Wednesday, April 23, 2014

How the Down Payment Affects Your Mortgage

When you take out a mortgage to buy a house, you are expected to contribute to the purchase of the property with money out of your pocket. Basically, you have to make a down payment. The size of this payment has a direct impact on your home loan and on your finances as a whole. Find out what the effects are.

Loan Approval

When you put down more money, you have higher chances of getting approved for a mortgage. This is because lenders assume a lower risk when they extend a smaller amount of money. While people with high credit score and good credit history can expect to quality for a home loan even with a smaller down payment, this is not the case for those with bad credit. If you have bad credit, one of the best ways to compensate for the blemishes on your credit record is to put down more money.

Loan Size and Cost

The bigger the down payment is the smaller the home loan amount will be. When the amount is smaller, the total cost of the loan will be lower as well. This is because interest will be charged on a smaller amount. If you place more money now, you will save more in the future. This is especially the case when the term of the loan is longer. You can generate huge savings, if you go for the classic 30-year fixed mortgage, for instance.


When you have lower interest payments due to the smaller low amount, the total size of your monthly payments will be lower as well. This will make the home loan much more affordable to repay. You will have greater financial freedom. You will be able to save more for important things such as your children's education. You will be able to make larger contributions to the home loan and repay it more quickly. Even if you have financial difficulties, the risk of default will still be lower.


Home buyers who make a down payment of 20% of the market value of the property or higher are exempt from private mortgage insurance (PMI). In recent years, the cost of this insurance has grown significantly due to the disturbances in the housing market. The FHA loans, which can be obtained with just 3.5% down payment, have some of the highest PMI costs and some of the strictest PMI requirements. By putting more money down now, you can generate even greater savings in the future.


You will have better chances of affordable refinancing if you put a bigger down payment when you buy a house. This is because you will automatically get more equity in the property. The greater your equity is the more likely you are to get approved. You can also expect to get a better deal featuring much lower interest rate and monthly payment.

Overall, the bigger the down payment is the better. You will save on the mortgage and on PMI. You will enjoy lower monthly payments and lower risk of default. Experts recommend that you put as much money down as possible. Anything over 20% of the property's market value would be outstanding.

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Sunday, April 20, 2014

Practical Mortgage Tips for First-Time Home Buyers

It is both exciting and a bit scary to buy your first house. This is an extremely important step so you would want to lower the risk of costly mistakes to the very possible minimum. For this, you have to be fully prepared for what lies ahead. Use some practical advice which will help you secure the best mortgage and enjoy homeownership fully.

Find out how much house you can afford.

This is now easier than every before with the mortgage calculators available online. All you need to do is to figure out how much you can afford to pay in the form of monthly installments. Then the calculator will show you how much you will be able to borrow given the current interest rates and the loan term which you prefer. The next step is to compare this number to the property sales prices in your area. You will definitely benefit from experimenting with different numbers to see which kind of borrowing strategy will be best for you.

Take into account all relevant costs.

There are various different costs which you will incur as a homeowner in addition to the mortgage payments. The closing costs associated with the property purchase deal are typically around 3.5% of the purchase price and you will have to pay them out of your pocket. You will also have to pay taxes and home insurance premiums. It is important for you to calculate all of these costs to decide whether you will be able to afford homeownership.

Check whether you qualify for a mortgage.

As of January 2014, the requirements which you have to meet in order to qualify for a home loan are stricter. Applicants have to have debt-to-income ratio lower than 43%. In general, the monthly home loan payment should not exceed a third of your gross income. You may be able to qualify for a loan with credit score of 600, but the most affordable rates are available to applicants with score higher than 720.

With an FHA loan, the minimum down payment requirement is 3.5% while for conventional loans it is typically 10%. You have to ensure that you have sufficient savings for making this payment. In general, if it is lower than 20% of the property purchase price, you will have to pay mortgage insurance as well.

Get familiar with the different types of loans.

