How To Save Money By Choosing A Better Closing Date

When a loan officer locks a mortgage rate for you, that rate is tied to an expiration date. 

The expiration may be 30 days, or 75 days, or 90 days, or more into the future, but so long as the rate is “locked”, the bank is committed to delivering that rate to you at your closing.

What most people don’t know is that the longer the rate lock, in general, the higher the interest rate and/or fees and that’s because banks can’t predict the future. 

The more time that passes between today and your rate lock expiration, the more likely it is that market conditions will have changed from where they are today, and the bank will be “below market” on your individual loan. 

Therefore, banks compensate for this “time risk” by increasing their rate of return (i.e. your mortgage rate), and/or charging “extended lock fees” to borrowers. 

To lenders, rate locks represents a huge risk — what if its prediction of the future is wrong?

Rate locks vary from lender to lender, but in general, they move in 15-day increments — 15-day, 30-day, 45-day, et cetera.  After 90-days, rate locks tend to move in 30-day increments.  The shorter the time, generally, the lower the rate and/or fees.

So, when you’re negotiating a new contract on a home, it makes more sense set a closing date 30 days in the future as opposed to 40 days; 45 days as opposed to 46.  By keeping your rate lock commitment days as low as possible, you’ll help save money long-term. 

There’s no sense in paying for extra rate lock days if you don’t need them.

Understanding Real Estate Terms: Absorption Rate

Let’s review a term that real estate professionals use to describe housing inventory.

Absorption Rate is a real estate term for the length of time required to sell all of a given stock in a given area. 

We can use it to determine how quickly homes are selling in a neighborhood, city, or region.

The formula to calculate Absorption Rate is simple:

• Add up the number of homes on the market
• Divide it by the number of homes taken off the market in the past 30 days because offers were accepted for the sale of those homes

For example, if 500 homes are on the market and 89 of these homes received offers in the past 30 days, the absorption rate is 500/89, or 5.6 months. 

In generally, the smaller the absorption rate, the more seller-friendly the region.

How To Explain “Per Diem” and Why It’s Not A Closing Cost

Line 901 of a mortgage settlement statement is commonly confused for a closing cost.  It’s actually an “advance payment” on the mortgage.

Often called a per diem by mortgage professionals, line 901 itemizes a borrower’s prepaid mortgage interest charges due at closing.  The total amount due equals the daily rate of interest multiplied by the number of days remaining in the month.

If a mortgage funds on May 29, for example, the per diem would be 3 days.

One reason why per diem is due at closing is because mortgage interest is billed in arrears.  That means that on the first of every month, the mortgage interest that accrued in the month prior is due. 

Now, in the scenario above in which the closing is set for the last Friday of the month, it is highly unlikely that a mortgage lender would receive the loan documents from closing, process them through quality control, and then get a statement to the new borrower in time for the borrower to make his mortgage payment Monday morning.

Even with a 15-day grace period, it’s a challenge.

So, to keep life simple, lenders collect all of the interest that would normally accrue up to the date of first payment at the time of closing.  Then, when the 1st of the month arrives, there is no payment due — it was already paid at the time of closing.

What’s The True Risk In Mortgage Lending? It’s Anyone’s Guess Right Now.

Any security — stock, bond, or otherwise — has a specific risk associated with it.  Based on that risk, an investor decides whether or not the price is worth paying.  If the security is a “good value”, an investor will buy it.  If not, the investor will pass.

Until summer of 2007, mortgage bonds were considered a good value because the risk of the investment was relatively low compared to the reward (i.e. interest rate). 

If you’re wondering why markets are in disarray right now, it’s because the risk tagged to the mortgage bonds was dramatically underestimated.

Hindsight, as they say, is 20/20.

When homeowners began defaulting on home loans at a quicker pace than was expected, the risk attached to each mortgage bond increased.  Higher risk should mean higher return, but investor doesn’t have the right to change a homeowner’s mortgage rate.

As a result, the “reward” on mortgage bonds moved below the risk on which they were originally priced.  The bonds, therefore, are a losing bet and the investors either (a) tries to sell the bond at a lower price, or (b) holds the less valuable bond and hopes for a rebound.

The bigger problem in the markets is that — at least so far — the financial models used to determine mortgage “risk” were proven wrong.  Until new models are tested and “approved”, markets will continue to literally guess what a mortgage bond should be worth. 

This is the major reason why markets have gyrated wildly since August pf 2007.  Investors have no idea what the true value of their mortgage bond investments is/will be.

Why The Mortgage “Crisis” Is Not A “Crisis” For Everyone

Another day, another batch of Gloom-and-Doom stories in the news.  Remember to keep a level head — the media’s job, in part, is to sell newspapers and capture eyeballs.  Using the word “crisis” repeatedly is one way to meet that goal.

