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Want To Own Your Home Free And Clear? 7 Ways To Pay Off Your Mortgage Early

There was a time when taking out a mortgage on a house meant you actually planned to stay there long enough to pay it off and own it outright. In many cases, people bought homes, raised their families, retired, and then passed this valuable asset down to their kids. But, largely, this is not the case anymore. The most recent National Association of REALTORS® 2016 Profile of Homebuyers and Sellers shows that homeowners stay in their houses an average of 10 years – which seems like a lot when you consider how many people move up to a larger home as their family grows, move away for job transfers or other employment issues, or take the equity and run to something better after just a few years.

But that doesn’t mean it doesn’t make great sense to pay off your mortgage early, which can save you many thousands of dollars. “Topping the list for most folks in the ‘Pro’ category is peace of mind,” said The Balance. “Plain and simple, you don’t have to worry about a mortgage payment, and you know you’ll always have a roof over your head if, for example, you lose your job. For a lot of folks, knowing they’re not paying their hard earned money to the bank in the form of interest is also a plus. But freeing yourself from a big mortgage payment also gives you more financial flexibility to do other things.”

Here are seven ways to go about it.

1. Make an extra payment per year

Making 13 payments instead of 12 in a year can save you thousands and shorten your loan. “One way to pull off this tactic is to save 1/12 of a payment every month, and then make an extra payment after every 12 months,” said Bankrate. “Let’s say you do this starting the first month after getting a 30-year mortgage for $200,000 at 4.5 percent. That would save more than $27,000 interest, and you would pay off the mortgage four years and three months earlier.”

You can accomplish the same thing by changing when you pay your mortgage. Instead of making one mortgage payment per month, split it up into two. “A bi-weekly mortgage payment program is meant to short-circuit your loan’s amortization schedule,” said The Mortgage Reports. Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year. With each ‘13th payment,’ your loan balance is reduced by the entire amount of the payment. You reach your loan’s payoff date sooner.”

2. Make an extra payment each quarter

Want to be a little more aggressive than that about getting your mortgage paid off early? “Make an extra house payment each quarter, and you’ll save $65,000 in interest and pay off your loan 11 years early,” said Dave Ramsey – an example that’s based on “the average $220,000, 30-year mortgage with a 4% interest rate.

3. Refinance

It may sound counterproductive to add to your mortgage balance while your goal is to lower it, but, depending on your existing interest rate and the new one you could get, it might be a great move, especially if your closing costs are low. Remember, though, that, while your monthly payments will drop and you will save money on all that interest you don’t have to pay, “It won’t accelerate your pay-off date,” said Forbes. “(In fact, it may extend that date even further out into the future.) Refinance into a 30-year mortgage with a lower rate, and then continue making the same monthly payment that you were previously making. This ‘extra’ money (the gap between your new, lower monthly payment and your original monthly payment) will get applied to the loan as an extra principal payment. And this will accelerate your payoff date.”

Or…

4. Refinance to a 15-year loan

As long as you’re refinancing with the goal of paying your mortgage off sooner, switch from a 30-year to a 15-year loan. By refinancing that same $200,000 loan at 4.5 percent into a 15-year loan at 4 percent, you can pay off the mortgage “10 years earlier and save more than $60,000,” said Bankrate.

5. Get rid of PMI

Refinancing is also a good idea if you’re looking to lower your payment – and apply the savings toward your mortgage balance – by removing your PMI. “If a home was purchased with less than a 20% down payment, the bank is probably charging PMI,” said Mortgage Calculator. “However, once the borrower owns 20% of the home, this charge could be eliminated.”

6. Apply any windfalls

Get a raise? A bonus? A surprise cash gift? Instead of taking that vacation or putting it into your savings, apply it to your mortgage balance. “A $10,000 lump sum payment on that 30-year, fixed-rate mortgage for $200,000 at 4.5 percent “pays off the mortgage two years and four months earlier, and saves more than $19,000 interest,” said Bankrate.

7. Save those pennies

They do add up, especially if by “pennies” you mean dollars. If you apply the same saving techniques toward paying off your mortgage as you did to get your down payment together, you should be able to carve away at the total owed. Even an extra

$100 a month toward your principal can save you more than $30,000 in interest over the life of your loan – or more, depending on your interest rate and mortgage total.

One of the easiest ways to chip away at your mortgage is to simply “round up your payments so you’re paying at least a few extra dollars a month,” said Dave Ramsey.

Think Your Credit Score Is Too Low To Buy A House? Maybe Not

When it comes to your credit score, how low is too low? The number you really need to buy a house.