There are loans with a fixed rate and ones with adjustable rate. There are also hybrid loans which have the rate fixed for an initial period of time. There are loans especially designed for the purchase of luxury properties. There are government-backed mortgages including FHA loans, VA loans and USDA loans. It pays off to compare all options available to you in order to make the right choice.

Finally, you should consider your future plans carefully. How long do you plan to stay in this house? Do you plan to have a bigger family? Do you plan to make other major investments in the future? Do you plan changing your job or starting your own business? All of these and other relevant factors should play a role when you are making a decision on a mortgage.

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Thursday, April 17, 2014

The Benefits and Drawbacks of FHA Loans

During the years after the housing market crisis of 2007, the FHA loans enjoyed great popularity among home buyers. Now as the economy is improving while the interest rates remain low, they are facing growing competition. The general trends are always important, but when you have to make a decision on whether to get such a loan, you need to focus on the facts. Here is a detailed evaluation of these types of mortgages. It will certainly help you make up your mind.

Understanding FHA Loans

The abbreviation stands for Federal Housing Administration. This is the Federal Government agency responsible for insuring the mortgages. That is why they are called FHA loans. It is important to note that the Federal Housing Administration is not a lender and does not issue mortgages. It backs them up with insurance. It works with a multitude of approved lenders that provide the actual house financing products, which are accessible to all qualifying American citizens.

The Good Things

There are two main benefits of FHA loans which the other mortgages do not offer. It is worth looking at them in greater detail.

Lower down payment - With these mortgages, the minimum down payment requirement is 3.5%. This means that you will be able to quality for financing even if you have modest savings. For comparison, most conventional lenders require a down payment of at least 10%. Some may offer products with 5% down payment, but these are typically harder to qualify. You may be required to present evidence of bank reserves which would allow you to make the mortgage payments for a set period of time. Simply put, these loans require the lowest possible down payment.

Lower credit score requirement - Far from perfect borrowers can secure an FHA mortgage with ease. The official minimum credit score requirement is 580. Over the past few years, lenders kept their minimum score requirement higher at around 640. Now the biggest players in the market have announced that they have lowered their minimum requirement to 600 and others will certainly follow as well.

The Bad Things

The FHA loans are easier to get, but are they affordable? They may actually not be the most cost-efficient solution.

Potentially Higher Cost - Home buyers who make a low down payment will have to borrow more money to finance the purchase of a house and this will result in higher interest payments. These push the total cost of the loan up and the size of the monthly payment as well. Furthermore, borrowers with lower credit score can expect to pay higher interest rate.

Costly mortgage insurance - All such loans are backed by the government and borrowers are responsible for paying insurance premiums. There is an upfront premium of 1.75% of the value of the mortgage. Currently, the annual premium ranges from 0.45% to 1.3% of the mortgage amount depending on the term and on the initial loan-to-value ratio (LTV). If the initial LTV is higher than 90%, which corresponds to down payment lower than 10%, premiums have to be paid during the whole term of the mortgage.

Overall, the FHA loans are a good choice for people with limited means and less than perfect credit score. Others should consider conventional mortgages as well.

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Monday, April 14, 2014

5 Mistakes Which Lower Your Chances of Mortgage Approval

Buying a house is perhaps the biggest purchase that you will ever make in your life. That is why you simply cannot afford to make mistakes when it comes to getting house financing. Take a closer look at the mistakes, which will have the greatest negative impact on your chances of mortgage approval, and learn how to avoid them.

1. Relying greatly on gifts

Lenders will inspect your finances more strictly than ever before. If you have plenty of gift contributions from relative or from other sources and these have not been formally documented, you may be unable to use the money to make a down payment. When you have smaller down payment, your chances of getting approved for a mortgage will be lower.

The best strategy to adopt in case you plan to use gifts is to have the people who make them sign contribution letters. That way, you will have formal documents proving the sources of the money. You will be able to get approved and even to secure a more affordable loan. Make sure that you use as much of your savings as possible as well. Many lenders set a maximum limit on the contributions as a percentage of the down payment which the house buyer makes.