A few facts to keep it all in perspective:

1. There are still BILLIONS of dollars being lent to homeowners every single day.
2. In May, 98.3% of full documentation, “prime” conforming and jumbo mortgage payments were not 60 days late
3. In May, 99.5% of full documentation, “prime” conforming and jumbo mortgages were not in default

In other words, there is still a very low default for borrowers willing to submit tax returns, W-2s, bank statements, and other financial data along with their loan application.  This represents the large percentage of American homeowners and is why the mortgage “crisis” is not so bad for most people.

The credit market troubles with home loans are more “inconvenience” than “crisis” and, so far, are limited to those that are self-employed, are highly commissioned, have poor credit history, and/or are unwilling to document their financial world to a mortgage lender.

If you are feeling in any way overwhelmed, reach out and contact me for further insight, advice and opinion.  You’ll get better perspective from an industry insider than an industry reporter.

What’s The True Risk In Mortgage Lending? It’s Anyone’s Guess Right Now.

Any security — stock, bond, or otherwise — has a specific risk associated with it.  Based on that risk, an investor decides whether or not the price is worth paying.  If the security is a “good value”, an investor will buy it.  If not, the investor will pass.

Until last year, mortgage bonds were considered a good value because the risk of the investment was relatively low compared to the reward (i.e. interest rate). 

If you’re wondering why markets are in disarray right now, it’s because the risk tagged to the mortgage bonds was dramatically underestimated.

Hindsight, as they say, is 20/20.

When homeowners began defaulting on home loans at a quicker pace than was expected, the risk attached to each mortgage bond increased.  Higher risk should mean higher return, but investor doesn’t have the right to change a homeowner’s mortgage rate.

As a result, the “reward” on mortgage bonds moved below the risk on which they were originally priced.  The bonds, therefore, are a losing bet and the investors either (a) tries to sell the bond at a lower price, or (b) holds the less valuable bond and hopes for a rebound.

The bigger problem in the markets is that — at least so far — the financial models used to determine mortgage “risk” were proven wrong.  Until new models are tested and “approved”, markets will continue to literally guess what a mortgage bond should be worth. 

This is the major reason why markets have gyrated wildly since August of 2007.  Investors have no idea what the true value of their mortgage bond investments is/will be.

Is Your Loan Officer Incorrectly Reading In Which Direction Mortgage Bonds Are Moving?

As we discuss over and over again, mortgage interest rates are determined by the price of mortgage bonds.  Nothing else, and nothing more.  The challenge in that truth is that mortgage bond pricing is not very accessible to the general public. 

This includes the press.

As a result, the media tends to use a government bond called the “10-Year Treasury Note” as a mortgage rate indicator because it tends to move in the same direction as mortgage bonds. 

Not knowing any better and making matters worse, a lot of loan officers also use the 10-Year Treasury Note as a benchmark.  This is dangerous to their clients.

Look at the data from yesterday (as of 11:20 A.M. ET):

• 10-Year Treasury Note: + 53 basis points
• 30-Year 6.000% Mortgage-Backed Bond: - 19 basis points

If you were watching the 10-Year Treasury Note today, you’d think that mortgage rates would be decreasing over the course of the day instead of increasing. 

This same divergence has occurred several times in August and — for people watching the wrong indicator — may have led to costly rate lock errors.

The only security to watch with respect to mortgage rates each day is the price of mortgage-backed securities.

How To Protect Yourself From Becoming A “Trigger Lead”

From the CBS News Video Web site, an interesting story for anyone who’s recently applied for credit.

Credit repositories now sell the contact information of people applying for new mortgage loans to other mortgage lenders that want to compete for the business.

Called “trigger leads”, an unsuspecting mortgage applicant can have his credit checked by a mortgage lender, and then discover that the credit bureaus have sold the rights to his personal information to countless other credit firms across the country.

Because trigger leads identify a person making a lending decision right now, one marketer of trigger leads calls them “the best leads in the business”. It’s no wonder that the credit bureaus are marketing them, and that some lenders are salivating over them.

As the family in the CBS video learned, though, it’s difficult to make the phone stop ringing.  Some of the calls bordered on harassment.

For consumers, there is a very low-tech opt-out Web site called http://www.optoutprescreen.com that is sponsored by the three major credit bureaus (and are also the ones that sell trigger leads).  You can opt out for five years, or submit a form by mail to opt out forever.

Watch the video and then go protect yourself.

(Image courtesy: CBS News Video)

Financial Planning: How The Recasting of Interest Only Loans Work

An interesting feature of interest only loans is that your payment is re-calculated each month based on how much money you are borrowing. 

