We all want to save as much of our hard earned money as we can. Luckily for those shopping for a mortgage, there are several steps you can take to ensure you are saving money and getting the best deal possible.
Step 1: Get Lots of Estimates
Home loans are available from many different types of lenders, such as credit unions, big commercial banks, private mortgage companies, and thrift institutions. It’s worth your time to contact various types of lenders to see which has a program that best fits your needs.
Most of these lenders have forms that you can fill out online to get a custom rate estimate. If they don’t, you can always shoot them a call to give them your information. Make sure you give each lender the same personal information so that you can compare rates directly. Most lenders will require you to give them different variations of the following information:
Your name
The loan amount
Your social security number (so they can get your credit score)
The address and price of the house you want to buy
Your income
When you compare rates, make sure that you are comparing the same type of loan (the rates for a 30-year fixed will be different than a 15-year adjustable loan). Also, rates change frequently so try to compare them on the same day to get the most accurate information.
Another thing to consider is working with a mortgage broker who will help you find a lender and arrange transactions. They usually have connections with lots of lenders and can provide you with a wide variety of products and terms—for a fee. However, like lenders, you should consider contacting more than 1 broker to ensure that you are getting the best deal.
Step 2: Know the Costs Involved With Taking out a Mortgage
Unfortunately, there are some lenders out there who play games. They might offer you a lower rate but compensate by giving you higher closing costs (or vice versa). Instead of falling for their tricks, it is important to know all of the fees involved with taking out a mortgage so that you can insure you’re getting the best deal.
Rates:
Every mortgage will have a mortgage rate, or the rate of interest that a lender will charge you on your loan. They normally come in fixed or adjustable options. With a fixed interest rate, you will be paying the same amount of interest throughout the life of your loan. With an adjustable rate, your rate will remain fixed for a certain period of time and then adjust at intervals according to the benchmark interest rate.
Another factor that adds to your monthly interest is the annual percentage rate (APR). APRs are based on credit charges, broker fees, and points. Be sure to ask your lender how much you will be paying per month in APR.
Points:
Points are fees paid to a lender for the loan. Each point is equivalent to 1% of the loan amount and there are two types.
Origination points are used to pay loan officers for their efforts in closing a loan for you. Ask lenders how many origination points you will have to pay for the loan as these will add to your total cost.
Discount points are paid up front in exchange for a lower interest rate. Usually if you buy one point the lender will lower the interest rate by around 0.25%. These can be used to decrease your long-term cost.
Private Mortgage Insurance:
Some lenders offer low down payment options. However, if you put less than 20% down, it is likely that they will make you get private mortgage insurance (PMI) to protect them from damage if you default on the loan. PMI will add to your monthly payment, so be sure to ask if you need to take it out.
Closing Costs:
Closing costs are all the fees related to getting your loan. These include title search and insurance, appraisal fees, government recording and transfer fees, and escrow charges. Lenders are required to estimate these closing costs accurately using a “good faith estimate” so be sure to ask for one.
Step 3: Compare Lenders and Choose One
Now that you know the fees involved with taking out a mortgage, compare your potential lenders. Though obtaining the best deal financially will likely be a priority, make sure you also consider these three things below.
Prepayment Penalties
Some lenders charge borrowers a fee if they pay off their loan early. There are two types of prepayment penalties. A “soft” penalty is only charged if the borrower pays back the loan early with a refinance while a “hard” penalty is charged if the loan is payed back for any reason. Be sure to ask if your loan has a prepayment penalty, especially if you don’t plan on staying in your house for the entire life of the loan.
Rate Lock Period
When a lender offers you a rate, they will usually designate an amount of time in which you have to close loan and receive the rate, called the “rate lock period.” A longer lock period will give you more time to complete the process, and since most of us are pretty busy, this can be helpful. Some lenders charge a fee if you ask to extend the rate lock period, so make sure you ask lenders if they do.
Comfort with a Loan Officer/ Lender
The mortgage process can be tedious, so you want to be sure that you are working with a loan officer that you trust to get the job done in a timely and accurate manner. A slightly lower rate might look appealing, but it may not be worth it if it comes from an untrustworthy source.
Step 4: Negotiate
Many prices that come with a mortgage can be negotiated, especially since you can use all the offers you got from other lenders to increase your bargaining power. Even if your lender doesn’t lower their prices, it doesn’t hurt to ask. You can’t negotiate about transfer taxes, appraisal fees, and government recording fees, however, you can negotiate interest rates and closing costs.
Now that you know how to find yourself the best deal, it’s time to get started. Be sure to check out what Total Mortgage can offer you at https://www.totalmortgage.com.
Buying a house ranks among the biggest financial decisions of a lifetime. So when making an offer, it helps to have an escape hatch if something goes wrong. That hatch is called a real estate contingency.
What is a real estate contingency?
Typically included in the contract, contingencies aim to protect buyers and sellers should issues emerge in the period between accepting an offer and closing the sale.
“The transaction is typically 30- to 60- day process—it isn’t like walking into a store and buying an iPhone,” says Anurag Mehrotra, an assistant professor of finance at San Diego State University.
With properly worded contingencies, buyers can rescind their offer if, for example, they’re unable to get a home loan or an inspector flags a leaky roof. In short, they can walk away from the deal without losing their “earnest money,” the security deposit put down when the offer was made.
When the real-estate market is cooling, as it has been in many parts of the country over the past year, buyers are increasingly able to ask for contingencies and still remain competitive if there are other offers.
In theory, potential buyers can ask sellers for almost anything imaginable—like assurances that the house has “good vibes.” But in reality, there are five contingency clauses most commonly found in real estate contracts.
Contingencies to consider
Inspection contingency
Once an offer has been accepted, there is typically a 30-day period for due diligence, Mehrotra explains. A buyer can hire a third-party inspector or engineer to assess things such as the home’s foundation and structure, electrical wiring and plumbing, the heating/cooling system and kitchen appliances.
Many inspection reports reveal minor or cosmetic defects that are no cause for alarm, a ding on the refrigerator door, for instance. But when the report unearths major issues, an inspection contingency allows the buyer to tell the homeowner to rectify them or reduce the purchase price.
“This is a huge one,” Mehrotra says. “It helps with unforeseen problems.”
Indeed, Realtor.com found that the number of buyers asking for repairs after an inspection more than doubled between August 2021 and August 2022, with the majority of sellers saying the cash value of repairs was in the $10,000-or-less range.
(News Corp, parent of The Wall Street Journal, operates Realtor.com.)
Appraisal contingency
Before it provides a mortgage, the lender will have the home appraised to ensure that its value meets or exceeds its purchase price. If the property’s valuation comes in low, buyers with an appraisal contingency are able to quash the transaction without losing their security deposit. Without that contingency, buyers would typically be on the hook to pay the difference upfront.
When the inventory of available homes is low but the demand from buyers is high, purchase prices are more likely to exceed appraised values. That dynamic was at play after the onset of the pandemic, when throngs of buyers sought larger homes. In January 2020, just 7% of home sales had a contract price above the appraised value, an analysis by real-estate data provider CoreLogic found. By May 2021, the frequency increased to 19% of transactions.
Since then, however, the demand for homes has eased—partly because rising interest rates have made mortgage payments less affordable. When sales are slower, bidding wars that jack up prices are less likely, which in turn helps close gaps between a home’s purchase price and its appraised value.
Mortgage contingency
When buying a house, most people can’t exactly whip out their checkbooks. According to the National Association of Realtors, 78% of recent home buyers obtained financing to complete their purchase. A mortgage or financing contingency gives buyers some extra time to shop for the best lender and interest rate.
That time is especially essential today. In the early months of 2023, average mortgage-interest rates bounced around 6.5%—well above the 2021 lows of less than 3%. In general, higher interest rates lead to larger house payments, so some borrowers may have more difficulty qualifying for a mortgage. That’s because a key component of the lender’s decision is the borrower’s debt-to-income ratio, a measure of the applicant’s total monthly debt payments in relation to the total monthly earnings.
It’s helpful when potential borrowers are preapproved for a mortgage before house hunting begins, explains Vanessa Famulener, president of HomeLight Homes, a real estate technology company. That may be enough to assure sellers that the deal will go through even with a financing contingency in the contract.
Better yet is conditional approval from a lender before the home search begins, Famulener adds. With preapproval, the lender mainly looks at the borrower’s credit score, credit history, income and assets. With conditional approval, the underwriter has received and reviewed most or all of the documentation required to get a loan up to a certain amount. Assuming nothing changes—no job losses or change in marital status, for example—borrowers with conditional approval can feel confident about their creditworthiness, which may eliminate the need for a financing contingency entirely, Famulener says.
