Posts Tagged ‘mortgage’

Can I afford to buy a home?

There are a couple of ways to approach the question “Can I afford to buy a home”? One way is to see it from they eyes of a lender. Most lenders agree on the following guidelines:

• Your debt-to-income ration can be no more than 36%
• A housing payment-to-income ration of no more than 33%, preferably around 28%
• Good Credit history
• Required Down payment or around 5%

If you meet all of those guidelines then you will have a good shot at getting a home loan from a lender.

However from your own personal financial situation you may get a different answer. From my own personal experience most lenders will offer to lend you more money than you can really afford. Lenders don’t factor other spending habits into the equation such as entertainment budgets, giving to charities, medical expenses and many other budgeted expenses. They also do not factor in future expenses such as retirement, college, weddings, etc.

Additional expenses will include possible home improvements you want to make once you move into your home. Paint, blinds, new carpet and an extensive list of improvement will probably cross your mind.

Before you decide how much money you spend on buying a home you should do a detailed budget analysis. Find out exactly how much money you are spending each month and how much you are saving. Don’t forget to include all of you and your spouses’ income as well as all your expenses. Also, include room for other future expenses that I mentioned earlier. Once you find your target amount find a good mortgage calculator online that will tell you how much house you can afford.

Once you have all these numbers calculated give it a test run. For the next three months pretend like you have purchased your home. Instead of actually paying the house payment put this money into savings. Not only will it inform you that you can afford a house, but it will give you additional money to pay down on the home or to purchase those possible improvements once you move into your new home.

So, if you are wondering if you can afford to buy a home use the lender guidelines as a starting point, follow up with a detailed personal budget analysis, do a test run and finish off with even more research.

Be smart when you refinance your home

It may sound tempting to refinance your home loan now that rates are low, but is it really the smart thing to do? Before you make the final decision to refinance your home be sure to do all the calculations carefully. You could actually end up losing money on a home refinance.

When you refinance your home there are many fees involved that must be considered along with the lower rate. There are many fees that are mandatory before you can close the refinance loan and these little fees can add up to a large chunk of money at the end. Typical refinance fees include: application fee, title search and title insurance, appraisal fee, survey costs, hazard insurance, attorney’s fees, home inspection fees, loan origination fees, mortgage insurance, prepayment fees, flood certification, interim interest, and discount points.

An application fee is charged by the lender which covers their cost to process the loan. Usually this fee is paid up front and ranges from $75 to $300. Most lenders apply this cost to the final loan. Usually this fee is non refundable even if you are not approved for the loan.

A title search is required even though one has already been performed on the home. A title search is a review of the historical record associated with the property. This includes items such as property and name indexes, deeds, court records, etc. The lender does a title search to ensure that the buyer is purchasing a house from a legal owner and there are no liens against the home. In the case of a refinance loan they want to make sure you own the home and they are aware of any outstanding liens or loans on the home. 

The lender needs to perform an appraisal fee to make sure the value of the home will stand good for the loan amount. Today many lenders will only loan an amount equal to 80% and 90% of the home value. About a year ago many lenders would loan over 100% of the home value, but times have changed. For example if your home is appraised for $200,000 then a lender who lends 90% of the value would only loan $180,000 toward the home. This means if you owe more than $180,000 then you could not refinance the home. Typical appraisal fees range from $150 to $400 and vary based on the value of the home.

Sometimes lenders require a survey on the property before you can refinance a loan. This is to make sure you have not crossed any boundaries of the property while you have lived there. This cost can range from $200 to $400 depending on the size of the property.

Hazard insurance costs are included in closing costs. It’s mandatory to have hazard insurance on the property before a loan can be acquired. Most lenders requrie these to be prepaid thus they are included in closing costs.

Attorney’s fees must be paid at closing to cover any work the attorney does for the loan. Usually these fees range from $50 – $200.

Sometimes lenders a new home inspection before you can refinance the loan. This is to make sure the home is still in good shape in case you were to default on the loan. Home inspection fees usually range from $150 to $400.

A loan origination fee is a fee charged by the lender for preparing, evaluating and submitting a proposed mortgage loan. Most of the time these fees are expressed as a percentage of the loan amount.  A typical loan origination fee is about 1% of the loan amount.