The industry term for the re-calculation is “recasting”.

When an extra principal payment is made on an interest only loan, the new loan payment is calculated as:

(Outstanding Loan Size) * (Annual Interest Rate) / (12 months)

Therefore, an additional $500 principal payment against a $200,000 interest only loan at 6.000% will reduce next month’s mortgage by $2.50, or $30 annually. 

$30 is six percent of $500.

This is in contrast to an amortizing loan in which your mortgage payment never changes until the loan is satisfied.  Any additional payments to principal on these types of loans shave months off the end of a loan.

Recasting is not exclusive to interest only loans, however.  Many lenders will allow you to recast an amortizing loan for a small fee ($100-500) but may limit the total number of times you can recast over the life of your loan.

Interest only loans recast once monthly.

Interest only loans require discipline and are not proper for every homeowner (the same way that a 30-year fixed is not appropriate for every homeowner, either).  However, within a balanced financial portfolio, they can be a terrific financial planning tool.

Be Wary Of Opinions That Masquerade As News

Is “news” always news, or is it masked opinion? 

When doing research on mortgages, it’s important to pay attention to the objectivity of your research source. 

Often, a writer will deploy key adjectives, phrases, and/or images that distort an otherwise factual story.

This cartoon from clangnuts.com is a terrific example. 

It implies that interest only home loans are for people that can’t otherwise afford homeownership.

The truth is that interest only loans are used by all economic classes of homeowners — not just those that need payment relief. 

Many people choose interest only home loans for their flexibility, or as a financial planning tool.

Sure, there are some people that use interest only loans to “get onto the housing ladder”, but that is a statement about the homeowner and not the mortgage product.

Our opinions are often formed by the words and images we hear in a public forum.  Sometimes, it pays to look a little deeper.

Why Paying Cash & Refinancing Later Is Bad Advice

How often have you been involved in a real estate transaction and decided to put down a large down payment just to “get the deal done”?  After all, you’re a good risk and expect to get a loan whenever you want it.  You’ll just refinance the loan later and “pull cash out”

It would be easy for me to shake my head and suggest that you are getting poor financial advice…that would be easy.  You might be violating the tax code if you deducted that interest from the larger loan if you took it out after 90 days from the close of escrow.   AND…you probably got away with it…up until next year.

A few things you should know about the deductibility of mortgage interest:

1- It is limited to $1.1 million.
2- You must itemize (Schedule A) to receive that deduction.
3- A fully-amortizing loan reduces your Acquisition Indebtedness each month.
4- An interest-only loan does not reduce your Acquisition Indebtedness; it remains level.
5- You are entitled to a $100,000 over the Acquisition Indebtedness as a home equity exclusion for tax deductibility.

Now, here’s the catch.  The IRS monitors your interest paid on mortgages through a Form 1098.  The IRS has no formal system to monitor the segregation of debt (how much was the Acquisition Indebtedness, how much is covered under the home equity exclusion, and how much is not deductible)…UNTIL NOW.

In 2007, lenders are required to report cash-out refinance transactions.  That includes any and all refinanced loans that exceed the original Acquisition Indebtedness.  This means that if you bought a home in 2000 with a $250,000 loan against it and have subsequently increased that debt to $400,000, your qualifying debt for interest will be capped at $350,000, more if you paid down the loan through an amortized loan.  In California, that applies to MANY refinance transactions for homes owned more than three years.

Why is the IRS doing this?  Well, follow the money.  The IRS has overlooked this common ignorance of the tax code because it really didn’t affect the average Joe…until NOW.  The real estate boom gave homeowners a chance to use their home like an ATM and withdraw cash.  Now, the IRS wants it’s pound of flesh.  If you’ve refinanced and pulled out cash over and above $100,00 above your Acquisition Indebtedness, you had better start paying attention to your deductibility of mortgage interest …because Uncle Sam is…next year.

Mortgage planning encompasses this information and works with your tax professional to ensure that you get the largest tax-deduction available.  You can always opt against that advice and put down a larger down payment.  Wouldn’t you like to make an educated choice?

Ask the mortgage salesman your Realtor recommended why she didn’t tell you about this when you bought your home; she could cost you a lot of money next year.

______________________________________________

Special thanks to Brian Brady, for giving me permission to reprint this post. To subscribe to Brian Brady’s Blog (highly recommended), go to http://delmar.typepad.com/world_wide_wealth_advisor/.  Copyright 2007 Brian Brady. All rights reserved worldwide. Brian can also be contacted via email at mailto:brian@californialoanconnection.com. Brian also writes articles at:  BloodHound Blog, ActiveRain and NELA Live

Putting Things In Perspective

Last week my son forwarded me the story below. While this does not deal directly with real estate or mortgages, it does deal with putting events or circumstances into perspective. How many times do we get upset, yell or lose our cool over something that in the grand scheme of things, really is not that big a deal.

