3 Things No One Tells You About Buying a House

This past November, my boyfriend and I were lucky enough to buy our first home — even with student loans and an ongoing pandemic. 

Not even COVID-19 could dull the thrill of buying a home, though it did make it an incredibly sterile process (pun intended). Even though I write about mortgages and buying a home for a living, the process still came with many learnings. Now, this might seem obvious for seasoned home buyers, but for my first-time home buyers, this one’s for you. 

1. Be prepared to feel financial anxiety

Millennials grow up thinking that they’ll never be able to afford anything — or at least I did. Because of that, I thought my days of buying a house were years away. But after a frank conversation about just how much we were paying in rent, we realized that buying a house was a much better investment of our money.

[ Read: How Do You Know You’re Ready to Buy Your First Home? ]

That said, your mortgage isn’t the only number that you need to think about when you’re deciding to buy. Don’t forget about things like closing costs or your down payment.

So, when the full-blown “no way I can afford this” panic set in, we sat down and evaluated our finances — and not just how much money we each had in the bank. We took into account our bills, student loan payments and potential monthly mortgage payments in a simple excel spreadsheet. Seeing it all laid out in front of us made things doable. 

It’s important to compare your financial obligations to how much you make and consider how much you could afford if you lost your job. 

2. With purchasing power, comes great responsibility

I chose where I went to college and what I do for a living, but I’ve never felt more in control of things in my life. Which admittedly was pretty terrifying because I had no idea what I was doing.

Our realtor was helpful, but when it came down to it, he could only suggest things. Ultimately every decision landed on us. Not all choices were complicated  — deciding on which house to pick was easy enough. After we shopped around for rates and compared who was going to give us the best terms, we chose our lender. But everything after putting an offer in was where things got tricky. 

[ Read: Best Mortgage Rates for February 2021 ]

From what inspections you want to which lawyer you want to use, you have to decide, even when you have no idea if you made the right choice. 

You also have to decide how much house you should buy, not just how much you can “afford.” I can’t explain the flurry of utter shock when we were pre-approved for a $600,000 mortgage. There was no chance we could actually afford that price. Even if a pre-approval doesn’t guarantee a mortgage, don’t let a high number like that lead you to take on more than your finances truly allow. 

3. The lessons will never end

There is no such thing as perfection when it comes to purchasing a home. There will be repairs to be made, and budgets to reevaluate. But with an open mindset, the inconveniences can become learnings. Here are my top three.

Everyone may know the word appraisal, but not what it really means

I happened to be buying a home at the same time as a friend, and it was interesting to see the noticeable differences between our journeys. They ran into trouble with their appraisal, which at the time I thought was a very obvious process. However, their experience makes me realize that knowing something topically doesn’t mean you understand the implications. 

A home appraisal is required and will be coordinated by your lender. But if the offer accepted by the seller was for $300,000 and the appraisal values the home at only $290,000, your lender is only going to give you what the home is worth.

If you don’t have an extra $10,000 lying around to cover that gap, you’ll have to check if the seller will come down. Thankfully it all worked out for my friend, however, had it not, they would have lost money when they would have been forced to walk. 

In this article

Really think about what to spend money on

Given that the coronavirus is still very much around, we thought it best to forgo movers or painters to keep our bubble as small as possible. Not to mention the added benefit of saving a significant amount of money. 

[ Read: 7 Crucial Steps to Buying a Home in 2021 ]

If I could go back, I would pay for one, if not both. It was a ton of added stress and time that could’ve been saved. That said, the money saved cannot be ignored. The thing about buying a house is that you need a million things right from the start, especially if you’re moving out from an apartment, as I did. 

Most people likely cannot afford to pay painters, movers and all the things you need right from the start at the same time. Think about what your priorities are. For me, it was painting. If you’re fine with the walls’ colors, save that expense for later and focus on movers or the work your house needs. 

COVID-19 made for a memorable experience

In response to the pandemic, lenders have added extra employment verification steps to the process. If you lose your job, you may have to stop the process and reapply later. Yet, the pandemic’s reach went beyond just the underwriting process. 

If I saw my realtor on the street post-pandemic, I would not recognize him. We wore masks for the entire process, and even the official closing was done outside in the cold, with two pairs of sterile gloves and masks. It was not an exciting event like many people describe. The most exciting part of closing was getting to keep the pen at the end. 

We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Image credit: Bibadash / Shutterstock

Source: thesimpledollar.com

Mortgage Rates vs. Presidential Inaugurations: Is There a Correlation?

Last updated on October 14th, 2020

Let’s get political – just kidding.

Let’s talk about data that involves presidential elections and mortgage rates, more specifically, what happens to rates during an election year and the subsequent year to find out if there are any trends that pop out.

I went ahead and scoured Freddie Mac’s 30-year fixed-rate mortgage data, which dates back to April 1971 and lined it up with every presidential election since then.

Three pieces of data were plucked from their database:

– Mortgage rates at the time of the election
– Mortgage rates a month after the inauguration
– Mortgage rates at inauguration year-end

November 6th, 2012 Obama incumbent win (Democrat)

The 30-year fixed averaged 3.35% during the month of November 2012. It averaged a HIGHER 3.53% for the month of February 2013, the month after Obama’s inauguration.

It ended the year 2013 HIGHER at 4.48%.

November 4, 2008 Obama win (Democrat)

The 30-year fixed averaged 6.09% during the month of November 2008. It averaged a LOWER 5.13% for the month of February 2009, the month after Obama’s inauguration.

It ended the year 2009 LOWER at 4.93%.

November 2, 2004 Bush Jr. incumbent win (Republican)

The 30-year fixed averaged 5.73% during the month of November 2004. It averaged a LOWER 5.63% for the month of February 2005, the month after Bush’s inauguration.

It ended the year 2005 HIGHER at 6.27%.

November 7, 2000 Bush Jr. win (Republican)

The 30-year fixed averaged 7.75% during the month of November 2000. It averaged a LOWER 7.05% for the month of February 2001, the month after Bush’s inauguration.

It ended the year 2001 LOWER at 7.07%.

November 5, 1996 Clinton incumbent win (Democrat)

The 30-year fixed averaged 7.62% during the month of November 1996. It averaged a HIGHER 7.65% for the month of February 1997, the month after Clinton’s inauguration.

It ended the year 1997 LOWER at 7.10%.

November 5, 1992 Clinton win (Democrat)

The 30-year fixed averaged 8.31% during the month of November 1992. It averaged a LOWER 7.68% for the month of February 1993, the month after Clinton’s inauguration.

It ended the year 1993 LOWER at 7.17%.

November 8, 1988 Bush Sr. win (Republican)

The 30-year fixed averaged 10.27% during the month of November 1988. It averaged a HIGHER 10.65% for the month of February 1989, the month after Bush’s inauguration.

It ended the year 1989 LOWER at 9.74%.

November 6, 1984 Reagan incumbent win (Republican)

The 30-year fixed averaged 13.64% during the month of November 1984. It averaged a LOWER 12.92% for the month of February 1985, the month after Reagan’s inauguration.

It ended the year 1985 LOWER at 11.26%.

November 4, 1980 Reagan win (Republican)

The 30-year fixed averaged 14.21% during the month of November 1980. It averaged a HIGHER 15.13% for the month of February 1981, the month after Reagan’s inauguration.

It ended the year 1981 HIGHER at 16.95%.

November 2, 1976 Carter win (Democrat)

The 30-year fixed averaged 8.81% during the month of November 1976. It averaged a LOWER 8.67% for the month of February 1977, the month after Carter’s inauguration.

It ended the year 1977 HIGHER at 8.96%.

November 7, 1972 Nixon incumbent win (Republican)

The 30-year fixed averaged 7.43% during the month of November 1972. It averaged a HIGHER 7.44% for the month of February 1973, the month after Nixon’s inauguration.

It ended the year 1973 HIGHER at 8.54%.

Did We Find Any Trends?

So let’s tally up the numbers here. The Freddie Mac data stretches back to 1972, allowing us to cover 11 presidential elections.

There were six Republican wins and five Democratic wins during that time.

