Origination fees and other costs

An origination fee is a term for the sum paid to a mortgage lender in return for processing the loan. It is usually a small percentage of the loan, along with an assortment of other small fees.

Compared to the average down payment sum, origination fees fluctuate depending on a variety of factors, including the type of mortgage, the lender, and the borrower’s credit score. Generally, they are between 0.5% and 1%, meaning that a $200,000 loan would equal out to an origination fee between $1,000 and $2,000.

The demographics of mortgages

Compared to past generations, Millennials have been slow to embrace home ownership. Owing to some generational setbacks, which include coming of age during an economic recession, amassing huge piles of student debt, and feeling locked out of a pricey housing market, the generation lags behind its forebears in buying the first house: just 37% of Millennials between the ages of 25 and 34 are homeowners compared to the 45% of Baby boomers that bought the first home when they were between 25-34. In that era, wages were higher relative to the cost of living and homes were cheaper, on average (Source).

What’s more, Baby boomers have hampered Millennial homeownership directly through their life choices. Young buyers historically depend on older generations to put their homes up for sale, keeping the market active. Yet Boomers, owners of 43.5% of U.S. homes, are retiring later than previous generations while continuing to live in their homes rather than moving in with family or joining retirement communities. As a result, their homes stay off the market, contributing to the nationwide home shortage and keeping prices high.

Yet, there’s a good chance that Millennials’ time as home buyers has arrived. With a large share now entering their 30’s, they are beginning to shop for homes en masse. They already claim the largest dollar volume share of new mortgages in the U.S. with 42%, while Boomers account for 17% and Generation X, 36%. However, Millennials still pay lower down payments than other generations, averaging a down payment of 8.8% versus Gen X’s 11.9% and Boomers’ 17.7% (Source).

Boomers are not without their housing woes: members of the generation were three times more likely to have remaining mortgage debt in 2015 compared to a homeowner of the corresponding age in 1980 (Source).

Mortgages and race

Although it’s against the law for lenders to discriminate on the basis of race, there is evidence that blacks and Hispanics face a disproportionate struggle in getting approved for a mortgage.

According to the recent Home Mortgage Disclosure Act (HMDA) data, it was found that 19.8% black applicants were denied mortgages in 2020, while just 11% of Asian and white applicants were denied. The most common reason given for rejected applications varied depending on race: for whites, Asians, and Hispanics their high debt-to-income ratio was the most frequent explanation, while for blacks it was a bad credit score.

Hispanics and blacks’ relative difficulty in securing a mortgage does not offer hope that the ethnic groups can branch the considerable home ownership gap in America, with 71.9% of whites owning their homes compared to 44% of blacks and 47% of Hispanics (Source).

Delinquency rates and foreclosures continue to drop

In a positive development, the percentage of U.S. mortgages in some stage of delinquency recently hit a 20-year low of 3.6% in April 2019, a 0.7% decline compared to April 2018’s 4.3%.

Foreclosures are also down slightly compared to the previous year, with April 2019’s 0.4% rate tying the prior five months for the lowest the market has seen in the 21st century. Corelogic credits rising home prices and declining unemployment for this reduction in mortgage delinquency (Source).

Adjustable-rate mortgages

ARMs grew popular in the wild and loose 2000’s housing market, but cautious homeowners have made them a relatively uncommon choice — as of December 2018, just 9.2% of new mortgages had an adjustable rate (Source).

The preference for fixed-rate mortgages over ARMS is in part explained by 2019’s low-interest rates, along with lingering memory of their role in the mass of foreclosures during the late 2000’s housing market crash.

The numbers tell the tale: Marketwatch reported in February 2019 that the average ARM of $688,400 was two and a half times the size of the average fixed-rate mortgage of $280,900. These days, few are willing to commit to a loan with a much larger balance in the hopes of refinancing at a later date (Source).

When to refinance

As mortgage rates continue to drop, the percentage of homeowners with shifting loan-to-value ratios that could benefit financially from refinancing their mortgage grows.

