mortgage payment

Apache is functioning normally

A while back, I cautioned readers to avoid swiping the credit card before applying for a mortgage.

In short, the more you charge, the higher your outstanding balances. And the higher your balances, the lower your available credit.

This can result in lower credit scores since utilization is a big factor for FICO. And it can increase your debt-to-income ratio as well.

Simply put, if you’re seen as overextended due to maxed out credit cards, your credit scores will suffer.

So you can give your credit scores a boost by simply doing nothing, but there are some proactive measures you can take as well.

Increase the Credit Limits on Your Credit Cards

  • One quick and easy way to boost your credit scores is to increase your available credit
  • You can do this by raising the credit limits on the credit cards you have open
  • Simply ask your credit card issuers for credit line increases online or by phone
  • Once granted your utilization will go down and your credit scores should improve over time

One simple trick to improve your credit scores is via a credit limit increase.

This is something that is very easy (and fast) to accomplish thanks to the many credit card management tools now at our fingertips.

If you visit just about any credit card issuer’s website, you should be able to find an area to increase your credit limit online.

Typically, all you need to do is enter enter your gross annual income and monthly housing/rent payment.

With other issuers, such as American Express, you are asked to enter your desired credit limit and then hope they extend it to you. Apparently you can get 3x your starting limit with little trouble.

So if you started with $5,000, you could get it increased to $15,000 simply by visiting the American Express website and filling out an online form.

Once submitted, you’ll either get that new limit, something in between, or you’ll be denied.

But as long as your credit history and income is sufficient, you should get something. What’s awesome is it can take as little as a few seconds to get your new line of credit.

Note: Some card issuers may need to pull your credit report to do this, which could affect your credit scores temporarily due to the inquiry.

They’ll typically notify you first, but this is why you should request credit increases 3+ months in advance of your mortgage application to let the dust settle.

Lower Your Credit Utilization to Improve Your Scores

The underlying goal of a credit limit increase is to lower your credit utilization, which is the percentage of credit you’re actively using at any given time.

A lower utilization, similar to a lower debt-to-income ratio, is viewed favorably by credit bureaus and mortgage lenders, respectively.

So imagine you have that American Express credit card with a $5,000 limit.

If you currently have a $2,500 balance, even if it’ll be paid off on time and not revolved, you’re essentially using 50% of your available credit. This isn’t a good thing when it comes to credit scores.

You may actually want to keep your utilization rate below 25%. In this case, no more than $1,250 outstanding, even if you pay it off in full by the due date.

But what if you naturally charge a lot on your credit cards each month, despite paying them off in full every month? What can you do to keep utilization low?

Well, if your credit limit happened to be $10,000 instead of $5,000, that $2,500 balance would only represent 25% utilization.

If it were $15,000, it’s only around 17% utilization, which should certainly be viewed favorably.

In other words, all you have to do is ask for higher credit limits, instead of spending less. Of course, spending less will sweeten the deal and ideally push your credit scores even higher.

Tip: It’s easier to get credit limit increases approved if your balances are low because you’re viewed as a lower risk customer.

Pay Off Your Existing Balances at the Same Time

  • Another trick that goes hand in hand with the first tip is to pay down your balances
  • Any existing loans and credit card balances that you can chip away at
  • This will also effectively free up available credit and should give your credit scores a boost
  • It will also lower your DTI because minimum payments will be reduced in the process

In conjunction with the first tip, you can also pay down any balances you may have, assuming you don’t pay your credit cards in full each month.

If implemented together, you can get higher limits and reduced balances, which will be a one-two punch in the credit utilization department.

So using our same example, if the individual with the $2,500 balance lets carries it from month to month and only has a $5,000 credit limit, imagine if they got a higher limit and started paying it down.

They could push their utilization down from 50% to say 15% if they got the limit increased to $10,000 and paid $1,000 off the balance.

These actions should result in a higher credit score, which generally means a better mortgage rate if you apply for a home loan.

Additionally, smaller credit card balances mean you’ll have more of your income available to use toward a mortgage payment.

So you may actually be able to qualify for a larger mortgage and/or buy more house.

Give It Time to Work

The only caveat here is that a credit limit increase request could result in a hard inquiry on your credit report.

Because you’re requesting additional credit, some card issuers treat it as a quasi-application, meaning they’ll need to review your credit history.

This could ding your credit slightly, like any new line of credit. It’s temporary, but may offset some of the expected gains of a higher limit.

So either request the increased limits several months in advance of applying for a mortgage, or ask the credit card issuer if it will result in a hard or soft pull before making the request.

If it’s the latter, it won’t harm your credit score. Regardless, inquiries typically don’t impact scores much, maybe 3-5 points and the damage is generally short-lived.

One final thing you can do is check out the Experian Boost, which increases credit scores by adding positive payment history to your credit file.

It can be helpful to those who lack traditional credit history, but pay other bills on time like a cell phone or utility.

In closing, you’ll want to approach mortgage lenders with the highest credit scores possible. This ensures you have the best chance of approval and also obtain the lowest interest rate available.

Read more: What credit score do I need to get a mortgage?

Source: thetruthaboutmortgage.com

Apache is functioning normally

Think mortgage rates are high now? Connie Strait remembers when she was starting her career in real estate in the early 1980s and buyers were contending with rates three times higher.

Strait recalled one couple who were actually relieved when they locked in a 30-year fixed-rate mortgage at 19% in September 1981. The couple had told her they were hoping to close on their new home before rates moved any higher.

