Uncommon Knowledge
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President Joe Biden has proposed an annual tax credit that would give Americans $400 a month for the next two years to put towards their mortgages.
Addressing the affordability crisis in the housing market in his State of the Union address on Thursday, Biden said: “I know the cost of housing is so important to you. Inflation keeps coming down, and mortgage rates will come down as well.
“But I’m not waiting. I want to provide an annual tax credit that will give Americans $400 a month for the next two years as mortgage rates come down, to put towards their mortgage when they buy their first home, or trade up for a little more space.”
Home prices skyrocketed during the pandemic, driven by relatively low mortgage rates, high demand and low inventory. At their peak, the median listed price for a home in the U.S. reached $465,000 in June 2022, according to data from the Federal Reserve Bank of St. Louis (FRED).
While the housing market experienced a price correction between late summer 2022 and spring 2023, prices remain historically high, propped up by lingering low supply. In June 2023, the median listed price for a home in the U.S. was $448,000. As of January 2024, this was $409,500, according to data from FRED.
While home prices have stayed high for the past three years, a rise in mortgage rates driven by the Federal Reserve’s aggressive hike rate campaign last year has led to many aspiring homebuyers being completely squeezed out of the market. In December last year, the reserve said that it would have stopped rising rates, but mortgages are yet to significantly come down.
High mortgage rates, together with the historic shortage of homes in the U.S.—due to the fact that the country hasn’t built enough homes to meet demand since the housing crash of 2008—have contributed to the current affordability crisis.
In late 2023, J.P. Morgan said that, based on then-current trends, housing affordability could be restored in 3.5 years. Newsweek contacted J.P. Morgan for comment by email on Friday morning.
Biden is now calling on Congress to provide a one-year tax credit of up to $10,000 to middle-class families who sell their starter home—a home below the median home price of the area where it is located—to another owner or occupant. The White House said that this proposal could help nearly 3 million American families.
On Friday, Biden’s announcement on the tax credit was met with a standing ovation and roaring applause by Democratic lawmakers, while about half of the House stayed seated.
The president also mentioned other measures to address the housing affordability crisis in the U.S. These included down-payment assistance for first-generation homeowners, tax credit to build more housing, and lowering costs by building and preserving millions of homes.
“My administration is also eliminating title insurance on federally backed mortgages,” Biden told lawmakers on Friday.
“When you refinance your home, you can save $1,000 or more as a consequence. We’re cracking down on big landlords who break antitrust laws by price-fixing and driving up rents. We’ve cut red tape, so builders can get federal financing,” the president said among the cheering of some lawmakers.
Update, 3/8/24, 8 a.m. ET: The headline on this article was updated.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Source: newsweek.com
Today’s mortgage rates are quite a bit higher than the rates that hovered near 3% in late 2020 and early 2021. But they’re also quite a bit lower than the 8% (or higher) interest rates from October 2023. So, depending on when you purchased your home, you may be wondering if now is a good time to refinance.
After all, if you purchased your home when mortgage rates were at their peak last year, refinancing now could lead to meaningful savings. On the other hand, there are costs involved with a mortgage refinance related to the appraisal, application, loan origination and more. Considering these costs, how much do mortgage rates need to drop to make refinancing worth it?
Compare your mortgage refinancing options now.
“This is the million dollar question, and it’s not the same for everyone,” says Earl Dell, SVP of national retail sales and acquisitions at Mutual of Omaha Mortgage. “A lot of this goes into what your current mortgage balance is at this time, and how long you plan to stay in your home.”
For example, let’s say you owe $250,000 on your home with a 30-year mortgage at 8.35%. You could refinance your home with a new 30-year mortgage with a lower interest rate of 7.25%, but doing so comes with fees that range, on average, from 3% to 5%. If we’re assuming 3%, that would equal about $7,500 in fees.
At the current rate of 8.35%, you would pay $433,433 in interest in total over the life of your mortgage loan. However, if you refinance your home with a 30-year loan at a 7.25% interest, you would pay a total of $364,365 in interest over the life of the loan. And, after accounting for the $7,500 in fees, refinancing would result in a total savings of $61,568 in interest over the life of your mortgage.
If you have a mortgage with a higher balance and rate, a drop of 0.5% interest could be worth refinancing, according to Dell. “For a lower balance, rate and term refinance, it may be at least 1% or more to be worth your time and money,” Dell says.
It’s also important to consider how long you plan on living in the home, according to Dell.
“If you plan on moving in the next two years, I would hold off from refinancing,” he says.
Find out how much you could save by refinancing your mortgage today.
If your current mortgage rate is lower than today’s rates, there may be no long-term interest savings when you refinance. However, mortgage refinancing may still be worth considering in certain cases. For example, you could refinance from a 30-year loan term to a 15-year loan term at a slightly higher rate to pay off your mortgage loan quickly. Or, you could use cash-out refinance at a slightly higher rate to pay off high-interest debt if a home equity loan isn’t an option.
Tap into your home equity with a cash-out refinance now.
There are numerous factors to consider before refinancing your loan — but your new mortgage rate plays a large part in whether or not it makes sense to do so. And, while a 1% drop in mortgage rates nearly always makes sense to consider, in certain cases, even a slight drop in mortgage rates could make refinancing worth it — especially if you plan to stay in your home for the long term. Before you make any decisions, though, just make sure to understand the short- and long-term implications of refinancing your mortgage loan to ensure that it’s the right move for you.
Source: cbsnews.com
The mean rate for a 15-year fixed-rate refinance moved higher this week, while 30-year fixed refinance rates trailed off. The average rate on 10-year fixed refinance increased.
Refinance rates saw some turmoil over the last week, but they’ve been slowly dropping from their peaks in 2023. Experts say slowing inflation and the Federal Reserve’s projected interest rate cuts should help push mortgage interest rates down to around 6% by the end of 2024.
Over 82% of homeowners currently have interest rates below 5% on their property. If home loan rates stabilize over the next several months, more homeowners should be able to save money through refinancing. But in order for refinance applications to pick up in a meaningful way, rates would need to fall substantially, according to Mark Zandi, chief economist at Moody’s Analytics.
Mortgage refinance rates change every day. Experts recommend shopping around to make sure you’re getting the lowest rate. By entering your information below, you can get a custom quote from one of CNET’s partner lenders.
About these rates: Like CNET, Bankrate is owned by Red Ventures. This tool features partner rates from lenders that you can use when comparing multiple mortgage rates.
Refinance rates are currently between 6% and 7%, but your personal interest rate will depend on your credit history, financial profile and application.
Here are the average refinance rates provided by lenders across the US. We track refinance rate trends using information collected by Bankrate:
Product | Rate | A week ago | Change |
---|---|---|---|
30-year fixed refi | 7.18% | 7.21% | -0.03 |
15-year fixed refi | 6.58% | 6.52% | +0.06 |
10-year fixed refi | 6.47% | 6.38% | +0.09 |
Rates as of Feb. 13, 2024
When mortgage rates hit historic lows during the pandemic, millions of homeowners were able to refinance to lower interest rates. While experts don’t anticipate another refinancing boom, it’s a positive sign that rates are now tending to move downward or sideways instead of soaring up.
For homeowners looking to refinance, remember that you can’t time the market: Interest rates fluctuate on an hourly, daily and weekly basis, and are influenced by an array of macroeconomic factors. Your best move is to keep an eye on day-to-day rate changes and have a game plan on how to capitalize on a big enough percentage drop, said Matt Graham of Mortgage News Daily.
