Avoid These Mortgage Mistakes in Your Quest to Save Money

Avoid These Mortgage Mistakes in Your Quest to Save Money

Although your mortgage can provide you with many avenues to save money, it’s wise to be aware of common mortgage mistakes.

When you’re considering doing anything to alter how you establish and pay your mortgage, avoid the following hazards:

1. Adjustable Rate Mortgages, known as “ARMs.” Although an ARM might save you a lot of money during the first few years you pay your mortgage payment, there may come a time when the interest rate – and your monthly payment – rises too high to be affordable.

* And when it does, you have no control over that rate, because you agreed to the unknowns early on in the process of accepting the mortgage loan as it was designed. If you intend to stay in your house a long time, you’ll want to definitely avoid an ARM.

* However, an ARM might work if you’re planning on selling the home and moving within the first couple of years of home ownership.

2. Interest only mortgages. An interest only loan means that for the first several years of the loan, you’re paying nothing toward the principal amount you borrowed and 100% toward the interest. Your principal will, therefore, not reduce at all over these years, which is a disadvantage for you.

* Plus, you’ll eventually get hit with having to pay the total amount of that principal over a shorter period of time.

* When should you consider an interest only mortgage? If you’re planning to move during the first few years of the mortgage, this type of loan might work.

3. Committing to a shorter term loan than you can comfortably afford. Although a shorter term mortgage sounds great can you comfortably pay the increased monthly payment on time consistently? Keep in mind that it’s wiser to spend beneath your means rather than right up to the top of them.

* Ensure you look at all your incoming funds and outgoing expenditures and figure up total monthly expenses before you commit too quickly to a shorter term mortgage.

* Consider that your income could reduce in the future because of some reason that you may not know about right now (like an injury, company lay-off, or employer closing). And those unknown events could affect your ability to pay a high monthly mortgage payment.

4. Not researching the broker or lender. The unfortunate fact is that there are predatory mortgage companies and banks that you should avoid. Even though it puts more work on you, do your upfront research on the lending institutions and brokers you’re considering doing business with. In the long haul, you’ll be better off for it.

5. Agreeing to add your closing costs into your loan. Never a good plan, this decision can easily cost you in five figures over the term of your mortgage. Always pay your closing costs (or have the seller pay them) upfront.

6. Obtaining a mortgage loan that penalizes you for paying it off early. You might want to pay extra mortgage payments throughout the year to pay down your principal quicker, so delve into the details of your loan to ensure there isn’t a prepayment penalty.

* When your loan penalizes you for paying it off early, then you’re not saving much money from your efforts to get out from under your house payment.

7. Refusing to hire a real estate attorney to look over your mortgage documents before you close. Yes, it will cost you a few hundred dollars, but you’ll be glad that someone was representing your interests in the transaction.

* Use word of mouth to find a competent real estate attorney in your area. Allow your attorney an appropriate length of time to carefully look over your mortgage purchase agreement and bank documents.

We all hope to receive the best deals we can on our mortgages. And we want to do whatever possible to save money. However, in your quest to save money using your mortgage, exercise special cautions regarding these issues. When you do, you can be confident of successfully achieving your financial goals.

Buying Your House: The Escrow Process Explained

California is an Escrow closing state…. so this is super relevant to home buyers here.

If you’ve recently had your offer on a house accepted by the seller, you must be ready and waiting to move in! If you’re on the other end of the transaction, you want your money! You’re also likely to be wondering, “What is escrow and why does it take so long?”

Escrow may be the last hurdle in buying or selling real estate, but it’s a hurdle that can take a while. Let’s discuss what escrow really is and what needs to happen for everything to go smoothly.

The Purpose of Escrow

The escrow company simply acts as an impartial third party. They ensure that everything that must be done has been done before the property and the funds are swapped. So, they hold the money and the property and then transfer them to the proper parties when all the requirements have been met.

For example, they would hold any earnest monies. How could you be sure the seller wasn’t going to cash your check and then refuse to sell you the house?

The escrow company handles the money and the required documentation.