“They were so delighted to be closing at 19%,” said Strait, who now works at William Raveis Real Estate in Danbury, Connecticut. “They said, ‘We made it in just under the wire, next week it is going to 20%!’”

The following month, in October 1981, the average weekly interest rate for a 30-year, fixed rate loan hit an all-time high of 18.6%, according to Freddie Mac. The average mortgage rate is based on a survey of conventional home purchase loans for borrowers who put 20% down and have excellent credit. But many buyers pay even more.

This week, the 30-year fixed-rate mortgage rate hit an average of 6.70%. Although it may come as cold comfort to someone who let a 3% rate slip through their fingers just seven months ago, today’s interest rates are, historically speaking, still relatively low.

“Unfortunately, now people don’t remember how Baby Boomers were getting rates of 10%, 12% and higher for most of the 1980s,” Strait said. “Meanwhile, our kids are shocked by 6%.”

Those ultra-high rates made homeownership less affordable in the early 1980s than it is now. By the mid-1980s though, mortgage rates had fallen somewhat, making financing more affordable, even with rates near 10%.

But many things have changed since the 1980s.

Given wage growth, sky-high home prices and rapidly rising interest rates, homes today are the least affordable they have been in 35 years.

Home affordability has worsened

Mortgage rates were high in the 1980s, but home prices were a lot less expensive, too.

In October 1981 a typical home cost $70,398. But with mortgage rates averaging 18.45% that month, the $870 monthly payment took up about 55% of the median income at the time, according to Black Knight, a mortgage data company.

By October 1986, rates had dropped to 9.97% and a typical home was $91,488. That brought the monthly payment down to $640, and took up just 30% of the median income.

“If you reduce interest rates by 8.5% that doubles your buying power,” said Andy Walden, vice president of enterprise research at Black Knight.

With the typical home currently costing $434,978, and rates over 6%, the monthly mortgage payment of $2,061 eats up more than 36% of the median monthly income, according to Black Knight.

“When we lower interest rates it allows home prices to grow much more quickly than incomes,” said Walden. “It gives folks the ability to buy more home with the same amount of income. So a 1% decline in interest rates allows you to buy 10% to 12% more home, with the exact same amount of money.”

Interest rates have been below 5% for the past 11 years, with the weekly average reaching an all-time low of 2.65% in January 2021. That’s part of the reason why home prices are so high today.

Incomes aren’t keeping up

Making affordability matters worse, home prices are significantly out of whack with income levels.

Over the past five years, while the average home price has gone up 60%, the average income has risen less than 15%.

“We now have the highest ratio of home price to income that we’ve seen in the past 50 years plus,” said Walden. “We have data going back to 1970 and it is the highest we’ve seen by far.”

Historically, home prices were between three to four times the median income, a ratio that remained consistent from 1975 until 2000, according to Black Knight. In 2000, as interest rates began to drop below 8%, the ratio began to rise, reaching a point in 2005 where home prices were almost five and a half times the median income.

The sharp rise in 2005 was largely fueled by expanded credit in the mortgage market, said Walden, with mortgages being offered based on a buyer’s unverified income, and through products like interest-only, adjustable-rate and negative amortizing loans.

“That allowed those shopping to buy more home than their income level would traditionally support,” he said. It also created a bubble that led to the 2008 housing crash.

Today, the typical home price is six times the median household income of about $71,000.

Credit availability has greatly increased

Another reason why rates were so high in the 1980s was that there was less credit available to borrow, making it more difficult and costly for buyers to secure a mortgage. Banks had to charge higher rates for taking on the risk. But today’s mortgages are often bundled and sold into investment products. That secondary market makes it profitable for lenders to give loans to many more people, and at lower interest rates.

“Back in the early 1980s, rates were in the mid- to upper-teens,” said Pete Miller, senior vice president for residential policy at the Mortgage Bankers Association. “Part of the reason was that the supply of mortgage credit was more constrained. We didn’t have the secondary market liquidity we have today.”

Miller – who bought his first home in California in the mid 1980s with a 13% adjustable rate mortgage – said 6% for a fixed-rate 30-year loan is historically a very good interest rate.

“I remember when interest rates went to single digits and saying, ‘I thought that would never happen.’”

Source: cnn.com

Apache is functioning normally

Just five percent of homeowners who recently got approved for mortgage forbearance actually needed it, according to a shocking survey from home loan comparison company LendingTree.

The company said 70% of those in forbearance plans could have made mortgage payments, but “wanted a break.”

While 26.2% said they would have had to “skip other essential bills,” which is interesting because borrowers historically pay the mortgage first.

The trend was even more apparent among younger generations, with 71% of Millennial and Gen X respondents saying “they could’ve made their payment but just wanted a pause.”

And only 4.3% of these two groups on average indicated that they wouldn’t have been able to pay the mortgage without forbearance.

Meanwhile, 20% of baby boomers said they actually needed forbearance to avoid missing their mortgage payment, despite being less likely to apply for assistance.

The Moral Hazard of Mortgage Forbearance

mortgage forbearance guilt

  • CARES Act offers mortgage forbearance to homeowners with no proof of hardship
  • Allows borrowers to voluntarily accept assistance even if not necessary
  • Just 5% wouldn’t have been able to pay their mortgage without forbearance
  • 72% who received forbearance feel “at least a little guilty about it”

While you would expect that most people who asked for mortgage forbearance to actually need it, turns out it’s just not the case.

This might explain why a large number of those who successfully received it feel some level of guilt.