Home-sale contingency
Over 56% of buyers are also selling a home, Famulener notes. And for most of them, selling is necessary before buying. First, they likely need the equity in their existing home to qualify for financing on their new home. And second, they can’t afford to make two mortgage payments every month. For both of these reasons, home-sale contingencies are commonly used in tight markets, Famulener says.
When including the home-sale contingency, it is important to include a time limit. Typically, the clause gives buyers 30 to 90 days after the contract is signed to sell their home. Without a time frame, buyers and sellers are left in limbo.
Facing a home-sale time crunch, some buyers turn to companies that pay cash for their current home.Terms vary widely among these companies, with some requiring homeowners to pay service fees, broker commissions, taxes and/or closing costs.
Title contingency
Before a home sale closes, a title search is performed to ensure there are no issues over ownership, such as liens against the property for things such as unpaid taxes, outstanding loans or overdue contractor fees.
A title contingency allows the buyer to back out of the deal if the title search flags ownership concerns. However, this contingency is less common because most purchase agreements already include a clause that voids the sale if title issues emerge, Famulener says.
Even if they waive a title contingency, buyers are typically required to purchase title insurance. This policy covers them—and their lender—if ownership issues arise down the road, such as an undisclosed heir. The premium is generally a one-time fee paid to the title company at closing.
Will contingencies hurt my chances in a bidding war?
While contingencies of all types give buyers some wiggle room when making an offer, contingencies can also hurt your chances of getting the house of your dreams.
In Milwaukee, first-time home buyers Drew and Lyn Buus, both 26, made offers on seven homes between March and mid-May—losing out each time to other buyers, most likely because of contingencies.
In one instance, the couple bid $303,000 for a three-bedroom, 1½ -bathroom house in Wauwatosa, Wis., that was listed for $273,000. They included inspection and appraisal contingencies, but also said they would cover up to $5,000 if there was an appraisal gap and up to $5,000 if the inspection showed necessary repairs.
After just one day on the market, the house had 33 offers, eventually selling for $293,000. “We offered more and it sold for less,” Buus says. “We never heard back [from the sellers], but we assume contingencies were waived” in the winning bid.
For now, he and his wife—and their dog Bailey—are staying put in a house they’re renting in Milwaukee’s Bay View neighborhood. “I feel strongly that you shouldn’t waive the inspection and appraisal contingencies,” says Buus, a supply-chain specialist for a medical manufacturer.
“It’s one of the largest financial decisions you’re going to make,” he says. “If something goes wrong, you’re on the hook.”
More on real estate
The advice, recommendations or rankings expressed in this article are those of the Buy Side from WSJ editorial team, and have not been reviewed or endorsed by our commercial partners.
Refinancing a mortgage can be a great financial move for homeowners to potentially lower monthly mortgage payments, tap home equity, or build equity more quickly by shortening the term of the loan.
Refinancing can save you money — but it can cost you money too. Before you start the refinancing process, you should know how it works, the benefits and drawbacks, and the steps you’ll need to take.
What Is Mortgage Refinancing and Why You Might Want to Refinance?
Refinancing a home mortgage is basically replacing your existing mortgage with a new one, typically with a different principal and interest rate.
There are many reasons why borrowers choose to refinance a mortgage, including:
To take advantage of lower market interest rates
To shorten the term of their loan
To withdraw a portion of their equity
To lower their monthly payments with a longer repayment term
To convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
To remove or add another person to the mortgage
Choosing the Right Type of Mortgage Refinances
There are three main types of mortgage refinances: rate-and-term, cash-out, and cash-in.
Rate-and-term refinance: This type of refinancing allows the borrower to change the interest rate, the term of the loan, or both without advancing any new money.
Cash-out refinance: A cash-out refinance takes advantage of the built-up equity in the home and gives the borrower cash in exchange for a larger mortgage.
Cash-in refinance: A cash-in refinance allows homeowners to pay a large sum towards their principal balance during the refinance process.
4 Benefits of Refinancing a Mortgage
Your decision to refinance your home mortgage ultimately depends on your goal. Do you want to lower your monthly payments? Are you hoping to shorten the length of your loan?
Here are some common reasons that people choose to refinance:
Changing the length of your loan. By refinancing from a 30-year mortgage into a 15-year mortgage, you could pay it off in half the time. This also results in paying less interest; however, your monthly payment may go up.
Switching to a different loan type. Some homeowners choose to refinance their mortgage to change their loan types. For example, refinancing from an adjustable-rate mortgage to a fixed-rate mortgage. The interest rate for an adjustable-rate mortgage can go up and down over time but the interest rate for a fixed-rate mortgage doesn’t change.
Tapping into your home equity. Want to do some home improvements, pay off debt, or even take a trip? You can do a cash-out refinance to borrow more than you owe on your current mortgage.
Getting a lower interest rate. Interest rates fluctuate for a variety of reasons. Refinancing could make financial sense if you can get a lower interest rate than when you originally took out your mortgage. If you can secure a lower interest rate, you could potentially save money and pay off your mortgage faster.
Calculate how refinancing might affect your monthly payments with Total Mortgage’s Refinance Calculator and see how much you can save.
How to Refinance a Mortgage: 4 Key Steps
Refinancing a mortgage is very similar to purchasing a home; however, it’s a little less complicated. But how exactly does refinancing your home work? Here is a simplified step-by-step guide:
Understand your reasons for refinancing. Before you refinance, you need a clear goal. What do you want out of your refinance and what type of loan will help you achieve that goal?
Apply for a refinance. Once you’ve selected your lender, you’re ready to complete your refinance application, lock your interest rate, and submit any necessary documents. Keep inmind that you don’t have to refinance with your current lender. Exploring other landers’ options could increase your chances of finding a better interest rate with more favorable loan terms.
Appraisal and underwriting. The underwriter will review the application and documents and offer conditional and/or final approval of the loan. The lender will also order a home appraisal to verify the current home value.
Close on the loan. The home closing is when you and your lender will go over the loan documents and finalize all details. You’ll need to sign documents and pay closing costs listed in the Loan Estimate and the Closing Disclosure.
The time it takes to refinance a mortgage depends on several factors, such as credit checks, appraisals, and the lender. Refinancing a mortgage can take anywhere from 15 days to 45 days or longer, with an average of 30 days to close.
Costs of Refinancing a Mortgage
Refinancing isn’t free — but depending on your circumstances, it can be worth it. Closing costs typically include origination fees, home appraisal, and recording. Depending on where you live and your lender, there could also be an attorney fee and title search, and insurance.
Closing costs are generally a percentage of your loan amount —about 2% to 5% — though these are just estimates and costs may vary depending on the state and county where you live as well as your lender.
Not every closing will cost you money at the closing table. You could also have a no-closing cost refinance.
This is a refinance where instead of paying upfront, closing costs are either rolled into the new loan or the lender may raise your interest rate. While this does mean that you need to come up with less money at closing, you could end up paying more over the long run.
Explore Total Mortgage’s Refinancing Options
Unsure if you should refinance? Refinancing a mortgage could potentially lower your monthly payments with more favorable terms. Another option is to use a mortgage refinance to tap your home’s valuable equity and use the cash as you please.
If you’re looking to refinance a mortgage, be sure to check out Total Mortgage’s list of branches across the US and find the one nearest to you. You can also apply online and get a free rate quote.
The home-buying process can seem daunting for first-time homebuyers. The good news is there are some mortgage lenders that offer home loan products designed to provide more ease with the process, which can be very appealing to many first-time future homeowners.
To help you get started, CNBC Select rounded up a list of the best mortgage lenders first-time homebuyers should consider. We evaluated home loan lenders based on the types of loans offered, customer support, credit score requirements and minimum down payment amount, among others (see our methodology below.)
Beyond just the lowest rates, it’s important to go with the lender that offers the best loan terms to suit your needs. There’s a learning curve when it comes to homeownership, but we’ve included an FAQs section below to help you get a better understanding of some aspects of the process.
