Home equity lending in the United States is on the rise. While reverse mortgage volume has yet to benefit from that spiked interest, consumer curiosity about Home Equity Lines of Credit (HELOCs) appears to be translating into significant volume gains for that product, according to Bankrate.
“Online searches for ‘HELOC’ rose 305 percent this year, reaching an all-time high in July 2023, according to a Google traffic analysis by real estate platform RubyHome,” the Bankrate article said.
But that curiosity is also translating into volume. Based on data released by both ATTOM Data Solutions and the Mortgage Bankers Association (MBA) this past summer, “lenders originated more than 284,000 HELOCs in the second quarter of the year,” up from just under 252,000 in the first three months of 2023, while debt from home equity loans is projected to increase by more than 11% by the end of this year.
Part of this is likely due to a spike in home prices, which has been observed in the market since the beginning of the COVID-19 pandemic.
“The median home sales price stood at $394,300 in September 2023, according to the National Association of Realtors,” the article said. “While down from the record high of $413,800 in June 2022, it still represents a 2.8% increase year-over-year.”
Home equity-related debt also appears to be a growing segment of personal debt carried by homeowners. A survey for Creditcards.com showed that 7% of Americans hold debt in the form of home equity loans and/or lines of credit, but homeowners are also using equity as a source of extra cash to be able to further invest in their homes.
“Many people are tapping into their home equity to spruce up their homes, and better equip them to meet their family’s needs,” the article explained. “Borrowing money to upgrade their current home makes a lot more sense than trying to buy into a new one nowadays.”
That rise in home price appreciation, in addition to increasing levels of tappable equity for homeowners, also translates into a challenging housing market for prospective buyers, which may give some insight into the motives related to additional equity-based debt.
And why isn’t the amount the same at every community?
There are a few variables that determine that number.
What is the average security deposit for an apartment?
On average, the security deposit is equal to one month’s rent. So, you want to keep this number in mind when calculating how much money you’ll need to give your landlord at move-in. Many landlords require the security deposit and first month’s rent (and sometimes last month’s rent too) before they’ll give you keys.
Landlords set security deposits to protect them from damage and non-payment. Security deposits are set based on four important factors: State law, cost of monthly rent, included amenities (elevator, W/D in unit, private parking, furnished vs. unfurnished, doorman on site, new renovations) and market competition. When anticipating how much a security deposit might be, consider those factors when making an estimate. State law may limit how much a landlord can set a security deposit for, so it is always a good idea to check into your local legislation if you feel the security deposit set was too high.
Coming up with this amount of money may seem overwhelming. But, remember that if you’re in an apartment now, and you haven’t damaged it, you might a security deposit coming back to you. You should receive it within 30 days after you move out. (If you’ve earned its return, but you don’t receive it within 30 days, contact the office).
Where can I find the security deposit amount for a unit?
The amount owed for security deposit should be on the application, and must be on the lease. Before deciding on an apartment, make sure you have the dollar amount of the security deposit in writing.
See also: What you could need for the application process
How much can a landlord charge for a security deposit?
That’s up to the landlord. The average is one month’s rent, but some will charge up to three month’s rent. Most states have a limit to what can be charged, but there are some states that have no maximum.
If everyone else in the area is charging one month’s rent for security deposit, the landlord may want to do the same, to lease the unit. If you’ve seen evidence of that, take it with you in order to negotiate.
Why would a landlord charge more than one month rent for the security deposit?
Some property management companies have a policy that the deposit is 1.5 or two times the monthly rent. However, another reason your deposit may be quoted as higher is due to your less-than-perfect credit history. The landlord may want to rent to you but must offset the risk by charging you a higher security deposit.
Can my security deposit be used as rent?
Your security deposit is not meant to be used to pay your last month’s rent. When the time comes for you to move, you cannot ask your landlord to use your deposit to cover full or prorated rent. However, if you paid first and last month’s rent in lieu of – or in addition to – a security deposit, then you have, in fact, already paid for your last month, and shouldn’t be required to pay for your final month at the time, since you already did so up front.
Pet deposits
If your landlord allows your pet to move in, there will be an additional pet deposit due before the landlord gives you the keys. If your dog or cat is a service or therapy animal, the pet deposit should be waived with a doctor’s note. Bear in mind, you are still financially responsible for any damage your service or therapy animal does to the apartment.
Pet deposits are either refundable or non-refundable. If your landlord doesn’t charge a pet deposit, it may be because they charge monthly pet rent. This can be anywhere from $10 – $30 depending on the type of property and location. Some landlords will charge pet rent in addition to a security deposit, so make sure you ask about the pet charges up front.
When is the security deposit less than one month’s rent?
Some low-income tax credit properties have lower security deposits for those with good credit. In a market-rate complex, a lower security deposit might be offered to incentivize more people to move in.
Paying the security deposit and the first (and sometimes last) month’s rent can be tough, but it’s part of moving. Just remember, you do get your deposit back if you leave your unit in good condition when you move out. It’s part of the business. Once you get that part out of way you can focus on making your new apartment feel like home.
How do I get my security deposit back?
Getting a security deposit back can be difficult when dealing with some leasing companies. Here’s the best way to ensure you will get most – or all – of your security deposit back:
Take pictures and make notes during initial walk-through. Make sure you agree to everything that is listed on the walk-through sheet before you sign it.
Repair any and all damage that is your responsibility before you move out.
Read your lease carefully and make sure to follow all of the stipulations for moving out. This may include having carpets professionally cleaned and providing a receipt upon your move-out. Make sure you don’t miss these little, and often hidden, stipulations. It could end up costing you a lot more money in the end, as landlords often up-charge for these services if they have to do it themselves.
Follow your move-out process to a tee, including writing and delivering a proper Notice of Intent to Vacate.
Replace any broken blinds yourself.
Before filling any nail holes, make sure that your landlord intends to repaint after you leave. Landlords are supposed to do this, but some don’t. Those filled nail holes could cost you in the end.
Take pictures and document everything you do. Keep receipts to prove that you left your old place in tip-top shape, minus regular wear and tear.
Bekah Steenbock is a freelance writer with a background in real estate and business growth. She is a native Austinite, but has called Seattle, Mankato,
Milwaukee, Las Vegas and Atlanta home. Bekah, her husband and their three children love exploring the outdoors in their spare time.
Whether you’re selling your home to begin a new adventure or refinancing your existing home, getting an appraisal with the value you want is an important hurdle to clear. You may feel that the appraisal process is out of your control, but there are many easy and inexpensive ways to get both yourself and your home ready.
We put together a checklist of our top tips below. But first, let’s quickly cover the basics of home appraisals.
What Is a Home Appraisal and Why Is It Important?
A home appraisal is an unbiased report on the value of your home performed by a trained and state-licensed individual. Appraisals are an essential part of the home financing process, ensuring the homebuyer, seller and mortgage lender each have an impartial, consistent and accurate assessment of the value of the property under consideration.
The lender is responsible for ensuring that your home provides adequate collateral for the mortgage. For most loans, the lender obtains a signed and completed appraisal report that accurately reflects the market value, condition and marketability of the property.
It’s the appraiser’s job to provide a factual, unbiased and detailed description of the property and the neighborhood. They must take into account all factors that influence a home’s value when developing the market value opinion in the appraisal report.
Home Appraisal Cost
While home appraisal costs can vary by state and property size, the fee can range between $300 and $1,200. Most fall somewhere around $600-$1,000, with costs based primarily on the geographical area of the home.
How Long Does a Home Appraisal Take?
From start to finish, the home appraisal process usually takes approximately 7-10 days to complete.
The required in-person visit by a home appraiser can take over an hour, depending on the size of your home. However, several other steps are involved in making an unbiased and professional assessment of your home’s value. Your appraiser will research trends, local county records and recently closed comparable homes in your area, known in the industry as “comps.”
Once your appraiser compiles and analyzes all the information and data, they will present a final report of your home’s value.
What Do Home Appraisers Look For?
A home appraiser uses several sources of information to determine a property’s value. As part of the assessment, the appraiser will visit the property in person and review recently completed sales of comparable homes. Common factors examined during home appraisals include:
Property size. In real estate appraisals, size significantly affects the final number. In general, the higher the square footage of a home, the higher its value. An appraiser will also look at the kitchen, number of bedrooms, bathrooms and closets.
Exterior condition. When assigning a value to your property, the appraiser will consider not only the exterior appearance of your home but also its condition. They will check the following:
The condition of the roof, foundation, siding, gutters, chimney and walls, looking for signs of leaks, mold and other safety hazards
Lot size, including front and backyard square footage
Pool, outdoor kitchen, deck, porch and other amenities
Interior condition. Again, this refers not only to the appearance of the interior but also to the working condition of standard household assets such as:
Plumbing
Electrical and HVAC systems
Doors and windows
Light fixtures
Any kitchen appliances to be included in the sale
Attic, basement and foundation. A finished basement or attic may impact a home’s value, but these areas must meet specific requirements to be considered part of the Gross Living Area (GLA). An appraiser will also evaluate your home’s foundation and its condition.
Home improvements and renovations. Tell your appraiser about any work or upgrades you have done to spruce up your home. This can include anything from the central air system you installed 10 years ago to the kitchen flooring and countertops you just renovated (along with the new oven and fridge to match, of course).
What Hurts a Home Appraisal?
If an appraisal is in your future, it’s essential to understand the factors that could negatively impact it, such as the following:
Low-value comps and decreasing neighborhood property values
Poorly maintained interior or exterior
Age of the home
Location, such as a flood zone or busy road
Signs of mold, insect infestation, leaks or other safety concerns
Issues with the home’s systems, such as plumbing, electric or HVAC
Lack of parking
Hazardous construction materials like lead paint or asbestos tile
Outdated or faulty plumbing, electrical and heating systems
Some issues are in your control and some may not be. Whether you choose to address the correctable concerns or not, being aware of crucial appraisal criteria can help you avoid the potential unwelcome surprise of a lower-than-expected home value.
Top 7 Tips Home Appraisal Checklist
How does one best prepare for a home appraisal? We put together a checklist of common (and not-so-common) tips to help you get a high valuation from your appraiser.
1. Do Your Own Appraisal
Imagine that you are the appraiser. Walk around your home’s interior and exterior and really scrutinize it as if you were going to complete the appraisal report yourself. Take note of any obvious damage or deferred maintenance that needs your attention. Leaks, broken systems and damaged surfaces should all go on your list of things to repair.
Thoroughly inspect safety equipment like smoke alarms, carbon monoxide alarms and home security systems. Are they all functioning, or do parts or entire systems need to be replaced? Make a plan to repair these issues and clean up any cosmetic issues that may have occurred as a result.
2. Investigate Comps
Check out recent home sales in your neighborhood. What has the price range been for homes with features and updates similar to yours? The values of these comparable homes should be similar to what your home will appraise for. This information can help you know where to focus your time, efforts and funds.
