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.

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.

Selling or Buying, This Idea Will Close Your Deal Fast

For most people, the prospect of selling their home can be positively daunting. Besides the traditional clean-up, paint-up and fix-up that invariably wind up costing more than you planned, there are always the overriding concerns about how much the market will bear and how much you will eventually wind up selling it for.

For the buyer, any edge that will help the buying and financing process is always more than welcome. This idea may just do the trick!

This Seller Technique Will Sell Your Home Faster

Will you get your asking price, or will you have to drop your price to make the deal? After all, your home is a major investment, no doubt a rather large one, so when it comes to selling it you want to get your highest possible return. Yet in spite of everyone’s desire to get the top dollar for their property, most people are extremely unsure as to how to go about getting it.

Get the Most for Your Home and Sell it Faster

Some savvy sellers have long known a little financial technique that has helped them to get top dollar for their property. In fact, on some rare occasions, they have even sold their properties for more than they were worth using this powerful financing tool. Although that might be the exception rather than the rule, you can certainly use this technique to get the most money possible when selling your property.

A Win-Win for Both Buyer and Seller

Seller carry-back, or take-back financing, has proven to be a surefire technique for closing deals. Even though most people do not think about when it comes to selling a property, they really should consider using it. According to the Federal Reserve, there are currently over 100 Billion dollars of seller carry-back (seller take-back) loans in existence. By any standard, that is a lot of money. But most importantly, it is also a very clear indication that more people are starting to use seller take-back financing techniques because it offers many financial benefits to both sellers and buyers.

Seller Financing and How it Works

Basically, seller take-back financing is a relatively simple concept. A seller-take back loan is created when a property is sold and the seller performs like a lender by assisting in financing all or part of the total transaction. In effect, the seller is actually lending the buyer a portion of money toward the purchase price, while a traditional mortgage company usually funds most of the balance of the funds. A seller take-back loan is secured with the property, just like a regular mortgage.

Advantages For the Buyer

If you will be going for a regular mortgage from an institutional lender, the carry back loan  becomes the secondary mortgage behind the first mortgage loan, and both are fully secured by the property. Keep in mind that most lenders require that subordinate liens must be recorded and clearly subordinate to the traditional first mortgage loans. You should ask your mortgage lender or broker about the guidelines for seller carry back mortgages, to make sure the terms are acceptable to the first mortgage lender.

In most seller take-back financing transactions, the buyer repays the seller with interest in accordance to mutually agreed terms over a period of time. Usually, the terms call for the buyer to send the payments, consisting of principal and interest, on a monthly basis.

This is advantageous to the seller, because it creates a steady monthly cash flow for the note holder. And if the note holder decides to cash out, he or she can always sell the note for a lump sum cash payment. It also may help the borrower avoid costly mortgage insurance if they plan on putting down less than twenty percent of the purchase price.

Regardless of market conditions, seller take-back financing makes sound financial sense;  it provides both buyer and seller with flexible financing options, makes the property easier to sell at a higher price and shortens the sales cycle. It also has the added advantage of being an excellent investment for the seller that generates a steady cash flow and high return. If they ever need immediate cash, they can always sell the note.

Advantage Seller, Advantage Buyer

If you are planning to sell a property, then consider the many benefits of seller take-back financing. Knowing that this financing is available will attract more buyers. If you are looking to buy a home, consider suggesting this option to any prospective seller. If you have any questions about take back financing, feel free to contact me.

The APR When Shopping For a Mortgage, Not Always the Best Way to Shop

There are two different rates we’ve always been told to look for when shopping for a mortgage. The first is the Mortgage Interest Rate, which is the rate of interest that will determine your monthly payment. The second is the Annual Percentage Rate, more commonly referred to as the APR.

Many people have come to believe that a loan’s APR, is the single most important factor in comparing mortgage loans. However, this is rarely the case, especially in today’s marketplace,” explains Bob Peckenpaugh, Manager of CFIC Home Mortgage. Analyzing the APR during mortgage refinancing or second mortgage loan shopping can be a very tricky proposition.

