Sean Pyles: Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Pyles.
Liz Weston: And I'm Liz Weston. To contact the Nerds, call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at [email protected].
Sean: And be sure to subscribe to get new episodes delivered to your devices every Monday, and if you like what you hear, leave us a review.
This episode, Liz and I answer a listener's question about the risks, if any, of going with a small mortgage lender. First though, I'm talking with investing Nerd Alana Benson for a new segment that we're calling Buzzwords, where Alana gives us the rundown on some financial concepts you've probably been hearing about in the news and what they mean for your finances.
Sean: Alana, hey, welcome back to the podcast.
Alana Benson: Hey, thanks for having me.
Sean: Glad to have you. I'm really excited for this segment. I think it'll be really beneficial for a lot of listeners to help them make sense of what's going on in the world and what it means for their money. So, let's dive into it.
What is the first buzzword that we are exploring?
Alana: Today we are talking about inflation, which is definitely a scary buzzword that has been floating around a lot lately.
Sean: Right. It seems like there's a lot of uncertainty around where it's going. Obviously we know what it means for our finances. It means that we're spending more money on everyday goods, but can you start by giving us a rundown of what exactly is happening?
Alana: Yes. The first thing that we really need to understand is what inflation is and what it does. Inflation is the increase in the price of goods and services over time in relation to the decrease in purchasing power that your money has. So imagine you had a $100 bill in the year 2000. You thought about all the stuff you could buy with it, like maybe a lifetime supply of Lip Smacker lip gloss if you were me, but you decided to save it instead, and so you just stuffed it under your mattress. So if you took that bill out in 2021, you would still have $100, but you wouldn't be able to buy as much lip gloss or eyebrow gel, since I think that's what's cool now, as before. The price has likely gone up, so you just wouldn't be able to buy as much stuff.
Sean: OK. We're seeing prices pretty much across the board go up.
Alana: Yeah, definitely. There's two ways of looking at this. One, and this is the stance of a lot of economists and the stance of the White House, is that these things are situational. The pandemic has led people to not be traveling for a long time. So as soon as people are vaccinated and borders are opening up again, a lot of people have booked flights and booked rental cars, and that's caused certain shortages and prices to go up.
Sean: I think the example of rental cars and used cars is a good one because what we're seeing with used cars and why they're so expensive, it's in part because last year during the pandemic rental car companies sold off their fleets. So there aren't as many used cars on the market right now because these companies are now trying to rebuild their fleets by grabbing up every decent car in sight.
What's kind of crazy is that I purchased a used car last May, and it has in fact accrued value in that amount of time. So now my car, which is used, again, and I've racked up a good amount of miles on it, has over $4,000 in equity, which is just unheard of when it comes to used cars.
Alana: It's definitely unheard-of, and it's so funny because I would never say that a used car is an investment. It is definitely something that normally loses value over time, but you may have gotten yourself an investment right there if you sell it at the right time.
Sean: Yeah. With rental cars we are hearing about some coworkers who are trying to go on trips right now, and they were originally booking their rental car for a few hundred dollars and then when it came time to actually get the car itself, the company is saying, "Oh, well actually it's going to cost you a couple thousand dollars," because of how they booked their reservation. That is something that is shocking to me.
Alana: Yeah. It's definitely shocking for people who are traveling right now. But I think the question we have to think about in terms of inflation is, is that a short-term increase because of the pandemic, because of what people have been not doing and are now starting to do, or is this inflation here to stay? Economists are kind of divided on that. Some folks are saying that we're going to see price increases for a longer duration rather than just a short snap after things open up, after the pandemic eases. We really don't have too many global pandemic examples to draw from to figure out how this is going to go.
Sean: Right. Again, to pull out maybe the most overused word of the past year and a half, this is unprecedented. We don't really know what's happening, whether this is situational or structural.
Alana: Yes. I am ready to stop hearing the word "unprecedented" being used in the news. You're totally correct. A lot of these things are unprecedented. One of them in particular is this percentage about consumer prices. We had a number come out in May that we saw that consumer prices rose 5% from last year, which is the fastest rate since 2008. This affected everything that we've talked about; used cars and trucks, airfare, which rose over 24%. One reason those numbers are so dramatic is because prices fell a lot last spring, which made the year-over-year increase unusually high. There are other factors, like material shortages and high consumer demand in that short term that we're talking about, but there's also just a little trick behind the numbers that's making that 5% jump seem really, really large right now.