If you know a neighbor (or real estate agent) who recently sold a home in your area, contact them to find out if there were any appraisal issues or insights that they can share.
If you’re working with a real estate agent, you can request that they collect some comps for you and your appraiser to review. Particularly if your home has unique or uncommon features, your agent may need to get creative while staying within the guidelines for selecting comps.
A quick way to get a rough idea of how much your home is worth is to use a home value estimator calculator. Add some basic information to gauge your home’s current value and view recent home sales in your area.
3. Get Superficial
Clean your house from top to bottom and remove extra clutter. Once you’ve scrubbed and straightened up everything possible, consider making some easy, low-cost cosmetic updates that can have a big impact, like the following:
Paint or touch up existing paint
Hang updated window treatments
Replace worn faucets, doorknobs and cabinet hardware
If you’ve been planning to update your decor after you move, consider bringing in a few of the newer pieces to make the old house look fresh and modern. Downsizing or packing for a long-distance move? Ask your real estate agent if they have staging furnishings you can borrow or recommendations for a service you can use.
4. Make Your Outdoor Areas Truly Great
Now that your home’s interior looks fantastic, it’s time to pay attention to the exterior. Make sure that your landscaping is looking its best by doing the following:
Mow your lawn, trim your trees and bushes
Remove weeds and dead vegetation
Add color with inexpensive, seasonal flowers in the spring, summer or fall, and ensure that snow removal is neat and tidy in the winter
You’ll also want to:
Remove outdoor clutter, like yard tools and stray toys, from everywhere on the property
Consider staging any outdoor living spaces with new furniture or accessories
Power wash your home’s exterior, as well as your driveway and any deck or patio surfaces
Ensure your pool is well-maintained and in safe operating condition
Most of this can be accomplished in a weekend, and the increased curb appeal will be worth it.
Check out expert tips for outdoor home renovations — you may find just the right improvement to increase your value!
5. Be Sure To Share Your Upgrades
Tell your home appraiser about the improvements you’ve made to your home. Inform them of upgrades like the following that will positively impact your appraisal value:
New features that you have added, like a security system
Updated HVAC units
Exterior improvements like siding, gutters or a new roof
High-value room remodels like kitchens and bathrooms
An easy way to make sure that your appraiser remembers all of these improvements is to create and share a short, one-page list detailing each. You should have this list ready in advance and include any applicable permit information.
6. Know Your Neighborhood
Make your appraiser aware of any recent improvements in your overall neighborhood. It’s worth mentioning things like:
New or highly rated schools
Parks
Transportation enhancements
Shopping
Other beneficial amenities
These kinds of changes can add significant value to your home, and if your appraiser is not a local resident, they may not be aware of them. Appraisers are often familiar with the general area, but you probably know your specific neighborhood better than they do.
7. Stay Focused
While you are working your way through the tasks and updates listed above, it’s important to remember not to go overboard and take on too many projects. Invest your time, money and effort only on issues that clearly need attention. If you’re getting an appraisal for a home you’re selling, you most likely already have a buyer who liked your home enough in its current state to make an offer on it. Making unnecessary major changes could end up being a waste of your time and resources.
Your home’s selling price is affected by much more than just the appraisal! Find out how the time of year can increase your sale price.
Although it’s not possible to change your bungalow into a country estate overnight, taking the time to tackle a few strategic projects before your appraisal can help put you in a better position to get the outcome you want. If you’re ready to move or refinance the home you love living in, get a custom mortgage rate quote from Pennymac today. Our Loan Experts can answer your questions and help guide you through the mortgage loan process.
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Refinancing your mortgage can be a smart financial move if you do it the right way. You can tap into your home equity, get a lower interest rate, or even shorten or lengthen the terms of your loan. All of these are great outcomes for you and your wallet.
But here’s something that’s not so great: Picking the wrong mortgage refinance lender.
This one major mistake can potentially cost you tons of money in closing costs, hidden fees, and high interest rates.
You can avoid that by learning just a bit about what to expect throughout the refinance process and how to find the right lender. We’ll walk you through everything you need to know and give you some suggestions for the big decision.
9 Best Mortgage Refinance Lenders of 2023
We’ve compiled a list of the best mortgage refinance companies with the most competitive mortgage rates. Read through our short reviews to understand what kind of mortgage products they offer and how their process works. It’s an excellent resource for narrowing down your list of refinance lenders to consider.
1. loanDepot
loanDepot is a lender that values and earns customer loyalty. This is evident by their refinancing lifetime guarantee. Once you refinance with them the first time, they will waive their lender fees and reimburse your appraisal fee.
It’s also an excellent choice for people who like a person-to-person connection. You can call them at any time to talk directly to a loan officer.
This can be especially helpful for a refinance because there are many reasons for refinancing and many ways to refinance.
After defining your goals, they let you choose from both fixed-rate and adjustable-rate loans. There are other loan types available, such as jumbo and government, or even home equity loans. The minimum credit score is 620.
They are committed to customer satisfaction and back it up with extensive refinance products.
Terms and conditions apply.
Read our full review of loanDepot
2. LendingTree
LendingTree offers a ton of benefits when it comes to refinancing. First, the online process is very easy and can even get you a mortgage rate quote in under three minutes.
LendingTree isn’t a direct lender and instead matches you up with multiple loan offers with mortgage lenders, so you can compare your options.
Here’s why that’s so helpful.
It makes LendingTree’s refinance options much more robust than many other online lenders. For example, you can convert an adjustable-rate mortgage into a fixed rate or refinance your FHA loan or even VA loan.
You can also cash out home equity as part of your refinance or choose from multiple loan terms.
If you’re still in the information-gathering stage of your refinance journey, LendingTree’s website has many valuable resources.
Play around with numbers to check out different scenarios using tools like their refinance calculator and cost estimator.
Read our full review of LendingTree
3. Rocket Mortgage
Another driving force in the online refinance marketplace is Rocket Mortgage, which is part of Quicken Loans.
The application process is straightforward and can be completed entirely online. You can pick your goal for your refinance to help Rocket tailor your loan offers.
You can even link your financials and property information so that you don’t have to gather and upload all the documentation manually. In fact, 98% of financial institutions in the U.S. can be imported for both your bank statements and investment assets.
Rocket Mortgage also allows you not only to browse different options but also customize them. You can choose from a traditional mortgage product, FHA loans, VA loans, USDA loans as well as fixed or adjustable rates. The minimum credit score is 620.
For an exceptional customer service focused experience that’s entirely based online, Rocket Mortgage is certainly worth exploring.
Read our full review of Rocket Mortgage
4. New American Funding
Another direct lender, New American Funding, is a mortgage company that simplifies the online mortgage process. Get started by selecting the type of real estate you want to refinance.
You can choose from:
Single family home
Condo
Townhouse
Multi-unit
Other
You’ll then answer a series of questions about your personal information, including the existing loan amount and your credit scores.
Afterward, you’ll get a quote estimate on the type of refinance loan you could potentially receive. You can also call the 800-number at any time to speak to one of New American Funding’s loan officers.
The average refinance saves their customers about $360 per month. So, they’re definitely worth checking out, especially if your goal is to lower your payment amount.
Read our full review of New American Funding
5. SoFi
SoFi started as a student loan refinance company and has recently branched out to mortgage refinancing as well. One of the key advantages here is that they go beyond the traditional credit score and base your qualification on high-tech algorithms using various criteria.
In addition to the typical refinance and cash-out refinance options, SoFi also offers a refinance product specific to paying off your student loan debt.
As a result, you could end up lowering your monthly mortgage payment on top of getting rid of your student loan payments.
SoFi lets you check your prequalification for a refinance in just two minutes without affecting your credit score. You can usually close on your new loan within 30 days, and you don’t have to pay any lender origination fees.
A final bonus? If you have an existing SoFi loan, you can qualify for an additional 0.125% rate discount on your refinance.
Read our full review of SoFi
6. Guaranteed Rate
This major lender has offices in each state (plus the District of Columbia) but also lets you get started using its Digital Mortgage platform.
Guaranteed Rate requires a minimum credit score of 620 for mortgage approval. However, alternative credit data, such as utility and rent payments, are considered in some cases.
Guaranteed Rate is highly rated for customer service. They consistently receive stellar customer reviews with a satisfaction rate above 95%.
Whether you want a completely online refinance experience or a more personal one, they deliver.
Read our full review of Guaranteed Rate
7. Carrington Mortgage Services
Carrington begins the process by asking you to select one of four goals:
Lowering your interest rate
Lowering your payments or consolidating debt
Remodeling your home
Getting cash out
Fill out a contact form to have them get in touch with you. Alternatively, you can call Carrington anytime between 7:00 a.m. and 6:00 p.m. PST, Monday through Friday.
If you like a lot of personal care and attention throughout the process, you’ll appreciate Carrington. Their mortgage professionals walk with you every step of the way to ensure you have a speedy and successful closing.
Read our full review of Carrington Mortgage Services
8. Bank of America
One of the biggest banks out there, Bank of America puts its resources to good use by creating a comprehensive and easy online user experience.
You can zip through the application from start to finish by uploading all of your supporting documentation and e-signing with a touch of your finger.
Plus, Bank of America practically has a complete offering of refinancing products, including fixed-rate loans, ARMs, jumbo loans, FHA loans, and VA loans. B of A’s interactive website also makes it easy to get a rough estimate of current mortgage interest rates.
All you have to do is type in your zip code and desired loan amount, and you can see where refinance rates start for various mortgage types.
If you already bank with B of A and are a Preferred Rewards member, you may also be eligible for a reduction of your mortgage origination fee anywhere between $200 and $600.
Read our full review of Bank of America
9. Chase
You don’t need to be a bank member to refinance with Chase. And if you prefer to work with a traditional bank over a strictly online lender or matching website, then Chase is a strong choice.
Start the process online by choosing one of two goals: lowering your monthly payment or cashing out your home equity.
From there, you can get started on the prequalification form. Be prepared to enter information on your current mortgage and your finances.
If you ever have a question before or during the application process, you can either call or connect with a home lending advisor in person in one of 28 states.
There are plenty of refinancing options available through Chase, including jumbo, FHA, VA, and HARP loans. As with most other lenders, the minimum credit score is also 620.
Read our full review of Chase
How does refinancing a mortgage work?
Applying for a refinance is very similar to applying for a home loan. It’s also important to note that you don’t have to use your current lender or servicer. You can pick any mortgage lender that you’d like for your refinance.
After shopping around for lenders and comparing your loan options, you’ll have to complete a formal application. This involves submitting your income and financial statements. The loan officer and underwriter will review your materials to make sure you can afford the new terms.
Mortgage Refinance Requirements
Mortgage refinance lenders are primarily concerned with three things: credit score, debt-to-income ratio, and average loan-to-value ratio (LTV).
Credit score: The minimum credit score for most mortgage refinance companies is around 620.