A staggering 40.7% of Gen X respondents said “a lot” when asked if they felt guilty about receiving mortgage forbearance.

Males also seemed to express more guilt, at a rate of 37.4% versus just 16.7% for females in the “a lot” category.

Some of that guilt might be shame, knowing they signed a contract to pay a mortgage and didn’t hold up their end of the bargain.

Of course, no one should feel too bad about being blindsided by a pandemic, unless they have absolutely no problem paying and are just using the forbearance as a liquidity boost.

This speaks to the dilemma policymakers face when dealing with a fast-moving crisis.

The CARES Act allows homeowners to request mortgage assistance with basically a phone call or a letter, with no evidence of hardship.

This was done to ensure borrowers weren’t stuck in a bureaucratic nightmare, but may have had unintended consequences.

There is an assumption that some homeowners applied just because they could, since who doesn’t like no mortgage payments for six or 12 months?

Especially when the missed payments don’t have to be repaid until you refinance the mortgage or sell the home.

Higher-Income Borrowers More Likely to Get Approved for Forbearance

mortgage forbearance by income

Perhaps more troubling, those with higher salaries have seen better mortgage forbearance approval rates.

As you can see in the chart above, nearly 90% of applicants making $100,000 or more got the green light.

Conversely, just 50% of homeowners making $25,000 to $34,999 successfully received forbearance from their loan servicer.

While LendingTree said one explanation could be that servicers expect higher-income homeowners to repay missed payments, I wonder if it’s for another reason.

It’s possible the confusing and sometimes misleading language surrounding mortgage forbearance may have led some folks to think they didn’t qualify, or to put up less of a fight if servicers weren’t forthcoming.

Regardless, it’s not a good correlation and just shows more help is going to those who may need it the least.

The Argument for Taking Forbearance Even If Not Necessary

  • Should you apply for mortgage forbearance even if you don’t “need it?”
  • LendingTree refers to it as a “good strategy for managing your personal finances”
  • Says it’s one way to preserve cash and provide budget wiggle room during the COVID-19 pandemic
  • Could argue that it provides a lifeline if assistance is needed eventually

Sure, we can sit here and point the finger at homeowners for requesting mortgage assistance even if they didn’t explicitly need it.

But it’s not necessarily that simple because no one really knows how bad this pandemic will get, nor how long it will last. Some reasonable projections have it going 18-24 months.

So it’s fair to argue that taking the forbearance plan while it’s being offered can act as a safety net assuming things get worse.

In reality, a lot of homeowners don’t know if or when they’ll be affected by COVID-19 or how long they could be out of work.

They might not need the assistance this month or next, but there’s a decent chance they may need to skip some mortgage payments in the near future.

Perhaps the scariest part of losing your job during this crisis is finding another one.

Same goes for owners of investment properties who have tenants paying the rent today, but maybe not tomorrow.

This might explain why a third of borrowers in mortgage forbearance plans have continued to make payments.

Source: thetruthaboutmortgage.com

Apache is functioning normally

It’s been some time since I’ve done mortgage Q&A, so without further delay, let’s explore the following question: “Do you need 20% down to buy a house?”

If you chat with anyone older than 50 (maybe 60), they’ll probably tell you that you need to (or should) put 20% down if you want to buy a house.

For them, it’s the normal, or should I say traditional, down payment needed to secure a mortgage.

And while it might be conventional wisdom when it comes to home buying, it’s not necessarily the reality anymore.

In fact, the median down payment is just 12%, per the National Association of Realtors (NAR) 2021 Home Buyer and Seller Generational Trends report. Despite this, a lot of people still seem to think you need 20% down to purchase a home.

You Don’t Need a 20% Down Payment…

typical down payment

A few years back, the NAR 2017 Aspiring Home Buyers Profile report found that 39% of non-owners believed they needed more than 20% for a mortgage down payment on a home purchase.

And 26% assumed they needed to put down 15-20%, while 22% said they needed a down payment of 10-14% in order to buy. None of those answers are true.

A 2020 study from NAR also had a whopping 35% of respondents going with the 16% to 20% down payment tier, easily the number one answer.

In reality, you may not even need a down payment if you take out a certain type of home loan, or receive gift funds for the down payment.

Even if a down payment is required, it’ll be a lot less than 20% in most cases, most likely less than 5%.

Last year, the typical down payment for first-time home buyers was just 7%, while it was 17% for repeat buyers, per NAR.

It’s common for repeat buyers to use the proceeds from their original home to buy a replacement, making it easier to come up with a larger down payment.

Conversely, first-timers often have a tough time coming up with funds because they can’t tap into home equity.

You’ll notice both figures have moved lower over the years, though average down payments have ticked higher recently, perhaps due to home buyer competition in this hot housing market.

20% Down Payments Used to Be the Norm

20 percent down payment

  • Your parents probably put down 20% or more when they bought a house
  • But back then home prices were a lot lower than they are today (and interest rates a lot higher)
  • You might only need to put down 3% or 3.5% when you purchase a property these days
  • But there are still key advantages to putting down at least 20% like no mortgage insurance and a lower interest rate

Back in the day, it was customary to come in with 20% down (or more) when purchasing a property.

But property values were significantly lower those days, and mortgage rates a lot higher.

Times have changed as home prices skyrocketed and mortgage lenders got more competitive (and less risk-averse).

Leading up to the housing crisis seen in the mid-2000s, a zero down mortgage was a common theme. In fact, there were lenders that named themselves after that lack of a down payment…

Of course, we all know what happened next – home prices tanked and low down payment options began to evaporate.