When you refinance your mortgage, you take out another home loan that pays off your initial mortgage. With a traditional refinance, your new home loan will have a different term and/or interest rate. With a cash-out refinance, you’ll tap into your equity with a new loan that’s bigger than your existing mortgage balance, allowing you to pocket the difference in cash.
Refinancing can be a great financial move if you score a low rate or can pay off your home loan in less time, but consider whether it’s the right choice for you. Reducing your interest rate by 1% or more is an incentive to refinance, allowing you to cut your monthly payment significantly.
Refinancing in today’s market could make sense if you have a rate above 8%, said Logan Mohtashami, lead analyst at HousingWire. “However, with all refinancing options, it’s a personal financial choice because of the cost that goes with the loan process,” Mohtashami said.
Homeowners usually refinance to save money, but there are other reasons to do so. Here are the most common reasons homeowners refinance:
The rates advertised online often require specific conditions for eligibility. Your personal interest rate will be influenced by market conditions as well as your specific credit history, financial profile and application. Having a high credit score, a low credit utilization ratio and a history of consistent and on-time payments will generally help you get the best interest rates.
The average rate for a 30-year fixed refinance loan is currently 7.18%, a decrease of 3 basis points compared to one week ago. (A basis point is equivalent to 0.01%.) A 30-year fixed refinance will typically have lower monthly payments than a 15-year or 10-year refinance, but it will take you longer to pay off and typically cost you more in interest over the long term.
The average 15-year fixed refinance rate right now is 6.58%, an increase of 6 basis points from what we saw the previous week. Though a 15-year fixed refinance will most likely raise your monthly payment compared to a 30-year loan, you’ll save more money over time because you’re paying off your loan quicker. Also, 15-year refinance rates are typically lower than 30-year refinance rates, which will help you save more in the long run.
For 10-year fixed refinances, the average rate is currently at 6.47%, an increase of 9 basis points from what we saw the previous week. A 10-year refinance typically has the lowest interest rate but the highest monthly payment of all refinance terms. A 10-year refinance can help you pay off your house much quicker and save on interest, but make sure you can afford the steeper monthly payment.
To get the best refinance rates, make your application as strong as possible by getting your finances in order, using credit responsibly and monitoring your credit regularly. And don’t forget to speak with multiple lenders and shop around.
Source: cnet.com
It doesn’t matter how long ago you purchased your house, whether it’s been just a few years or several decades. Consider re-evaluating your current mortgage and living situation to determine whether a refinance could benefit your wallet.
The process is almost as in-depth as getting a new mortgage, so we’ll show you exactly when you should consider refinancing and how to complete the process.
Mortgage refinancing is the process of replacing an existing mortgage with a new mortgage loan. The new loan may have a different interest rate, term, or loan amount than the original mortgage.
People often refinance their mortgages to take advantage of lower interest rates, to change the terms of their loan, or to tap into the equity they have built up in their home.
Before you jump into the refinance process, it’s wise to think about your goals. There are many times when it’s a good idea to look into mortgage refinancing, but you always have to look at the big picture as well.
For example, if interest rates are lower than when you got your mortgage or your credit has improved recently, you may qualify for a lower interest rate. This allows you to save money over the long run and have a lower monthly payment.
But here’s the catch.
If you lock into that lower interest rate and refinance for another 30-year mortgage, you’re adding time to the loan term. This might not be a big deal if you’ve only been paying off your mortgage for a couple of years. On the other hand, you may end up paying more interest over time, even with the lower rate, if you’re already several years into your current term.
Get your lender to crunch some comparisons for you, or do it yourself using a refinance calculator. That way you know for sure whether you’re really saving money or not.
See also: How Much Does it Cost to Refinance a Mortgage?
Another time to look into refinancing your mortgage is if you’re paying private mortgage insurance and have reached 20% equity in your home’s value. At that point, you may be able to refinance and drop that PMI contingency.
Since PMI typically costs up to 1% of your loan amount each year, you could save yourself some serious money, especially since it’s not going towards your principal or interest.
As always, be sure to also consider the closing costs that come along with refinancing as well as how much of your loan you’ve already repaid. The financial benefits of the refinance should always outweigh the expenses.
Another reason some people want to refinance is to access cash. Maybe they want to fund a home renovation project or pay off debts. A cash-out refinance will allow them to leverage the equity in their house to obtain that cash.
When it comes to refinancing, lenders typically look more at the amount of equity in your home than the length of time you’ve owned it. This is especially true of cash out refinances, which require 20% equity in the home. If you just want to change your interest rate or length of the loan, then you’ll need somewhere between 5% and 10% home equity.
If you’ve already refinanced your home once after the original purchase, your lender might make you wait before doing it again. The industry standard is usually six months, so as long as you’re over that threshold, you shouldn’t have an issue.
One issue to be aware of, however, is the potential for a prepayment clause in your existing home loan. Although it’s rare these days, this penalty can charge you a large fee if you pay off your mortgage early.
When you refinance, that’s exactly what you’re doing: paying off your old mortgage (and lender) with a new mortgage that could very well be through a new lender. Check your existing loan contract to make sure a refinance won’t come with any unexpected penalties.
How much could you end up paying?
Some prepayment penalty clauses are structured so that you pay 80% of the interest you would owe over the next six months. That can easily amount to thousands of dollars, especially if you’re early in your mortgage with interest-heavy payments.
Refinancing your home doesn’t happen overnight. In fact, there are several steps involved. Here’s a play by play so you know exactly what to expect.
We’ve talked about setting a goal for your refinance and this is a huge part of starting the process. You may want a standard refinance that merely adjusts your interest rate. Or perhaps you want to cash out some of your equity. Alternatively, you may wish to refinance out of an adjustable-rate mortgage to a fixed-rate or switch the length of your term.
Once you know the type of mortgage loan you want, it’s time to start preparing for the process. Knowing your credit score lets you know a bit more what you can expect in terms of loan qualification and interest rates.
Some loan types have absolute minimums, while others are more flexible. Check your credit score upfront so that you can get an idea of whether you meet basic refinance requirements.
Next, you need to get an idea of how much your home is currently worth. The best way to do this is to look at comps in your neighborhood.
Check websites like Zillow and Realtor.com to find out what current sales prices look like, as well as properties that have been recently sold. Take a look at the price per square foot for these homes and apply that number to the square footage of your own home.
Of course, that’s not an absolute. Your home’s true value depends on several factors, including upgrades and lot size. But you can take these things into consideration to get a general idea of what your appraisal value could be.
You don’t have to refinance with your current mortgage lender. In fact, it’s smart to shop around to find the best loan terms. Compare all the details of your refinance offer. Getting a lower interest rate is definitely important, but you also want to consider potential closing costs and origination fees.
How a lender structures the new loan is also significant and can influence your decision. If you’re trying to save on how much cash you spend upfront, you might prefer a lender who lets you incorporate your closing costs into the loan amount. Alternatively, low interest rates may be the most influential factor when choosing a lender.
After comparing rates and fees from multiple mortgage lenders, you can get a loan estimate from your top choices. A loan estimate is a form that provides essential information about the terms of a mortgage refinance loan.
It is intended to help borrowers compare different loan offers and make an informed decision about which one is the best fit for them. The loan estimate includes the loan terms, the projected monthly payments, the closing costs, and other charges associated with the loan. It also includes information about the lender, the mortgage broker (if applicable), and the real estate broker (if applicable).
After you pick out a lender with the mortgage rates and terms you like, it’s time to start gathering your documentation for your refinance application. You’ll likely need things like bank statements, tax forms from the last two years, and pay stubs.
