Better Homes and Gardens Real Estate Life

Category: Finance

  • When to Refinance Your Home

    Refinancing a home loan can be a creative way to access additional money easily. Refinancing allows you to convert an existing mortgage into a fully paid off one, and thus obtain a new loan. In many cases it is considered a favorable option for consumers, especially if they have good credit. Now is a favorable time to consider refinancing as interest rates are at their lowest rates in years. Compare the scenarios below to consider whether it is worth your time and to refinance.

    When to Refinance: There are times when refinancing your existing mortgage loan can prove to be ideal.

    • Lower Interest Rates: If you secure a new interest rate, at least one percent lower than what you have now, refinancing for the same length of loan term will save you money. You will build equity faster as you will have a lower monthly payment too.
    • Shorten the Term: Cutting your loan term from 30 years to 15 years will mean a higher monthly payment, but a much lower overall cost of buying your home.
    • Get a Fixed Rate Loan: A fixed rate loan is a good idea if you currently have an adjustable rate mortgage (ARM) and are seeking to avoid the risk of paying more at a later time.
    • Consolidate Other Debt: Consolidating other debts through a refinanced mortgage loan can be beneficial, but only if you able to overcome the risk of defaulting.

    When Not to Refinance: Loan refinancing can be less beneficial in several situations such as:

    • Term Extended: If you refinance your loan to get a lower monthly payment, but you extend the terms; you will likely spend more money in the long term to purchase your home.
    • High Monthly Payments: If you refinance your home to pay off high-interest credit card debt or other types of unsecured debt, this can lead to high monthly payments. If it results in defaulting on your payments as they are too high, you could lose your home.
    • Not Making Credit Card Payments: On the other hand, not making payments on those credit cards, while financially devastating, will not lead to your home being confiscated. It also indicates you do not have money to pay payments.
    • Interest Rates Less than One Percent: If you refinance your loan at an interest rate that is less than one percent of a difference, you will likely lose any benefit due to high closing costs.

    For those who need a lower payment, lower interest rate or help with other debts, it can be beneficial if you refinance. Your lender can provide you with advice regarding all aspects of refinancing terms and to determine if it makes sense to move forward with your financial situation.

  • Checking Your Credit Before Buying a Home

    The American dream has always been to own your own home and your Better Homes and Gardens® Real Estate agent is there to help you achieve that goal. A key component is to understand what finance companies look for when considering an application. This knowledge can go a long way towards helping you finally purchase your new home. Finance companies typically look at two very important factors when deciding whether or not to approve a loan application. The first factor is your income to debt ratio and the second is your credit score. If home buying is in your future, checking your credit score now is an essential first step.

    If you are like most people, you most likely have not given your credit score much thought. Now that you are in the home buying market, knowing your credit score is very important. Although there are numerous companies that will provide you with your score for a fee, the federal government has mandated that each consumer is entitled to one free report each year, which includes the three major credit reporting bureaus. Your free report can be accessed at annualcreditreport.com once a year. The report will provide you with your score from Experian, TransUnion and Equifax. Once you have reviewed your report for accuracy, you can challenge any inaccuracies by following the procedures outlined by each of the individual credit reporting agencies. You may also choose to subscribe to one of the many services that offer assistance to keep an eye on your credit score for you to be certain your score remains in the acceptable range as you get closer to the actual home buying process.

    Your credit score will have a direct and significant impact on what type of financing you qualify for, as well as the interest rate you are offered if approved. Individual finance companies set their own guidelines for what is considered an acceptable score; however, an average score of over 600-650 is usually required in order to qualify for conventional financing. The higher your score, the lower your interest rate will be as well. In general, finance companies look for scores over 720-750 to qualify for the lowest interest rates offered by the lender at the time of application.

    Lenders also look at your debt to income ratio. In essence, this means how much debt do you have compared to the income you earn. If you earn $5,000 a month, but your debt is $2500 a month, you have a debt to income ratio of 50 percent which is too high for conventional financing. Check with your potential lenders what debt to income ratio they typically look for.