The best mortgage lenders for first-time homebuyers
Best for loan variety
PNC Bank
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, HELOCs, Community Loan and Medical Professional Loan
Terms
10 – 30 years
Credit needed
Minimum down payment
0% if moving forward with a USDA loan
Pros
Offers a wide variety of loans to suit an array of customer needs
Available in all 50 states
Online and in-person service available
Cons
Doesn’t offer home renovation loans
Who’s this for? PNC Bank has a wide variety of home loan options, making it easy for first-time homebuyers to find a loan that suits their circumstances. This lender offers conventional loans, FHA loans, VA loans, jumbo loans and HELOCs. On top of that, PNC Bank offers USDA loans, which can be tougher to find among some lenders. PNC Bank also has some specialized loan options, like the Community Loan, which is meant for individuals with lower cash reserves and allows for a down payment as low as 3% and no PMI (private mortgage insurance).
It also offers a Medical Professional Loan for interns, residents, fellows or doctors who have completed their residency in the last five years. Eligible borrowers for this loan can borrow up to $1 million and won’t have to pay PMI, regardless of their down payment amount.
In addition to all these offerings, PNC Bank gives eligible borrowers the chance to qualify for a $5,000 grant to be used toward closing costs. Eligible borrowers must have an income at or below 80% of the median household income for the metropolitan statistical area (MSA), or their desired property must be located in a low- or moderate-income census tract as designated by the FFIEC, according to PNC’s website.
Best for educational offerings
Bank of America Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, FHA loans, VA loans, jumbo loans, doctor loans and the Affordable Loan Solution mortgage
Terms
15 – 30 years
Credit needed
Not disclosed
Minimum down payment
0% if moving forward with a VA loan; 3% if moving forward with the Affordable Loan Solution mortgage
Pros
Offers a wide variety of loans to suit an array of customer needs
Offers an Edu-Series for educating first-time homebuyers as well as other learning resources and materials
Online and in-person service available
Fixed-rate and adjustable-rate mortgages offered
Reduced cost of mortgage insurance
Cons
Doesn’t offer USDA loans
Who’s this for? Bank of America stands out for its first-time homebuyer educational resources. Aside from home loan calculators, which are typical for mortgage lenders to provide on their websites, Bank of America has an online “Edu-Series” for first-time home buyers. There are also guides on its website that break down key terms and a list of FAQs geared toward first-time home buyers.
Bank of America also offers a variety of loan options, including a home loan for medical professionals. With this loan, doctors, dentists, residents and fellows can make down payment minimums that are tiered based on the size of the loan they’re applying for. They’ll put down at least 3% on mortgages up to $850,000, at least 5% on mortgages up to $1 million, at least 10% down on mortgages up to $1.5 million and at least 15% down on mortgages to $2 million. If you’re a medical professional, Bank of America will also exclude your student loan debt from your total debt when you’re applying for the loan. This could bring down your debt-to-income ratio for the purposes of applying for the loan and make it easier for you to qualify.
Even if you aren’t a qualifying medical professional, you can still potentially take advantage of tiered down payment terms through the Affordable Loan Solution mortgage option. With this loan, eligible borrowers can make a down payment as low as 3% on loan amounts up to $726,200, and as low as 5% on mortgages up to $1,089,300. Mortgage insurance would be required if making down payments lower than 20%, but according to Bank of America’s website, the mortgage insurance would come at a reduced cost compared to that of other conventional loans.
Best for lower credit scores
Rocket Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, FHA loans, VA loans and Jumbo loans
Terms
8 – 29 years, including 15-year and 30-year terms
Credit needed
Typically requires a 620 credit score but will consider applicants with a 580 credit score as long as other eligibility criteria are met
Minimum down payment
3.5% if moving forward with an FHA loan
Pros
Can use the loan to buy or refinance a single-family home, second home or investment property, or condo
Can get pre-qualified in minutes
Rocket Mortgage app for easy access to your account
Cons
Runs a hard inquiry in order to provide a personalized interest rate, which means your credit score may take a small hit
Doesn’t offer USDA loans, HELOCs, construction loans, or mortgages for mobile homes
Doesn’t manage accounts for jumbo loans after closing
Who’s this for? First-time homebuyers tend to be younger and may not have a long credit history, which can make it harder to qualify for a good mortgage rate. Rocket Mortgage stands here because it accepts applicants with credit scores as low as 580. The lender also has a program called the Fresh Start program that’s aimed at helping potential applicants boost their credit score before applying.
Rocket Mortgage offers conventional loans, FHA loans, VA loans and jumbo loans but not USDA loans, which means this lender may not be the most appealing for potential homebuyers who want to make a purchase with a 0% down payment. Rocket Mortgage doesn’t offer construction loans (if you want to build a brand new custom home) or HELOCs, but if you’re a homebuyer who only plans to purchase a single-family home, a second home, or a condo that’s already on the market, this shouldn’t be a drawback for you.
This lender offers flexible loan repayment terms that range from 8 – 29 years in addition to standard 15-year and 30-year terms.
Best for no lender fees
Ally Bank Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, HomeReady loan and Jumbo loans
Terms
15 – 30 years
Credit needed
Minimum down payment
3% if moving forward with a HomeReady loan
Pros
Ally HomeReady loan allows for a slightly smaller downpayment at 3%
Pre-approval in just three minutes
Available in all 50 U.S. states
Online support available
Doesn’t charge lender fees
Cons
Doesn’t offer FHA loans, USDA loans, VA loans or HELOCs
Who’s this for? Ally Bank doesn’t charge any application fee, origination fee, processing fee or underwriting fees. These are what’s collectively known as “lender fees” and they can cost you anywhere from a few hundred to a few thousand dollars, and eat into the money you put aside for buying your home. When you’re a first-time home buyer, going through the process as affordably as possible is often top-of-mind, so saving on these fees will let you keep more of your money for other things, like renovations or moving costs.
Keep in mind, though, that Ally Bank may still charge appraisal fees and recording fees and may charge for the title search and insurance. As long as you have all the necessary documents handy and submit complete and accurate information, you can get pre-approved for a loan in as little as three minutes online and submit your application in just 15 minutes.
Best for no PMI
CitiMortgage®
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, FHA loans, VA loans and Jumbo loans
Terms
15 – 30 years
Credit needed
Minimum down payment
Terms apply.
Pros
Citi’s HomeRun Mortgage program allows for a downpayment as low as 3%
Citi’s Lender Assistance program gives eligible homebuyers a credit of up to $5,000 to use toward closing costs
Ability to choose between fixed-rate and adjustable-rate mortgages
New and existing Citi bank customers can qualify for closing cost discounts based on their account balance
HomeRun mortgage program allows for a downpayment of less than 20% without PMI
Provides homeownership education and counseling
Cons
No options for a 0% downpayment
Existing customers need high account balances to receive some of the highest interest rate discounts
Who’s this for? CitiMortgage gives homebuyers a chance to save big-time by waiving the PMI (private mortgage insurance) requirement on loans with down payments below 20%. This can be done by applying for a mortgage through Citi’s HomeRun program, which also allows for down payments as low as 3%.
PMI is typically a required monthly charge with other home loans if you make a down payment of 20% or less. But PMI can cost you tens of thousands of dollars extra over the entire life of the loan. The money you save from not paying PMI could potentially go towards saving for a second property, a home renovation, or any other financial goal you have. HomeRun mortgages also allow borrowers to lock in a fixed rate on their mortgage so they won’t have to worry about their rate increasing down the line.
FAQs
How do mortgages work?
A mortgage is a type of loan you can use to purchase a home. This agreement essentially says you can purchase a home without paying for it in full, upfront — you’ll just need to put some of the money down — usually between 3% and 20% of the home price — and pay smaller, fixed monthly payments over a certain number of years, plus interest and potentially other charges. Having a mortgage allows you to own the property even if you don’t have the hundreds of thousands of dollars in cash needed to purchase it outright.
What is a conventional loan?
A conventional loan is a home loan that’s funded by private lenders and sold to government enterprises such as Fannie Mae and Freddie Mac. It’s a very common loan type and some lenders may require a down payment as low as 3% or 5%.
What is an FHA loan?
A Federal Housing Administration loan, or FHA loan, is a loan program that has some slightly looser requirements. For example, this loan program may allow some borrowers to be approved for a loan with a lower credit score or be able to get away with having a higher debt-to-income ratio. You’ll typically only need to make a 3.5% down payment with this type of loan.
What is a USDA loan?
A USDA loan is offered through the United States Department of Agriculture and is aimed at borrowers who want to purchase a home in a qualifying rural area. USDA loans don’t require a minimum down payment, so borrowers can use this loan to purchase a home for almost no money upfront (you’ll still likely pay fees, though).
What is a VA loan?