Getting all of this paperwork together in advance can save time during the application and underwriting processes.
Part of the mortgage refinance process is to get a professional appraisal on your home. Your lender typically orders this and the fee is usually included in your closing costs. Make sure your home is clean and presentable. You don’t need to make major changes but picking up ahead of time can create a good impression on the appraiser, as can a freshly mowed yard.
Closing on a refinance is similar to when you originally closed on your home. Typically, your lender will arrange a meeting with a public notary so you can sign all of your paperwork. You can make this at a time and place that is convenient for you. If the refinanced loan is in both your name and someone else’s, like your spouse’s, then you’ll both need to be present to sign.
Once the paperwork is complete, you’ll start making monthly payments to your new lender as scheduled in your closing documents. Any new terms or rates will also apply so you can start paying down your newly refinanced home loan.
To be eligible for a mortgage refinance, you typically need to have good credit, sufficient equity in your home, and the ability to make the monthly payment on the new loan.
In addition to these requirements, you may also need to meet other eligibility criteria, such as being current on your mortgage payments and having no recent bankruptcies or foreclosures.
To compare refinancing options, you can use online mortgage calculators or consult a financial professional or mortgage lender. You should consider the interest rate, terms, and costs of each option.
Closing costs are fees that are associated with the process of obtaining a mortgage. They can include fees for appraisals, credit checks, title searches, and other services.
Closing costs can vary widely depending on the specific loan and lender, but they typically range from 2% to 5% of the loan amount.
It may be more difficult to qualify for mortgage refinancing if you have bad credit, but it’s not impossible. You may be able to qualify for a refinancing option with a higher interest rate or with a co-signer.
Refinancing your mortgage can take anywhere from a few weeks to a few months, depending on the complexity of your situation and the lender’s process. It’s a good idea to start the process as early as possible to ensure that you have enough time to complete it.
Source: crediful.com
Many choose to refinance a mortgage to lower monthly payments, pay off the loan faster or tap home equity for cash. Homeowners usually think of refinancing when interest rates are sinking or stable — and the current environment has been anything but. Still, swapping your old home loan for a new one could make financial sense for you. Read on to learn when to refinance a mortgage and when it might be better to consider other options.
When deciding if refinancing is right for you, consider current mortgage rates. The math isn’t as simple as comparing the interest rate you locked in when you were approved for your mortgage versus the rate you can qualify for now. There are several kinds of refinance options out there, each with unique pros and cons. Review this trio of factors from Bill Packer, chief operating officer of reverse mortgage lender Longbridge Financial, LLC, as you consider each:
Once you know these three things, you can calculate your return and see if it is positive, says Packer.
Some of the best reasons to refinance your mortgage include saving money on monthly payments and paying off your mortgage faster. More specifically, it’s often a good idea to refinance if you can lower your interest rate by one-half to three-quarters of a percentage point, and if you plan to stay in your home long enough to recoup the refinance closing costs.
If interest rates have dropped since you first obtained your mortgage, a rate-and-term refinance can provide you with a lower rate. You might also qualify for a better interest rate if your credit score has improved since taking out your current loan.
The best mortgage rates and terms go to those with the best credit (a score of at least 740), so check your credit report to understand your risk profile. If you’re carrying a lot of credit card debt or you’ve missed a payment recently, you might look like a riskier borrower.
You can use a cash-out refinance to tap your home’s equity and lower or pay off high-interest debt. Whether it’s credit card balances or other forms of debt that are costing you a fortune, using the funds from a cash-out refinance could save you several thousands of dollars.
If your home’s value has increased, you could refinance to get out of paying private mortgage insurance (PMI) on conventional loans or mortgage insurance premiums (MIP) on FHA loans. Most commercial home loan products require PMI until you reach 20 percent in equity. MIP on standard modern FHA loans (post-2013) stays in effect for the life of your loan, unless your down payment cleared a certain amount. If you paid at least 10 percent down, MIP goes away after 11 years of on-time payments.
Refinancing could also be sensible if you qualify for more competitive loan terms and are planning to stay put for some time to take advantage of the cost-savings. However, it might not be smart to refinance if you plan to move in the near future, which gives you little time to recoup the costs associated with taking out a new loan.
If you’re struggling to make your monthly mortgage payments, you can refinance to get a longer loan term, which means a smaller monthly payment. However, overall the loan will be more costly since you will be paying interest for a longer period.
Home renovations can be costly, but if they increase your home’s value, pulling out funds through a cash-out refinance could be a worthwhile investment.
It might not be smart to refinance for any of these reasons:
Refinancing may save you money in the long run, but it comes with closing costs you’ll need to be prepared to pay. The cost of refinancing your mortgage will depend on your property’s location, which company is servicing your loan and which closing cost fees apply to your specific situation. For example, you might need to pay an appraisal fee, an origination fee and an attorney fee.
Rather than pay all that money upfront, many lenders allow you to roll the closing costs into your principal balance and finance them as part of the loan. Keep in mind, though, that adding those costs to the loan only increases the total amount that will accrue interest, ultimately costing you more.
The amount you can save by refinancing depends on several factors, including your closing costs. If you refinance to a $250,000 loan and the closing costs total 2 percent of that, for example, you’d owe $5,000 at closing.
You won’t begin to reap the benefits of a refinance until you reach the break-even point — when the amount that you save exceeds the amount you spent on closing costs. To determine the break-even point on your refinance, divide the closing costs by the amount you’ll save each month with your new payment.
Let’s say that refinancing will save you $150 per month, and the closing costs on the new loan are $4,000.
$4,000 / $150 = 26.6 months
So, if you were to close your new loan today, you’d officially break even just over two years and two months from now. If you live in the home for five years after refinancing, the savings really start to add up — $9,000 total.
You can use Bankrate’s refinance break-even calculator to figure out how long it will take for the cost of a mortgage refinance to pay for itself. If you think you might sell the home before your break-even point, refinancing might not be worth it.
Let’s say you took out a 30-year mortgage for $320,000 at a fixed interest rate of 6.23 percent. Your monthly payment would be $1,966. Over the life of that loan, you’d pay about $707,901, which includes $387,901 in interest.
Now say about 15 years into the loan, you’ve paid $86,551 toward the principal and $257,499 in interest and you want to refinance the remaining $233,449 of your principal balance with a new 15-year fixed-rate loan at 5.11 percent.
The new loan would trim your monthly mortgage payment to $1,859 per month, giving you an additional $107 of wiggle room in your monthly budget. Over the life of the loan, you’d pay $334,756, of which $101,307 would be interest. Add in the $344,050 in principal and interest you paid on the previous mortgage, and your total cost will be $678,806.
By refinancing, you’d not only lower your monthly payments — you’d see a long-term savings of about $30,000.
Current mortgage | Refinance | |
---|---|---|
Monthly payment | $1,966 | $1,859 |
Interest rate | 6.23% | 5.11% |
Total payments | $707,901 | $678,806 |
Savings | $0 | $29,095 |
Is refinancing a good idea? If it frees up money in your monthly budget or reduces the overall cost of the loan, refinancing can be well worth the work and money.
That said, there’s no one correct path to do it. You might want to switch from an adjustable-rate mortgage to a fixed-rate loan that has the same monthly payment, or you might want to shorten your loan’s term from 30 years to 15 years and save yourself a bundle in interest charges. You could also simply move from one 30-year mortgage to another 30-year mortgage with a lower rate.
Additionally, refinancing allows you to get rid of PMI after you have accumulated 20 percent equity in your home.
