When homebuyers take out a conventional mortgage but don’t have a 20% down payment, they will likely need to get private mortgage insurance. PMI is usually required when the down payment is less than 20% of the home’s value.
In some situations, a lender may arrange for PMI coverage. It then becomes known as lender-paid mortgage insurance. For some homebuyers, LPMI can work in their favor. But for others, having a lender secure private mortgage insurance can end up costing them.
Read on to learn more about LPMI and the pros and cons for homebuyers.
How Does Lender-Paid Mortgage Insurance Work?
Unless 20% or more of a home’s value is paid upon closing, homebuyers can typically expect to be required to purchase private mortgage insurance, or PMI.
While government-back loans tend to have their own insurance programs (for instance, most FHA loans require a mortgage insurance premium for 11 years or the life of the loan), most loans not provided by the government with a loan-to-value ratio higher than 80% require PMI to protect the lender in case of default.
PMI is typically purchased in one of four ways, and it’s a home-buying cost you’ll want to budget for. PMI can be paid:
• Along with monthly mortgage and insurance payments
• In one annual premium
• With one large payment and corresponding monthly payments
• By the mortgage lender in a LPMI policy
While it may seem that the last option, LPMI, eliminates a task on a homebuyer’s to-do list, there is some fine print to be aware of.
Having LPMI for a loan doesn’t mean the cost is absorbed by the lender. A homebuyer will still pay for the coverage in one of two ways:
• A one-time payment due at the beginning of a loan.
• A slightly higher interest rate — usually 0.25% — which increases the monthly mortgage payment. This is the more common arrangement of the two.
So while many homebuyers accept an LPMI arrangement in hopes of saving money, that isn’t automatically the case. Sometimes LPMI is more about convenience than savings.
In fact, unless they’re paying a one-time lump sum, homebuyers could end up spending more for LPMI over the life of their loan than if they had chosen a traditional PMI route. That’s a potential home-buying mistake you’ll want to avoid.
LPMI might be a good choice for a homebuyer planning to keep the mortgage for five to 10 years or stay in the home. It usually takes 11 years to build enough equity to cancel a borrower-paid PMI policy.
Recommended: How to Get a Mortgage in 2023
A Pro of LPMI
Before a homeowner writes off lender-paid mortgage insurance altogether, it’s best to look at a potential benefit the arrangement offers over traditional monthly mortgage insurance.
More Affordable Monthly Payment
With LPMI, the monthly payment could be more affordable because the cost is spread out over the entire loan term rather than bunched into the first several years.
Here’s an example. If Sarah buys a home with a 10% down payment and it takes her 10 years to get the loan-to-value ratio down to 78% (a lender automatically drops PMI payments at this percentage if the borrower is in good standing), those 10 years of payments could all include several hundred dollars in addition to her premium and interest payments.
While LPMI may not save Sarah money overall, she may have smaller monthly payments because the additional payments for coverage are stretched out equally over the entire life of her loan rather than the start.
… and Potential Cons
In the right situation, LPMI can make sense. But there are potential downsides homebuyers should know about as well.
Rate Never Drops
While having mortgage insurance stretched out over the life of a loan can save some homebuyers money, it can cost others. The higher interest rate — as mentioned, a 0.25% rate increase is common — will never drop, even once the loan balance is less than 80% of a home’s purchase price.
LPMI can end up costing homebuyers more than if they had bought PMI on their own. Much depends on how long the borrower expects to hold the mortgage.
Refi Costs
Some homebuyers navigate toward LPMI because of the initial savings and hope they can refinance in the future.
While this may be a possibility, they must consider the sizable out-of-pocket costs that go along with refinancing, and that refi rates may be higher in the coming years.
No Itemizing
LPMI can’t be itemized if you deduct mortgage interest at tax time.
PMI vs LPMI
There are several numbers to take into consideration when choosing between traditional PMI and LPMI, including:
• the down payment
• remaining mortgage
• interest rate (for LPMI, a 0.25% rate increase is common)
• average mortgage insurance rate (PMI is typically 0.5% to 1.5% of the loan amount per year)
• anticipated life of the mortgage loan
• monthly budget.
A borrower may want to not only consider the monthly payment but also the lifetime loan costs.
The difference between PMI and LPMI is different for every homeowner and situation. Taking the time to crunch the numbers is the only way to fully understand the pros and cons of each option.
LPMI Alternatives
LPMI isn’t always the clear winner when choosing between mortgage insurance options. There are alternatives to consider.
Put More Down
A down payment of at least 20% will eliminate the need for PMI entirely. There are several other benefits that go along with larger down payments as well, such as a better loan rate, making this a great option for those who can afford it.
Shop Around
One main disadvantage of LPMI is that the homeowner has little to no control over the price and provider. So when homeowners are responsible for their own PMI, shopping around for the best price becomes an option.
Piggyback Mortgage
A piggyback mortgage makes it possible to avoid PMI with a combination of loans.
It’s important to understand the pros and cons of a piggyback mortgage before deciding on one as an alternative to LPMI to avoid potential financial pitfalls.
Recommended: Second Mortgage Explained: How It Works, Types, Pros, Cons
The Takeaway
If mortgage insurance is necessary to secure a loan, understanding all the options is the first step any house hunter should take. This includes lender-paid mortgage insurance vs. PMI. While LPMI may serve as an overpriced convenience for some, it can be the financially smarter option for others.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: Simple, smart, and so affordable.
*SoFi requires PMI for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Minimum down payment varies by loan type.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Are you planning to buy a luxurious house in Indiana or a home in an expensive market this year? If so, you might be wondering what a jumbo loan is and whether it’s right for you. Simply put, a jumbo loan is a type of mortgage loan that’s used to finance loans that exceed the conforming loan limit.
What is a jumbo loan?
What exactly is a jumbo loan in Indiana? A jumbo loan is a specialized type of mortgage that comes into play when you’re seeking financing for a home that surpasses the conforming loan limits (CLL) established by the Federal Housing Finance Agency (FHFA). Typically, this type of loan is necessary for upscale, luxurious properties or those situated in pricey housing markets.
If you’re considering purchasing a home that requires financing beyond the CLL, then you’ll need to apply for a jumbo loan. Indiana jumbo loans allow you to borrow more money to buy a more expensive home, but they also come with higher interest rates and stricter requirements than conventional loans.
What is the jumbo loan limit in Indiana?
In Indiana, the conforming loan limit is $726,200 across all counties. For example, the conforming loan limit in Marion County is $726,200, so if the loan amount needed is even $726,201, it’s considered a jumbo loan.