Mortgage insurance or PMI is usually required by lenders if you need a loan for more than 80% of the homes value. This can be charged on a monthly basis or as a lump sum at closing. If it’s paid in closing it’s typically 1/2% to 1% of the loan amount.

A tricky fee that is often overlooked is a prepayment fee. If you pay off the loan before the end of the term you will be charged a fee. This fee can vary by states but should always be presented to you at closing.

A flood certification fee is a small fee, usually less than $50. It’s required by most insurance companies to ensure the home is not in a flood plain.

Interim interest is the amount of interest that has accrued from closing date until the end of the month. This can be a large sum if you close at the first of the month.

Finally, discount points is a percentage amount that is typically 1/2% to 1% of the loan amount. This fee is used to reduce the interest rate of the loan. This varies by bank but an example would be paying 1 point (1% of the loan amount) to reduce the interest rate 1/4%.

As you can see there many fees associated with closing a loan. Be sure that these fees don’t add up to more than you will save over the time you expect to keep the loan. Just because you are getting a smaller monthly payment doesn’t mean you are actually saving money!

Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is basically a third party insurance policy that covers a lenders risk when the buyer doesn’t have at least 20% equity in a home. So if you don’t pay down 20% or you don’t purchase your home for 20% less than what it appraises for then you will usually be required to pay private mortgage insurance or PMI.

The creation of PMI has allowed many buyers to purchase homes that normally would not be able to own their own home. For as little as 3% to 5% down potential buyers can purchase a home without having to save for a large down payment.

One important aspect of PMI you should always keep in the back of your mind is that once you have 20% equity in your home you are no longer required to pay this insurance policy. Some lenders require this 20% to be from the original purchase appraisal and others will allow a new appraisal amount at the current time. This is a big benefit if your home has increased in value over a short period of time. Usually you will have to contact the lender once you have 20% equity in your home in order to cancel the PMI. However, usually lenders are required to automatically terminate PMI once you have paid down the mortgage to 78% of the original apprasial value.

There are ways to avoid paying PMI. The first and most obvious is by paying down at least 20% of the loan at the time of purchase. The second method is a piggy back loan or taking out a second mortgage at the time of purchase. Before you choose an option consider the pros and cons of each type of loan.

How much should a mortgage down payment be?

Deciding how much down payment to pay on your home mortgage affects many aspects of purchasing a home. Before you talk to a realtor or call about a home listing you should figure out how much money you can pay down on your home. Your down payment can affect your interest rate, the amount of  money you save, and the type of loan you qualify for.

The interest rate you qualify for on a home mortgage loan is very important. A single percentage point can change your monthly payment by hundreds of dollars. It will also affect the amount of interest you pay over the life of the loan by thousands of dollars. Many times the more down payment you put down the better interest rate you will get.

Paying any down payment will save you thousands of dollars over the course of 30 years. A down payment of $10,000 on a $250,000 loan at 6% for 30 years will save you an additional $11,000 in interest over a 30 year mortgage.

There are different types of loans to consider when purchasing a home. Some are more beneficial than others depending on your financial situation.  The different loan choices available include: conventional fixed rate loans, (ARM) or adjustable rate mortgages, VA, buydowns, FHA, graduated payment mortgages and all the variations of each. The more down payment you have the better loan program you will qualify for.

There are many important choices when it comes to purchasing a home. Home quality, neighborhood, affordability and pricing are all important aspects of a home purchase; however your down payment could be one of the most important decisions. Maximize your buying power with the best down payment you can afford!

Interest Only Mortgage Loan Information

Interest only mortgage loans usually have an interest only period of 5 to 10 years. During this time period the borrower only has to pay the interest on the loan. After the initial interest only time period the remaining balance is amortized for the remaining term of the loan. For example if the initial loan was a 30 year interest only loan with a 10 year term of interest only payments the remaining balance would be amortized over 20 years.

An interest only loan allows for lower payments at the front part of the loan, freeing up cash for other purposes. Many times borrowers take out this type of loan because they are expecting a raise in the near future and will be able to afford higher payment later.