Republican terms were split 3/3 in favor of lower vs. higher rates at inauguration year-end.
Democratic terms were split 3/2 in favor of lower vs. higher rates at inauguration year-end.

In six out of the 11 inauguration years, mortgage rates ended up LOWER at the end of year compared to November of the previous year.

That meant the five remaining years did the opposite. The same held true of rates in November (election) versus the following February (inauguration). So LOWER barely edged out HIGHER overall.

But if we remove the elections from 1972-1980, the balance shifts to 6 to 2 in favor of LOWER rates.

If we throw out the four incumbent wins since 1984, it moves to 4 to 0 in favor of LOWER rates.

If we throw out all incumbent wins since 1972, we have a ratio of 4 to 2 in favor of LOWER rates.

When Donald J. Trump won the election last November, the 30-year fixed averaged 3.77%. It has since shot up to 4.12% in rather volatile fashion (it was as high as 4.32% in December).

The last inauguration year that mortgage rates ended higher with a newcomer president (a president-elect) was in 1981. Does this mean mortgage rates could end 2017 lower with President Trump in office?

The data isn’t definitive, but if they don’t go down, it would be the first time in nearly 40 years.

Read more: Presidential Elections vs. Mortgage Rates

(photo: DVIDSHUB)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.

Source: thetruthaboutmortgage.com

Will Mortgage Rates Go Up or Down If Trump/Biden Wins the Election?

Last updated on October 15th, 2020

As everyone knows, we have a very important U.S. presidential election just around the corner. In fact, it’s now less than three weeks away.

It could be the biggest in U.S. history, at least in terms of drama and friction, and possibly an unknown or disputed outcome come November 3rd.

Unfortunately, not everyone takes the time to vote for one reason or another, and it appears that those behind on the mortgage are even less likely to vote.

Those Behind on the Mortgage Are Less Likely to Vote

mortgage vs vote

A new survey from Apartment List revealed that 87% of homeowners who began the month without any unpaid mortgage bills will “definitely” vote next month.

This compares to just 60% of those who had unpaid bills to begin the month.

Now it’s unclear if these borrowers are actually late, given the fact that mortgage lenders often provide a grace period to pay the mortgage until the 15th of the month.

But we can at least glean some patterns and trends that emerge over time.

You can also see that voter turnout is even worse for renters, whether they pay on time or not.

Only 68% of on-time renters plan to vote, whereas just 48% of those behind on rent expect to make it out to the polls.

As to why renters are generally less likely to vote than homeowners, Apartment List noted that homeowners are often motivated by policies and propositions that could affect local property values.

There are also housing related bills that could affect tax treatment, property tax rates, and so forth.

While there doesn’t seem to be a difference based on party affiliation, such as being a Democrat or Republican, they said they’ve previously found that renters are more likely to be non-citizen immigrants, which makes them ineligible to vote.

Renters may also have more difficulty getting out to vote, due to an hourly-wage job, or possibly affected by voter suppression tactics.

Overall, the company said 71% of homeowners made a complete on-time payment in the first week of October, down from 73% in September.

Despite the month-to-month decline, it’s certainly better than the 68% of homeowners who made on-time payments in August.

What Will Happen to Mortgage Rates If Trump/Biden Wins the Election?

Mortgage Rates vs Presidential Elections

  • Mortgage rates surged higher after Trump won the presidential election in 2016
  • They improved slightly during 2017 but remained above November 2016 levels
  • Today they are at/near all-time record lows due to a variety of different factors
  • Statistics tell us a Biden victory would lead to lower mortgage rates both post-election and post-inauguration

Now let’s talk about mortgage rates, which could be affected by the outcome of the very important presidential election.

Roughly eight years ago, I wrote about the correlation between presidential elections and mortgage rates, specifically the 30-year fixed.

What I found was the election itself didn’t tend to make much of an impact, at least from November to December in an election year.

However, mortgage rates often fell if a Democrat won, which means if Biden wins, rates may improve.

Additionally, rates went up fairly significantly after Trump won back in 2016, from 3.77% to 4.20% in the span of a month.

They’ve since dropped tremendously to near-record lows, but during that window from November to December, they experienced a volatile uptick.

I also looked into mortgage rate movement from election month to a month post-inauguration, and found that rates were lower in six out of 11 Februaries versus the preceding November.

More importantly, if the four incumbent wins since 1984 were removed, mortgage rates were lower four out of four times by the end of the following year.

And they were always lower in February, other than when Reagan took office in 1981, Bush Sr. in 1989, and Trump in 2017.

As expected, mortgage rates did close out the year lower in 2017, but were still higher than they were before the election.

Now if Trump wins again, as the incumbent, the outlook is a little less clear.

A total of five incumbents have won the presidency since 1972, which resulted in lower mortgage rates only two out of those five years.

The 30-year fixed ended the year higher in 1973, 2005, and 2013, and lower in the years 1985 and 1997.

Basically, the best chance for lower mortgage rates is for both a newcomer to win and a Democrat, which favors Biden, based on the data.

But Trump could always pull a Reagan if he wins a second term.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.

Source: thetruthaboutmortgage.com

Why Joe Biden and Kamala Harris Haven’t Paid Off Their Mortgages

Posted on November 11th, 2020

You’d think presumably wealthy politicians like Joe Biden and Kamala Harris would own their homes free and clear. But that’s not the case, per their 2019 tax returns.

Both individuals disclosed their returns on the JoeBiden.com website, and each paid tens of thousands of dollars in mortgage interest last year.

But why would they pay interest if they had the means to simply pay off the loans, a luxury most other Americans can’t afford to do? The reason is simple.

Mortgage Debt Is the Cheapest Debt Out There

  • Joe and Jill Biden paid $15,796 in home mortgage interest in 2019
  • Kamala Harris and Douglas Emhoff paid $32,041 in home mortgage interest in 2019
  • There’s a good chance both parties could have paid off their mortgages in full
  • But why bother if you can earn a higher rate of return for your money elsewhere?

Why Biden and Harris and so many other rich homeowners choose to carry mortgages as opposed to paying them off has to do with how cheap they are relative to virtually everything else.

Ultimately, it doesn’t get much better than home loan debt, especially with mortgage rates in the 1-2% range at the moment. What other type of loan offers such cheap financing?

This is why I refer to mortgages as good debt, especially since you have the opportunity to write off the interest in many cases.

On top of that, the low rate of interest makes it easy for savvy homeowners to beat the rate of return on their mortgage by investing elsewhere.

Simply put, your mortgage rate is your rate of return if you choose to prepay your home loan ahead of schedule.

Any extra dollars put toward your loan essentially earn whatever your mortgage rate is, so if it’s 2.75%, you’re earning 2.75% if you choose to pay any extra each month or year.

Unfortunately, the lower mortgage rates go, the less it makes sense to prepay the mortgage because you’re earning a lower and lower rate of return.

Interestingly, we often hear feel-good stories in the news about everyday Joes paying off their mortgages in just 5-10 years. Or even less time. But why? What’s the rush exactly?

Getting Rid of the Mortgage Is a Psychological Victory

  • The obsession with paying off the mortgage is a psychological one
  • Often times there are better uses for your money than prepaying your home loan
  • An alternative might be to pay off other high-interest rate debt like credit cards
  • Or to invest any extra funds in the stock market, mutual funds, or a general retirement account

Sure, it’s great not to have to make a monthly mortgage payment, but that doesn’t mean it’s the best move financially to prepay your home loan.

Often, the desire to pay off the mortgage has more to do with human psychology than it does math.

It probably feels good to pay off any debt, especially a large sum of money such as a mortgage.

But as noted, it’s cheap debt and you might be better served putting extra dollars elsewhere.

Apparently, this is what Joe Biden and Kamala Harris do, and Obama did the same based on his old tax returns.

In the past, I reported that Joe Biden had been a refinancing machine, constantly taking advantage of cheaper financing by way of rate and term refinance to save money on his home loans.

One of the richest men in the world, Warren Buffett, has also been a proponent of carrying a mortgage for the same reasons.

You get to lock in an ultra-low mortgage rate for three decades and watch the payment become effectively cheaper over time as inflation erodes the value of the dollar.