Keep in mind that the loan amount is what determines whether or not you’ll need a jumbo loan, not the home price. So, if you were to put $50,000 down on a $750,000 home in Indianapolis, the mortgage would be $700,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
This FHFA map will give you more specific information related to the conforming loan limits in your county.
What are the requirements for a jumbo loan in Indiana?
Borrowers must meet stricter requirements to qualify for a jumbo loan than they would for a conforming loan. Each lender may have different requirements or processes, but below are the typical requirements for borrowers seeking a jumbo loan in Indiana.
Higher credit score: When it comes to obtaining a jumbo loan, credit score requirements are typically more stringent than for conventional mortgages. It’s possible that some lenders may be willing to accept a lower score, a credit score of at least 720 is generally required to qualify for a jumbo loan. It’s essential to have a strong credit profile and a solid financial history to increase your chances of being approved for a jumbo loan.
Larger down payment: Jumbo loans typically require larger down payments than conventional mortgages. While the exact amount varies depending on the lender and the borrower’s financial situation, down payment requirements for jumbo loans can be as high as 20% or more. That said, some lenders may offer jumbo loans with down payments as low as 10%, provided the borrower meets certain credit and income requirements.
More assets: Jumbo loan lenders generally require borrowers to demonstrate a strong financial profile, including substantial liquid assets or savings. To qualify for a jumbo loan, borrowers must have enough reserves to cover at least one year of mortgage payments. This requirement ensures that borrowers have the financial flexibility to meet their loan obligations in the event of a financial hardship.
Lower debt-to-income ratio (DTI): When applying for a jumbo loan, Indiana lenders typically look for a borrower with a debt-to-income ratio (DTI) below 43%. Ideally, a DTI closer to 36% or lower is preferred. The DTI is calculated by dividing the sum of all monthly debt payments by gross monthly income. A lower DTI signifies a borrower’s ability to manage their current debt load while taking on additional mortgage payments. It also indicates greater financial stability and the ability to make on-time payments towards their non-conforming loan.
Additional home appraisals: When you buy a home in Indiana, lenders will require a home appraisal to confirm that the property’s value is equal to or higher than the loan amount. In some cases, a lender may require an additional appraisal for a jumbo loan. In counties with very few comparable property sales, the cost of the appraisal may be higher than in markets with more frequent sales.
Average mortgage rates fell just a little last Friday. But last Thursday’s massive jump means they finished that week — and last month — higher than when they started them.
First thing, it was looking as if mortgage rates today might again barely budge. But that could change as the hours pass.
Markets will be closed tomorrow for the Independence Day holiday. And we’ll be back on Wednesday morning. Enjoy your celebrations!
Current mortgage and refinance rates
Program
Mortgage Rate
APR*
Change
Conventional 30-year fixed
7.129%
7.158%
Unchanged
Conventional 15-year fixed
6.638%
6.651%
Unchanged
Conventional 20-year fixed
7.506%
7.558%
Unchanged
Conventional 10-year fixed
6.997%
7.115%
Unchanged
30-year fixed FHA
6.672%
7.303%
Unchanged
15-year fixed FHA
6.763%
7.237%
Unchanged
30-year fixed VA
6.729%
6.937%
Unchanged
15-year fixed VA
6.625%
6.965%
Unchanged
5/1 ARM Conventional
6.75%
7.266%
Unchanged
5/1 ARM FHA
6.75%
7.532%
+0.11
5/1 ARM VA
6.75%
7.532%
+0.11
Rates are provided by our partner network, and may not reflect the market. Your rate might be different. Click here for a personalized rate quote. See our rate assumptions See our rate assumptions here.
Should you lock a mortgage rate today?
Recent reporting in the financial media makes me think mortgage rates are unlikely to see any significant and sustained falls until at least the fourth (Oct.-Dec.) quarter of 2023 and probably not until 2024.
And that’s why my personal rate lock recommendations remain:
LOCK if closing in 7 days
LOCK if closing in 15 days
LOCK if closing in 30 days
LOCK if closing in 45 days
LOCK if closing in 60days
However, with so much uncertainty at the moment, your instincts could easily turn out to be as good as mine — or better. So let your gut and your own tolerance for risk help guide you.
>Related: 7 Tips to get the best refinance rate
Market data affecting today’s mortgage rates
Here’s a snapshot of the state of play this morning at about 9:50 a.m. (ET). The data, compared with roughly the same time last Friday, were:
The yield on 10-year Treasury notes edged down to 3.82% from 3.85%. (Good for mortgage rates.) More than any other market, mortgage rates typically tend to follow these particular Treasury bond yields
Major stock indexes were mostly lower. (Good for mortgage rates.) When investors buy shares, they’re often selling bonds, which pushes those prices down and increases yields and mortgage rates. The opposite may happen when indexes are lower. But this is an imperfect relationship
Oil prices inched up to $70.61 from $70.25 a barrel. (Neutral for mortgage rates*.) Energy prices play a prominent role in creating inflation and also point to future economic activity
Goldprices rose to $1,930 from $1,919 an ounce. (Neutral for mortgage rates*.) It is generally better for rates when gold prices rise and worse when they fall. Gold tends to rise when investors worry about the economy.
CNN Business Fear & Greed index — climbed to 84 from 80 out of 100. (Bad for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are often better than higher ones
*A movement of less than $20 on gold prices or 40 cents on oil ones is a change of 1% or less. So we only count meaningful differences as good or bad for mortgage rates.
Caveats about markets and rates
Before the pandemic and the Federal Reserve’s interventions in the mortgage market, you could look at the above figures and make a pretty good guess about what would happen to mortgage rates that day. But that’s no longer the case. We still make daily calls. And are usually right. But our record for accuracy won’t achieve its former high levels until things settle down.
So, use markets only as a rough guide. Because they have to be exceptionally strong or weak to rely on them. But, with that caveat, mortgage rates today might again hold steady or close to steady. However, be aware that “intraday swings” (when rates change speed or direction during the day) are a common feature right now.
Important notes on today’s mortgage rates
Here are some things you need to know:
Typically, mortgage rates go up when the economy’s doing well and down when it’s in trouble. But there are exceptions. Read ‘How mortgage rates are determined and why you should care’
Only “top-tier” borrowers (with stellar credit scores, big down payments, and very healthy finances) get the ultralow mortgage rates you’ll see advertised
Lenders vary. Yours may or may not follow the crowd when it comes to daily rate movements — though they all usually follow the broader trend over time
When daily rate changes are small, some lenders will adjust closing costs and leave their rate cards the same
Refinance rates are typically close to those for purchases.
