Beyond the usual and most basic mortgage calculators, let’s explore some scenarios where having the right mortgage calculators can help you and your home buyers shine and rise above the average mortgage loan officer level of service. Some mortgage calculators exist to handle each, and we’ll get to where you can find them a little later in this article.
First-time buyers with a lower than ideal credit score may be more concerned with getting “a loan” vs. even thinking about what the right loan for them may be. Trade-up buyers have already been around the block. They will be more knowledgeable, yet that may extend only to wanting to avoid PMI with a larger down payment or perhaps utilizing a term shorter than the typical 30 years.
In either case, there’s so much more that borrowers should consider before making a final selection as to the “right type” of loan for them and their specific personal and financial goals.
In the case of first-time buyers, it’s likely they’ll not even be in the home, much less so the same loan, after 5-7 years. Thus, why pay a premium for a plain vanilla 30-year fixed-rate loan when one locked in for 7 years may give them all the security they wish for? Especially while the lower interest rate provides them nice savings to boot?
As an even greater hedge against any “but what if we do stay longer” concerns, taking the savings from a blended ARM loan and applying it as either a pre-payment against principal or putting that money away in a dedicated savings account can mitigate any payment increase that could potentially occur when the loan converts to a true adjustable-rate mortgage.
This way, the borrowers either have a lower principal balance and hence a lower payment when the loan does adjust or have a dedicated reserve account to draw from to cover the potentially higher payment.
In all likelihood, though, first-time buyers will have refinanced or sold and moved before that happens. If they started out with a smaller down payment, paying down principal would also help them reach a point where refinancing to eliminate any mortgage insurance premiums could occur sooner. Refinancing will not only enhance their savings, but it also starts that 5- or 7-year blended ARM loan clock all over again.
For trade-up buyers or those who already did and are refinancing, they may think a 20- or 15-year loan is the ultimate goal. After all, many buyers really love the idea of owning their home free and clear before they actually retire. But financially speaking, that’s rarely the ideal goal that it seems to be.
Many homeowners make the mistake of obligating themselves for a higher payment when the extra could be voluntary instead. What is meant by that? Simply that you can take a 30-year loan and choose every month to add enough to the payment to amortize or pay off the loan in full in 15 years (or any number of years, for that matter).
This approach makes so much more sense for many. Why? Here are a few reasons:
First, it’s a hedge against a loss of income. If borrowers qualified for a 15-year loan only because there were two incomes in the family, and one is lost or suspended, handling that payment on one salary can be a real hardship and lead to losing one’s home. There is a myriad of reasons for income curtailment ranging from job loss to childbirth or the need to take time to care for a sick loved one.
Paying a 30-year loan as a 15-year loan and always having the option of not having to send in the extra amount to pay it down in a shorter time period is a great insurance policy.
Yes, there is a small interest rate premium for a 30 vs. a 15-year life loan. Yet if you acknowledge the benefit a little bit of potential extra tax deduction may provide, additional interest cost works out to being an average of only a few extra payments made 15 years after the loan started—so they’re mostly principal anyway. That’s pretty inexpensive insurance against what are pretty common worries for a lot of people.
Let’s extend this example of a 30- vs. 15-year financing to the trade-up or refinancing borrowers, most of whom have started a family. If you ask anyone with children if they’ve done anything or even thought about paying for college, the responses aren’t anywhere near as positive as they should be ideally.
Just think about the homeowners who switch to a 15-year loan to accelerate the time for paying it down or off, only to borrow against their home 10 years later at a much higher rate to help pay for their kids’ higher education.
Not only are they incurring the extra cost of refinancing, but they’re paying an interest rate premium now too. In all likelihood, they may have picked a 30-year loan at this point since the payment with the higher rate and all that cash out is much more manageable. Instead of paying their loan off in 15 years as planned, they might be paying on their home loan for 40 years or more instead of locking it in for 30 at the start.
Weigh that scenario against borrowers who took a 30-year loan and put the monthly savings over a 15-year loan payment into a qualified college savings plan. They would not only enjoy tax-free earning potential on those funds, but they would have also locked in at what could have been a far lower interest rate than the one our other borrowers might have secured to pull cash back out of their home after sending it to the lender all those years.
It’s also worth mentioning again that the slightly higher rate on the 30-year loan would be earning borrowers a potentially higher tax benefit, which could also enhance their contribution to the college savings plan.
For anyone unfamiliar, a college savings plan such as a 529 program allows for tax-free earning accumulation and even a tax benefit to certain limits on the contribution. The value of this can be significant, especially if started when the ultimate recipients are young, and there’s time for those early investments to pay off. Provided these funds are later used for qualified purposes such as college tuition, even the distribution of funds is a tax-free event.
Down Payments or Loan Amounts – Large vs. Small
Another comparative calculation handled beautifully by the right mortgage calculator is contrasting a small down payment vs. a large one. No one likes PMI until they realize it’s the difference between getting into a home today vs. taking years and years to save for a 20% down payment while inflation pushes up the cost of a home and potentially the interest rate too.
It’s amazing how the real cost of a home today with a small down payment and mortgage insurance can be far less than the cost tomorrow with a 20% down payment and no MI if prices and/or rates have risen. That’s not even to mention the expense of renting while trying to accumulate a larger down payment.
Points vs. No Points
A simpler concept, yet equally important, especially when first-time buyers are not operating with a ton of extra cash, is whether to pay points or not to secure a lower interest rate. The simple math done by a mortgage calculator usually dictates about a 6-year break-even point. Given that most first-time buyers will not have their loan that long, there’s little point in paying points. That same money could be used to bolster their reserves, pay for intended improvements or satisfy any high-rate consumer debt or credit card balances they might be carrying.
Property vs. Property
Homes will vary greatly. One may have low insurance premiums vs. one that’s too close to a waterway that will require a flood insurance policy. Condos carry condo fees, co-ops have standard charges, and HOA properties require monthly fees costs while many single-family homes may not. A new home will have little maintenance expense while an older one will. All these comparison scenarios can be handled side by side and projected for a time period that your clients intend to occupy or own their home.
Program Types
Choosing between an FHA or VA loan vs. a conventional loan is important to discern clearly. Each offers unique benefits, so it’s imperative to contrast them and see what fits the buyer best. That may require more questioning and speculating about intentions regarding the length of stay, etc., yet that’s what turns a mortgage banker into something more.
A mortgage loan officer, banker or broker who takes the time to truly understand their client’s needs and dreams will always be more appreciated for their efforts in the end.
Doing what’s right for your prospects leads to them doing what’s right for you – and who doesn’t like a good warm referral from a happy client singing your praises?
To find out how you can access the right loan comparison calculators to help your prospects and clients find and choose the best loan for them, simply sign up for a Surefire demo. Packed with simple and sophisticated mortgage calculators and so much more, Surefire, the best mortgage CRM offers abundant ways to help you make clients for life.