Smart Ways to Build Equity in Your New Home

Now that you’ve invested in a home, how do you increase its value?

That’s called “building equity.” Equity is the market value of your home or property, minus your outstanding mortgage debt. So, for example, if you can sell your home for $450,000 and you still owe $100,000, you have $350,000 in equity. Building equity is one the biggest financial benefits of ownership.

If you live in a market where home values are rising, yours may float up with the rising tide and your equity will increase without doing a thing.

Or you can work on growing your home’s value by decreasing the amount you owe and/or increasing the value of your property. Here are some ways to do both.

Mortgage payments

Part of every mortgage payment goes towards paying off your loan’s principal and interest, with most of the payment going to interest in the loan’s early years. You can use Zillow’s amortization calculator to estimate how much money will be paid over the life of your loan for principal and interest. If you pay down the principal faster, your equity should increase faster. This can be done a few different ways.

Paying more: If you have a 30-year mortgage, adding more to your payment either monthly or when you have extra cash can help you gain equity. If you pay more, make sure your lender applies it to your principal. This is a great way to use your tax refund, a bonus from work or an inheritance.

Paying faster: You could divide your monthly mortgage payment into two bi-weekly payments, for a total of 26. So instead of 12 payments a year, you make the equivalent of 13, paying down your mortgage faster and gaining more equity. But make sure to check with your lender first to make sure they accept bi-weekly payments. And make sure all the extra money goes immediately to the principal instead of waiting for the second half-payment. Reputable lenders will not charge a fee for bi-weekly payments.

Refinancing: If you have a 30-year mortgage, you might want to consider refinancing to a 15-year loan, which has a lower rate. Most consider this worthwhile only if you can drop your interest rate by at least 1.5%. Factor in any closing costs before making this move. Also make sure your mortgage doesn’t have a penalty for pre-payment. It’s not common, but it’s better to check.

Before you decide on any of these options, consider if it’s really the best use of your money. If you’re not maxed out on employer-matched saving accounts, perhaps you should be putting extra money into your 401(k) rather than paying off a low-interest mortgage. It’s smart to talk with a financial advisor to determine the best investment strategy for you.

Also make sure you have an emergency fund, typically 6 months of savings in case you fall ill or lose a job.

Renovate wisely

Making smart improvements and adding the right amenities to your home can also increase its market value, which means more equity for you.

How do you know which projects will bring the best return on your investment? Even though you’ve just moved into your new place, there are home improvements buyers typically love: bathrooms, attics, entrances, kitchen updates, garage doors and siding. Popular features can vary by area and home type, so consider what’s in demand in your market.

Also, be mindful of your market as you’re thinking about how much to invest in improving your home. The realities of a buyers or sellers market will have an impact on how much return you’ll get when you sell.

You can find more inspiration, ideas and guidance in Zillow Porchlight home improvement articles.

For new homeowners, Zillow’s design and home improvement videos show you how to tackle your first project.

Source: zillow.com

Should You Refinance?

You may not need a map to find your hidden treasure. It could be, literally, right beneath your feet. Sometimes, the best way to get the most out of owning a home is to refinance your mortgage. Refinancing can be a powerful tool that could help you lower monthly payments, pay off your mortgage faster, or save tens of thousands on interest in the long-run.. Many don’t understand how to refinance and others wonder if it’s the right decision. Here are some factors to consider.

Take Advantage of Low Interest Rates

In the past, interest rates were high and the amount of buyers was low. Today, it’s not uncommon to see rates below 3%. Interest rates are one of the biggest factors to consider when it comes to getting a home loan or a refinance.

The Low Interest Rate Advantage

Let’s say you have an interest rate on a 30-year mortgage for $300,000 at 5%*. Your monthly payment would be around $1,610. If some years have gone by and the amount you owe on the home has dropped to $260,000, a refinance could make your monthly financial picture look a lot prettier. Here’s how:

If your lender offers you a rate of 2.9%* on $260,000, your mortgage plummets to $1,082. Because you were paying $1,610 before, you will be saving $528 every month.
For the sake of simplicity, this example doesn’t take into account taxes and insurance, but if you were paying private mortgage insurance (PMI) before you refinanced, the lower principle and higher home value would free you up from that as well, resulting in additional savings.

Refinancing to Save on Your Mortgage as an Investment Strategy

With the help of some basic investment tools, you can save even more when you refinance. If your budget can sustain your current mortgage payment, you could still refinance for the purpose of using the money you save—to make more money. Here’s are some ways to use your refinancing savings as an investment vehicle:

  • Take the money you save and invest in CDs (certificates of deposit). You can save up and then invest or you can start as soon as you hit the minimum and open several at once.
  • Use the money to contribute to a retirement plan. This is one of the most profitable techniques because the money gains interest over a longer period of time. Eventually, you can have a pretty little nest egg waiting for you when retirement rolls around.
  • Invest in the stock market. Whether you go with traditional stocks, ETFs, or indices, a conservative strategy can still provide handsome rewards.
  • Invest in a business. You can put money into a business idea that’s been spinning in the back of your head for a while.
  • Refinancing for Home Improvement

    Home improvement projects that have been lingering for a while are easy to knock out if you have the cash to do it. Whether you want to take your home to the next level for personal reasons or to add to its value, refinancing can help you get your hands on the cash you need.