VA mortgage loans are provided through the U.S. Department of Veterans Affairs and are meant for service members, veterans and their spouses. They typically require a 0% down payment and borrowers don’t have to pay private mortgage insurance.
What is a jumbo loan?
A jumbo loan is meant for home buyers who need to borrow more than $647,200 to purchase a home. Jumbo loans usually have stricter credit score and debt-to-income ratio requirements, and they also typically require a larger minimum down payment.
How is my mortgage rate decided?
Mortgage rates change almost daily and can depend on market forces such as inflation and the overall economy. However, your specific mortgage rate will depend on your location, credit report and credit score. The higher your credit score, the more likely you are to be qualified for a lower mortgage interest rate.
Be sure to submit the necessary information for more personalized rate estimates from your desired lender.
What is the difference between a 15- and 30-year term?
A 15-year mortgage gives homeowners 15 years to pay it off in fixed, equal amounts plus interest, while a 30-year mortgage gives homeowners 30 years to pay it off. Monthly payments are generally lower with a 30-year mortgage since you’ll have a longer period of time to pay off the loan. However, you’ll wind up paying more in interest over the life of the loan since it is charged on a monthly basis. A 15-year mortgage, on the other hand, lets you save on interest but you’ll likely have to make a higher monthly payment.
How does private mortgage insurance (PMI) work?
Lenders charge private mortgage insurance (PMI) to protect themselves in the event that a borrower defaults on their loan. PMI is assessed to your account if you choose to make a down payment of less than 20%. You’ll be responsible for paying this in addition to your monthly mortgage payments.
However, you can usually have the PMI waived after you’ve made enough payments to build 20% equity in your home.
Bottom line
If you need to take out a mortgage to purchase your first home, you have options. Certain mortgage lenders stand out for first-time homebuyers by considering applicants with lower credit scores, offering lower down payments and providing useful educational resources.
Keep in mind that mortgage interest rates fluctuate often and the rate you receive will vary depending on your location, credit score and credit report. While lenders may post general interest rate ranges on their websites, the best way to get a more accurate estimate of your rate is to provide the necessary information to check your rate.
Our methodology
To determine which mortgage lenders are the best for first-time homebuyers, CNBC Select analyzed dozens of U.S. mortgages offered by both online and brick-and-mortar banks, including large credit unions, that come with fixed-rate APRs and flexible loan amounts and terms to suit an array of financing needs.
When narrowing down and ranking the best mortgages, we focused on the following features:
Fixed-rate APR: Variable rates can go up and down over the lifetime of your loan. With a fixed rate APR, you lock in an interest rate for the duration of the loan’s term, which means your monthly payment won’t vary, making your budget easier to plan.
Types of loans offered: The most common kinds of mortgage loans include conventional loans, FHA loans and VA loans. In addition to these loans, lenders may also offer USDA loans and jumbo loans. Having more options available means the lender is able to cater to a wider range of applicant needs. We have also considered loans that would suit the needs of borrowers who plan to purchase their second home or a rental property.
Closing timeline: The lenders on our list are able to offer closing timelines that vary from as promptly as two weeks after the home purchase agreement has been signed to as many as 45 days after the agreement has been signed. Specific closing timelines have been noted for each lender.
Fees: Common fees associated with mortgage applications include origination fees, application fees, underwriting fees, processing fees and administrative fees. We evaluate these fees in addition to other features when determining the overall offer from each lender. Though some lenders on this list do not charge these fees, we have noted any instances in which a particular lender does.
Flexible minimum and maximum loan amounts/terms: Each mortgage lender provides a variety of financing options that you can customize based on your monthly budget and how long you need to pay back your loan.
No early payoff penalties: The mortgage lenders on our list do not charge borrowers for paying off the loan early.
Streamlined application process: We considered whether lenders offered a convenient, fast online application process and/or an in-person procedure at local branches.
Customer support: Every mortgage lender on our list provides customer service via telephone, email or secure online messaging. We also opted for lenders with an online resource hub or advice center to help you educate yourself about the personal loan process and your finances.
Minimum down payment: Although minimum down payment amounts depend on the type of loan a borrower applies for, we noted lenders that offer additional specialty loans that come with a lower minimum down payment amount.
After reviewing the above features, we sorted our recommendations by best for loan variety, educational offerings, lower redit scores, no lender fees and no PMI.
Note that the rates and fee structures advertised for mortgages are subject to fluctuate in accordance with the Fed rate. However, once you accept your mortgage agreement, a fixed-rate APR will guarantee the interest rate and monthly payment remain consistent throughout the entire term of the loan, unless you choose to refinance your mortgage at a later date for a potentially lower APR. Your APR, monthly payment and loan amount depend on your credit history, creditworthiness, debt-to-income ratio and the desired loan term. To take out a mortgage, lenders will conduct a hard credit inquiry and request a full application, which could require proof of income, identity verification, proof of address and more.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Flueid, a leading technology company specializing in real estate transactions, announced on Thursday the integration of its patented Flueid Decision platform with Encompass by ICE Mortgage Technology. This integration allows lenders to access Flueid’s title data and insights during the loan application process, resulting in time savings and a simplified consumer experience.
The Flueid Decision integration, built on the Encompass Partner Connect API Platform, provides greater transparency and awareness of the property’s title condition from borrower engagement through closing, according to the company. Loan officers and underwriters can now easily check title information and review critical insights to understand the status of a property and consumer.
The integration also helps lenders identify transactions that are eligible for accelerated closing, saving time and providing a competitive advantage.
“Lenders are increasingly under pressure to close home equity loans in as little as five days; Flueid recognized that hitting this mark requires a way to easily uncover and prioritize the most seamless opportunities in the pipeline,” said Matt Regan, EVP of transaction management systems at Flueid.
“This is where our concept for a title check came to life within Encompass: rather than waiting until after title is ordered to understand if any issues exist, we deliver the insights from Flueid Decision to lenders while reviewing an application so they know immediately if a consumer and property are clear and can be fast tracked to closing. If not, they have a set of actionable title insights during this early stage to have conversations with their borrowers and make informed decisions,” Regan added.
The Flueid Decision platform delivers title insights to lenders during the application review process, enabling them to determine immediately if a consumer and property are clear for fast-track closing or if further discussions are needed.
Once ordered in the Encompass platform, Flueid Decision provides lenders with insights and underwriter-backed title clearance decisions through a dynamic report. It summarizes key alerts related to additional properties, property liens, and consumer judgments for easy comparison with the loan application.
The report includes Flueid ‘Pro Tips’ that explain alerts and provide guidance on curative items for title.
Flueid Decision also offers a product designed specifically for title providers to digitize and automate title search best practices. When title is requested within Encompass, a Fueled by Flueid partner’s title commitment or title condition report will align with the lender’s upfront decision and insights, ensuring an accurate and efficient process.
This content was generated using AI, and was edited and fact-checked by HousingWire’s editors.
VA loans are exclusive to veterans, active military personnel and their families. It’s a government-backed loan program designed to make homeownership more affordable for these individuals by offering flexible financing options with competitive interest rates. Additionally, VA loans do not require any down payment or private mortgage insurance (PMI). These loans serve as an important tool to help those who have served our country gain access to their dream of homeownership.
If you are an active-duty military personnel or a veteran, there are many VA loan lenders out there, including New American Funding. The company offers lower interest rate mortgages with excellent terms exclusive to service members and military spouses.
Read on for our review of New American’s VA loan offerings.
Best for Low-Credit Borrowers
New American Funding provides a range of benefits that make homeownership more accessible to U.S. service members, veterans and their spouses. As with all other VA loan programs, New American doesn’t require a down payment, and interest rates are usually lower than those of mortgages not guaranteed by the government. Credit score requirements are not published on New American’s website, but they do mention on their blog that VA loans are a good option for “buyers with less-than-perfect credit.”
Additionally, New American Funding doesn’t require any monthly mortgage insurance payments and has no prepayment penalty, meaning borrowers can refinance or sell without having to pay additional fees.
New American VA Loans Pros and Cons
Good for borrowers with challenged credit
Focuses on lending to minority groups
High BBB rating
Offers a closing guarantee
APR information and interest rates are not publicly accessible
Unavailable in Hawaii
Pros explained
An option for borrowers with challenged credit
New American Funding’s VA loan is ideal for service members and veterans looking to become homeowners without needing perfect credit or a large down payment. Even with a credit score of around 580, you can access a wide range of mortgage loans and low-interest VA loan rates. VA loans also come with a funding fee, which is a percentage of the loan amount that goes toward funding the VA Home Loan program. This fee helps VA lenders to take on customers with lower credit and no or low down payments.