A cash-out refinance is another option that allows you to pull equity from your home. You can use the funds however you see fit, whether it’s to pay off credit card debt or cover the cost of renovations that will improve your home’s value.
To decide if you should refinance your mortgage, conduct a cost-benefit analysis to see if it’s right for you. Make sure you understand how each mortgage refinance option works to inform your decision.
When you’re ready to move forward, start by shopping around to find lenders with refinance options that could work for you. Get quotes from three or more lenders and compare the figures to identify the most attractive loan offer.
How soon you can refinance a mortgage varies by the loan type. Some lenders require you to wait at least six months to refinance a conventional loan, particularly if you are seeking to refinance with the same lender, while others might let you refinance with no waiting period. Government-backed loans each have their own requirements, so check with your lender on waiting periods to refinance.
Source: bankrate.com
Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.
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When buying a home, you’ll need to decide which type of mortgage is the best fit.
Your decision may come down to how much you need to borrow and how strong your finances are. If you don’t qualify for one type, you may be able to find another one that’s a good match.
A conforming mortgage is a type of conventional mortgage, or a mortgage not backed by a government agency such as the FHA.
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These mortgages meet the conforming loan limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets the limit for conforming loans every year, and in 2024, the limit is $766,550 in most parts of the US. In areas with a higher cost of living, the limit goes up to a ceiling of $1,149,825.
Many mortgage lenders require a 620 credit score and a maximum debt-to-income ratio between 36% to 50% to get a conforming loan. You’ll need at least a 3% down payment if your mortgage is backed by government-sponsored mortgage companies Fannie Mae and Freddie Mac, though individual lenders may require more.
You’ll pay for private mortgage insurance on a conforming mortgage if you have less than 20% for a down payment. PMI typically costs between 0.2% and 2% of your mortgage amount. You can cancel PMI once you have at least 20% equity in your home.
A jumbo mortgage, also known as a nonconforming mortgage, is another type of conventional loan. You’ll need a jumbo mortgage to borrow more than the FHFA borrowing limit.
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As discussed above, in 2024, the limit is $766,550 in most parts of the US., up to a ceiling of $1,149,825 in areas with a higher cost of living. A jumbo mortgage is for an amount higher than these limits.
Eligibility requirements for jumbo mortgages are a bit stricter than for conforming mortgages, because lenders are taking a greater risk by lending you more money. Each lender has its own requirements for nonconforming mortgage, but you’ll likely need a higher credit score, lower debt-to-income ratio, and bigger down payment than you would for a conforming mortgage.
There are three types of government-backed mortgages, or home loans backed by federal agencies: FHA, VA, and USDA. If you default on your mortgage payments, the agency compensates the lender. This makes the loans less risky for your lender, and therefore more accessible for you.
An FHA mortgage is a government-backed mortgage insured by the Federal Housing Administration. You can get an FHA mortgage with a 3.5% down payment if your credit score is 580 or higher, or with 10% down if your score is 500 to 579. Most FHA mortgage lenders require a debt-to-income ratio of 43% or lower.
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You don’t have to pay for PMI with an FHA mortgage, but you do have to pay for a different type of mortgage insurance. It will cost you 1.75% of your mortgage at closing. Then you’ll pay an annual premium of 0.45% to 1.05% of your mortgage.
A VA mortgage is a government-backed mortgage guaranteed by the US Department of Veterans Affairs, and it’s for military families only. VA mortgages typically come with lower interest rates than conforming mortgages, and you don’t need a down payment.
You will need at least a 660 credit score and 41% debt-to-income ratio to qualify for a VA mortgage.
You won’t have to pay for mortgage insurance, but you will pay a funding fee. The fee is 2.3% of the amount borrowed if this is your first VA loan, or 3.6% if you’ve used a VA loan before. The fee will be lower if you have money for a down payment, though.
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A USDA mortgage is a government mortgage backed by the US Department of Agriculture. It’s for low-to-middle-income families buying a home in a rural or suburban area. The qualifying income limit depends on where you live in the US. The population restrictions are 20,000 for some counties and 35,000 for others.
Like a VA mortgage, a USDA mortgage comes with lower interest rates and doesn’t require a down payment. Most lenders require a 640 credit score and 41% debt-to-income ratio.
You will have to pay for mortgage insurance, but it should cost less than what you might pay for PMI or for insurance on an FHA mortgage. You’ll pay 1% of your principal at closing, then an annual premium of 0.35% of your remaining principal.
When it comes to locking in an interest rate, you’ll choose between two types of mortgages: fixed-rate or adjustable-rate.
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Depending on which type of mortgage you get, you may get to pick between the two types or be limited to just one. For example, you can select either a fixed or adjustable rate for a conforming mortgage, but you can only get a fixed rate on a USDA mortgage.
A fixed-rate mortgage locks in your rate for the duration of your loan. Although US mortgage rates will increase or decrease over the years, you’ll still pay the same interest rate in 30 years as you did on your very first mortgage payment.
An adjustable-rate mortgage, commonly referred to as an ARM, keeps your rate the same for the first few years, then periodically changes over time — typically once a year. For example, if you have a 5/1 ARM, your introductory rate period is five years, and your rate will go up or down every year.
You might need a construction loan if you build a house and need financing to cover permits, supplies, and labor.
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Construction loans are short-term loans (usually for one year) that carry higher interest rates than regular mortgages. You may choose to pay off your loan once construction is completed, or roll it into a regular mortgage.
If you want to buy a home and make significant changes to it, you can apply for a renovation loan. The money you borrow for renovations will be rolled into your mortgage.
With a balloon mortgage, you’ll make monthly payments as you would for any other type of mortgage for the first five years or so. At the end of that initial payment period, you’ll pay off the total amount you still owe in one lump sum.
Balloon mortgages come with low interest rates, but they’re risky. You might like a balloon mortgage if you expect to move out of your home or refinance before the initial payment period ends. This way, you’ll benefit from the low rate without paying a ton of money all at once later.
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You also may prefer a balloon mortgage if you expect to receive a lot of money in the time between getting the mortgage and paying off the total amount. But this mindset can be dangerous, especially if the money you were expecting doesn’t come through.
Balloon mortgages are risky for both the buyer and lender, so finding a lender that offers one may be difficult.
With an interest-only mortgage, you borrow money as you would with any other type of mortgage, and you make monthly payments. But you only pay off the interest charged by the lender, not the principal (the amount of money you borrow).
Interest-only mortgages have a set period, such as ten years, where you’ll make interest-only payments. Once that period is up, you’ll start paying both principal and interest.
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Some people like this type of mortgage for the low monthly payments. But interest-only mortgages typically have adjustable interest rates, so your rate will fluctuate from year to year. You also won’t build equity in your home, because you won’t be paying down the principal.
Each lender sets its own eligibility requirements for interest-only mortgages, but you’ll likely need a higher credit score, lower debt-to-income ratio, and bigger down payment than you would for a conforming mortgage.
A piggyback loan involves taking out two mortgages, one large and one small. The smaller mortgage “piggybacks” on the larger one. The primary loan is a conventional mortgage. The other is a home equity loan or home equity line of credit.
There are several types of piggyback loans, but an 80-10-10 loan is probably the most common. The first mortgage is for 80% of the purchase price, the second is for 10%, and you provide 10% cash for the down payment. By combining the second mortgage and the money you already have saved for the down payment, you’ll have 20% total to put down. This way, you don’t have to pay for private mortgage insurance.
