Tag: home loans

Build Equity By Choosing The Right Mortgage

Home ownership is the key to building wealth for most people because it is an involuntary savings account. As you pay down your mortgage each month, the value of your interest in the home rises.

Build Equity By Choosing The Right Mortgage

Equity is a beautiful word as every homeowner knows. Once you get used to making your mortgage payments, you can rest assured that you are creating a nest egg every month. Throw in the appreciation on the property and your nest egg can grow large before you realize it. This savings account, better known as equity, can provide the means for putting your kids through college, dealing with emergencies and retiring.

Building equity is fairly simple, just make your monthly mortgage payment. There are additional steps you can take to move the process along at a faster pace. These steps are all about the type of mortgage you obtain when you purchase your home.

When you purchase a property, particular for the first time, it can be a stressful event. Right or wrong, most people tend to take anything they can get in a mortgage loan so they can meet close. This is understandable, but can come back to haunt you financially. If you can step back from the chaos for a moment, you might consider the following options that will help build equity.

A 30 year mortgage is the default for most home buyers. It is the first thing that comes to mind, and most assume it is the safest option. It is the mortgage I recommend to most home buyers, because it has the lowest monthly interest and highest deduction for tax purposes.

However, we are discussing acquiring equity, and for that purpose, a 15 year mortgage is going to cut down on the total interest you pay on the loan as well as supercharge your equity growth. A 15 year loan is far better than a longer option to build equity, but only if you are absolutely sure you can meet the monthly payment requirements. If you have any doubts whatsoever, there is another option that you can consider.

Making prepayments on principal is a simple, proven way to build equity. The idea is to make an extra monthly payment when you have sufficient cash to do so. Effectively, you use your home as a savings account by doing this.

The advantage over other investments is the equity growth should be tax free. Before taking this step, find out from your lender if there are any prepayment penalties. Regardless, making two of these payments each year will quickly build equity in your home. Make sure your extra payments are credited toward the principal balance of your loan, not the interest.

If any of these ideas sound interesting, you can still take advantage of them even if you currently have a mortgage. Refinancing your mortgage gives you an opportunity to correct mistakes you made when you were more focused on your initial purchase. Talk to me to find out your options.

Does Paying Points On a Mortgage Make Sense?

You’ve found your dream home and are now ready to start shopping for a mortgage. Several lenders have talked about points. Points, also called discount points or origination fees, are each worth one percent of the loan amount. Paying points basically allows the borrower to buy down the interest rate. They are paid to the lender at closing.

You’ve heard that paying points is the only way to get a low interest rate. But is increasing your initial costs worth getting a lower rate?

For most people, paying points doesn’t make sense.

Points became popular in the early 1980s when mortgage rates were in excess of 15%. Most people could not afford the monthly payments that come with such high interest rates. Lenders began offering discounted rates at a certain fee. Sellers often paid the points in order to sell their properties. This gave buyers affordable mortgages and owners were able to sell their homes.

Times are different now. Interest rates are low. There isn’t a large need to pay a lot of money up front in order to get a lower rate.

Let’s look at the numbers. You have contracted to purchase a home for $450,000. You have the 20% down, which leaves you with a mortgage of $360,000.

You find a 30-year fixed rate mortgage at 3.50% with one point. For closing, you will need to pay an additional $3,600 ($360,000 x 1%) for the point.

The lender can also offer you a rate of 3.75% with no points.

What do you choose? The lower rate or the lower closing?

At 3.50% you will have a monthly principal and interest payment of $1,616. At 3.75% your payment increases to $1,667 each month. That’s a difference of $51 per month. If you are looking for a monthly payment reduction, that’s not really a significant one.

It will take you 70 months ($3,600 divided by $51) to recoup your one point payment at closing in the form of a lower monthly payment. This is your payback period. But if you had the $3,600 still, it could be earning interest elsewhere. If it gets 3% interest in another investment, it would earn about $9 per month. If you pay points, this is interest lost, so subtract $9 from your $51 per month savings. Now divide $42 into $3,600, and your payback period increases to 85 months — seven years.

