Better Homes and Gardens Real Estate Life

Tag: Finance Tips

  • What Are Mortgage Points?

    If you are in the market to purchase your first home, you have likely been bombarded with a tremendous amount of information that you need to learn and understand about the home buying process. For most buyers, a mortgage loan must be secured to cover the cost of purchasing the home. Also for most buyers, the financing portion of purchasing a home is typically the most complicated, yet important, aspect of the process. You may have heard the term “mortgage points” used by a lender during discussions about securing a loan. Understanding what mortgage points are will help you get one step closer to finalizing the purchase of your home.

    Mortgage points, also commonly referred to as discount points, are essentially just a way to pre-pay interest on a mortgage loan. When you start shopping around for a lender, one of the most important factors you will consider is the interest rate the lender offers you on the loan. Even half a percent difference in an interest rate can make a significant difference in the amount of money you repay over the lifetime of the loan. One way that a borrower can lower the interest rate charged by the lender is to purchase points. One point is equal to one percent of the loan amount. If, for example, you take out a $200,000 loan you would pay $2,000 for each point. In return for paying for points, the lender will lower your interest rate by a fraction of a percent (usually around 0.125 – 0.250 percent). The idea, therefore, is that by purchasing points upfront at the start of the loan you will be paying less over the life of the loan (as a result of the lower interest rate). A borrower, however, should do the math to ensure that this is actually the case before agreeing to pay points on a loan.

    Mortgage points should also not be confused with an origination fee or origination “points”. The term “origination fee” may be used to refer to a method of buying down the interest rate; however, the term may also refer to one-time fees charged by the lender to set up the loan. In the latter case, your origination fee may be used to pay for lender attorney fees, document preparation fees and the like but will not result in a lowering of the interest rate on your loan.

    As a general rule, the longer a borrower plans to remain in a home the more sense it makes to pay for mortgage points up front because it takes years for the fractional savings provided by purchasing a point to add up to the initial cost of purchasing the point. Consider the following scenarios:

    Scenarios A – You take out a 30 year fixed rate mortgage for $200,000. You decide not to pay points and receive an interest rate of 6.0 percent. Your monthly mortgage payment will be $1,193. After one year you will have paid out $14,316, after ten years — $143,160, and after 30 years — $429,480.

    Scenario B – Same 30 year fixed mortgage but this time you purchase two points at a total cost of $4,000 to you up front. The lender lowers your interest rate to 5.5 percent. Your monthly mortgage payment will be $1,130. After one year you will have paid out $17,560 (monthly payments plus cost of points), after ten years — $139,600, and after 30 years — $410,800.

    Scenario C – Same 30 year fixed rate mortgage but with the purchase of four points at a cost of $8,000. Lender lowers your interest rate to 5.0 percent. Your monthly payment will be $1,069. At the end of year one you will have paid our $20,828, after ten years — $136,280, and at the end of year 30 — $392,840.

    As you can see, purchasing points will save you a considerable amount of money if you plan to remain in the home for long enough to realize the savings. The difference in total out-of-pocket expense between scenario A and C at the end of year ten is less than $7,000 though it climbs to closer to $40,000 by the end of year 30. For this reason, a borrower should take the time to analyze whether purchasing mortgage points is the best way to spend his or her money.

  • Do I Need to Put 20% Down?

    Home buyers across the country ask if it is required to put 20% down on a house to qualify for a new home. It is not difficult to grasp why that “20%” figure strikes such fear into the hearts of potential homeowners, especially the young and not-so-wealthy. The average for home sales has reached $347,000 as of 2015. When you consider that 20% of an average sold home, priced above, is more than $69,000, it resonates that one needs serious savings to provide a 20% down payment.

    The Amount of Money You Pay Up Front is Impacted by the Following:

    • How your loan application is viewed by lenders
    • Your interest rate
    • If you will need to pay for private mortgage insurance (PMI)
    • The Type of loan you qualify for

    Fortunately, the 20% “rule” is considered a myth today. In fact, according to U.S. News & World Report, many lenders will still finance a home sale with less than 20% down. Keep in mind that even if you put down a 20% payment on a house that offers potential benefits, it is not a necessity. There are many loan programs that exist primarily for home buyers that are not able to set aside tens of thousands of dollars. A growing number of home buyers simply do not put 20% down.

