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First time buyer mortgage with 3% down

First time buyer mortgage with 3% down

First time buyer mortgages with 3% down offer many advantages compared to traditional loan options. One reason to consider first time buyer mortgages is the lower down payment requirements. Another is that it may open the door to homeownership sooner than other loan programs. So, what else should you know when it comes to these mortgage loans?

Here are the key facts you need to know about the Fannie Mae Standard 97% LTV, a first time buyer mortgage requiring just 3% down payment.

Must I be a first time buyer?

Yes, you must be a first time buyer.  A “first time buyer,” according to the definition, is someone who has not  owned residential property in the past three years.   As a result, this opens to door for many potential home buyers who have not owned a home recently.

Another Fannie Mae loan product, named HomeReady 97% LTV, does not list a first time buyer requirement.  We’ll cover that mortgage in our next post. For now just note that it has limitations that may render it unavailable to many first time buyers.

Which property types are eligible?

Properties purchased with this first time buyer mortgage must be one-unit primary residences. This means they cannot be multi-unit properties, second homes or investment properties.

Detached single family homes, condos, co-ops, and planned unit developments (PUDs) are typical.  A PUDs is a development of homes (attached or detached) where a monthly association fee is paid to manage common areas.

Is there a minimum credit score?

The minimum credit score for this first time buyer mortgage is 620. Fannie Mae states this explicitly in their guidelines. Many lenders prefer to see higher credit scores and may impose their own guidelines for this program.  A down payment including gift funds will usually require a higher credit score.

Does better credit lower my interest rate?

Conventional mortgages, including this first time buyer mortgage, use “risk-based pricing.”  This is a fancy term for the process of increasing the mortgage interest rate as the credit score or other factors worsen.

Credit scores are usually placed into “buckets.” Any borrowers with credit scores between 680 and 699 will be placed into the same bucket. For this reason, drastically improving credit scores can be valuable while small movements may make little difference.

Which loan terms are available?

A 30-year term is the only term available. Adjustable rate mortgages or interest only mortgages are not available for this loan program.

Having a fixed rate is advantageous for many reasons.  Most importantly, a fixed rate ensures each payment is predictable.  Even more, a fixed rate ensures that future rate changes will not impact the monthly mortgage payment.

Where can the down payment come from?

Down payments for this mortgage can come from the borrower’s funds or from a gift.  Usually, seasoned funds are required when coming from the borrower’s checking or savings account.

Similar to FHA mortgages, gift funds can also be used for the down payment and closing costs. The funds gifted must be from a blood relative and there can be no expectation of repayment.  In this sense, it is a true “gift” and a letter is usually included within the file stating as such.

Do I need mortgage insurance for this loan?

The Conventional 97 first time buyer mortgage does not have an up-front mortgage insurance requirement. This differentiates it from it’s rival, the FHA 3.5% down payment loan.

Similar to the low down payment FHA mortgage, the Conventional 97 does require monthly mortgage insurance.  Risk factors (just like interest rate) will determine the amount of mortgage insurance.  Lower credit scores will require a higher monthly mortgage insurance payment.

Do I need first time buyer education to qualify?

This first time buyer mortgage with 3% down does not require homeownership education. Without this requirement, potential homebuyers are already one step closer to ensuring they can purchase their first perfect home!

So, there you have it! All the details you need to know about the Conventional 97.

What else should I consider as a first time buyer?

A low down payment mortgage can be advantageous for several reasons. Making a decision on just one fact, however, may not set you up for financial success. There are several important considerations worth noting before making a decision about your first time buyer mortgage. So, let’s take a look at three:

First, a low down payment mortgage requires a higher payment each month. The higher payment is required because your starting mortgage balance is higher.  Due to this, you’ll have less monthly cash flow for other things like savings, paying off student loans or vacations.  If extra cash flow could be important for you or a growing family, you may want to consider a larger down payment amount.

Second, a low down payment mortgage requires mortgage insurance.  Mortgage insurance can be expensive and may not be tax deductible.  Changes in the tax code can happen quickly, and these changes may make it more or less beneficial to have mortgage insurance. Therefore, assuming tax deductibility could be risky.

Lastly, it may be important to consider opportunity cost.  Opportunity cost is what you are giving up when you use funds for a larger down payment.  For example, if you had a crystal ball and could predict stock gains with perfect accuracy, you may elect to put as little down as possible. This way, you could invest all your cash and see huge financial gains!

Above all else, consider your individual circumstances when it comes to your first time buyer mortgage.

Other relevant resources

millennial mortgage shopping

Three reasons millennials don’t shop for mortgages

It never fails.  Millennial buys a home, thinks all is good in the world and only then realizes they just got taken to the cleaners on their mortgage.  They are then stuck in a loan with an unnecessarily high payment every month for years to come. How did they end up in that situation?  Why didn’t they take time to explore mortgage options?  Here are the top three reasons millennials don’t shop for mortgages.

1. “I was scared by my real estate agent”

A millennial may never admit it, but they are subject to human emotions just like the rest of us. When it comes to a big purchase, such as a home, it is human nature to want to avoid risk. Some agents take advantage of this and inject questionable statements like this:

  • “Our in-house lender is always the best.”
  • “Her service is great and she’ll be at closing, nobody else ever does that.”
  • “Those online lenders, stay away!  They’ll never close on time!”
  • “Our in-house lender will shop rates for you, you don’t need to.”