    If you want to boost your home’s value, you should first check to make sure the uptick in the appraisal is going to be more than the sum of the cost of the refinance and the improvements. It may be best to consult a realtor or do your own comps to figure out how much value you’ll be adding to your home. Here’s how to do it:

    • Find a graph of home values in your area—for your type of home—over the last 10 to 15 years. Print it out. If there’s an upward or downward trend, use a ruler to extrapolate the approximate selling price of your home when you plan to sell it. Alternatively, you can consult a licensed real estate agent. A local agent will be able to give you a good idea of what is in demand in your area.
    • If you plan on adding a bathroom, bedroom, or other space, find a similar graph for homes with that added feature and do the same thing.
    • Compare the expected value of your house when you may sell to what it would be worth without the remodel.

    If the difference is higher than the cost of your refinancing and remodeling, you will be making a profit.

    When to Think Twice About Refinancing

    If you have a low interest rate already, refinancing may not be worth the cost, especially if you recently purchased your home. If you owe close to what you paid for the home and the refinancing interest rate isn’t much lower than what you currently have, it may not be worth it.

    In addition to that, you should compare the monthly savings to the amount of time you plan to spend in the home, weighed against closing costs. If this is your forever home, a refi might be worth it if everything else is right.

    Consult Homie Loans™***

    Refinancing can be a powerful financial tool. If you’re ready to crack open the treasure chest by refinancing your home, Homie Loans is here to help. Homie Loans has quick turnaround on refinances, so you’re not left hanging. If you find a better rate, we can give you $500 back**. Learn more about Homie Loans today.

    *For illustrative purposes only. Rates Vary. Contact Homie Loans for a quote today.
    **Terms and conditions apply. Click here to learn more.
    ***Homie Loans, NMLS# 1016597, UT MB#8533383, AZ MB# 0945972

    Source: homie.com

    The Refinance Rule of Thumb

    How Much Lower Should Mortgage Rates Be to Refinance?

    • Unfortunately there is no one-size-fits-all answer
    • Because no two loan scenarios are the same
    • You have to factor in existing home loan details
    • And future plans/financial objectives/tenure in home, etc.

    If you’re considering refinancing your mortgage, you may have searched for the “refinance rule of thumb” to help you make your decision.

    Of course, there isn’t a single refinance rule of thumb. There are numerous ones that exist.

    And before we dive into them, it should be noted that rules don’t tend to work universally because there is a laundry list of reasons to refinance a mortgage.

    What works for one person might not work for another, and if you’re relying on some sort of shortcut to make a decision, you might wind up shortchanging yourself in the process.

    That being said, let’s look at some of these “refinance rules” to see if there are any takeaways we can use to our advantage.

    Only Refinance If the New Mortgage Rate is 2% Lower

    refinance rule of thumb

    • Some say to only refinance if you can get a rate 2%+ lower
    • This is definitely not a rule to live by and ultimately very conservative
    • It’s possible to save lots of money with a rate that is less than 1% lower
    • There are also other reasons to refinance that aren’t always interest rate-dependent

    One popular one is that you should only refinance if your new interest rate will be two percentage points lower than your current mortgage interest rate.

    For example, if your current mortgage rate is 6%, this rule would tell you to refinance only if you could obtain a rate of 4% or lower.

    But clearly this rule is much too broad, just like any other rule out there. When it comes down to it, a refinance decision will be unique to you and your situation, not anyone else’s.

    This old rule assumes most mortgage loan amounts are pretty small, unlike the jumbo loans we see nowadays.

    Is It Worth Refinancing for a 1% Lower Rate?

    Let’s take a look at some math to illustrate why the 2% refinance rule falls short, and how even a rate just 1% lower (or less) can be quite beneficial:

    Loan amount: $500,000
    Loan type: 30-year fixed-rate mortgage
    Current mortgage rate: 4%
    Refinance mortgage rate: 3%
    Cost to refinance: $4,000

    In this scenario, the existing mortgage payment is $2,387.08. If refinanced to 3%, the monthly mortgage payment falls to $2,108.02.

    That’s a difference of nearly $300 a month, which will certainly make it easier to meet your mortgage obligation.

    However, it will take just over 14 months to recoup the cost of the refinance ($4000/$279). It’s actually even less once you factor in increased equity accumulation.