2. Taking your time to shop around

When you shop around for a mortgage, the lenders have to get your credit record to provide an interest estimate. Your credit score will not get affected for 30 days after the check. This means that if you get several quotes within a couple of days or a week, your score will not be greatly affected. However, if you shop around over a period of several months, your credit score may get seriously damaged. In this case, you will face a higher rejection risk. You will most likely be charged higher interest as well. The best way to avoid this mistake is to get organized and to get quotes without wasting time.

3. Switching jobs

Lenders evaluate not only the size of your income, but its security as well. If you switch jobs shortly before applying for a mortgage, your income will appear less secure and stable. This can lower your chances of approval significantly. Generally, people who have been working for the same employer for over two years have the best chances of approval. You should try to meet this lenders' requirement as closely as possible.

4. Being careless about payments

Any missed or late payment will have a damaging effect on your credit score along with blemishing your credit record. Such mistakes are silly, but quite easy to make at the same time. That is why you have to do your best to avoid them. Plan and schedule all payments which you have to make. Use alerts if you have to. If you are too busy, you can consider setting direct debit payment.

5. Taking out another loan

When you take out another loan, both your credit score and your debt-to-income ratio will be adversely affected. This can literally ruin your chances of getting a mortgage loan. If you need to get cash, you should consider other sources such as your credit cards. Just make sure that you use them wisely and repay any outstanding balances on time.

Do what it takes to get approved for a mortgage loan.
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Friday, April 11, 2014

5 Factors to Consider Before Mortgage Refinancing

It is a common misconception that homeowners should go for refinancing straight away if the mortgage rates fall. There are many different aspects to this type of deal. On one hand, you have to figure out how much money you will actually save. On the other, you need to decide how well prepared you are for making this step. Find out what factors you need to take into account in order to make the right decision about this major financial move.

1. Interest Rates

The first thing which you need to do is to compare the current mortgage rates to your interest rate. Calculate the difference and how much you will save monthly. You should also calculate the total amount of savings that you will generate. These numbers will give you a general idea of whether the deal is worth it.

2. Closing Costs

You will most certainly save money if you refinance your existing loan at a lower interest rate. However, the closing costs will reduce these savings and you need to calculate by how much. There are various administrative and banking fees that you have to pay. You will most certainly have to pay an application fee and a fee for locking the quoted interest rate.

You have to figure out whether you actually have sufficient savings to cover the closing costs. You should definitely avoid no-cost refinancing. This is because in this case the costs are actually added to the new loan amount. As a result, you will have to pay interest on them throughout the whole term of the loan. This will surely reduce the projected savings.

3. Current Loan Term

If you have had your current mortgage for less than five years, your may have to pay a penalty fee for refinancing. Check to see if such a fee exists in your agreement and how much you will actually have to pay. Typically, these fees are high enough to prevent homeowners from getting a new loan.
If you are close to the end of the term of your current home loan, it may not be wise to refinance. If the new loan has a longer term, you may actually pay more interest even though the rate is lower. Besides, you will have to bear the possible risk of default and foreclosure for longer.

4. Equity

You should check how much equity you have in your home before you decide to go for refinancing. The more equity you have the better your position is. It will give you better chances of qualifying for a new loan. More importantly, you will have to borrow less money and this will help you save even more on interest.

5. Mortgage Requirements

Currently, the requirements for home loans are stricter than before so you have to be absolutely certain that you will meet them before applying for one. You have to have a credit score of 720 or higher in order to qualify for a conventional home loan with affordable rate. Your debt-to-income ratio must not exceed 43%. You must have secure employment income.

You have to be absolutely certain that you will benefit fully from mortgage refinancing before you make this important step.

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Tuesday, April 8, 2014

This Month in Real Estate April 2014 (US)

While that figure's not surprising, it's important to note that in a seller's market, what's online right now may not be there tomorrow. In fact, the information on many listings may be out of date the instant they're posted. That's where your real estate agent comes in. Your agent can get updates and information as it's happening- before it shows up on the web. And in a seller's market, getting info a few hours ahead of time could make the difference between finding your dream home and missing out on a great deal.