That led to increased FHA loan lending, which requires only 3.5% down if you have at least a 580 FICO score.

And over time, Fannie Mae and Freddie Mac introduced a competing product that allows for loan-to-value ratios (LTVs) as high as 97% (just 3% down).

So we’ve kind of come full circle, though we’re not quite at the zero-down stage just yet.

Though lenders have offered mortgages with just 1% down, such as Quicken, Guaranteed Rate, and United Wholesale Mortgage thanks to the use of grants.

Should You Put Less Than 20% Down on a Home?

median down payment

  • You may not need to put 20% down on a home purchase in many cases
  • But it will cost you more money monthly if you don’t via a higher rate, PMI, and a larger loan amount
  • It may also make your offer less desirable to home sellers if they have competing bids with larger down payments
  • So it can beneficial to put down more, especially in a seller’s market

We’ve already answered the original question. You don’t need a 20% down payment to purchase a home.

In fact, you don’t need any down payment in some cases if you consider a home loan from the VA or USDA, both of which offer 100% financing.

You also don’t need to put down 10% or even 5% thanks to widely available programs from the FHA and Fannie and Freddie.

The median down payment is quite a bit lower, around 12% at last glance, and even lower (6%) for the 22 to 30 age cohort.

This age group also said saving for the down payment was one of the most difficult steps of the home buying process.

Now assuming you can muster a 20% down payment, should you come in with less?

This answer is a bit more elusive because it depends on a variety of factors, which include your household balance sheet and your financial goals.

Perhaps it’s better to frame the question the other way around.

Why You Should Put 20% Down on a House

In short, the less you put down on a home, the more you pay each month via your mortgage payment. This happens for three main reasons:

– Larger loan amount (less down means more financed)
– Higher mortgage rate (rates tend to rise as down payments fall)
– Mortgage insurance (added cost to account for risk)

If you put down less than 20%, you wind up with a bigger loan amount (obviously), a higher mortgage rate (usually) because of pricing adjustments, and you have to pay mortgage insurance to protect the lender.

This means your monthly housing costs go up, but you keep more cash in-hand, or at least not in your house.

Let’s assume the home you want to purchase is selling for $350,000 and you plan to take out a 30-year fixed mortgage. This comparison chart shows us how things might look.

3% Down vs. 20% Down: The Math

$350,000 Home Purchase 3% Down Payment 20% Down Payment
Down payment $10,500 $70,000
Loan amount $339,500 $280,000
Mortgage rate 4.125% 3.875%
Monthly P&I payment $1,645.39 $1,316.66
PMI $125 n/a
Total monthly cost $1,770.39 $1,316.66
Difference +453.73

As you can see from the chart above, the 3% down mortgage payment is roughly $454 more expensive each month thanks to those three things I mentioned.

That higher payment equates to an additional $27,223.80 spent over the course of five years.

Additionally, because the loan balance and mortgage rate are higher, more of your payment goes toward interest every month.

After 60 months, the 3% down mortgage would have a balance of $307,684.69, whereas the 20% down mortgage would be whittled down to $252,738.50.

The tradeoff is basically more money in your pocket versus the home, and the ability to buy more house now in exchange for a higher monthly payment.

This assumes you lack the down payment funds, but can afford the higher payments, which can be a common scenario for young high-earning individuals without significant savings (HENRYs).

At the same time, I’ve argued that it’s possible to buy more house if you put more money down because less income is required.

This assumes income is the problem and not assets, which can result in debt-to-income issues, which are prevalent and often grounds for denial.

Of course, it’s entirely possible for a low-down payment to be voluntary, for a homeowner who wants to park their money elsewhere.

That decision really comes down to how you value your housing investment, and if you think you can do better putting the money in the stock market or some other place.

For those who don’t have that choice, take comfort in the fact that you don’t need a 20% down payment to buy a home, or anywhere close to it.

But you will pay extra for that convenience, and you might have more hurdles to clear, such as convincing a seller to take your offer when another prospective buyer offers to put down 20%.

Alternatively, you could get a gift for a portion of the down payment and get the best of both worlds.

Can You Put More Than 20% Down on a House?

  • You can put as much down as you’d like (or even buy all-cash to avoid the mortgage entirely)
  • There are advantages to putting down more than 20% on a home purchase
  • Such as a lower mortgage rate thanks to fewer pricing adjustments
  • And an even stronger offer if buying a home in a hot market
  • Also a lower monthly payment and much less interest paid

You sure can. It’s generally possible to put down as much as you’d like on your home purchase, though if you put down too much you could run into issues with minimum loan amounts from lenders.

Of course, this probably isn’t going to be an issue in most cases with property values so high these days.

I’ve heard of home buyers putting down 50% just because they are debt-averse, but again, most folks don’t have that type of cash lying around.

The obvious benefit of putting a large down payment on a house is that you’ll have a smaller mortgage balance and pay less interest as a result.

You’ll also enjoy lower monthly payments, which will free up cash for other expenses or investments.

Conversely, you’ll have that much more money locked up in your property, which you’ll only be able to access if you sell or take out another home loan.

When it comes to mortgage rate pricing, it’s possible to obtain a slightly lower interest rate when you put down more than 20%, though it likely won’t be much.

We’re talking .125% to .25% lower depending on the scenario in question, so there are diminishing returns, especially when interest rates are already low.

But if you have bad credit the pricing impact can be greater with a larger down payment, so in those cases it could make sense to put down more than 20%, assuming you’ve got the cash available.