Next time you find yourself getting upset, stop and think, is it really worth it.

A father passing by his son’s bedroom was astonished to see that his bed was nicely made and everything was picked up.

Then he saw an envelope, propped up prominently on the pillow that was addressed to “Dad.” With the worst premonition he opened the envelope with trembling hands and read the letter.

Dear Dad:

It is with great regret and sorrow that I’m writing you. I had to elope with my new girlfriend because I wanted to avoid a scene with Mom and you. I have been finding real passion with Stacy and she is so nice. But I knew you would not approve of her because of all her piercings, tattoos, tight motorcycle clothes and the fact that she is much older than I am. But it’s not only the passion…Dad she’s pregnant. Stacy said that we will be very happy. She owns a trailer in the woods and has a stack of firewood for the whole winter. We share a dream of having many more children.

Stacy has opened my eyes to the fact that marijuana doesn’t really hurt anyone.We’ll be growing it for ourselves and trading it with the other people that live nearby for cocaine and ecstasy. In the meantime we will pray that science will find a cure for AIDS so Stacy can get better. She deserves it. Don’t worry Dad. I’m 15 and I know how to take care of myself. Someday I’m sure that we will be back to visit so that you can get to know your grandchildren.

Love,
Your Son John

P.S. Dad, none of the above is true. I’m over at Tommy’s house. I just wanted to remind you that there are worse things in life than the report card that’s in my center desk drawer.

I love you.
Call me when it’s safe to come home.

FTHB’s – How Much Do I Need for a Down Payment? – Part 6

Today’s flexible home loan programs make the down payment less of a challenge than it was when your parents first purchased a home.

In the past, saving money for a down payment on a home was often the largest obstacle to homeownership with lenders requiring a minimum of a 20% down payment. But today’s flexible home loan programs make this issue less of a challenge, with some programs allowing you to put very little down (3% or less). In fact, you may qualify for programs that don’t require down payments at all.

Some homebuyers may be eligible for local down payment assistance programs.

If you decide to use less than a 20% down payment, your lender may require Private Mortgage Insurance (PMI). These insurance programs protect the lender in the event you do not fulfill your commitment to repay the mortgage.

What About Closing Costs?

Closing costs cover the amount of money you pay to close a mortgage loan aside from the down payment. The amount you pay in closing costs varies among lenders, mortgage products and localities. The closing cost fees generally fall into one of three categories:

1. out-of-pocket expenses,
2. pre-paid items and
3. points

Out-of-Pocket Expenses

Usually cover third-party services that aredirectly charged to you, such as fees for appraisals, attorneys, credit reports, title (deed recording), or tax services. Which services you must pay for varies on the property location and home financing program. If you don’t understand what a particular fee covers, or why you are required to pay it, ask your home mortgage consultant to explain.

Prepaid Items

Can vary based on the type of property and the timeof the closing, but they generally include homeowner’s insurance, mortgage insurance, and fees associated with establishing an escrow account. Escrow accounts are set up by lenders to pay property tax and insurance premiums. Instead of paying the entire premium every six or twelve months, the borrower pays a portion of the cost along with every monthly mortgage payment. This helps the borrower avoid the hassle of planning for the large payments, while reassuring the lender that tax and insurance payments are always up to date. Using an escrow account is an option and not a requirement

Points

Are fees, with each point representing 1% of your loan amount,that cover the cost of your mortgage loan. Generally, points can be split into two categories:

• Origination points: This is an amount collected by the lender for making the loan.
• Discount points: As discussed elsewhere in this guide, this is a fee that allows you to buy down your interest rate. In other words, in return for paying more discount points upfront, you can lower your interest rate and thus your monthly payment.

To make the best apples-to-apples comparison on lenders and home financing packages, be sure that the rates all have the same number of total points and that you factor in the total amount you will be paying in closing costs. While one loan may offer a lower rate, it may also require you to pay a higher number of points at closing and more money out of pocket for you. Also, don’t forget to consider loan features and service after closing in addition to the rate, APR, and points when you compare different loan programs.

Feel free calling me and I can give you information on average closing cost percentages for specific areas and loan programs. And, shortly after you apply for a home mortgage, you will be sent a Good Faith Estimate, which provides details on the approximate costs you will be required to pay at or before closing. While it is only an estimate, it can help you budget for your closing.

First-Time Homebuyer’s – How Important Is My Credit? – Part 5

Your credit report is an important consideration to lenders reviewing your financial profile. If you have a history of paying your monthly obligations on time, that’s a signal to a lender that you are likely to make your monthly mortgage payments on time as well. So your credit can be a factor in the kind of mortgage program you may qualify for.