The Annual Percentage Rate is defined as “the cost of consumer credit as a percentage spread out over the term of the loan.” Most consumers have no idea what makes up this elusive number. The APR is a valuable tool in comparing various mortgage loan programs, but it should never be relied upon as the sole determining factor in choosing a loan, for the following reasons:

1) Not all closing costs are calculated within the APR uniformly. According to Peckenpaugh, “There is a huge variance among lenders, mortgage loan officers, and even states on which fees they include in their APR when calculating the loan. There is no standard among the mortgage industry, let alone among competing mortgage companies.”

2) The costs themselves can be manipulated within the loan. For example, prepaid interest (the amount of pro-rated interest a consumer pays at closing for interest which will be earned from that date until the end of the month) can be represented as anywhere from 1 to 30 days, a potentially huge difference, especially on larger mortgage refinancing loans.

3) Manipulation of the title fees. Ordinarily, the title company’s settlement or closing fee is an APR fee, while their title insurance cost is not. Peckenpaugh explains, “recently, in order to minimize the effect to the APR, title companies began simply decreasing their closing fee, while subsequently increasing their title insurance fee by the same amount, thereby reducing the APR.”

4) Lack of industry awareness of what is accurate. Most mortgage loan or refinancing officers do not intentionally try to mislead, but inaccurate information could result in the consumer making a poor decision.

As opposed to APR, consumers would be better served by asking the following simple questions.

1) What is the mortgage interest rate?
2) What is the total mortgage loan amount?
3) What is the monthly mortgage payment (principal and interest)?
4) How much are the closing costs?

Under new guidelines issued in 2015, within three days of applying for a mortgage, the borrower will receive a Loan Estimate Form that discloses all of the estimated costs of the loan, including taxes and insurance.

If you have any questions about anything written here, feel free to contavt me, I will be happy to clarify things for you.

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?

Avoiding Mortgage Mistakes That Can Cost You Money

If you are planning to obtain a mortgage, then you should make sure that you avoid a number of common mistakes that will leave you paying too much money or getting into financial difficulties. If you are aware of potential mortgage mistakes that can cost you money, you will be better equipped to get the best deal for your needs.

Here are the most common mortgage mistakes that can cost you money, and how to avoid them:

Not sorting out your finances

If you try to obtain a mortgage before you have sorted your finances out, you could find yourself getting a rough deal or even being rejected. Before looking at mortgages, get all of your finances in order and have all your paperwork ready to submit to mortgage lenders. Also, obtain a free copy of your credit report and make sure that all the information on it is correct. If there are mistakes on your credit report, it could harm your chances of getting a good mortgage.

Looking for a house without being pre-qualified

Many people make the mistake of looking at property without having any idea whether they can secure a mortgage to pay for it. Pre-qualification is an initial estimation of how much you can borrow based on your income, assets, credit and debt. It relies on the undocumented information you give to your mortgage broker or lender, along with a copy of your credit report. It is very helpful when shopping for a home. A full application would include the documentation needed to back up the information.

Borrowing too much

Perhaps the biggest mistake people make is to borrow too much money. This can come about through a combination of not being honest with yourself and pressure from lenders. If you are not honest with yourself about how much you can afford then you will end up in financial difficulty. You shouldn’t be tempted by lenders who offer you overly generous mortgages because it is you who will pay the price if you cannot keep up with the payments. Work out how much you can comfortably afford to pay each month and stick to this budget.

Not shopping around

If you want a good deal you have to shop around. If you find a good deal, you shouldn’t automatically think it is the best deal you can get. Many companies offer amazing deals that turn out to be a lot more expensive than initially advertised. Do your research and find out what someone with your credit rating should be paying on average for a mortgage. If you do this then you will end up with a much better price.

Paying for things you don’t need

There are many unnecessary closing costs and junk fees that some brokers and lenders add. Don’t be ripped off by hundreds or even thousands of dollars in extra fees. Check out our Mortgage Saver Program, and don’t pay these unnecessary fees.

What to Do When Your Mortgage Lender No Longer Exists

So you’ve paid your mortgage on time every month and have always made sure that you review your yearly mortgage summary from your lender. You stay on top of things and have developed a good working relationship with your lender, even though they may be thousands of miles away. Then one day you wake up to find out that your mortgage lender has been bought or sold, or even worse, they have gone bankrupt and just closed up shop!

Now what do you do when your mortgage lender no longer exists, and how does this affect your mortgage?

