less than it costs to own, one can hopefully save the difference, thus increasing the potential down payment when an opportunity arises.

Justifying the current cost of housing, modern homes are significantly more advanced than those from 75 years ago. Features such as plumbing, central air conditioning, LED lighting, and construction materials are more expensive than in the past. These amenities are present in 90% of homes, and Americans are willing to pay more for them. They offer a higher quality of life and more property making it more attractive than urban living. In the 1950s, 64% of Americans lived in urban areas, whereas today, that figure exceeds 80%.

INCOME

The main issue with the wait-and-rent strategy is the expense of renting. Even though nominal incomes have increased, living costs can consume 50% or more of a household’s income. This is largely due to expenses beyond housing. Healthcare, education, and a consumer culture that values convenience and immediacy over savings, thus, put more pressure on wages.

The positive aspect is that income has increased, but the downside is that it hasn't risen sufficiently. According to the same 2022 Census study, the median household income reached $74,580, which is over ten times higher than in 1964. However, home prices have grown to $432,950, which is 20 times the 1964 amounts.

Income to home prices in 1964 = 34%

Income to home prices in 2020 - 17%.

The Area Median Income (AMI) represents the median point in the income distribution of a particular area and is determined annually by the Department of Housing and Urban Development (HUD). This means that half of the area's earners have incomes below this number, while the other half have incomes above it. The AMI varies by region and serves as a barometer for determining eligibility for affordable housing. Housing prices are not the lone culprit, taxes, insurance costs, and maintenance has also risen dramatically in the past 5 years.

What income level is necessary to buy in this market? According to the New York Post, the median home price for April 2025 is $431,250. To qualify, an annual income of $114,000 is needed, assuming a 20% down payment and a 30% front-end ratio. If you can't raise your down payment or lower your purchase price, you'll need to boost your income.

Look closer and a stark divergence of income to home price began in 2000. From 2000 to 2008, housing prices rose by 4.2 percent each year, and from 2008 to 2023, they increased by 4.4 percent annually. Meanwhile, median family income grew at a much slower pace: 2.5 percent annually from 2000 to 2008, and 3.4 percent from 2008 to 2023.

Divergence in the Force: Housing prices started to separate from incomes in the early 2000s.

INTEREST RATES

High Times: Boomers are quick to remind everyone that when they purchased their first home mortgage rates were double digits.

Last year the 30-year fixed rate averaged 6.72%. Boomers are happy to remind everyone that when they purchased their first home in 1982 rates were 14%. Millennials will tell you that anything over 5% is highway robbery. Both viewpoints have merit but it’s important to consider “normal” interest rates before the 1970s. Back to the Great Depression, rates averaged between 4-6% with some periods going below 3%. The average annual mortgage rate over the past 95 years is 6.71%.

Considering historical data, it is reasonable to conclude that today's interest rates are fairly priced. In recent years, mortgage rates breached 8% but only for a very short period. What are the odds that rates will increase further, given that inflation poses a significant threat? Certainly, that is a possibility, but consider the following:

In the short term, market volatility has spiked due to the Trump administrations tariffs. The uncertainty for future prices of goods may impact company earnings and profitability. The longer the volatility remains, increases the flows into bonds. The shakeup should create an opportunity for lower interest rates, especially mortgages. In the near term, consider the Fed's short term monitory policy. If you have watched the Fed pressors, chairman Powell has reiterated the commitment to the 2% target rate. 2% represents the ideal inflation rate. Inflation has cooled tremendously over the past 4 years due to the increase in interest rates, quantitative tightening, resulting in demand destruction. Simply put its harder to afford a home post pandemic than pre-pandemic, partly due to the interest expense on a mortgage. It’s going to take time, but the Fed is steadfast on restoring the 2% target rate.

Longer term, consider the demographics of the aging population. Through the next few years, the US will have 11,000 people per day retire. That is a tremendous amount of people that are leaving the workforce and reducing consumption - buying less homes, automobiles, in general, less everything! Further, the onset of Artificial Intelligence is set to disrupt the economy in a major way. It will reduce the prices of goods and services and increase productivity. Like tariffs, it is hard to estimate the impact of A.I. and what it means to jobs and economic output. When you combine all of these factors, rising interest rates may be the least of your worries.

INFLATION

Inflation isn't inherently negative. In fact, some inflation is beneficial, indicating that people are spending and the economy is expanding. This is desirable, as deflation poses a greater threat, a contracting economy. Inflation refers to the rate at which the prices of goods and services rise over time. It can impact nearly any product or service, including essential costs like housing. The risk with inflation is that once it starts, it can spread throughout the economy, fueling expectations of continued inflation and becoming a major concern for consumers and businesses.