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A reverse mortgage is a type of home loan for people age 62 or older. Unlike most of the other mortgages on our list, a reverse mortgage isn’t the first mortgage you’ll take out on your home. It’s for people who have gained equity in their home since originally buying it, and likely have paid off their mortgage already.
A forward mortgage — which you probably think of as a regular mortgage — is a type of loan you’d use to buy a home. You make monthly payments to the lender until the home is paid off, and over time, your debt decreases.
A reverse mortgage, on the other hand, is used after you’ve already bought the home. The lender pays you, and the money comes out of the equity you’ve acquired in the house. Over time, your debt increases.
When you eventually sell the home (whether you’re living or dead), the proceeds go to the lender to pay off your debt from the reverse mortgage. Any additional money from the sale will go to you if you’re living, or to your estate if you’re dead.
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If your heirs want to keep the property, then they can pay off the reverse mortgage themselves.
When you refinance your home, you replace your initial mortgage with a new one. There are multiple potential benefits to refinancing: locking in a lower mortgage refinance rate, making lower monthly payments, or canceling private mortgage insurance are just a few.
Because you’re just applying for a new mortgage, much of the process will be the same as it was the first time around. The lender will still look at your credit score and debt-to-income ratio. But instead of determining your interest rate by looking at your down payment, the lender will consider how much equity you’ve accumulated in your home.
By far, conventional mortgages are the most popular mortgage type. In 2022, lenders originated more than 4.1 million conventional loans, according to Home Mortgage Disclosure Act data. By contrast, there were over 1.3 million nonconventional mortgage originations in 2022, including all FHA, VA, and USDA mortgages.
VA mortgages often have the lowest interest rates, though FHA interest rates are also relatively low and occasionally dip below average VA mortgage rates. However, if you have a great credit score, a low debt-to-income ratio, and a large down payment, you may be offered a better rate on a conventional mortgage.
Generally, an FHA mortgage would probably be considered the “easiest” mortgage to get, but you’ll still need to meet certain criteria if you want to qualify. FHA mortgages are geared toward those with lower incomes or rocky credit histories, so if you aren’t able to qualify for a conventional mortgage, you might want to see about getting approved for an FHA mortgage.
Source: businessinsider.com
For first-time buyers — or anyone facing financial hurdles — getting an FHA loan can help make homeownership a reality. With insurance from the Federal Housing Administration, lenders can afford to offer loans with a lower down payment, lower closing costs, and less restrictive qualifying credit requirements.
But can you refinance an FHA loan? Yes, FHA loans are available for those looking to refinance an existing mortgage rather than take out a new one — whether or not that existing mortgage is itself an FHA loan. However, there are a variety of different ways to go about refinancing an FHA loan, and which is right for you will depend on your circumstances. Here’s what you need to know.
Like any FHA loan, FHA refinancing loans are insured by the FHA — and therefore available with easier qualifying requirements and lower costs than other types of conventional loans may be. Refinancing your mortgage with an FHA refinance loan could help you save money on interest over time by scoring a lower rate, lowering your monthly payments, or even accessing cash by leveraging your home’s equity. And yes, you can refinance an FHA loan, or another type of existing home loan with an FHA refinancing loan. However, the specific FHA refinance requirements vary depending on your circumstances.
There are four main options when it comes to FHA loan refinancing: Simple refinancing, Streamline refinancing, cash-out refinancing, and 203(k) refinancing. Which is right for you will depend on what kind of loan you have — and why you’re refinancing in the first place.
FHA Simple refinancing is for those whose original home loan is an FHA loan. With an FHA Simple refinance, you’ll simply — as the name implies — refinance your home, using a new FHA loan to pay off the existing one, ideally with a lower monthly payment or interest rate to make it worth your while. You may also be able to switch between fixed and adjustable interest rates.
Unlike some other types of FHA refinancing, you won’t be able to access any cash using this type of refinance, so it’s not a viable option for homeowners attempting to leverage home equity to pay for other expenses. In addition, it has slightly stricter qualification requirements than FHA Streamline refinancing, which requires less credit documentation and underwriting. Although credit score requirements vary by lender, most FHA Simple refinance programs require a minimum credit score of 580.
The FHA Streamline refinancing option also follows the logic of its name: The underwriting and qualification process is less intense than other types of FHA refinancing. In addition, unlike the FHA Simple refinance option, a home appraisal is not required. You can also take out up to $500 in cash against your home equity with an FHA Streamline refinance loan.
To qualify for FHA Streamline refinancing, your original home loan will also need to be FHA insured, and payments must not be delinquent. The FHA also requires that the new loan result in a financial benefit for the borrower. Of course, you wouldn’t be going through the process and expense of refinancing if you had nothing to gain in the bargain.
FHA cash-out refinancing allows borrowers to leverage their home equity to take out cash that can be used for any purpose. To make this work, a new, larger loan is taken out, which is used to refinance the existing home loan — which need not be FHA insured — as well as to provide cash value.
Using an FHA cash-out refinance loan, homeowners may be able to lower their payments or interest rates while also accessing lump-sum cash that can be used for just about any purpose under the sun. Again, however, the underwriting and qualification process for FHA cash-out refinance loans may be more intense than Streamline loans — though a cash-out refi is still accessible to most borrowers with a credit score of 580 or higher and a debt-to-income ratio (DTI) of 43% or less.
Finally, the FHA 203(k) loan, also known as rehabilitation loan, allows homeowners to take out money for the purpose of restoring, rehabilitating, or repairing their home along with purchasing it. FHA 203(k) loans can be used for an original purchase or a refinance, and homeowners with a non-FHA loan can apply for 203(k) refinancing, and may find FHA-insured rates are lower than those of other home improvement loans.
💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).
Why choose to refinance with an FHA loan rather than a conventional one? Or vice versa? There are pros and cons to consider either way you go. For instance, although FHA refinance loans tend to come with more accessible qualification requirements, some types are only available for those with existing FHA loans — and all of them require a mortgage insurance premium (MIP). The important thing is to consider all your options so you can make an informed decision. Let’s take a closer look.
While there are many benefits to refinancing with an FHA loan, there are some drawbacks to consider, too.
Pros of refinancing with an FHA loan:
• Lower interest rates and down payments than some conventional refinancing options
• Easier qualification process
• Different options available, including cash-out options
Cons of refinancing with an FHA loan:
• MIP (mortgage insurance premium) required on all FHA loans; conventional refinance loans will not require mortgage insurance if you’ve paid off at least 20% of your home’s value.
• Some types of FHA refinance loans are only available to those with existing FHA home loans.
In addition to the pros and cons of FHA loan refinancing, there are also differences in the requirements and benefits for FHA versus conventional home refinancing loans. For instance, in most cases, FHA loans require a minimum credit score of just 580, whereas conventional loans might have a minimum credit score starting at 620 or higher.
And while FHA loans often come with lower interest rates, they always come with a mortgage insurance requirement — whereas conventional loans may not require private mortgage insurance (PMI), if you already own at least 20% of your home’s equity.
Finally, FHA refinancing loan options may be somewhat limited, depending on your existing home loan and your motivations for refinancing. Some types of FHA refinancing loans are only available to homeowners who already have an FHA-insured mortgage, which may make them inaccessible to other borrowers.
So, what does it take to secure an FHA home loan? While requirements vary by lender, here are some basic rules of thumb:
As mentioned above, certain types of FHA refinance loans are only available to those who already have an FHA-insured mortgage loan. In addition, only FHA loans that are not delinquent — i.e., you’re up to date on your payments — may qualify for refinancing.