It doesn’t get much better than that, especially when you might be able to write off the interest too.

This explains why Joe Biden, Kamala Harris, Warren Buffett, and even Facebook founder Mark Zuckerberg choose to hold mortgages when they can easily pay them off.

Read more: Should I pay off my mortgage early?

(photo: Elvert Barnes)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.

Source: thetruthaboutmortgage.com

Zillow Will Now Buy Your Home for Its Zestimate Price

Posted on February 25th, 2021

Zillow appears to be putting its money where its mouth is by offering to buy properties at their Zestimate price.

No longer is the Zestimate just a number you can fantasize about, assuming your home qualifies for the company’s iBuying program known as Zillow Offers.

The Zestimate Turns 15 Years Old

  • Zillow introduced the Zestimate all the way back in 2006
  • They claim it was the first time homeowners had instant access to free estimated home values
  • Zestimates are published for nearly 100 million homes nationwide with a median error rate for on-market homes of just 1.9%
  • Today’s algorithm uses public records, feeds from MLSs, artificial intelligence, computer vision, and a deep-learning neural network that even factors in photographs

Zillow’s new initiative coincides with the 15th anniversary of their popular home valuation tool known as the Zestimate.

The free quasi-appraisal tool was launched in 2006 and essentially put Zillow on the map by providing homeowners and prospective home buyers with a quick tool to see what a home was worth.

Today, their complex algorithm goes beyond public data and MLS feeds and uses things like artificial intelligence and computer vision that allows it to incorporate data from photographs.

In other words, if images are uploaded that show a new kitchen or bathroom, or even just new paint or more expensive fixtures, your Zestimate might get a boost.

They claim all these improvements to the always-evolving Zestimate give it a median error rate of just 1.9% for on-market homes.

While that sounds pretty impressive, it doesn’t mean you should just sell your home to Zillow and call it a day.

Where Zillow Is Buying Homes for Their Zestimates

Sell for Zestimate price

  • If your home is eligible you’ll see an initial cash offer prominently displayed at the top of your property listing page
  • The initial offer is before taxes/fees are factored in and also subject to the accuracy of property information
  • Currently available in a large number of markets including Phoenix, Charlotte, Orlando, San Diego, and Los Angeles
  • The company plans to expand the pool of eligible homes over time as the Zillow Offers platform grows

At the moment, the company’s “buy at the Zestimate price” deal is available on a limited number of homes in markets where Zillow Offers currently operates.

This includes a pretty large number of cities, including:

  • Phoenix and Tucson, Arizona
  • San Diego, Los Angeles, Riverside, and Sacramento, California
  • Denver, Colorado Springs, and Fort Collins, Colorado
  • Miami, Jacksonville, Orlando, and Tampa, Florida
  • Atlanta, Georgia
  • Minneapolis, Minnesota
  • Las Vegas, Nevada
  • Charlotte and Raleigh, North Carolina
  • Portland, Oregon
  • Nashville, Tennessee
  • Dallas, Houston, and San Antonio, Texas

To see if your home is included, simply head over to your property’s listing page on Zillow and look for a prominent “Sell to Zillow for your Zestimate” box.

If it’s there, this means you can begin negotiations at that price, before the company factors in things like taxes, fees, and repair requests.

Their offer is also subject to eligibility and accuracy of property information. In other words, they’ll need a human being to back up the findings of their Zestimate technology before they proceed with an offer.

My assumption is the more cookie-cutter the property, the more likely it is to have one of these instant offers.

That means a property in a housing tract that is moderately priced and similar to other properties nearby.

Conversely, they probably aren’t doing this for high-priced properties or homes that have unique features.

Is Selling at the Zestimate Price a Good Deal?

  • Zillow has referred to the Zestimate as a starting point in the past
  • And that could still be the case if you take them up on this offer once they negotiate the price
  • They’ll also factor in repair costs, listing costs, their service fee, and more
  • When all is said and done you could be looking at sales proceeds that are 10%+ below the Zestimate

While Zillow boasts about its high accuracy rate for the Zestimate, it doesn’t mean it’s a no-brainer to just sell your home to Zillow.

While they claim their median error rate is just 1.9% for listed properties, what about properties that aren’t listed, i.e. YOUR HOME.

Personally, I always feel that the Zestimate is lower than the comparable Redfin Estimate, and often lags home price data.

In other words, the Zestimate typically displays a price that feels a little bit in the past, whereas the Redfin Estimate appears to show a more forward-looking price.

Put another way, the Zestimate seems to mirror what someone paid for a home, while the Redfin Estimate often feels more like what a buyer would pay.

That’s just my personal opinion, but I’ve been tracking these numbers for years, and I’ve rarely seen a Zestimate that’s higher than a Redfin Estimate.

This is especially important given the fact that it’s a seller’s market at the moment.

Lastly, you need to consider the fees charged for selling to Zillow Offers, including prep and repair costs (they’ll be reselling your home quickly), along with the Zillow service charge.

They say that service charge is 2.5% on average, which is on top of the ~6% in selling costs that mirrors what a pair of traditional real estate agents would earn, along with 1-2% for closing costs like transfer taxes, escrow, etc.

All said, you could be looking at 10% off the Zestimate, not including repair requests, so your actual walkaway cash could be much lower.

Of course, the same can be said of a traditional sale (minus that service charge), and you get to sell immediately without the usual inconvenience, aggravation, and uncertainty.

But that’s where the service fee comes in. It’s more like a convenience fee.

In any event, this is an interesting development and a sign that Zillow wants its Zestimate to serve a larger role than just a free home price estimate.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.

Source: thetruthaboutmortgage.com

Lender credits: How a mortgage lender can pay your closing costs

What are lender credits?

Lender credits are an arrangement where the lender agrees to cover part or all of a borrower’s closing costs. In exchange, the borrower pays a higher interest rate.

Lender credits
can be a smart way to avoid the upfront cost of buying a house or refinancing.

Getting
closing costs to $0 means you can put more of your savings toward a down
payment — or, in the case of a refinance, lock in a lower interest rate without
having to pay upfront fees.

But lender credits aren’t always the right
choice. For some borrowers, it makes sense to pay more upfront and
get a lower interest
rate. 

Here’s how to negotiate the best mortgage deal for you.

Check your no-closing-cost mortgage options (Feb 25th, 2021)


In this
article (Skip to…)


How lender credits work

Lender credits are a type of ‘no-closing-cost mortgage’ where the mortgage lender covers all or part of the borrower’s closing costs.

Of course, lenders don’t pay borrowers’ closing costs out of generosity. In exchange for absorbing closing costs, the lender charges a higher interest rate. The ‘extra’ interest paid by the homeowner over time eventually repays any fees covered by the lender. 

Lender credits can be structured a few different ways, depending on what the lender agrees to cover and how much the borrower is willing to increase their mortgage rate.

For example:

  • The lender might cover all the borrower’s closing costs
  • The lender might cover its own fees and third-party services (like the
    appraisal) but not prepaid items (like property taxes and homeowners insurance)
  • The lender might cover only its own
    fees and none of the third-party services or prepaid items

The more of your closing costs a lender pays via lender credits, the higher your interest rate will be, and vice-versa.

Mortgage
pricing is flexible, and you can take advantage of tools like lender credits to
negotiate a rate and fee structure that works well for you.

Check your no-closing-cost mortgage options (Feb 25th, 2021)

How to compare mortgages
with lender credits

If you’re
considering a home loan with lender credits, it’s important to weigh the
short-term savings versus the long-term cost.

You might
eliminate your upfront cost with lender credits. But accepting a higher
interest rate means you’ll pay more interest in the long run. You’ll also have
a higher monthly payment.

If you keep
your loan its full term — typically 30 years — the amount of ‘extra’ interest
you pay could far exceed the amount you would have spent on upfront closing
costs.

However, most
home buyers don’t keep their mortgages for the full term. They sell or
refinance within a decade or so. And if you’ll only keep your loan a few years,
having a slightly higher interest rate might not matter as much.

So you need to
consider how long you plan to keep the mortgage before selling or refinancing
to decide if lender credits are worth it.

You should
also compare no-closing-cost loans from a few different mortgage lenders.