Sean: Right. It almost would be better to compare prices now to what they were in 2019, and understand that there are a lot of bottlenecks. One that comes to mind for me as a homeowner is lumber because there wasn't a lot of logging during the pandemic.
Alana: Right. In the ripple effects that we see from what's happening now, are very hard to predict because as we said, this is unprecedented, but if we listen to the economists and we look at the current situation with inflation, inflation is happening, it's affecting a lot of things that people are purchasing right now, and we don't know how long these inflated prices will last. Hopefully they come down soon, but we truly don't know for sure.
Sean: Right. Well, that brings me to my next question for you, which is what can people do right now about this?
Alana: There's a lot of things that you can do. The first big thing is to avoid hoarding cash. As we noted before, cash loses its value. So instead of stuffing your money under your mattress or putting it into a regular savings account, you can combat inflation by investing it.
The second thing that you can do is think critically about your future purchases, particularly if they fall into the categories of these highly affected items. So if you're looking to buy a used car, prices are really, really high right now. So you could ask yourself, do you need to buy a car right now, or could it be worth waiting a little bit to see if you could get a better deal later on? Obviously, if you need to buy a car right now, that's one thing, but if you have some flexibility, it may be worth considering timing.
The third thing is that you can think about diversifying your investment portfolio. There are some assets, like gold or real estate, and they can withstand inflation a little bit better. So it may be worth looking into those, but it's always good to think about your portfolio and even talk to a professional before you dive into investing in anything new.
Sean: Right. One thing I've been doing is changing the way I shop for things, and trying to get the most bang for the more bucks that I'm putting toward everyday items like this. I've become a little bit of a coupon junkie, I'll say. I find myself scrolling through websites and making sure that when I am buying groceries, I'm saving a little bit more money than I would have otherwise because before, I probably wouldn't have minded it too much, but it really has been adding up. When it comes to gas, I'm driving a little bit more now, gas is a lot more expensive, I recently got a credit card that gives me more points for gas. That way I feel like I can swallow the price a little bit better because I'm getting something back for it. That's one way I've been changing my own personal habits.
Alana: The credit card idea is really great, like looking at where you can be getting points for the things that you know, you're going to be spending money on, particularly if they've been really affected by inflation.
The other thing is just general thrifty living. I recently put together some garden boxes and was really pretty horrified when I went to the lumberyard and saw how expensive lumber was. I actually ended up using some pallets to put together a DIY-style garden box. It took much longer and it was definitely challenging. I'm not sure if my time was worth it. But if you're really looking to pinch pennies, something like that, or looking for ways that you can either earn points or do something a little thriftier than you had planned will be able to help save you some money in an inflated market.
Sean: That's some great advice. Well, thank you so much, Alana.
Alana: Yeah. Thanks for having me.
Sean: All right. With that, let's get onto this episode's money question.
This episode's money question comes from Ravi, who left us a voicemail. Here it is.
Ravi: Hi there. I've got a few questions for you. My partner and I are in contract to buy a house. We're closing in a few weeks, and I'm getting cold feet about the lender we decided to go with. Our lender is a small company that does wholesale mortgage banking, and the process to get financing with our loan officer has been great, but after talking to some friends who are also shopping for houses, I get the feeling we're making a risky bet by going with our lender instead of a well-known local or a national bank. What risks do we open ourselves up to with a smaller, not-mainstream lender, compared to a well-known local or national bank? How can one check to see if a lender is reputable? Can I change our mortgage after entering the contract with a lender prior to closing? What happens if our lender goes under? Is there any personal blowback for the decision we made even though our lender went bankrupt? Thanks.
Liz: To help us answer Ravi's question, on this episode of the podcast we're joined by mortgage Nerd, Linda Bell.
Sean: Hey Linda, welcome back onto the podcast.
Linda: Thank you so much. I'm glad to be here.
Our listener, Ravi, is wondering about different types of lenders and whether the fact that they have a small mortgage lender is potentially risky. I think to start, it'd be helpful to break out different kinds of mortgage lenders. Let's just go through them one by one. Can you start by talking about small lenders?