    That said, the refinance “breakeven period” (time to recoup your upfront closing costs) is very short here. So we don’t need to follow that “2% lower rate” refinance rule.

    In fact, even a drop in rate of just 0.50% (from 3.5% to 3%) would result in monthly savings of about $140 and take less than two years to recoup.

    [See all the top refinance questions in one place.]

    Pay Attention to Fees, Especially with Small Loan Amounts

    But what if the loan amount were only $100,000? The game changes in a hurry. Your mortgage payment would drop from $477.42 to $421.60.

    That’s roughly $56 in monthly savings, not very significant, especially if it still costs you thousands to refinance.

    Assuming the cost of the mortgage was still somewhere around $3,000, it would take about 40 months, or roughly three and a half years, to recoup the costs associated with the refinance.

    So if you were thinking about selling your home in the short term, it probably wouldn’t make sense to throw money toward a refinance.

    That is likely why this old refinance rule exists. But home prices (and loan amounts) are much higher these days, so it’s not a good rule to follow for everyone.

    The same goes for any other mortgage rate rule that says your rate should be 1% lower, or 0.5% lower.

    Whether it’s favorable or not really depends on a number of factors, such as the loan amount, closing costs, and expected tenure in the home.

    If we don’t know the answer to all those questions, we can’t just throw out some blanket rule for everyone to follow. Again, don’t cut corners or you could find yourself in worse financial shape.

    [Check out these mortgage payment tables to quickly eyeball differences in rate, or use my refinance calculator to run your own simulation.]

    Tip: Pay close attention to the closing costs associated with the loan. Simply looking at the rate and payment isn’t good enough.

    Only Refinance If You’ll Save “X” Dollars Each Month

    • This blanket refinance rule fails to consider the interest savings
    • It might have nothing to do with your monthly payment
    • The faster accrual of home equity and things like a shorter loan term
    • Can make a refinance totally worth your while, regardless of payment

    Another common refinance rule of thumb says only to do it if you’ll save “X” dollars each month, or only if you plan to live in your home for “X” amount of years.

    Again, as seen in our example above, you can’t just rely on a blanket rule to determine if refinancing is a good idea or not.

    Some borrowers may need to stay in their home for five years to save money, while others may only need to stick around for just over a year.

    But plans change, and you may find yourself living in your home much longer (or shorter) than anticipated.

    And if you look at the refinance savings in dollar amounts, it will really depend on the cost of the refinance and how long you make the new payment.

    If it’s a no cost refinance, which is a popular option these days, you won’t even have to worry about the break-even period.

    There are also homeowners who simply want payment relief, even if it means paying more interest long-term.

    So it’d be foolish to get caught up on this rule unless you have a bulletproof plan in place. Let’s face it, nobody does.

    [Does refinancing hurt your credit score?]

    Forget the Rules, Consider the Loan Term

    • The mortgage term can be a big part of the decision
    • Consider your remaining loan term and what type of mortgage you’ll be refinancing into
    • Along with how long you plan to keep the new loan
    • And your future plans (moving, staying put, or keeping the property to rent out?)

    Finally, consider the mortgage term when refinancing, and the total amount of interest you can avoid paying over the life of the loan.

    If you’re currently five years into a 30-year fixed mortgage, and refinance into a 15-year fixed mortgage, you’ll shave 10 years off your aggregate mortgage term.

    Assuming mortgage rates are low enough at the time of refinance, you could even wind up with a lower monthly payment despite the shorter term.

    You will also build equity faster and greatly reduce total interest paid, which will shorten your break-even period and maximize your savings.

    [30-year mortgage vs. 15-year mortgage]

    If you simply refinance into another 30-year loan, you must consider the five years in which you already paid interest when calculating the benefits of the refinance.

    Those who have had their mortgage for a decade or longer certainly won’t want to restart the clock at 360 months, even if mortgage rates look too good to pass up.

    Also factor in your current loan type versus what you plan to refinance into.

    If you currently hold an adjustable-rate mortgage that will reset higher soon, the decision to refinance may be even more compelling.

    At the end of the day, you shouldn’t use any general rule to determine whether or not you should refinance.

    Doing so is lazy, especially when it’s not that difficult to run a few numbers to see what will make sense for your particular situation.

    If you feel overwhelmed by all the math, ask a loan officer or mortgage broker to run some scenarios for you to illustrate the potential savings and break-even periods.

    Just be sure they’re giving you an accurate and complete picture and aren’t simply motivated by a paycheck.

    And take your time – you’re not shopping for a big screen TV, you’re making one of the biggest financial decisions of your life.

    Tip: When to refinance a home mortgage.

    (photo: angermann)

    Source: thetruthaboutmortgage.com

    Use These Mortgage Charts to Easily Compare Rates

    Last updated on December 14th, 2020

    One of the things prospective home buyers and existing homeowners seem to care most about is mortgage rates.