Each lender
structures lender credits differently — so you might find one that covers the
same amount of closing costs, but charges a lower interest rate than
another. 

And be sure to compare offers on equal footing.

If you look at
one lender quoting a zero-cost mortgage, and another that’s only covering origination
fees, for example, you’re going to see very different rates. So make sure all
the lenders you compare are covering the same amount and types of closing
costs.

You can find you total closing costs and how many lender credits are included on the standard Loan Estimate you’ll receive after applying with any lender. These documents make it easy to compare home loan offers side-by-side to find the better deal.

Are lender credits worth
it? An example

Typically, the
less time you keep your mortgage, the more you’ll benefit from lender credits.

Here’s an
example:

  No Lender Credits With Lender Credits
Loan Amount $250,000 $250,000
Interest Rate* 3.0% 3.75%
Upfront Closing Costs $9,000 $0
Interest Paid In 5 Years $35,500 $44,500
Interest Paid In 30 Years $129,500 $166,800

*Interest
rates are for sample purposes only. Your own interest rate with or without
lender credits will vary.

This home
buyer can take a 3% interest rate on a 30-year fixed-rate mortgage, with $9,000
in closing costs (3.6% of the loan amount). Or, they can accept a 3.75%
interest rate with $0 in upfront closing costs.

If the
homeowner keeps the mortgage 5 years or less, lender credits are likely worth
it.

At the end of
year 5, they will have paid $9,000 in ‘extra’ interest due to their higher
rate. But they saved $9,000 upfront. So if they sell or refinance any time before
the end of year 5, the savings from lender credits outweigh the added cost.

This point —
where the upfront savings level out with the long-term cost — is known as the
‘break-even point.’

If this
homeowner stays beyond the break-even point, they end up paying their
lender more in added interest than they saved upfront. So it’s easy to see how
lender credits don’t make as much sense if you plan to keep your loan a long
time.

However, there
are some scenarios where lender credits are worth it even for long-term
borrowers.

Lender credits in a rising interest rate environment

Even if you’ll
spend more in the long run, there are still scenarios where lender credits can
make sense. That’s especially true in a rising rate environment.

For example:

  1. A first-time home buyer wants to buy at today’s low interest rates, but
    only has enough saved for a down payment — not closing costs. This person could
    take a small rate increase, and may still lock in a lower rate than the one
    they’d get if they had to save another year or two and rates rose during that
    time  
  2. A homeowner bought their home a couple years
    ago and has an interest rate 2% higher than today’s rates. They want to
    refinance at today’s low rates but can’t afford closing costs. They could
    likely take a rate above the current market, get their closing costs paid by
    the lender, and still save money every month compared to their old loan

In these
cases, the higher interest rate is relative. Some homeowners can take a rate
increase on their lowest offer and still ‘save’ money overall.

Often, lender
credits are a matter of timing. They allow homeowners and home buyers to lock
during a low-rate environment, even if they don’t have the cash to cover
upfront fees out of pocket.

And remember,
lender credits aren’t all-or-nothing.

You don’t need
to take a big rate increase and get closing costs to $0. You can have the
lender cover part of your closing costs and take only a slight rate increase.

Make sure you
talk to lenders about all your options. And if one lender doesn’t offer the
right combination of rate and fees for you, shop around for another company
that will.

Compare no-closing-cost loans (Feb 25th, 2021)

Lender credits vs. discount points

Lender credits
work the opposite way, too. Instead of paying less upfront and taking a higher
rate, you can pay more upfront and get a lower interest rate.

This strategy
is known as ‘points,’ ‘mortgage points,’ or ‘discount points.’

Whereas lender
credits save you money upfront but increase your long-term cost, discount points cost you more
at closing but can save you a huge amount of money over the life of the loan.
Having a lower interest rate also reduces your mortgage payments.

Take a look at
an example:

  With 1 Discount Point No Points Or Credits  With Lender Credits
Loan Amount $250,000 $250,000 $250,000
Interest Rate* 2.75% 3.0% 3.75%
Upfront Closing Costs $11,500 $9,000 $0
Interest Paid In 5 Years $32,500 $35,500 $44,500
Interest Paid In 30 Years $117,500 $129,500 $166,800

*Interest
rates are for sample purposes only. Your own interest rate with or without points
or credits will vary.

One discount
point typically costs 1 percent of the loan amount and lowers your rate by
about 0.25%.

In this case,
one point costs the borrower an extra $2,500 at closing and lowers their rate
from 3% to 2.75%.

By the end of
year 5, the homeowner has already saved $3,000 in interest compared to the
original rate quote. And the longer they keep their mortgage, the more that
discount point will pay off.

By the end of
year 30, they’ve saved $12,000 compared to the original rate — and nearly
$50,0000 compared to the no-closing-cost mortgage.

This is just
another example of how borrowers can use mortgage pricing to their advantage.

The homeowner
staying long-term can pay for discount points and save themself tens of
thousands of dollars over 30 years. The person buying a starter home or a
fix-and-flip can eliminate their upfront cost and sell before the higher
interest rate starts to matter.

It’s up to you
to decide what makes the most sense based on your home buying or refi goals,
and your personal finances.

Your loan
officer or mortgage broker can help you compare options and choose the right
pricing structure.

Negotiating your interest rate

Both lender
credits and discount points involve negotiating with your mortgage lender for
the deal you want.

You’ll be in a
better position to negotiate low closing costs and a low rate if lenders
want your business. That means presenting yourself as a creditworthy borrower
in as many areas as you can.

Lenders
typically give the best rates to borrowers with a:

Of course, you
don’t need to be perfect in all these areas to qualify for a mortgage. For
instance, FHA loans allow credit scores as low as 580. And if you qualify for a
USDA or VA loan, you can buy with 0% down.

But making
improvements where you can — for instance, by raising your credit score or
paying down debts before applying — can make a big difference in the rate
you’re offered. 

Today’s mortgage rates with lender credits

Today’s rates are still at historic lows. Many
borrowers can get their closing costs paid for and still walk away with a great
deal on their mortgage.

The trick is to compare mortgage loans from a
few different lenders.

If you want a zero-cost mortgage, make sure
you ask specifically for quotes with lender credits so you can find the lowest
rate on the mortgage you want.

Verify your new rate (Feb 25th, 2021)

Compare top lenders

Source: themortgagereports.com

Can closing costs change on the closing disclosure?

What to expect on your Closing Disclosure

The Closing Disclosure (CD) is one of the most important loan documents you’ll receive during the mortgage process.

You should read the CD very carefully, as it lists the final terms and closing costs for your home loan.

Many of these numbers will be the same as what you’ve seen before, but some elements on the CD may have changed since you initially applied. Certain closing costs may even increase.

Here’s what you should look out for when you read your CD, and how to know if the numbers you’re seeing are correct.

Verify your mortgage eligibility (Feb 24th, 2021)


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What is a Closing Disclosure?

The Closing Disclosure is a 5-page document your lender or mortgage broker will provide at least three days prior to your closing date.

Also known as a ‘CD,’ the Closing Disclosure is a standard document that all lenders are required to provide all mortgage applicants. It lists the final terms, mortgage rate, and closing costs for your new loan.

The counterpart to the CD is the Loan Estimate (LE), a document you receive after applying which outlines the initial terms and costs of the mortgage you’ve been approved for.

Today’s standard Closing Disclosure replaced the HUD-1 settlement statement as the final document that mortgage borrowers are given before signing closing documents.

What information is on the Closing Disclosure?

As you review the Closing Disclosure, you’ll find important details about your mortgage loan.

Many of the key figures appear on the first page of the disclosure form, including:

  • Loan information — Your loan length, loan product (e.g. conventional or FHA), interest rate type (fixed or adjustable), and loan purpose (purchase or refinance)
  • Loan terms — This is where you’ll find your loan amount, interest rate, principal and interest (P&I) payment, and whether or not the loan comes with a prepayment penalty or balloon payment (most don’t)
  • Projected payments — Here you’ll find a breakdown of your full monthly mortgage payment, which includes principal and interest as well as mortgage insurance, property taxes, homeowners insurance premiums, and (if applicable) HOA dues
  • Costs at closing — Lists your total closing costs as well as ‘cash to close,’ which is the total amount you’ll need to pay on closing day including your down payment

You’ll also find a breakdown of your longer-term loan costs — including the annual percentage rate (APR) and total interest cost — on page 5 of the CD.