In a recent Mortgage Monitor report, Black Knight put the number of homeowners with the incentive to refinance at 5.9 million, a three-year high. They estimate that these 5.9 million could cumulatively save $1.6 billion in monthly savings, or $271 a month per mortgage holder (Source).

Even with low-interest rates, not all borrowers stand to benefit from refinancing, so it helps to employ the services of a mortgage refinance calculator to determine when the time is right for you.

The emergence of FinTech

In the past decade, FinTech lenders have claimed a larger share of the mortgage market, going from 2% in 2010 ($34 billion) up to 8% (161 billion) in 2016 (Source). The term “FinTech” is short for “financial technology” and though the term is not clearly defined, for the purposes of the mortgage industry, it applies to a lender using an exclusively online mortgage application model.

It’s clear that FinTech lenders have some advantages over traditional lenders: they are able to process applications five times faster on average than traditional lenders and offer lower default rates. With less than 10% of the market share, FinTech lenders have a lot of room for expansion in the industry and will continue to do so if current trends persist (Source).

Top mortgage lenders

Here are the top five U.S. mortgage lenders in the United States by loan volume. Together, they logged $472 billion in mortgage originations in 2018.

Wells Fargo

Wells Fargo is considered the second largest private mortgage lender by a significant amount, with $228.6 billion in loans already made. Wells Fargo also issues other types of loans, such as private student loans and small business loans.

JP Morgan Chase

The fourth-largest private mortgage lender, J.P. Morgan Chase has issued approximately $205 billion in loans. Washington Mutual, as well as various smaller mortgage lenders, was acquired by the bank at the end of the 2000’s, and therefore, the outstanding debt owed to those firms as well.

Quicken Loans

Quicken loans is the biggest private mortgage lender that is not affiliated with any financial services corporation or large bank. However, it is still the largest online mortgage lender in the country. Quicken loans have made a whopping $342.7 billion in loans, which is even more than Wells Fargo.

PennyMac

When Pennymac was set up in 2008, the initial service was focused on distressed loans rather than originating new ones. This made them the youngest company on the list. Pennymac based in Moorpark, California, is a firm that focuses solely on direct consumer loans online and over the phone rather than in person or in-branch. However, it is still managed to generate loans to the value of $124.7 billion.

Bank of America

The Bank of America is considered a mega-bank offering pre-approval and pre-qualification with speedy pre-approval available for all online applicants. Loans are available to borrowers nationwide, and there are an array of loan options with competitive pricing and timely approvals. Mortgage rates are advertised on a daily basis. The Bank of America has generated $2.1 trillion in loans to date.

Reasons to buy a house

The National Association of Realtors reported the following statistics:

• Approximately 64% of movers have experienced a recent and significant life event, such as getting married or starting a new job.
• 44% of homebuyers aged between 22 to 29 said that commuting costs were a significant factor when it came to choosing a home.
• When it comes to purchasing previously owned homes, there are at least three factors that play a role in the decision-making process. This includes better overall price, better home value, as well as more charm and character.
• When it comes to purchasing a new home, three factors play a role in the decision-making process. This includes the ability to customize the house and the amenities of the new home communities, as well as avoiding renovations.
• Most young people that purchase homes do so because they desire homeownership.
• Lots of movers choose to move due to them needing to upsize or having to support their growing families. This is the primary reason why the majority of families who move, move.
• The key buying factor, as cited by 58% of homebuyers, is neighborhood quality.

Choosing a mortgage

Is it time to buy a house?

Ultimately, this is a philosophical question that only the potential home buyer knows the answer to. Sure, income, job security, current interest rates and the price-to-rent ratio of your area are worth careful consideration, but in the end, it’s not a decision reliant on data and statistics.

Purchasing your own real estate is a huge step: likely the biggest investment most Americans will ever make and one they’ll probably spend the next 30 years paying off. If these facts don’t scare you or hamper your enthusiasm for making the transition from renting to owning a property, then maybe it’s time. 

Knowing your budget

While this isn’t a guide on choosing a home (we’ll leave that up to you), the home price you are able to commit to is crucial since it will determine the characteristics of the mortgage loan you’ll be attached to for the next few decades.

