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.

“Renting Back” After Your Home Is Sold

Sometimes it’s helpful to sell your home before you really want to move. This often happens when you are having a new home built, but aren’t sure of the completion date. Is there any way you can sell your home so you’re sure of the funds available for the new purchase, but continue to live in your old home until construction of the new one is complete? Yes, there is with the renting back strategy.

Enter the Lease-Back or Rent-Back Agreement

The particulars of this strategy vary from state to state, but in the strong seller’s market we’re experiencing, buyers will often agree to let the seller stay in the home for a period of time as long as rent is paid. In a competitive situation, the buyer willing to do this will often have the winning bid even though there is another offer as high as his.

The agreement covering the situation states the length of time the seller will remain. It can be done with a specific date named or wording that allows the seller to remain up to a specific date with the possibility of moving sooner. The amount can be a fixed figure paid out of the proceeds of settlement or a monthly amount, or a daily amount. It is usually, but not always, tied to the amount of the mortgage payment under the buyer’s new loan. Sometimes there is a deposit against damage, sometimes not. There is usually a clause saying the seller will hold the buyer harmless for any damage to himself or his property which occurs after the sale is consummated and before the seller moves.

The attorney who draws up your contract offer can create such an agreement. If you’re using online forms, you should be able to find one for this situation. If you’re working with a real estate broker, he or she can handle it for you.

I’ve recently seen a very pleasant example of this idea in action. An elderly widow contracted to have a one level condo unit built in a new community which provides all exterior maintenance. She had had hip replacement surgery and wanted to get away from the drawbacks of the home in which she’d reared her children. The home was large, had stairs and was located on a large, partially wooded lot with many mature perennials and shrubs. Both the home and garden were beautiful, but high maintenance.

Her contract to purchase required a series of deposits and a firm indication as to her source of funds well before settlement on her new condo. The widow put her home on the market. A young couple with two sons was very anxious to buy it. The situation was competitive. They made the widow an offer. She countered their original offer. She did not raise their offer price, which was slightly below her asking price. She did not believe the young couple would qualify for a larger loan. Instead, she did something rather creative.

The widow countered with a proposal that she “rent back” for a period of “up to” a certain date (a date beyond her scheduled competition date on the condo) in exchange for a modest flat sum to be paid to the buyer at settlement. The total rent back period was less than two months. The flat fee was less than the amount of the new mortgage payment for the buyers. However, since they made no payment on their new mortgage the first month, it wasn’t too far out of line. The couple really wanted the home, so they accepted the counter offer.

Another win, win situation was created. The widow only had to move one time and the young couple got a house they probably wouldn’t have in a straight bidding war. If you find yourself in a situation similar to either the widow or the young couple, perhaps you can work out a similar solution.

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.

The 7 Worst Financing Mistakes First Time Home Buyers Make…And How to Avoid Them, A Free EBook

I am excited to release my new EBook for first time home buyers: The 7 Worst Financing Mistakes First Time Home Buyers Make… and How to Avoid Them.

Click here or on the picture on the right to download your free copy.

Having originated mortgages for close to three decades, I have found the topics covered in this EBook are the ones first time home buyers want to know about most. Hopefully, this EBook will help you avoid the mistakes others have made that have cost potential home owners thousands of dollars, and blown up many deals.

Here are some of the mistakes I cover in this easy read, that will help you avoid a similar fate:

  • Overextending yourself
  • Not counting the cost of bad credit
  • Not knowing your down payment options
  • Not budgeting for closing costs
  • Not getting pre-approved
  • Not choosing the right mortgage product
  • Not getting multiple lenders to compete for your business
  • and so much more…

The download is absolutely free as my gift to you for reading my blog; there is nothing to buy and no commitments to make. Enjoy it, and feel free to pass it on.

I wish you much success on your purchase.

Buy Now or Buy Later? A Mortgage Rate Dilemma

Have you ever heard the story of the guy who always held out until tomorrow because he was certain mortgage rates were going to go lower? He waited his entire life and ended up dying with plenty of money, but living in an apartment. Sort of defeats the purpose of saving money to buy a home, doesn’t it?

A lot of potential home owners are like this fellow, constantly waiting around for the best deal to come along. They are certain they can wait out the market – little do they realize the market can long outlive all of us!

The Mortgage Rate dilemma.

Mortgage rates, with all the dire predictions over the last few years that they will soon be increasing, are still at one of the lowest rate thresholds ever despite weakening economic conditions around the world. There are many reasons for that, and maybe we can address them in a future article. But the fact remains that 30 year fixed rates are about as low as they have ever been.

Of course, as with any financial tool, mortgage rates will always be in flux. The good news for many homeowners currently holding mortgages, is that when rates drop substantially, the opportunity is there to refinance into into an even lower rate. It’s almost like being able to have your cake and eat it too!