Generally, the terms and closing costs listed on your Closing Disclosure should very closely match the ones listed on the Loan Estimate you received after you applied.

In fact, there are some items that cannot change on the CD by law. But some closing costs can increase before closing.

It’s important to understand which items can and can’t change on the CD — and by how much — so you know you’re getting the deal you were promised before you sign off on the mortgage.

Here’s what you should know.

What can change on the Closing Disclosure?

According to TRID — the set of fair lending rules that regulates Loan Estimates and Closing Disclosures — some of the costs for your loan may not increase at closing. Others may change, but only by 10 percent or less. Some other closing costs can increase without limit.

Closing costs that cannot change

Certain fees may not change. These fall into the “zero tolerance” category for any increases whatsoever. Such costs include:

  • Lender fees
  • Appraisal fees
  • Transfer taxes

Lender fees, including origination charges and underwriting fees, make up a big chunk of your closing costs.

These are not allowed to change, so if you see a difference between lender fees on your LE and CD, that should raise a red flag.

Closing costs that can increase 10% or less

Unless there is a “change in circumstances,” some closing costs may be permitted to change as long as the total does not increase by more than 10 percent.

These items include recording fees, and fees for lender-required third-party services you’ve chosen, such as:

  • Title search
  • Lender’s title insurance
  • Survey fee
  • Pest inspection fee

Note, the cost of these items cannot change at all if the service provider is an affiliate of your mortgage lender.

Closing costs that can increase by any amount

Certain closing costs are not controlled by the lender, nor do they go to the lender. They can increase by any amount at any time. These include:

  • Prepaid interest
  • Prepaid property taxes
  • Prepaid homeowners insurance premiums
  • Initial escrow account deposits
  • Real estate-related fees

Can my interest rate change before closing?

Unless your interest rate is locked when you receive your Loan Estimate, it can change before closing.

Your rate can change even if it has been locked, too.

For instance, if your credit score has fallen since applying, or if you don’t end up closing during the specified rate-lock timeframe, your rate can change.

Or, if your mortgage has a ‘float down option,’ you might pay an additional closing cost for the chance to lower your rate if current interest rates fall before closing.

What happens when closing costs change?

Closing costs can change dramatically if your application has a “changed circumstance” — meaning you no longer qualify for, or no longer want, the loan you originally planned on.

If your loan application has changed circumstances, you will likely receive a revised Loan Estimate and later, a revised Closing Disclosure.

A changed circumstance could be for a number of reasons. For example:

  • You or your lender decide on a different loan program
  • You make a different down payment
  • Your home under appraises
  • Your credit score or credit report changes
  • Your income or employment can’t be verified as expected

If closing costs have increased more than the allowed limits and your application has not had a “changed circumstance,” you are entitled to a refund of the amount above the allowable limits.

If a changed circumstance is required, the Closing Disclosure will need to be redone.

This could delay your closing, so you’ll want to contact your lender to make any of the necessary changes immediately.

How to use your Loan Estimate to check the Closing Disclosure

When you started your loan, your lender issued a Loan Estimate.

The Loan Estimate (LE) is another product of the TRID rule. This disclosure replaced what was formerly known as the ‘Good Faith Estimate’ or GFE.

Your Loan Estimate highlights the most important features of the loan and makes it easier to compare different lenders.

The numbers on your LE and CD should be similar, but might not be exactly the same. The Loan Estimate shows what you may pay. The Closing Disclosure shows what you will pay.

To make an accurate comparison between your LE and CD and make sure you’re getting the mortgage you were offered, pay attention to a few key points:

  • Make sure your loan type, loan term, and monthly payment are what you expect
  • Check that your interest rate is the same one you locked in, provided you’re closing within the rate lock period
  • Make sure the closing costs that cannot change on the CD exactly match what’s shown on the LE
  • Make sure the closing costs that can change have only increased within the 10% allowable limit, if applicable (see above)

You should also look closely at the more mundane details on your CD. Even small errors, such as the misspelling of your name or address, can create significant problems later on.

Look at your CD with a close eye and if anything seems amiss, contact your lender immediately to get the issue sorted out.

For a full breakdown of the Closing Disclosure form and tips on how to read each page, see this example from the Consumer Financial Protection Bureau (CFPB).

Why the Closing Disclosure is important

Thanks to TRID, also known as the “Know Before You Owe” rule, all lenders are required to issue a Closing Disclosure three business days prior to closing.

This important disclosure was meant to protect mortgage borrowers by preventing surprises at closing.

When you receive your Closing Disclosure, be sure to read each item on the disclosure. Take note of whether there have been any changes since you received the Loan Estimate.

Do you understand the fees and have any of them changed? Do you have an escrow account and do you understand how it works?

If you’re uncertain, ask your lender to help you go over everything.

You should fully understand the terms and cost of a home loan before signing on — and you should be sure you’re getting the deal you expected.

Verify your new rate (Feb 24th, 2021)

Compare top lenders

Source: themortgagereports.com

Average closing costs in 2021 and how to keep yours low

How much are closing costs?

Closing costs are
typically 2-5% of your loan amount, with a smaller percentage for larger loans.
For example, closing costs on a $100,000 mortgage might be $5,000 (5%), but on
a $500,000 mortgage they’d likely be closer to $10,000 (2%).

Some closing costs are
set in stone, but many aren’t. Lenders have a lot of flexibility over the fees
they charge.

That means borrowers can
shop around for the lowest closing costs as well as the lowest rate.

If you find a lender willing to cover part of your closing costs or roll them into your loan amount (when refinancing), you might not even have to pay out of pocket.

Check your interest rate and closing costs (Feb 13th, 2021)


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What are closing costs?

Closing costs are a
collection of fees required to set up and close a new mortgage. They typically
cost 2-5% of the mortgage amount for both home purchase and refinance loans.

Closing costs include
everything charged by your lender, home appraiser, title company, and other
third parties involved in the mortgage transaction.

For simplicity, borrowers pay all these fees together on closing day. Closing costs are paid to an independent ‘escrow company,’ which handles distributing each fee to the right party. This is much easier than having borrowers pay each cost separately.

When purchasing a home, the down payment is not included in the closing costs.

These are additional
charges on top of your down payment, so you need to budget for both
amounts.

The good news is that many closing costs are flexible. So borrowers can shop around for the lowest fees, and even negotiate with their lender to reduce certain items.

The key is to get offers from at least a few different lenders so you can see the range of closing costs for your loan and which company is most affordable.

What’s included in closing costs? 

Closing costs include
just about every upfront fee to purchase or refinance a home, except for the
down payment.

There’s a long list of closing costs, all of which are itemized on the standard Loan Estimate you’ll get from any lender. But the main (most expensive) fees to be aware of are:

  • Origination fee or broker fee (0-1% of loan amount) — A fee the lender or broker charges for its services. This fee can be heavily negotiated, as it is mainly paying for lender overhead and adding to its profit
  • Mortgage points or “discount points” (0-1% of loan amount) — OPTIONAL upfront fees paid to directly lower your mortgage rate. The lender is not allowed to use these funds for overhead or profit
  • Processing and/or underwriting fee ($300-$900 each) A fee charged to pay for the lender’s employees who gather documentation, coordinate with third parties like appraisers, and manually look at the file to approve the loan
  • Title search and title insurance ($300-$2,500+) — Fees paid to check historical records and make sure the property can be legally transferred to you 
  • Escrow fees ($350-$1,000+) — Fees paid to a third-party escrow company that handles funds and facilitates the home sale 
  • Home appraisal ($500-$1,000+) — Fee to evaluate the home’s fair sale price or refinance value 
  • Prepaid taxes and insurance ($1,000-$4,500+) — Generally you pay six months to a year of property taxes and homeowners insurance in advance when you close 

Government-backed mortgages also require an upfront
insurance premium or ‘guarantee fee.’ This covers all or part of the cost for
the federal government to insure your loan.

