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Three Percent Or 20 Percent – Which Is The Smarter Down Payment Strategy?

The minimum down payment on an FHA loan is 3.5 percent, which makes it a popular choice among those who don’t have the funds for a large down payment (and also those who don’t meet the higher credit score requirements for other types of loans). And that’s not even the lowest you can go. Loans like this one require only three percent down, and if you’re a veteran or are buying a home in a rural area, you may be able to buy a home for nothing down. But should you go that low just because you can, or are you better off making a larger down payment? We’re breaking it down.

The case for 20 percent

There are several advantages to putting down 20 percent when buying a home, like:

  • Since the bank will generally consider you a lower risk because you have “more skin in the game,” you may be able to get a lower interest rate than you would with other types of loans—as long as you have the credit score to support it.
  • You’ll have built-in equity as soon as you move in.
    You can avoid paying private mortgage insurance (PMI).
  • It’s that last part that drives a number of people to strive for that 20 percent down payment since PMI can add several hundred dollars to a new homeowner’s monthly payment, and it can be hard to get rid of it. “If you can put 20% down and avoid PMI, that is ideal, said certified financial planner Sophia Bera on Business Insider.

The case for as little down as possible

The biggest roadblock to homeownership for many people is coming up with the down payment, so minimizing that expense sounds great, right? “The good news is a first-time buyer can purchase a home for a little as three percent down – and even no money down in some cases,” said U.S. News.

But is that a smart move?

“The less you put down, the higher the mortgage insurance is,” Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area, told them. “With five percent down, the mortgage insurance is quite high.”

Yep, there’s that pesky PMI again, which, for many first-time buyers, pushes their monthly payment to a level they’re not comfortable with. Another bummer about PMI: “If you need to pay PMI, the size loan you can get will be slightly smaller, to allow for the bigger payment,” they said.

You may also have trouble qualifying for a loan even if you have a high enough credit score because you don’t have enough cash reserves; if you are using all your savings for the down payment and the lender questions where the funds for your closing costs, taxes and insurance, and any needed repairs are coming from, you could have a problem.

But, on the flip side, a smaller down payment will up your rate of return, said The Mortgage Reports. “Consider a home which appreciates at the national average of near five percent. Today, your home is worth $400,000. In a year, it’s worth $420,000.

Irrespective of your down payment, the home is worth twenty-thousand dollars more. That down payment affected your rate of return. With 20 percent down on the home – $80,000 – your rate of return is 25 percent. With three percent down on the home – $12,000 – your rate of return is 167 percent.”

Even when you add in the PMI and a higher interest rate, the equation comes out in favor of the lower down payment. “With three percent down, and making adjustments for rate and PMI, the rate of return on a low-down-payment loan is still 106 percent – much higher than if you made a large down payment. The less you put down, then, the larger your potential return on investment.”

The case for somewhere in between

Finding that balance between down payment and savings is a challenge for many homebuyers, and the sweet spot will be different for everyone depending on their unique circumstances and financial situation. Most financial experts will say that saving and scrounging to get together 20 percent at the risk of depleted savings and zero emergency funds is a shaky strategy, at best.

“If putting 20 percent down means that you use all of your savings, then don’t do it! I would much rather see people put five percent down, wipe out all their other debt with cash, and still have three months of emergency savings versus putting 20 percent down on a house,” said Bera.

Especially when you consider all the added costs you may be facing once you buy: “yard work, home repairs, renovation costs, property taxes, insurance, etc. It’s important to consider all of the costs and not just compare the monthly mortgage payment to your current rent amount,” she said.

Another thing to consider when evaluating how much you should put down is what would happen if you had an emergency. It’s easy to lose sight of real-life issues that can arise when you are so driven to buy a home and focused on saving the money to get there.

“A financial event can leave you wishing you had access to the money without selling,” said The Mortgage Reports. “Say you lose a job for three months. An extra $20,000 would be a nice safety cushion. And, if you lose your source of income, you can’t take home equity out via a cash-out refinance or home equity line of credit (HELOC). Lenders won’t approve a new loan to someone between jobs. In short, the more you need to get at the money, the less access you have to it.”