Linda: Yes. That smaller lender, that local, right around the corner, they offer a variety of loan services. They can give you that personal touch. They may be more flexible with their loan guidelines. A lot of people like that, especially with this whole buy-local thing, people like local lenders.
Sean: Yeah. These are coming from places like credit unions, right?
Linda: Yes. When talking about small lenders, we're talking about credit unions, nonbank lenders, community and regional banks.
Sean: To your point about shopping local; that's what can be appealing to some people because they're keeping their money in their community.
Linda: Yes. That's a big deal for a lot of people. With that small lender, you have that personal touch as I mentioned, a contact person that you are dealing with every day or every week. The bigger lenders, which we'll talk about in a little bit, they don't have that personal touch. You may contact them and not contact the same person every time that you're reaching out to them. A lot of people don't like that, especially going through the home buying process, which can be very stressful and confusing. And having that personal touch can really make a difference for a lot of people.
Sean: Right. When I was shopping around for mortgages, that was pretty important to me. I wanted to feel like if I had a question about my mortgage, which I had many throughout my process, I wasn't going to be talking with a different customer service rep every time. I wanted to know who I was going to be dealing with and have an ongoing relationship with them. That's what it seems like you can get from smaller or local lenders.
Linda: Yes, you can certainly get that. In comparison, having a national lender, they have that name recognition that a lot of people like, and that reach. A lot of them, you can just go across the street and you see one and a few blocks down, you see another one of them. They like having that reach and knowing, "OK, this company is reliable. I can rely on them to provide me with my mortgage."
Sean: Right. So if you have a question at 1 a.m. on a Saturday, which I don't know why you would about your mortgage, but some people may, a national lender might have some sort of customer service chat option that you could tap to get that answer at that time.
Linda: Yes. Depending on the lender, you may have that 24/7 service. There may not be an actual human to be able to have a conversation with you, but they do have, as you mentioned, the chat that is definitely a possibility with the bigger banks. It's important to kind of weigh the pros and cons, whichever way you decide to go.
Liz: Well, the big banks with that large presence, you know that they are legit. How do you find out if a smaller lender is legitimate?
Linda: One main thing that you can do is check the Better Business Bureau. That's a mainstay for a lot of people. Check the Better Business Bureau, the Consumer Financial Protection Bureau. See if there's any consumer complaints against the company. Online reviews are also great. You may even want to take it a step further and check with your state attorney general's office to see if the company is registered because they have to be registered in order to do business there. You could take those steps to check if a company is actually legit.
Liz: I've gotten mortgages and refinance mortgages several times, and it was helpful to me to go through NerdWallet's rating system. We've got Nerds that do deep dives on all of these lenders. They can let you know what the customer service is like. They can let you know what the responsiveness is like. I wound up going with a much smaller lender than I ever have before because I had that expectation and comfort with the review process, because I know how rigorous it is. That's something else to consider that when Linda was talking about the rating systems, make sure that you are getting ratings from a legitimate source and that can really guide you to the right place.
Sean: What I ended up doing with my mortgage shopping process is that I went through the options that we had laid out at NerdWallet for my credit score and my budget and whatnot, and then I put all of the outputs from these calculators into my own spreadsheet, so that way I could take it on my own and think about it and then apply for these mortgages. That's how you can really get a good experience of shopping around.
Linda: Sean, Liz, I've got to hand it to both of you, you both did a great job with getting a mortgage and doing the right things, looking at your budget, comparing mortgages. That's so important. I have to tell you, when my husband and I bought our home 15 years ago, we didn't do half of the research both of you guys did. If only NerdWallet existed back then, I always say. Today it's so much easier to shop around and compare mortgages than it was back then. So it's great that you both took advantage of that.
Sean: Well, I think it helped that I was applying in the middle of a pandemic, so I had nothing else to do besides submit five mortgage applications. Yeah. I wanted to make sure I was making an informed decision because it's such a big purchase.
Well, now I want to talk about another aspect of Ravi's question, which was whether there are any specific risks of small lenders. Linda, what do you think about that?