  • FHA loan — Upfront mortgage insurance premium (1.75% of loan amount)
  • VA loan —VA funding fee (1.4% to 3.6% of loan amount)
  • USDA loan — Upfront mortgage insurance fee (1% of loan amount)

These premiums are technically part of your closing
costs on an FHA, VA, or USDA loan. But you’re allowed to roll them into the
loan balance (even on a home purchase loan) and most borrowers choose this
route to avoid the extra upfront charge.

Conventional loans with less than 20% down charge for private mortgage insurance (PMI). But unlike government loans, there’s no upfront charge; only a monthly premium.

What are average closing costs in 2021?

In 2019 (the most recent data available), the average closing costs for a single-family home were $5,750.

Today’s average closing costs are likely higher, as home
values and loan amounts have been increasing across much of the nation.

At the end of 2020, the median purchase price in the U.S. hit $346,000. At that price point, average closing costs would be closer to $6,000-$9,000 (assuming a 10% down payment).

Of course, these averages are very broad. Individual
closing costs can vary a lot based on factors like:

  • The home’s purchase price
  • Your down payment
  • Your credit score
  • Location
  • Mortgage lender
  • Type of home loan

Your closing costs could be significantly higher or
lower than average depending on the specifics of your loan.

Closing cost calculators can give you a general estimate if you want to know what yours will be. But to find your exact closing costs so you can budget appropriately for them, you’ll need to get an estimate from a lender. 

Check your interest rate and closing costs (Feb 13th, 2021)

Understanding your Loan Estimate and Closing Disclosure

All lenders use standard loan forms called the ‘Loan
Estimate’ and ‘Closing Disclosure.’

Lenders are required to send you a Loan Estimate (LE) after you apply. This document will list your loan terms, interest rate, and every closing cost associated with the offer.

All Loan Estimates use the same format, making it easy
for you to compare rates and fees to find the best deal.

You can also use your Loan Estimates as leverage; if one
lender offers a great rate but another offers lower fees, you can bring your
low-fee estimate to the first lender and see if it will reduce your costs.

The second document you will receive is the Closing Disclosure (CD).

Lenders are required to send you a CD at least 3
business days before your closing date. This document will list the final
details of your mortgage — which should closely match the rate, terms, and
closing costs on your initial Loan Estimate.

There are legal limits to the amount your closing costs
can increase on the CD. If you see a change in your fees before closing, be
sure to bring it up and get an explanation.

You’re never committed to a mortgage until you sign — so before you do, make sure you’re getting the deal you were promised.

Full list of mortgage closing costs

Mortgage closing costs fall into three categories: lender fees, third-party fees, and prepaid items.

Here are specific closing costs included in each category, along with the typical cost for each one.

Mortgage lender fees

These are fees charged by the lender or broker to underwrite,
process, and close your loan. They include:

  • Origination fee or broker fee (0-1% of loan amount) — The lender or broker’s fee to set up the loan. This is your lender’s profit
  • Discount fee (0-1% or more of loan amount) — Also called mortgage points or discount points, this is an OPTIONAL closing cost that reduces your mortgage interest rate
  • Processing fee ($300-$900) — May be included in the origination fee. This is the cost to source and process your documents (e.g. bank statements and verification of employment) and put together your loan file
  • Underwriting fee ($300-$750) — The cost for the underwriter to review and verify the information on your loan application
  • Administrative fees ($100 or more) — Miscellaneous lender charges. Likely included in the origination fee
  • Lock-in fee, application fee ($200-$500 or more) — Many lenders do not charge application fees or fees to lock your rate. In some states, application fees are illegal. You should be able to find a lender without these fees
  • Loan-Level Price Adjustments (LLPAs) (0-4% of loan amount) — For conventional loans backed by Fannie Mae and Freddie Mac, LLPAs are charged for ‘higher-risk’ loans (e.g. low down payment and/or low credit score). These are typically paid via a higher rate, NOT an upfront fee. But it’s important to know what they are

Third-party fees

Third parties don’t work for
mortgage lenders, but they provide services necessary to complete the
transaction. These services include the following:

  • Credit report fee ($35) — The cost to pull your credit reports from at least 2 of the top 3 credit bureaus: Experian, TransUnion, and Equifax
  • Appraisal fees ($500-$1,000 or more) — The cost for a professional appraiser to determine the property’s current market value. Appraisals are almost always required, with the exception of certain refinance loans
  • Title search, title report, and title insurance policy ($300-$2,500 or more) — The title search and title report check for any outside ownership claims to the property. Lenders title insurance (REQUIRED) and owner’s title insurance (OPTIONAL) protect your lender and you against losses in case such a claim arises after closing
  • Escrow fees ($350-$1,000 or more) — The cost of a third-party escrow company’s services. Escrow companies facilitate mortgage transactions by holding and distributing funds, managing paperwork, and more
  • Flood certification ($20) — Evaluates flood risk at the property in question to determine whether flood insurance is required
  • Recording fee ($20-$250) — Fees charged by your county to process records when a property changes hands. You’ll likely pay a tax as well, which goes by different names: real estate conveyance, mortgage transfer, documentary stamp, or property transfer
  • Survey fee ($400+) — In some cases a professional survey is required to determine property lines. Fortunately, this is not often required
  • Attorney fees ($400+) — Charged in states where closing attorneys are required. Closing attorneys facilitate closing and negotiating the contract. You can shop for low-cost attorney services
  • HOA dues (varies) — If you buy in a homeowners association, you’ll probably pay for a copy of the Covenants, Concessions and Restrictions (CC&Rs), a fee for the property manager to complete a condo survey for the lender, and a fee to transfer ownership records
  • Tax service fee ($50) — This OPTIONAL fee goes to a tax service company to keep track of your tax payments. Most homeowners will NOT pay this fee because their property taxes will be paid through their lender via an ongoing ‘impound account’ (see below)
  • Notary fee ($100) — Pays a notary to travel to a convenient location, like your home, to sign the final paperwork and certify signatures on the closing documents
  • Closing protection letter (CPL) fee ($50) — A fee charged by escrow to create a CPL: a document that puts liability on the title company if the escrow does not disburse the home purchase funds appropriately
  • Document prep fee ($50) — The fee that the escrow company charges to prepare the final loan documents for signature

Prepaid items

“Prepaid items” are
costs of homeownership for which you pay upfront when you close the loan.

The lender needs to guarantee you will pay things like property taxes and homeowners insurance. So, in most cases, they collect these costs at closing and monthly, then pay them for you to make sure the home isn’t at risk of tax foreclosure, fire, or another hazard.

Prepaid items go
into an escrow account or “impound account,” which isn’t as bad as it sounds.
It simply means the lender has set up a holding place from which to pay the
expenses you would have to pay anyway.

  • Property tax reserves ($500-$2,500 or more) — Most homeowners pay 2-6 months of property taxes upfront at closing. NOTE: This can increase your closing costs significantly because property taxes can cost a few hundred dollars per month
  • Homeowners insurance ($400-$1,000 or more) — Homeowners typically pay 6-12 months of homeowners insurance premiums upfront at closing. Before you close, you should compare insurance companies to find the lowest-cost homeowners policy for you
  • Flood insurance ($300-$1,000 or more) — This only applies if your home is in a certified flood zone where flood insurance is required. Standard homeowners insurance policies do NOT cover flooding. This insurance is paid separately

How to reduce your closing costs

The high price tag on closing costs often takes first-time home buyers by surprise. If you budgeted for a low down payment — say, 3% — closing costs could double your out-of-pocket expenses.

This can prove challenging for home buyers on a tight
budget.

Closing costs are also a drawback for homeowners who
want to refinance into a lower rate, but don’t have the cash for upfront fees.

Luckily, you don’t always have to pay out of pocket.
There are a number of ways to reduce your upfront closing costs, including:

Lender credits

Lender credits are an arrangement where the mortgage lender covers part or all of your closing costs. In exchange, you pay a higher interest rate. This is also known as a “no-closing-cost mortgage.”

A no-closing-cost loan will likely cost you more in the
long run due to higher interest.