Position Realty
Office: 480-213-5251

7 Reasons To Stop Renting Today

Still renting? You must have a good reason. Although, we’re not really sure what it is. With rents continuing to rise across the country, interest rates staying around historic levels, and new loans lowering down payment requirements, it just makes sense to take the leap to homeownership. Maybe you’ve got terrible credit and don’t want to take the time to improve it (or don’t know about loans that accept lower scores)? Or, maybe you just like giving your money away. If you’re still not on board, these 7 reasons might change your mind.

Because owning a home is still less expensive than renting across the country

GOBankingRates’ annual survey of “the cost of renting versus owning a home in all 50 states and the District of Columbia” just came out, and, while they “found that the number of places where it’s more expensive to own than rent has increased,” the number went from 9 to 11. That means that, in 39 states, it still makes more financial sense to buy.

Rates are near historic lows

We’re spoiled. Seriously. Anyone who has been paying attention to the market over the last few years and has seen interest rates with a 3 or 4 before that decimal point may just think it’ll always be that way. But history has a way of repeating itself, and while we may not see rates in the teens again anytime soon, most industry experts have been predicting rates moving into the 5s sometime this year, with a pattern of rising rates beyond. Buying a home while money is cheap is a smart move.

“A difference of even 1 percent can have a major impact on your total payments over time,” said ZACKS. “For instance, a $200,000 mortgage for 30 years at an interest rate of 5 percent would require a monthly payment of $1,073.64. By comparison, the same mortgage at 4 percent interest would result in a payment of $954.83.” That might not seem like a big deal every month, but, consider the long-term potential: “Over 30 years, the total difference between the two would be $42,771.60.”

FHA loans and the like make it easier to qualify

Don’t have an 800 credit score? You don’t need to today. FHA requirements are lower than conventional loans, and you may already be where you need to be to qualify. “The average FICO score for buyers who finance FHA loans is 683, according to Ellie Mae. That’s considerably lower than the average score of 753 for conventional, non-FHA financing,” said Interest.com. “Most lenders have a…minimum of 600.”

A little thing called equity

Rising rents may or may not equate to rising property values in your area, but either way, you’re not going see any financial benefit from it. When you own your home and your equity rises, that equity is yours. And so is the choice of what to do with it. Whether you decide to let it sit and continue to grow or tap your equity for home improvement projects, the money is yours to decide how to use.

The days of the 20 percent down payment are all but gone

Does 20 percent down make it more likely that you’ll qualify for a loan? Sure. Does that mean you have to come up with that huge chunk of money? No. Nor do you have to come up with 10 percent down, which, for some reason, the majority of new buyers seem to believe. “87% of first-time buyers think they need 10% or more down to buy a home,” said The Mortgage Reports.

The FHA loan is one of the most popular loans available to first-time buyers because, not only can you qualify with a fair credit score, but the down payment is as low as 3.5 percent, and, “100 percent of the down payment can be a financial gift from a relative or approved non-profit,” they said. But, it’s not the only option for a low down payment. Fannie Mae’s Conventional 97 Mortgage and HomeReady Mortgage require just 3 percent down. The Mortgage Reports also has information on closing cost help and down payment assistance programs.

Rents keep rising

Unless you’re in a rent-controlled apartment (and, bless you if you are since there are so few left), your rent is just going to keep going up every year. Apartment List’s monthly National Apartment List Rent Report shows that, “Our national rent index is continuing to climb, with month-over-month growth of 0.5 percent for June. Rents grew at a rate of 0.5 percent between May and June, which is generally in line with the monthly growth that we’ve seen over the course of this year thus far. Year-over-year growth at the national level currently stands at 2.9 percent, surpassing the 2.6 percent rate from this time last year. In addition to the growth on the national level, rents are now increasing in nearly all of the nation’s biggest markets.”

When you own your home, your payment is your payment is your payment. Unless you take out a home equity loan or refinance to take cash out, your payment’s not going to go up.

