Monthly Archives: September 2016

Avoid 5 Mistakes When Buying a New Home

While a house can be a great investment and an even greater place to call home, there are specific mistakes everyone should be aware of and avoid at all costs. The following are five mistakes all homebuyers should avoid when looking into buying a new home:

1. Don’t Buy a House if You Have Plans to Move Again
Many people become enamored with the idea of being a homeowner and make a purchase even though they know they plan to move again soon.

Understandably, people feel it’s wrong to continuously rent and write checks to landlords while paying down zero equity on a house they do not own. Based on the feeling that paying down equity is better than paying a landlord, many people jump into home ownership with the idea that it is a good investment regardless of the time horizon.

If a potential homebuyer is not sure he plans to stay at his current location for more than two years, it is probably not a good time to make a purchase. With closing costs, property taxes and the possibility of a depreciating asset, homebuyers who move soon after purchasing a house might lose more money than the equity they pay down.

2. Don’t Blow Through a Set Budget
It may be due to the rise in popularity of home-purchasing shows on networks such as Home and Garden Television (HGTV), but many potential homebuyers set a budget and then immediately disregard it when they see a house out of their price range.

However, the budget was set for a reason. Back when emotions were not involved, the set budget was probably based on logic and financial constraints. It is important for a homebuyer to remove his emotions from the financial equation.

While budgets can be stretched and dollars met, many homebuyers do not take into account scenarios where income might decline or the real estate market might depreciate. If this happens, the budget reworked to buy a “dream home” ends up being a huge mistake.

To combat this potential mistake, make sure to get preapproved for a loan prior to house hunting. This way an upper limit is set and only houses below that limit are viewed.

3. Don’t Forget About Added and Hidden Costs
Alluded to above, buying a house is not a simple act of trading a rent payment for a mortgage payment. First, there are closing costs, property taxes, home owners insurance and even homeowners’ association (HOA) fees. Additionally, homebuyers almost never think about maintenance costs that are normally covered by the landlord of the place they are renting.

With all of these added and hidden fees, it is entirely possible that even a house within budget might quickly become over budget. It is important to factor in these costs when searching for a home and making a purchase decision.

To do this, inquire around as to how much average maintenance, other taxes and insurance cost in the home’s location. Add these costs to the monthly mortgage to get the potential real cost of home ownership.

4. Don’t Skimp on the Down Payment
While the economy continues to climb and houses continue to appreciate, do not forget about the 2008 financial housing crisis. While there were many factors to the economic downturn, a lot of it was due to lenders giving mortgages to unvetted buyers at little-to-no down payment.

While not all homebuyers default, skimping on the down payment means the monthly mortgage payment is much higher; do not forget this increases the interest payments. Even though it sounds better to put less down and then cover a higher mortgage with a level of monthly income a home owner might already have, do not be fooled. This is the exact mentality others had before defaulting pre-2008.

A small down payment ensures a homebuyer not only has a higher monthly mortgage, but also has less initial equity in the house. If something comes up and the home owner has to sell, it is possible he will owe more than the equity he has in the home.

Additionally, if a small down payment is put down, mortgage insurance needs to be paid until as much as 20% of the house is paid off, further increasing expenses. If possible, wait until 20% can be put down for the purchase of a home.

5. Don’t Forget to Take Advantage of an Inspection
If anyone has seen the HGTV shows mentioned above, oftentimes the most beautiful houses become the most nightmarish. This is because although a house may look great on the outside, there can be many problems waiting below the surface.

Leaky pipes, a lack of proper insulation, an eroding foundation and even a faulty chimney are just a few of the many problems that might not be found by a potential homebuyer at first glance. If the house is taken at face value and purchased, the new home owner becomes responsible for all of those potential problems.

It is important, then, for a potential homebuyer to have the house inspected by a professional inspector. These professionals know exactly what to look for when a house is on the market, even including hard-to-spot water damage and termite infestations.

Often, the cost of inspection can even be covered by the seller. If any significant damage is found during the inspection, the repair prices can be negotiated into the purchase price of the home, protecting the homebuyer from paying out-of-pocket for these costs.