A common rule of thumb espoused by mortgage lenders is that your monthly mortgage or house payment shouldn’t exceed 28% of your monthly income before taxes. Of course, costs of living, student loan payments, children, etc, make each situation unique, but it’s a good number to start with.

For example, if your annual household income is $100,000, that calculates to $2,333 a month which can be allotted towards a mortgage payment.

Deciding on a loan option

Once you’ve nailed down a budget, it’s time to choose which type of mortgage works best for you. There are a ton of variables between loans, but they can be narrowed down into three principal categories.

Fixed vs. adjustable

We’ve already covered this earlier, but it’s worth reviewing the basic differences between the two types of interest rates. Fixed stay the same for the entire loan term, with payments that don’t change, while adjustable rates can start rather low, but vary unpredictably as time progresses or eventually become unaffordable.

The choice is yours, but the fact that less than 10% of borrowers opt for ARMS these days is worth noting (Source).

15-year vs. 30 year

The loan term you choose mostly depends on the size of the monthly payment that you can handle. For those that can afford it, a 15-year loan term might be a good option as you’ll pay less interest and pay off the house much quicker. However, for a majority of first-time buyers, a 30-year term is the safe option.

Loan type

Another decision that depends on your circumstances. Most buyers opt for a conventional loan, i.e. one coming from a commercial bank or credit union. Yet, those with a lower household income may decide to apply for an FHA loan, a type of loan insured by the Federal Housing Administration with the intent of giving a leg up to those of lower income or stuck with bad credit. FHA loans are attractive for many due to their low 3.5% down payment rate, with 1 in 5 home buyers using an FHA when purchasing a home (Source).

The third category of loan type includes the department of veteran affairs issued loans for veterans and other programs available to other specific groups. Most buyers won’t be eligible for these types of loans, but if you are and the terms are favorable, you should probably take one.

Shopping around for lenders

After deciding on the right type of loan, it’s time to consult with lenders. It always pays to meet with a multitude of lenders, especially as a first-time buyer. Speaking with a variety of agents, comparing offers, and discovering what’s out there is a great way to build confidence and choose a mortgage on your own terms.

No need to go crazy either, just make a list of several possible lenders and after meeting with their representatives, etch out the pros and cons of each, while comparing them. Also, don’t forget to consult with friends and family whenever necessary.

Getting pre-approved

Now it’s time to get pre-approved and put earlier budget estimates into sharper focus. Pre-approval is a slightly nerve-wracking but essential step wherein lenders scrutinize your financial history and information in order to decide whether you qualify for the mortgage you want. They look at a potential borrower’s

• Income
• Employment history
• Assets
• Total debt
• Credit score and history

Once you are pre-approved, congratulations are in order. You are a large step closer to a new home. It’s important to note that mortgage pre-approval letters come with an expiration date of 4 to 6 weeks and you’ll have to get a new one if you don’t complete the mortgage process in the allotted time.

Homebuyer characteristics

The following statistics are provided by the National Association of Realtors:

• Of all the homebuyers in 2021, 62% were married couples, while single females made up 18%, single males made up 9%, and unmarried couples made up another 9% of homebuyers.
• Additionally, 31% of all homebuyers in 2021 were first-time buyers.
• Of the 61% of homebuyers aged between 31 to 40, one or more children residing in the home were under the age of 18.
• 33% of homebuyers aged between 29 and 38 said that they were purchasing a home to take care of their parents.
• 86% of buyers, which is the largest percentage of homebuyers, purchase a previously owned home.

Deciding on a down payment

Now that everything else is in the bag, the last important decision you’ll have to make in the mortgage process is choosing the size of your down payment. Usually, the more the better, as a down payment of 20% or more will get you a lower interest rate and you won’t have to pay private mortgage insurance.

Of course, not everyone has that kind of cash on hand. But unless you take out an FHA loan, you’ll be expected to pay at least 5% of the price of the home. Most young first-time buyers put down 8%-9%, which is a reasonable number to shoot for.