Debt-to-income ratio: Your monthly debt should not exceed 43% of your monthly take-home pay, just like a regular mortgage. In addition to personal loans and credit card debt, they also include your new mortgage payment in that number.
Loan-to-value ratio (LTV): Lenders would like to see a low loan-to-value ratio (LTV). Typically, you should have at least a 20% equity in your home. In addition to personal loans and credit card debt, they also include your new mortgage payment in that number.
You’ll be required to get an appraisal of your home as part of the process. This makes sure the property lives up to its estimated value and helps determine your total equity in the home. You don’t need to do anything special before the appraiser arrives. However, it is wise to clean and tidy up to make a favorable impression.
Thereafter, you just have to wait for closing. Usually, your lender lets you pick the date, time, and location. Next, they’ll send a notary who will walk you through signing the closing documents. Then, you’ll start fresh with your new payment schedule. If you’ve cashed out some of your home equity, you can typically receive a check or have it deposited directly into your bank account.
How to Choose a Lender to Refinance Your Mortgage
When you decide to refinance, picking the right lender is vital to your financial success.
Mortgage refinance lenders structure loans differently, depending on whether you want to minimize closing costs or lower monthly payments—or a combination of the two.
The first thing to look at is what kind of refinance loans the lender offers. For example, you can find FHA refinance loans with lower minimum credit score requirements than conventional loans if you’re looking for a government-backed refinance.
Loan Terms
Alternatively, you may want to refinance into a shorter term than the standard 30-year fixed mortgage. Look for mortgage refinance companies that offer multiple options, such as 10, 15, or 20-year mortgages. Then, you can compare refinance rates and payments and pick the best one.
As with any kind of loan, you also want to shop around for mortgage rates. Not every lender automatically offers the same interest rate or APR. You’ll also want to compare closing costs as part of the evaluation process. You need to know both your upfront costs and long-term costs in terms of interest.
Closing Costs
If you want to minimize the amount of cash you bring to the table, ask whether your closing costs can be rolled into the loan.
There are numerous ways you can tackle mortgage refinancing. That’s why picking the right refinance lender can make a huge difference. They can help you understand the pros and cons of different options, so you can make the right choice.
Don’t be afraid to ask questions. Ask for specific numbers, and talk to a few different lenders to get an idea of their recommendations and refinance process.
When to Refinance a Mortgage
Now that you’ve learned of the best refinance lenders out there, make sure you’re refinancing for the right reasons. Here are some of the most common reasons for refinancing a mortgage.
Lower Your Monthly Payments
It’s entirely possible to refinance to lower your payment amount. To save money over the life of your loan, you could refinance into a lower interest rate if mortgage rates have dropped since you got your loan. Or, if your credit score has improved, you might be able to qualify for a lower refinance rate as well.
If you’re having trouble making your payments, you could also consider refinancing into a longer loan term. This spreads out your existing mortgage amount over more years.
For example, if you’ve been paying your mortgage for 10 years on a 30-year loan, you could extend the existing 20 years over another 30 years. However, you should proceed with caution, depending on your financial situation and retirement plans.
Cash Out Your Home Equity
If you have equity in your home—at least 20%—you could potentially qualify for a cash-out refinance. This allows you to get a lump sum of money and then add that amount to your existing loan. Usually, you can borrow up to 80% of your equity.
Let’s take a look at an example.
Say your home is valued at $200,000, and your mortgage is down to $150,000. That leaves you with $50,000 in equity. The bank will let you borrow up to 80% of that, which is $40,000.
If you qualify for the mortgage, you could then refinance a total of $190,000. You can then use the cash for home renovations, college tuition, medical bills, high-interest debt, or anything else.
Change the Terms
Shorter loan terms typically come with lower mortgage rates since there’s less of a chance for you to default on the loan. Once you’ve paid off a portion of your current 30-year mortgage, you may be able to save on interest by switching to a 15-year mortgage.
If, for example, you’re 15 years into a 30-year fixed mortgage, you only have 15 years left to pay. So, you could potentially save thousands by getting a lower interest rate via an actual 15-year fixed mortgage.
Switch to a Fixed Rate Mortgage
If you initially took out an adjustable-rate mortgage (or ARM) and your fixed period is ending, you should consider refinancing your loan. There’s a cap on how high your adjustable mortgage can go. It could potentially be much higher than current fixed interest rates.
Talk to a lender to see the best option to avoid a significant jump in your monthly payment. And be sure to plan ahead since it can take time for the approval process to finish.
See also: How to Refinance Your Mortgage
When Not to Refinance
When shouldn’t you refinance? If your credit score has dropped significantly since you took out your original mortgage, you may be surprised by higher interest rates. Similarly, refinancing today may not save you money if you qualified for a rock-bottom rate during the recession.
Furthermore, consider that every mortgage refinance comes with closing costs, just like your initial home loan. Therefore, you need to make sure any financial benefits you expect to receive from your refinance outweigh the added closing costs.
All of these considerations can be discussed with a suitable lender, whether in person, on the phone, or online. Do the research it takes to make sure you’re making an intelligent decision on your next home refinance.
Frequently Asked Questions
What are the steps to refinancing a mortgage?
The process of refinancing a mortgage typically includes the following steps:
Determine if refinancing makes sense for your financial situation and goals.
Research and compare different mortgage lenders.
Choose the right lender and loan product for your needs.
Complete a formal application, providing all necessary income and financial documents.
Wait for the lender’s underwriting process, which includes verifying your information and appraising the home.
Once approved, arrange for a closing where you will sign all required documents.
Begin your new payment schedule, or receive your funds if you’ve done a cash-out refinance.
How does refinancing a mortgage affect my credit score?
Refinancing a mortgage can temporarily lower your credit score, as the lender will perform a hard credit check during the application process. This is typically a small drop and should recover over time as long as you continue to make regular, on-time payments. Additionally, the old mortgage will be marked as paid off on your credit report, which can be beneficial to your credit history in the long run.
What are some reasons I might not qualify for a mortgage refinance?
If your credit score has significantly dropped since you took out your original mortgage, you may not qualify for a favorable interest rate, making refinancing less beneficial. Additionally, if your debt-to-income ratio is too high, you may not qualify. Lastly, if you do not have sufficient equity in your home (usually at least 20%), you may not qualify for certain types of refinancing.
Can I refinance my mortgage with bad credit?
While it may be more difficult to refinance your mortgage with bad credit, it’s not impossible. Some lenders specialize in loans for individuals with poor credit, and government programs like the FHA refinance loans may have lower credit score requirements. However, be aware that you will likely be offered higher interest rates.
How much does it cost to refinance a mortgage?
The cost of refinancing a mortgage typically includes an origination fee, an application fee, an appraisal fee, and closing costs, among other potential costs. This can usually amount to between 2% and 6% of the loan amount. However, in some cases, you may be able to roll these costs into your loan to reduce your out-of-pocket expenses at closing.
Can I refinance my mortgage more than once?
Yes, you can refinance your mortgage more than once. However, it’s important to consider the costs of refinancing, such as closing costs and possible prepayment penalties, and weigh them against the benefits you expect to receive. You’ll want to make sure that refinancing makes financial sense each time.
What’s the difference between a cash-out refinance and a rate-and-term refinance?
In a cash-out refinance, you take out a new mortgage for more than what you currently owe, and then receive the difference in cash. This can be useful if you need to cover large expenses or consolidate higher-interest debt.
A rate-and-term refinance, on the other hand, changes the interest rate, the term length, or both of your existing mortgage, but you don’t receive any cash. This is typically done to lower monthly payments or to pay off the loan faster.
When should I consider a fixed-rate mortgage over an adjustable-rate mortgage?
A fixed-rate mortgage may be a better option if you plan to stay in your home for a long period of time and want predictable, stable monthly payments. On the other hand, an adjustable-rate mortgage (ARM) may initially offer a lower interest rate, but it can fluctuate over time. An ARM could be a suitable option if you plan to sell or refinance your home before the interest rate starts adjusting.
Home equity is one of the main benefits of owning a home. Renting puts money into a landlord’s pocket, but owning a home helps you increase the value of your investment over time. When you do build home equity, it opens up cash-out options that can be used for home improvements, education expenses, paying off debt or other projects.
How can you tap into this valuable equity and turn it into cash? Typically you can access equity through a second mortgage, such as a home equity line of credit (HELOC) or a one-time home equity loan, or by using an alternative option like a cash-out refinance.
Let’s take a look at what a HELOC is, how it works and how it differs from other products that allow you to take advantage of the equity you’ve built in your home, like a home equity loan or cash-out refinancing.
What Is a Home Equity Line of Credit (HELOC)?
A home equity line of credit allows you to take out funds based on your home equity and pay it back with a variable interest rate. You can think about it as a credit card: Homeowners have access to a credit line that they can take from and pay back while using their home equity as collateral if they’re unable to make payments. Essentially, HELOCs enable homeowners to borrow against their own home equity.
Generally speaking, HELOCs have lower interest rates compared to similar options, like home equity loans or personal loans. That said, because HELOCs use variable rates, the interest rate will change based on certain benchmark rates and the current market. This, along with the amount of money you’ve spent using the line of credit, will determine your payments.
Although Pennymac does not currently offer HELOCs, we are available to answer any questions you have about how they work or what your other options are. Don’t hesitate to get professional advice. Contact a Pennymac Loan Expert to determine just what you should be doing with your home equity.
How to Qualify for a HELOC
To qualify for a HELOC, you will need a sufficient amount of equity in your home, a good credit score and low debt-to-income (DTI) ratio. Here are some tips to help you start the HELOC process and increase your qualification chances.
Start Building Home Equity
Since you usually need at least 15-20% home equity to qualify for a home equity line of credit, start prioritizing increasing the value of your home. You can build your equity by making slightly larger payments on your principal balance for your current mortgage. You can also consider refinancing your existing mortgage into a shorter-term mortgage.
Know Your Credit Score and History
Your credit score affects your eligibility for a HELOC, similar to when you were a first-time homebuyer applying for a mortgage. Most lenders require a credit score between 580 and 620, although that is ultimately dependent on the type of loan you choose and other qualifying factors.
Decide Why You Need the Funds
You don’t want to be casual with your HELOC spending, so be specific and intentional with borrowing by having a plan in place. While you may use a HELOC to have flexible on-hand funds, that doesn’t mean you should be careless. Set boundaries from the beginning on what you can and can’t spend these funds on, how often you want to make payments, etc.
People often use a HELOC to pay for home renovations, debt consolidation, education and special events, like weddings.
Do Your Research
Talk to multiple lenders, compare rates and benefits and read reviews. Look for a credible lender who is upfront about fees, timelines and other expectations. When deciding who to work with, it’s important to carefully evaluate the HELOC’s fees and terms and the lender’s reputation.
You’ll also want to know the following:
The length of the draw period, i.e., how long you’ll be able to access the funds
The period of time you’ll have to pay the remaining balance after the draw period ends. Sometimes terms can be 15 years and you may have a steep payment.