A lot is going on at the moment. And nobody can claim to know with certainty what will happen to mortgage rates in the coming hours, days, weeks or months.
What’s driving mortgage rates today?
Currently
To see sustained lower mortgage rates we need to see the inflation rate halving, the economy weakening, and the Federal Reserve stopping hiking general interest rates. And none of those looks likely anytime soon.
Some progress is being made on inflation. But not enough.
And the economy is showing extraordinary resilience. Last week’s gross domestic product (GDP) headline figure was 50% higher than many expected.
Meanwhile, the Fed seems highly likely to hike general interest rates by 25 basis points (0.25%) on Jul. 26. And there may well be at least one more increase after that in 2023.
Recession
As I’ve written before, our best hope for lower mortgage rates is a recession. That should weaken the economy, reduce inflation and perhaps cause the Fed to at least hold general rates steady.
Economists have been predicting an imminent recession for ages. And, not so long ago, I bought that line and was expecting one at any moment.
But, now, many big hitters aren’t expecting a recession until 2024. Yesterday, CNN Business listed a few of those making that prediction:
Bank of America CEO Brian Moynihan
Vanguard economists
JPMorgan Chase economists
Of course, others disagree, as economists always do. Some think a recession will still land later this year. And others believe there will be no recession at all.
This week
There are a few reports this week that could send mortgage rates up or down a bit. But Friday’s jobs report is the one most likely to have a decisive impact.
The consensus among economists is that the report will show 240,000 new jobs created in June compared with 339,000 in May. Anything lower than 240,000 might see mortgage rates tumble, which would be great.
However, we’ve witnessed economists making similar predictions for employment several times over recent months. And, nearly every time, their forecasts have greatly underestimated the resilience of the American labor market and therefore the American economy.
Of course, they might be right this time. Let’s hope so. But I shouldn’t hold my breath if I were you.
Please read the weekend edition of this daily report for more background on what’s happening to mortgage rates.
Recent trends
According to Freddie Mac’s archives, the weekly all-time low for mortgage rates was set on Jan. 7, 2021, when it stood at 2.65% for conventional, 30-year, fixed-rate mortgages.
Freddie’s Jun. 29 report put that same weekly average at 6.71%, up from the previous week’s 6.67%. But Freddie is almost always out of date by the time it announces its weekly figures.
In November, Freddie stopped including discount points in its forecasts. It has also delayed until later in the day the time at which it publishes its Thursday reports. Andwe now update this section on Fridays.
Expert mortgage rate forecasts
Looking further ahead, Fannie Mae and the Mortgage Bankers Association (MBA) each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.
And here are their rate forecasts for the current quarter (Q2/23) and the following three quarters (Q3/23, Q4/23 and Q1/24).
The numbers in the table below are for 30-year, fixed-rate mortgages. Fannie’s were published on May 23 and the MBA’s on Jun. 21.
In the past, we included Freddie Mac’s forecasts. But it seems to have given up on publishing those.
Forecaster
Q2/23
Q3/23
Q4/23
Q1/24
Fannie Mae
6.4%
6.2%
6.0%
5.8%
MBA
6.5%
6.2%
5.8%
5.6%
Of course, given so many unknowables, the whole current crop of forecasts might be even more speculative than usual. And their past record for accuracy hasn’t been wildly impressive.
Find your lowest rate today
You should comparison shop widely, no matter what sort of mortgage you want. Federal regulator the Consumer Financial Protection Bureau found in May 2023:
“Mortgage borrowers are paying around $100 a month more depending on which lender they choose, for the same type of loan and the same consumer characteristics (such as credit score and down payment).”
In other words, over the lifetime of a 30-year loan, homebuyers who don’t bother to get quotes from multiple lenders risk losing an average of $36,000. What could you do with that sort of money?
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.
How your mortgage interest rate is determined
Mortgage and refinance rates vary a lot depending on each borrower’s unique situation.
Factors that determine your mortgage interest rate include:
Overall strength of the economy — A strong economy usually means higher rates, while a weaker one can push current mortgage rates down to promote borrowing
Lender capacity — When a lender is very busy, it will increase rates to deter new business and give its loan officers some breathing room
Property type (condo, single-family, town house, etc.) — A primary residence, meaning a home you plan to live in full time, will have a lower interest rate. Investment properties, second homes, and vacation homes have higher mortgage rates
Loan-to-value ratio (determined by your down payment) — Your loan-to-value ratio (LTV) compares your loan amount to the value of the home. A lower LTV, meaning a bigger down payment, gets you a lower mortgage rate
Debt-To-Income ratio — This number compares your total monthly debts to your pretax income. The more debt you currently have, the less room you’ll have in your budget for a mortgage payment
Loan term — Loans with a shorter term (like a 15-year mortgage) typically have lower rates than a 30-year loan term
Borrower’s credit score — Typically the higher your credit score is, the lower your mortgage rate, and vice versa
Mortgage discount points — Borrowers have the option to buy discount points or ‘mortgage points’ at closing. These let you pay money upfront to lower your interest rate
Remember, every mortgage lender weighs these factors a little differently.
To find the best rate for your situation, you’ll want to get personalized estimates from a few different lenders.
Are refinance rates the same as mortgage rates?
Rates for a home purchase and mortgage refinance are often similar.
However, some lenders will charge more for a refinance under certain circumstances.
Typically when rates fall, homeowners rush to refinance. They see an opportunity to lock in a lower rate and payment for the rest of their loan.
This creates a tidal wave of new work for mortgage lenders.
Unfortunately, some lenders don’t have the capacity or crew to process a large number of refinance loan applications.
In this case, a lender might raise its rates to deter new business and give loan officers time to process loans currently in the pipeline.
Also, cashing out equity can result in a higher rate when refinancing.
Cash-out refinances pose a greater risk for mortgage lenders, so they’re often priced higher than new home purchases and rate-term refinances.
How to get the lowest mortgage or refinance rate
Since rates can vary, always shop around when buying a house or refinancing a mortgage.
Comparison shopping can potentially save thousands, even tens of thousands of dollars over the life of your loan.
Here are a few tips to keep in mind:
1. Get multiple quotes
Many borrowers make the mistake of accepting the first mortgage or refinance offer they receive.
Some simply go with the bank they use for checking and savings since that can seem easiest.
However, your bank might not offer the best mortgage deal for you. And if you’re refinancing, your financial situation may have changed enough that your current lender is no longer your best bet.
So get multiple quotes from at least three different lenders to find the right one for you.