So you have to live in your home for at least seven years in order to take advantage of the savings that paying points gives you. Most people don’t keep a mortgage for seven years.

Whether through sale to  move up or elsewhere or refinance for cash out or lower rates, the average American keeps their mortgage for six years. Unless you are absolutely sure you will live in the home for the time period necessary to recoup your points, you should probably invest your money instead of putting it towards points.

If you are looking at paying points in order to reduce your monthly housing payment, you may want to look at a less expensive property. Fifty one dollars worth of savings isn’t a lot if you are on a tight budget. Chances are that if you have a tight budget to start with, finding extra money for closing would be difficult. And don’t forget, taking out a side loan to get the money to pay points with is defeating the purpose.

My suggestion, don’t pay points unless you’re sure it makes sense for you.

Some Money Saving Mortgage Tips

Buying a house is a great long term investment. If you’ve never had a mortgage payment, it simply means you’ll have to be more careful regarding the management of your finances.

The first step before venturing into a mortgage if you’re not already in one, is to consider your financial situation. Then decide to buy a home where the mortgage and down payments meet your financial situation, so that you can enjoy life and have a roof over your head at the same time. If you have no idea what your monthly budget can afford then you should take some advice from a finance professional first.

Regardless of your situation here are several ways to reduce your monthly mortgage payments:

• As interest rates keep on changing you should keep track of changes and consider refinancing at the right time. This will reduce your expenditures. Do the calculations to know your savings after paying closing costs and other expenses. Closing costs can be added to your new mortgage to avoid out of pocket expenditures, while still saving you money.

• Check your monthly mortgage statement properly and regularly to make sure that all adjustments are made correctly; even banks sometime they make mistakes.

• Choose a mortgage that offers flexibility. You want a mortgage that allows you to pay in an easy way according to your earnings.

• Consider biweekly payments or accelerated equity plans. This will give you an additional payment each year and begin to reduce your mortgage quickly right from the start.

• Consolidate all your loans into a single one with lower monthly payments. Make a table and analyze all your loans; education, car, home and bank loans for example. Study your expenditures. Try to consult a mortgage specialist, ask him or her about debt consolidation, and how much it can reduce your monthly payments.

• Go for a 30 mortgage. This will allow you to pay lower monthly payments, which will lower the amount of interest you pay. Make sure there is no prepayment penalty on your loan, because the best move you can make is to pay way more each payment than the minimum. Each time you do this you’ll be reducing the principle of your mortgage.

A mortgage or home loan is a long term debt but it doesn’t have to be a burden. You are advised to pay it off as soon as possible but arrange your budget tactfully by keeping an eye on insurance, loan disbursements and their interest rates. Enjoy your new home; hopefully with a few of these tips it will be all yours sooner than the banks desire. Remember, if it’s paid for it’s yours.

Debt-to-Income Ratio –- It’s Just as Important as Your Credit Score When Buying a New Home

Your debt-to-income ratio (DTI) is a simple way of calculating how much of your monthly income goes toward debt payments. Lenders use the DTI to determine how much money they can safely loan you toward a home purchase or mortgage refinancing. Everyone knows that their credit score is an important factor in qualifying for a loan. But in reality, the DTI is every bit as important as the credit score.

Historically, lenders have applied a standard called the “28/36 rule” to your debt-to-income ratio to determine whether you’re loan-worthy. Although those numbers have changed, and many of our loans exceed these numbers, it is instructive to use them to explain this concept.

The first number, 28, is the maximum percentage of your gross monthly income that the lender will allow for housing expenses. The total includes payments on the mortgage loan, mortgage insurance, homeowners insurance, property taxes, and homeowner’s association dues. This is usually called PITI, which stands for principal, interest, taxes, and insurance.

The second number, 36, refers to the maximum percentage of your gross monthly income the lender will allow for housing expenses PLUS recurring debt. When they calculate your recurring debt, they will include credit card payments, child support, car loans, and other obligations that are not short-term.

Let’s say your gross earnings are $4,000 per month. $4,000 times 28% equals $1,120. So that is the maximum PITI, or housing expense, that a typical lender will allow for a conventional mortgage loan. In other words, the 28 figure determines how much house you can afford.