The pros of interest only home mortgage loans:

• Lower monthly payments during the interest only period
• Free up cash to save for retirement
• Still get the benefit of tax savings

The cons of interest only home mortgage loans:

• Risk of declining value of real estate and being upside down at the end of the interest only period
• Higher payments after the interest only period
• Little or no equity in your home during the initial interest only period
• Higher interest rates because they are riskier loans for the lender

If used properly you can find some advantages in interest only loans; however with the poor money management skills of most Americans it’s not the best idea. If you are planning on using an interest only loan to purchase a home you can’t really afford now, it’s not a good idea. Even though you may expect more income later in life it’s not a guarantee. Research and plan very carefully before taking out an interest only loan.

Piggyback Mortgage Loan Information

A piggyback loan is a mortgage loan in which the financing is handled by two different lenders. The first lender finances a large portion of the loan, usually 80% and another seperate lender finances the remaining balance of the loan. There are three common options of piggyback loans, 80-10-10 loan, the 80-20 loan (also known as the 80-20-0 loan) and the 80-15-5 loan.

An 80-10-10 loan is when the first mortgage finance company finances 80% of the loan amount, the second finance mortgage company finances 10% of the loan balance and 10% of the balance is paid down by the purchaser. The 10% financed by the second lender is basically a second mortgage on the home.

An 80-20 loan is when the first mortgage finance company finances 80% of the loan amount and the second lender finances the remaining 20% of the loan as a second mortgage. No down payment is paid by the borrower or there is already some equity in the home.

The final typical type of piggyback loan is the 80-15-5. The first lender finances 80% of the mortgage balance. The second lender finances a second mortgage for 5% of the loan amount and 5% of the balance is paid down by the buyer.

The biggest pro of a piggyback loan is that 20% of the home value is paid for through a down payment or by the second lender. This means that the first mortgage lender doesn’t charge PMI or private mortgage insurance. Private mortgage insurance is a third party insurance required by lenders if you do not have 20% equity in your home. It protects lenders from borrowers in case they file bankrupsy. A piggyback loan reduces the loan risk of the lender because they aren’t financing the entire amount. Avoiding PMI can save you hundreds of dollars per month depending on the equity and financing terms.

There are three major cons of a piggyback loan. First, you already have a second mortgage on your home. If you ever have an emergency where you need to use your home as equity it will be very difficult since you already have a second mortgage on your home. The second major con is that the second mortgage will haev a higher interest rate than a normal loan with PMI. Sometimes the interest rate can be 2% or 3% higher. Even though your monthly payment may be lower you will end up paying more for the loan in the end. The third major con is that PMI drops off after you have 20% equity in your home. This could happen quick if you overpay your minimum monthly payments. If you don’t have a piggyback loan your payment will decrease once PMI drops off, with a piggyback loan you are stuck with the second mortgage payment until it’s completely paid off.

In my oppinion in most cases you are better off to avoid a piggyback loan. Even though you will have a smaller monthly payment up front you will pay more in the end. Do the math for you own individual situation before you close the loan!

FHA Home loan information

FHA home loans are a great way to purchase or refinance your next home. When it comes to mortgages there many different possibilities for financing. The best way to decide which type of loan is best for you it to be informed and educated about all the different types of loans available (FHA and Conventional). Here is some valuable information about FHA home loans.

A FHA home loan is a mortgage that is insured by the Federal Housing Administration, a United States government agency.  FHA loans were designed by the government to allow lower income families an opportunity to purchase a home. Today FHA home loans allow borrowers to purchase homes with smaller down payments, less than perfect credit and higher debt to income ratios. There are disadvantages of FHA loans including PMI or mortgage insurance, more strict property requirements, maximum amount a loan can be, and possible additional income tax penalties if you sell the property too soon.

Before you decide which type of loan to pursue consider all the pros and cons of each type of loan.

Conventional loan

Conventional loan defined
 A conventional loan is basically any mortgage loan that is not insured by the federal government or the FHA (the Federal Housing Administration). A conventional loan was the first type of traditional mortgage loan made by lenders. It was basically a fixed rate mortgage for the entire period of the loan. Lenders basically loaned the money to borrowers and the loan was kept open until the loan was paid in full. It was a great way for the borrower to create a relationship with the lender, but often times weren’t the best financial move for lenders. If interest rates rose, lenders were stuck receiving a lower return rate on their money.