Additionally, New American’s VA loan allows you to sell or refinance your home at any time with no penalty or restrictions on cash-out refinances, unlike conventional or FHA loans, which require you to have 20% equity left over after the refinance.
Heavy focus on lending to minority groups
New American Funding is committed to offering clients from all backgrounds a variety of mortgage products and services. Being the nation’s largest home loan company founded by a Latina, New American Funding is dedicated to hiring Hispanic personnel and helping minority groups.
This company lends with an emphasis on social responsibility, as special attention is paid to minority groups whose access to financing may be limited by traditional lenders. New American Funding also brings mortgage education to underserved communities and works with them to overcome income, credit score and race-based barriers to attain home loans. This includes the company’s Latino Focus initiative, which works to improve the experience of Hispanic clients when obtaining a home loan and its New American Dream initiative, which seeks to increase homeownership in African American communities.
As part of the company’s commitment to serving all communities, New American Funding offers FHA, VA and USDA loans designed specifically for first-time homebuyers. It also offers options for adjustable-rate mortgages, fixed-rate mortgages, jumbo loans and more.
BBB accredited with an A+ rating
The company has accreditation and an A+ rating from the Better Business Bureau. This is an indication that it meets all of the BBB’s high standards for operating with integrity and fairness. New American Funding maintains a 4.04 out of 5 stars from 606 customer ratings on BBB with an overwhelming number of customers giving the company a full 5-star rating.
Many of the negative reviews seem to be related to customers not being approved for a loan rather than issues with customer service. Even for these reviews, the company is quick to respond in a respectful and helpful manner.
Offers a closing guarantee
This guarantee is available for all VA mortgages processed with New American Funding. The borrower will receive a full refund of their loan origination fee if the loan fails to close within the specified timeline.
Cons explained
APR information and interest rates not publicly available
New American Funding does not provide publicly available information about its APR or interest rates. To get an accurate estimate on the cost of a loan, you must provide contact information for a quote.
Not available in Hawaii
New American Funding is not available in Hawaii. This means that military families seeking a mortgage loan in this state won’t be able to take advantage of the company’s services.
New American VA Loans Offerings
New American offers a wide range of VA Loans, including 30-year fixed-rate and adjustable mortgages. Below, we explore the types of mortgage loans offered at New American Funding to help you identify which loan is right for you.
VA streamline refinance loan
Also known as the Interest Rate Reduction Refinance Loan (IRRRL), the Streamline Refinance Loan provides an opportunity for veterans and active military members currently carrying VA home loans to take advantage of lower interest rates, reduce mortgage payments and increase overall savings.
If your home has increased in value or you owe less than 80% of its worth, you can refinance. Additionally, a VA Streamline Refinance loan can be done with no money out of pocket. This means you can cover all of the upfront costs of refinancing by rolling them into the total loan amount or adjusting the interest rate.
The IRRRL can also be used to refinance your mortgage from a fixed-rate loan to an adjustable-rate loan, from one type of adjustable-rate loan to another or to convert a non-VA loan into a VA loan.
The table below shows the typical refinance costs.
Refinancing requirements:
Average cost
Loan discount points
0 to 3% of your home loan amount
Appraisal fee
$300 – $500 (could be more for larger homes)
Inspection fee
$175 to $500
Title search and title insurance
$400 – $900
Survey fee
$150 – $500
Prepayment penalty
2% of the loan balance for the first two years and 1% of the loan balance for the third year
VA purchase loan
New American’s VA purchase loans are available to eligible military borrowers with no down payment required. This can be an ideal solution for those who may not have enough funds to cover a large upfront cost.
A purchase loan offers further benefits, such as no PMI requirement or prepayment penalty. With VA purchase loans, borrowers can also finance closing costs up to 4% of the purchase price and receive funds for improvements that enhance the home’s value or energy efficiency.
VA loan type
Loan amount
Interest rate
Annual percentage rate
30-year fixed VA purchase
$295,000
5.250%
5.717%
VA cash-out refinance
A VA cash-out refinance loan can be a great way to use the equity in your home.
With this type of loan, you get a new mortgage to convert some of your home equity into cash. This option may also provide tax benefits since it is typically considered a form of debt consolidation rather than income generation. For example, if you itemize your deductions, you may be able to deduct some of the mortgage interest paid on a VA cash-out refinance. This can result in a lower taxable income and a lower overall tax burden.
VA cash-out rates change daily based on market conditions. The following cash-out rates are current as of April 2023:
VA loan type
Interest rate
Annual percentage rate
30-year fixed VA cash-out
6.750%
7.103%
30-year fixed VA cash-out
6.990%
7.349%
VA energy-efficient mortgage (EEM)
VA loans for energy efficiency improvements can cover items such as storm and thermal windows, solar heating, cooling systems and heat pumps. These loans are not intended for non-permanent purchases such as appliances or window air conditioning units. VA loans can provide up to an additional $6,000 for qualifying energy efficiency improvements, helping you reduce monthly utility bills while improving the value of your home.
The following energy-efficient upgrades are eligible for the VA EEM Program:
Solar energy systems
Caulking, weather stripping and vapor barriers
Upgrades to furnace and heating systems
New thermostats
Upgraded insulation
Upgrades to windows and doors
Water heater upgrades and insulation
Heat pumps
VA Native American Direct Loan
The Native American Direct Loan (NADL) is a program for Native American veterans and their families that allows them access to the same financial advantages of conventional mortgages, including no down payment or monthly mortgage insurance.
Additionally, the NADL offers the ability to build or purchase a home on federal trust land and make repairs on an existing property. This provides Native Americans with more flexibility in choosing where they want to settle.
New American VA Loans Pricing
New American Funding VA loans offer fixed-rate mortgages with repayment options of 15, 20 and 30 years. The shorter the term, the lower the rate — however, your monthly payments will be higher. For adjustable rate loans, adjustable rate caps can be as low as 2% for initial adjustment periods and 5% for subsequent adjustments.
Borrower credit history is a major factor in determining your New American Funding loan rates. Loan and down payment amounts also affect mortgage rates. Larger loan amounts can result in higher interest rates due to increased risk to the lender. Lenders also consider your debt-to-income ratio.
If you’re a low-income borrower, you may be eligible for the Freddie Mac Refi Possible program, which includes a $500 credit toward your appraisal cost and five years of no interest.
The table below shows New American Funding’s VA loan rates:
VA loan type
Interest rate
Annual percentage rate
30-year fixed mortgage
5.250%
5.882%
15-year fixed mortgage
5.000%
5.645%
30-year VA cash-out refinancing
6.625%
6.978%
30-year fixed VA purchase loan
5.250%
5.717%
VA Native American direct loan
6%
6%
New American Funding Financial Stability
New American Funding has seen a recent shift in its Fitch Ratings outlook, a common measure of financial stability, from negative to stable. This upgrade reflects improvements the company has made to its management team and risk environment and investments in compliance management systems. As a result, New American Funding is now better positioned to ensure consumers and businesses access to reliable and secure mortgage services.
New American Funding Accessibility
Availability
Unlike some lenders that offer 24/7 live customer support, New American Funding is more limited. Customers can contact the company Monday through Friday from 8:00 a.m. until 9:00 p.m. CST or on Saturdays from 10:00 a.m. until 2:00 p.m. CST. You can also make payments through your account on New American Funding’s website.
Contact Information
You can reach customer support via phone at 1-800-893-5304 or by email: at [email protected].
You can also use New American’s branch locator tool to find a loan office near you. You can review your loan application status or your account through the online portal.
User experience
New American Funding’s online portal makes it easy to stay up-to-date on your loan application with real-time tracking. Additionally, you can access various New American Funding loan payment options through a secure online system.
You can also browse the company’s Mortgage Resource Center to find information about mortgage payment assistance programs, the latest mortgage news and tips for getting a good VA loan rate.
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New American Funding Customer Satisfaction
New American Funding mortgage reviews from customers significantly exceed industry standards for mortgage servicing satisfaction. New American Funding reviews have a 4.90 out of 5 in customer ratings on Zillow based on more than 8,800 reviews. Additionally, it scored 695 out of 1,000 in J.D. Power’s 2022 U.S. Mortgage Servicer Satisfaction Study — well above the industry average of 607.
New American VA Loans FAQ
What’s the difference between a VA loan and a conventional loan?