Is the interest rate fixed once you can no longer access the credit line
Understand Typical Contracts and Look for Fees
Understand the terms of your HELOC agreement. Are there prepayment penalties that prevent you from paying off more of your credit during the draw period? Is there a minimum amount you have to take out, and does it make sense to take out that much with your financial goals? Are there annual fees? What about application fees? Make sure you know the overall cost before signing a contract.
Know Your Debt-to-Income Ratio (DTI)
The debt-to-income ratio is the percentage of your monthly income that goes toward your current debt. Keep in mind that you can only have so much debt before lenders no longer consider you eligible. Paying off debt is a good way to show lenders that you know how to manage your money. Having too much debt, especially compared to your income, will indicate to lenders that you can’t sustain a line of credit with interest. Lenders typically look for your DTI ratio to be less than 43-47%. Reach out to a licensed loan officer who can help you figure out where you stand.
What Can You Use a HELOC For?
Essentially, homeowners can use a HELOC for whatever they need to, though it’s not wise to use these funds for nonessentials or day-to-day expenses. HELOC funds are best used for the following:
Home improvement. Home improvement is one of the best uses of HELOC funds. From renovations to additions, projects that increase the value of your home also help contribute to your home equity. Plus, there are potential tax deductions for certain home improvement projects.
Emergency funds. If you find yourself without a job or facing other emergencies, HELOCs are a good source of revolving funds that can be carefully managed, even in the draw period. Because interest doesn’t accrue on unused funds, you can use and pay off only what you need.
Debt consolidation. Though you should be careful not to generate more unnecessary debt, you can use a home equity line of credit to consolidate current credit card debt. Instead of dealing with high-cost credit card loans, you switch to a low-cost line of credit.
Medical bills. Medical bills can add up quickly, especially for unexpected or ongoing health concerns. People often take advantage of the low cost and low interest rates of HELOCs for these types of health expenses.
Education costs. Some people also use a home equity line of credit to pay off student loans or pay for tuition, especially because HELOC interest rates can be lower than student loan interest rates.
How Much Can You Borrow?
Even if you have substantial home equity, most lenders only allow you to take out some of what your home equity is worth.
Typically, you can use up to 85% of your home equity value, though it could be less depending on your financial history and other personal qualifications. Factors that influence your overall eligibility, how much you can borrow and the interest rate you may qualify for include:
Credit score and credit history
Current debt
How much home equity you have
Reliable income
Payment history
How to Pay Back a HELOC
A home equity line of credit is paid back with interest on whatever you take out of your revolving funds. However, HELOCs have a unique two-phase repayment method. These two phases are the draw and repayment periods, though the names can be misleading since you will make payments during both periods.
Phase 1: The Draw Period
The first phase is the draw period. This is when the credit line is open and your funds are available to use.
During the draw period, you can borrow funds as needed and only have to make minimum payments, or sometimes even interest-only payments for what you have borrowed. However, funds aren’t limitless; they’re revolving. If you hit the limit of available funds, you’ll need to pay back some of the money before you can continue borrowing.
The draw period is usually between 5 and 15 years. Some borrowers, like investors, commonly take out the maximum amount of funds and pay it off several times over. More commonly for homeowners, HELOCs can just be paid in minimum payments. Any other payments made on the principal loan during this time will lessen the amount you have to pay back during the repayment period.
Phase 2: The Repayment Period
Once your draw period is over, the repayment period begins when you must make recurring monthly payments. You also can’t take anything more, as access to the home equity line is closed. Payments will vary depending on whether or not you paid any interest during the draw period and how long each period is. Since most HELOC loans use variable interest rates, how the rate changes also affects payments.
Minimum payments may become significantly larger if you choose interest-only payments, so even if you have an interest-only payment option during the draw period, consider both the current and future financial consequences. These two periods aren’t necessarily split evenly, either; a 30-year HELOC loan is common, with a 10-year draw period and a 20-year repayment period.
It’s important to know when your draw period ends and when your repayment period begins so you can properly prepare. If you aren’t prepared to adjust financially, it’s tempting (or necessary) to open other lines of credit to pay what you owe on the HELOC, which can bury you in debt. It’s also possible to refinance if you aren’t ready to or don’t want to enter the repayment period when it arrives.
Pros and Cons of a Home Equity Line of Credit
HELOCs are a great way to put the money sitting in your home to work, but there are both pros and cons that homeowners should be aware of. Not every scenario calls for a HELOC loan, so consider the following benefits and drawbacks.
Advantages of a HELOC
Lower upfront costs. Compared to home equity loans, HELOCs tend to have lower upfront costs, which may help a homeowner decide what type of cash-out option they prefer.
Low or no closing costs. There are typically no closing costs for HELOCs. If there are closing costs, they are very low.
Lower interest rates. Traditional credit cards tend to have higher interest rate fees, but HELOCs generally offer lower interest rates. This makes consolidating debt a bit easier.
Interest is charged sparingly. Interest accrues only on funds that you actually use. You may have $200,000 available, but if you’ve only used $20,000, interest is applied just to that 10% utilized.
Flexibility. Because you don’t have to pay interest on more than what you’ve taken out, homeowners have much more flexibility and opportunity with their spending. You’ll have affordable funding options if something unexpected pops up or a project costs more than anticipated. You can use it for what you need, even for education.
Tax deductions. In some instances, the government allows homeowners with HELOCs a tax deduction for interest payments. Please consult your tax advisor regarding the tax benefits of HELOCs.
Disadvantages of a HELOC
Minimum draws. Some lenders require you to use a certain amount of the equity funds for their own benefit. Even if you end up not needing the minimum, you still have to take out and pay back (with interest) that money. Most lenders also charge an inactivity fee if the account isn’t being used.
Upfront costs. Though lower cost than other loans, HELOCs may still require application fees, home appraisal costs and other procedures. Consider the upfront expenses and determine if they’re worth the funds you would have access to.
Variable interest rates. Variable rates can go up and down depending on the market and federal lending rate, which can affect your monthly HELOC payments. When they are low, it’s great for borrowers, but high-interest rates can take a toll.
Fees. Without properly vetting a lender, you may find yourself stuck with unexpected or overwhelming fees such as cancellation fees, application fees, annual fees and prepayment penalties.
Potential credit damage. If you are unable to make payments, as with any loan, your credit score will take a hit.
Risking your home. Remember, your home is the collateral. If a homeowner mismanages their funds, misses payments and ultimately defaults when the repayment period rolls around, they could lose their home.
Attraction to nonessentials. Having large amounts of available funds can be freeing, but some homeowners struggle to use their funds only for essential or intentional spending, which can lead to greater debt that’s harder to pay off. HELOCs are not meant for day-to-day expenses like a regular credit card.
The Difference Between a Home Equity Loan and Line of Credit
HELOCs and home equity loans are similar in that they are both loans that use the value of your house as collateral and tend to have lower interest rates. However, there are some key differences.
What Is a Home Equity Loan?
A home equity loan is a form of consumer debt that allows you to borrow money against your home’s equity. The loan is paid separately in addition to your first mortgage which is why a home equity loan is often called a “second mortgage.” The following are some of the main differences between a home equity loan and a HELOC.
Lump sum payment. Home equity loans aren’t a revolving source of funds like HELOCs are. Instead, homeowners still use their home equity funds, but are given the money as a one-time lump sum.
Fixed interest rate. Unlike a home equity line of credit, home equity loans usually come with fixed interest rates. A fixed interest rate also means a fixed payment — you’ll know exactly what you are going to pay every month regardless of what’s going on in the market.
Prepaid interest costs and closing costs. With a home equity loan, you may have prepaid interest costs that you’ll have to sometimes pay at closing time. You also usually have to pay 2-5% of the loan amount in closing costs, whereas a home equity line of credit doesn’t often have closing costs.
Home equity loans are often used when borrowers need a big sum of cash for a one-time expense. If you need more flexibility, a HELOC loan lets you acquire funds as needed. If you know exactly what you need the money for and prefer fixed payments, a home equity loan is probably best.
HELOC Alternative: Cash-Out Refinancing
HELOCs are flexible and offer a lot of freedom, but they aren’t for everyone. If homeowners don’t want to take out a second mortgage, there are other options like cash-out refinancing.
What Is Cash-Out Refinancing?
A cash-out refinance is a new “first” mortgage that replaces your original mortgage with a new one through refinancing. Unlike the original, a cash-out refinance allows homeowners to borrow cash that they can use as needed. The new mortgage loan will be higher than the old one, and the difference between the loan amounts is distributed directly to the homeowner.
Cash-out refinancing allows you to maintain just one mortgage rather than two while still getting the immediate cash you need. These also offer fixed rates, which some people prefer for consistency.
How do you decide between a cash-out refinance and a HELOC? Determine whether you’d like to replace your current mortgage to get the cash you want (cash-out refinance) or add a second mortgage to get that cash (HELOC). For help understanding which could be the best fit for your needs, talk to a Pennymac loan expert.
HELOC Rates
Most often, the interest rate on a HELOC is variable. Variable rates come with pros and cons, and they are largely dependent on the current market and economy. Your eligibility will also affect the kind of rate you qualify for. Rates usually start lower at the beginning of the loan, or in this case, at the beginning of the draw period.
However, the rates will change based on benchmark interest rates, which can lower or raise your payments in both HELOC phases. Still, many lenders offer caps so that your interest rate won’t exceed a certain percentage. This is especially important to look for in a contract and consider as you’re trying to decide on a lender or on applying for a HELOC.
Also consider that HELOCs are a type of second mortgage, and generally speaking, rates for second mortgages are higher because the lender is taking on more risk.
HELOC FAQs
Here are some of the common questions many homeowners have regarding home equity lines of credit.
How Does Home Equity Work?
Many people want their home equity to work for them instead of being stagnant. That’s why HELOCs, home equity loans and cash-out refinance options exist. Homeowners should understand that though home equity refinancing can be helpful, you’re putting your home at risk if you aren’t properly prepared for the payments. Done correctly, though, home equity can be a great alternative source of funds and debt management.
How Can You Use Your Home Equity?
You can use your home equity loan for all sorts of reasons, as long as the lender hasn’t set certain limitations. Some lenders do limit what the line of credit can be used for, so it’s always best to discuss such limitations with lenders before signing anything. Also remember that funds shouldn’t be used for nonessentials or like a traditional credit card. Most often, people use HELOC loans to add value to their home through home improvement, to pay off extensive bills or expenses or to consolidate their current debt to get a better rate and lower costs.
Can You Pay Off a HELOC Early?
As long as the lender sets no prepayment penalties, you should be able to pay off a HELOC early, even in the draw period. The more you pay off during the draw period, the less you’ll have to spend during repayment. If, for example, the variable interest rate is relatively low during the draw period, you could pay the interest plus a little extra on the principal balance. Again, some lenders will penalize you for paying more than the required minimums, so learn about the lender’s prepayment policies.