2. Compare Loan Estimates
When shopping for a mortgage or refinance, lenders will provide a Loan Estimate that breaks down important costs associated with the loan.
You’ll want to read these Loan Estimates carefully and compare costs and fees line-by-line, including:
Interest rate
Annual percentage rate (APR)
Monthly mortgage payment
Loan origination fees
Rate lock fees
Closing costs
Remember, the lowest interest rate isn’t always the best deal.
Annual percentage rate (APR) can help you compare the ‘real’ cost of two loans. It estimates your total yearly cost including interest and fees.
Also pay close attention to your closing costs.
Some lenders may bring their rates down by charging more upfront via discount points. These can add thousands to your out-of-pocket costs.
3. Negotiate your mortgage rate
You can also negotiate your mortgage rate to get a better deal.
Let’s say you get loan estimates from two lenders. Lender A offers the better rate, but you prefer your loan terms from Lender B. Talk to Lender B and see if they can beat the former’s pricing.
You might be surprised to find that a lender is willing to give you a lower interest rate in order to keep your business.
And if they’re not, keep shopping — there’s a good chance someone will.
Fixed-rate mortgage vs. adjustable-rate mortgage: Which is right for you?
Mortgage borrowers can choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM).
Fixed-rate mortgages (FRMs) have interest rates that never change, unless you decide to refinance. This results in predictable monthly payments and stability over the life of your loan.
Adjustable-rate loans have a low interest rate that’s fixed for a set number of years (typically five or seven). After the initial fixed-rate period, the interest rate adjusts every year based on market conditions.
With each rate adjustment, a borrower’s mortgage rate can either increase, decrease, or stay the same. These loans are unpredictable since monthly payments can change each year.
Adjustable-rate mortgages are fitting for borrowers who expect to move before their first rate adjustment, or who can afford a higher future payment.
In most other cases, a fixed-rate mortgage is typically the safer and better choice.
Remember, if rates drop sharply, you are free to refinance and lock in a lower rate and payment later on.
How your credit score affects your mortgage rate
You don’t need a high credit score to qualify for a home purchase or refinance, but your credit score will affect your rate.
This is because credit history determines risk level.
Historically speaking, borrowers with higher credit scores are less likely to default on their mortgages, so they qualify for lower rates.
For the best rate, aim for a credit score of 720 or higher.
Mortgage programs that don’t require a high score include:
Conventional home loans — minimum 620 credit score
FHA loans — minimum 500 credit score (with a 10% down payment) or 580 (with a 3.5% down payment)
VA loans — no minimum credit score, but 620 is common
USDA loans — minimum 640 credit score
Ideally, you want to check your credit report and score at least 6 months before applying for a mortgage. This gives you time to sort out any errors and make sure your score is as high as possible.
If you’re ready to apply now, it’s still worth checking so you have a good idea of what loan programs you might qualify for and how your score will affect your rate.
You can get your credit report from AnnualCreditReport.com and your score from MyFico.com.
How big of a down payment do I need?
Nowadays, mortgage programs don’t require the conventional 20 percent down.
In fact, first-time home buyers put only 6 percent down on average.
Down payment minimums vary depending on the loan program. For example:
Conventional home loans require a down payment between 3% and 5%
FHA loans require 3.5% down
VA and USDA loans allow zero down payment
Jumbo loans typically require at least 5% to 10% down
Keep in mind, a higher down payment reduces your risk as a borrower and helps you negotiate a better mortgage rate.
If you are able to make a 20 percent down payment, you can avoid paying for mortgage insurance.
This is an added cost paid by the borrower, which protects their lender in case of default or foreclosure.
But a big down payment is not required.
For many people, it makes sense to make a smaller down payment in order to buy a house sooner and start building home equity.
Choosing the right type of home loan
No two mortgage loans are alike, so it’s important to know your options and choose the right type of mortgage.
The five main types of mortgages include:
Fixed-rate mortgage (FRM)
Your interest rate remains the same over the life of the loan. This is a good option for borrowers who expect to live in their homes long-term.
The most popular loan option is the 30-year mortgage, but 15- and 20-year terms are also commonly available.
Adjustable-rate mortgage (ARM)
Adjustable-rate loans have a fixed interest rate for the first few years. Then, your mortgage rate resets every year.
Your rate and payment can rise or fall annually depending on how the broader interest rate trends.
ARMs are ideal for borrowers who expect to move prior to their first rate adjustment (usually in 5 or 7 years).
For those who plan to stay in their home long-term, a fixed-rate mortgage is typically recommended.
Jumbo mortgage
A jumbo loan is a mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac.
In 2023, the conforming loan limit is $726,200 in most areas.
Jumbo loans are perfect for borrowers who need a larger loan to purchase a high-priced property, especially in big cities with high real estate values.
FHA mortgage
A government loan backed by the Federal Housing Administration for low- to moderate-income borrowers. FHA loans feature low credit score and down payment requirements.
VA mortgage
A government loan backed by the Department of Veterans Affairs. To be eligible, you must be active-duty military, a veteran, a Reservist or National Guard service member, or an eligible spouse.
VA loans allow no down payment and have exceptionally low mortgage rates.
USDA mortgage
USDA loans are a government program backed by the U.S. Department of Agriculture. They offer a no-down-payment solution for borrowers who purchase real estate in an eligible rural area. To qualify, your income must be at or below the local median.
Bank statement loan
Borrowers can qualify for a mortgage without tax returns, using their personal or business bank account. This is an option for self-employed or seasonally-employed borrowers.
Portfolio/Non-QM loan
These are mortgages that lenders don’t sell on the secondary mortgage market. This gives lenders the flexibility to set their own guidelines.
Non-QM loans may have lower credit score requirements, or offer low-down-payment options without mortgage insurance.
Choosing the right mortgage lender
The lender or loan program that’s right for one person might not be right for another.
Explore your options and then pick a loan based on your credit score, down payment, and financial goals, as well as local home prices.
Whether you’re getting a mortgage for a home purchase or a refinance, always shop around and compare rates and terms.
Typically, it only takes a few hours to get quotes from multiple lenders — and it could save you thousands in the long run.
Current mortgage rates methodology
We receive current mortgage rates each day from a network of mortgage lenders that offer home purchase and refinance loans. Mortgage rates shown here are based on sample borrower profiles that vary by loan type. See our full loan assumptions here.
Unless you come by a huge influx of cash either by winning the lottery or through an inheritance; a mortgage remains the most affordable way to own a home. Among the tools that lenders use to determine your eligibility for a home loan is debt-to-income ratio, or DTI.