Linda: Well, there's been a lot of talk since the housing crisis in 2008 about nonbank lenders and the risk that they could possibly have on the entire financial system. Now, these lenders depend on short-term credit to finance their loans and they don't offer deposit services like checking or savings accounts. What that means is that if we have another financial crisis, credit could potentially tighten making these loans that the lenders offer more expensive and create a situation in the housing market that could be very dire. A lot of people talking about those lenders and some experts are saying, "There's nothing to worry about. We're not on the verge of a crisis like we had back in 2008 because the environment, the lending is definitely different." But it's important to keep in mind.
Liz: Well, we should be clear that the risk here is basically to the financial system. With the borrower, your biggest risk is during the application process. Once you've actually got the loan, that's an asset for any lender. So if the lender should go under, they would just sell it to another lender.
Sean: And what could happen at that point?
Linda: The assets will be sold to another company. This will be the new company that manages your mortgage. You need to continue making your payments. You haven't hit the lottery. Your loan is not eliminated. Make sure that you keep paying it, and make sure that your payments are clearing, you're keeping records of all this, because you wouldn't want this new company to come on board and say, "Hey Liz, hey Sean, we don't see that you paid your mortgage for the past six months." I'm not saying that would happen necessarily, but there could be confusion with the transfer over to this new company.
Liz: It's not just nonbank lenders that can have problems; some of the biggest lenders in the country went under or had problems during the crisis. So, we don't want to pick on the little guys; this is just saying, this is a risk that's out there.
Linda: It could be the big lenders. It could be the local lenders. It could be the nonbank lenders. It could be any company. Just to be on the safe side, just to make sure you keep your records.
Sean: Another question that Ravi had was whether you can change your lender after entering into a contract but prior to closing. Is that possible?
Linda: Yeah, it's possible, but my question, Sean, for the listener is, would you want to do it? Is it financially worth it? You could be unhappy with the lender, the service they're providing, maybe they lost paperwork, or there's been unexpected changes with your loan, but you switched lenders so there's going to be more delays. You have to do the application, documents, credit check, appraisal, all that stuff. That is just so stressful when I think about how I went through that getting my mortgage. You may have extend your closing date and that could jeopardize your whole deal. So you have to weigh the pros and cons and see does this make sense for me to switch my lender?
Liz: The reality is you don't really choose who your loan servicer is, and that's the company that you're going to have the most interaction with. That's the company that you make the payments to, and they pass it on to the lender or the investors or whoever. People don't understand this. They pick a lender and think they're going to stay with them for the length of the mortgage, and that's just not true. Once the mortgage is made, you lose control over who it gets sold to and who your servicer is.
Sean: It can be sold and resold many times throughout the course of having this mortgage, right?
Linda: Yes, they can. Most of the times people don't realize what's happening behind the scenes. It's very common for mortgages to be sold after you take out the mortgage. So don't be surprised if you see some changes.
Sean: Another thing I think worth mentioning is that regardless of the size of the lender that you are considering working with, they're all going to be looking at the same general factors on your end when they consider the terms of the mortgage they'll offer you. This is things like your credit score, your income and your debt obligations. I don't think it's really that different from a smaller lender to a larger lender what kind of deal they'll be offering you when it comes to that. Is that right, Linda?
Linda: It might depend. Sometimes they say local lenders, those smaller lenders, tend to be more lenient with people who are credit-compromised perhaps, or their income is low, and national lenders tend to be a little bit more stringent. This is just generalities, but it's important to consider, and remember the fact that all of these lenders will be looking at the same factors when deciding whether or not to approve you for a loan.
Sean: Well Linda, thank you so much for talking with us today.
Linda: Thanks for having me.
Sean: And with that, let's get onto our takeaway tips. Liz, do you want to kick us off?
Liz: My pleasure. First, note the different types of mortgage lenders. Each has their own pros and cons, so think about what might be best for your needs.
Sean: Next up, small lenders aren't necessarily risky. They may have fewer loan offerings and larger lenders, but they can give you a more personalized experience.
Liz: Finally, vet any potential lender. Before committing to a mortgage, check their ratings and any complaints against them. And that's all we have for this episode.
Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more information on this episode, and remember to subscribe, rate and review us wherever you're getting this podcast.
Sean: Here is our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
Liz: And with that said, until next time, turn to the Nerds.