Your credit history can also affect the amount required for a down payment, the amount of money you can borrow in relation to your income, and the interest rate you are offered. But keep in mind that even if you have no established credit history or less-than-perfect credit, there are still loan programs that can help you buy a home.

Here are some steps you can take to establish or improve your credit rating:

1. If you’ve always paid cash or used checks to make purchases and haven’t established a credit record, it’s a good idea to do so before you buy a home. You can use credit to purchase low-priced items, make prompt payments and pay off the balance.
2. Some loan program guidelines allow “alternative” credit records. If you have a limited credit history, your paid receipts and canceled checks for rent and utility payments can help you document a pattern of paying your monthly obligations on time.
3. If you already have outstanding loans or credit card debts, try to pay off as many as possible. The amount of monthly debt you are responsible for paying reduces your capacity for taking on housing debt (via the back-end ratio, discussed above).
4. Even if you are a consistent, on-time bill payer, you can damage your credit rating by just having a lot  credit cards with large credit lines. Contact any creditors for accounts which you no longer use and request that they close the account.

First-Time Homebuyer’s – What Can I Afford – Part 4

How Much Home Can I Buy?

To answer that question, lenders look at all the elements that make up your financial profile, including your credit history, the cash you have available for a down payment and closing costs, your income and your existing debt and financial obligations. Then, taking the current market interest rate into account, a lender can give you an estimate of the maximum mortgage amount you can afford. By adding your maximum mortgage amount to the funds you plan to use for your down payment, you will know your home purchase price range.

How Large of a Loan Can I Be Approved For?

Two general guidelines are used by lenders to determine the loan amount for which you may qualify. Based on your individual financial profile, these guidelines ensure that your housing expenses and debt payments don’t take up too much of your income. These guidelines can help you remain inside your financial comfort zone after you buy a home.

The first guideline, known as the housing expense-to-income ratio (or front-end ratio), compares your proposed monthly house payment (PITI) to your total household gross monthly income. The second guideline, known as the debt-to-income ratio (or back-end ratio), compares your anticipated monthly housing payment to your gross (pre-taxed) monthly earnings and your monthly debt requirements. Monthly debt includes expenses such as credit cards, car loans, student loans, consumer loans plus other financial obligations such as child support and alimony.

It used to be that most loan programs required 28/36 ratios, which meant you could devote up to 28% of your gross monthly income to housing expenses (the front-end ratio), while your monthly housing expenses plus your monthly debt combined could be as high as 36% (the back-end ratio).

Many of today’s loan programs offer expanded guidelines and much more flexible qualifying ratios that allow you to devote more of your gross monthly income to your combined monthly debt.

If you need further information, feel free contacting me and I can help you get a better idea of the maximum mortgage amount that you can qualify for. Depending on your financial profile and the mortgage program you choose, you may use standard or flexible ratios as a part of the qualifying process. Once you have this maximum figure, it’s up to you to decide if this is the right amount for you, or if you would feel more comfortable with a smaller mortgage and a lower monthly payment.

First-Time Homebuyer’s – How Do I Qualify For a Mortgage? – Part 3

Your past financial history is very important because it indicates your willingness and ability to handle the increased financial responsibility of repaying your home loan.

In general, all lenders use the same four basic standards to approve applicants for a mortgage. Different mortgage products have varying guidelines within those standards. The lender looks at what is referred to as the “the four C’s”:

• Capacity
• Character
• Capital and
• Collateral

Income (Capacity)

Do you have steady and sufficient income to make the monthly payments? This income can come from a primary, second, or part-time job(s), overtime and bonuses, commissions, self-employment, retirement benefits, pensions and annuities, public assistance, child support, alimony or maintenance payments, veterans benefits, disability payments or rental property income. In most cases, you need to provide documentation regarding your income. Lenders also offer no documentation mortgage loans for borrowers who qualify based on other criteria. Alimony and child support need not be noted unless you want to have them included as the basis for repayment of the debt.

Credit History (Character)

Have you paid back money you borrowed in the past? Have you been late in making your payments? Have you filed for bankruptcy? Do you have a record of judgments and collection accounts filed? Some lenders, do offer special products for homebuyers with past credit problems. If you have a limited or no credit history, a “nontraditional” credit history will be considered. You may need to show paid receipts and canceled checks for rent and utility payments that document a pattern of paying your monthly obligations on time.

Savings (Capital)

Have you saved any money that can be used toward the purchase of your home? The savings can be money in a savings account, certificate of deposit, retirement [401(k)] account, or a gift from a relative or friend. A lender wants to see that you have the capital to fulfill your current obligations as well as your new mortgage. Ideally, you should have enough savings to act as a source of funds for your down payment and several months of reserve funds to cover your anticipated monthly mortgage payments should anything happen to you or your job.