The ratio is used to determine how much of your income can go towards monthly mortgage payments as compared to other monthly debts that your income settles. Read on to find out how to calculate DTI and what ranges are desirable according to the industry standards.
What is a Debt-to-income Ratio & How is it Calculated?
A debt-to-income ratio is a number used to measure a person’s ability to manage their debt. This number is calculated using two key pieces of financial information: your debt and your income. By taking your total monthly debt and your total monthly income, which includes any money earned prior to taxes and deductions, you can determine your debt-to-income ratio.
In another example where the total debts are higher than $1,500 and income is still $4,000, you see an increase in the DTI. If you have monthly debt payments equal to $2,000, and your gross monthly income equals $4,000, your debt-to-income ratio will be 50%.
STEP 1. Determine your monthly liabilities. These include:
Monthly Home-related costs – If it is your first mortgage this will be sum of all monthly expenses that go towards paying your rent. It has to be expressed as a monthly amount i.e. if you pay an annual sum then divide it by 12. Similarly if you pay it quarterly, divide by 4. Add in the proposed or expected monthly payment for the mortgage you are considering.
Also included in this will be other housing costs such mortgage insurance, real estate taxes and homeowner’s association payments. In case you are a homeowner in the market for a second mortgage, the monthly payments you make towards your first mortgage will constitute the cost.
Although you could be paying monthly for utilities like power and gas, they are not taken into account in this summation. Same goes for food, health and car insurances, phone bill, your taxes and cable bill.
Monthly loan payments – A sum of all monthly loans that are deducted from your pay and show on your credit report. These include monthly remittances towards car loan, student loan, credit union and personal bank loans.
Monthly credit card payments – This is the sum of minimum payments that you make for each credit card. It excludes credit card debt that you settle monthly in full.
Other monthly obligations – This could be any other line of credit that involves financing. Monthly child support or alimony payments fall under these obligations.
This refers to your total pay before any deductions are made or simply pre-tax pay. This comprises of;
Basic wages or salary.
Bonuses and commissions
Alimony and or child support.
Income from investments (must be verifiable via your tax returns)
Tip: If you draw a salary, bonus or commission annually then divide it by 12 to arrive at its monthly value.
How to Calculate the Front-end Ratio
This is the home-related costs divided by your monthly gross income. It shows the amount of monthly income that can be freed to service the house loan you propose to get. To put this into context, suppose your monthly gross income is $6,000 and total monthly home-related costs are $1,500.
Front-end DTI = ($1500/ $6000) * 100 = 25%
How to Calculate the Back-end ratio
When lenders speak of DTI, this is mostly what they have in mind. It’s a ratio that shows the amount of your income that goes towards settling all your debts. It’s the sum of all monthly debts divided by your monthly gross income. Suppose your total monthly liabilities (including home related costs) in the above example is $2500 then,
Back-end DTI= ($2500/ $6000) *100 = 41%
Standards for Debt-to-income Ratio
A low DTI means that you have more of your income left after paying bills. Back-end ratio of 36% and front-end ratio of 28% or below is considered favorable by most lenders.
Back-end ratios of between 36%-49% translate to less amount left to spend. Lenders will view you as a potential defaulter. You may have to contend with higher interest rates and huge down payments for your loan.
Anything higher than 50% puts you on the red. It means half of your pay is going toward debt payments leaving you with little to spend or even take up a new financial obligation. This greatly reduces your chances of landing a mortgage.
What is the Ideal Debt-to-income Ratio?
If you aren’t thinking about applying for an auto or home loan, opening a credit card account, moving into a new apartment, or doing anything else that requires someone to review your credit and finances, you may not care too much about your DTI. But when you are seeking credit, part of the application process may include a thorough review of your finances. Even though it will vary, every creditor and lender has certain criteria that applicants must meet in order to approve an application, so they might be interested in examining your DTI to determine if you should be approved.
Since this number gives insight into how you manage your debt, specifically your ability to repay your debt, the higher your DTI, the more likely you are to be denied. Creditors will look for borrowers who have a debt-to-income ratio no higher than 43%. This means that if your monthly income is $4,000, your total monthly debt payments should be equal to no more than $1,720. Although 43% is acceptable to most creditors, a lower DTI is even better.
Improving Your Debt-to-income Ratio
If your DTI is above 43%, you have the power to change it. Since your monthly debts and income are the two important factors used to determine your DTI, there are a number of ways you can lower your DTI and get in a better position financially.
If you want to improve your debt-to-income ratio, one thing you can do is reduce the total amount of debt you owe. If you have taken out a loan for $5,000, your monthly loan payment will be included in your debts used to calculate your DTI. By making extra payments on your loan, you will be able to pay off the loan faster and reduce the amount of debt owed.
Additionally, if you want to improve your DTI, you can also avoid adding to your current amount of debt or increase your monthly income by taking on a hiring paying full-time job, part-time job, or gig.
For many individuals and families, owning a home is a lifelong dream. However, with rising real estate prices, some may find themselves seeking financing beyond the conforming loan limit. In this instance, you’d need to apply for a jumbo loan.
What is a jumbo loan?
So, what exactly is a jumbo loan in Rhode Island? It’s a mortgage loan that allows homebuyers to finance a property that exceeds the conforming loan limit set by the FHFA. In simpler terms, a jumbo loan is a specialized mortgage that enables you to borrow more money than you would be able to with a conventional loan. These loans are typically used to finance high-end or luxury properties in areas with high home prices, like Newport.
If you’re considering purchasing a home that requires financing beyond the conforming loan limit (CLL), then you’ll need to apply for a jumbo loan. Because of the larger loan amounts, jumbo loans typically carry stricter requirements and higher interest rates than conforming loans. Lenders may require a higher down payment, a lower debt-to-income ratio, and a stronger credit score to qualify for a jumbo loan in Rhode Island.
What is the jumbo loan limit in Rhode Island?
In Rhode Island, the conforming loan limit is $726,200 across all counties. For example, the conforming loan limit in Providence County is $726,200, so if the loan amount needed is even one dollar more than this amount, it’s considered a jumbo loan.
Keep in mind that the loan amount is what determines whether or not you’ll need a jumbo loan, not the home price. So, if you were to put $100,000 down on a $780,000 home in Providence County, the loan would be $680,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
To identify the conforming loan limits where you’re considering buying a home in Rhode Island, check out this FHFA map.
What are the requirements for a jumbo loan in Rhode Island?
As previously mentioned, the requirements for a jumbo loan are much more stringent than a conforming loan. Each lender may have different requirements or processes, but below are the typical requirements for borrowers seeking a jumbo loan.