However, once you’re at 65% LTV (35% down payment) the pricing incentives tend to stop, so there wouldn’t be a benefit mortgage rate-wise after that threshold.

In summary, consider how much money you want locked up in your home, what your money could be doing (earning) otherwise, and how much it’ll cost you to put less down.

Lastly, don’t forget home sellers favor those who come in with larger down payments!

Read more: 2021 home buying tips to get the deal done.

Pros of Putting Down 20% on a Home Purchase

– Smaller loan amount
– No mortgage insurance required
– Lower mortgage rate
– Pay less interest over the life of the loan
– Ability to tap equity or take out a HELOC
– Lower closing costs
– Better chance of getting your offer accepted in a hot market
– More lender choice and loan options available

Cons of Putting Down 20% on a Home Purchase

– Requires a lot more money up front
– May make you house poor (little leftover for repairs/maintenance)
– Money tied up in the home that could lose value (and thus access to it)
– Could invest that money elsewhere for a better return
– Inflation makes dollars worth less over time
– Difference in monthly payment may not be all that substantial

Source: thetruthaboutmortgage.com

Apache is functioning normally

If your appraisal is so low that you owe more on the house than you could sell it for, there are several options for you to consider.

The 30-year fixed mortgage rate keeps getting lower and lower, making it a great time to refinance your mortgage and cut your monthly payment. But as Pat Esswein, associate editor of Kiplinger’s Personal Finance magazine, reports, homeowners have to clear a few hurdles before they can refinance.

One of those hurdles is the appraisal, which determines the value the bank will assign to your home.

That’s an important number because it determines your refinancing options and affects your monthly payment and interest rate. For example, if your home value drops and your loan-to-value is higher than your lender allows, typically 80 percent, you have to either increase your equity with cash or pay for mortgage insurance.

I recently spoke with Esswein about ways to get the highest possible value before the appraisal, and what to do if your appraisal comes in low.

What to Do Before an Appraisal to Get a Higher Home Value

There are a few things you can do to get highest possible appraisal possible.

First, consider researching the appraisal company. “This may be a little bit of a stretch, but when looking for a lender, ask what appraisal management company they order appraisals from,” says Esswein.

What you want is an experienced appraiser who really knows your local market, and you’re most likely to find that kind of appraiser at “a smaller, local appraisal management company that probably pays more and therefore attracts the best appraisers,” says Esswein. “Some companies go for the cheapest hires who also are willing to travel really far, so that means they’re inexperienced and they don’t know your area very well.”

Second, get your home in shape. “Make your house show well,” says Esswein. “Clean, declutter and fix things that need to be fixed so that when the appraiser comes, they’ll note that your house is in the best condition it can be.”

While you’re at it, create a house file for the appraiser that documents any upgrades or recent repairs, such as the new roof you installed two years ago. “When the appraiser actually comes to your home, have the file ready for them and walk around with them to point out the upgrades,” says Esswein.

Third, research recent comparable home sales. “Even though you may feel that prices are rising in your market, and in many markets they have, the appraiser still has to find comparable recent sales to support the value,” says Esswein. “One recent comp doesn’t make a trend, and appraisers may be adjusting prices more slowly than you wish.”

Instead of hoping the appraiser will pull a complete list of comps, Esswein suggests contacting a real estate agent to ask for a list of recent comparable sales, which you can add to your house file. “An experienced real estate agent will know what’s most comparable to your house,” she says.

What to Do If Your Appraisal is Low

So what happens if your appraisal is lower than expected? Is it possible to get another appraisal from a different company?

Esswein says you could shell out $250-$350 for a second opinion, then appeal to your loan officer with the new appraisal. “But before you do that, you should ask your loan officer if they’ll even consider the second appraisal,” says Esswein.

It’s more likely that the first appraisal will stick, but you still have options for refinancing.

Let’s say your home is appraised for $180,000. You still owe $162,000 on the mortgage, which is 90 percent of the value of the home. What are your options?

When it comes to maximum allowable loan-to-value, 80 percent is usually the magic number, so there are three things you can do if you aren’t at 80 percent.

Option one: Bring more cash to closing. If you can afford to put in an additional $18,000 in cash, you’d reduce the loan balance to 80 percent of the value of your home.

“Keep in mind that even if you anted up that money, you still have to have enough money in your reserves to satisfy any lender requirements for adequate savings, which is usually two months’ worth of mortgage payments, but can be more,” says Esswein.

Option two: Refinance into an FHA loan. An FHA loan is a Federal Housing Administration-backed mortgage loan.

Although an FHA loan requires just 3.5 percent equity, “with recent increases in FHA’s upfront mortgage insurance and monthly premiums, private mortgage insurance (PMI) could be cheaper,” says Esswein. Which brings us to…

Option three: Pay for PMI. PMI protects the lender if you stop making payments. “Because home values have fallen, many homeowners who didn’t need PMI when they bought their home will need it when they refinance,” says Esswein.

If you opt to refinance and need PMI, there are two ways you can pay for it.

One way is to simply pay for PMI yourself, which typically costs 0.5 percent to 1.5 percent of your loan amount per year. “Your lender will add the cost of PMI into your monthly mortgage payment,” says Esswein. “You would continue to have to pay the extra premium each month until you have 20 percent equity, at which point you can contact the lender and ask them to cancel PMI. Otherwise, when loan-to-value reaches 78 percent, they have to drop PMI automatically.”