Inflation can arise from several sources, such as rising production costs linked to raw materials, a tight labor market, or disruptions like the pandemic. Add in higher demand, government spending, tax reductions, and lower interest rates there is more inflation. It is the responsibility of the Federal Reserve to keep inflation at bay. However, inflation can accelerate quickly, and when it does it can impact essential goods with higher prices. Additionally, inflation diminishes consumer purchasing power, reduces the value of currency, and can hinder saving returns.

The primary risk of inflation is that it acts as a lagging indicator. Price increases are only noticeable after the economic activities recorded. Just like the saying "where there's smoke, there's fire," economic activity is the initial sign, while inflation comes afterward, indicating the outcome of spending. This delayed characteristic of inflation is essential for comprehending its behavior and function in our economy.

Houses are regarded as asset goods, which means that during inflation, house prices typically rise at the same rate as inflation. This can become a self-fulfilling prophecy, as the increase in home prices during times of high inflation makes them more costly to finance. Higher inflation leads to an increase in interest rates, which in turn raises the cost and price of financing a home more than yesterday. This situation worsens the imbalance between housing demand and supply.

PURCHASING POWER

There may not be a single reason why homes are unaffordable; it's likely a combination of all the factors mentioned, known as purchasing power. Are home prices really the issue when the real problem is that your dollar loses value over time? Purchasing power is influenced by inflation or deflation, earnings or wages, interest rates, and some other factors. Purchasing power is determined by the amount of goods or services a unit of money can buy, usually in a round number like $100. Similarly, inflation can lead to the dollar's devaluation. In a consumer-driven economy, saved money becomes less valuable over time. For instance, if you save $1,000 at 2% per year, it grows to $1,020. However, if an item's price rises from $1,000 to $1,050 in a year, you've effectively lost $30 in purchasing power. That item costs more. Conversely, if home prices decrease, your purchasing power increases, allowing you to buy more house for the same amount of money, provided you have the same income.

While maintaining purchasing power is mostly beyond your control, there are some strategies to enhance it. You can earn more money, allowing you to afford more, or relocate to a region with a lower cost of living. During the pandemic, many people leveraged remote work to enhance their purchasing power. Workers from California moved their incomes to areas where they could afford larger homes or similar homes for significantly less money.

Interest rates have a comparable impact. When interest rates rise, borrowing becomes more expensive, which reduces the potential loan amount. On the other hand, if borrowing costs decrease, you can afford a larger loan, potentially leading to higher home prices. During the pandemic, interest rates remained significantly below long-term averages, creating conditions for the lock-in effect.

The notion of affordable housing is a misnomer. It was an issue even before the pandemic, but recent discussions have highlighted it is worsening. Achieving affordable housing requires two things, time, and good financials choices. Factors like home supply, prices, income, and interest rates are mostly beyond your control. Additionally, purchasing power diminishes the longevity of your savings and earnings. History shows that high inflation periods eventually end, offering opportunities for home ownership. Hopefully, by that time your income will have increased enough to catch up to home prices. If waiting isn't an option, consider finding a new job or starting a side business to boost your income. Alternatively, relocating to another state or region with a lower cost of living might offer a boost to your home ownership opportunities.

Housing, it is not a pretty sight right now. Personally, I would not want to be a buyer or seller in this market. Funny, housing has always appeared out of reach since 2001 when I got my start in the business. Your housing alarm clock may need to hit the snooze button but never give up hope. Housing needs you in the worst affordable way.

Is Now the Time to Use a HELOC?

With first lien mortgage rates fluctuating between six and seven percent, many have seen the potential in second mortgages, primarily through home equity loans or lines of credit. Whether referred to as a loan or a line, both offer a way to tap into equity without affecting the ultra-low rate of your first mortgage. The industry has called this the "lock-in effect"

https://www.experian.com/blogs/ask-experian/what-is-lock-in-effect/

Despite the higher rates, homeowners continue to borrow using any available means. Recently, Home Equity Lines of Credit [HELOCs] balances have risen by 10% year over year and 25% since 2022. Although this surge in popularity has raised some concerns, it's important to remember that these instruments are still near historic lows since the GFC. Mortgage Jinn examines the five W's of the HELOC to educate you on this traditional yet modern technique.

WHAT is a HELOC?

One way to view a Home Equity Line of Credit is as a large credit card that uses your home as collateral. A credit card is an unsecured debt, with limits primarily determined by your income and credit history. HELOCs operate under similar principles, but their limits depend on the amount of home equity you possess, which is based on your home's current market value and the balance of your first mortgage. Like a credit card, a payment is required when there is a balance. If there is no balance, there is no payment, and therefore no interest expense.