    And for good reason – the interest rate you receive on your home loan dictates what you’ll pay each month, sometimes for as long as the next 30 years. That’s 360 months!

    The rate you receive can also completely make or break your home purchase, or sway the decision to refinance a mortgage.

    As such, I decided it would be prudent (and helpful) to create a “mortgage rate chart” that displays the difference in monthly mortgage payment across a variety of interest rates and loan amounts.

    My New Expanded Mortgage Rate Chart

    mortgage rate chart

    • I created a fresh mortgage rate chart that factors in the new record low rates
    • And the possibility of them drifting even lower over coming months and years
    • The chart is also more granular because rates are broken down by eighths as opposed to quarters
    • Also available in 50k increments if your loan amount is closer to that

    mortgage rate chart 150k

    These charts can make it quick and easy to compare rate quotes from mortgage lenders, or to see the impact of a daily rate change in no time at all.

    After all, mortgage rate updates can happen frequently, both daily and intraday. And rates are especially erratic at the moment.

    So if you were quoted a rate of 3.5% on your 30-year fixed mortgage two weeks ago, but have now been told your home loan rate is closer to 4%, you can see what the difference in monthly payment might be, depending on your loan amount.

    Today, that scenario might be the opposite. A quote of 3.5% a month ago might now be 3%, or even below 3%.

    That has forced me to create a new expanded mortgage rate chart that contains 30-year fixed interest rates all the way down to 2%. Whether they get anywhere close to that remains to be seen, but never say never.

    I just hope I don’t have to make another chart…

    Anyway, this is all pretty important when purchasing real estate or seeking out a mortgage refinance, as a significant jump in monthly mortgage payment could mean the difference between a loan approval and a flat out denial.

    Or you might be stuck buying less house. Or perhaps driving until you qualify!

    30-Year Mortgage Rates Chart

    Mortgage Payment Chart

    Click to enlarge

    • Use the 30-year mortgage rates chart above
    • To quickly ballpark monthly principal and interest payments
    • At varying interest rates and loan amounts
    • While handy for estimates, don’t forget the taxes and insurance!

    My first mortgage rate chart highlights monthly payments at different rates for 30-year mortgages, with loan amounts ranging from $100,000 to $1 million.

    I went with a bottom of 3.5%, seeing that mortgage interest rates were around that level recently, and generally don’t seem to go any lower than that. Well, maybe they will…one can hope.

    There is certainly the possibility that fixed rates could drift back in that direction with all the trade war uncertainty and the election year on the horizon.

    Regardless, one might be able to buy their rate down to around that price, assuming they want an even lower rate on their home mortgage.

    For the high-end, I set interest rates at 6%, which is where 30-year fixed mortgage rates were for many years leading up to the mortgage crisis.

    With any luck, they won’t return there anytime soon…though in time they could potentially surpass those levels. Eek!

    Yep, they could rise even higher over time depending on what transpires in the mortgage market, but hopefully home loan rates won’t climb back to the double-digits last seen in February 1990.

    That fear aside, this mortgage payment chart should give you a quick idea of the difference in monthly payments across a range of mortgage rates and loan amounts, which should save some time fooling around with a mortgage calculator.

    It should also make your job easier when you compare rates from different lenders. Or when you compare your current mortgage rate to what’s being offered today.

    For the record, you can use the 30-year chart above for adjustable-rate mortgages too because they’re based on the same 30-year loan term. They just don’t offer fixed rates beyond the initial teaser rate offered.

    So if you’re looking at a 5/1 ARM, you can still use this chart, just know that your interest rate will adjust after those first five years are up, and the chart will no longer do you any good.

    That is, unless you’re looking to refinance your mortgage to a new low rate to avoid the interest rate adjustment.

    Tip: Use the charts to quickly determine the impact of a higher or lower credit score on rates. If you’re told you can get a rate of 4% with a 760 credit score or a rate of 4.5% with a 660 score, you’ll know how much marginal or bad credit can really cost.

    15-Year Mortgage Rates Chart

    15 Year Fixed Mortgage Payment Chart

    Click to enlarge

    • The 15-year mortgage rates chart helps illustrate the massive cost difference of a shorter-term mortgage relative to a 30-year mortgage
    • Use it to determine the capability of making larger monthly payments at various loan amounts
    • And also to see if refinancing makes sense at certain interest rates
    • While payments are significantly higher, you can save a ton of money on interest while paying off your home loan in half the time

    Now let’s take a look at my mortgage rates chart for 15-year fixed mortgages, which are also fairly popular, but a lot less affordable.

    I used a floor of 3% and a max rate of 5.50%.  Again, rates can and probably will climb higher, just hopefully not anytime soon. Spoiler alert: They drifted lower, but not much lower than 3%.