Now, $4,000 times 36% is $1,440. This figure represents the TOTAL debt load that the lender will permit. $1,440 minus $1,120 is $320. So if your monthly obligations on recurring debt exceed $320, the size of the mortgage you’ll qualify for will decrease proportionally. If you are paying $600 per month on recurring debt, for example, instead of $320, your PITI must be reduced to $840 or less. That translates to a much smaller loan and a lot less house.

Bear in mind that your car payment has to come out of that difference between 28% and 36%, so in our example, the car payment must be included in the $320. It doesn’t take much these days to reach a $300/month car payment, even for a modest vehicle, so that doesn’t leave a whole lot of room for other types of debt.

The moral of the story here is that too much debt can ruin your chances of qualifying for a home mortgage. Remember, the debt-to-income ratio is something that lenders look at separately from your credit history. That’s because your credit score only reflects your payment history. It’s a measurement of how responsibly you’ve managed your use of credit.

However,  your credit score does not take into account your level of income. That’s why the DTI is treated separately as a critical filter on loan applications. So even if you have a PERFECT payment history, but the mortgage you’ve applied for would cause you to exceed the 36% limit, you’ll still be turned down for the loan by reputable lenders.

The 28/36 rule for debt-to-income ratio is a benchmark that has worked well in the mortgage industry for years. Unfortunately, with the recent boom in real estate prices, lenders have been forced to get more “creative” in their lending practices. Whenever you hear the term “creative” in connection with loans or financing, just substitute “riskier” and you’ll have the true picture. Naturally, the extra risk is shifted to the consumer, not the lender.

If your DTI disqualifies you for a conventional 30-year fixed rate mortgage, you should think twice before squeezing yourself into an adjustable rate mortgage just to keep the payment manageable.

Instead, think in terms of increasing your initial down payment on the property in order to lower the amount you’ll need to finance. It may take you longer to get into your dream home by using this more conservative approach, but that’s certainly better than losing that dream home to foreclosure because increasing monthly payments have driven your debt-to-income ratio sky-high.

Build Equity by Choosing The Right Mortgage

This savings account, better known as equity, can provide the means for putting your kids through college, dealing with emergencies and retiring.

Home ownership is the key to building wealth for most people because it is an involuntary savings account. As you pay down your mortgage each month, the value of your interest in the home rises.

Equity is a beautiful word as every homeowner knows. Once you get used to making your mortgage payments, you can rest assured that you are creating a nest egg every month. Throw in the appreciation on the property and your nest egg can grow large before you realize it. This savings account, better known as equity, can provide the means for putting your kids through college, dealing with emergencies and retiring.

Building equity is fairly simple. Just make your monthly mortgage payment. There are additional steps you can take to move the process along at a faster pace. These steps are all about the type of mortgage you obtain when you purchase your home.

When you purchase a property, particularly for the first time, it can be a stressful event. Right or wrong, most people tend to take anything they can get in a mortgage loan so they can meet the closing of escrow. This is understandable, but can come back to haunt you financially. If you can step back from the chaos for a moment, you might consider the following options that will help build equity.

A 30 year mortgage is the default for most home buyers. It is the first thing that comes to mind and most assume it is the safest option. A 15 year mortgage, however, is going to cut down on the total interest you pay on the loan as well as supercharge your equity growth. The 15 year loan is far better than a longer option, but only if you are absolutely sure you can meet the monthly payment requirements. If you have any doubts whatsoever, there is another option that you can consider.

Making prepayments on principal is a simple, proven way to build equity. The idea is to make an extra monthly payment when you have sufficient cash to do so. Effectively, you use your home as a savings account by doing this. The advantage over other investments is the equity growth should be tax free. Before taking this step, find out from your lender if there are any prepayment penalties. Regardless, making two of these payments each year will quickly build equity in your home.

If any of these ideas sound interesting, you can still take advantage of them even if you currently have a mortgage. Refinancing your mortgage gives you an opportunity to correct mistakes you made when you were more focused on getting through escrow. Talk with a mortgage professional to find out your options.

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