How the Internet Has Changed The Traditional Home Buyer – Business Paper
In today’s day and age it is becoming much more accepted to explore and complete nearly every aspect of the real estate process online. From researching, to touring the house, to figuring out how much and what type of mortgage is best, the consumer can undergo nearly all of the steps to purchasing a house without ever leaving
their computer. Many commonly performed tasks such as driving to various neighborhoods, scouring the phone book for realtors, and going to various lending institutions for assistance with a loan are not nearly as stressful and time consuming. All of this has opened the door for a new type of “ambitious consumer” when it comes to buying real estate online. The internet has vastly transformed the average home-buyer. There are many characteristics that online real estate buyers have in common. A study was released by the California Association of Realtors titled “Internet versus Traditional Buyer Study” that gave interesting insight into who exactly is the “average internet real estate consumer?”. A few highlights of the study concluded that the online consumer was more self-motivated, wealthier, younger, and more likely to be married (housebloggers, 2005). Some of the key comparisons are as follows:
• The average age of Internet buyers was 39 compared to 46 for traditional buyers.
• 9 out of 10 internet buyers were married compared to 8 out of 10 non-internet.
• 85% of internet buyers had a 4-year degree, 11% completed post-graduate work, whereas only 78% of non-internet buyers had a bachelors, 4% had completed any post-graduate work.
• Internet buyers had an average income of $185,088.00 and non-internet buyers had an average of $151, 190.00.
• Internet buyers spend three times as much (5.8 weeks) time considering buying a home before contacting a realtor than non-internet buyers (2.1 weeks).
• Internet buyers took only two weeks to select a house instead of the seven weeks the traditional buyer took.
• Due to the use of virtual tours, internet buyers only looked at an average of 6.2 homes with a realtor compared to the 14.5 homes a traditional buyer looks at.
This study shows the obvious changes that are taking place in the real estate world. Buyers are getting younger, smarter, and much more ambitious. They are spending more time researching on their own, and needing less assistance from a realtor.
What is it exactly that attracts these younger, smarter, educated buyers to the internet instead of dealing directly with a real estate expert? It’s simple, there is literally an encyclopedia of information on how to handle every step of the process all over the internet. Every major realtor’s web site has sections that you can learn all about the real estate buying process without even talking to a representative (century 21). You can investigate neighborhoods, find information on exactly how much a mortgage would cost you, and even get in touch with a representative when you are ready to make that final leap. Site’s such as Century 21’s homepage has a complete First-time Homebuyer’s Guide that you can read to inform yourself on some of the less-known or confusing factors that go into purchasing real estate. Other web site’s such as the home loan learning center provide a step by step checklist to walk you through the rigors of determining the right type of loan for you (MBA, 2004).
Not only does can you use the internet to educate yourself on the ins-and-outs of buying real estate, but it is also a valuable tool to direct you to the places you need to go when you’re ready. You can get in touch with a realtor, mortgage counselor, loan officer or a host of other individuals that can help answer any questions you still may have. This can save a lot of time searching through the phone book trying to distinguish what services each realtor can provide, or who really knows what it is you are looking for.
When it comes to buying a house, there’s one word that causes more confusion, frustration, fear and anguish. That word is “mortgage”. For almost every individual out there, a mortgage is an essential part of the home-buying process. However, it may be one of the most confusing parts as well. With all the different types of mortgages, how does one know what is right for them? In the pre-internet days, a person would have to sit down with a mortgage consultant or loan officer or whoever, and be educated on how the whole loan process works. With the advent of internet real estate a whole new breed of sites have been born. Not only can you find tons of information about mortgages on any real estate company’s web site, but there are many sites dedicated solely to helping consumers understand mortgages and how they work.
Fixed Rate Mortgage
The most common mortgage in use today is what’s known as a fixed rate mortgage. A fixed rate mortgage is defined as a mortgage in which the interest rate and payments remain the same for the life of the loan (MBA 2004). The fixed rate mortgage is one of the oldest lending tools and still one of the most widely used. A fixed rate mortgage is comprised of the principal and the interest. When you set up your repayment schedule you will have a set amount that you must pay every month until the balance is paid off. Your monthly payment will be paying off only part of the amount you borrowed and part of the interest, or what you are being charged to borrow the original loan amount. This predetermined monthly payment is locked in or “fixed” for the entire life of the loan, regardless of changing interest rates, or how much you are willing to pay every month. The most common fixed rate mortgage issued is the 30-year mortgage (MBA 2004). You can, however, set up a multitude of fixed rate mortgages such as a 15 or 20 year fixed rate mortgage. The main reason that the 30 year fixed rate mortgage is the most common is because it offers the lowest monthly payments. This allows for a higher likelihood of being approved and is geared toward borrowers that will be remaining in the house for a long time and would also like to keep their housing expenses consistent (MBA 2004).
Another fixed rate mortgage that can be obtained is a 15-year fixed rate mortgage. This is almost exactly like a 30-year mortgage except that you will have significantly less interest to pay. The drawback of the 15 year mortgage is that it does require a higher credit rating and a much larger monthly payment (MBA 2004).