While FHA-insured loans tend to have lower minimum credit scores than conventional refinance loans, lenders do still have a minimum. In most cases, it’s 580—though specifics may vary by lender.
A home’s loan-to-value (LTV) ratio refers to what percentage of the home’s current market value you’re taking out a loan for. Ideally, those who are refinancing their homes have a lower loan-to-value ratio — meaning they owe less of their home’s total value than they did when it was first purchased. Still, the LTV is one factor lenders look at when qualifying borrowers for an FHA refinance loan; the lower your LTV, the better.
Lenders have a vested interest in making sure you’ll be able to repay your loan, so a lender will verify your employment situation and income before qualifying you for a new loan, whether you’re taking out an original mortgage or refinancing.
Your debt-to-income, or DTI, ratio refers to the proportion of your available income each month that goes toward existing debts. While FHA loans have a higher maximum DTI than other types — borrowers with DTIs as high as 57% may still qualify — some lenders may choose not to qualify borrowers with a DTI of 43% or more.
💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.
For the FHA’s Streamline refinance program, certain specific requirements apply, including:
• The existing mortgage must also be FHA-insured.
• The refinance must result in a “net tangible benefit” to the borrower.
• Only up to $500 may be taken out of the loan in cash.
• In most cases, investment properties are ineligible.
In order to qualify for an FHA cash-out refinance, you’ll need:
• To have lived in your home for at least 12 months
• To own at least 20% of your home’s equity
• A minimum credit score of 580
• A debt-to-income (DTI) ratio of 43% or lower
What are the specific benefits of refinancing with an FHA loan? Here are just a few of the reasons people choose to take this route when refinancing a mortgage.
For most homeowners, the primary motivator for refinancing is to save money — either over the long term, by scoring a lower interest rate, or on a monthly basis by choosing a loan with a lower minimum monthly payment. In some instances, you may be able to achieve both goals with the same refinancing loan, particularly if your credit history has appreciably improved since you originally took out your mortgage.
Some borrowers refinance to give themselves more time to pay off their home loan with a longer term — or to accelerate their repayment process with a shorter term.
For most consumers, a home is the single most valuable asset they’ll ever purchase. Being able to access the value of that equity with a cash-out refinance option is another important motivator for those seeking to refinance, and FHA refinance loans can make that goal a reality whether or not your original loan is FHA-insured.
For borrowers looking to avoid private mortgage insurance (PMI), take heed: Although FHA loans don’t require PMI, they do require mortgage insurance. The FHA-loan version is called MIP (mortgage insurance premium), and is required on all FHA loans.
For some borrowers, refinancing can improve overall financial stability by achieving any of the goals listed above — for example, freeing up more discretionary income each month with a lower monthly payment.
Seriously considering an FHA refinance loan? Here are the steps it takes to turn your ideation into reality.
The first step in shopping for a new loan should always be to review your existing mortgage. After all, that’s the best way to understand what factors would make a new mortgage more favorable for your finances. If your original loan is not FHA-insured, note that you may not qualify for certain types of FHA refinancing loans.
Next up: The actual shopping part. In order to ensure you get the best deal available, it’s worth asking several lenders for refinancing quotes, including a full amortization schedule. That way, you’ll understand exactly how much money you stand to save — or not — by choosing a specific lender.
Once you’ve settled on a lender, you’ll submit your application, including any required documentation (such as ID and income verification, including bank statements and tax forms). In most cases, this process can be done entirely online.
As part of most refinancing processes, you’ll need to have your home appraised so the lender understands its current market value — and can use that value to calculate important aspects of your application, like the LTV. An underwriter will assess your holistic financial profile to determine whether or not you qualify for the refinance loan.
Finally, if the terms are favorable and you are approved, you’ll close the refinance loan. The new lender will repay your existing loan, and your new payments will be directed toward this new lender, using the new terms you’ve agreed to.
Want to get the very best out of your FHA loan refinancing process? Here are some tips to help you get the most bang for your buck.
Refinancing isn’t right for everyone. In fact, in most cases, the FHA won’t even allow you to refinance with one of its loans unless it results in a net financial benefit for you, the borrower. You can take a few first steps to determine whether or not it will help before you ever get a lender involved.
Using a mortgage calculator, you can determine how much a lower interest rate would save you over time or how much a longer loan term would reduce your monthly payment. Keep in mind that refinancing isn’t free, so unless the savings are substantial enough to eclipse your closing costs, it may make more financial sense to keep your original loan.
Loans come with a variety of closing costs and fees, such as application fees, the cost of the appraisal, attorney fees, and more. These costs can add up to about 6% of your overall loan value, and though some of them may be able to be financed as part of your loan, they still have the potential to eat into any savings your refinancing loan might offer.
When it comes to refinancing your mortgage, timing matters. For example, if interest rates are higher than when you took out your original loan, the timing might not be right. The same could be said if you’re planning on moving out of your home in the near future, in which case, you may not have enough time in the home left to break even on your closing costs.
Here are some common errors borrowers make when undergoing the FHA loan refinancing process.
Although FHA loans come with more accessible eligibility criteria than many conventional loans, they do still have standards. If your credit score is less than 580 or your payments are delinquent, you’re unlikely to qualify for an FHA refinancing loan.
As mentioned, closing costs and fees can really add up — so if you don’t take them into account when you’re considering a refinance, you may wind up with an unpleasant case of sticker shock.
Refinancing your home, when done best, is all about saving money over time, which means having enough time for those savings to accrue. If you’re planning on selling your house and moving in three to five years, refinancing may actually end up being more expensive than staying with a higher-rate original loan. Additionally, if you’re refinancing primarily to lower your monthly payment and make ends easier to meet, don’t forget to keep your long-term finances in mind. It may not be worth the extra monthly money to pay thousands more in interest overall.
FHA refinance loans are available for homeowners whose original loans are FHA-insured—as well as for those who have a conventional original mortgage. FHA loan requirements vary depending on which type of loan you’re considering, and may not be right for everyone. But if you can meet the qualifications and derive a solid financial benefit from an FHA refinance, it may be worthwhile to embark on the process.
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.
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Yes — but only if you qualify for an FHA Streamline loan, which requires your original loan also be an FHA-insured loan.
Even if your home’s value has decreased, you may still be eligible for a refinance loan through the FHA Streamline program. It all depends on how much you owe on your home and your other qualifying factors. (Keep in mind, too, that this program requires that your original home loan also be an FHA one.)
No. All FHA loan refinance programs require borrowers to be up-to-date on their loan payments, with most including provisions that there must not have been any payments more than 30 days late within the last six months.
Photo credit: iStock/gremlin
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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
*SoFi requires Private Mortgage Insurance (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. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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.
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Source: sofi.com
If sky-high house prices and mortgage rates have made you hit pause on your home buying plans, you may want to think again, or so says personal finance personality Dave Ramsey.
The average 30-year fixed mortgage rate increased to 7.79% last week — up from the prior week’s average of 7.63% — and hitting (another) highest level since 2000. At the same time, house prices continue to rise, primarily due to low inventory.
“[House] prices aren’t going to go anywhere but up, even with interest rates going up,” Ramsey said on a recent episode of “FOX & Friends.”
“The housing market is just stalled and, man, we’ve got Bloody Sunday with the student loans kicking back in [as of Oct. 1] and Christmas is bearing down on us so it is time to get on a budget and get on a plan.”
With that in mind, Ramsey says you shouldn’t sit back and wait for conditions to improve — reminding potential buyers that you can always refinance your home loan to get a better rate down the road. In fact, if you meet two criteria — “you’re out of debt and you’ve got your emergency fund” — Ramsey suggests going for it now.