    If your credit score is not where is should be, you can take some additional time to try and pay off debts and raise your score, or you can look to non-conventional financing. If your scores are in the acceptable range, check with your lender to see if you can get pre-approved which will give you an idea of how much home you can afford and what your monthly payments will be. Be sure you are actually getting pre-approved, not pre-qualified. “Pre-qualified” simply means the lender gives you an idea of what you will qualify for based on information you supply, whereas getting “pre-approved” typically requires you to fill out an official application, pay a fee, and submit to a credit check.  This will ultimately provide a more accurate estimate of what you will be approved for when you decide you purchase your dream home.

  • What is a Reverse Mortgage?

    Financial freedom during one’s golden years often requires more funds than expected. By using a reverse mortgage on a property you already own or property that has a low mortgage balance amount remaining, you access the opportunity to meet your financial obligations and still maintain your retirement plans.

    What is a Reverse Mortgage?

    The U.S. Department of Housing and Urban Development calls a reverse mortgage a loan that converts the equity in your property into cash. Essentially, the mortgage is a type of loan that helps with financial concerns or provides extra cash for seniors when they own a home or have already paid the majority of a home loan.

    Although a reverse mortgage is a type of loan, it does not require repayment until you move out of the property or unless you do not meet the obligations stated in the loan agreement. If the homeowner passes away, then the loan is repaid by selling the property. Any remaining equity from the home sale goes to an appropriate heir or is passed down according to a will. If you move from the property, then you must repay the loan according to the terms of your agreement

    Qualification Requirements

    Unlike a traditional mortgage, a reverse mortgage focuses on the needs of seniors. As a result, it has clear standards to determine when an individual qualifies for the loan.

    • Applicants for the loan must be at least 62 years old or older before qualifying for the loan. If a husband and wife own property together, then both individuals must be at least 62 years old.
    • The mortgage requires a majority of the equity in the property. If you still owe money on a previous home loan, then you must discuss your options with a lender before applying for a reverse mortgage.
    • You must pay off a previous home loan before qualifying, but a small remaining balance also qualifies for the loan.
    • The homeowner must live in the property, so a vacation home does not qualify for the loan.
    • You are required to receive a mandatory but free discussion with a home equity counselor before you can be approved for a loan. A counselor provides essential information about the loan and helps you understand the terms and alternative options before you move forward with the process.

    Funding Amounts

    The amount of funds provided by a reverse mortgage depends on several factors, including:

    • The age of the homeowner
    • The current market value of the property. Some locations set a lending limit on the loan, even if your home’s value exceeds the limitation.
    • The interest rates. Younger seniors usually receive fewer funds due to interest charges and the expected timeline before they are expected to repay the loan amount.

    A reverse mortgage offers supplemental income, pays for unexpected expenses, health care expenses, pays off debts, and pays for home improvement jobs, but it only applies to specific groups and individuals. It is not an appropriate mortgage option for young homeowners or for individuals looking for supplemental income from a vacation property.