But for home buyers on a budget — and refinancers
getting a significantly lower rate — this strategy can be a smart way to get
the loan you need without having to empty your savings.

Seller concessions

A seller concession is when the seller covers part or all of the buyer’s closing costs. The seller does not pay out of pocket; rather, they use part of the proceeds from the home sale to cover the buyer’s fees.

This strategy works best in a buyers’ market where
homeowners are motivated to sell. Sometimes, the buyer must agree to a higher
purchase price for the seller to agree to pay their closing costs.

Note: There are limits on the amount of closing costs a seller can pay for, which vary by loan type.

Roll closing costs into the loan

If you’re refinancing, you might have the option to roll closing
costs into your loan balance. (This is only an option on refinance
transactions; not purchase transactions.)

Rolling closing costs into the loan means you’ll pay interest on them, so they cost more in the long run. But if you don’t plan to keep the loan its full term, your monthly savings from refinancing might be more important than the long-term cost. 

Not all closing costs can be included in the loan amount. For
instance, prepaid items like property taxes and homeowners insurance must
always be paid upfront.

Rules vary by loan type, too. On an FHA Streamline Refinance, for example, only the upfront mortgage insurance fee can be rolled into the loan balance. All other closing costs must be paid upfront.

Closing cost assistance

Closing cost assistance is available from state housing finance agencies (HFAs) and some local governments, lenders, and nonprofits. This typically comes in the form of down payment assistance, which can be used to help pay for your down payment and/or closing costs.

Closing cost and down payment assistance can be a grant
(which never needs to be repaid) or a loan (which often has low or no interest
and may be forgivable).

These programs are often targeted toward first-time and/or lower-income home buyers. But specific rules and requirements vary a lot by program.

Your real estate agent or loan officer can help you find down payment and closing cost assistance in your area.

Negotiation

The final tool in your belt is negotiation.

As a borrower, you can shop around with as many mortgage lenders as you want. You can choose the one with the lowest closing costs outright, or you can take your best offer and ask another lender to match or beat it.

With a little time and dedication, it’s possible to get mortgage lenders to compete for your business.

You’ll have even more bargaining power if you have an excellent
credit score and large down payment; in other words, if you’re a ‘prime’
borrower.

Just note, not all closing costs are negotiable.

  • Mortgage lender charges — negotiable. These include items like the origination fee, underwriting and processing fees, and the application fee. (Many lenders don’t charge an application fee, so look for one that doesn’t)
  • Appraisal and credit reporting — non-negotiable. Closing costs for third-party services cannot be negotiated with your lender. These include appraisal charges and credit reporting fees. However, you may be able to shop around and save on some of these items — for instance, by finding a lower-cost closing attorney
  • Title and escrow fees — negotiable in some states. Title service fees show up in section B or C of page 2 of your Loan Estimate. If they appear in section C, you can shop for them — and you should. You’ll want to compare charges from several companies because, in states that allow you to shop, fees and premiums can vary by thousands of dollars. If you purchase lenders and owners title insurance policies from the same provider, ask for a “simultaneous issue” discount

Your ability to negotiate certain closing costs depends on the location of your property. Your Loan Estimate will detail which items you can shop around for (labeled “section C”).

Check your interest rate and closing costs (Feb 13th, 2021)

How closing costs affect your
mortgage interest rate

Mortgage loan pricing is
flexible. You can choose the fee structure that works best for your financial
situation.

For instance, maybe you
want the lowest interest rate and monthly mortgage payment possible — and
you’re willing to pay extra upfront to get it.

Or, you might accept a
slightly higher interest rate if your lender will cover the closing
costs and get your out-of-pocket expense to zero.

You should be aware of
your options so you can choose the structure that’s most affordable for you.

Mortgage rebate
pricing

Rebate pricing
allows the lender to take your mortgage rate higher in exchange for crediting
an amount to you. You can use the rebate to cover other closing costs — even
prepaid items like property taxes and insurance premiums.

So a loan
with “minus three points” could credit you with up to 3 percent of the
loan amount for other costs. On a $200,000 mortgage, that’s $6,000.

Rebate pricing is
ideal for those who only plan to stay in the home or mortgage for a few years.
You take a higher interest rate for a short time in exchange for very low
upfront costs.

Mortgage discount
pricing

“Discount” pricing
doesn’t mean lower charges. It actually refers to the extra fees you might pay
to “buy down” your rate. Discount points add to your closing costs but reduce
your interest rate.

Breaking even on
closing costs

Is it worth it to pay more up front for a lower rate? Or to eliminate closing costs but accept a higher
rate? 

You can determine if
this is a good deal or not by looking at the ‘break-even point’ on your new
loan. That’s the point at which your monthly savings outweigh your upfront
costs.

Here’s an example of
how discount points and rebate pricing might compare for a $250,000 home loan. 

  No Points Rebate Pricing (1 Point) Discount Pricing (1 Point)
Loan amount $250,000 $250,000 $250,000
Quoted interest rate 4% 4% 4%
Closing cost No added cost -$2,500 (paid back to you) +$2,500 (paid to lender)
Actual interest rate 4% 4.25% 3.75%
Monthly payment $1,269 $1,305 $1,233
Total interest paid (30 years) $179,700 $192,750 $166,800

In this example,
spending an extra $2,500 for one discount point saves you $36 per month, or
$12,800 over 30 years. 

With these savings
it would take you almost six years to break even with the extra closing costs
you paid — so you’d have to stay in the house quite a while to make that
discount point worth it. 

With rebate pricing,
on the other hand, you save $2,500 at the closing table. But you pay $36 more per
month thanks to the higher interest rate. That adds up to an extra $13,000 over
the 30-year loan. 

So if you plan to
stay in the house 6 years or more in this scenario you’re actually losing money
with rebate pricing.  

Find the best loan for you

Shopping for a
mortgage is about more than just an interest rate.

It’s equally important
to compare upfront fees and find the lender that’s most affordable overall —
not just the one with the lowest rates.

Luckily, lenders are
required by law to provide a Loan Estimate listing every closing cost
associated with their mortgage offers. 

Use these documents to
find the best deal, and you could save thousands over the life of your loan.

Verify your new rate (Feb 13th, 2021)

Compare top lenders

Source: themortgagereports.com

How to apply for a mortgage and get approved: 5 steps to success

How to apply
for a mortgage

Applying for a mortgage is pretty straightforward.

You’ll choose a lender, start the application (typically online), and provide supporting documents like tax returns and bank statements to verify your finances.

After that, it’s mostly a waiting game. Underwriters will check your credit and documentation, then decide whether to approve you. If everything checks out, you’ll set a date to close the loan — usually within 30-40 days.

The most important thing is to apply with more than one lender. You should apply with at least 3-5 mortgage companies to make sure you’re getting the best deal.

Luckily, many lenders now offer
online applications, so the process is much faster and simpler than it used to
be.

Start your mortgage application today (Feb 11th, 2021)


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5 steps to a
successful mortgage application

When you apply for a mortgage,
you’ll be assigned a loan officer to guide you through the application process
and paperwork — so you don’t need to worry about navigating everything on your
own.

As the borrower, your main job is
to set yourself up for success.

You want to provide your mortgage
lender with the strongest application possible in order to widen your loan
options and lower your interest rate.

To apply for a mortgage in the
right way and improve your chances at getting a great deal, you should:

  1. Check your credit report for errors and raise your score if possible 
  2. Apply with multiple lenders to find the lowest rate and fees
  3. Get pre-approved for a mortgage before making an offer on a house
  4. Avoid late rent payments; these can affect your mortgage eligibility
  5. Avoid financing expensive items before closing, which can reduce your home buying budget 

Here’s what you need to know at each stage of the process.

Check your mortgage eligibility (Feb 11th, 2021)

1. Check your credit before you apply for a mortgage

If you’re waiting until you apply
for a mortgage to check your credit, you’re waiting too long.

That’s because mortgage interest rates
— and mortgage qualification — depend on your credit. And the stakes are pretty
high.

If you check your credit when you apply and
find out it’s lower than you thought, you’ll likely end up with a higher interest
rate and more expensive monthly payment than you were hoping for.