• In contrast to a conventional mortgage, the funds can be accessed as needed from the balance and repaid at any time. The scheduled payment reflects the balance; if the balance is reduced by half, the payment typically decreases by half as well. The interest expense is determined based on the daily balance, summed over the billing period.

• Funds are frequently allocated for home improvement projects but can also be utilized for debt consolidation, educational expenses, or emergencies. Because the money is secured by the home, it typically offers a lower interest rate well below rates from a credit card.

• HELOCs generally have variable rates that are indexed to the prime rate. Home Equity Loan rates are often fixed and based on a term ranging from 5 to 30 years. Similar to first mortgages, longer terms typically result in higher rates. The typical margin on average, it is about 1% over the prime rate. Any margin at prime or below prime is an excellent deal.

• The interest expense might be tax-deductible, unlike most unsecured debt. However, it probably needs to be invested in enhancing the home's value, with proper documentation. Depending on the balance of the first mortgage, it could eliminate or reduce the deductibility entirely, so consult a CPA.

WHO needs a HELOC?

As the name suggests, Home Equity requires homeownership. You can leverage a primary, secondary, or investment property, but it must be residential real estate. Additionally, similar to most loans originated after financial reform, borrowers seeking a HELOC must demonstrate their ability to repay. Unlike qualifying for a first deed of trust, you must qualify based on a payment calculated at a higher rate and a full draw of the line.

For instance, your line's effective rate might be 9%, with a requested limit of $100,000. The lender could qualify you at 1% to 1.5% of the requested limit, which translates to $1,100 to $1,500, and not the actual statement bill of $900. Additionally, certain credit minimums for scores and payment history will apply. Higher credit scores result in a lower margin relative to the index. Credit tiering can affect the line's size or the Loan to Value Max. Last, expect most HELOCs limitations to 80% of the total collateral, but lenders with a higher appetite may extend up to 95% of the home's value.

HELOCS like to use the Prime Rate as the Index, plus or minus a margin

WHERE to find a HELOC?

That's a great question with a challenging answer. Not all lenders are interested in these types of loans. Wells Fargo Bank, once a popular lender, removed this product from their offerings during Covid with no immediate plans to reinstate. Other major banks may offer them, but restricts the line size or reserve for existing banking customers. Credit Unions could be a good partner, offering several ways to customize them. Mortgage Brokers might have limited capacity for these loans or may charge an hefty fee. Generally, larger banks or credit unions offer the best terms, lower costs, and flexibility regarding property type.

WHEN to get a HELOC?

The ideal time to establish a credit line is when you don't actually need one. If your income is increasing, you have substantial equity, high FICO scores, and no immediate need for funds, secure a HELOC as soon as possible! Banks prefer lending to individuals who aren't in need of money, often providing competitive terms. To enhance many offers, banks frequently give a 0.25% discount to those who set up automatic payments from the originating bank. Similar to a mortgage, your income, assets, and property will be assessed, which requires time. Anticipate at least a 30-day processing period as your chosen lender will need to conduct a title search, verify your employment, and update your insurance.

WHY use a HELOC?

There are numerous benefits in this market that make HELOCs the preferred option. First, they have a lower acquisition cost compared to a traditional mortgage. Additionally, they enable you to leverage your home equity while maintaining the terms of your first mortgage. Furthermore, many HELOCs offer interest-only terms, allowing you to manage expenses with lower carrying costs. However, they typically have a higher cost of funds than the current rate on a30-year fixed mortgage. It's also important to consider them as a 1-month A.R.M.., as the prime rate aligns with the Federal Reserve's short-term policy, leaving you exposed to any increases. These instruments are ideal for short-term expenses that can be paid off in less than a few years. The standard term includes a 10-year draw period followed by a term loan up to 30 years with principal and interest payments. Some lenders offer the flexibility to fix the rate or convert it to a loan before the initial term ends. While there is no prepay penalty, lenders might impose an early termination fee if you close within three years of opening.

Until mortgage rates drop significantly - below 5%, expect balances and use of a HELOC to increase over time. According to recent "Fed-Speak," short-term interest rates are expected to improve throughout 2025, directly reducing the cost of borrowing on a HELOC. It's important to note that unless the HELOC was obtained as a purchase money mortgage on the home's acquisition date, combining it later with a first lien mortgage is still regarded as a "cash-out" refinance. This approach might result in refinancing two loans into one at a slightly higher rate than advertised. It may not be a concern for now, but eventually, your loan officer will hit your with a "?", WHEN did you acquire your HELOC?

Stay Thrifty,

-Matthew