The other way you can pay for PMI is lender-paid mortgage insurance. With lender-paid mortgage insurance, the cost of PMI is folded into your interest rate. The less equity you have, the higher your rate. “The higher rate applies for as long as you have the loan, so this option makes sense only if you don’t plan to own your home for the long term,” says Esswein. “You’re going to have to pay the higher rate for as long as you have that loan, it’s not going to fall away when you reach 20 percent equity.”

Before you decide to take lender-paid mortgage insurance, Esswein says to calculate your monthly payments and the total interest you’ll pay over the life of the loan, based how long you plan to keep loan.

So if you have to take on PMI, is it worth it to refinance? After all, you’re trying to lower your payments, not add extra fees!

Esswein says that as long as you’re saving money, it’s worth it. “PMI is a tool you can use if you need it, and if you’re still reducing payments and saving on interest, then it makes sense,” says Esswein.

And even if you have enough cash to bring your loan-to-value to 80 percent, you might think twice about spending it. “Before you bring cash to the table, decide what else you might want to spend that cash on,” says Esswein. “Don’t drain your emergency fund to avoid PMI.”

Finally, if your appraisal is so low that you owe more on the house than you could sell it for, you have options, too. Esswein recommends makinghomeaffordable.gov, which highlights home loan programs and refinance options for people who are underwater on their homes.

Source: getrichslowly.org

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This story is from Karl Boericke. He is the author of The Frugal Berry, money-saving tips of all kinds for home, office, and small business.

In 1990, I was honorably discharged from the Navy and quickly found a job in an electronics manufacturing company as a technician in their test department. While renting an apartment at the time, I wondered how I would ever be able to afford to buy a house with my meager salary. I had heard that buying a duplex was an inexpensive way to live and build equity in a home.

After looking at a few mobile homes and quickly realizing the long-term downside to such an “investment,” it became clear that buying a duplex was my best realistic ticket to home ownership. I lucked out in finding a great real estate agent who gave me some sage advice. Even though I could buy a duplex with a VA loan with almost NO cash up-front, she advised me to use an FHA first-time buyer mortgage. This would cost me some money at purchase, but it would give me the possibility of using my VA loan in the future for my “next duplex.” This thought stimulated my imagination, and seemed like an impossibility at the moment, but I followed her advice and kept this long-term idea in storage for another time.

Before I bought my first duplex, I was spending $525 per month to rent a studio apartment that consisted of a kitchen, bathroom with stand-up shower, and an all-purpose room that held my bed, dresser, couch, and a small TV placed on top of my file cabinet. After buying, I was now living in luxury. I had two bedrooms, a living room, a spacious kitchen with laundry hookup, and a full bathroom. I was now renting out a one-bedroom apartment below me for $425 per month, and my mortgage payment was $653 per month, which included real estate taxes, mortgage interest and insurance. This meant that my effective cost of housing per month went from $525 while renting to $228 for more space and home ownership.

Twenty-five months later, I bought my second duplex. This time I used my VA loan, and had very few out-of-pocket costs at closing. I moved into this new duplex to satisfy the loan requirements, and lived there for five years before getting married and buying a single home.

At this point my duplexes were paying for themselves, generating some additional income, and building equity that didn’t suffer even in the most recent housing tumble. Anyone who has watched the movie “Pacific Heights” knows the possible downside to being a landlord. Luckily I did not watch this movie until I was a year into my second duplex.

I had a huge learning curve as a landlord, but never had to evict anyone through the legal system. Twice the tenant and I came to a “mutual understanding,” and they were out by the end of the month.

Maintenance came easy for me, but even if I had to pay contractors to take care of any issues, I still would have been saving money like crazy. The dollar figures have changed over the past 20 years or so and mortgage requirements are changing, but the investment opportunities are just the same, or even better in the current housing market.

If you are renting an apartment, living paycheck to paycheck, I highly recommend that you consider buying a duplex. It doesn’t cost anything to look, and if nothing else you will be more educated on your possible options for the future.

Source: getrichslowly.org

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A few weeks ago, I wrote about how I refinanced my mortgage for the second time in a year. The second refinance wasn’t actually part of my master plan, but I ended up having to refinance in order to remove my private mortgage insurance. And although refinancing our home again proved to be a huge pain, we are now saving $135 per month by no longer paying private mortgage insurance premiums.

Thankfully, we managed to secure a no-cost refinance that only cost us in time and effort. It’s a huge relief that the process is finally over, and I am fairly hopeful that this is the last time we will ever have to refinance.

Refinancing Has Its Perks

Luckily, I am no stranger to the benefits of refinancing. Not only did we refinance our primary residence, but we also refinanced our two rental homes within the past 18 months. We did so in order to take advantage of record low interest rates and to shorten the terms of their loans.

Now that we have refinanced our rental properties, they will be paid off much faster. In fact, our two rental properties are due to be paid off in about 13 years. Once they are completely paid off, we will then have another (somewhat) passive income stream and will be that much closer to our lifetime dream of early retirement.

Since I have refinanced properties so many times, I decided to write about some of the reasons that people choose to refinance. Like me, you may find that refinancing could save tens of thousands of dollars in interest and years of mortgage debt repayment. Unfortunately, it does take some effort to get the process started. However, the time and effort spent could easily be worth it depending on your situation. Here are some reasons that you may want to consider refinancing your home loan.

5 Reasons You May Want to Refinance

Refinance to shorten the term of your loan. If you have a 30-year mortgage, now may be a great time to consider refinancing. With record low interest rates, you may find that a 15-year mortgage is not much more expensive than the 30-year loan payment you have been paying.