We all know that when it comes to buying a house, there are a few things we need, like a down payment and a good enough credit score to qualify for a loan. But what does a “good enough credit score” really mean? Does your credit history have to be impeccable? Can you have a couple of boo-boos? And, if you do have issues on your report, how much of a hit will you take?

Your credit score is “a number, roughly between 300 and 850, that summarizes a consumer’s creditworthiness,” said Bankrate. “The higher the score, the more able and willing a consumer is to repay a loan, lenders believe. The best mortgage rates and terms go to borrowers with credit scores of 740 and higher.”

But most of us can’t measure up to that number. Thankfully, we don’t have to. There’s room for lower scores – even really low scores – depending on the type of loan you’re applying for, with a number of other factors (your income and work history, the amount of your down payment, the state of the economy) thrown in. Knowing where the bottom is will help you figure out how to proceed.

FHA loans

The advantage to a Federal Housing Administration (FHA) loan for many buyers is the low down payment. You may need only 3.5% down to purchase a home with this type of loan, which is backed by the government. But, you’ll need a minimum 580 credit score if you’re only planning to put 3.5% down. Can’t meet that benchmark? You’ll need more cash up front.

“If your credit score is below 580, however, you aren’t necessarily excluded from FHA loan eligibility,” said the FHA. “Applicants with lower credit scores will have to put down a 10 percent down payment if they want to qualify for a loan.”

For FHA loans, your credit score can be as low as 500. But, “Those with credit scores between 500 and 579 are limited to 90 percent LTV,” which leaves a lot of people out of luck.

Non-government-backed loans

The issue with FHA loans for many buyers: That pesky private mortgage insurance (PMI), which can add several hundred dollars to the monthly payment and is “required any time you put less than 20% down on a conventional loan,” said My Mortgage Insider.

If you have a larger down payment, you may be able to avoid paying PMI by going with another type of loan – but only if you have the credit score. “To qualify for a conventional mortgage, a borrower generally needs a minimum credit score of 680 and at least 5 percent down,” said Bankrate. “Many lenders require at least 10 percent down.”

There may be more wiggle room in that credit score if you can come up with more money for a higher down payment. But, if it’s too low, you’ll likely be pointed right back to FHA loans. On the other end, a higher score will get you the best possible interest rates.

Subprime mortgages

Have a credit score below 500? You’re officially in the “bad credit” zone. But, you may still be a candidate for a loan, even if you can’t qualify by FHA standards, by going with a subprime mortgage. The word “subprime” still sends shivers down the spines of many people because loans extended to what many industry professionals considered to be unqualified applicants were largely blamed for the last housing crash. Accordingly, many of these opportunities dried up in the aftermath.

Today, though, subprime mortgages are available. Keep in mind that minimum credit scores will depend on the individual loan and lender, and each borrower’s unique set of financial circumstances. And, you’ll pay for the privilege of being extended a loan with higher rates and/or fees.

“Subprime mortgage lenders mostly use collateral like equity earned when considering a ‘refinance’ or a more significant down-payment when talking about a ‘purchase money’ transaction,” said First Time Home Financing.

Private Money Lenders

If all other avenues fail, you may still be able to get a loan with your bad credit from a private money lender. These are individuals with money to spend who are looking for investments. Because your low credit score makes you risky, you’ll be charged more for your loan.

“Your personal credit is usually a smaller factor in these types of loans. However, you should know that the interest rate on these loans is much higher – in the range of 10-15%,” said First Time Home Financing. “If you really have bad credit, this could be your only option for the time being.”

We currently work with lender who can offer these loan program and we would be happy to put you in contact with these lenders so you can qualify for mortgage financing. Please CLICK HERE for additional information about these loans or give us a call at 480-213-5251.

Understanding Adjustable Rate Mortgages

Question. We are shopping around for a mortgage for our first home and are confused about the many loans that seem to be available. Interest rates are low, real estate appears to be picking up again, and the adjustable rate mortgage is of interest to us. We do not understand how that works. What exactly is an ARM, and do you have any advice on whether we should use this form of loan?

Answer. Interesting — and timely — question. For a number of years — especially since mortgage interest rates were very low — rarely did any homeowner even bother looking at creative mortgages. And there have been a lot of them. For a long time, it seems that every day, the mortgage financing industry came up with a new kind of mortgage — or at least a new twist on the old ones. Many of these mortgages have acronyms, such as as GEMs (Growing Equity Mortgages), RAMs (Reverse Annuity Mortgages), HECM (Home Equity Conversion Mortgage — aka reverse mortgage), SAMs (Shared Appreciated Mortgages), and of course ARMs (Adjustable Rate Mortgages).

