There’s so much to do in getting a loan that sometimes it can make your head explode.
There’s the endless probing into your life for tax returns, bank and financial statements, lengthy explanations as to why you were late in returning a library book back in 2000. It seems the only things banks aren’t asking now is what your neighbors think of you or how often you have sex.
As you’re pulling all this information together, don’t forget that you are going to need a lot of liquid cash soon for your down payment and closing costs.
Where are the funds coming from? Are they in stocks? Do you have capital gains on these stocks? These and many more questions are going to need to be answered. And it’s best to sit down with your accountant or financial adviser and go over these important details before you even apply for a loan. The answer you get could have profound implications as to how much cash you put down or whether this is the right thing for you to do altogether at this point.
So, you meet with your adviser and are told how best to liquidate some of your holdings to come up with the necessary funds for a purchase. You also know if there’s any potential tax liability. Some of the money will be needed promptly for a deposit when you make an offer. The balance of funds will be needed right before the close of escrow.
The big question is when do you sell your stocks? That’s kind of a hard question to answer because there’s been so much stock market volatility with big swings on both the upside and downside making it hard to decide when to pull the trigger. One day the market is down 600 points and two days later it’s up 400 points.
Do you wait for the market to recover its losses? If my stock goes up five points, I’ll get another $20,000. But what if the market goes down again. Now you have less money for your down payment. Here you are competing with the big boys on Wall St in their sandbox. Do you think you’re smarter than the traders at Goldman Sachs? I doubt it. They have too many advantages over you.
Same can be said about your quoted mortgage rate. Your lender will ask you when you want to lock-in or finalize your mortgage rate. Well, if you know where mortgage rates will be over the next two weeks, that’s an easy decision to make. Unfortunately, life doesn’t come with a crystal ball. Do you lock it in at a fixed price you like today or do you gamble that rates will drift lower over the next few weeks? When do you pull the trigger and what’s your expectation for the near term in terms of stock prices and interest rates?
But sometimes stocks and interest rates move in opposite directions and while your stock may be falling, your interest rate is going up. This gives you the worst of all outcomes.
This could affect your sale unless you’re some Facebook millionaire who could probably just buy the house outright. Do you have enough cash and reserves to buy the home at a lower stock price? Perhaps you may not have enough surplus cash to be comfortable so you may need to increase your loan amount. What if your mortgage rate went up a quarter percent and now this messes up your already tight financial ratios?
Trust me, these scenarios can and do happen and probably more often than you think. This isn’t the time to play games or show everyone how smart you think you are. You are dealing with a lot of money both in terms of down payment and interest on a big mortgage for many years. And if you guess wrong, you can cost yourself a lot of money in both the short and long term not to mention possibly losing the house.
Steve Hyman is the broker and owner of Century 21 Sunset Properties. He can be reached at 726-6346 or www.century21sunset.com.