Steps in the Escrow Process

1. Appraisal. Your lender will have the home appraised, as it is part of their process to approve your home loan. It also serves as a second opinion regarding the fairness of the selling price. They’re making sure that the amount of the loan isn’t greater than the value of the home. The bank is always concerned about the collateral on the mortgage.

2. Financing. Hopefully, you already have your financing secured, but it’s not uncommon for the lender to have additional requirements that must be met before they’ll provide the funds. Usually the underwriter working for the lender makes these requests.

* The escrow company helps to ensure that these additional requirements are met before the closing takes place.

3. Inspections. A home inspection, termite / pest inspection, hazard inspection, and more are normally required before the bank will approve the loan. The bank doesn’t want to make a loan until it’s fully aware of the condition of the property.

* The home inspection will look at the electrical system, plumbing, structure, roof, and general condition of the property. It will also assess any necessary repairs. Pest inspections look for termite damage and any other type of infestation that would reduce the value of the property or require extermination.

* The bank’s primary concern with these inspections is that they’ll be able to get their money back out of the property should the buyer fail to make the mortgage payments.

4. Title Search. Do the sellers even own the house? Are the property taxes paid up? Are there any other liens against the property? A title search will make sure there are no clouds on the title.

* Basically, the title search ensures that there are no creditors with any claims against the home and that the seller actually has the right to sell the house. It also looks for any other people that might have an ownership claim on the property.

* For example, can the husband sell the house without the wife’s agreement? Are there any uncles, cousins, business partners, or anyone else that has a claim to the home?

* Title insurance is also part of the closing process. This means the insurance issuer will deal with any title problems that may have been missed during the title search.

5. Insurance. Your lender will require home insurance. Obviously, they want to know that they will be paid if the house is destroyed.

While this list is not inclusive, it covers the basics of the escrow process. It varies from state to state. Your escrow company, lender, real estate attorney, and real estate agent are all very familiar with the process. Don’t be afraid to ask any questions you may have so you can help expedite the process where necessary and move into your new home as soon as possible.

4 Key Areas – How to Get a Home Loan

In spite of what you might think, banks are desperate to make loans right now. But that doesn’t mean that lending standards aren’t tight; it’s still going to take a lot of paperwork to make the lenders happy.

Rates are the lowest they’ve ever been, so while it might be a bit of a hassle to jump through all the hoops, the time has never been better for that jumping. With rates well under 5% and 4% for 30-year fixed-rate loans, now is the time to act.

Fannie Mae, Freddie Mac and the FHA are still the major players in the mortgage business. Although different lenders have different requirements, the following details are generally what they’re looking for in today’s economic climate.

Meet these requirements and you should be able to find the loan you’re seeking:

1. Credit score. If you’re buying your primary home or refinancing your primary home, a minimum credit score of 620 is required if you have at least 20% equity in the property. If you have less than 20% equity, the required credit score is 640-660, depending on the Private Mortgage Insurance applicable. These values are for Fannie Mae and Freddie Mac and do change.

* For FHA loans, the minimum credit score is 580 with a down payment of 3.5%. The actual lenders may impose higher credit requirements than this, however.  Most bank require 640 FICO, some 620.  FHA permits 580 for maximum financing.

2. Down payment. A down payment of 3%, 5% to 10% is required on a conforming loan for your primary residence. A conforming loan is currently set at anything less than $417,000. Down payments on jumbo loans (> $417,000) are want to be at least 10%.

* Having a down payment of 20% will allow you to avoid PMI (private mortgage insurance); this can save 0.5% – 1.5% per year.

3. Debt, Debt Ratios. Lenders like to be sure that your income can support all of your debt. The primary way they do this is to look at your debt to income ratio. They’ll look at the total housing expenses, including mortgage payment, taxes, home insurance, private mortgage insurance, and any association fees.

* This total is divided by your monthly gross (pre-tax) income. The general rule is to be at less than 28%. When all other debt is included, the total should be less than 36%. In rare instances, lenders may allow up to 45% or more.

* This is a very easy calculation you can do at home before you ever apply for a loan. Do what you can to minimize your debt before you apply for a mortgage.