Lets look at the Adjustable Rate Mortgage. This was created in the early 1980’s when lenders were hurt financially because homeowners were repaying their loans at 8, 9, or 10%, while the cost of borrowing that money was more than 15%.

Lenders made a basic decision several years ago. The shorter the term of the loan, the lower the interest rate would be. Thus, today you can still obtain a fixed-rate, thirty year mortgage, meaning that you will be guaranteed that the mortgage payment will be the same every month. But the fixed rate, thirty year mortgage — although still quite low today — carries about the highest interest rate going.

The Adjustable Rate Mortgage is guaranteed to stay on the books for thirty years, but the interest rate is adjusted periodically. There are many variations on the adjustable rate theme. There is the so-called 7-23, where the rate is fixed for the first seven years, and then adjusts thereafter for 23 more years. If the rate is adjusted for five or seven years, the initial rate will be lower than the one for a fixed rate thirty-year mortgage, but higher than an adjustable rate mortgage that is adjusted every year.

Today, the most common ARMs are the one-year, the three-year adjustable, or the 7-23. But even with these common ARMs, consumers should shop around for the best deal.

Here is what you should do:

  • Determine the initial interest rate. It is defined as the rate on which your loan will be based in the initial period — whether it is 1, 3, 5, 7 or even 10 years.
  • Ask if the ARM is based on a negative-amortization schedule. Although my experience is that most ARMs currently are not amortized on a negative basis, I still have seen some loans with a negative factor built in. This means that although you may be paying a lower interest rate for the first few years — let’s say two or three percent — the interest still is being charged on your loan at a higher rate — for example 4 or 5 percent.. If this is the case, the extra interest payment (the difference between what you are paying and what is being charged you), is added to your mortgage balance. Under no circumstances can I recommend the negative amortization mortgage.
  • Determine what the rate adjustment will be. Find out if there is a cap on the periodic increases, and determine what index the lender uses as a base for calculating changes in the adjustable rate.

Generally, lenders use one of three indexes: (1) the weekly average yield on Treasury Bills, which is published by the Federal Reserve Board, (2) the 11th District cost of funds index — called COFI, or (3) the Libor (London Interbank Offered Rate) The lender then adds to that index number a rate adjustment (called a margin) and if the adjusted rate is higher than the old one when your adjustment period comes due, your interest will be modified accordingly for the next set of payments.

Another point to consider is whether there is a ceiling on the overall amount that your rate can increase. Lenders realize that an ARM without such a ceiling is a potential disaster for consumers. If you start with a 3 % loan, for example, and there is a 2% point cap on the yearly increases, it is conceivable that at the end of the fifth year you would be facing a mortgage rate of 13%.

Most lenders, therefore, are putting an overall ceiling on the amount that your interest rate can rise. And it is usually limited to 5- 6 percentage points. Thus, if your initial rate is 3%, the most you will ever pay would be 8 or 9%. Make sure you understand what the ceilings are, and get them in writing, before you commit yourself to an ARM.

This analysis is equally valid for the various kinds of ARMs, whether the three year, the 5-25, the 7-23 or even the 10 year ARM.

There are also serious problems with interpreting how the rate adjustment works after you get the loan. Anyone with an ARM is advised to carefully review their original loan documents, to determine whether the lender has properly and correctly assessed the new adjustable rate, when the adjustment period comes due.

And keep in mind: depending on the cap, at some point in the future, you may be required to make more monthly payments than you can afford.

Position Realty
Office: 480-213-5251

3 Steps To Saving For Your Dream Home

According to Harvard University’s “State of the Nation’s Housing” report, while more people than ever before want to own their own home, fewer feel financially ready to do so yet. Reasons range from high rents to student loan debt.

Saving For Down

Millennials, in particular, are waiting longer to get married, start families and purchase their first home. But this is not necessarily bad news for the housing market. In fact, it could mean that the millennial generation has something to teach us all about saving consistently towards a big life goal such as owning your own home!

In this article, learn three important steps to take when you start saving for your dream home.

Step 1: Pay down your debt to clean up your credit.

Your credit score is a tricky business when it comes to saving for your first home. You have no history of carrying a mortgage, so you can’t make any real impact there. What you can do is to clean up your overall credit report so your general credit score is as healthy as possible before you apply for your mortgage loan.