Property (Collateral)

Your lender will require an appraisal on your home to determine its market value in comparison to similar houses that sold recently in the neighborhood. Your lender will also look at the type of the property and whether there are additional fees such as homeowner’s association dues. If you’d like to be pre-approved for a mortgage loan, you do not need to have a property in mind. Before you being working with a real estate agent or builder, ask your mortgage professional about getting pre-approved. It is a smart move for serious homebuyers because it shows sellers that you come to the negotiating table ready to complete the transaction.

Your lender will require an appraisal on your home to determine its market value in comparison to similar houses that sold recently in the neighborhood. Your lender will also look at the type of the property and whether there are additional fees such as homeowner’s association dues. If you’d like to be pre-approved for a mortgage loan, you do not need to have a property in mind. Before you being working with a real estate agent or builder, ask your mortgage professional about getting pre-approved. It is a smart move for serious homebuyers because it shows sellers that you come to the negotiating table ready to complete the transaction. Property (Collateral) 

First-Time Homebuyer’s Guide – The Basics – Part 2

What Is a Mortgage?

A mortgage is a loan secured by real estate. In other words, in return for the funds necessary to purchase a home, a lender, gets your promise to pay back the funds over a certain period at a certain cost. Backing your promise to repay is the property. Should you default, or stop paying, the loan, the lender would take over ownership of that property. Typically, the repayment of a mortgage occurs through monthly payments.

What Does My Mortgage Payment Include?

Usually, your monthly mortgage payment is made up of four parts:principal, interest, taxes and insurance (PITI), but it can also include maintenance expenses, such as condominium homeowners’ association dues. The principal is the amount in your monthly payment that reduces the original amount borrowed. Over the life of a standard mortgage loan, the entire original amount borrowed is generally scheduled to be fully paid off, or amortized. The interest rate is the fee charged to borrow the outstanding balance for the past month. In addition, a monthly amount may be collected and held in a separate escrow account to cover property taxes, homeowner’s insurance and mortgage insurance. Your lender uses the money in the escrow account to pay your tax and insurance bills, as they come due.

Mortgage Payment Breakdown

Principal + Interest + Taxes + Insurance = PITI

1. Principal is the amount of money you borrow based on the sale price of the home. In the early stages of your mortgage term, your monthly payment includes only a small portion that repays your original principal. As you continue to make payments through the years, a greater portion of your payment goes to reduce the principal.
2. Interest is the cost of borrowing money. In the early stages of your mortgage term, your monthly payment is mostly interest.As you continue to make payments through the years, a smaller portion of your payment goes to interest.
3. Taxes are paid by homeowners to local governments, and are usually charged as a percentage of theassessed property value. Tax amounts vary depending on where you live.
4. Insurance offers financial protection in the event of a loss and has two main components that can be included as part of your payment.

Homeowner’s or hazard insurance protects you against financial losses on your property as a result of fire, wind, natural disasters or other hazards. Most lenders will require you to have a homeowner’s insurance policy on your home because it will help protect their investment as well as yours.

• Mortgage insurance (MI) is required on certain loans to protect the lender against financial losses if the borrower fails to repay the loan.Usually, whenever the down payment is less than 20% of the home’s purchase price, lenders require some type of insurance. Loans insured by FHA/HUD programs require a mortgage insurance premium (MIP), while VA loans require a funding fee. Conventional loans, or those without government backing, can be insured with Private Mortgage Insurance (PMI).

Typically, the portion of your monthly mortgage payment that covers taxes and insurance is held in a special account by your lender.Then,when these bills are due, the lender forwards payment on your behalf to the local government or insurance company.This process is known as escrow. Using escrow for taxes and insurance is an option for the homeowner and not a requirement. Once your mortgage is paid in full, you are still responsible for taxes and hazard insurance.

First-Time Homebuyer’s Guide – Part 1

Buying a home is part of the American dream. It is a significant long-term investment that often represents the foundation of our lives, providing financial and emotional security. It is also the largest single transaction most people ever make. That’s why, I believe it’s so important to choose a home and a mortgage that are well suited to your needs. This series of posts is designed to help you learn about the home buying process, so that you can make informed decisions.

But you don’t have to do it alone. Whether you decide to use online tools or rely upon this series of articles  to help. It is a good idea for you to understand your mortgage options and how much they may cost so you can make an educated decision about the home financing package that best fits your needs.

Why Buy Instead of Rent?