  • Types of Mortgages – ARMs and Fixed Rate Mortgages

    Buying a home is an exciting, yet complicated, process. A home buyer who plans to secure a mortgage when financing a home has a dizzying array of options available. Although there are a number of hybrids and variations, mortgages loans come in two basic types—adjustable rate mortgages, or ARMs, and fixed rates mortgages. Understanding the advantages and disadvantages of your options will help you make a more informed decision.
    Fixed Rate Mortgages
    As the name implies, when you enter into a fixed rate mortgage the interest rate is fixed at the time of purchase and will remain the same throughout the life of the loan. Although a traditional fixed rate mortgage contemplates a 30 year repayment schedule, you may have the option to select a shorter or longer repayment period. Your monthly payments will remain the same throughout the life of the loan. Interest, however, is front-loaded, meaning that your payments during the first few years of the loan will be predominantly interest with only a small percentage of the payment going toward the principal.
    Among the advantages to financing a home with a fixed rate mortgage is that there are no surprises. Your payments will never change even if inflation causes current interest rates to surge. Buying a home with a fixed rate mortgage is often easier for a first-time buyer to understand as well. The terms of an ARM can be very confusing which sometimes leads to misunderstandings on the part of the buyer. With a fixed rate loan, budgeting is much easier for the buyer because there are no surprises or changes during the life of the loan.
    One disadvantage to a fixed rate mortgage is that a borrower must refinance if interest rates fall significantly. This means additional closing cost fees to the borrower. In addition, first time borrowers may not qualify for the amount of loan they need because the initial monthly payments are usually higher under a fixed rate mortgage.
    Adjustable Rate Mortgage (ARM)
    Financing a home with an ARM also has advantages and disadvantages. Under the terms of an ARM, the interest rate is subject to change. Typically, the loan starts off at a lower interest rate than a fixed rate mortgage but adjustments over the life of the loan can raise the interest rate substantially and the monthly payments along with it. One advantage to an ARM is that a buyer may be able to qualify for a higher loan amount than with a fixed rate mortgage because the lender will use the lower payment amount reflected by the initial interest rate when qualifying the buyer. With a lower monthly payment, a home owner can save or invest the money saved each month. An ARM is often a good option when a buyer doesn’t plan to stay in a home for more than a few years because the interest rate will typically stay relatively low during the first few years of the loan.
    Among the disadvantages of an ARM is the uncertainty surrounding the monthly payments. Although most ARMS have built in caps that limit the amount the interest rate can change each year and/or over the lifetime of the loan, a borrower may still end up with an interest rate substantially above that of a fixed rate at some point during the lifetime of the loan. In addition, the terms of an ARM can be very confusing to a borrower because of the flexibility a lender has to change the interest rate and therefore the monthly payments.
    There are also a number of hybrids that combine aspects of both a fixed rate mortgage and an ARM. Hybrids come in numerous forms and offer a veritably unlimited combination of advantages and disadvantages for financing a home. Be sure to consult with your Better Homes and Gardens Real Estate agent about all of your mortgage options before choosing one.

  • Congratulations! You Just Opened Escrow. Now what?

    After years of working hard, saving your earnings and building your credit history, it is finally time to purchase your dream home, and the very last steps lie in the escrow process. However, if you’ve never used an escrow before, it can seem quite confusing.  Understanding the purpose of an escrow and how the escrow works will help make the process of buying a first home seem less intimidating.

    Basically, an escrow is used for the protection of all the parties involved in the real estate transaction.  For most, the purchase of a home will be the single biggest purchase of their lifetime. Large sums of money will change hands when you buy real estate, which is why an escrow company is hired to implement the transaction according to the terms of the sales agreement.  Purchasing a home also involves a significant amount of paperwork. Important legal documents that must be signed and filed in a timely manner to ensure that the sale goes through without a hitch. The escrow officer also takes possession of all the documents involved in the sale to ensure that the necessary paperwork will be completed and filed at the right time and in the right place.

    If you’ve just opened escrow, and are now wondering what will happen next, here is an introduction to the escrow process timeline. Although not all home purchases follow the exact same escrow process timeline, the following is a common step-by-step glimpse into the process:

    1. Appraisal. The lender will do their own appraisal to ensure that the agreed upon purchase price is not higher than the home value.
    2. Financing. You may already be pre-approved or pre-qualified for a loan; however, once you have decided on a specific property the lender will prepare a “good faith estimate” that details the loan amount, monthly payments, interest rate, and closing costs.
    3. Disclosures. The seller must provide you with a written list of any known problems with the home.
    4. Inspections. You will need to have a certified home inspection as well as other inspections that are required by the lender such as a pest inspection or a flood inspection.
    5. Insurance. Your lender will require you to provide proof of homeowners insurance. You may also need additional insurance, such as flood, earthquake, or hurricane insurance depending on where the home is located.
    6. Title report/insurance. The seller must have a clear and unencumbered title to the home in order to sell it to you. A title report looks for things such as liens that would prevent a clear title. You may also need to purchase a title insurance. Title insurance protects you if something is overlooked during the title search.
    7. Final walk through. This is done to make sure nothing has changed since you made the purchase offer and that items such as appliances or window treatments are left behind if they are part of the purchase agreement.
    8. HUD forms. This will arrive just before the closing and is the final statement of loan terms, fees, and closing costs. Review it for mistakes.
    9. Close escrow. This is when you close on the home. You will sign lots of documents and will likely need to pay costs related to the sale other than the purchase price. The lender will transfer the remaining purchase money and your escrow funds will be released by the escrow agent and applied to the purchase price.