Start by entering your information into a mortgage calculator to see what your new payment might be. If your new estimated payment is feasible, consider contacting a mortgage professional. (When we first refinanced our home from a 30-year mortgage at 5 percent to a 15-year mortgage at 3.25 percent, our payment only increased by about $200. Since the increase fit easily into our budget, the decision was a no-brainer.)

Refinance to lower your interest rate. As I mentioned before, interest rates are near a record low. And as I write this, 30-year mortgage rates are hovering above 3 percent and 15-year loans can be secured for an even lower rate. If your home is now financed at a higher interest rate, it may be a great time for you to consider refinancing. You could literally save tens of thousands of dollars just by taking the time to fill out the necessary paperwork and gather the needed documents.

Refinance to lower your payment. Refinancing your mortgage at a lower interest rate could mean drastically reducing your payment and saving tens of thousands of dollars in interest. Lowering your mortgage payment could also free up hundreds of dollars per month that could be saved or invested. Although refinancing to lower your payment could increase the term of your loan, it could make sense in your particular situation.

Refinance from an adjustable-rate mortgage to a fixed-rate loan. If you currently have an adjustable-rate mortgage, now may be the perfect time to refinance into a fixed-rate loan. Interest rates are low now, but they may not stay this low forever. Locking into a low, fixed rate can protect you from rising interest rates in coming years. Additionally, a fixed payment is easier to plan for and budget.

Refinance to cash out home equity. It’s a tempting proposition to cash out your home equity by refinancing your home. It could even be a great financial move in some circumstances. For instance, it may make sense to cash out some of your home equity in order to buy an investment property or start a business. It mostly depends on what you are trying to achieve and if you are someone who can manage your debts responsibly.

Can Refinancing Help You Meet Your Goals?

Before refinancing, consider what your goals really are. Do you want to lower your monthly mortgage payment? Do you want to pay off your mortgage and get out of debt faster? Only you can answer these questions.

It is also important to take all closing costs and fees into consideration. Depending on which new loan you choose, you may have to pay thousands of dollars in fees for your new mortgage. It may take several years to recoup the costs of refinancing, and it is important to identify your breakeven point. If you plan on moving in the near future, it may not make sense to refinance your home loan at all.

Do You Even Qualify For a Refinance?

Due to government-backed programs, you may be able to refinance your home even if you owe more than your home is worth. The Home Affordable Refinance Program, known as HARP, loosens requirements for traditional refinancing. According to MakingHomeAffordable.gov, your loan must meet several requirements in order to qualify:

  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
  • The current loan-to-value (LTV) ratio must be greater than 80%.
  • The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.

Consider Refinancing Decisions Carefully

There are many things to consider before refinancing your mortgage. Most importantly, you should weigh the pros and cons of your particular situation and act according to your own best interest. With some thorough research and planning, refinancing your mortgage could turn out to be the best thing for your family and for your pocketbook. Have a look at the table below for the best mortgage rates.

Have you considered refinancing your mortgage? If so, why did you decide to refinance? If not, why haven’t you?

Source: getrichslowly.org

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While the average mortgage rate remains stuck above 6%, buyers of new homes are getting a much better deal, according to one expert.

“So buyers out there today that are buying new homes are not paying 6.5% — the headline rate,” John Lovallo, UBS homebuilders and building products analyst, told Yahoo Finance Live (video above). “They’re paying under 5% in most cases.”

That’s another big advantage that homebuilders have in this market — their financing — in addition to capitalizing on the low inventory environment in the previously-owned home market.

Builders “have the ability to do this because of the captive finance arms that they have,” Lovallo said. “And we think that positions the public homebuilders in particular extremely, extremely well here in this environment.”

MIAMI, FL - SEPTEMBER 25: A family rides their bike past a Lennar Corp sign, as the company reports that it's third-quarter net income ending on August 31st rose to $87.1 million, or 40 cents a share, from $20.7 million, or 11 cents, a year earlier on September 25, 2012 in Miami, Florida. The company said the better than expected quarter was due to demand for new houses has climbed and a real estate recovery is gaining traction. (Photo by Joe Raedle/Getty Images)MIAMI, FL - SEPTEMBER 25: A family rides their bike past a Lennar Corp sign, as the company reports that it's third-quarter net income ending on August 31st rose to $87.1 million, or 40 cents a share, from $20.7 million, or 11 cents, a year earlier on September 25, 2012 in Miami, Florida. The company said the better than expected quarter was due to demand for new houses has climbed and a real estate recovery is gaining traction. (Photo by Joe Raedle/Getty Images)

MIAMI, FL – SEPTEMBER 25: A family rides their bike past a Lennar Corp sign, as the company reports that it’s third-quarter net income ending on August 31st rose to $87.1 million, or 40 cents a share, from $20.7 million, or 11 cents, a year earlier on September 25, 2012 in Miami, Florida. The company said the better than expected quarter was due to demand for new houses has climbed and a real estate recovery is gaining traction. (Photo by Joe Raedle/Getty Images)

For homebuyers, a 1-percentage-point difference in the mortgage rate can significantly impact home purchasing power. The monthly mortgage payment on a $400,000 home with 20% down at 5.35% is $1,787. The payment rises to $1,991 at 6.35%. That’s over $200 more per month, or $2,400 a year.