According to the National Foundation for Credit Counseling (NFCC), a surprising number of Americans think they have “above average” (60 percent) to “very good” (41 percent) credit, although a full 48 percent have not seen their credit score in the past three years or ever.

So clearly, this is where you need to start. The best way to differentiate yourself from your competition (other people who are trying to convince a direct lender to give them a mortgage loan) is to pay down your debt, clear up any disputes on your credit report and, in so doing, boost your credit score so you can qualify for the best mortgage at the lowest interest rates.

Step 2: Separate and automate your savings.

Saving money is never going to be the easiest goal you attempt. In fact, according to The Atlantic, one of the chief reasons that nearly half of all Americans have little or no emergency savings to fall back on is taking on too much mortgage debt.

So here is a clear area where you should proceed with caution. First, save. Then, buy a home. The best approach to make saving as painless as possible for you is to automate your savings. You can do this by setting up direct deposit on your paycheck and then regular auto-drafts into a savings account reserved just for dream home savings. This way, you never even touch those funds and feel tempted to spend them instead.

Step 3: Downsize to upsize.

Finally, one effective change many adults today are making to save more towards their dream home is to downsize while they save. This can mean anything from moving to a smaller apartment to getting rid of your cable television subscription. Also, you must continually remind yourself why you have downsized in order for this step to work well.

But the key to making downsizing work to serve your greater goals is to make sure you deposit every cent of what you save into your dream home fund. Referring back to Step 2 here, the easiest way to do this is to calculate for yourself exactly what you are saving by paying less rent, giving up cable, etc., and then setting up a monthly auto draft in that amount to deposit directly into your dream home savings account.

By following these three steps, you can make tangible financial progress in saving to buy your dream home. If you can save 20 percent towards a downpayment, you can avoid paying expensive Private Mortgage Insurance (PMI) and you may even qualify for a lower interest rate. Scrimping and saving is never fun or easy, but it will be worth it when your realtor hands you that brand-new set of house keys!

What Is The Difference Between A Mortgage Broker and Lender

When you’re ready to get a mortgage, you face a dizzying array of choices: Fixed rate or variable? Points or no points? Mortgage broker or mortgage lender?

That last decision – mortgage broker or mortgage lender – involves a simple but easily misunderstood distinction.

Simply put, a mortgage broker is an independent professional who can shop around to find deals from a variety of lenders. A mortgage lender is represented by a loan officer who can speak only for that institution’s product line.

What does that mean for the borrower? As a practical matter, a mortgage broker can present you loan packages from multiple lenders – for instance, Wells Fargo, Chase and Quicken Loans. The loan officer from Wells Fargo, on the other hand, can pitch only Wells Fargo mortgages.

The advantages of dealing with a lender include reliability and reputation. With a broker, you have greater flexibility. Based on your financial profile, the broker may also line you up with a lender where you’re most likely to qualify for the loan.

When in doubt, comparison shop

So, which one should you use? There’s no clear answer, says Eric Tyson, author of Personal Finance for Dummies and co-author of Mortgages for Dummies.

“I’ve seen people be happy using either option,” Tyson says. “The important thing is to shop around.”

Tyson suggests soliciting loan packages from a mortgage broker and a couple of mortgage lenders, then judging which proposal offers the best deal based on rates and fees.

In the end, whether to use a mortgage broker or mortgage lender depends in part on your finances. If you have stellar credit and steady income and you’re shopping for a plain-vanilla loan, mortgage rates and loan fees are unlikely to vary much from one lender to the next.

mortgage-broker

If, on the other hand, you have spotty credit, you’re self-employed or you have an otherwise-tricky profile as a borrower, you may find the number of mortgage lenders willing to do business with you is more limited. In that case, it can be more convenient to use a mortgage broker. After all, they make a living from their knowledge of various loan products.

Laws offer protection

Unfortunately, the image of both mortgage brokers and mortgage lenders was tarred by a minority of unethical practitioners who built an unsavory reputation for themselves during the housing bubble. The movie The Big Short, based on author Michael Lewis’s expose on the U.S. mortgage meltdown of 2005, portrayed greedy mortgage brokers going so far as to target exotic dancers with bad loans. In another example, The Miami Herald reported in 2008 that thousands of convicted criminals were given mortgage broker licenses by the state of Florida. Not to be outdone, many mortgage lenders offered a menu of high-fee, high-risk loans.

Those excesses have largely gone away, however. The Consumer Financial Protection Bureau, created in 2010 to ride herd on the mortgage industry, released guidelines in 2014 that included a ban on “steering” – that is, on financial incentives for loan officers to push you into a loan you can’t afford. Lenders have stopped offering some of the risky loans that drove the housing bubble, and mortgage lenders and brokers operate under heightened levels of scrutiny and disclosure.