    For the record, you can obtain mortgage rates at every eighth of a percent, so it’s also possible to get a rate of 3.625%, 3.875%, 4.125%, 4.375%, and so on.

    But for the sake of simplicity, I spaced it every quarter of a percent except for the jump from 5% to 5.5%.

    These charts are really just a quick reference guide to get ballpark monthly mortgage payment amounts if you’re just beginning to dip your toes in the real estate pool.

    If you’re getting serious about home buying or looking to refinance an existing mortgage, whip out a loan calculator to get the exact PITI payment.

    Some Interesting Takeaways from the Mortgage Rate Charts

    • Monthly payment differences are larger when interest rates are higher
    • Higher mortgage rates may be worse than larger loan amounts
    • Small loan amounts are less affected by interest rate movement
    • Those with smaller loan amounts have a higher likelihood of affording 15-year payments

    The lower the interest rate, the smaller the difference in monthly payment. As rates move higher, the difference in payment becomes more substantial. Something to consider if you’re looking to pay mortgage discount points.

    If you look at the 30-year mortgage rate chart, the monthly payment difference on a $500,000 loan amount between a rate of 3.5% and 3.75% is $70.36, compared to a difference of $77.93 for a rate of 5.25% vs. 5.5%.

    Additionally, higher mortgage rates can be more damaging than larger loan amounts. Again using the 30-year mortgage rates chart, the payment on a $400,000 loan amount at 3.50% is actually cheaper than the payment on a $300,000 loan at 6%.

    So you can see where an individual who purchases a home while mortgage rates are super low can actually enjoy a lower mortgage payment than someone who buys when home prices are lower.

    However, for someone purchasing a really expensive home, upward interest rate movement will hurt them more than someone purchasing a cheaper home.

    Sure, it’s somewhat relative, but it can be a one-two punch for the individual already stretched buying the luxury home.

    To illustrate, the difference between a rate of 5% and 5.25% for loan amounts of $300,000 and $900,000 is about $46 vs. $138, respectively.

    Be Sure to Look at the Big (Payment) Picture

    • Most advertised mortgage payments only include principal and interest
    • There is a lot more that goes into a monthly housing payment
    • Including property taxes, homeowners insurance, HOA dues, PMI, and so on
    • Don’t buy more than you can afford without considering all of these items

    Lastly, note that my mortgage payment graphs only list the principal and interest portion of the loan payment.

    You may also be subject to paying mortgage insurance and/or impounds each month. Property taxes and homeowner’s insurance are also NOT included.

    You’ll probably look at this chart and say, “Hey, I can get a much bigger mortgage than I thought.”  But beware, once all the other costs are factored in, your DTI ratio will probably come under attack, so tread cautiously.

    And don’t forget all the maintenance and utilities that go into homeownership. Once you hire a gardener, pool guy, and run your A/C and/or heater nonstop, the costs might spiral out of control.

    I referenced this problem in another post that focused on if mortgage calculators were accurate, in which I found that housing payments are often greatly underestimated.

    So you might want to drop your loan amount by $100,000 if you think you can just get by, as those other costs will certainly play a role.

    Oh, and if you want to nerd out a little bit (a lot), learn how mortgages are calculated using real math, not some fancy calculator that does it all for you.

    Or just use my mortgage payment calculator and enjoy the simplicity of it all. The choice is yours.

    Source: thetruthaboutmortgage.com

    3 Simple Mortgage Tricks Can Save You Over $5000/year

    July 8, 2019 Posted By: growth-rapidly Tag: Buying a house

    If you’re ready to refinance your mortgage loan, and speed up the process of being debt free, then you’ve come to the right place. The following mortgage tricks can save you several thousands of dollars.

    As a homeowner, it’s probably been a while since you last checked and compared home loan rates to see if if your current loan rate is still a good deal. If you haven’t done so in a while, then you’re making a big mistake. Indeed, this mistake could be costing you a lot of money in interest every year, given that there are relatively low home loan rates out there.

    3 Simple Mortgage Tricks Can Save You Over $5000/year:

    These 3 simple mortgage tricks can help you get rid of your debt sooner, save on interest, and allow you to live in a house that is actually and really your own without worrying about monthly mortgage payment ever again. Who wouldn’t want that!?


    LendingTree: A Better Way to Find A Mortgage

    LendingTree.com is making getting a mortgage loan simpler, faster, and more accessible. Compare the best mortgage rates from multiple mortgage lenders all in one place and at the same time. >> (opens in a new tab)”>LEARN MORE ON LENDINGTREE.COM >>>

    Related Resources

    1. Compare mortgage rates.

    Even if you think your home loan was a pretty good deal, you still need to compare home loans to see what rates are available.