Here’s how you can hit Ramsey’s critical financial conditions to buy your dream home — plus some other ways to invest in real estate while dodging housing market headwinds.
Ramsey was joined on “FOX & Friends” by his “The Ramsey Show” co-host George Kamel, who backed Ramsey’s bold housing call and mirrored his advice around becoming debt free.
“If you’re a millennial or you’re Gen Z, you’re feeling hopeless right now, you’re feeling cynical,” says Kamel. “Your parents are saying: ‘You’re throwing away money on rent, get a house, get a house, get a house’ — and you’re broke.
“You’ve got to have some patience because rent and mortgages are not apples to apples,” Kamel said, adding buying a home also comes with taxes and insurance — and in some cases, homeowners’ association fees and private mortgage insurance. All those expenses can add up, which is why the Ramsey camp argues it’s important to ensure you’re debt free with an emergency fund established before making an offer.
There are many different ways to handle debt, but in his well-known seven “baby steps” to financial success, Ramsey advocates for the snowball method. With this strategy, you pay off the smallest debt (or account with the lowest balance) first and make only minimum payments on all of your other outstanding debts. Once you’ve paid off your smallest debt, you move on to the next smallest debt, and so on.
But how much interest you end up paying on your debt is an important factor. If you’ve got a pile of high-interest debt on your credit card or your car loan, you could fall behind on your payments, be subject to financial penalties and your balance can quickly spiral out of control, making it even harder to get debt free. For you, it might make more sense to use the “avalanche method” of debt repayment, where you tackle the loan with the highest interest rate first and go from there.
Regardless, to succeed in this journey, you’ll need to stick to a budget that breaks down your monthly income into necessities, wants, savings and debt repayments.
Read more: Thanks to Jeff Bezos, you can now use $100 to cash in on prime real estate — without the headache of being a landlord. Here’s how
Ramsey believes every adult American should have at least $1,000 set aside to cover life’s inevitable surprises, like you’re suddenly slapped with a big medical bill or your car breaks down. That back-up fund will stop you from falling into financial distress.
But that’s just meant to get you started. Once you’ve paid down your debts, Ramsey suggests revisiting your emergency fund to set aside three to six months worth of living expenses — including your rent or mortgage, other loan repayments, grocery and energy bills and other regular expenditures — to cover larger surprises like a job layoff or a long hospital stay.
Wherever you are on your savings journey, you might consider stashing some cash in a high-yield savings account (HYSA). With an HYSA, you could earn more interest on your money and benefit from greater compound growth than you would with a traditional savings or checking account.
You may also want to consider using other high-yield savings products like money market deposit accounts (MMDA) or a certificate of deposit (CD) to make the most of the current high interest rates. But remember that banks and credit unions will often charge an early withdrawal penalty for taking money out of a CD before its maturity date.
Once you’ve hit those two financial milestones — paying down your debt and building an emergency fund — then Ramsey says you should go ahead and buy a house (if that’s what you want to do). But if you’re unconvinced, there are other ways to get a foothold in the real estate market without dealing with the extensive costs of homeownership.
For instance, you may want to consider putting your money in a real estate investment trust (REIT), which are publicly-traded companies that collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.
There are also online crowdfunding platforms that allow everyday investors to pool their money to purchase property (or a share of property) as a group.
If you don’t want to make investment decisions on your own, some new online platforms can even help you invest in diversified real estate portfolios that will maximize your returns while keeping your fees low.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source: finance.yahoo.com
With mortgage rates higher than they have been in over two decades, homebuyers may be looking for alternative ways to finance their home.
An interest-only mortgage can free up some front-end cash, allowing a buyer to cheaply purchase otherwise expensive property, but it carries long-term risks that borrowers should seriously consider.
Here, CNBC Select shares everything you need to know about interest-only mortgages, including how they work and their benefits and risks.
In a traditional loan, borrowers gradually repay the principal (the money borrowed) and the interest (the amount it costs to borrow that money).
This is slightly different in an interest-only mortgage. After a borrower takes out an interest-only loan, they are allotted an introductory grace period, during which they do not have to make payments on the principal of the loan. Instead, they only make interest payments throughout that set period.
Borrowers must then repay the loan in full, whether by lump sum or gradual monthly payments when that set period is over.
Interest-only mortgages are primarily designed for borrowers who stand to make a profit from their loan-funded purchase. For example, if you flip houses, you might take out an interest-only loan to purchase a fixer-upper, since you plan to sell the house at a higher price later. By doing so, you postpone your principal payments until you have sold the renovated house, freeing up front-end cash to make said renovations.
Several of CNBC Select’s top-ranked mortgage lenders offer interest-only mortgages, including Chase Bank and PNC Bank.
CNBC Select found PNC Bank to be the best lender for flexible loan options. PNC Bank offers interest-only mortgages to eligible borrowers with a minimum credit score of 620 and a minimum down payment of 3%. Further, the national lender offers a plethora of tailored mortgage options as well as online and in-person application processes.
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, HELOCs, Community Loan and Medical Professional Loan
10 – 30 years
0% if moving forward with a USDA loan
Terms apply.
Meanwhile, Chase Bank stood out for its flexible down payment options. Similar to most lenders, Chase Bank offers interest-only mortgages to eligible borrowers with a minimum credit score of 620 and a minimum down payment of 3%. Further, the company offers a wide range of mortgage terms and a number of educational resources to support their borrowers through the home-buying process.
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Conventional loans, FHA loans, VA loans, DreaMaker℠ loans and Jumbo loans
10 – 30 years
3% if moving forward with a DreaMaker℠ loan
Terms apply.
To calculate the payment you’ll make on an interest-only loan, multiply the loan balance by the annual interest rate, then divide by 12.
For example, say you borrow $100,000 at a 5% interest rate. Your calculation would look like this: (100,000 x .05)/12 = 416.67. This means that your interest-only payment would be $416.78 per month.
Payments will then increase to those of a typical, amortized loan, covering both principal and interest. Because your new monthly payment amount is based on the remaining principal, the payments should marginally change as you pay off the mortgage.
The most obvious benefit of an interest-only mortgage is that monthly payments are initially considerably lower than of typical loans. These loans allow the borrower to make larger purchases that they would otherwise only be able to afford a few years down. Thus, interest-only loans might be a wise investment if you are expecting a significant income boost in the coming months and years.
Interest-only mortgages typically turn into an adjustable-rate mortgage (ARM) once principal payments begin, and borrowers can potentially benefit from a lower rate than the fixed-rate average.
But in the same vein, that adjustable-rate mortgage might be significantly higher than a fixed-rate traditional mortgage taken out initially, and this is one among many risks associated with interest-only mortgages.
Though a borrower’s monthly payments are initially temporarily lower than those of a traditional loan, there are several considerable risks.
First, if you take out an interest-only mortgage, you will not gain any equity in your home (beyond the equity of your down payment) until you begin principal payments.
Home equity is astoundingly important for your financial future. Equity is the money owed to you should you sell or refinance your home in the future. So, if you take out an interest-only mortgage with a five-year grace period, and you move out in five years, you will likely make no money from the sale of your home (unless the market has boomed exponentially since closing). Your interest-only payments will have realistically acted similarly to rent payments.
Alternatively, if the housing market goes down during your interest-only period and you try to sell your house without paying off any of your principal, you may actually owe the bank money at the time of sale.