Tax breaks

Here’s another bit of fun for renters: nothing you pay comes back to you. I mean, except for that security deposit, but that all depends on what effect your dog and those few parties you threw had on the condition of the home. As a homeowner, you get to write off all kinds of stuff, which lowers your overall costs. “Your biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. And all that interest is deductible,” said Bankrate. “Did you pay points to get a better rate on any of your various home loans? They offer a tax break, too. The other major deduction in connection with your home is property taxes.”

And think about it this way: Even if your house payment is going to be a little bit higher than what you’re currently paying in rent, it’s not an apples-to-apples comparison. How do those numbers look when you calculate the tax savings?

Position Realty
Office: 480-213-5251

3 Types Of Loans To Go For If You’re Credit Challenged

The latest numbers from mortgage analysts Ellie Mae show that the average FICO score of approved conventional mortgages is 732. If a borrower has low credit scores (650 and under), then that average FICO score could seem like a chasm between them and the home they want to buy. But just because the average credit scores for a conventional mortgage are above 732 doesn’t mean low-credit borrowers are shut out of homes.

There are a good amount of options, and the federal and state level for mortgages can help even low-credit borrowers get the home of their dreams. Here are three types of loans you may want to explore.

1. USDA Loans

USDA loans are a great option for borrowers with low credit scores, because the minimum score for approval is 640. Not only that, but you won’t have to make a down payment for this mortgage. It sounds like an incredible deal and, for the consumer with bad credit, it is a legitimate option.

However, borrowers need to know the very clear limits the USDA places on where homes can be bought. Because the program was initially started to provide economic stimulation in rural areas, only homes outside of urban areas are eligible for the USDA mortgage program.

As far as the hard numbers go, several sources indicate that the borrowers’ mortgage can’t be more than 29 percent of their income, and the overall DTI is 41 percent. Both home prices and borrower income are capped, and that cap depends on the area in which the borrower wants to buy.

To understand exactly where the urban limits are for the city in which you live, the USDA’s website has a straightforward mapping app that shows clear boundaries between urban and rural.

2. State Bond Programs

While the USDA program is available in all states, bond programs tend to be specific to certain states. For example, Florida’s first-time homebuyer bond program offers up to $15,000 toward down payment and closing costs. The product is treated as a second mortgage.

Like the USDA mortgage, the credit scores needed for this loan are pretty low: 660. Also, there are income limits and limits on the purchase price of the home. The down payment assistance is “free” – you don’t have to pay it back as long as the home is your primary residence for five years after closing.

The catch here is that the interest rates are higher because they’re set by the state. So, while the borrower is getting up-front free money, they end up paying for it on the back end over the life of the loan.

3. FHA Loans

Ellie Mae estimates that 689 was the average credit score for borrowers who were accepted for an FHA loan. These loans require a 3.5 percent down payment if the borrower’s credit is 580 or higher, Zillow says, while scores between 500 and 579 require a down payment of 10 percent. The standard for the total mortgage payment is 31 percent of income, and DTI needs to be less than 43 percent. Mortgage insurance applies to the life of the loan.

A cursory view of the numbers makes the FHA loan a good bet for borrowers with average to bad credit scores who have the ability to make a 3.5 percent down payment. However, there can be some problems.

The FHA has their own criteria for the condition of the home the borrower is buying—if certain things need to be fixed, those fixes have to happen before closing and paid for out-of-pocket by the seller. However, if the borrower can find a home in good condition with only minor repairs noted during inspection, closing should proceed with the normal aches and pains.

Some Final Thoughts About Mortgages for Bad Credit Scores

It’s important to remember that borrowers have bad credit scores for a variety of reasons. One of those reasons could be that the borrower has high utilization – their credit card balances are more than 60-70 percent of their credit limits.

While most of us see this as a credit score issue – high utilization leads to lower scores – the more important area of concern is debt-to-income ratio. Having multiple credit cards with high balances leads to high minimum payments, which can cut into a borrower’s DTI and push them past 45 percent.

While a high DTI isn’t a mortgage death sentence, it is, according to the Federal Reserve, the number one reason why borrowers are rejected for a mortgage.

Position Realty
Office: 480-213-5251

How to Get Denied for a Mortgage After Preapproval

You’ve done the work to clean up your credit score, scrape together a down payment and pry a preapproval letter from your mortgage lender. Cheers!