Higher credit score: In order to qualify for a jumbo loan, most lenders will require a credit score of 720 or higher. While some lenders may be more lenient and accept a score as low as 660, a score below this threshold is generally not accepted. In contrast, a credit score as low as 620 could suffice for a conforming loan with some lenders.
Larger down payment: Jumbo loans typically require larger down payments than conventional loans. While the exact amount varies depending on the lender and the borrower’s financial situation, down payment requirements for jumbo loans can be as high as 20% or more. That said, some lenders may offer jumbo loans with down payments as low as 10%, provided the borrower meets certain credit and income requirements.
More assets: To qualify for a jumbo loan, lenders require borrowers to demonstrate that they have sufficient liquid assets or savings to cover at least one year of loan payments. The exact amount of assets needed can vary depending on the lender and the size of the loan, but having more assets can increase the chances of approval and potentially lead to better terms and interest rates.
Lower debt-to-income ratio (DTI): Mortgage lenders typically require a debt-to-income ratio (DTI) of under 43% for jumbo loan borrowers, although a DTI closer to 36% is preferred. This ratio is calculated by dividing the sum of all monthly debt payments by the borrower’s gross monthly income. A lower DTI indicates a stronger ability to repay the loan and can help applicants secure more favorable terms and rates. It’s important for Rhode Island borrowers seeking a jumbo mortgage to have a clear understanding of their DTI and take steps to improve it if necessary.
Additional home appraisals: A home appraisal is required whenever a homebuyer receives financing for their home purchase. However, for jumbo loans, lenders may require an additional appraisal. In areas with limited comparable property sales, this appraisal can be more expensive than in places with higher sales rates.
The FHA has taken a number steps to address risk and strengthen its balance sheet, including requiring larger down payments and higher mortgage insurance premiums.
The upfront mortgage insurance premium (MIP) will be raised from 1.75 percent to 2.25 percent to “build up capital reserves and bring back private lending.”
The FHA will also request legislative authority to increase the maximum annual MIP so it can shift some of the cost, as annual premiums are paid over time, proving to be less of a barrier for prospective buyers.
New FHA borrowers will also be required to come in with a 10 percent down payment if their Fico score is below 580; those with scores of 580 and above can still qualify for the 3.5 percent minimum payment.
In other words, if you have terrible credit, you can still get a mortgage with just 3.5 percent down.
Finally, the FHA will reduce allowable seller concessions from six percent to three percent, in line with industry standards.
The current level essentially exposes the FHA to excess risk by creating incentives to inflate appraised values.
The proposed changes will go into effect in either spring or summer, giving lenders time to speed applications through the system under the current rules.
The FHA said it will continue to increase enforcement on FHA mortgage lenders, while publicly reporting lender performance rankings.
“When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history,” said Commissioner David Stevens, in a statement.
Check out this chart from the FHA’s 2009 fiscal year detailing Fico score distribution (it doesn’t look like the new down payment requirement will have any impact, given very few borrowers have scores below 620, let alone 580):
It appears the pesky down payment hurdle to homeownership is finally being swept aside.
This week, Fifth Third Bank out of Cincinnati, Ohio announced the availability of a mortgage with absolutely no down payment requirement.
Put simply, that means you no longer need to save up to buy a home, whether that’s actually a good thing or a bad thing.
This seems to have been borne out of necessity, not preference, especially as home prices reach new heights nationwide.
Fifth Third’s Down Payment Assistance Program
If you’re light on down payment money
You may want to check out Fifth Third’s DPA program
Which offers up to $3,600 in down payment assistance
Combined with Freddie Mac’s Home Possible Advantage mortgage to create a zero down home loan option
The so-called “Down Payment Assistance Program” from Fifth Third relies upon Freddie Mac’s Home Possible Advantage, which allows for loan-to-value ratios as high as 97%.
The remaining three percent of the home purchase price is covered by Fifth Third via down payment assistance.
Fifth Third will allow up to $3,600 in down payment assistance, meaning the property price can’t exceed $120,000.
That $3,600 doesn’t need to be paid back, and it can used toward the down payment or closing costs depending on product type.
So the loan program is clearly geared toward those with low or moderate income, not just anyone looking to forego the usual down payment requirement.
The property must also be located in the following states: MI, IN, IL, KY, TN, OH, WV, NC, GA, FL.
To qualify, the property must either be located in a Low Income Census Tract or the borrower must meet the low income limit threshold based on figures from the Federal Financial Institutions Examination Council (FFIEC) website.
Prospective home buyers can also utilize local and state housing programs to “take advantage of free money for their down payments.”
Fifth Third does note that the down payment assistance might be treated as taxable income and reported to the IRS, so keep that in mind when pursuing this type of loan.
You don’t need to be a first-time home buyer to take advantage of this program, and if it aligns with Freddie Mac’s guidelines, the minimum FICO score is just 620.
It turns out Fifth Third accepts credit scores as low as 600, which is pretty amazing when coupled with a no down payment loan program.
However, if you are a first-timer, you probably have to complete some form of homeowner education.
The property must be a single-unit, primary residence, though I believe both single-family homes and condos/townhouses qualify.
Loan options are probably restricted to fixed-rate offerings, with the 30-year fixed the most likely candidate for home buyers with limited means.
No Money in the Bank Might Not Be a Problem
Aside from not needing a down payment
You might be able to qualify without reverses as well
So having no money in the bank isn’t necessarily a roadblock here
You can also enjoy reduced mortgage insurance premiums
The Freddie Mac program doesn’t require asset reserves so qualifying homeowners may be able to purchase a home with absolutely no money in the bank.
Additionally, it comes with reduced mortgage insurance premiums, making monthly payments more affordable to those with limited income.
Fifth Third is the latest bank to offer a low or no-down payment mortgage option.
A couple weeks ago, Guaranteed Rate launched a 1% down mortgage that relies upon a forgivable grant as high as 7% of the purchase price.
Quicken Loans, the largest nonbank mortgage lender in the nation, also has a 1% down payment mortgage that isn’t widely publicized.
Interestingly, all of these new mortgages rely on conforming loan programs and noticeably snub government lending such as FHA, which fell out of favor recently after a number of lawsuits.
While it’s great to have another flexible mortgage option, keep in mind that it may be more difficult to get your offer accepted if you are putting little to nothing down.
Home sellers aren’t particularly keen on seemingly high-risk buyers because chances of lender fallout are higher.
Read more: 3 ways a low down payment raises your monthly mortgage payment.