Types of conventional loans
There are many types of mortgage loans that are considered conventional loans. A few examples include conforming loans, nonconforming loans, and jumbo loans. A conforming loan is a mortgage loan that conforms to GSE guidelines. Nonconforming loans fall outside the GSE guidelines because of bad credit, lack of collateral backing the loan, or the loan is over a certain amount of money. Finally, a jumbo loan is a loan that large to be financed by normal mortgage trading companies. This amount is currently just over $400,000.

Pros and Cons of Conventional Loans

Pros

• Lenders will be more flexible with lending fees
• The lender may take into consideration other collateral other than the property being mortgaged
• A lender may consider other personal property included in the property as part of the home value
• Appraisals will be more lenient
• The lender may self insure the loan
• A higher interest rate may be considered in exchange for lower closing costs

Cons

• Usually require larger down payments
• The lender sets their own interest rates
• Though lenders can be flexible with lending fees they can also charge more
• There may be some fees associated with paying off the loan early
• Require PMI if the LTV (loan to value) is greater than 80%
   

Other mortgage loan options other than a conventional loan

FHA loans are non-conventional loans. FHA loans are insured by the federal government and have many advantages over conventional loans. FHA loans usually require lower down payments, have more flexibility when it comes to the borrowers credit scores, and have lower PMI or private mortgage insurance.

Reasons you may want to refinance your home

Interest rates are still very low compared to a decade ago. Average mortgage interest rates continue to stay around the 6.5% mark for the 30 year fixed loan. You may have thought about refinancing your home loan before, but just never got around to following through, or maybe you just didn’t know if it would be in your favor. Everyone’s financial situation is different and you should consider many different factors before you decide to refinance. Some factors to consider are your financial goals, your current interest rates, the currently type of mortgage loan you have, and how long you want to stay in your current home. After you consider these factors here are 5 instances when you may want to consider refinancing your current home mortgage loan.

Refinance from an adjustable rate mortgage (ARM) to a Fixed-Rate Mortgage

An adjustable rate mortgage is a type of mortgage loan that is fixed for a certain amount of time, usually 3, 5, or 7 years. After that time period the rate adjusts usually according to the current prime rate. The interest rate can continue to rise with the prime rate up to a certain percentage. The advantage to an ARM loan is a lower interest rate and payment for a short period of time. If you had an arm loan a couple of years ago with a really low interest rate and that term is expiring you may want to refinance your mortgage loan into a fixed-rate in order to avoid the rising interest rates.

Refinance from a fixed-rate mortgage to an ARM

A fixed-rate mortgage is a loan for a certain time period, usually 15, 20, 25 or 30  years. The interest rate is fixed for the entire period of loan. This is a great deal if interest rates are low when you lock the rate, but bad if the rate you have is much higher than current interest rates. A good time to refinance your fixed-rate mortgage to an ARM loan is if yo are planning on moving in the next 3,5, or 7 years and interest rates are much lower now than your current fixed rate. You can take advantage of the lower interest rates and then purchase your new home before the rates start to rise.

Lower your monthly mortgage paymnet

You may want to consider refinancing your home mortgage loan to lower your monthly mortgage payment. Even the smallest drop in interest rates can change a monthly mortgage payment significantly. For example lets assume you borrowed $250,000 on a home 5 years ago at 7.5% for 30 years. Today interest rates have dropped to 6.25% and you want to consider refinancing the mortgage.  Your original mortgage payment would have been around $1750, your new payment would be $1435 a savings of about $315 per month. I’m assuming you paid your exact payment for 5 years so you would only refinance $233,000. There are other factors to consider such as closing costs but some simple math can save you some money in your monthly budget.

Getting cash from your home for improvements or additions

Wanting to finish the basement, add on a patio, screened in porch or swimming pool? Where will you get the money to do these projects? A great option is a home equity loan. If you got equity in your home you can take out a second mortgage on the house to finance the other projects. Not only will you get a better interest rate than a credit card but the loan is also tax deductible.

Consolidate high interest rate credit card debt

If you’ve got yourself into more debt than you can handle it’s possible to take out a second mortgage on the house to consolidated high interest rate credit card debt.  I’m not a big fan of this method because most people who choose this option will use the credit cards again. Be very careful when taking loans against your home it’s your prized possession and mortgage companies won’t hesitate to take it away from you.