Homeowners sometimes take out a home equity line of credit to access cash value tied up in their home’s mortgage. If you purchase your home with an interest-only mortgage, there will be less equity, or less cash, to access if you must take out a second mortgage.
Second, your monthly payments will be relatively high once you begin paying back the principal. This will cause a considerable shift in your monthly budget. Unless you are incredibly financially disciplined, you might not be able to afford these payments. Some interest-only mortgages even require that you pay off the loan in a lump sum when the introductory grace period ends.
Read the terms of an interest-only loan closely and make a sound plan for the duration of the loan. Otherwise, you might end up stuck in financial mud.
One way that buyers can get the keys to a new home without locking in a fixed rate for 30 years is by taking out an adjustable-rate mortgage (ARM), during which interest rates fluctuate with the market through the duration of your loan. Because rates are so high right now, this can save you money in home loan interest down the road when interest rates cool.
Interest-only mortgages typically require a credit score of 670 or above.
A home equity line of credit, or HELOC, is essentially a second mortgage that liquidates (usually up to 85% of your home’s equity), or the amount that you have paid toward your principal home loan. A HELOC is more commonly known as a second mortgage. Taking out a HELOC will usually cost you between 2% and 5% of the loan amount.
An interest-only mortgage is smart for the forward-thinking borrower who has a sound plan to make future payments. Otherwise, it makes more sense to pursue a traditional mortgage, avoiding the temptation to bite off more than your wallet can chew.
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A flexible expense is a non-essential item in your budget. Because it’s not a must-have, you can change the expense in question to help save money. For example, while the newest smartphone (with all kinds of amazing camera functions) might be enticing, purchasing it could add strain to your budget. Instead, you could continue using the phone you bought last year and not increase that expense. In this way, managing flexible expenses can be key to making a budget that helps you reach your financial goals.
Flexible expenses span many categories, from dining out to travel to self-care. These expenses are negotiable, meaning you can save money by reducing or changing how often you spend on these items and services.
Here’s how to distinguish flexible expenses from inflexible expenses and how to reduce your monthly costs on them.
The definition of a flexible expense is an item in your budget that you can modify or adjust as needed. These are different from necessities with fixed costs, such as rent and health insurance.
In addition, it’s worth noting that a fluctuating bill is not necessarily a flexible expense. For instance, while you might turn the thermostat down a degree or two to be thrifty or the price of fuel might shift, heating your home during cold months isn’t a negotiable expense.
Flexible expenses are those you change to make room in your budget. These may at times be commonly forgotten monthly expenses, such as buying birthday gifts or loading up on toys for your pet, but they aren’t essential for life.
Therefore, you can change them if you want. Perhaps you realize something (boredom? FOMO?) has been a cause of overspending in a specific area, or maybe you want to start saving money for a financial goal, like the down payment on a house.
Flexible expenses are daily or monthly expenses you can change or eliminate. Here are examples of items in your budget that have wiggle room:
• Vacations. You might decide against saving for a vacation in Mexico and instead have a staycation to free up some funds.
• Beauty treatments. Having your hair or nails done is an expense you could eliminate or pay for less frequently.
• Electronics. A new phone or tablet can be a nice upgrade, but, if the one you bought three years ago is in working order, replacing it is a flexible expense.
• Food. This is a good example of an expense that can be either a flexible or inflexible expense. Everyone has to eat, that’s a fact. But planning meals and saving money on groceries when you shop are examples of how you might manage the inflexible cost of feeding yourself. There is a range of how much you might pay, but you will have to pay something.
However, when it comes to how often you eat out, get fancy lattes on the go, and meet friends for drinks, those are flexible expenses you can cut (even entirely) to save money. Those expenses are likely to vary too; for instance, you might dine out more around holidays.
• Entertainment. How much you spend on streaming services and cable television isn’t a necessary expense. It’s a flexible one. Yes, this kind of entertainment can be fun and relaxing, but you could cut cable or limit yourself to one or two streaming services.
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When you make a budget, inflexible expenses are the ones that are permanent and vital to daily life. For example, your mortgage, credit card minimum payments, and car loan costs are inflexible expenses. But, of course, they are flexible at a certain point. For instance, you could refinance your home to lower your mortgage payment or pay off a debt to get rid of it.
However, these require significant financial shifts and are more challenging to adjust to than your flexible expenses. As mentioned above, flexible expenses can reflect the wants vs. needs in life, or your discretionary spending. Flexible expenses can include dining out, deciding to upgrade your car or electronics, taking a vacation, purchasing gifts for others, paying to redecorate your home, joining a gym or yoga studio, and the like.
These are things many of us spend money on, but how much you spend and how often is under your control.
Taking control of your flexible expenses can mean making a budget to manage your money and prevent overspending. One approach to take is the 50/30/20 budget rule. This popular system involves designating 50% of your income for essentials, such as housing and transportation, 30% for nonessential expenses, and saving the remaining 20%. Your flexible expenses will go into the 30% portion of the budget.
For example, say your monthly take-home pay is $5,000. Half your income ($2,500) goes towards your needs, and 30% ($1,500) is for flexible expenses. The remaining $1,000 gets put towards savings. So, your job is to make your non-essential expenses fit into the $1,500 portion of your budget.
That said, the 50/30/20 rule might not work for you, especially if more than half your income goes toward essentials. Not to worry: You can approach flexible expenses from another angle. Instead, you can take your bank and credit card statements from the past three months, identify the flexible expenses, and decide which ones you can cut from your budget or reduce. For instance, you might realize you’re spending $75 at coffee shops every month and decide to make your own coffee every morning.
You can pay for flexible expenses by opening a checking account and using funds in it for those charges. For instance, you might have your cable bill linked to your bank account to make an automatic payment every month. You might tap a linked debit card when you shop for, say, some new shoes.
A credit card with rewards could also be a good way to pay for flexible expenses. Getting cash back on every purchase can be a good perk when paying for flexible expenses. For example, using specific credit cards for such major expenses as flights and hotels during a vacation can provide considerable rewards. However, you’ll want to be wary of carrying too much of a balance on your credit card since that’s typically high-interest debt that can be hard to pay off.
Also worth noting: If you have enough money in an emergency fund, that could be useful for specific flexible expenses, such as unexpected bills. Not things like taking a long weekend away, but perhaps paying for a car repair bill that you didn’t see coming.
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A flexible expense is one you can usually change at will to fit your budget or an expense that can pop up without warning. These irregular expenses usually reflect your spending habits, such as how often you’ve dined out or treated yourself to some new clothes or electronics. Recognizing and wrangling these flexible expenses can help you take control of your finances. Also, keeping some cash in an interest-bearing bank account can be one way to afford fluctuations in these expenses.
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Because rent is a consistent monthly cost, it isn’t a flexible expense. This bill doesn’t fluctuate, and you’re usually only able to change it by moving somewhere else.
You can budget for flexible expenses with the 50/30/20 rule, where 50% of your income is for inflexible expenses and 30% of your income is for flexible expenses. The remaining 20% is for saving. This 30% provides a boundary in which you must fit paying for the nonessentials, like entertainment and travel.
Flexible expense examples include a vacation and a meal out. Both are flexible expenses because they are nonessential expenses. You dictate the cost because you choose where you’ll go and what luxuries, treats, and events you’ll pay to partake in.
Flexible expenses regularly change based on your spending habits. For example, your choices regarding food and entertainment drive how much you’ll spend in these areas. You can change these habits weekly or monthly to adjust how much you’re spending, unlike rent or a car note.
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SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..
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.
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Source: sofi.com