If you find out your credit score
is really low — below 580 — you might not qualify for a
mortgage at all. You’ll likely be out of the home buying game for another year
or more as you work to boost your score back up.

Small changes can make a big difference

Keep in mind, a higher credit score usually means
a lower mortgage rate. So if you check your score and learn that it’s strong,
you might still want to work on improving it before you buy.

Consider that mortgage rates are based on credit “tiers.” A higher credit tier means a cheaper mortgage.

If your credit score is currently 719, for example, raising it just one point could put you in a higher tier and earn you a lower rate.

Check your credit early

Ideally, you should start checking
your credit early. It can easily take 12 months or more to reverse serious
credit issues — so the sooner you get started, the better.

You’re legally entitled to free
copies of your credit reports each year through 
annualcreditreport.com. These
reports are vitally important because they’re the source documents on which
your credit score is calculated.

Yet one study found that as many
in one in five
reports contain errors that are serious enough to affect a consumer’s
creditworthiness.

So you need to crawl yours, making
sure they’re 100% accurate. The Consumer Financial Protection
Bureau has useful advice for disputing errors.

Raise your credit score before you apply if possible

If your reports are accurate but
your score is lower than it could be, work on it. There are three things you
can do immediately to become a better qualified borrower:

  1. Keep paying every single bill on time
  2. Reduce your credit card balances — If they’re above 30% of your credit limits, you’re actively hurting your score. The lower the better
  3. Don’t open or close credit accounts — Wait until after closing

Those three action points should
help your score over time. You can also read our Guide to improving your credit score.

Check your mortgage eligibility (Feb 11th, 2021)

2. Apply for a mortgage with multiple lenders

It’s a huge mistake to accept the
first mortgage quote you get.

Many first-time home buyers don’t
know it, but mortgage rates aren’t set in stone. Lenders actually have a lot of
flexibility with the interest rate and fees they offer.

That means a lender you’re looking
at might be able to offer a lower rate than the one it’s
showing you.

In order to get those lower rates, you have to shop around and get a few different quotes. If you get a lower rate quote from one lender, you can use it as a bargaining chip to talk other lenders down.

Shopping around for mortgage rates
also lets you know whether you’re getting a good deal.

For example, a 3.5% rate
and $3,000 in fees might sound all right if it’s the first quote you’ve gotten.
But another lender might be able to offer you 3.0% and
$2,500 in fees.

That makes the first offer a lot
less appealing — but you won’t know it until you look around.

Get at least three mortgaeg quotes

Compare personalized rate quotes from at least three lenders (but more’s fine) to make sure you’re getting the best deal. A mortgage broker could help you compare multiple quotes at once.

And make sure you’re comparing apples-to-apples quotes. Things like discount points can make one offer look artificially more appealing than another if you’re not watching out.

Different down payment amounts, loan terms, loan amounts, and
mortgage loan types will skew loan estimates, too.

For example, an FHA loan would require mortgage insurance
which will increase borrowing costs. A conventional loan with a 20% down
payment lets you skip the mortgage insurance.

Make sure all your mortgage quotes include the same loan type
and terms so you know you’re comparing rates on even footing.

3. Get pre-approved before you make an offer on a home

Many first-time home buyers make the mistake of applying for a
mortgage too late, and not getting pre-approved before they begin house hunting.

How late is too late to start the pre-approval process? If you’re already seriously looking at homes, you’ve waited too long.

You really don’t know what you can
afford until you’ve been officially pre-approved by a mortgage lender. They’ll
look at your full financial portfolio —bank statements, tax returns, pay
stubs, credit reports — and determine your exact home
buying budget.

Even if you think you know what
you can afford, you might be surprised.

Existing debts can reduce your
home buying power by a startling amount. And you can’t be sure how things like
credit will affect your budget until a lender tells you.

By not getting pre-approved for a
mortgage before you start shopping, you run the risk of falling in love with a
house only to find out you can’t afford it.

A
pre-approval letter gives you leverage

Worse, you might find yourself
negotiating for your perfect home and being ignored. Imagine you’re a home
seller (or a seller’s real estate agent) and you get an unsupported offer from
a total stranger.

For all you know, the prospective
buyer stands zero chance of getting the financing they need.

If the seller gets another offer
from someone who has a pre-approval letter on hand, they’re
bound to take that offer more seriously. They might
even accept a lower price from the buyer they know
can proceed.

So getting pre-approved gives you
credibility and leverage in negotiations. And those are two things every
homebuyer needs.

Start your mortgage pre-approval (Feb 11th, 2021)

4. Don’t be late on rent payments

Being late on rent is a bigger
deal than you might think — and not just because it’ll land you with a late fee
from your landlord.

Late rent payments can actually
bar you from getting a mortgage.

Your rent history is the biggest
indicator of whether you’ll make mortgage payments on time. Late or missed rent
checks can prevent you from buying a home.

It makes sense when you think
about it. Rent is a large sum of money you pay each month for housing. So is a
mortgage loan. If you
have a spotty history with rent checks, why should a lender believe you’ll make
your mortgage payments on time?

When you apply for a mortgage, the
lender will check your rent history over the past year or two.

If you’ve been late on payments,
or worse, missed them, there’s a chance you’ll be written off as a risky
investment. After all, foreclosure is an expensive hassle for lenders as well as
for homeowners.

Rent is especially important for
people without an extensive credit history.

If you haven’t been responsible
for things like credit cards, loans, or
car payments, rent will be the biggest indicator of your creditworthiness.

5. Don’t take on any new debts  

You may have heard that you
shouldn’t finance an expensive item while applying for a mortgage.

But most people don’t know it’s a
mistake to buy something with big payments even years before applying for a new
loan.

That’s because mortgage underwriters look at your “debt-to-income ratio” (DTI ) — meaning the amount you pay in monthly debts compared to your total income.

The more you owe each month for
items like car payments and loans, the less you have left over each month for
mortgage payments. This can seriously limit the size of the mortgage you’re
able to qualify for.

For example, take a scenario with
two different buyers — they earn equal income, but one has a large car payment
and the other doesn’t.

  Buyer 1 Buyer 2
Income $75,000 $75,000
Existing debt $100/month $100/month
Car payment $500/month $0
Qualified mortgage amount $300,000 $390,000

In this scenario, both buyers
qualify for a 36% debt-to-income ratio. But for Buyer 1, much of that monthly
allowance is taken up by a $500 monthly car payment.

As a result, Buyer 1 has less
wiggle room for a mortgage payment and ends up qualifying for a home loan worth
almost $100,000 less.

That’s a big deal:
$100,000 can be the difference between buying a house you really want
(something nice, updated, in a great location) and having to settle for a
just-okay house — maybe one that needs some work or isn’t in the location you
wanted.

So if home buying is in your
future, examine your priorities. Consider a car with inexpensive payments or
one you can pay off quickly.

And try to avoid making other
big-ticket purchases that could compromise your home buying power.

Keep credit card balances low, too

If you’ve already taken out a big loan, there’s not a lot you
can do about it now. But you can still look out for
shorter-term credit purchases. Try to avoid financing or refinancing
anything before closing, if you can.

Of course, it’s tempting. You’re
going to need a ton of stuff for your new home — and you might want to start
stocking up on furniture, decorations, etc.

But loan officers nowadays
routinely pull your credit score in the days leading up to closing. And any new
account you open or any significant purchase you make on your plastic could
drag that score down enough to re-open your mortgage offer.

It may only be enough to increase
your mortgage rate a little. But in extreme circumstances, it could see your
whole approval pulled and your journey to homeownership stalled.

So avoid making those purchases until after you close. If it helps, imagine the shopping spree you can go on the moment you become a homeowner.

Find a low
mortgage rate and save

If you plan to buy a house any
time soon, now is the time to start thinking about the
mortgage application process.

Take a look at your credit, get
your debts in check, and start shopping around for rates.

Try to see your financial life the way a lender’s underwriter
sees it before starting your loan application.

Remember, the most important thing you can do before house hunting is to get pre-approved and determine your budget at today’s rates.

Verify your new rate (Feb 11th, 2021)

Compare top lenders

Source: themortgagereports.com