    Working with an experienced real estate professional is highly advisable when buying a first home to ensure that the escrow process timeline proceeds in a smooth manner. For more information about how to navigate the escrow process, contact one of our Better Homes and Gardens Real Estate professional today!

  • Answers to Common Questions About Title Insurance

    As a homebuyer, you’re probably excited to finally be closing on your home purchase. However, for many homebuyers, closing on a home purchase comes with a lot of uncertainty.  When you begin the process of closing on a home purchase, you may suddenly find yourself faced with a lot of different costs. One of these costs includes the title insurance. To help you better understand what title insurance is, here are a few answers to some frequently asked questions.

     

    What is title insurance?

    Title insurance is a type of insurance that protects either the home purchaser’s interest or the mortgagee’s interest in a property, depending on the type of title insurance policy you purchase: The Owner’s Policy protects the home purchaser (i.e. home owner), while the Lender’s Policy protects the mortgagee (i.e. mortgage lender)

    To the extent of the policy’s coverage, title insurance protects the insured from incurring financial loss or legal obligations due to title defects, hidden liens, or other title issues that are specified within the policy. Simply put, title insurance protects your interest in a property, so you can rest assured that the home you purchase is your in fact you own, and that you will not be held responsible for issues with your title that you did not cause.

     

    What is the difference between an Owner’s Policy and a Lender’s Policy? Owner’s policy is usually purchased by the home seller on behalf of the home buyer, while a lender’s policy is purchased by the homebuyer (i.e. mortgage borrower) on behalf of the mortgagee (i.e. mortgage lender) before the home loan is issued.  Both types of title insurance policies insures a clean and clear title, protecting the insured from the financial and legal burdens of unforeseen title issues. However, a Lender’s Policy usually only covers the amount of the loan, and the coverage gradually decreases as the loan gets paid off.

     

    What can I expect to have covered in my policy? For homeowners, getting an owner’s policy protects you from a number of things (e.g. mistakes or errors that have been made in public records or during the title search). If an issue comes up that was not discovered during the title search, you are protected under this insurance. Also, if you are ever in a situation where you need to defend your title, your insurance covers the costs of negotiation with third parties and the payment of legal fees as well.

     

    What is not covered under my policy? This depends. As with any insurance, there are some risks that may not be covered under your policy. For example, this type of insurance does not protect you against anything found during an inspection of your property. Also, it does not insure against any title issues that you are already aware of.

     

    Why do I need title insurance? Home owners want to have title insurance because it affords certain privileges such as the ability to use and enjoy your home without limitations that were not bargained for, or the freedom from incurring any financial obligations due to hidden title issues, etc.

     

    For example, say that one of the previous owners of the home you are about to purchase failed to pay his state taxes, and as a result, a tax lien was place on the property 50 years ago.  Upon reviewing public records today, the abstractor makes an error and fails to notice that there is a lien on the property. Title insurance will protect you from being obligated to pay for this tax lien.

     

    Where should I shop for title insurance? To purchase title insurance, you need to find a licensed insurance carrier. The law prohibits anyone without a license to issue this type of insurance. To protect lenders and homeowners, states typically regulate these carriers heavily so that you can be confident that you remain protected after you purchase a title insurance policy from a licensed insurance carrier.

     

    As we mentioned earlier, closing on a home purchase will require a number of necessary costs that may come as a surprise to you. Talk to your loan officer, real estate agent, and any trusted professional during the buying process to get answers to your questions regarding the closing costs for your home loan and home purchase.

  • Renting to Own

    For many, buying a home remains the American dream. Traditionally, buying a home entails getting approved for a mortgage and purchasing the home outright. There are, however, other options such as the rent-to-own route. Whether you are a seller or a buyer, understanding the rent-to-own process can help you decide whether it is a viable option for you.

    From a buyer’s standpoint, the rent-to-own option, also referred to as a “lease option contract”, may be an attractive option if the buyer cannot obtain conventional financing right away because of a poor credit score or an insufficient employment history. A buyer may also choose to enter into a lease option contract if the buyer is new to the area and not certain where he or she wishes to live. From a seller’s point of view, a rent-to-own agreement offers an option when the market is slow and a house has been on the market for some time without selling.