How Long Does the Closing Process Take for a HELOC?
Closing a home equity line of credit usually takes 1-2 weeks. However, it can take up to 4 weeks to get everything settled, and even after that, you may have to wait several days or weeks before accessing the available funds. It all depends on the appraisal process, documentation timeline and the lender’s underwriting process.
What’s the Difference Between a HELOC and a Home Improvement Loan?
The main difference between a HELOC and a home improvement loan is how you receive the funds. HELOCs allow borrowers to take out smaller amounts of money depending on how home projects change and evolve. Home improvement loans are also limited to specific home projects, whereas HELOCs can be used outside the home for any purpose.
Is a HELOC Right for You?
A home equity line of credit can be a great solution for established homeowners who need more flexible spending options. If funds are used carefully, for the right reasons and through a reliable lender, borrowing against your home equity is a viable option for many.
However, a home equity loan may be a better option if you could benefit from a lump sum of immediate funds and prefer fixed interest rates and predictable monthly payments. To learn more about turning your home equity into cash in hand, speak with a Pennymac loan expert today.
Many people are lured into the world of real estate investing by stories of millionaires who started their journey with no money down or no steady employment. But the reality is that making money in real estate isn’t easy; a good credit score, investment capital and steady income can help in the beginning.
You’ll also need to grasp the nuances of the local real estate market and learn how to manage financial aspects such as cash flow and property taxes. While real estate buying, selling, and renting may not be much like a game of Monopoly, it is possible to earn steady side income, supplement your retirement, or even build a full-time real estate investment business with the right tools, knowledge, and patience.
Unlike mutual funds, the stock market, cryptocurrency or many other investments, real estate is tangible. Real estate is a concrete asset—one can see, touch, and even reside in. That gives investors a sense of security. However, it also creates unique challenges.
Managed well, the stability and passive income from rental properties can be a safety net against more volatile investments.
This guide is here to clarify the process for beginners. It aims to empower you to make informed decisions, reduce risks, and lay a strong foundation for your real estate investing journey.
Benefits of Investing in Real Estate
The allure of real estate goes beyond the mere ownership of tangible assets. It presents a robust suite of financial benefits that have the potential to amplify wealth and provide stability in uncertain times. As we navigate the advantages, it becomes evident why many seasoned investors prioritize real estate in their portfolios.
Steady and Passive Income
Real estate investing, especially in rental properties, stands out for its potential to provide a consistent revenue stream. When you own a rental property, the monthly or quarterly distributions from tenants contribute to steady income, which can safeguard your finances against unexpected events or economic downturns.
This consistency contrasts with the often erratic nature of the stock market, which can fluctuate daily based on global events, company performances, and other factors. Additionally, for those aiming to attain financial freedom, the passive income generated from real estate can be a step closer to achieving that goal. Over time, as the mortgage payment decreases or remains static, rental rates may rise, increasing your monthly cash flow.
Appreciation Potential
Every investor dreams of their assets appreciating, and real estate often doesn’t disappoint. While there can be periodic downturns in the real estate market, historical trends suggest that properties generally gain value over the long run.
This means that not only can investors benefit from rental income, but they can also potentially see substantial gains when they choose to sell the property.
Tax Benefits
Navigating the world of taxes can be intricate, but real estate investors often find several advantages here. The ability to deduct mortgage interest and property taxes from taxable income can be a significant financial boon.
Furthermore, strategies like depreciation allow real estate investors to offset rental income, reducing their tax burden. Consulting with a financial advisor can help investors maximize these benefits and understand other potential tax advantages, such as 1031 exchanges or deductions related to property management.
Diversification
The saying “don’t put all your eggs in one basket” is sound investment advice. Diversification is a fundamental strategy to mitigate risks. By adding real estate to an investment portfolio, investors introduce a separate asset class that doesn’t directly correlate with the stock market or mutual funds. This can provide a buffer, ensuring that a downturn in one sector doesn’t wholly derail an investor’s financial trajectory.
Leverage
Leverage, in the context of real estate investing, refers to the ability to use borrowed capital to increase the potential return on an investment. When you purchase property with a mortgage loan, you’re often putting down only a fraction of the property’s total cost, while still reaping the benefits of its entire value in terms of appreciation and rental income.
This magnifies the return on investment, as the gains and income generated are based on the property’s total value, not just the down payment. It’s a powerful tool but should be used wisely. Over-leveraging or not accounting for potential rental vacancies can turn leverage into a double-edged sword.
Types of Real Estate Investments
As one dives deeper into the world of real estate, it becomes evident that this asset class is multifaceted, with various avenues to explore and invest in. The right choice often depends on an investor’s goals, risk tolerance, budget, and expertise. Here’s a closer look at some prominent types of real estate investments:
Residential Properties
Residential properties cater to individuals or families. They range from single-family homes to duplexes, triplexes, high-rise buildings with apartments, and other multi-unit properties. You may encounter the term “MDU” or “MUD,” which stand for multi-dwelling unit or multi-unit dwelling, to describe anything more than a single family home, or SFR (single family real estate).
Investing in residential real estate, especially the SFR market, is often a beginner’s first step due to its familiarity and the perpetual demand for housing. While these properties can be a reliable source of rental income, investors should be prepared for the challenges tied to property management, tenant turnover, and ongoing maintenance.
Commercial Real Estate
When one thinks of skyscrapers lining city horizons or sprawling office parks in suburban locales, that’s commercial real estate. These properties are tailored to businesses, and can include complete corporate headquarters or individual offices.
Commercial leases often run longer than residential ones, offering the potential for stable, long-term rental income. However, the entry point can be higher, with larger down payments and a more extensive due diligence process. Additionally, commercial real estate values can be closely tied to the business environment of the locality.
Industrial
Industrial real estate encompasses properties like warehouses, distribution centers, and manufacturing facilities. They’re integral to business operations, ensuring products move efficiently from manufacturers to consumers.
Investing in this sector can offer substantial rental yields, especially if the property is strategically located near transportation hubs. However, the nuances of industrial real estate, such as zoning laws and environmental concerns, necessitate a more in-depth understanding than residential or commercial sectors.
Retail
This sector includes shopping malls, strip malls, and standalone stores. What’s unique about retail real estate is that leases sometimes include a provision where the landlord gets a percentage of the store’s profits, termed as “percentage rent.”
In a thriving commercial area, retail properties can be quite profitable, with long-term leases and the potential for appreciating property values. However, investors should be mindful of shifts in consumer behavior and the evolving retail landscape, especially with the rise of e-commerce.
Multi-Purpose Commercial
A new breed of commercial real estate has emerged to compete with the growth of e-commerce. Multi-purpose commercial spaces blend housing units with office space and retail, often adding hospitality and entertainment venues.
Typically, these spaces are the domain of large real estate investment and property management firms. But if you invest in commercial office space or retail, you will be competing with these multi-purpose properties for tenants, so they are worth acknowledging.
Real Estate Investment Trusts (REITs)
For those not keen on direct property ownership, REITs present an attractive alternative. These are companies that own, operate, or finance income-producing real estate across various sectors. What makes REITs distinctive is that they’re traded on stock exchanges, similar to stocks.
By investing in a REIT, you’re buying shares of a company that manages a portfolio of properties, thus gaining exposure to real estate without the hassles of property management. Moreover, by law, REITs are required to distribute at least 90% of their taxable income to shareholders, leading to potentially attractive dividend yields. However, it’s essential to remember that like all publicly traded entities, REITs can be subject to market volatility.
9 Ways to Invest in Real Estate
Investing in real estate can seem tricky for beginners. But, with time and patience, anyone can master it. Focus on simple investment methods first to get to know your local property scene, meet experienced investors, and learn how to handle money wisely. As you learn and grow, you can dive into more complex investment options.
Here are some great ways for beginners to start in real estate:
1. Wholesaling
Acting as the bridge between property sellers and eager buyers, this method primarily focuses on securing properties at a rate below the prevailing market value. The secured contract is then transferred to an interested buyer, ensuring a margin for the wholesaler.
2. Prehabbing
Unlike intensive property renovations, prehabbing is about amplifying a property’s appeal through minimalistic enhancements. These properties, once given their facelift, usually attract investors with a keen eye for larger renovation projects.
3. Purchasing Rental Properties
An avenue promising consistent returns, this involves acquiring properties to lease them out. For those not inclined towards the intricacies of landlord duties, there’s always the option of hiring seasoned property management professionals.
4. House Flipping
A strategy that has garnered significant attention, house flipping involves a cycle of purchasing, upgrading, and promptly reselling properties, aiming for a profit. The emphasis is on swift transactions and keen market acumen.
5. Real Estate Syndication
Envision a collective where like-minded investors come together, pooling both resources and expertise. Such collectives venture into large-scale property acquisitions, and the ensuing profits or rental incomes are distributed among the participants.
6. Real Estate Investment Groups (REIG)
Primarily, these are conglomerates that steer their operations around real estate investments. By amassing capital from a plethora of investors, they dive into acquisitions of sizeable multi-unit residences or commercial holdings.
7. Investing in REITs
Real Estate Investment Trusts (REITs) revolve around the ownership and meticulous management of properties that yield income. However, investors don’t have to handle the management themselves. Instead, participants can relish the benefits of the real estate sector without the responsibilities of direct property ownership.
8. Online Real Estate Platforms
A fusion of technology with real estate, these platforms seamlessly connect potential investors with vetted property developers. This synergy enables backers to finance promising property ventures and, in exchange, enjoy periodic returns that encompass interest.
9. House Hacking
A blend of homeownership and investment, house hacking is about maximizing the potential of a multi-unit property or a single-family home. Investors live in one segment while leasing out the remaining portions. This dual approach can significantly reduce or even negate monthly housing expenses, serving as an excellent introduction to the world of property management for novice investors.
6 Steps to Get Started in Real Estate Investing
Starting on the path of real estate investing requires careful planning, due diligence, and a methodical approach to ensure that your investments are sound and have the potential for fruitful returns. Whether you’re dreaming of becoming a millionaire real estate investor or merely looking to diversify your investment portfolio, following a structured process can be the key to success. Here’s a step-by-step breakdown:
1. Assess Your Financial Health
Every investment journey should begin with introspection. As an aspiring real estate investor, it’s essential to have a clear understanding of your current financial standing. Ask yourself questions like:
How much capital am I willing to invest?
What are my short-term and long-term financial goals?
Do I have an emergency fund set aside?
Evaluating your risk tolerance is equally crucial. Some might be comfortable flipping houses, while others might prefer the steadiness of rental properties. Consulting a financial advisor at this stage can provide insights tailored to your financial health, enabling you to make informed decisions as you proceed.
2. Dive Deep into Market Research
Knowledge is power in the world of real estate. The local market can be significantly different from national or even statewide trends. Delve deep into understanding:
The demand for rental properties in your target area.
The average property values and rental rates.
The historical appreciation rates.
Any upcoming infrastructure projects or urban development initiatives.