Should You Know About 9 Things to Know Before You Refinance Your Mortgage

Refinancing applications are a significant portion of all mortgage applications according to the Mortgage Bankers Association (MBA), in part, because today’s relatively low mortgage interest rates encourage homeowners to restructure their finances. But whether or not a mortgage refinance is right for you depends more on individual circumstances than this week’s mortgage interest rates. Here are a few considerations to think about before applying for a home refinance.

Home Equity
The first qualification you will need to refinance is equity in your home. Dropping home values across the country have left many Americans “underwater,” owing more to their mortgage lender than their home’s current market value. Other homeowners have low equity. Refinancing with little or no equity is not always possible with conventional lenders, but some government programs are available. The best way to find out if you qualify for a particular program is to visit a lender and discuss your individual needs. Homeowners with at least 10-15% equity will have an easier time qualifying for a new loan.

Credit Score
Lenders have tightened their standards for loan approvals in recent years, so some consumers may be surprised that even with good credit they will not always qualify for the lowest interest rates. Typically, lenders want to see a credit score of at least 720 or higher in order to qualify for the lowest mortgage interest rates. Borrowers with lower scores may still obtain a new loan, but the interest rates or fees they pay may be higher.

Debt-to-Income Ratio
If you already have a mortgage loan, you may assume that you can easily get a new one. But lenders have not only raised the bar for credit scores, they have also become stricter with debt-to-income ratios. While some factors such as a high income, a long and stable job history or substantial savings may help you qualify for a loan, lenders usually want to keep the monthly housing payments under a maximum of 28% to 31% of your gross monthly income. Overall debt-to-income should be 36% or less, although with some additional positive factors some lenders will go above 40%. You may want to pay off some debt before refinancing in order to qualify.

Refinancing Costs
A home refinance usually costs between 3% and 5% of the loan amount, but borrowers can find several ways to reduce the costs or wrap them into the loan. If you have enough equity, you can roll the costs into your new loan, increasing the principal. Some lenders offer a “no-cost” refinance, which usually means that you will pay a slightly higher interest rate to cover the closing costs. Don’t forget to negotiate and shop around, since some refinancing fees can be paid by the lender or reduced.

Rates vs. Term
While many borrowers focus on the interest rate, it is important to establish your goals when refinancing to determine which mortgage product meets your needs. If your goal is to reduce your monthly payments as much as possible, you will want a loan with the lowest interest rate for the longest term. If you want to pay less interest over the length of the loan, look for the lowest interest rate at the shortest term. Borrowers who want to pay off their loan as fast as possible should look for a mortgage with the shortest term at payments they can afford.

Points
When you compare various mortgage loan offers, make sure you look at both the interest rates and the points. Points, equal to 1% of the loan amount, are often paid to bring down the interest rate. Be sure to calculate how much you will pay in points with each loan, since these will be paid at the closing or wrapped into the principal of your new loan.

Breakeven Point
An important calculation in the decision to refinance is the breakeven point, the point at which the costs of refinancing have been covered by your monthly savings. After that point, your monthly savings are completely yours. For example, if your refinance costs you $2,000 and you are saving $100 per month over your previous loan, it will take 20 months to recoup your costs. If you intend to move or sell your home within two years, a refinance under this scenario may not make sense.

Private Mortgage Insurance (PMI)
Homeowners who have less than 20% equity in their home when they refinance will be required to pay PMI. If you are already paying PMI under your current loan, this will not make a big difference to you. But some homeowners who own homes that have decreased in value since the purchase date may discover that when they refinance they will need to start paying PMI for the first time. The reduced payments due to a refinance may not be low enough to offset the additional cost of PMI. A lender can quickly calculate whether you will need to pay PMI and the impact on your housing payments.

Taxes
Many consumers rely on their mortgage interest deduction to reduce their federal income tax bill. If you refinance and begin paying less in interest, your tax deduction may be lower, although few people view that as a reason to avoid refinancing. However, it is also possible that the interest deduction will be higher for the first few years of the loan when the interest portion of the monthly payment is higher than the principle. Increasing the size of your loan due to taking cash out or rolling in closing costs will also impact the amount of interest you will pay. Points paid during a refinance can be deducted over the life of the new mortgage loan. Consult a tax advisor for individual information on the impact of refinancing on your taxes.