One more uncommon fixed-rate mortgage is the Bi-weekly mortgage. This type of loan is great if you have the budgeting skills to make a half-payment on your monthly loan amount every paycheck. By making a bi-monthly payment every two weeks, you are actually making the equivalent of 13 full monthly payments (MBA 2004). This loan is also typically a 30 year term, but allows you to have it paid off long before the 30 years are up. The example below illustrates the potential savings one can have by using a bi-weekly payment as opposed to a typical monthly payment.
Example:
You have a mortgage with a monthly payment of $997.00
Total interest paid over the 30 year life of the loan: $209,263.00
Half payments of $498.00 ($997.00/2) every two weeks would result in 26 equal payments per month. This extra month allows you to pay off the 30-year loan in 22-23 years.
Total interest paid over the 22-23 year life of the loan: $155,938.00.
Total savings over the traditional loan: $53,325.00!
Adjustable Rate Mortgage
A far less common and more complicated lending tool is an adjustable rate mortgage. An adjustable rate mortgage is defined as a mortgage loan or deed of trust, which allows the lender to adjust the interest rate in accordance with a specified index periodically, and as agreed to at the inception of the loan. Also called “variable rate mortgages” (VRM) (MBA 2004). ARM’s can be a bit more confusing because they require an understanding of a few more terms that dictate exactly how and how much the monthly payments of the mortgage can change. Some of the key terms to understand before getting into an ARM are as follows:
The adjustment period: The length of time which dictates interest rate adjustments on an adjustable rate mortgage. A six-month ARM would have an adjustment every six months.
The index: A published interest rate, such as the prime rate, LIBOR, T-Bill rate, or the 11th District COFI. Lenders use indexes to establish interest rates charged on mortgages or to compare investment returns. On ARMs, a predetermined margin is added to the index to compute the interest rate adjustment.
The margin: In an adjustable rate mortgage, the spread between the index and the mortgage interest rate. Index rate + Margin = Your ARM
Annual Percentage Rate (APR): A term defined in section 106 of the federal Truth in Lending Act (15 USC 1606), which expresses on an annualized basis the charges imposed on the borrower to obtain a loan (defined in the Act as “finance charges”), including interest, discount and other costs.
Interest Rate Cap: A limit on interest rate increases and/or decreases during each interest rate adjustment (adjustment period cap) or over the term (life cap) of the mortgage.
*Definitions come from the home loan learning center web site
ARM’s come with many different adjustment periods, margin rates and caps. It is important to consider each of these variables when selecting the right type of ARM for you.
Hybrid and convertible ARM
A hybrid and convertible mortgage is a mortgage that interchanges between a fixed-rate and adjustable-rate mortgage. One convertible is a mortgage that starts with a fixed rate for a period of time (2,5,10 yrs) and then converts to an annual adjustable-rate mortgage for its remaining life. Conversely there is the convertible mortgage that begin as an adjustable rate mortgage and can be converted into a fixed rate after an agreed payment period. You typically have to pay a fee when you convert the mortgage and most of the time the fixed rate you pay is slightly higher than the going rate for fixed loans (MBA 2004).
To sum it all up, here is a list of the most common mortgages used today. Below the type of mortgage is some pro’s and con’s for each.
Fixed-rate mortgages
30-Year Fixed
Pros:
• Lower monthly payment
• Most affordable
• More cash/savings because payment is lower; easier to bear if the homeowner has repairs to make or comes upon hard times; extra cash allows homeowner to make other investments since cash isn’t tied up in the mortgage
Cons:
• Longer term
• Pay more interest
• Costs more than shorter term mortgages over the life of the loan
15-year fixed
Pros:
• Shorter term, own your home in half the time (allows you to own your home before your children start college or before you reach retirement)
• Often the total interest paid over the life of the loan is lower, less than half the total interest of a 30 yr
Cons:
• Bigger monthly payment
• Qualification may be difficult because the income requirement is higher
Bi-weekly
Pros:
• Loan is paid off much more quickly
• Interest savings is significant
• Often automatically deducted from your checking account
Cons:
• Must be able to budget and make the half-mortgage payment every two weeks
Adjustable Rate (ARM)
Pros:
• When interest rates go down, payment goes down
• Initial interest rate can be as much as 2 to 3 percent lower than a comparable fixed rate mortgage
• Homeownership is more affordable
• Qualifying is easier
• Lower initial interest rate compared to fixed-rate mortgages, which can make homeownership more affordable and make qualifying for a mortgage easier. And if interest rates decline, your mortgage payments decline as well.
Cons:
• When interest rates go up, payments go up
• The potential for higher monthly payments if interest rates increase
• Requires more budgeting discipline
Convertible Mortgages
Hybrid and convertible ARMs
Pros:
• Advantages of an ARM with the ability to convert to a fixed-rate mortgage
• If you don’t convert, it’s a regular ARM
Cons:
• If interest rates are at a higher level, when its time to convert, you may not want to go with it
*Info from home loan learning center