    LendingTree mortgage loans comparison can help you find the best mortgage loan rates for your needs and situation. With LendingTree, you can compare several mortgage lenders for home loan rates and fees side by side at one place and at the same time. It’s easy, fast, and free.

    Head over to LendingTree now to compare low rate home loans.

    2. Establish your credit score.

    Before you can get the best home loan, you will need to establish and maintain a good credit score. In fact, a good credit score is one of the most important factors to determine whether you will get a good rate.

    The first step then is to get a copy of your credit report for free online. Check for any mistakes and address them immediately. And if you find any red flags, contact the three credit bureaus (Equifax, Transunion, Experian). If your credit score is below 730, take steps to raise it.

    One of the ways to raise your credit score is to pay your bill on time. In fact, payment history accounts for 35% of your total credit score. Another way to improve your credit score is keep your credit card utilization rate below 30 percent of your total balance. For more information, check out: How To Raise Your Credit Score To 850.

    3. Refinance your mortgage.

    After comparing home loans, you need to refinance it with a lender. Refinancing your loan simply means that you take a new loan to replace the one you currently have, in the hope that you get a lower interest rate, so you can same money on interest. Or that you get a shorter term on your mortgage.

    Refinancing can save you over $5000 a year in interest and fees.

    Want to compare home loans? Check out the latest mortgage rates through LendingTree. It’s completely FREE.

    Not only that, it will allow you to pay your mortgage sooner. Let’s take an example. Let’s say you have a 30 year, $400,000 mortgage with an interest rate of 4.04%. If you were to refinance the loan with a rate of 3.34%, you’d be able to pay off the loan 4 years earlier.

    So, if you’d like to pay off your loan sooner, check out some current rates now.

    Related Articles

    3 Signs You’re Not Ready To Refinance Your 30-year Mortgage

    How To Pay Off Your Mortgage Early

    Related Resources

    Not All Mortgage Lenders Are Created Equally

    When it comes to getting a mortgage, rates and fees vary. LendingTree allows you to view and compare multiple mortgage rates from multiple mortgage lenders all in one place and at the same time, so you can choose the best rates for your needs. LendingTree makes getting a loan faster, simpler, and better. >> (opens in a new tab)”>Get started today >>>

    Source: growthrapidly.com

    Balloon Payment Mortgage – What It Is & How It Works

    Mortgages come in many varieties. One lesser-known type of mortgage is the balloon payment mortgage, sometimes called simply a balloon mortgage. Often a mystery to home buyers, this type of mortgage comes with unusual terms, a potential for huge savings, and enormous risk.

    What Is a Balloon Mortgage?

    A balloon payment mortgage is a short-term home loan with low monthly payments where the bulk of the loan is due at the end of the loan period.

    Unlike a typical mortgage, the balance of a balloon mortgage isn’t designed to fully amortize — reduce to $0 through debt payments — throughout the loan payment term. Instead, the borrower pays the majority of the loan off in one lump-sum payment at the end of the term.

    How Does a Balloon Mortgage Work?

    Balloon loans can be any loan with a lump-sum payment schedule, including auto loans, personal loans, and mortgages. The lump sum can be due at any point during the loan term, but it’s most often due at the end.

    Balloon mortgage terms can be as short as 18 months, but they’re more typically five to seven years.

    Monthly payments throughout the loan term are either:

    • Interest Only. You pay interest that accrues each month, so your payment at the end is the full amount you borrowed.
    • Balance and Interest. You’ll make payments toward the interest and principal, so your payment at the end is less than the full amount you borrowed.

    If you make balance-and-interest payments, your monthly mortgage payment is similar to what you’d pay with a 30-year mortgage, except the balance comes due after just a few years.

    If you make interest-only payments, your monthly payment is lower than what you’d pay with a typical mortgage, and you owe the amount you borrowed in one lump sum after a few years.

    Balloon mortgage rates are often lower than those for longer-term mortgages, and balloon mortgages can be fixed-rate or variable-rate loans. Balloon mortgages tend to come with lower closing costs, so they may be easier to afford or qualify for than a typical mortgage.

    Example of a Balloon Payment

    Say you’re purchasing a house for $250,000. You make a down payment of $50,000 and borrow a $200,000, seven-year balloon payment mortgage at a 4.5% fixed interest rate.

    If you make balance-and-interest payments of $1,013 per month for 83 months, you’ll owe a balloon payment of $175,066 after seven years, according to the balloon mortgage calculator from MortgageCalculator.org. You’ll have paid $59,176 in interest.

    With the same mortgage on a typical 30-year term, you’d pay $1,013 per month. Over the life of the loan, you’d pay back the $200,000 you borrowed plus $164,680 in interest.


    What Happens If You Can’t Pay a Balloon Payment?

    Balloon payment mortgages present a risk for homeowners because you count on being able to afford a large payment five or seven years down the road. However, borrowers have options to get rid of a balloon payment.