Are you planning to buy a luxurious house in Ohio or a home in an expensive market this year? If so, you might be wondering what a jumbo loan is and if it’s right for you. Whether your sights are set on a home in Columbus or a condo in Cleveland, join us as we break down what a jumbo loan is in Ohio, the 2023 conforming loan limits, and what’s needed to qualify for this type of loan.
What is a jumbo loan?
A jumbo loan in Ohio is a type of mortgage that enables homebuyers to borrow more than the limits set by the Federal Housing Finance Agency (FHFA) for conforming loans. The conforming loan limit (CLL) is the maximum amount of money that a lender will provide to borrowers at a specific interest rate and is established each year. Jumbo loans are necessary for homebuyers who want to purchase a high-value property, such as a luxury home, that exceeds the conforming loan limit.
If you find yourself in a situation where the home you wish to purchase requires borrowing beyond the CLL, then you’ll need to pursue a jumbo loan. Because of the larger loan amounts, jumbo loans typically carry stricter requirements and higher interest rates than conforming loans. Lenders may require a higher down payment, a lower debt-to-income ratio, and a stronger credit score to qualify for a jumbo loan in Ohio.
What is the jumbo loan limit in Ohio?
In Ohio, the conforming loan limit is $726,200 across all counties. For example, the conforming loan limit in Cuyahoga County is $726,200, so if the loan amount needed is even $726,201, it’s considered a jumbo loan.
Keep in mind that the amount being borrowed is what determines whether or not you’ll need a jumbo loan, not the price of the home. So, if you were to put $100,000 down on a $780,000 home in Cincinnati, the loan would be $680,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
You can find more information on the conforming loan limits specific to where you’re looking to buy a home in Ohio by using the FHFA map.
What are the requirements for a jumbo loan in Ohio?
Borrowers must meet stricter requirements to qualify for a jumbo loan than they would for a conforming loan. Each lender may have different requirements or processes, but below are the typical requirements for borrowers seeking a jumbo loan.
Higher credit score: To qualify for a jumbo mortgage, borrowers typically need to have a credit score of at least 720. However, some lenders may be willing to accept scores as low as 660, although less frequently. A higher credit score demonstrates a borrower’s ability to manage credit responsibly and is a crucial factor that lenders evaluate when considering jumbo loan applications.
Larger down payment: Buying a high-priced home typically requires a larger down payment from the buyer. Conventional mortgages may offer programs for down payments as low as 3%- 5%, but jumbo loans require a minimum down payment of 10%, with some lenders requiring up to 30%. If the buyer puts down less than 20%, they will likely need to pay for private mortgage insurance (PMI).
More assets: Jumbo loan borrowers are typically required to have additional assets. In particular, lenders may require borrowers to demonstrate sufficient liquid assets or savings to cover one year’s worth of loan payments.
Lower debt-to-income ratio (DTI): Whether a buyer is applying for a conventional loan or a jumbo loan, lenders evaluate your spending habits and creditworthiness by analyzing your debt-to-income ratio (DTI). The DTI is determined by dividing the total of your monthly debt payments by your gross monthly income. While some lenders may accept a DTI as high as 50% for a conforming loan, those applying for a non-conforming loan should aim for a DTI under 43% and ideally closer to 36%.
Additional home appraisals: When you buy a home in Ohio, lenders will require a home appraisal to confirm that the property’s value is equal to or higher than the loan amount. In some cases, a lender may require an additional appraisal for a jumbo loan. In places with very few comparable property sales, the cost of the appraisal may be higher than in areas with more frequent sales.
For many individuals and families, owning a home is a lifelong dream. However, with rising real estate prices, some may find themselves seeking financing beyond the conforming loan limit. This is when you may need to apply for a jumbo loan.
What is a jumbo loan?
What exactly is a jumbo loan in Iowa? A jumbo loan is a specialized type of mortgage that comes into play when you’re seeking financing for a home that surpasses the conforming loan limits (CLL) established by the Federal Housing Finance Agency (FHFA). Typically, this type of loan is necessary for upscale, luxurious properties or those situated in pricey housing markets.
If the loan amount needed is more than the CLL, you’ll need a jumbo loan. Iowa jumbo loans allow you to borrow more money to buy a more expensive home, but they also come with higher interest rates and stricter requirements than conventional loans.
What is the jumbo loan limit in Iowa?
In Iowa, the conforming loan limit is $726,200 across all counties. For example, if you’re buying a home in Des Moines County, where the median sale price is $132,000, a loan limit exceeding $726,200 would be considered a jumbo loan.
As a reminder, the amount being borrowed is what determines whether or not you’ll need a jumbo loan, not the home price. So, if you were to put $50,000 down on a $750,000 home in Burlington, the mortgage would be $700,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
For more information on the conforming loan limit in your county, use the FHFA map.
What are the requirements for a jumbo loan in Iowa?
Borrowers must meet stricter requirements to qualify for a jumbo loan than they would for a conforming loan. The specific requirements may vary from lender to lender, but below are the typical requirements for borrowers seeking a jumbo loan.
Higher credit score: When it comes to jumbo loans, lenders generally look for a credit score of 720 or above to qualify a borrower. While some lenders may accept a score as low as 660, this is typically the lowest threshold for qualification.
Larger down payment: Jumbo mortgages typically require larger down payments than traditional mortgages. Generally, lenders require a down payment of at least 20% of the home’s purchase price to qualify for a jumbo loan. However, some lenders may require a higher percentage, depending on the borrower’s creditworthiness and overall financial situation. Keep in mind that larger down payments can help to reduce monthly mortgage payments, as well as overall interest costs over the life of the loan.
More assets: Jumbo loan lenders generally require borrowers to demonstrate a strong financial profile, including substantial liquid assets or savings. To qualify for a jumbo loan, borrowers must have enough reserves to cover at least one year of mortgage payments. This requirement ensures that borrowers have the financial flexibility to meet their loan obligations in the event of a financial hardship.
Lower debt-to-income ratio (DTI): When applying for a jumbo mortgage, Iowa lenders typically look for a borrower with a debt-to-income ratio (DTI) below 43%. Ideally, a DTI closer to 36% or lower is preferred. The DTI is calculated by dividing the sum of all monthly debt payments by gross monthly income. A lower DTI signifies a borrower’s ability to manage their current debt load while taking on additional mortgage payments. It also indicates greater financial stability and the ability to make on-time payments towards their non-conforming loan.
Additional home appraisals: When you buy a home in Iowa, mortgage lenders will require a home appraisal to confirm that the property’s value is equal to or higher than the loan amount. In some cases, a lender may require an additional appraisal for a jumbo loan. In areas with very few comparable property sales, the cost of the appraisal may be higher than in places with more frequent sales.