Decades after the phrase “the American dream” was first coined, homeownership is still a meaningful goal for a large number of individuals and families. Buying a home is considered by many to be a wise investment because typically, houses increase in value over time. And, as the years go by, you can build ownership interest, called equity, which you can borrow against. In contrast to renters, most homeowners receive significant tax breaks, because interest paid on a home mortgage is almost always tax deductible. You will want to consult your tax advisor regarding deductibility of interest. Finally, there’s the personal satisfaction of having a home you can call your own to share and enjoy with friends and family.

So Where Do You Start?

I typically recommend potential homebyers begin by asking their mortgage professional key questions such as:

• What is a mortgage?
• What does my mortgage payment include?
• How do I qualify for a mortgage?
• How much home can I buy?
• How large of a loan can I be approved for?
• How important is my credit history?
• How much do I need for a down payment?
• What about closing costs?
• What kinds of mortgages are available?
• What are my possible financing choices?
• Which loan is right for me?
• Are there any tips to consider when loan shopping?
• How important is preapproval?
• Who will approve my application?
• What happens after I apply?

This homebuyer series is intended to answer many of these questions and helps you become more comfortable with the homebuying process. It was designed as a reference tool and will include a useful glossary. I will also included valuable checklists that can help with your home shopping process.

VA Loans | Guide for Veterans and Active-Duty Military Personnel

Military service brings enough challenges to life. Buying your home shouldn’t be one of them.

Whether you’re a veteran or active-duty military, an experienced loan professional and Realtor can help make it faster, easier and more suitable for you to purchase a home. Regardless of your situation – whether you’re rushing to respond to PCS orders or seeking to establish roots near your current station – this post will provide an overview of the homebuying process for Veterans and Active-Duty Military Personnel.

So Where Do I Start?

Throughout the nation, there are several hot spots for both veterans and active-duty military to live and own a home. That means I get numerous questions regarding VA loans from consumers. Accordingly, I always recommend whomever they are working with that they begin by asking the following key questions:

• What does my mortgage payment include?
• How do I qualify for a mortgage?
• How much home can I buy?
• How large of a loan can I be approved for?
• How important is my credit history?
• What if my credit is “less than perfect?”
• How much do I need for a down payment?
• What about closing costs?
• What kinds of mortgages are available?
• Would a VA mortgage be best for me?
• What if I’m responding to PCS orders?
• What are my possible financing choices?
• Which loan is right for me?
• Are there any tips to consider when loan shopping?
• How important is pre-approval?
• Who will approve my application?
• What happens after I apply?

What Kinds of Mortgages Are Available?

It’s a good idea to gain a basic understanding of the kinds of available home mortgages. As you review the list, keep in mind that these categories widely overlap – for example, a good lender will provide VA, FHA, adjustable-rate and fixed-rate mortgages. As your partner through the mortgage process, a professional loan consultant can help you determine the best loan to fit your needs and design a custom financing solution for you.

VA Loans

Qualified veterans, reservists, active-duty personnel, and their spouses can purchase a home up to a specified amount with little or no down payment. 

VA loans feature:

• Low or no down payment requirements
• A wide range of rate, term, and cost options
• Flexible qualifying guidelines
• Use of gift funds for closing costs

More flexible requirements in comparison to FHA or conventional home loans enable easy qualification with regard to credit and income.VA loans are assumable, offer a no-down payment option and enable out-of-pocket expenses to come from a gift.

FHA Loans

The Federal Housing Administration (FHA) insures a wide variety of mortgages provided FHA approved lenders.These loans are designed to meet the needs of homebuyers with low or moderate incomes and feature:

• Low down payment requirements
• Loan limits based on geographic locations
• Generally more liberal qualifying guidelines
• Use of gift funds for down payment and/or closing costs.

Fixed-rate mortgages

The interest rate remains fixed for the life of the loan.These loans:

• Offer predictable monthly principal and interest payments throughout the life of the loan.
• Provide protection from rising rates. No matter how high market rates go, your interest rate stays the same.
• Generally are well-suited to borrowers who plan to stay in their homes for a long period of time, have a fixed or slowly-increasing income, and have a lower tolerance for financial risk.

Adjustable-rate mortgages (ARM)

The interest rate adjusts periodically to reflect market conditions on pre-determined dates.These loans:

• May be more appropriate for borrowers who may want to sell or refinance early, are able to make larger monthly payments after the rate adjusts, or are looking to buy a home when interest rates are relatively high
• Have an initial introductory period that usually offers a lower rate (relative to fixed-rate mortgages), after which the rate adjusts periodically, based on a market index.
• Protect borrowers from steep increases in rates through annual and lifetime adjustment caps.
• The initial rate can be locked in for different periods. Most lenders offer introductory periods of one, three, five, seven, or 10 years.Typically, the rate readjusts annually after the introductory period.
• Because of the introductory period’s lower rate, some borrowers may be eligible for a larger loan amount with an ARM than with a fixed-rate mortgage.