    Although the exact terms of a rent-to-own agreement or lease options contract may vary, the basics remain the same. A renter enters into an agreement to rent the property for a specific term just as in a conventional lease agreement; however, the renter also pays an additional sum of money for the option to purchase the property at a fixed price within a specific time frame. This offers the buyer the time necessary to qualify for conventional financing. The funds paid for the option are usually non-refundable, meaning that if the renter does not ultimately purchase the home the money is lost.

    Typically, the funds are credited to the purchase price if the sale does goes through. In addition, a percentage of the monthly rent payments may also be credited to the purchase price of the property.
    For example, imagine that a home is listed for sale for $150,000 but you, as the purchaser, are unable to obtain conventional financing right now. You are, however, relatively certain that if you are able to work on your credit score over the next two years that you will be approved for a mortgage. You and seller could enter into a rent-to-buy contract that allows you to rent the home for two years with an option to purchase the home for the $150,000 price if you can accomplish the sale within the two year period. In the meantime, you will pay monthly rent in the amount of $900. You will also pay an option fee of $2,500 which locks in the purchase price for the next two years. If you ultimately purchase the home, the $2,500 will be applied to your down payment; however, if you do not purchase the home, the seller gets to keep the $2,500. You may also be able to get the seller to agree to apply some of the monthly rent payment toward your down payment if you buy the home.

    As the buyer, you get extra time to work on any issues that need to be resolved in order to qualify for a mortgage. You also know that the money you paid for the option to purchase as well as some of your monthly rent is going toward a down payment which makes saving for the down payment easier. The seller, in turn, covers his or her monthly mortgage payment and knows that one of two things will happen within the time frame agreed upon in the contract – either home will be sold or the seller will be able to keep the option fee funds as compensation for having kept the home available for the buyer.

  • Financing a Second Home

    Purchasing a second home can be a sound financial investment that has the potential to offer a prime spot for your future vacations, bring in long-term profits though the appreciation of your home, rental income and perhaps some tax breaks. If you’re in the market for a second home, there are many considerations to keep in mind, including location, potential maintenance and repair responsibilities, etc. However, before any of those factors come into play, it’s a good idea to think about and understand the process of financing a second home.

    While many aspects of the home buying process remain the same whether you’re buying a primary residence or a second home, there are some additional considerations that are different when you’re financing a second home. Take a look at the following issues that you should keep in mind before you prepare to buy another residence.

    Cash Up Front
    If you already own a home, then you probably know that you’ll need to come to the table with enough cash to make your down payment and cover closing costs. However, for a second home, you’re likely to need more cash than you would to purchase a primary residence in the same price range.

    While you can purchase a primary home with a 20% down payment or less, in many cases, lenders consider second homes to be riskier investments, so they require homeowners to put down more than 20% of the price as a down payment. If you don’t have this amount saved up just yet, you may need to wait a little longer to finance your second home.

    However, some homeowners decide to use the equity in their first home to obtain enough money for the down payment on their second home. You can accomplish this by taking advantage of a cash-out refinance, an equity line of credit or a home equity loan.

    Interest Rates
    In the same way that lenders will require a larger down payment because rental properties pose a higher risk, they’ll also lend at a higher interest rate than homeowners would otherwise qualify for if they were purchasing a primary residence. These higher interest rates, also known as non owner occupied mortgage rates, are often 1.5 to 2 points higher than owner occupied interest rates. Non owner occupied mortgage rates mean that homeowners will have to make higher monthly mortgage payments and contribute a larger sum of interest over the lifetime of the loan.

    To save money, homeowners should aim to qualify for the lowest possible non owner occupied mortgage rates available. One way to do this is by making sure your credit score is as high as possible when you lock in a rate. Even though your credit score draws from years of your financial history, there may be certain steps you can take in the short term to boost your credit score in time to get a better rate.

    Prepare in advance by scheduling a meeting with a mortgage professional or financial advisor who can let you know if there are any blemishes on your credit history that you can eliminate in the short-term.

    The process of financing a second home can pose a unique set of challenges. However, if you’re prepared before you sit down at the table, you’ll have a better chance of closing on a solid investment.