Furthermore, familiarize yourself with real estate terminology. Phrases like “cap rate,” “loan-to-value,” and “operating expenses” will become a regular part of your vocabulary. The better informed you are, the more confidently you can navigate your investments.
3. Assemble Your Real Estate Team
No investor is an island. Success in the real estate business often hinges on the strength and expertise of your team. Look for professionals with a proven track record and positive reviews. Your team might include:
Real estate agents who understand the investor’s perspective.
Property managers to streamline tenant interactions and maintenance.
Lawyers specializing in real estate transactions.
Accountants familiar with the tax implications of real estate investments.
4. Explore Financing Options
The path to acquiring a property is paved with various financing methods. Traditional mortgages are common, but the real estate industry offers other mechanisms like:
Hard money loans.
Private money loans.
Real estate syndication where multiple investors pool resources.
Seller financing.
Each of these has different pros and cons, interest rates, and repayment terms. Understand each deeply to determine which aligns best with your financial strategy.
5. Analyze Potential Properties
The crux of real estate investing is ensuring that the numbers make sense. Before purchasing, assess the property’s potential for generating rental income. Break down:
Monthly mortgage payments
Property taxes
Maintenance costs
Potential vacancy rates
Your goal should be a positive cash flow, where the monthly income from the property (rent) exceeds all these expenses.
6. Negotiate and Close the Deal
Once you’ve zeroed in on a property, the negotiation phase begins. Here, understanding the property’s market value, any existing damages or repair needs, and the local real estate market dynamics can give you an edge.
When it comes to closing, be aware of all associated costs. These might include inspection fees, title insurance, and escrow fees. Being well-informed can help you negotiate these fees and ensure that you’re not overpaying.
Risks and How to Mitigate Them
Like any investment, real estate comes with its set of challenges and uncertainties. The difference between successful real estate investors and those who falter is often the ability to anticipate risks and prepare for them. Here’s an exploration of some prevalent risks in real estate and actionable steps to manage them:
1. Market Fluctuations
Real estate markets can be volatile, with property values rising and falling based on a myriad of factors.
Mitigation: To protect against market downturns, it’s essential to buy properties below their market value. Conducting comprehensive research and seeking expert investment advice can help investors make informed decisions. Remember, real estate is often a long-term game, so a short-term dip can be offset by long-term appreciation.
2. Unexpected Repairs and Maintenance
Properties can often come with surprises, from plumbing issues to roof repairs.
Mitigation: Regular property inspections can catch potential problems before they become major expenses. Setting aside a buffer fund specifically for maintenance can also cushion the financial blow of unforeseen repairs.
3. Vacancy Periods
There might be periods where your property remains unoccupied, leading to loss of rental income.
Mitigation: Properly vetting and building a good relationship with tenants can lead to longer lease periods. Diversifying your investment properties across different areas can also help, as vacancy rates might vary from one location to another.
4. Legal and Tax Implications
Real estate investors can sometimes find themselves entangled in legal disputes or facing unexpected tax bills.
Mitigation: Regular consultations with a tax professional or attorney familiar with the real estate industry can keep investors informed and protected.
Long-term Strategy and Growth
Real estate investing is not just about making a quick buck; it’s about building lasting wealth. Adopting a long-term perspective and continuously refining your strategy can pave the way for consistent growth in the real estate industry. Here’s how:
1. Define Your Real Estate Identity
Are you more comfortable with a buy-and-hold strategy, where properties are retained for long-term growth and steady rental income? Or do you thrive on the excitement of flipping houses, where properties are bought, renovated, and sold for profit? Understanding your preference can help tailor your investment strategy.
2. Reinvestment is Key
For those adopting a buy-and-hold strategy, reinvesting the rental income can substantially grow your real estate portfolio. By channeling profits into purchasing additional properties, investors can benefit from compounded growth.
3. Diversify Your Portfolio
As you gain experience, consider diversifying across various real estate sectors. Branching out into commercial real estate or exploring real estate investment trusts (REITs) can provide additional avenues for income and growth.
4. Continue Your Education
The real estate industry is continually evolving. By staying updated on market trends, attending seminars, and networking with other real estate professionals, you can adapt your strategy and seize new opportunities as they arise.
5. Scale Strategically
A real estate empire begins with just one property. With time, dedication, and a sound strategy, it’s possible to grow your holdings into a substantial full-time income. As you scale, ensure you’re not overextending; always prioritize the quality of investments over quantity.
Key Tips for Beginners
Embarking on a journey into real estate investing can be thrilling, yet the complexities of the industry can sometimes overwhelm beginners. Simplifying the learning curve is essential for novice investors to make informed decisions and find success. Here are some pivotal tips to guide those just starting out:
1. Start Small and Scale Gradually
Many millionaire real estate investors began their journey with a modest property. Purchasing a smaller, more manageable property as your first investment can help you navigate the nuances of the real estate business without being overwhelmed. As you gain confidence and experience, you can then venture into bigger and more diverse properties to scale your portfolio.
2. Prioritize Education
The world of real estate is vast and ever-evolving. Leverage online real estate platforms to learn about market trends, investment strategies, and financing options. Additionally, joining real estate investment groups can be invaluable. These groups not only provide mentorship but also offer opportunities to share resources, insights, and deals with other investors.
3. Location is Crucial
In the real estate realm, location often takes precedence over the type or condition of a property. A mediocre house in a prime location can fetch better returns than a grand mansion in a less desirable area. Research local market dynamics, neighborhood amenities, future development plans, and other location-specific factors before making an investment decision.
4. Networking is Key
Surrounding yourself with knowledgeable people can fast-track your learning process. By connecting with seasoned real estate investors, you can gain insights from their experiences, avoid common pitfalls, and even discover potential partnership opportunities. Attend local real estate seminars, join investor forums online, and participate actively in real estate conferences to grow your network.
5. Stay Updated and Adapt
The real estate industry is not static. Market conditions, property values, and investment strategies can change. Being adaptable and staying updated on industry trends will ensure you remain ahead of the curve and can capitalize on new opportunities.
6. Always Conduct Due Diligence
Before diving into any real estate transaction, thorough due diligence is imperative. From understanding property taxes and zoning laws to estimating potential repair costs and evaluating tenant profiles, leaving no stone unturned will protect you from potential setbacks.
8 Terms Beginner Real Estate Investors Should Know
Venturing into real estate can feel like you’ve entered a world with its own language. Don’t worry; everyone feels this way at the start. Knowing basic real estate terms can help you communicate confidently and make informed decisions.
Dive into these essential terms every beginner should grasp:
Appreciation: Appreciation is the increase in the value of a property over time. It’s one of the primary ways real estate investors make money, especially in growing markets. Appreciation can result from factors like inflation, increased demand, or improvements made to the property.
Capitalization rate (cap rate): Think of the cap rate as a tool to gauge the potential return on a property. It’s a percentage derived from comparing a property’s net operating income to its current market price.
Cash flow: This term captures the money dance – what’s coming in and what’s going out. In the context of rental properties, it means the rental earnings minus all the costs. Positive cash flow indicates you’re earning more than you’re spending.
Equity: Equity represents the value of ownership in a property. It’s calculated by taking the market value of the property and subtracting any outstanding mortgage or loans against it. As an investor pays down their mortgage or if the property appreciates in value, their equity in the property increases. This equity can be tapped into for various financial needs or reinvested.
Leverage: This term refers to the concept of using borrowed money, often in the form of a mortgage, to invest in real estate. It allows investors to purchase properties with a small down payment and finance the remainder. When used correctly, leverage can amplify returns, but it can also increase the risk if property values decline.
Net operating income (NOI): Simplified, NOI is the profit made from a property after deducting all operational costs. It’s your rental income minus all the expenses, showing the true earning potential of a property.
Real estate owned (REO): An REO property is one that didn’t sell at a foreclosure auction and is now owned by the bank. These properties are often sold at a lower price because banks aim to sell them quickly, making them attractive to investors.
Return on investment (ROI): In simple terms, ROI measures the bang you get for your buck. It’s calculated by comparing the profit you made to the amount you invested. The higher the ROI, the better your investment performed.
Conclusion
Real estate investing offers an avenue to diversify your portfolio, generate steady income, and potentially achieve long-term growth. With due diligence, a clear strategy, and the right team, beginners can successfully navigate the complexities of the real estate industry and lay the foundation for a prosperous investment journey. Remember, every millionaire real estate investor started with their first property. Your journey is just beginning.
Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…
Taking out a home mortgage or refinancing a currently existing mortgage? If so, you need to know the tax rules for deducting interest.
home equity loans is tricky.
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You can deduct this interest if the loan is secured by a first or second residence and used to buy, build or substantially improve a home. That’s part of the $750,000 (or $1,000,000) acquisition debt. Improvements are substantial if they add value to the home, extend the residence’s useful life or create new uses for the home. Additions and renovations count. Basic repairs and maintenance don’t.
You can’t deduct interest if you use the home equity loan proceeds for purposes other than to buy, build or substantially improve the home. Before 2018, you could use cash from these loans to buy a car, pay off credit card debt, take a trip and the like, and deduct interest on up to $100,000 of debt. But, the 2017 tax law temporarily ended this tax advantage for home equity loans.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
On average, homeowners insurance in the United States is $1,424 annually and about $118 per month. This price varies based on the state you live in, along with other factors like previous home insurance claims, credit score, and the age of your home.
If you’re buying a home, there are a lot of cost considerations, from the monthly closing costs to the mortgage payments and interest rate. One factor many people often overlook is the additional cost of home insurance. To properly budget for your new dream home, it’s helpful to know the average cost of home insurance in your state.
Today, we’ll go over the average insurance cost for each state, which companies have the best rates, and what factors can affect your rates. By learning more about home insurance, you can find the best deals to save money and enjoy the experience of moving into your new home. If you’re considering moving to a new state, this information may also help influence your decision.
Table of contents:
Homeowners Insurance Facts
The cost of your homeowners insurance is affected by various factors. The cost of homeowners insurance can vary by state because some states are more prone to natural disasters than others. For example, Florida is more prone to hurricanes than other states, so the average cost is higher than in a state like Nevada.
As you’ll learn, homeowners insurance can range from less than $1,000 to over $3,000 per year. Here are some key facts about homeowners insurance in the United States:
The average annual cost of homeowner’s insurance in the United States is $1,424.
The state with the cheapest homeowners insurance at $382 per year is Hawaii.
Oklahoma has the highest homeowners insurance rates, averaging $3,659 annually.
Portland, Oregon, is the most populous city with the lowest average annual insurance rate at $686 per year.
People with a credit score of 740 or higher have the lowest average insurance rates at roughly $1,207 per year.
Average Cost of Home Insurance by State
The overall average cost of home insurance in the United States is $1,424 annually or $118 per month.
The following chart and table show the average cost of home insurance for each state and includes Washington, D.C. These prices are based on $250,000 for dwelling coverage.