    How to Get Rid of a Balloon Payment

    You have four main options to meet or eliminate your obligation to a balloon mortgage payment:

    • Pay It Off. The simplest — but maybe not the easiest — option is to stick to the original plan and make the balloon payment to pay off your loan.
    • Sell the Home. If you can sell the home for more than what you owe in a balloon payment, you can pay off the mortgage and profit from the home sale.
    • Refinance. Borrowers commonly refinance the mortgage before the balloon payment comes due. This can change the interest rate and extend the repayment term to set you up with ongoing monthly payments.
    • Reset. A balloon payment mortgage might come with an option to reset at the end of the term. These are sometimes called “convertible” balloon mortgages, and the lender writes the terms when you take out the original loan. For example, a 3/27 convertible balloon mortgage will start with three years at the original interest rate and then give you the option in year four to pay the balance or convert the loan to a fixed-rate, fully amortized 27-year mortgage with a new interest rate based on market rates.

    Selling a Home With a Balloon Payment Mortgage

    Homeowners who plan to sell quickly after buying a property often benefit from the low interest and low monthly payments of a balloon payment mortgage. You save money as long as you can sell the home at a profit before the balloon payment comes due.

    This plan can benefit home buyers who plan to move within a few years, buyers who want to flip properties for a profit, and commercial developers who want to build on and sell property.

    The risk in this plan is the timing. You could end up needing to sell a property in a down market when prices are low or buyers are scarce. You lose money or face foreclosure if you can’t sell for more than what you owe on the mortgage.

    Refinance vs. Reset

    Refinancing or resetting a balloon mortgage lets a borrower enjoy the initial low-interest, low-payment period while avoiding the balloon payment.

    Accepting a convertible balloon mortgage now could put you at a disadvantage if you expect your credit to improve over the next few years. The lender sets the reset terms based on your current credit score, so interest and terms might be less favorable than you’d get by refinancing to a new loan.

    Refinancing down the line when you’ve built better credit seems wise, but you risk needing to refinance during a period when market rates are high. Signing up for a 30-year fixed-rate mortgage in the first place could prove more financially beneficial.

    Refinancing might be your best option, though, if you can’t afford to make the balloon payment when it’s due. In that case, even a higher interest rate is better than foreclosure.


    Is a Balloon Mortgage a Good Idea?

    Balloon mortgages come with risks and rewards that make them a good or bad fit for different types of buyers.

    Pros

    1. Interest rates are often lower than with standard 30-year fixed-rate mortgages.
    2. This type of mortgage is often easier to qualify for.
    3. Closing costs are often lower.
    4. Monthly payments are lower, especially if you make interest-only payments.
    5. You pay less in interest over the life of the loan.

    Cons

    1. You must pay back the bulk of the loan — potentially hundreds of thousands of dollars — in one payment.
    2. Counting on selling the home, refinancing, or resetting the loan risks unfavorable terms in a poor market.
    3. Interest-only payments don’t let you build home equity.

    Who Should Get a Balloon Payment Mortgage?

    Because of the risk for borrowers, balloon mortgages are more common in commercial real estate — where businesses can absorb ill-timed balloon payments — than for private home buyers. But some private home buyers can benefit from this type of mortgage too.

    A balloon payment mortgage might be right for you if:

    • You Move Often. When you know you’ll sell your home within seven years — regardless of the market — a short-term loan might make sense.
    • You Flip Houses. When you buy a home intending to sell it in a year or so, a balloon mortgage could help you get started with lower upfront costs.
    • You’re Early in Your Career. If you expect to have significantly higher income within a few years and could afford a balloon payment or higher monthly payments after resetting the mortgage, the loan could be a good fit.
    • You’re Building Credit. If you expect to improve your credit in a few years, you may be able refinance the loan later to a longer term at a more favorable interest rate, depending on market rates in the future.

    An adjustable-rate mortgage (ARM) — which starts with a period of three to seven years at a low fixed interest rate and then switches to a variable rate for the remainder of the loan term — can offer most of the same benefits with less risk than a balloon mortgage. However, an ARM might come with higher closing costs and be tougher to qualify for.


    Final Word

    When they first came on the market, balloon mortgages were only available to real estate investors. They generally make sense for home buyers who plan to flip a property quickly to ensure they have enough money to make the balloon payment. These mortgages offer the benefit of low closing costs, low interest rates, and low monthly payments, making home investment more affordable.

    Now that balloon mortgages are available to home buyers for any property, you have the option to use one for your primary residence. But the benefits largely disappear if you plan to stay in your home beyond the length of the loan.

    Lenders might promote balloon mortgages to borrowers with poor credit as a way of getting a favorable interest rate, but beware the risks. If you can’t afford the balloon payment when it’s due, you could face foreclosure. Or you’ll have to refinance the mortgage and risk less favorable terms. Consider an adjustable-rate mortgage or other options for low-income home buyers to get similar benefits without the risk.