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A VA loan is a type of mortgage backed by the U.S. Department of Veterans Affairs and is available to qualifying veterans, their surviving spouses and active duty personnel. These loans offer competitive interest rates and no down payment requirements. They also don’t require private mortgage insurance. It’s important to note that a funding fee can be rolled into the loan amount or paid at closing.
In contrast, New American Funding’s conventional loan is not backed by the government and typically has stricter credit requirements than a VA loan. Additionally, these loans usually require a higher down payment and more expensive fees.
What are the benefits of a VA home loan?
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When you take out a VA loan from New American Funding, you can take advantage of the following benefits:
Up to 100% financing, even for those with less-than-perfect credit
No private mortgage insurance
Funding fees rolled into the loan
Quick loan closings
No down payment required
Lower interest rates
No monthly mortgage insurance premiums
No prepayment penalty
Reduced funding fees
What are the eligibility requirements for a New American VA loan?
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To be eligible for a New American VA loan, you must have a Certificate of Eligibility (COE) and sufficient income. To get a COE, you must be an active service member, veteran, National Guard, or Reserve member.
Spouses of veterans may apply for a VA home loan if they meet specific requirements. If a spouse’s partner is missing, is a prisoner of war or if remarriage has not occurred after a service-induced disability or death, they may qualify for a loan.
How do I apply for a New American VA loan?
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To apply for New American loans, you must:
Apply for a Certificate of Eligibility (COE) that verifies your eligibility status for a VA loan.
Work with a mortgage specialist to choose the best loan for your needs.
Apply for the loan, either online or with the support of New American’s specialists.
Your lender will then take care of the home appraisal process for you.
How we evaluated New American VA Loans
We looked into VA loans from 20 major mortgage lenders to find the best options for veterans and their families. We compared New American Funding mortgage loan reviews and evaluated rates, repayment options, fees, customer service, closing times and additional benefits.
Summary of Money’s New American VA Loans Review
Military service members, veterans and military families looking to qualify for a VA loan to buy a house may find New American Funding appealing. You can finance up to 100% of the home’s value and take advantage of quick closing times, even with a lower-than-average credit score.
On the other hand, New American Funding does not list its credit and income requirements online. Check out the best VA loans from top mortgage companies if you’re looking for a lender that provides in-person assistance or is more transparent about its rates and fees.
Have you ever thought about doing a cash-out refinance on your home for investment?
A lot of people have.
I received exactly this question from a reader.
Reader Question
Hi Jeff,
Thanks for your videos and educational websites!
I know you are very busy and this may a simple answer so thank you if can take the time to answer!
Would you ever consider approving someone to taking a cash-out refi on the equity in their house to invest?
I have been approved for a VA 100% LTV cash-out refi at 4% and would give me 100k to play with.
With average ROI on peer to peer, Betterment, Fundrise, and S&P 500 index funds being 6-8%, it seems like this type of leveraging would work. However, this is my primary residence and there is an obvious risk. I could also use the 100k to help buy another property here in Las Vegas, using some of the 100k for a down and rent out the property.
BTW, I would be debt free other than the mortgage, have 50k available from a 401k loan if needed for an emergency, but with no savings. I have been told this is crazy, but some articles on leveraging seem otherwise as mortgages at low rates are good at fighting inflation, so I guess I am not sure how crazy this really is.
I would greatly appreciate a response and maybe an article or video covering this topic as I am sure there are others out there who may have the same questions.
My Thoughts
But rather than answering the question directly, I’m going to present the pros and cons of the strategy.
At the end, I’ll give my opinion.
The Pros of a Cash-Out Refinance on Your Home For Investment Purposes
The reader reports he’s been told the idea is crazy.
But it’s not without a few definite advantages.
Locking in a Very Low-Interest Rate
The 4% interest rate is certainly attractive.
It will be very difficult for the reader to borrow money at such a low rate from virtually any other source. And with rate inching up, he may be locking into the best rates for a very long time.
Even better, a home mortgage is very stable debt. He can lock in both the rate and the monthly payment for the length of the loan – presumably 30 years. A $100,000 loan at 4% would produce a payment of just $477 per month. That’s little more than a car payment. And it would give him access to $100,000 investment capital.
As long as he has both the income and job stability needed to carry the payment, the loan itself will be fairly low risk.
So far, so good!
The Leverage Factor
Let’s use an S&P 500 index fund as an example here.
The average annual rate of return on the index has been right around 10%.
Now that’s not the return year in, year out. But it is the average based on nearly 100 years.
If the reader can borrow $100,000 at 4%, and invest it and an average rate of return of 10%, he’ll have a net annual return of 6%.
(Actually, the spread is better than that, because as the loan amortizes, the interest being paid on it disappears.)
If the reader invests $100,000 in an S&P 500 index fund averaging 10% per year for the next 30 years, he’ll have $1,744,937.That gives the reader a better than 17 to 1 return on his borrowed investment.
If everything goes as planned, he’ll be a millionaire using the cash-out equity strategy.
That’s hard to argue against.
Rising Investment, Declining Debt
This adds an entire dimension to the strategy. Not only can the reader invest his way into millionaire status by doing a cash-out refinance for investment purposes, but at the end of 30 years, his mortgage is paid in full, and he’s once again in a debt-free home.
Not only does his investment grow to over $1 million, but over the 30 year term of the mortgage, the loan self-amortizes down to zero.
What could possibly go wrong?
That’s what we’re going to talk about next.
The Cons of a Cash-out Refinance on Your Home
This is where the prospect of doing a cash-out refinance on your home for investment purposes gets interesting.
Or more to the point, where it gets downright risky.
There are several risk factors the strategy creates.
Closing Costs and the VA Funding Fee
One of the major disadvantages with taking a new first mortgage are the closing costs involved.
Whenever you do a refinance, you’ll typically pay anywhere from 2% to 4% of the loan amount in closing costs.
This will include:
origination fees
application fee
attorney fee
appraisal
title search
title insurance
mortgage taxes
and about a dozen other expenses.
If the reader were to do a refinance for $100,000, he would only receive between $96,000 and $98,000 in cash.
Then there’s the VA Funding Fee.
This is a mortgage insurance premium charged on most VA loans at the time of closing. It’s usually added on top of the new loan amount.
The VA funding fee is between 2.15% to 3.30% of the new mortgage amount.
Were the reader to take a $100,000 mortgage, and the VA funding fee set at 2.5%, he’d owe $102,500.
Now… let’s combine the effects of both the closing costs in the VA funding fee. Let’s assume the closing costs are 3%.
The borrower will receive a net of $97,000 in cash. But he will owe $102,500. That is, he will pay $102,500 for the privilege of borrowing $97,000. That’s $5,500, which is nearly 5.7% of the cash proceeds!
Even if the reader gets a very low-interest rate on the new mortgage, he’s still paid a steep price for the loan.
From an investment standpoint, he’s starting out with a nearly 6% loss on his money!
I can’t recommend taking a guaranteed loss – upfront – for the purpose of pursuing uncertain returns.
It means you’re in a losing position from the very beginning.
The Interest on the Mortgage May No Longer be Tax Deductible
The Tax Cuts and Jobs Act was passed in December 2017, and applies to all activity from January 1, 2018, forward.
There are some changes in the tax law which were not favorable to real estate lending.
Under the previous tax law, a homeowner could deduct the interest paid on a mortgage of up to $1 million, if that money was used to build, acquire or renovate the home. They can also deduct interest on up to $100,000 of cash-out proceeds used for purposes unrelated to the home.
That could include paying off high interest credit card debts, paying for a child’s college education, investing, or even buying a new car.
But it looks like that’s changed under the new tax law.
Borrowing up $100,000 for purposes unrelated to your home, and deducting the interest looks to have been specifically eliminated by the new law.
It’s now widely assumed that cash-out equity on a new first mortgage is also no longer deductible.
Now the law is still brand-new and subject to both interpretation and even revision. But that’s where it stands right now.
There may be an even bigger obstacle that makes the cash-out interest deduction meaningless, anyway.
Under the new tax law, the standard deduction increases to $12,000 (from $6,350 under the previous law) for single taxpayers, and to $24,000 (up from $12,700 under the previous law) for married couples filing jointly. (Don’t get too excited – personal exemptions are eliminated, and combined with the standard deduction to create a higher limit.)
The long and short of it is with the higher standard deduction levels, it’s much less likely mortgage interest will be deductible anyway. Especially on the loan amount as low as $100,000, and no more than $4,000 in interest paid.