Saturday, April 5, 2014

How To Determine What Is Better? Renting Versus Buying A Home

The first question many people ask is whether it is better to rent a home or buy a home.

That is not exactly an easy question to answer generically. There are many factors to consider. Are you going to be in your home for a long time? Is it a place that you are looking to raise your children in until they are finished with school? If yes, the answer is that it is better to buy.

If you are just starting out and don't have any children yet, perhaps renting a one bedroom apartment is cheaper for you economically. Most homes for purchase have at least two bedrooms. You could also purchase a two bedroom condo and rent out the second bedroom to a roommate. This would be cheaper for you than renting.

If you have a job that requires a lot of travel and has the possibility that you can be asked to relocate to another office, in another State, renting makes it easier to pick up and move if you have to leave on short notice and you find a landlord that can give you a month-to-month lease. Selling a home can often take two to six months.

There are many more reasons that it is economically better for you to purchase a home than to rent a home.

A landlord has to pay the mortgage, taxes, insurance, water, sewer and sometimes trash pick up on a property that he or she rents out. He or she also has to set aside a reserve fund in case there are any repairs that are needed to the property (like the furnace fails or the roof begins to leak). On top of all of those costs, he or she typically rents out properties to make a profit. You are inevitably going to be paying a higher price for the place that you live in when you rent from someone else. At the end of the year, he or she gets the tax write-offs for the mortgage interest, insurance costs and property taxes that you paid.

If you had your own home, yes, you would have a mortgage payment, insurance payment, property tax payment and water, sewer and trash pick up bills, and you would need to set aside some money in case necessary repairs come up unexpectedly; however, you will not pay the over-head of the profit the landlord is making, and your taxable income is reduced when you itemize your mortgage interest and property tax payments on your income tax return. If you pay mortgage insurance, that is deductible as well, so not only are you paying less to live in the property, you are reducing your taxable income. Last but not least, with each mortgage payment you make, you are increasing equity in your home which is money in your pocket when you sell it.

Adding equity quickly means more money in your pocket!

Another interesting tip that not many people realize is that (if you can afford it) paying an extra one hundred dollars per month to your mortgage will help you pay off the mortgage years earlier. Each time you reduce the principal on the mortgage payment, the interest due on the next payment is less; therefore, more of your next payment is applied to the balance. The more often you do this, the faster you are paying down the mortgage. You can reduce a thirty year mortgage by about five to seven years.

If you aren't sure you could be disciplined enough to voluntarily make the extra hundred dollar payment each month, you can ask your mortgage company for a bi-weekly payment option that coincides with your bi-weekly paychecks. Every two weeks, on your pay date, the mortgage company can auto-draft half of your mortgage payment. This is another option that helps pay off your mortgage faster and reduce the amount of interest that you pay. A bi-weekly pay schedule is actually twenty six paychecks per year. If the mortgage company takes half your payment bi-weekly, this would result in thirteen monthly payments (instead of twelve) per year. That extra payment goes completely to reduce the principal balance, which thereby, reduces the interest you owe faster on the mortgage, and the mortgage is then paid off (or paid down) faster than originally intended. This option works well even if you are planning to sell your home in five to ten years when you upgrade or downgrade your home. The balance owed on the home will have been reduced more than you had originally planned and you will have more equity in the home (i.e. cash in your pocket when it is sold).

Maintaining a steady monthly budget.

Lastly, you must consider that a landlord typically has a clause in his or her lease that after a certain amount of time, he or she can increase the rent. If he or she has been doing a lot of repairs on the property, he or she may do that every time he or she has the ability to, based on the lease guidelines. If you purchase a home with a fixed-rate mortgage, your mortgage payment can never go up. The taxes might increase slightly, sometimes they go down too. Your insurance might increase, but that can also decrease at times, as well. Your mortgage payment itself will never increase.

This article has covered the basics of how to determine if you should rent or buy. We will go into expenses involved in owning a home in post on our blog, so be sure to follow along.

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