Tipping the negotiation in your favor

Whether you opt for a mortgage broker or a mortgage lender, the paperwork burden will be similar. Both will run a credit check, and both will ask for tax returns, pay stubs, bank balances and other information required for the lender’s underwriting process.

But payments for brokers and lenders are different, and understanding how the broker or loan officer is paid may help you land a better deal. Mortgage brokers are typically paid a commission by the lender – usually 1 percent to 2 percent of the amount of the loan. For loan officers at banks, compensation models vary. They might be paid a commission, but they typically collect a salary plus bonus.

To win your business, a mortgage broker might be willing to negotiate his fee, Tyson says. And the larger your loan, the more negotiating power you have.

Position Realty
Office: 480-213-5251

Should You CoSign On Your Kid’s Mortgage? The Crucial Questions To Ask Yourself

If your child is looking to buy a house and can’t qualify on their own, you may have thought about consigning on a loan. “It can be a brutal world out there, and you want to help someone you care about. That’s a perfectly reasonable argument,” said US News.

But have you examined the potential consequences of this action? Your good intentions could end up costing you, so you might want to ask yourself a few key questions before you sit down at the closing table.

What’s the plan?

It’s a good idea to examine the goals here – both yours and the recipient of your kindness. Is this house a long-term investment that will be on your credit for a long time? A short-term thing that’s only intended to help establish credit for your child? A moneymaking venture that could pay off for both of you after you flip the house? Knowing the plan can help you make the best decision.

Is your child responsible?

What have you observed about your son or daughter’s financial responsibility. Do they have a lot of outstanding credit they’re not managing well? Do they regularly borrow money without paying it back? Do they buy a lot of unnecessary items instead of being more prudent with their money and establishing some solid savings? These could all be red flags.

What is your financial commitment?

If your child needs a cosigner, does that also mean they need help with the down payment? If your money is going to be tied up in this home purchase, you’ll want to establish ground rules from the beginning. Is it a gift or a loan? If it’s a loan, what are the terms? What if he or she defaults? If your name is on the mortgage, the responsibility to pay may fall to you.

Why-You-Should-Never-Cosign-for-Your-Kids

How important is your credit to you?

Your credit is going to take a bit of a hit with the addition of a new mortgage.

“The loan appears on your credit report, and the monthly loan payment factors into your debt-to-income ratio – regardless of whether the primary applicant makes the payment each month. Because you’re liable for this balance in the event of default, being a cosigner can decrease your ability to get new credit,” said Money Crashers. “But this isn’t the only consequence of a higher debt-to-income ratio. Cosigning a loan can also lower your credit score because the amounts you owe makes up 30% of your FICO score. Thus, the more debt you have, the lower your credit score. Ideally, your debt-to-income ratio should be no higher than 36%, as your credit score will drop as your debt approaches or exceeds this percentage.” But the real danger is, again, in the possibility of your child defaulting on the loan.

“The bank wants to have someone on the hook in case a loan is not repaid; if you cosign a loan, you’re that person who is on the hook,” said GO Banking Rates. “So if your child doesn’t make his loan payments, you will be expected to do so – or risk suffering the impact of a defaulted loan on your credit score.”

Will two mortgages be a hardship?

Cosigning for a loved one could prevent you from doing the things you want to do, like buying a new house for yourself, refinancing, or even buying a car. “One potential downside for parents is that the mortgage will show up on their credit as an outstanding loan obligation, which could complicate refinancing or buying another home in the future,” said US News.

There may also be additional impacts to your finances you hadn’t considered. “You should consult a financial advisor first to make sure you can comfortably afford to help without jeopardizing your financial security,” they said. “You may also want to consult your tax preparer about potential tax implications, and, depending on the circumstances, ask a lawyer how to structure the legal paperwork in case your child divorces a spouse or defaults on the loan. Nobody plans on things going awry with real estate transactions, but it can happen, so it’s best to be prepared.”

How’s your relationship?

“Another important risk to consider with a cosigned loan is the effect it could have on your relationship with your child,” said GO Banking Rates. “Animosity can result from late payments or, even worse, defaulting on the loan.”

parents-estranged

What’s your goal?

If you’re simply looking to lend a hand, well, first of all, that’s super nice of you. Homeownership is still the American dream, and helping someone else’s come true is awesome. But, is putting your credit at risk really the best plan?

There may be much better ways to help, like:

Gift a down payment – just make sure you know the tax implications.