Jumbo loans

These are loans that exceed a specified size (conforming loan amounts).

• Jumbo loans on single-family homes can now exceed $417,000 ($625,500 in Alaska and Hawaii).
• Rates are generally higher on jumbo loans that on smaller comparable loans.

Alternative financing

These programs are designed for borrowers with less-than-perfect credit histories, excessive debt, previous bankruptcy, foreclosure or tax delinquency.

No Documentation Loans

Designed for borrowers who are self-employed, on commission or whose financial situation may be difficult to document.These loans allow borrowers to apply for a loan based on their credit history and stated income.

Would a VA Loan Be Right for Me?

A VA loan can be a good choice for qualified veterans, active-duty military personnel and their spouses. Backed by the Department of Veterans Affairs, they offer low to no down-payment requirements, flexible qualifying guidelines, no private mortgage insurance (PMI) requirements, and permit out-of-pocket expenses to come from a gift.

Everyone is required to obtain a Certificate of Eligibility. If you do not have this Certificate, you will need to apply using VA Form 26-1880 and this will require a copy of DD-214 (Certificate of Release or Discharge from Active Duty) showing character of service. Along with the Certificate of Eligibility, loan applicants will need to document their credit, savings and employment information.

If you are unable to meet VA requirements or want to exceed certain limits, contact me to discuss how to tailor a program to your specific needs.

In the following situations, a VA loan may not be appropriate:

• When buying a home that exceeds the maximum loan amount and down-payment funds are limited:
  • The VA doesn’t loan funds or set a maximum loan amount; they only guarantee loans. You’ll work with a lender to obtain your mortgage.
  • Lenders typically limit loans to what’s known as the “conforming loan limit,” which is $417,000. If the home you want exceeds that limit, you’ll need a down payment to cover the difference.
  • For Alaska, Hawaii, Guam, and U.S. Virgin Islands’ residents, note that maximum original loan amounts have now been increased 50 percent higher for first mortgages
• You do not meet service eligibility requirements:
• If you’re a veteran, you must be able to demonstrate wartime or peacetime service with a Certificate of Eligibility, discharge or separation papers.
  •  Active duty personnel are eligible after 181 days of service (90 days during the Gulf War)
  •  Reservists or National Guard members not otherwise eligible must have a total of six years of service
• To purchase an investment property: VA loans are only provided for owner-occupied properties.
• You want an adjustable-rate mortgage or a term that’s shorter than 30 years: VA typically offers 30-year, fixed-rate mortgages.
• The property you want to purchase exceeds the VA’s reasonable value for the property: The VA uses an appraisal to value your property. The loan amount will be limited to what the VA calls the property’s “reasonable value,” which is derived from the appraisal.

Get Preapproved Before House Hunting

Getting Ready To Buy A Home?

The first stop on the road to homeownership is working with an experienced mortgage professional/planner. It’s extremely important you get a written preapproval letter which will show you are a serious buyer in the eyes of real estate agents and sellers. That means you can expect preferential treatment because there’s no concern that your financing will fall apart. Preapproval has other benefits, as well:

• You know exactly how much you can spend on your new home.
• You won’t waste time looking at or falling in love with properties that are out of your price range.
• There’s no nerve-wracking waiting to see if you’ll qualify to purchase a home after you’ve fallen in love with it.
• A preapproved buyer is a sure thing (if you are working with a professional), so sellers will usually accept your offer first.
• Once you select a home, your loan approval process will be expedited and simple.

One-On-One Support

As an experienced professional mortgage planner, I know the Atlanta market and will ask questions that gives me a clear picture of both your current needs and future goals. I can then help you customize a home financing program that will not only help you buy a home now, but one that can also starts you on the road to overall financial success. My team helps homebuyers every day in making the right choices for their home financing needs. Whatever your homeownership goals are, I can help you capitalize on purchase opportunities and make the most out of your home buying experience wherever you are buying in Georgia or the Atlanta area.

Extra Support When It’s Needed

If you discover you’re not qualified to buy a home right away, count on my team to work with you to overcome credit challenges. For example, I provide my clients in such a situation free confidential credit counseling advice and materials that prepares you for homeownership. You’ll work one-on-one with one of my team members who will review your credit report, develop a home purchase action and savings plan, and guide you through every step of the home financing process. It can be your quickest route to homeownership, with personal support that helps you:

• Resolve credit issues.
• Budget for a down payment.
• Establish a savings plan.
• Connect with down payment assistance programs.
• Educate, guide and prepare yourself for the responsibilities of owning a home.