I received an email this week from Samantha asking if she should buy a home now or continue renting.  Here is her basic information:

• Gross annual income $85,000
• Current rent payments $1350
• Purchase price for home she’s considering:  $399,000
• 10% down payment (from 401k and savings)
• 38 years old
• Average to good credit

Based on the information Samantha provided me, she easily qualified to purchase the home she was interested in.   She only planned on staying in the home for 4-5 years and wanted the lowest payment possible, so I provided her with a Good Faith Estimate based on using a 5 year fixed 10 year interest only product with a note rate of 5.75% (APR 5.854%).    Her total mortgage payment, including estimated taxes and insurance would be $2,278.   

Here’s where it gets more interesting for people who don’t own a home yet…when you factor in Samantha’s income tax bracket, her effective payment (factoring in what she will be able to claim on her income taxes in a full calendar year) is actually $1,633.

$1,633 IS MORE ($263 more to be exact) than her current rent in the amount of $1,350.   However, if you consider a conservative appreciation on her potential new home in the amount of 5% annually…the picture changes dramatically for creating wealth.

In 3 years, Samantha will pay $50,793 in rent with nothing to gain.   As a homeowner, after taxes she will pay $58,700 BUT her home will be valued (again, very using a very conservative figure of 5% appreciation) at $461,892; providing her with $103,956 in equity…in just 3 years.

So what if Samantha decided to rent and invest the difference of the after tax mortgage payment and rent in the amount of $263 into an interest bearing account (I’m sticking with 5% interest)?   In three years, after investing $263 per month, she would have just over $10,000.   And how likely is it that someone would actually be disciplined to do that? 

You can guess my answer to Samantha.  BUY! In three years, she could decide to sell the home and would have more of a down payment for a next home.  If she opts to rent, her $10,000 would make a significant difference in a down payment.  Her $399,000 home she wants to buy now would then cost $461,892.   She would still have 10% down based on the appreciation (assuming her savings and 401k performs well) …only now the house and the mortgage payment cost more and she would not have the $103,956 in equity.   Not to mention the emotional values of owning your own home and the freedom it provides.

Names in this post were changed to protect the innocent.   Do you have a question about your mortgage?   Drop me a line, I’m happy to address it (and I’ll change your name should I decide to use your question for a post).

Jillayne and I go way back and recently have been reacquainted when we both became “Active Contributors” on Rain City Guide.  I have really enjoyed reading and responding to her blogs.  I am also quite interested in her company, Ethical Lending Foundation, which is very timely for the mortgage industry in light of new licensing laws and continuing education requirements.

Q: What prompted you to create Ethical Lending Foundation?

My business partner, Dr. Kevin Boileau and I do work in the area of applied professional ethics. Any profession that has to be licensed also has a code of ethics with mandatory training. An example is the Nat’l Assoc of Realtors Code of Ethics. Every four years, all Realtors nationwide must complete an ethics class. We write codes of ethics and have read hundreds of codes from all different industries. We have been writing and publishing articles in trade journals for many years now about the current codes of ethics available through The Nat’l Assoc of Mortgage Brokers, Mortgage Bankers Association of America, and the Nat’l Assoc of Professional Mortgage Women. We approached WAMB and NAPMW and offered to re-write their code. NAPMW declined and WAMB wanted us to do our work for free.

When the Department of Financial Institutions changed the Washington State law mandating all education course providers go through a professional organization, we decided to form a new professional organization with the absolute highest ethical standards, much higher than NAMB, MBAA, and NAPMW, and open up membership to all lending workers: loan officers from banks, loan originators from brokers, and so forth.

The biggest change we offer consumers is that members of our organization subscribe to put the client’s interest above their own interests. This prescribes "fiduciary duties" and elevates the status of our members to that of a "Professional."

The basic definition of Professional as a noun (and not as an adjective, as in "Jillayne is answering these questions in a professional manner") is as follows:

A Professional is someone who:

Has specialized knowledge in his or her subject area
Completes a minimum level of education
Is tested for competency
Is licensed
Maintains that license with mandatory continuing ed
Subscribes to a code of ethics with sanctions for violations
Owes fiduciary duties to clients

The easiest examples to see how this works is a doctor or a lawyer. The nice benefit for lenders who rise to the level of being a Professional is that you get to charge more for your services. Paralegals are another example. There was a group of legal secretaries who figured out that they were doing a whole bunch of legal work, and they didn’t have a law degree. They got together and formed a professional organization and now they get to charge a whole lot more money for their services.

In any narrative history of any profession, we will always see movement towards requiring MORE education, testing, higher ethical standards, more prescribed duties, as compared to any movement towards requiring LESS of these things.

I’m more of a DO-er instead of a talker. Dr. Boileau and I grew bored with all the talk about higher standards and decided to DO something about it. We have received favorable responses coming from all across the U.S.

Q: Sometimes your blog posts target mortgage brokers. What’s up with that?

I love mortgage brokers! But sometimes they get myopic and aren’t able to see that even though they are operating their business with a high degree of professionalism and ethics, that not everyone else in their industry is doing this. When consumers hear the word "predatory lending" to them, that means anyone in lending: banker, broker, credit union, consumer finance company. We all know that P-lending can take place at any institution. Consumers have become less trustworthy of all lenders, because they don’t really understand the difference between how institutions are regulated. The broker community likes to point the finger outward at banks or at consumers for being un-educated. A better action plan would be to figure out how to differentiate brokers so much that they are the institutions with the absolute highest ethical standards and offer the best choice for consumer trust. This is the change I would like to help influence.  Sometimes that means taking a bold stand and using radical, satiric references in order to get the attention of industry workers who normally just go on about their day thinking that someone else will solve the world’s problems. It will be all of us, slowly working
together every day.

Q: How has blogging impacted your career?

Oh, I’m not sure blogging has impacted my career. It’s too early in the advent of this medium to really have any meaningful data. Ask me this question again in six months. I can speculate on how it might impact what I do for the industry.

I think of blogging as another form of education. When online learning hit the world, I was unimpressed. It started out as correspondence classes put on a computer. Very boring. I remember finishing what was suppose to be a 3 hour class on Fair Housing in 19 minutes. Then we saw the online learning world add graphics and mini quizzes which made us pay more attention, but online learning is still kind-of one-dimensional. I think blogging might have a future in online education.

Q: What do you do for fun?

I play adult co-ed indoor soccer which provides a healthy aggressive outlet for all my energy. I also go to school at Antioch U in Seattle. I’m almost done with my Masters degree in Psych and I’m studying the relationship between business ethics, philosophy, and moral psychology. I have always been fascinated by the question "why do people do what they do?" I have two active daughters so I’m always running around having fun with them. Kids are avid tech sponges. My younger daughter walked up to a cell phone on display at the Sprint store and took my picture. And I’m the techie in the family! I think if we just simply watch what our kids are doing with communication devices and media, we will see how blogging will impact business in the years to come. In some elementary schools, they are already using blogging as a learning tool.

If you would like to learn more about Ethicial Lending Foundation, please contact Jillayne.  Jillayne, thank you for being my first blog interview!