Should You Know Before to Buy a House

Before you snatch a great buy on a home you love, your first question should always be: “What can I afford?” No matter what you want in a home as far as age, style, location or size, you could end up with a beautiful, furniture-less house if your mortgage payments eat up more than half of your income.(To learn about the process of buying your first home, read Top Tips For First-Time Home Buyers.)

Calculate an Affordable Payment
The 43% debt-to-income ratio rule is generally used by the federal housing administration (FHA) as a guideline for approving mortgages. This ratio is used to determine if the borrower can repay the mortgage; it often changes depending on market conditions.

All your debt payments plus your new housing expenses – mortgage, home owner’s association fees, property tax, homeowner’s insurance, etc. – shouldn’t equal more than 43% of your monthly gross income.

For example, if your monthly gross income is $4,000, multiply this number by 0.43. $1,720 is the total you should spend for debt payments including housing. Now, let’s say you have monthly minimum credits card payments of $120, a car loan for $240 and student loans for $120. By this rule, you have $1,240 per month you can afford for housing.

However, you also need to factor in the front-end debt-to-income ratio (DTI), the monthly debt you will have to incur from housing expenses alone. For example, although this metric is subject to change, during a recession it is usually greater than 30%. For example, if your gross income is $4,000 per month, you would have trouble getting approved for $1,720 in monthly housing expenses even if you have no other debt when the DTI is 31%. Your housing costs should be under $1,240.

Why wouldn’t you be able to use your full debt-to-income ratio if you don’t have other debt? Let’s say you’re debt free because you just paid off your vehicle loan. However, you may trade-in your car and take out a new car loan in six months. If your mortgage is 43% of your income, you’d have no wiggle room for when you want to or have to incur additional expenses.

Factor Budget Items Beyond Debt
You may love to cook with gourmet ingredients, take a weekend getaway every month, drink high-end wine or work out with a personal trainer. None of these relatively extravagant hobbies are budget killers, but they are reasons why you’d have to skip electricity bill payments if you bought a home based on a 43% debt-to-income ratio alone. Before you practice making mortgage payments, give yourself a little financial elbowroom by subtracting the amount of your most expensive hobby from the payment you calculated. If this amount isn’t enough to buy the home of your dreams, you may have to cut back on your hobby expenses – or start thinking of a less expensive house as your lifestyle-friendly dream home.

Play House, Financially
Save the proceeds from your current home in a savings account and determine whether or not, after factoring such expenses as car payments, you will be able to afford the mortgage. It is also important to remember that additional funds will have to be allocated for maintenance and utilities. These costs will undoubtedly be higher for larger homes.

If you can handle these extra payments without sweating extra credit card debt, you can afford to buy a home – as long as you have saved up enough money for your down payment.

Don’t Buy a Home Based on Future Income
Raises don’t always happen, and careers change. If you base the amount of home, you buy on future income, set up a romantic dinner with your credit cards. You’re going to end up with a long-lasting relationship with them.

Down Payments
It’s best to put down 20% of your home price to avoid paying private mortgage insurance (PMI). PMI can cost an extra $50 to $100 per month of your mortgage, sometimes more and sometimes less. But a smaller down payment won’t cost you buying a home. You can buy a home with as little as 3.5% with an FHA loan.

Bonuses to a larger down payment:

Smaller mortgage payment. For a $200,000 mortgage with a 5% interest rate for a 30-year term, you would pay $1,074. If your mortgage was $180,000 with a 5% interest rate for a 30-year term, you’d pay $966.28.
More lender choice. Some lenders won’t finance you unless you put at least 5-10% down.
While there are a lot of benefits to a larger down payment, don’t sacrifice your emergency savings account completely to put more down on your home. You could end up in a pinch when an unexpected repair arises.

When to Buy a Home
Ideally, you should buy a home in the opposite season from the best activities in your area. Find the nearest tourist area to your locale, and call a hotel and ask when the off season is. This is a great time to buy a home. Another strategy is if you are choosing an area with a lot of families, wait till October after kids are already in school.