Top 5 States With the Cheapest Homeowners Insurance Rates
Hawaii has the lowest annual rate of $382 per year, which is 73% lower than the national average. Vermont, Delaware, Utah, and Oregon are also in the top five states with the lowest homeowners insurance rates, and each is close to 50% lower or more than the national average.
Hawaii: $382 per year
Vermont: $658 per year
Delaware: $679 per year
Utah: $696 per year
Oregon: $723 per year
Top 5 states With the Most Expensive Homeowners Insurance Rates
The states with the most expensive homeowners insurance rates in the country are Oklahoma and Kansas at $3,659 per year and $3,083 per year respectively. Some of the other states with the highest rates include Nebraska, Colorado, and Arkansas.
According to Insurance.com, these states have high rates because they’re more likely to experience tornadoes, hurricanes, hailstorms, and other natural disasters.
Oklahoma: $3,659 per year
Kansas: $3,083 per year
Nebraska: $2,951 per year
Colorado: $2,152 per year
Arkansas: $2,123 per year
Average Cost of Homeowners Insurance by City
The city you live in may also determine the cost of your homeowners insurance rates. In addition to the possibility of natural disasters, population, crime statistics, and local materials and labor costs are also factors.
The following cities are the 25 largest cities in the United States, organized alphabetically. The table includes their average annual and monthly rates.
How Much Does Homeowners Insurance Cost by Company?
As with all forms of insurance, it’s typically a good idea to shop around for the best rates. Your rates may change depending on the provider based on the size of your home, claim history, and additional factors. And keep in mind that the level of coverage will also change the cost of your insurance premiums.
The following table shows 11 of the country’s most popular homeowners insurance providers sorted by annual rates.
4 Factors That Can Affect Homeowners Insurance Rates
Outside of your home’s location, some other factors can determine the cost of homeowners insurance. We’ve listed four of the most common factors that could affect your insurance rates.
1. Credit Score
Some states may look at your credit score to help determine your rates. Your credit score may be a factor because a low credit score or bad credit history can be considered a risk factor.
There are some exceptions. According to Experian®, states like California, Hawaii, Maryland, and Massachusetts prohibit using credit scores as a determining factor for insurance rates.
Credit Score:
Poor (300-579)
Fair (580-669)
Good (670-739)
Excellent (740-850)
Average Annual Rate:
$3,274
$1,571
$1,428
$1,207
2. Claims History
Similar to automotive insurance rates, if you have an extensive history of home insurance claims, this can raise the price of your rates. Although you have less control over the damage that may happen to your home, insurance companies require higher premiums to help cover the costs of damages or injuries.
This table shows what types of claims may raise your rate based on the average amount paid out for the claim. The average payouts are taken from the Insurance Information Institute’s research for dwellings with $250,000 in coverage.
Type of Claim
Average Dollar Amount of Claim Paid Out
Average Annual Rate After a Claim
Wind
$11,650
$1,570
Liability
$30,324
$1,749
Theft
$4,415
$1,763
Fire
$77,340
$1,773
3. Deductible Amount
Your deductible is another factor to consider. Some people opt for a higher deductible because it lowers their rate. Should something happen to your home, you’ll have a higher out-of-pocket expense due to that higher deductible. This is helpful to remember as you budget around your home insurance costs.
Another consideration is that while you may save money while paying for your homeowners insurance, you may face financial hardships should you need to file a claim.
Deductible Amount
Average Annual Rate
$1,500
$1,368
$2,000
$1,273
$5,000
$1,111
4. Age of Home
If you own an older home, it may be more expensive to repair the home if it’s damaged. Older homes typically have higher rates due to these higher costs for repairs. The repairs are often more expensive, and the contractors may need to bring the home up to the most current building and safety codes. The first year of recorded data was in 1959.
What Does Homeowners Insurance Cover?
Knowing what your homeowners insurance policy covers can help you better prepare for situations when you might need to use it. With a better understanding of what is and isn’t covered, you can protect yourself from the potential of financial losses if you need to file a claim.
Depending on which insurance provider you choose, they may offer some or all of the following coverages.
Dwelling coverage: The averages listed throughout this post are based on the dwelling coverage of $250,000, which means the insurance will cover up to $250,000 in repairs. Should you get a policy with a higher dwelling coverage amount, more repairs will be covered.
Additional structures: Basic dwelling coverage covers damages to your home, but if you have other structures like a guest house, shed, or detached garage, you’ll need this extra coverage. This coverage is often 10–20% of the dwelling coverage’s limit.
Medical payments: If someone who doesn’t live in your home gets injured on your property, you can get coverage for their medical payments. Medical payment coverage usually ranges from $1,000 to $5,000 of coverage.
Personal liability: Personal liability coverage can be between $100,000 and $500,000, which is for property damage to someone else’s property or if you’re legally liable for injuries on your property. Personal liability coverage may also cover legal fees if someone were to sue you after being injured.
Loss of use: If your home gets damaged to the point where you cannot live there until the repairs are done, this coverage will help cover living expenses. Loss of use coverage can range from 10% to 30% of dwelling coverage.
Personal property: Ranging from 50% to 75% of your dwelling coverage, this provides coverage for the personal property in your home, like clothing, furniture, and electronics. If you have this coverage, be sure to read the details because it may have a max limit of coverage on certain types of items.
What Characteristics Affect Homeowners Insurance?
Earlier, we went over different factors that can affect your homeowners insurance, like your credit score and history of claims. Home and location characteristics may also give you lower or higher rates.
Home Characteristics
Various characteristics of your home and how it’s built may make it more at risk for damage. As with other forms of insurance, if there are higher risks, they can increase your rates.
One of the common characteristics affecting your rates is the condition of your roof. Your roof is a primary part of your home that protects the inside of your home. If you have an older roof that may not withstand harsh weather or is made from poor materials, you may have to pay a higher insurance rate.
Some insurance providers may also have higher rates for special features. Some of these include having a pool, hot tub, sauna, or any other feature that may cause an injury.
Location characteristics
Earlier, you learned how the average home insurance cost varies from state to state, and much of this has to do with the area’s characteristics. In addition to weather risks, home insurance rates are often higher in areas prone to wildfires. Some insurance providers calculate risk based on how close the home is to fire stations and fire hydrants.
Another location characteristic that home insurance providers look at is crime rates. Home insurance policies may have theft coverage, but in higher crime areas, the rates will be higher due to a higher likelihood of break-ins. Sometimes, you can lower your insurance rates by installing security measures like cameras and alarms.
8 Ways to Lower the Cost of Your Homeowners Insurance
Your mortgage is the primary expense for your home, and it’s important to factor in the cost of your homeowners insurance as well for budgeting purposes. Fortunately, there are ways to lower your homeowners insurance through different methods. Here, we’ve listed different ways you can get better rates for your home insurance.
Improve your credit score: Many states allow insurance providers to use your credit score as a factor. By improving your score, you can likely lower your rates.
Bundle your policies: You may be able to bundle your home and car insurance for a better price on both.
Do some renovations: An old roof or out-of-date parts of your home may increase your rate, so it might be worth it to do some renovations.
Opt for the higher deductible: Although you’ll have to pay more when you file a claim, a higher-deductible policy can save you on your annual rate.
Compare insurance quotes: There are many different homeowners insurance providers, so it may be helpful to shop around to find the best price.
Try an independent agent: You don’t have to work with an insurance company directly. Some independent agents are licensed insurance professionals who can offer you a good deal.
Get the right coverage: Educate yourself about what coverages you need and which you don’t. Some people may pay for coverage they won’t need to use.
Check for discounts: There are a variety of discounts you could get in addition to bundling your policies. Your provider may offer a loyalty discount, an alarm system discount, or a claims-free discount.
Methodology
The primary source of this data comes from Bankrate. To conduct their analysis, Bankrate uses the data provided by Quadrant Information Services. The data comes from various insurance providers across all 50 states as well as Washington, D.C., for 2023.
The average rates use the following base insurance profile:
Homeowner: Male, 40 years of age
Dwelling coverage: $250,000
Personal property coverage: $125,000
Liability coverage: $300,000
Loss of use coverage: $50,000
Medical payments coverage: $1,000
Repair Your Credit Before Getting Homeowners Insurance
Depending on your state, your credit score may play a significant role in your homeowners insurance rates. By improving your credit score, not only can you potentially save on your home insurance rates, but your credit score can also help you when purchasing or refinancing your home.
Credit.com offers a free credit report card that provides you with an analysis of your credit health. You can also utilize our ExtraCredit® subscription for additional credit reporting and other services.
A jumbo loan is a type of mortgage that surpasses the Federal Housing Finance Agency (FHFA) limitations and is used to finance expensive properties.
If you’re looking to purchase a property or a home in a more expensive area, it’s important to understand how jumbo loans work. Many individuals use jumbo loans to finance properties that exceed conventional loan limits. So, what is a jumbo loan, and who requires one?
In this article, we’ll go over what jumbo loans are, how to qualify, and other considerations.
What Is a Jumbo Loan?
A jumbo loan is a type of mortgage that surpasses the limitations the Federal Housing Finance Agency (FHFA) set for Freddie Mac and Fannie Mae. These two companies secure the majority of mortgages in the United States. Since Freddie Mac and Fannie Mae cannot guarantee these loans, there’s a higher risk for the lender and therefore, stricter requirements to qualify.
What Is Considered a Jumbo Loan?
The limit for a jumbo loan differs from state to state and even county to county. In most parts of the United States, the jumbo loan limit is $726,200. However, more expensive areas have higher thresholds for a jumbo loan. For example, Orange County, California has a jumbo loan threshold of $1,089,300.
How Do Jumbo Loans Work?
Jumbo loans work like traditional mortgage loans with set terms and a repayment schedule. Both fixed-rate and adjustable-rate jumbo loans are also available. Since jumbo loans can be risky for the lender, the requirements to qualify are stricter.
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How To Qualify for a Jumbo Loan
Below are factors you’ll need to qualify for a jumbo mortgage loan.
Good Credit Score
While there’s no hard and fast rule, most lenders will require a credit score of 700 or above to qualify for a jumbo loan. The average credit score in the United States is 714, which is doable for most Americans.
If you don’t have a good credit score but are looking to qualify for a jumbo loan, there are steps you can take to improve your credit score.
Large Down Payment
While the minimum down payment requirement for a jumbo loan is just over 10%, a lower down payment often comes with higher monthly payments and interest rates. Most lenders require a 20 to 35% down payment.
The exact down payment the lender requires may also differ depending on the loan size, your credit score and other factors.
Low Debt-to-Income Ratio
Another factor that lenders will look at is your debt-to-income ratio, which is the monthly debt you owe divided by your gross monthly income. Most lenders require a debt-to-income ratio below 43% to receive a jumbo loan.
Enough Cash Reserves
You will need to show proof that you have enough cash reserves, or liquid assets, to cover about 6-18 months of mortgage payments.