Put the house in your name and rent it to your child – if you have the financial wherewithal and the goal is simply to provide a safe place to live, this might be a better solution. You can always pass the home along at the later date by providing seller financing.

If you choose to go ahead with cosigning, take precautions. There are steps you can take to help protect yourself, like using the tools provided by the lender to set up alert when payments are due, overdue, and when they’re posted, and setting up direct debit so payments are automatically made at the same time every month.

Position Realty
Office: 480-213-5251

CONFIRMING YOUR MORTGAGE LOAN BALANCE IS A YEARLY TASK

Have you ever wondered whether your lender has properly calculated your outstanding loan balance. All too often, we take for granted the mortgage loan balances given us by our lender, and never bother to check the figures ourselves. When we go to sell our house, the excitement of the settlement process often makes us overlook an important issue: was the loan payoff statement provided by our lender accurate?

Different lenders have different computer programs. However, at the end of each year, a mortgage lender is obligated to provide all borrowers with a statement indicating how much mortgage interest was paid during the previous year, and — if taxes were collected in escrow — how much was paid for the real estate taxes on the property.

Some lenders provide a running monthly statement, showing the old loan balance, the amount of the payment broken down into interest and principal, and the new loan balance after crediting the principal payment. Keep in mind that when you make a mortgage payment to your lender, interest is calculated first on the then-outstanding balance, and the difference goes toward reducing principal.

Let’s look at this example. You borrow $100,000 at 4 percent interest, to be amortized over thirty years. The computer — or an amortization program — tells us that the monthly payment required to fully pay off (amortize) the loan over a full 30 year period is $477.43. If we do some basic calculations, the first payment consists of $ 333.33 for interest and only $144.10 for principal. It should be noted that for the first seven years, you will be paying a lot more interest than will be credited toward the principal balance.

Thus, our example looks like this for the first two payments::

Mortgage Chart #1

Interest is always calculated on the then outstanding balance for the previous month, which is why the interest goes down (ever so slowly at first) and the principal goes up (ever so slowly).

If you did not make any extra payments over the life of your loan, these calculations can be done quickly — either by hand or preferably by using a computerized amortization program. However, if you have made a larger monthly payment, then you have to do the numbers. Let us further assume that in the third and fourth month, you decide to make a payment of $1,000, instead of the regular payment. The next two month’s calculation would look like this:

mortgage Chart#2

As can be clearly seen, if you make a larger payment every month, you will significantly reduce the length of your loan. In fact, if you make one extra monthly payment per year, you will reduce a 30 year loan down to approximately 22 years. And I recommend you spread the extra payments over the 12 month period, rather than making one lump sum at the end of the year.

confirm mortgage

If you decide to make these extra principal payments, make sure that you clearly notify your lender each time that you are making such extra payments. Write “Extra Principal, $___” on both the check and the mortgage statement which you send in to your lender.

If you do not have access to a computer, the math calculations — while easy — can be time consuming. Thus, each and every year, when you get your year end statement, you should spend a few minutes doing the calculations for the previous year, so as to confirm that the numbers are correct.

If you are having trouble reconciling your numbers with those provided by your lender, you should immediately request a payment history statement from your lender. At least once a year, your lender should be able to provide this to you — free of charge. Examine the statement carefully; make sure you have not been improperly charged late fees or other similar charges. Make sure that any extra payments you may have made during the previous year have been properly credited toward your principal balance.

Lenders and their computers are not always correct. But only you can confirm.

Position Realty
Office: 480-213-5251

THE FIVE BIGGEST MORTGAGE MISTAKES YOU CAN MAKE

For most buyers, the mortgage is the largest monthly expense they will have. Yet most borrowers will do little to no preparation, negotiation, or shopping to get the best deal. And they end up paying much more for their loans than they need to. You? You’re smarter than that, or you wouldn’t be reading this article. Here are five of the biggest mistakes that can cost you real money.

1. Believing advertised rates are what you’ll pay

Unless you have perfect or near-perfect credit, most advertised rates are out of your league. To get boasting rights on a rate that good, you have to pay part of a point (one percent of the loan amount) a point, or more to get the best rates.

Your lender will go over your credit with a fine-tooth comb to find anything to raise the rate. That includes qualifying you at the beginning of the transaction, and then running your credit again a day or two before you’re supposed to close on the home and loan. If there’s been any change in your debt-to-income ratio, goodbye low mortgage rate.