Getting preapproved is a smart move, especially in a seller’s market characterized by tight inventories and, in some regions, bidding wars. Having a lender’s letter in hand signals to sellers that you’re a legit buyer whose offer merits serious consideration.

Even so, a preapproval letter is just a conditional commitment. It can be withdrawn if your financial situation changes in a way that makes your lender nervous.

The best advice? “Maintain the status quo,” says Scott Schang, branch manager at BuyWise Mortgage in Anaheim, California.

There are a few surefire ways to get rejected after you’ve been preapproved. Among them:

Quitting your job

There’s nothing wrong with leaving a job to take a similar or better-paying position at another company, so long as you remain a full-time employee who gets a W-2 form at the end of the year.

“If you’re going from a W-2 job to a W-2 job, that’s fine,” Schang says. However, taking a significant pay cut will raise red flags. So will switching from a salaried job to a position where you’re compensated mostly on commission. And quitting your job to launch a new venture is a no-no, at least when it comes to keeping your mortgage approval.

Lending guidelines are much stricter for self-employed borrowers, and lenders typically want to see a two-year track record of self-employment income, says Mathew Carson, founder and broker at West County Mortgage in San Francisco.

The best play: Wait until after you’ve closed on your house and started paying your mortgage to quit your job and pursue your entrepreneurial dream.

Loading up on debt

This is an obvious bit of advice, but one well worth heeding. In the weeks or months after you get preapproved and before you close on your home, keep your spending impulses on lockdown. That means no new credit cards, no car loans and no big-ticket purchases of any kind. Ignoring this rule of thumb is likely to bring scrutiny from your lender.

Running up a balance on a new credit card will lead your lender to re-examine your debt-to-income ratios, Carson warns. If you were on the borderline before your shopping spree, the new bills could kill the deal.

Paying down old debt

Say you have a preapproval letter but realize you could get a better mortgage rate with a higher credit score. Don’t make the mistake of trying to be a hero — it’s likely to backfire, Carson and Schang say.

Paying off delinquent debt, settling up with creditors who have charged off an old debt, canceling credit cards — all might seem like responsible moves, but they’ll hurt your credit score.

“That’s one of the backwards things with the credit scoring system,” Schang says. “If you cancel a card, that will drop your credit score significantly for 60 to 90 days before it starts to creep up.”

It’s unclear exactly how much your score will fall if you cancel a card, but the hit could amount to as much as 40 points. Paying down an old balance presents a similar quandary. You think you’re cleaning up your finances but your lender just sees more available credit, Carson says, and you could be jeopardizing your credit score.

And when it comes to credit scores, not all debt is created equal. Before you close on a home — and ideally before you seek preapproval — you’ll need to pay off any liens, old tax bills or current debts in collection. However, if a debt has already been charged off — that is, the creditor isn’t expecting any more payments — paying it will vault your old debt to a “current” status and actually lower your credit score.

So the rule of thumb for retiring charged-off debt is the same as the guideline for taking on new debt: Wait until after you’ve closed on your home.

Moving large sums of money

Down payments are a challenge for first-time buyers, and many hit up relatives for help. However, receiving any sum that amounts to more than half your regular paycheck is likely to draw scrutiny from your lender, Carson says.

Banks want to make sure you aren’t laundering money. They also want to be certain any sudden windfalls are in fact gifts and not loans. “If money is moving around, that’s going to be a red flag for an underwriter, and they’re going to pull out the magnifying glass,” Schang says.

The good news is that receiving a gift doesn’t need to kill your preapproval. But your bank likely will require you to provide a paper trail that includes a letter stating the money is a gift and two months of bank statements from the gift giver. “It can be a little tedious,” Carson says.

The wiser move, Schang says, is to have your benefactor wire the down payment gift directly into your escrow account.

The bottom line

Keep in mind credit scores are based on complex calculations, and every borrower’s situation is different. In general, though, your overall financial situation matters.

If you have a gold-plated credit score and enough income to comfortably afford your loan, a new store credit card probably won’t kill your deal. But if you have a borderline credit score and you’re stretching to qualify, even a small hiccup could hurt your chances.

Position Realty
Office: 480-213-5251

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

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