Buy now or buy later?

There is no better investment you can ever make than buying a home for your family. Homes are an investment that, over time, will gain in value. Real estate is one of the safest investments you can make.

With all the news over the last number of years about the real estate fallout with sub-prime mortgages etc., most consumers who manage their credit and finances correctly can avoid having to deal with any of that. Knowing how much house you can afford, and what payments you can comfortably make will ensure that you don’t become another statistic. A good mortgage broker can help you figure that out.

One thing to remember, is that the future value of a dollar is always less. If I gave you the choice of giving you $100 today or $100 next year, the $100 I give you today is going to be worth more and will have more buying power. The same goes with a house – waiting to buy a house because you think the market is too volatile right now could be a big mistake. If your finances are in order and you are on solid ground with your credit, this make the perfect time to take advantage of today’s low mortgage rates and get a great deal in the real estate market.

There is no mortgage dilemma.

Taking advantage of the rates available today can help you secure your family’s financial future for years to come. Despite all the negative news you might hear about the real estate market, the fact of the matter remains that people who have kept up with their finances are going to benefit greatly from the housing market as it stands today. So why shouldn’t you as well?

How to Select the Home Mortgage That Is Right For You

If you are seeking to finance the cost of a new home, you may be faced with more than one home mortgage loan option, including those with various interest rates, payment terms and length. For those not versed in today’s home mortgage options, choosing the right mortgage to apply for may not be so easy.

How to Select the Home Mortgage That Is Right For You

In order to select the right mortgage loan for you, you will first want to have an idea how many years you plan to live in the home that you intend to purchase. A conventional fixed rate home mortgage is typically designed for someone who intends to live in a home for at least 10 years. The fixed rate home mortgage loan is the most popular of the home mortgage loan programs. With this style of loan, the interest rate remains the same for the entire life of the loan.

Another style of loan is the adjustable rate home mortgage, also known as an ARM loan. This option allows the interest to adjust based on current market rates, which means, one year the interest rate may be low and the next year it may be significantly higher. Check out my earlier posts for a complete explanation on how this type of mortgage works. Here’s part I and here’s part II.

An Interest Only home mortgage, is a type of loan that where the homeowner is permitted to make payments on the interest alone for a specified amount of time. After that time concludes, the payments are applied toward the principal balance of the loan.This type of loan will have significantly higher payments once the interest only period is concluded.

Balloon home mortgages offer smaller payments in the beginning, but come with a large payment due at the end of the loan. Be careful with this type of loan, as there will be one large payment due at the end of the loan, which in some cases may be the entire principal balance.

For any type of mortgage loan, make sure to steer clear of negative amortization.Check out my post on this subject for a full explanation of the risks of any mortgage loan that has this provision.

If you are planning to refinance your existing home or apply for a new home mortgage loan, a good lender or mortgage broker will help you select the best loan for your individual situation.For further information on any type of mortgage option, feel free to give me a call.

 

 

Pre-Qualified vs. Pre-Approved When Buying a Home

These days, getting a letter or post card in the mail that says “Congratulations! You have been Pre-Approved or Pre-Qualified for a mortgage,” are as commonplace as the numerous credit card offers that we all receive, and they are worth the paper they are printed on.

Having a Pre-Approval from a lender or broker in your pocket, will greatly improve your chances of buying the house you want.

Here are some important facts about Pre-Approval for mortgage loans..

Apply before you buy

Although many people used to look at homes before applying for a mortgage loan, nowadays it is critical that you apply for a mortgage Pre-Approval first. This will allow you to know exactly how much you can afford to spend on a house, and find the property you want much more quickly and easily.

Pre-Approval vs. Pre-Qualification

There is a great deal of confusion between these two terms. To be Pre-Qualified simply means that based on your income and debt and the amount of cash you have for down payment and closing costs, assuming your credit meets the standards of the lender, you are qualified to apply for a mortgage loan at today’s interest rates. A Pre-Approval letter is different.

Obtaining a Pre-Approval letter

In order to obtain a Pre-Approval letter with most lenders or brokers, you fill out a mortgage application form listing your income and assets, and a credit report is run. Some lenders may ask for additional documentation, while others will issue a Pre-Approval subject to receipt of documentation to substantiate what has been filled out on the application. Once you receive your Pre-Approval letter, you can start shopping for your new home.

Looking at the right homes

If you have a Pre-Approval letter, you know exactly how much you can afford to spend on a property, and can narrow your search down to homes within this price bracket. This will help you to find a property to match your needs much more quickly, and make buying easier.