Using the Funds to Invest in Robo-advisors, the S&P 500 or Peer-to-Peer Investments (P2P)
The reader is correct that these investments have been providing steady returns, well in excess of the 4% he’ll be paying on a cash-out refinance.
In theory at least, if he can borrow at 4%, and invest at say, 10%, it’s a no-brainer. He’ll be getting a 6% annual return for doing virtually nothing. It sounds absolutely perfect.
But as the saying goes, if it looks too good to be true, it probably is.
I often recommend all of these investments, but not when debt is used to acquire them.
That changes the whole game.
Whenever you’re thinking about investing, you always must consider the risks involved.
The last nine years have somewhat distorted the traditional view of risk.
For example, the stock market has been up nine years in a row, without so much as a correction of greater than 10%. It’s easy to see why people might think the returns are automatic.
But they’re not.
Yes, it may have been, for the past nine years. But if you look back further, that certainly hasn’t been the case.
The market has gone up and down, and while it’s true that you come out ahead as long as you hold out for the long term, the debt situation changes the picture.
Matching a Certain Liability with Uncertain Investment Returns
Since he’ll be investing in the market with 100% borrowed funds, any losses will be magnified.
Something on the order of a 50% crash in stock prices, like what happened during the Dot.com Bust and the Financial Meltdown, could see the reader lose $50,000 in a similar crash.
But he’ll still owe $100,000 on his home.
This is where human emotion comes into the picture. Since he’s playing with borrowed money, there’s a good chance he’ll panic-sell his investments after taking that kind of loss.
If he does, his loss becomes permanent – and so does his debt.
The same will be true if he invests with a robo-advisor, or in P2P loans.
Robo-advisor returns are every bit as tied to the stock market as an S&P 500 index fund is. And P2P loan investments are not risk-free.
In fact, since most P2P investing and lending has taken place only since the Financial Meltdown, it’s not certain how they’ll perform should a similar crisis take place.
None of this is nearly as much a problem with straight-up investing based on saved capital.
But if your investment capital is coming from debt – especially 100% – it can’t be ignored.
It doesn’t make sense to match a certain liability with uncertain investment gains.
Using the Funds to Buy Investment Property in Las Vegas
In a lot of ways, this looks like the most risky investment play offered by the reader.
On the surface, it sounds almost logical – the reader will be borrowing against real estate, to buy more real estate. That seems to make a lot of sense.
But if we dig a little deeper, the Las Vegas market in particular was one of the worst hit in the last recession.
Peak-to-trough, property values fell on the order of 50%, between 2008 in 2012. Las Vegas was often referred to as the “foreclosure capital of America”.
I’m not implying the Las Vegas market is doomed to see this outcome again.
But the chart below from Zillow.com shows a potentially scary development:
The upside down U formation of the chart shows that current property values have once again reached peak levels.
That brings the question – which we cannot answer – what’s different this time? If prices collapsed after the last peak, there’s no guarantee it can’t happen again.
Once again, I’m not predicting that outcome.
But if you’re planning to invest in the Las Vegas market with 100% debt, it can’t be ignored either. In the last market crash, property values didn’t just decline – a lot of properties became downright unsalable at any price.
The nightmare scenario here would be a repeat of the 2009-2012 downturn, with the reader losing 100% of his investment. At the same time, he’ll still have the 100% loan on his home. Which at that point, might be more than the house is worth, creating a double jeopardy trap.
Once again, the idea sounds good in theory, and certainly makes sense against the recent run-up in prices.
But the “doomsday scenario” has to be considered, especially when you’re investing with that much leverage.
Putting Your Home at Risk
While I generally recommend against using debt for investment purposes, I have an even bigger problem when the source of the debt is the family homestead.
Borrowing money for investment purposes is always risky.
But when your home is the collateral for the loan, the risk is double. You not only have the risk that the investments you’re making may go sour, but also that you’ll put your home at risk in a losing venture.
Let’s say he invests the full $100,000. But due to leverage, the net value of that investment has declined to $25,000 in five years. That’s bad enough. But he’ll still owe $100,000 on his home.
And since it’s a 100% loan, his home is 100% at risk. The investment strategy didn’t pan out, but he’s still stuck with the liability.
It’ll be a double whammy if the money is used for the purchase of an investment property in your home market.
For example, should the Las Vegas market take a hit similar to what it did during the Financial Meltdown, he’ll not only lose equity in the investment property, but also in his home.
He could end up in a situation where he has negative equity in both the investment property and his home. That’s not just a bad investment – that’s a certified nightmare!
It could even lead him into bankruptcy court, or foreclosures on two properties – the primary residence and the investment property. The reader’s credit would pretty much be toast for the next 10 years.
Right now, he has zero risk on his home.
But if he does the 100% cash out, he’ll convert that zero risk to 100% risk. Given that the house is needed as a place to live, this is not a risk worth taking.
Final Thoughs
Can you tell that I don’t have a warm, fuzzy feeling about the strategy? I think you figure it out by the greater emphasis on Cons than on Pros where I come down on this question.
I think it’s an excellent idea in theory, but there’s just too much that can go wrong with it.
There are three other factors that lead me to believe this is probably not a good idea:
1. The Lack of Other Savings
The reader reports that he has “…50k available from a 401k loan if needed for emergency, but with no savings.”For me, that’s an instant red flag. Kudos to him for having no other debt, but the absence of savings – other than what he can borrow against his 401(k) plan – is setting off alarm bells.
To take on this kind of high risk investment scheme without a source of ready cash, exaggerates all of the risks.
Sure, he may be able to take a loan against his 401(k), but that creates yet another liability.
That that will need to be repaid, and it will become a lien against his only remaining unencumbered asset (the 401k).
If he has to borrow money to stay liquid during a crisis, it’s just a question of time before the strategy collapses.
2. The Reader’s Risk Tolerance
We have no idea what the reader’s risk tolerance is.
That’s important, especially when you’re constructing a complex investment strategy.
While it might seem the very fact he’s contemplating this is an indication he has a high risk tolerance, we can’t be certain. He’s basing his projections on optimistic outcomes – that the investments he makes with the borrowed money will produce positive returns.
What we don’t know, and what I ask the reader to consider, is how he would handle a big reversal.
For example, if he goes ahead with the loan, invests the money, and finds himself down 20% or 30% within the first couple of years, will he be able to sleep at night? Or will he instead contemplate an early exit strategy, that will leave him in a permanent weakened financial state?
These are real risks that investors face in the real world. At times, you will lose money. And how you react to that outcome can determine the success or failure of the strategy.
This is definitely a high risk/high reward plan. Unless he has the risk tolerance to handle it, it’s best not to even start.
On the flip side, just because you have the risk tolerance, doesn’t guarantee success.
3. Buying at a Market Peak
I don’t know who said it, but when asked where the market would go, his response was “The market will go up. And the market will go down”.
That’s a fact, and one that every investor has to accept.
This isn’t about market timing strategies, but about recognizing reality.
Here’s the problem: both the financial markets and real estate have been moving up steadily for the past nine years (but maybe a little bit less for real estate).
Sooner or later, all markets reverse. These markets will too.
I’m worried that the reader might be borrowing money to leverage investing at what could turn out to be the absolute worst time.
Ironically, a borrow-to-invest strategy is a lot less risky after market crashes.
But at that point, everyone’s too scared, and no one wants to do it. It’s only at market peaks, when people believe there’s no risk in the investment markets, that they think seriously about things like 100% home loans for investments.
In the end, the reader’s strategy could be a very good idea, but with very bad timing.
Worst Case Scenario: The Reader Loses His Home in Foreclosure
This is the one that seals the deal against for me. Doing a cash out refinance on your home for investment is definitely a high-risk strategy.
Heads you’re a millionaire, tails you’re homeless.
That’s not just risk, it’s serious risk. We don’t know if the reader also has a family.
I couldn’t recommend anyone with a family putting themselves in that position, even if the payoff were that high.
Based on the facts supplied by the reader, we’re looking at 100+% leverage – the 100% loan on his house, then additional (401k) debt if he runs into cash flow problems. That’s the kind of debt that will either make you rich, or lead you to the poor house.
Given that the reader has a debt-free home, no non-housing debt, and we can guess at least $100,000 in his 401(k), he’s in a pretty solid situation right now. Taking a 100% loan against his house, and relying on a 401(k) loan for emergencies, could change that situation in no more than a year or two.
When you take out a mortgage, whether it’s for a purchase or a refinance, you must pay “closing costs,” which can vary considerably from transaction to transaction.