    Source: moneycrashers.com

    How Much Does It Cost to Refinance?

    For millions of American homeowners, their mortgage payment is one of their greatest financial commitments. With mortgage rates hitting record lows this year, it’s no wonder that people are interested in the possibility of refinancing their homes.

    Instead of only focusing on the potential of saving hundreds per month, it’s essential to fully understand how much it costs to refinance. We wanted to outline the basics so you have a strong starting point in your refinancing decision-making process.

    How Much Does It Cost to Refinance a Mortgage?

    Mortgage refinancing is defined as replacing your existing mortgage with a new one. There are multiple types of mortgage financing loans that require different considerations, such as cash-out refinances. In any case, working with your mortgage lender is essential to figure out if refinancing will be worth it for you.

    Below, we’ve listed the main types of fees you can expect when refinancing your mortgage. Depending on the situation, you could expect to pay anywhere from $5,000 to $10,000 in fees upfront.

    The cost of each fee varies greatly based on the type, size, and location of your home. You’ll also have to factor in your credit score and other aspects of your personal financial profile. Also, refinancing fees vary between states and lenders.

    Refinancing Closing Costs
    Type of fee Estimated cost
    Loan origination fee 0.5% – 1% of loan amount
    Appraisal fee $300 – $400
    Credit report fee $30 – $50
    Title insurance fee $500 – $1,000
    Government recording fee $30 – $50
    Property survey cost $300 – $800
    Home inspection cost $300 – $600
    Flood certification cost $15 – $20
    Prepaid Interest Charges Varies based on the interest rate and when your loan closes
    Tax service cost Varies
    Attorney cost Varies
    Mortgage points One point costs 1% of your mortgage amount
    Loan reconveyance fee $50 – $65

    By doing a cost-benefit analysis with your lender, you’ll determine if the short-term financial burden of refinancing is feasible. As with any financial endeavor, you’ll need to do your due diligence.

    It’s worth noting that some refinancing costs are tax-deductible based on certain criteria. For example, you can usually receive tax deductions on mortgage interest and closing costs.

    Questions to Ask Yourself Before Refinancing

    Before you make your decision, examine your long-term goals to see if you can justify the cost to refinance a mortgage. Ask yourself key questions about how much you’ll actually benefit from refinancing your loan or not.

    How-Much-Does-It-Cost-to-Refinance-1

    1) Will the Investment Pay for Itself?

    Ask yourself how long it will take you to earn back the cost of refinancing your home. Consider your ability to break even in a timely fashion. For example, it makes sense if you’re planning on staying in your home for the long haul and you can break even in a few years. If you might move in a year or two anyway, maybe you should reconsider refinancing.

    2) Is Your Loan Seasoned?

    Your loan is considered seasoned when it’s been out for at least a year and the borrower has a reliable payment history. If you’re five to ten years into paying off a 30-year mortgage, refinancing might not actually benefit you.

    For example, if you’re losing your potential savings to additional interest costs, you’ll likely just lose more by refinancing. On the other hand, refinancing could be a great option if you can ensure you won’t be losing money to interest fees.

    3) How Can I Lower my Refinancing Costs?

    Focus on improving your credit score and debt-to-income ratio before refinancing your mortgage. You’ll be in a strong position for negotiation to get the best possible rate. It’s worth asking if you can waive the appraisal fee, which could save you hundreds.

    If a property has been appraised fairly recently and prices have not significantly changed, your mortgage lender might be able to waive a new appraisal. Also, don’t hesitate to comparison shop to find discounted third-party fees.

    How-Much-Does-It-Cost-to-Refinance-2

    Will Refinancing Affect My Credit?

    Refinancing a mortgage has the potential to impact your credit score, although not permanently. If refinancing makes sense for your situation, you shouldn’t be concerned about it hurting your credit in the long term. It might not be the most ideal situation, but it’s extremely common and typically relatively easy for your credit score to bounce back.

    By consolidating your credit inquiries, you’ll prevent multiple hard inquiries from raising red flags. Also, you can work with your lenders to avoid having them all run your credit, which could risk lowering your credit score.

    From a long-term financial planning standpoint, home refinancing can be a smart move. Even if you’re considering refinancing your car loan, it makes sense to look into refinancing your house first. After all, a mortgage refinance allows you to benefit from more cash in your pocket due to lower monthly payments.

    Since financing decreases your monthly bills, you’ll want to be strategic about where you direct your additional funds. Are you saving for college tuition, a wedding, or retirement? Are you working towards becoming debt-free? Refinancing is a great time to get serious about budgeting and prioritizing your personal financial goals.

    Sources:

    Federal Reserve | Interest.com | The Nest | My Mortgage Insider | Freddie Mac

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