2. Not comparing lenders

Just like everyone knows two or three real estate agents or more, everyone knows a loan officer or a mortgage broker. A loan officer works for a bank or savings and loan and can only offer you loan packages that the bank has put together. A mortgage broker prequalifies you just like a loan officer, and shops your deal around to various lenders.

Whether you talk to a loan officer or a mortgage broker, you’re going to have to share personal financial information in order to get a realistic rate. Reputable brokers will show you what certain banks and credit unions quoted and you can pick the loan you like best.

If you’d rather do your own shopping, consider talking to a local bank, a national bank, a credit union, and a savings and loan, but remember, unless you give them personal information and permission to run your credit, it’s just talk.

3. Not paying attention to terms

Advertised rates even for those with perfect credit aren’t what you will actually pay. The true cost of the loan is the APR or annual percentage rate, which includes fees from the lender.

Understanding loan terms is harder than shopping for a new mattress. There are so many ways lenders can inch up the fees. A loan origination fee is also called a processing fee. It pays the loan officer or mortgage broker, so this fee can vary widely. You may pay one lender more for an appraisal than another might charge you.

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One lender may charge more for pulling your credit than another. It’s all in your good faith estimate, which you don’t get until you’ve applied for the loan.

All terms are negotiable, so don’t be afraid to ask what a particular fee is for and can it be reduced or eliminated.

4. Waiting for a better rate

It’s great to have bragging rights on a low rate, but you don’t want to lose the home of your dreams over a quarter of a point in interest.

There’s a big picture here you could be missing. No matter what your interest rate is, you’re going to pay thousands of dollars in interest up front before you make any serious gain in equity. If you go all the way to the end of your loan’s term, you’ll pay so much interest that you could have bought the same home two or three times.

Instead of focusing on the percentage rate, work on how quickly you can build equity. Make one extra payment a year. Pay $25, $100, or $500 extra per month and you’ll more than offset the rate you’re paying.

Down the road, if rates drop through the floor, you can refinance, but even that’s not an ideal solution. You’ll pay loan origination fees, title search fees, appraisal fees and so on — enough to equal the closing costs you paid the first time around.

And don’t forget, you’ll start the amortization schedule all over again — with most of your payments going to interest instead of principal.

5. Choosing the wrong type of loan

Many families were hurt post-9/11 when lenders opened the spigots and gave a loan to almost anyone who could sign the paperwork. Suckers bought homes that were too expensive using balloon loans with low teaser rates.

The type of loan you choose should depend on current market conditions and how long you plan to stay in your home, not how much home you want to buy.

Current market conditions favor fixed rates, because rates are rising from all-time lows. Yes, they cost more than hybrid loans or adjustable rate loans, but the base amount is fixed and doesn’t change. Only your taxes and hazard insurance will cost you more over the years.

If you get an adjustable rate mortgage, you are at the mercy of market conditions. While there’s a cap on how high your interest rate can go, it’s still a risk.

If you plan to stay in your home five years or more, get a fixed-rate mortgage. If you plan to sell your home sooner, you’re taking a risk. It takes most borrowers five years just to earn back their original closing costs in equity.

Once you’ve narrowed your choice of lenders, ask them on the same day to give you a quote. If you wait even one day, rates may have changed, so you’re no longer comparing apples to apples.

Position Realty
Office: 480-213-5251

THE MORTGAGE TRICK THAT COULD SAVE YOU $100,000 OR MORE

Should you switch to a 15-year mortgage? If paying off your house is a priority, you’ve obviously considered it. “One of the biggest benefits of a 15-year mortgage term is the ability to quickly pay off your home loan,” said Money Crashers. “This option is perfect if you plan to stay put and don’t want to pay your mortgage for a lengthy period of time.”

But even if you’re not planning to live in your home forever, a 15-year mortgage can be a great way to go because of the money saved. And we’re not talking about pennies. We’re talking hundreds of thousands of dollars.

“The 30-year fixed mortgage is practically an American archetype, the apple pie of financial instruments. It is the path that generations of Americans have taken to first-time home ownership. According to the Mortgage Bankers Association, 86% of people applying for purchase mortgages in February 2015 opted for 30-year loans,” said Investopedia. “But many of those buyers might have been better served if they had opted instead for a 15-year fixed-rate mortgage, the 30-year’s younger, and less popular, sibling. A shorter-term loan means a higher monthly payment, which makes the 15-year mortgage seem less affordable. But, in fact, the shorter term actually makes the loan cheaper on several fronts.”

The savings is substantial:

“Imagine a $300,000 loan, available at 4% for 30 years or at 3.25% for 15 years,” they said. “The combined effect of the faster amortization and the lower interest rate means that borrowing the money for just 15 years would cost $79,441, compared to $215,609 over 30 years, or nearly two-thirds less.”