Finding the perfect market conditions to buy a home is a little harder and riskier. You could decide to wait to buy a home because prices went up, but then prices go up further, and you can no longer afford a home in the area you want. As long as you plan on living in your home for 10-plus years, buy a home when you want to and where you want to, as long as you stick to your affordable payment range.

Planning to Stay Put
If you can’t estimate what city you are going to live in and what your 10-year plan is, it’s not the right time to buy a home. If you want to buy a home without a 10-year plan, buy a home that is priced much lower than the maximum you can afford. You’ll have to be able to afford to take a hit if you have to sell it quickly.

Tips To Buying a House on a Single Income

At a time when a lot of young adults are postponing marriage, the number of Americans buying a house on a single income is substantial. According to the mortgage software firm Ellie Mae, as many as 47% of Millennial home buyers last year were unmarried.

Buying a House on a Single Income Is Possible
Because single mortgage applicants rely on one salary and one credit profile in order to secure a loan, getting through the underwriting process can be a bit trickier. However, the more you understand about what the process entails, the better your odds will be of getting a lender to say “yes.” Here are four crucial things that can help.

Check Your Credit
When you apply for a mortgage on your own, lenders will be looking at just one credit profile: yours. Needless to say, it has to be in great shape.

It’s always a good idea to review your credit report beforehand, but that’s especially true of solo buyers. You can get a free copy once a year, from all three credit bureaus, at www.annualcreditreport.com. Make sure that it doesn’t contain any mistakes that will make you look like a bigger risk than you really are. If you see any, contact the credit reporting company right away, so it can investigate on your behalf.

You’ll also want to avoid doing anything that could hurt your credit, such as making big credit card purchase right before or after you apply for a home loan. And think twice before canceling any old credit cards. You might think you’re helping your cause, but you’re actually reducing the average age of your accounts and lowering your credit utilization ratio, two things that could hurt your application.

Look at Government Programs
A conventional mortgage typically requires a 20% down payment, something that can be hard to do if you’re drawing on only one person’s savings. But government-insured loans have a much smaller requirement – and sometimes none at all. For example, the popular Federal Housing Administration (FHA) mortgage program only mandates a 3.5% down payment. And if you’re a veteran or active member of the military, a Veteran’s Administration (VA) loan lets you finance the entire amount of the purchase, as long as it doesn’t exceed the appraisal amount.

There are some caveats, though. With an FHA mortgage, you’ll have to pay an upfront mortgage insurance payment (which can be financed) as well as a monthly premium. VA loans don’t carry an insurance fee, but they do assess a “funding fee” that can either be spread out over the course of the loan or paid in cash.

While low-down-payment requirements can help open the door to home ownership, they do carry risks. For example, paying 3.5% down doesn’t give you much of an equity buffer if the stock market takes a hit soon after you make the purchase. Putting down a little more, say 10% of the loan amount, will give you a little more peace of mind.

Protect Your Income
That first monthly mortgage payment can be startling for younger homeowners unaccustomed to such a big bill. As single home buyers rely on one source of income to pay the lender, it’s a good idea to take out some protection.

If your employer either doesn’t provide disability insurance or offers a bare-bones plan, you might consider looking into more-robust coverage on your own. That way you’ll get help paying your bills should you experience an illness or accident.

A specialized product known as mortgage protection life insurance can also help take care of your mortgage payments if you become unable to work. It’s only intended to help with home loan payments (some policies are a big more flexible), so it’s not a comprehensive financial solution. Still, because it typically has a looser underwriting process, it’s an option for those with riskier jobs or poor health, who consequently have trouble finding affordable disability coverage.

Put Someone Else on the Loan
Having a co-borrower on the loan can sometimes help home buyers clear the underwriting hurdle, especially if you don’t have a long credit history. The lender will look at the co-borrower’s income, assets and credit history – not just yours – when assessing the application.

While he or she may be doing you a huge favor by joining you on the loan, make sure the co-borrower knows the consequences. In the event you have trouble making your loan payments, the bank can go after the co-borrower, too. If you don’t want to worry about that, you should wait until you can qualify for a loan by yourself.