There is an old saying that nothing is as certain as change. It’s certainly true in modern markets where interest rates can change on a daily basis. When a mortgage lender goes out of business for whatever reason, there are typically a lot of questions from those who are used to sending in their payments every month.

The very first question is “How does this affect me?” – The good news is that in every case, even if your original mortgage lender no longer exists, your mortgage rate, payments and other terms will not change. The only thing that is likely to change is the address to where you send the payments, and even that might stay the same!

Mortgage lenders routinely buy and sell mortgage notes on the open market. In fact there are mortgage lenders out there who write mortgages for the sole purpose of selling them in the secondary mortgage market.

In years gone by when you took out a mortgage from your local bank it stayed with the bank through the entire life of the mortgage. Today, typically a mortgage will be sold an average of 1.5 times and rarely does it stay with the original lender unless they were one of the larger mortgage underwriters.

When a mortgage company ceases operation and no longer exists, that does not mean that the mortgages they wrote no longer exist. They are considered assets of the company, and are sold on the open market typically to the highest bidder. No matter how much they pay for the mortgage your rate, terms and amount due each month does not change.

The general rule of thumb, is to always mail your payments to the same address you have been mailing them until you hear from the new mortgage servicer directly. If you have automatic withdrawals from your checking or savings account, you may not have to worry about doing anything – the withdrawal may change automatically.

Above all, do not stop sending your payment in or “wait until you hear from the new company”. This will have a negative effect on your credit, and you could find yourself heading down the road to foreclosure. Banks, lenders and other underwriters have well established procedures in place for buying and selling existing mortgage notes. In the end, the only thing you have to worry about is making sure you continue to make your payments on time every month.

Act Now to Forgo Foreclosure

Prior to the mortgage crisis of 2008 and the recession that followed, lenders had been offering mortgages with low teaser rates for the first few years. While these low rates allowed thousands of homeowners to afford a new home, there are now many home owners holding loans with these low starter rates that have either reset or are about to. Many home owners now find themselves in a position where they cannot afford to make their new monthly payment.

Act now to forgo foreclosure.

If you find yourself in this position, and are facing difficulties with your loan, remember that the ultimate goal is to maintain your credit rating. There are a number of actions you can take.

Some options to consider to avoid foreclosure.

If you find yourself in this situation, you may be able to negotiate with your lender, you may be able to refinance or you may be forced to sell your home now in order to buy one in the future. The sooner you address the issue the more options you will have. By getting your finances in order you will be able to get on with your life sooner.

Don’t add to your stress by ignoring your fiscal situation; follow these steps to getting back on track:

Know the details.

Go over all your loan documents so that you are prepared for any upcoming resets or changes. When will your payments increase? By how much? Can you refinance? What kind of penalty would you face, if any? Cut in other areas – can you take a roommate or a second job to help make your payments? You may need to look at significant changes in your spending and lifestyle. Do not make any major purchases at this time, and look at liquidating other assets, such as cars or boats, to help meet your payments.

Contact your lender.

You should take the initiative with your lender. Contact them before the problem becomes overwhelming. If you receive calls or letters from your lender respond to them as soon as possible. Do not wait to get too far behind – lenders are less likely to move quickly into foreclosure if you are proactive. You want to speak to the right people – ask for the loss mitigation or collections department. Be honest with them about your situation and don’t make promises you can’t keep.

Beware of foreclosure “rescue” schemes.

There are a number of scam artists targeting people in neighborhoods where foreclosure rates have been high. They approach troubled homeowners with promises to help them keep their houses. These “rescues” often come with payments that are out of reach of the average homeowner and result in homeowners being defrauded of their homes, sometimes still owing the original mortgage amount.

Any company that approaches you with such an offer should be checked out through the Better Business Bureau, your state real estate commission and Attorney General. Do not sign anything without reading it all, get all promises in writing and ask your attorney or a financial professional to review any paperwork before you sign it.

There are nonprofit groups offering free housing advice for more information and counseling. Make sure they are legitimate and give them a call. They may be able to help you with your options.

If all else fails, negotiate a short sale.

If you have missed more than two payments but your home has not yet gone into foreclosure, you may be able to sell it for a price that falls short of what you owe the lender. If your mortgage holder agrees to accept the price and forgive the rest of your debt, they forgo the costly foreclosure process and you walk away with minimal damage to your credit score. You can chalk it up to experience, save up a down payment and buy low.