A woman holding a house with cash and keys on a silver platter.

According to The Mortgage Reports, going with a 15-year mortgage translates to a reduction in “the amount of mortgage interest paid over the loan’s life by $44,000 per $100,000 borrowed as compared to a 30-year loan. For loans at the conforming loan limit of $417,000, then, a homeowner would save $183,000 by using a 15-year mortgage to finance the home instead of using a 30-year one.”

That’s a lot of money. But it’s that higher monthly payment that is often the sticking point for many borrowers. The monthly payment on a 15-year loan will cost more than one that’s double in length for obvious reasons—you’re paying off more money in less time. But the two loan terms do not offer an apples-to-apples comparison because the interest rates for 15-year mortgages tend to be lower.

House-Sold-for-Happy-Family

“15-year-loans are less risky for banks than 30-year loans, and because the money banks use to make shorter-term loans costs them less than the money they use to make longer-term loans, consumers pay a lower interest rate on a 15-year-mortgage — anywhere from a quarter of a percent to a full percent (or point) less,” said Investopedia. “And the government-supported agencies that finance most mortgages impose additional fees, called loan level price adjustments, which make 30-year mortgages more expensive.”

The monthly payment on the 30-yer mortgage referenced above is $1,432. On the 15-year loan, it comes out to $2,108. That steep increase is often a deterrent for borrowers – especially those who are more concerned with their current monthly input and output than potential long-term savings.

Doing it on your own

Of course, a 15-year mortgage isn’t the only way to pay your house off sooner. Making additional principal payments can eat away at your balance without tying you to a higher monthly payment. Even one extra payment per year can make a big difference.

“Making an extra mortgage payment each year (totaling 13 payments in a 12-month period) could reduce a 30-year mortgage loan to approximately 22 years,” said Nationwide.

“The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you’ll have paid the equivalent of an extra payment by the end of the year.”

Overpaying also offers a shorter path to an equity position, so when you are ready to sell, you have more equity in your home and are in a greater buying position. And if you do get into a situation where you need cash you can always pull the equity out of your home.

Position Realty
Office: 480-213-5251

APPLYING FOR A MORTGAGE? KNOW YOUR NUMBERS

When you buy a home, it’s all about the numbers. Your mortgage rate is based on your credit scores, debt-to-income, and how much of a down payment you can afford.

Know your credit scores: Your credit scores can fall between 300 and 850. Lenders use these numbers, which are compiled by three credit bureaus and Fair Isaac to give them a quick snapshot of your credit-worthiness.

Lenders are still in a low-risk mood and are requiring fairly high credit scores from borrowers. To qualify for the best mortgage interest rates, such as a benchmark 30-year fixed rate, your credit scores must be approximately 720 or more. To find out what your credit scores are, visit www.annualcreditreport.com, the site where you can get free copies of your credit report and scores.

Know your income–to-debt ratios: To qualify you, lenders use two ratios — income to mortgage debt and income to total debt.

To qualify for a 30-year fixed rate conforming loan that is federally insured (FHA), your income to mortgage debt can be no higher than 29% of your gross annual income. If you make $5000 gross income per month, your house payment, including principal, interest, hazard insurance and property taxes, should be no larger than $1,450.00.

If you’re carrying credit card debt, student loans, or pay child support, your monthly debt service must be counted. To get the income to total debt ratio, multiply your monthly income by 41%. If you gross $5000 per month, your total debt -including your house payment – can be no larger than $2050.00. That means to qualify for a $1450.00 house payment, your other debt payments can be no higher than $600 per month.

Know your down payment: For most loans, your credit scores affect down payment requirements. If you have a high credit score, you can get an FHA-guaranteed loan with only 3.5% down, but if your scores are low, you may be required to put as much as 10% down. . FHA loans with less than 20 percent down require mortgage insurance that will not be discharged unless the home is refinanced or sold.

Conventional loans are sold by banks as securities to Fannie Mae and Freddie Mac, with the best rates only available to consumers with 20 percent down. You can obtain both FHA or conventional loans with less money down, but expect to pay a mortgage insurance premium, which reduces the risk for the lender.

Where your down payment originates also makes a difference to lenders. If you have saved the money yourself, or it comes from a recent real estate transaction, lenders tend to be more relaxed than if your parents are giving you the money as a gift.

All these numbers have to dovetail and make sense to the lender, so you can comfortably afford the home you want to buy.

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