    Here are some pros and cons of paying a 20% down payment:

    Why a 20% Down Payment is Important:

    • Higher down payments equal lower monthly payments for you.By paying more up front, you will have smaller monthly payments. Not owing as much money enables your debt-to-income ratio (the total amount paid toward debt every month as compared to your monthly income) to become even lower. Lenders consider your debt-to-income ratio when determining whether you qualify for a loan.
    • A larger down payment can get you a lower interest rate on your loan. That means that you will pay less overall for the life of the loan. That equates to more money in your savings.
    • Putting 20% down allows you to avoid private mortgage insurance (PMI). Making a 20% down payment means you will not be required to purchase private mortgage insurance. PMI is usually a requirement if your down payment is less than 20%. PMI premiums, added to your mortgage, require more money from you.

    The Benefits of Not Paying a 20% Down Payment:

    • You can become a homeownerSaving the money required for a 20% down payment requires years. Working with a lender that accepts lower down payments will help you purchase your home in less time.
    • Waiting may cause you to spend more. Interest rates tend to fluctuate causing prices generally, to rise over time. The money saved today will likely buy you less house in a few years. Consider the following:

    If you pay $10,000 down today at a 4% interest rate or wait several years when you can afford to pay more, such as a down payment of $60,000, but with an interest rate that has risen to 7% – you will end up paying more overall just in interest.

    • A homeowner builds equity as a result of owning their home. Waiting years to become a homeowner while saving money may result in the loss of time and thus the loss of equity.
    • Purchasing a home is for everyone. Whether you can afford 20% down or something less, buying a home is within reach for everyone. Lenders are a great source to learn about the many options available and to find the program that is right for you and your unique needs.

  • Determining How Much House You Can Afford

    Affordability of a new home depends on funds available for a down payment and your current debt ratios. Start the process by evaluating your total income, debts and other expenses before developing a budget plan. Try using a mortgage calculator to determine your monthly payments, based on interest rates and the loan amount. Once you have determined how much house you can afford, you will be able to pre-qualify for a loan and buy your dream home.

    The Budget  

    The exciting process of buying a new home starts with the critical step of identifying your budget. A personal budget depends on several factors, including your current debts and your salary. Personal spending and expenses associated with owning a home must be evaluated before purchasing a new property. By evaluating the factors that contribute to the affordability of a home, you will be able to identify your maximum budget and meet the requirements to pre-qualify for a loan.

    The Salary

    Your salary provides the foundation for your total income and the amount of funds available for a mortgage payment. Begin by evaluating your current salary and monthly income to determine your budget. As a general rule, a loan should never exceed 36 percent of your total monthly salary and income. An easy calculation that determines the affordability of property is determined by the following:

    Take into account about 1/3 of your monthly income. If you make $3,000 per month, then you can assess that you will want to handle a mortgage payment of $1,000 per month or less.

    Current Debts

    The cost of your mortgage will vary based on your debt-to-income ratio. A high-debt ratio determines that you will qualify for a smaller mortgage amount. You want to limit your total debt-to-income ratio to less than 40 percent of your total income. Debts such as credit cards, car payments or other loans impact how many homes you can afford by reducing the amount of funds available to you for the property.
    Types of Mortgages

    The type of mortgage you secure impacts the overall cost of your home loan. Mortgages are affected by fluctuating interest rates set by the Federal Reserve. Below are the types of mortgages available:

    • A traditional fixed-rate mortgage provides a stable payment plan that you pay off over a set period. You repay a traditional loan over a 30-year period by making monthly payments of a stated amount.
    • Adjustable-rate mortgages offer the lowest current interest rate but the interest increases and decreases with the current rates. As a result, the monthly payments change over time when the interest rates move up or down.
    • A short-term loan, such as a 15-year mortgage, impacts the affordability of property as it impacts monthly payments. A loan with a shorter repayment period usually costs more on a monthly basis, so the affordability of a home depends on the duration of your loan.

    The Down Payment

    A down payment depends on your financial situation and the funds available for the initial payments. In most cases, you will want to provide a down payment that is roughly 20 percent of a home’s value. There are options to provide larger or smaller down payments before buying a home that you may negotiate with your realtor or seller.

  • 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.

  • 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.