A reverse mortgage may help older Americans who find they need more money in retirement. It’s common for inflation and rising medical costs to be issues. A reverse mortgage allows them to convert some of their home’s equity into cash, which can benefit their financial situation.
Protections established over the past few years by the U.S. Department of Housing and Urban Development (HUD) focus on lowering the risk previously associated with reverse mortgages. What’s more, the federal and state governments have taken aim at deceptive marketing practices that can minimize the complex aspects of reverse mortgage agreements.
That said, it’s wise to proceed with caution. There are still considerable cons to reverse mortgages, and borrowers may be unaware of the finer points. One important fact: It is possible to lose one’s home if you don’t comply with all the loan terms. Take a closer look at this topic here.
Why Do People Choose a Reverse Mortgage?
A reverse mortgage allows qualifying homeowners age 62 and older to convert part of the equity they’ve built up in their primary residence into money they can use to pay off their existing mortgage or for any other expenses that come up in retirement (from health-care costs to home repairs).
The big selling point for reverse mortgages is that the loan usually doesn’t have to be paid back until the last borrower, co-borrower, or eligible non-borrowing spouse dies, moves away, or sells the home. And when it is time to repay the loan, neither the borrower nor any of the borrower’s heirs will be expected to pay back more than the home is worth.
Main Types of Reverse Mortgages
There are three basic types of reverse mortgages. The most common is a home equity conversion mortgage (HECM), which is the only reverse mortgage insured by the U.S. government and is available only through an FHA-approved lender. An HECM can be used for anything, but there are limits on how much a homeowner can borrow.
There are also proprietary reverse mortgages, which are private loans that may have fewer restrictions than HECMs — including how much a homeowner can borrow.
And there are single-purpose reverse mortgages, which are typically offered by nonprofit organizations or state or local government agencies that may limit how the funds can be used. Most of the time, when someone refers to a reverse mortgage, though, they’re talking about an HECM.
Reverse Mortgage Terms to Know
There are safeguards in the reverse mortgage process that protect borrowers, but there are also loan terms borrowers are required to uphold or risk defaulting and potentially triggering a mortgage foreclosure. They include:
Staying Current With Ongoing Costs
Borrowers must stay up to date on property taxes, homeowners insurance, homeowners association fees, and other costs, or they could risk defaulting on the loan. An assessment of a borrower’s ability to pay for those ongoing expenses is part of the reverse mortgage application process, and if it looks as though money might be tight, a lender may require a borrower to set up a reserve fund, called a “set-aside,” for those costs. (In this way, it’s akin to an emergency fund, which is there to cover expenses if needed.)
Maintaining Full-Time Residency
Borrowers (and eligible non-borrowers) must use the home as their primary residence — the home they occupy for most of the year. If they move out of the house or leave the home for more than six months, or receive care at a nursing home or assisted living facility for more than 12 consecutive months, it could result in the lender calling the loan due and payable.
The lender also may choose to accelerate the loan if the borrower sells the home or transfers the title to someone else, or if the borrower dies and the property isn’t the principal residence of a surviving borrower.
Keeping the Home in Good Repair
Because the home is collateral and may have to be sold to repay the loan, lenders may require borrowers to do basic maintenance that will help the property keep its value (e.g., repairing a leaky roof or fixing a problem with the electrical system). If an inspector feels the home is not being properly maintained, the lender could take action.
What Happens If a Reverse Mortgage Borrower Defaults?
If the homeowners default, the first thing that could happen is that future loan payments may be stopped. And if the problem isn’t corrected within the lender’s stated timeline, the loan may become due and payable, which means the money the lender has distributed to the borrower, plus any interest and fees that have accrued, must be repaid. In that case, the borrower typically has four options:
• They can pay the balance in full and keep their home.
• They can sell the home for the lesser of the balance or 95% of the appraised value and use the proceeds to pay off the loan.
• They can sign the property back to the lender.
• They can allow the lender to begin foreclosure.
No matter what the homeowners decide to do, the process could take months to complete. HECM lenders may offer borrowers additional time to fix the problem that put them into default, or the borrowers may qualify for extensions or a repayment plan.
But in the meantime, there could be other implications — if the homeowners are no longer getting money they need to pay their bills or if the lender reports the default to credit monitoring agencies — that could affect the homeowners’ credit scores.
A Few Alternatives to Consider
The advertisements some lenders use to sell their reverse mortgages can be convincing, and some seniors may see these loans as a convenient way to get some extra cash or as a much-needed lifeline.
But, as with any financial decision, there are advantages and disadvantages — and alternatives — to be considered. There are other ways homeowners may be able to get help that could be less complicated and less limiting than a reverse mortgage.
Here are a few options:
• Borrowers may wish to tap into their home’s equity with a traditional home equity loan or home equity line of credit. They’ll have to make monthly payments, and their income and credit history will be considered when they apply, but the terms may be more flexible and the overall cost may be lower than a reverse mortgage. Because the home is used as collateral, there’s still a risk of foreclosure.
• Low interest-rate personal loans might be another option for homeowners who qualify for a competitive interest rate based on their income and credit. Borrowers who don’t have much equity in their home may choose to look into this type of loan, which is unsecured and is paid out in a lump sum. While foreclosure is not a worry with a personal loan, there still may be consequences to the borrower’s credit rating if they don’t uphold the loan terms.
• Borrowers who are struggling to keep up with their bills in retirement may find that refinancing a mortgage with a new, lower-cost mortgage might be an option to help them lower their monthly payments and stay on track with their budget.
Or, if they need extra cash right away and can get a low enough interest rate, they may want to look into a “cash-out refinance,” which would involve taking out a new loan for a larger amount based on the equity they’ve built up during the years they’ve lived in the home.
Unfortunately, no matter which type of loan homeowners might choose, there could be risks.
The government requires a counseling session for reverse mortgage borrowers for a reason: They’re complex, and it can be helpful to have someone cover all the rules and costs involved.
Homeowners also may want to pay a financial advisor and tap their expertise about what type of loan, if any, fits with their needs, goals, and where they are in their retirement.
Though reverse mortgages are available to homeowners starting at age 62, borrowers who expect to have a long retirement may choose to wait until they’re older to tap into their home equity, so they don’t risk running out of money in their later years.
How SoFi Can Help
For many retirees, the equity they have in their home is their biggest asset. Armed with knowledge about the pros and cons of each type of loan and a long-term plan, borrowers can better protect that asset and their financial security.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: Simple, smart, and so affordable.
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