4. Proof.  Documentation. Lenders will want to see, at a minimum, your last two paycheck stubs and W-2 forms for the last two years. They will also want to see account statements for any bank, retirement, and investment accounts.

* If more than 25% of your pay is in the form of commissions or bonuses or you’re self-employed, they will want to see 2 years of tax returns. Your income will be averaged over those 2 years for any calculations.

* If you want to purchase a house but keep your current residence and rent it out, you’ll need to provide a signed 12-month lease, and only 75% of that income can be claimed when applying for the new mortgage. You also must have at least 30% equity in your current home.

Getting a mortgage isn’t especially easy right now because of the regulations, but banks really do want to loan money. That’s largely how they make money after all. If you conform to all the items above, you won’t have any problems qualifying for a loan.

Even if you don’t meet all the requirements, you might be surprised what they can do for you. It never hurts to ask – or to shop around for a good mortgage loan officer (hint!   homeloanblog.com).

Many people are surprised when they qualify for a mortgage; maybe that can be you, too!

Buying vs. Renting: The age old question

Buying or renting a home is a choice that never seems to be settled for certain. It’s easy to find experts that claim buying is better; it’s also easy to find experts that claim renting is better. The best idea is to consider all the factors involved and decide which is best for your own circumstances.

Remember that there are other factors to consider besides money; there are personal and emotional considerations as well. We’re going to focus on the financial side, but keep those other factors in mind, too.

What is Your Financial Situation?

Can you afford to purchase a home? A down payment and closing costs are going to cost more than the security deposit and first month’s rent on a rental. After the initial costs, you still have to be able to afford to stay.

Rental costs tend to be rather fixed. You’re not going to have to pay for a new roof or a new furnace. Mortgage payments can be less than rent, but there are the possible repair costs that can always pop up. Rents tend to rise slightly every year, but there are no big surprises.

Long-Term Financial Considerations

The main things to consider are equity, tax advantages, and investment potential. These factors do not necessarily guarantee, however, that owning is better than renting, even when looking at purely financial considerations.

1. Equity. While making mortgage payments, you build equity in your home. This happens slowly at first, as the bulk of your payment is going to pay the interest on the loan. On the other hand, with renting, you’ll never see a penny of the money you’ll pay in rent to a landlord; it’s gone forever.

* If you’re only going to be in a home for a short period, renting makes a lot of sense. You won’t have enough time to build any equity in the home unless you got a great deal or the housing market heads for the skies.

2. Tax advantages. While rent isn’t deductible on your federal income taxes, mortgage interest and property taxes are. Another nice advantage: if you sell your primary residence and make a profit, your gain is exempt from federal taxes (unless you really make a killing). The interest on home equity loans is also deductible in most cases.

* Owning a home has several tax advantages, but keep in mind that these tax breaks aren’t exactly ‘free’. You will likely pay $1.00 of interest to get back ~$0.33, but you’re still losing $0.66. The same goes for your property taxes, and property taxes never go away.

3. Investment potential. Paying rent isn’t an investment. But if you live in a rent-controlled area, or an area when rents are quite low compared to the cost of home ownership, you could take the extra money you’re saving and invest it.

* A home can be a decent investment, but if you look at the return you get when taking into account all of your costs, it’s rarely a great investment. Consider all the money you’ll pay in interest, repairs, taxes, and everything else that goes along with owning a home. You’ll probably find the return isn’t that great.

* Just because your home is probably your largest asset, it doesn’t mean it’s a great investment. It can be a better investment than rent though, and everyone has to live somewhere.
As you can see, it’s not entirely clear-cut whether it’s better to rent or own. In general, it’s better to rent in the short-term, unless the housing market is growing rapidly or you get a fantastic price.

Owning is usually preferred in the long term, but don’t kid yourself into believing it’s a great investment; in most cases, it’s just better than renting.

Do your homework and make a smart choice based on your own situation and how you feel about owning a home. Is it a dream of yours? Do you enjoy the privacy? Do you mind the expense, work and responsibility that go into maintaining a home?

There are many reasons that may lead you to determine that either owning or renting your home is your best choice.