More negotiating power

If you have a Pre-Approval on your mortgage loan, you will be seen in the same way as a cash buyer. You already have the funds in place, so the seller is more likely to accept an offer immediately, even if it is below the price estimate. This is because they can be more certain that their house is sold, and can take it off the market pending the close of sale.

Quicker sale closing

One of the lengthiest parts of house buying and selling is the closing of the sale. If you have agreed to buy a house but do not have a mortgage in place, then it can take time to arrange the funds, and you might even find that you cannot get the funds you need. However, if you have a Pre-Approval, the funds are essentially guaranteed, and you can push through the transaction much more quickly. This will make buying a house much less stressful, and help you to get the home you really want.

Anatomy of a Mortgage

In exchange for getting this very large loan, the person then agrees to put the house up as collateral against the loan

Introduction

Mortgages were the original home loan agreement. In many ways, the mortgage changed the real estate market completely and turned it on its head in a very good way. Before the advent of the mortgage, the only way for people to go out and get what they wanted in terms of property was to pay for it outright. Since very few people possessed the means back then to pay for property outright, the ownership rights were only there for pretty much the upper middle class. From the middle class downwards, most were excluded from home ownership. Mortgages changed all of that, and to understand how profound a mortgage is, it is important to take a close look at exactly what a mortgage entails.

Agreement

The agreement for a mortgage is one that is the main point of everything else that follows. Under the agreement of a typical mortgage, the person has the ability to borrow money from a lender in order to pay for a house or a property. The amount of money they can borrow varies, but for a Conventional Mortgage, the maximum you can borrow is 80% of the lower of the appraised value or purchase price of the house. Options for mortgages above 80% are available by paying mortgage insurance, which I will discuss in another blog. In exchange for getting this very large loan, the person then agrees to put the house up as collateral against the loan, so that the bank has some way to save itself in the event that the person is unable to pay the loan back.

Interest Rates

Whenever people think about loans, very likely the first thing that they think about is interest rates. There are a number of different interest rates involved in different loans, but when you compare the vast majority of them to what is available under a mortgage, what you find is that the vast majority of those interest rates don’t really match up. The average mortgage has an interest rate attached to it of between 4% and 5% (depending on the loan to value and credit score) and the vast majority of loans that are available on the marketplace today, even if they happen to be secured loans, really can’t match up.

Repayment Terms

Just like with interest rates, the repayment terms for a number of different mortgages are very impressive when compared to a number of other conventional loans. When you’re talking about unsecured loans (i.e. credit cards), then obviously there’s going to be no comparison, but for the most part you will find that mortgage repayment terms are significantly easier to deal with than with most other loans. This is because (a) the collateral being used is extremely strong and (b) the term lengths are longer, so naturally that makes the monthly payments smaller.

Fees

There are some fees for mortgage payments relating to things like late payments and underpayments, but you will find for the most part that fees are not really that important in the grand scheme of the agreement itself. It is important to be aware of what the fees are, and to make sure to pay your mortgage back on time every month.

Closing Costs

Closing costs for a home mortgage can be significant. With the advent of the new disclosure laws that have taken effect in 2015, all fees must be disclosed by your lender at the beginning of the loan process. These fees include appraisal costs, title fees, recording and lender fees. Make sure you receive a lender disclosure at the very beginning of the process.

 

Cash out Refinance – Things to Know about Refinancing Your Mortgage to Get Cash Out

While there are costs associated with a cash-out mortgage, you should also remember the benefits.

A cash-out mortgage allows you to refinance your mortgage and pull out part of your equity. Before deciding how much to cash to use, be aware of the impact of PMI and equity amounts. However, you may find the benefits of refinancing outweigh the costs.

Cash-Out Mortgage Basics

With a cash-out mortgage, you can refinance for lower rates or to just get part of your equity out. Once the refinancing process is completed, you will end up with a check. You can decide to take up to 85% of your home’s equity in some cases. However, cashing-out a large percent of your home’s value will impact your refinancing rate and might require you to carry private mortgage insurance.

Higher Rates

You may also find yourself paying higher interest rates, at least a quarter percent, for cashing out over 75% of your home’s value. Lenders charge higher rates because there is an increased risk level. Your credit history will also be a factor in the type of financial package you qualify for.

Benefits of Cashing-Out

While there are costs associated with a cash-out mortgage, you should also remember the benefits. You can write off the interest on your taxes (ask your accountant) and you qualify for lower rates than with other types of credit. You can also spread out your payments over a longer period, lessening the monthly financial burden.

Taking out more than 75% of your home’s equity is not necessarily a bad decision. You just need to weigh the financial costs. You may find that in the long-run, tapping into your home equity is better than the other types of credit available to you. You may also discover that the tax benefits offset the slightly higher costs.