There are fees that must be paid to the bank/lender, along with optional ones, such as mortgage discount points, and fees that must be paid to third parties, such as title/escrow and insurance.
Whether you pay these fees out-of-pocket is another question, but either way there will be a cost, and you must pay it in one way or another.
How Much Are Closing Costs on a Mortgage?
There is no set amount that everyone pays in mortgage closing costs
It can vary substantially based on the loan amount and loan type
Along with the lender you choose to work with
And the time of the month you close your home loan
It depends on your loan amount, the way you structure your loan, which lender you use, and when you close during a given month.
For example, if the lender you work with charges a flat 1% loan origination fee, that’ll cost $10,000 on a $1 million purchase and $5,000 on a $500,000 purchase.
Further complicating this is the fact that not all lenders charge origination fees directly. Additionally, some may charge processing and underwriting fees, while others may not.
Next, you need to determine if you’re paying discount points to obtain a lower mortgage rate, or if you’re simply taking the par rate offered. This can greatly affect total closing costs too.
Then there are third-party fees, such as title/escrow and appraisal fees, which can vary tremendously as well. And in some regions of the country they might be paid by the seller or the buyer, assuming it’s a home purchase.
Additionally, you need to consider prepaid items like property taxes, homeowners insurance, and interest, which could amount to a big sum if there are impounds on your loan and you need to set up an escrow account.
When you close in the month can also have a big impact on closing costs. Those who close late in the month can reduce per diem interest, whereas someone who closes early in the month could pay nearly a month’s worth of interest at loan closing.
Two Types of Closing Costs – Recurring and Non-Recurring
There are two main types of closing costs, including “recurring closing costs” and “non-recurring closing costs.”
Recurring closing costs are those that will be charged more than once, whereas non-recurring closing costs are charged just once.
Some examples of recurring closing costs (paid more than once):
– Homeowner’s insurance – Mortgage insurance – Flood insurance – Property taxes – Interest – HOA dues
*Note that not all fees are necessarily applicable depending on the property, location, loan type, etc.
Some examples of non-recurring closing costs (one-time fees):
– Lender fees (underwriting, processing) – Loan origination fee – Mortgage discount points – Credit report fee – Appraisal fee – Home inspection fee – Termite inspection fee – Building record fees – Title and escrow fees – Doc prep fees – Recording and wire fees – Notary and messenger fees – Transfer taxes
As you can see, there are quite a few costs associated with obtaining a mortgage, and not everyone has the cash on hand to pay for all these fees. There are also those who like to hang onto their cash and put it elsewhere.
If you want to reduce your closing costs, there are number of strategies to do so.
Use Seller Contributions to Cover Closing Costs
If it’s a home purchase you can ask the seller to chip in money toward the closing costs
Either in exchange for a higher purchase price or just via negotiation
Or receive a credit as a result of repairs found during the inspection
One of the most common ways to reduce your out-of-pocket closing costs is to get a contribution from the seller (if it’s a purchase transaction).
These so-called “seller contributions” or interested party contributions (IPCs) can be used toward the closing costs mentioned above, but cannot be used for the down payment or reserves, nor can they wind up in the buyer’s pocket.
Note that while seller credit can’t be used for down payment or reserves, it can free up your own cash to use toward down payment and/or reserves that may have otherwise gone toward closing costs.
When negotiating a sales price, the buyer and seller can discuss these contributions, and their presence will likely lead to a higher contract price.
As a result, the buyer still pays the closing costs by accepting a higher loan amount associated with a higher purchase price. However, the costs aren’t paid at settlement, so it’s easier for the buyer short on cash.
It’s also possible to get a seller credit for repairs that come up during the inspection, which is why it’s so important to take the inspection seriously. If you’re buying a home, you may actually conduct 3-5 different inspections for separate items like the pool/spa, roof, termite, chimney, and so on.
This is your chance to get money for the many things that might be wrong with the house. Once you present the seller with a request for repairs, they’ll likely offer a credit that you can use toward closing costs or to lower the purchase price. Or both.
The maximum amount of seller contributions allowed will vary based on the type of loan (conventional vs. FHA), the property type, and the LTV ratio. The lowest amount allowed is 2% of the purchase price, and the highest allowed is 9%.
Get a Lender Credit to Offset Closing Costs
In exchange for a higher mortgage rate
You can get a credit from the lender to cover closing costs
So they won’t need to be paid out-of-pocket
But instead via higher monthly mortgage payments
Another way to reduce or eliminate your out-of-pocket closing costs is via a lender credit, which is essentially agreeing to take a higher mortgage rate in exchange for lower settlement costs. This works on both purchases and refinances.
For example, a lender might tell you that you can secure an mortgage interest rate of 4.25% paying $5,000 in closing costs, or give you the option of taking a slightly higher rate, say 4.5%, with a $3,500 credit back to you.
If all your costs are paid via a higher rate, it’s a no cost loan, though sometimes this definition only covers lender fees, not third party fees.
Either way, you’ll pay a bit more each month when making your mortgage payment, but you won’t need to come up with all the money for the required closing costs.
Again, your out-of-pocket costs are reduced here, but you pay more throughout the life of the loan via that higher mortgage rate. That’s the tradeoff.
Ask for a Credit from Your Real Estate Agent
Hello controversy!
While it’s frowned upon by some real estate agents
It’s perfectly acceptable to ask for a credit from your agent
Though they can decline your request
Another way to reduce your closing costs (not just out-of-pocket) is to ask your real estate agent to give you a credit toward closing costs.
If they want your business, or just want the transaction to close, they might be willing to part with some of their commission to help you with closing costs.
For example, if they’re earning 2.5% to close the deal, they might be willing to give you 0.25% of that to help with your closing costs. Sometimes both agents will get together and give a small portion of both commissions to the buyer to get the job done.
And this will actually reduce what you pay, as you won’t take on a higher interest rate or pay for the costs via the loan.
Just be careful when combining credits to ensure they don’t exceed the maximum allowed by the lender. Assuming you find that you’re leaving money on the table, consider using the excess to buy down your mortgage rate or to cover prepaid items like escrows.
Negotiate and Shop Your Closing Costs
Like mortgage rates
You can negotiate your closing costs
Which can vary considerably from lender to lender
You may also be able to shop certain third-party costs
It’s also possible to shop around for certain settlement costs, instead of just blindly using the companies your real estate agent recommends.
For example, you can comparison shop for title insurance and/or your homeowner’s insurance and save on costs there. The same goes for your home inspection.
If refinancing your mortgage, ask for the “reissue rate” or “substitution rate” when purchasing the lender’s title insurance policy.
There is no reason you should have to pay full price again for a title search when you’ve been the only person living in the property. This could save you a significant amount of money on closing costs with as much as a phone call to the title company.
Similarly, when looking for a bank to work with, be sure to look closely at the fees they charge. They don’t all charge the same fees or the same amounts, so finding a lender with a low rate and low fees could save you big.
Also watch out for unnecessary junk fees, which can really add up. But remember that certain closing costs just aren’t negotiable, like property taxes.
What Else Should I Know About Closing Costs?
Closing at the end of the month is one way to cut down on closing costs
Because you can reduce per diem interest
But your first mortgage payment may be due sooner
If refinancing you might be able to roll closing costs into loan
Also look out for closing cost specials
There are a few other ways to cut down on closing costs. Prepaid interest, which is the per diem interest due between the time you close and your first mortgage payment, can be costly depending on the size of your loan and when you close.
If you close near the end of the month, you can greatly reduce the number of days of per diem interest due at closing. This can significantly reduce your closing costs.
However, the tradeoff is that it’s a very busy time for lenders, and they might not close in time.
For those refinancing, it may also be possible to roll closing costs into the new loan, instead of paying them out-of-pocket.
Again, the implication here is that you’ll be paying interest on those closing costs for as long as you hold your mortgage, as opposed to just paying them at face value upfront.
But it’s worth consideration, especially if you don’t plan to stay in your home, or with the mortgage very long. There’s also a thing called inflation that makes today’s dollars less valuable over time.
Lastly, check out special programs like HomePath and HomeSteps, which offer closing cost assistance if you take part in homeownership education courses. And be sure to look into state programs that offer incentives to first-time home buyers.
Most people have the dream of buying your first home. It is a huge accomplishment! However, many people do not have any idea of what they are doing when they buy their first house. They rely on their real estate agent, their lender or bank, and the title company or attorney to do everything for … Read more