Extensive Documentation
Last but not least, lenders often require you to provide extensive documentation such as bank statements, pay stubs, and tax returns. These documents show the lender that you have steady income that is unlikely to change.
Jumbo Loan Pros and Cons
There are a variety of pros jumbo loans can provide to future home buyers including:
The ability to purchase a luxury property. Jumbo loans provide you with the funds you need to purchase your dream home in your desired location.
Competitive interest rates. Jumbo loan rates are similar and sometimes even slightly lower than traditional loan rates.
A single loan. Without jumbo loans, homebuyers would need to take out multiple mortgages.
The finances to make renovations. You can take out a jumbo renovation loan to cover the cost of the home plus any renovations you do.
On the contrary, jumbo loans have the following cons that you should be aware of:
High costs. With a larger loan comes higher payments. Plus, you’ll likely have to pay higher closing costs and insurance.
Strict qualifications. Jumbo loans have stricter qualifications that you might not be able to meet.
Large down payments. Jumbo loans typically require you to put a high percentage down.
Limited tax breaks. The Internal Revenue Service (IRS) only allows you to deduct interest on mortgages up to $750,000. As a result, interest on a portion of your jumbo loan likely won’t be tax deductible.
Jumbo vs. Conforming Loan Rates: Is There a Difference?
In the past, jumbo loans had higher interest rates than conforming loans. However, in 2022, jumbo mortgage rates fell below conforming loan rates. While these rates have since even outed, jumbo loan rates have remained competitive with conforming loan rates, as seen in the graph below.
Jumbo Loan FAQ
Below, we’ve answered some common questions about jumbo loans.
What Are Jumbo Loan Limits?
While jumbo loan baseline limits vary from place to place, they range from $726,200 to $1,089,300 in more expensive areas.
Are Jumbo Loans More Expensive?
While they have comparable interest rates to traditional loans, they may be more expensive since they have higher payments and closing costs.
What Is the Down Payment on a Jumbo Loan?
The minimum down payment for a jumbo loan is 10.1%. However, most lenders require a down payment of 20 to 25%.
Should You Apply for a Jumbo Loan?
If the home you’re interested in purchasing exceeds the conforming loan limits in your area, a jumbo loan could be your best financing option. However, this option is only available to those with the financial resources to meet the strict qualifications, so it’s important to evaluate your financial situation to determine if it’s right for you.
Start by checking your credit score for free to see if you meet the minimum requirement for a jumbo mortgage.
This article originally appeared on The Financially Independent Millennial and was republished here with permission.
If you’ve been paying attention to the housing market recently, you will have noticed it’s on fire. From Seattle, WA, to St. Petersburg, FL, there isn’t a market that hasn’t been affected by the low mortgage rates and high millennial demand for housing. The market hasn’t seen this much activity ever (even more so than the housing financial crisis of 2008).
Given the recent interest in home buying, we thought it would be prudent to discuss exactly how Americans can afford such large homes. And, why now? After all these years, why are mortgages and refinances becoming popular all of a sudden? Let’s first discuss the basics of a mortgage and what its advantages are. They’re equally complex and beneficial, so it’s important to ensure we cover all the bases.
What Is a Mortgage Loan?
Simply put, your home secures the mortgage loan. It might be a house, a store, or even a piece of non-agricultural land. Banks and non-banking financial institutions both offer mortgage loans.
The lender gives the borrower cash, and charges them interest on it. Borrowers then pay back the loan in monthly installments that are convenient for them. Your property acts as security against the mortgage. And, your lender retains a charge until the borrower pays the loan in full. As a result, the lender will have a legal claim to the property for the duration of the loan. If the buyer fails to pay the debt, the lender has the power to seize the property and sell it at auction.
What Are the Different Types of Mortgage Loans?
No matter what anyone tells you, always remember: A mortgage is a debt. Debt is a very polarizing topic to discuss with friends because many of us were raised on the premise that debt is bad. The truth is, some debt is bad, some debt is okay, and some debt is good. Many today would argue that mortgage debt is good since the rate is so low and it affords you a bigger home.
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Some people believe that debt should be prevented at all costs. Others view it as a means of improving one’s quality of life or as a means of increasing fortune. What’s awful about debt, factually, is reckless credit usage.
Here’s a rundown of the many types of mortgage programs, along with their benefits and drawbacks, to help you determine which is best for you.
A mortgage with a fixed rate
The interest rate is fixed for the duration of the loan. These loans provide a consistent monthly payment and a low-interest rate. Borrowers who wish to pay off their mortgage quicker can typically make extra payments toward the principal, as prepayment penalties are uncommon.
Pro: It’s predictable because the monthly payment is fixed.
Con: Taking out a fixed-rate loan while the interest rates are high means you’re stuck with it for the duration of the loan. The only way out is to refinance at a lower rate.
A mortgage with an adjustable rate (ARM)
After a fixed-rate cycle of months to years, the interest rate on an adjustable-rate mortgage (ARM) varies. Lenders sometimes publish ARMs with a pair of numbers, such as 7/1 or 5/1. Usually, a 5/1 ARM has a fixed rate for five years and then adjusts every year, rounding off if that option exists.
Pro: An ARM’s opening interest rate is often lower than that of a standard fixed-rate loan, so it’s easy to get lured in by the teaser rate. But, it might wind up costing more in interest over the term of your mortgage than a fixed-rate loan. An ARM may be the ideal option for someone who plans to market their home before the rate changes.
Con: Future rate hikes might be significant, leaving many adjustable-rate mortgage borrowers with significantly elevated monthly payments than if they chose a fixed-rate mortgage.
Refinance loan or second mortgage
Sometimes, a homeowner already has a mortgage but wants to change the terms. Maybe they want a lower rate or a longer term. Or maybe, they want to take out more equity from their home. Whatever the case, many options are available! The most common would be refinancing the home mortgage. With mortgage refinance, the homeowner closes out their original mortgage, and obtains another one – ideally with more favorable terms.
With interest rates so low these past couple of years, refinancing has become much more popular. How often a homeowner refinances is usually a personal decision, but they should consider at least these factors:
market interest rate vs their current mortgage interest rate
length/term of their loan vs the new one they want to get
cost of the loan (“closing costs”) vs keeping still
[cash-out refinance only] what to do with the funds
Pros: If you can secure a lower interest rate than your current loan, and the closing costs aren’t significant, then it could definitely be worth refinancing. On the other hand, if you need the money for home renovations, a cash-out refinance may be your best bet.
Cons: Refinancing costs money, so make sure the math works in your favor.
Conventional loan
The standards for conventional loans are generally more stringent than those for government-backed house loans. When reviewing traditional loan applications, lenders usually look at credit history and debt-to-income ratios.
Pro: A conventional mortgage may be used for a range of property kinds, and PMI would help borrowers qualify for a conventional loan even if they have less than 20% for the down payment.
Con: Compared to government loans, conventional loans have tougher qualification standards and may demand a larger down payment.
Interest-only mortgage
The average age of home purchases has decreased, and an increasing number of millennials are now purchasing their first houses. Typically, the loan duration is determined by the debt-to-income (DTI) ratio and the sum of interest negotiated on the mortgage. For homebuyers, a longer contract means a lower payment, but a longer time to pay off that debt.
Some lenders may offer an interest-only mortgage, meaning the borrower’s monthly fees will cover only the interest. As a result, it’s best to have a strategy in place to ensure that you can have enough money to return the entire sum borrowed at the end of the period.
Interest-only loans may be appealing since your monthly payments are low. But, unless you have a strong strategy to reimburse the capital, at some point, a fixed loan could be the better option.
Pro: Interest-only mortgages allow the borrower to place their capital elsewhere, such as in dividend stocks, a rental property, or other investments.
Con: Borrowers who aren’t careful with their budget may find themselves never being able to pay off the loan.
Read more: 15 Ways to Generate Passive Income from Real Estate
FHA loan
FHA loans and VA loans are mortgage loans insured by the government and available for potential homebuyers. FHA loans are available to lower-income borrowers and typically require a very low down payment. Also, borrowers get competitive interest rates and loan costs.
The government does not directly grant Federal Housing Administration (FHA) loans. FHA loans can be issued by participating lenders, and the FHA guarantees the loans. FHA mortgages might be a viable option for those who have a high debt-to-income ratio or a bad credit score.
Pro: FHA loans need a smaller down payment and credit score requirements are lower than conventional loans. Moreover, FHA loans may enable applicants to use a non-resident co-signer to assist them to be qualified.
Con: Unless a borrower puts down 10%, the monthly mortgage insurance will remain a part of the payment for the loan’s life. If a borrower ever wants to remove the monthly mortgage insurance, they must qualify and refinance into a conventional loan.
Read more: How to Improve Your Credit Score
FHA 203(k) loan
An FHA 203(k) loan is a government-insured mortgage allowing funding borrowers with one loan for both home renovation and house purchase. Current homeowners may also be eligible for an FHA 203(k) loan to help pay for the repairs of their current house.
Pro: An FHA 203(k) loan can be utilized to purchase and renovate a home that would otherwise be ineligible for a traditional FHA loan. It just takes a 3.5% down payment.
Con: You must be eligible for the full property value, as well as the price of anticipated improvements, with these loans. The rate may be greater than on a normal FHA loan. You’ll also have to pay both a one-time, and monthly mortgage premium insurance payments.
VA (Veterans Affairs) loan
Home loans for veterans, reservists, and military or National Guard members, as well as qualified surviving married partners, are backed by the US Department of Veteran Affairs.
In fact, nearly 90% of all VA-backed home loans are made without a down payment.
Pro: You won’t have to put any money down, or deal with PMI payments every month.
Con: On purchase loans, a one-time VA “funding charge” varies from 1.4% to 3.6%.
Fannie Mae homestyle loan
The Fannie Mae homestyle mortgage needs just 3%–5% down, but a credit score of 620 is an option for fixer-uppers.
Pro: You don’t have to pay for mortgage insurance beforehand, and you can terminate it after twelve years or when you have 20% equity on your house. The rate is frequently cheaper than an FHA 203(k) loan.
Con: Credit score requirements must be met.
Reverse mortgage loan
Homeowners aged 62 and above can use a reverse mortgage to convert some of their property value into cash. The age of the youngest homeowner, the loan rate and fees, the heir’s wishes, and payout type are all aspects for the lender to consider.
Pro: There are no monthly payments required, and the homeowner can select between a one-time balloon payout, a monthly payout, a line of credit, or a combination of the three.
Con: The interest rate may be greater than that of a typical mortgage. Mortgage insurance, a direct charge, an initiation fee, and third-party expenses are usually paid by the homeowner.
Final Thoughts
Mortgage loans are given to those who have enough income and assets vs. their debt. Mortgages also aid in the development of credit. They enable homeowners to invest in a home, with the advantage of having a forced-savings component. However, like with any loan, borrowers should be responsible when taking out a mortgage. It’s easy to get carried away and buy more than is necessary (and become house-poor).