A 2-percentage-point difference is even better. And that’s what Pulte Homes was offering earlier this year. The homebuilder recently offered a 30-year mortgage rate at 4.25% for qualified homes under construction through its financing arm. During the time it ran the special, the average rate on a 30-year mortgage ranged from 6.09% to 6.73%, according to Freddie Mac.

“By offering lower rates, we are helping to make our homes more affordable for today’s consumers.” Macey Kessler, Pulte Group’s corporate communications manager, wrote to Yahoo Finance, “Given the extremely low inventory of existing homes, providing an opportunity for consumers to purchase a new home is more important than ever.”

“What the builders have been able to do…is to help buyers find that clearing price,” Lovallo said, “whether it’s through incentives on lowering the actual price of the home or — what’s been happening more often — is buying down interest rates.”

Homebuilders are benefiting from higher average mortgage rates in another way: less competition.

Many would-be sellers feel rate-trapped by their current low mortgage rate and have decided against putting their home on the market. As a result, new homes are making up a larger portion of for-sale inventory.

More than a third of homes on the market in April were new construction, the National Association of Home Builders estimated, when that share is typically 13%. The dynamic has buoyed housing confidence among builders, which hit its highest level in 10 months in May.

“I think that what’s interesting in going back to the fact that there’s very little existing home inventory on the market, to the extent that folks are looking to buy a home, they are more inclined today than at probably at any point in history to look at a new home,” Lovallo said.

That lack of inventory is also helping to keep housing prices elevated — another boon to builders.

“Home prices have remained very resilient,” Lovallo said, “which I think is a testament to the demand that’s out there currently. Also, the fact that there is very little existing home supply.”

But for homebuyers in the market, Lovallo concedes: “It is a very tough time.”

Rebecca is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).

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Source: finance.yahoo.com

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It’s good to be a homeowner these days. After all, home prices are rising at an incredible pace, and have been for nearly a decade now since bottoming out.

On top of that, many of today’s homeowners hold fixed-rate mortgages with ultra-low mortgage rates, making it very affordable to own rather than rent.

Unfortunately, the same can’t be said of those looking over the fence, or sitting on the fence, wondering if they too should make the move to homeowner.

One of the biggest hurdles to homeownership that continues to worsen is the pesky down payment.

And as property values increase, so too does the minimum amount required to get a mortgage, assuming a down payment is needed, which it often is unless you’re taking out a USDA loan or VA loan.

This has made it more and more difficult for renters to become homeowners, despite mortgage rates being at/near all-time lows.

It also highlights the fact that low mortgage rates, while certainly great, aren’t a be-all, end-all solution to affordable housing.

Home Price Gains Outpace Mortgage Rate Discounts

  • Median monthly mortgage payment on an existing single-family home increased to $1,059 in Q3
  • That number was up from $1,019 in the second quarter and $1,032 in Q3 2019
  • Mortgage payments accounted for 15.6% of income in Q3 based on median income of $81,477
  • That was up from 14.8% in the second quarter unchanged from a year ago

In the National Association of Realtors (NAR) latest statistical release, they noted that the median existing single-family home price surged 12.0% on a year-over-year basis to $313,500.

These home price gains were seen all throughout the country, with double-digit year-over-year increases in the West (13.7%), Northeast (13.3%), South (11.4%), and the Midwest (11.1%).

Meanwhile, home prices are growing four times as fast as median family incomes, which have only ticked up about 2.9%.

Still, with mortgage rates so low at the moment, the monthly mortgage payment on an existing single-family home has only increased to $1,059 from $1,019 a quarter earlier and $1,032 a year ago.

For most prospective home buyers and existing homeowners, this is probably incidental, and not a deal-breaker in terms of qualifying for a mortgage.

But NAR chief Lawrence Yun still remarked that “housing prices are increasing much too fast.”

Interestingly, the low mortgage rates are a double-edged sword because they’re continuing to lure buyers to market, thereby increasing demand and raising home prices in the process.

So while you might get a lower mortgage rate, you’ll pay more for the house, assuming you don’t already own it.

In fact, 65% of metro areas , or 117 areas out of 181, experienced double-digit price gains from one year ago.

Biggest Year-Over-Year Home Price Gainers

1. Bridgeport, Conn. (27.3%)
2. Crestview, Fla. (27.1%)
3. Pittsfield, Mass. (26.9%)
4. Kingston, N.Y. (21.5%)
5. Atlantic City, N.J. (21.5%)
6. Boise, Idaho (20.6%)
7. Wilmington, N.C. (20.6%)
8. Barnstable, Mass. (19.4%)
9. Memphis, Tenn. (19.1%)
10. Youngstown, Ohio (19.1%)

These are the hottest metros nationwide when measuring home price growth from the third quarter of 2019 to the third quarter of this year.

Shockingly, home values were up nearly 30% in Bridgeport, Connecticut, which certainly doesn’t sound like healthy home price appreciation.

Yun noted that home prices have “jumped” in cities that contain larger properties with more open space, a symptom of the ongoing COVID-19 pandemic.

More frightening is the continued lack of housing inventory – at the end of the third quarter there were just 1.47 million existing homes available for sale, which was down a whopping 19.2% from a year earlier.

That represented just 2.7 months at the current sales pace, as of September 2020, which tells you why it’s overwhelmingly a seller’s market still.

Sure, you can probably get your hands on a super low mortgage rate, but good luck finding a house if you don’t already own one!

Read more: Would You Rather Have a Low Mortgage Rate or Pay a Lower Price for a Home?

Source: thetruthaboutmortgage.com