Facts: Discouraging a home buyer from mortgage shopping is 100% unethical – and could even be illegal!  There are many incredible loan originators out there and many attend closings regularly. A single lender or broker can’t shop mortgage rates for you (learn why).

To understand why a real estate agent may steer a borrower to a specific lender, let’s follow the money!

The money trail

A real estate agent makes money when a house is sold or bought via commissions. The rate and loan program obtained by the homebuyer is irrelevant to the real estate agent’s income.  Their primary goal is to get the transaction done.  Until that moment, they haven’t earned a penny.

Additionally, many real estate agents have co-marketing agreements with specific mortgage lenders, brokers or loan originators. If these mortgage professionals don’t see an ROI on their investment of marketing dollars, the real estate agent stands to lose at least part of their marketing presence.  Therefore, the real estate agent wants to “feed” the mortgage professional to continue the financially beneficial co-marketing arrangement. 

With these in mind, is it any wonder that an agent will aggressively push you to a specific lender or mortgage broker?

Not all agents are the same

While many tech disrupters offering flat fees or “no-commissions” on real estate sales solves some of the problems, one major money problem remains.  Despite the removal of commissions, real estate agents may still be receiving funds from a mortgage broker or lender in the form of a co-marketing agreement or “MSA”.  This means they will still push a homebuyer to a specific lender, robbing them of the opportunity to shop for their mortgage.

How can this problem be solved?  You simply need to find an ethical real estate agent who isn’t “hooked” on the money coming from one specific lender.  Before you legally engage with any real estate agent, simply ask this question: “Do you receive money from any specific mortgage broker or lender?”

If the answer is “yes”, walk away and find someone else who will be just as interested in helping you save money on your mortgage as they will in finding you the house of your dreams.

2. “I used an app”

Every lender claims to have the tech to close your loan faster than you can say “mortgage transaction.” Can they really?  And if they can, who is actually the winner of this perceived huge investment in technology?  Do lenders make these massive investments purely for the consumer experience?

No, they sure don’t.

Fact: The shorter your loan is in processing, the lower the likelihood you’ll shop around or be solicited by other lenders and brokers.

Avoiding competition is a good thing for mortgage lenders and brokers, but not consumers.  When a millennial decides to not consider alternatives, voluntarily or involuntarily, the lender or broker wins.  The government has been fighting to help consumers shop for years, instituting more robust disclosure time periods and new documents – but the tech industry has quickly outpaced any government intervention.

Tech helps you shop too

Fortunately, the digitization of mortgages has made mortgage shopping easier provided you can avoid the common pitfalls.

Pitfall 1: Sharing your name, email and phone number with shopping sites who send it to multiple lenders.  This will get you bombarded with calls and you’ll wish you never uttered the words mortgage.

Pitfall 2: Shopping over the course of several days.  Rates change every day, so an apples-to-apples comparison is always essential.

Pitfall 3: Shopping while uninformed.  We tend to consider the use of a mortgage concierge a good thing but hey, we may be biased 🙂

Solutions to mortgage shopping

So, how can this problem be solved?  Fair warning, the answer may require that you have a conversation with an actual human at some point who isn’t your parent or friend who doesn’t know a lick about mortgages.

Solution 1: Our particular solution is to use MortgageCS’ concierge program which is free and provides education and insights from day 1 of your shopping through your loan closing.

Solution 2: Other options are becoming a mortgage expert by holding numerous conversations with many banks, lenders, and brokers all while resisting the urge to have your credit pulled numerous times and getting bombarded with follow-up calls and emails.  Grow thicker skin and don’t be afraid to say “no” and you’ll be all set here.

3. “I am subject to advertising”

It may be hard to admit, but marketing messages can impact everyone – even tech-enabled millennials.  From TV spots to billboards and creative event sponsoring, mortgage companies are investing more and more each year to maintain scale and keep their operations growing.  After all, they have an investor base or shareholders to keep happy.

Remember this: A mortgage is a single transaction, creating a predetermined amount of income. It follows that a company with lower costs and all else equal could deliver a better mortgage rate and fee structure.  While company size and other factors can sometimes influence this, you should read this first: Do mortgage brokers act in their customers best interest?

Now that you know the three reasons millennials don’t shop for mortgages – you can ensure you don’t fall victim to the same influences!

Share this to help your friends – they can use their savings to take you to a nice dinner one day!

mortgage brokers

Do mortgage brokers act in their customer’s best interest?

By definition, a broker is a person who arranges or negotiates something like a settlement, deal, or plan. It follows that mortgage brokers arrange or negotiate a mortgage.  But what does “arranges or negotiates” really mean?

More importantly, does a mortgage broker always act in the best interest of their customer, the mortgage borrower?

These questions come up whenever we meet with financial advisors. Understanding the answer (hint: it is not a simple yes or no) is essential for a fiduciary advisor who wants to remain, well, a fiduciary advisor. Failing to understand this answer results in failing to look out for the best interest of your client. 

Let’s examine how mortgage brokers come up with their mortgage rates.

How mortgage brokers come up with rates

A mortgage broker will compare various wholesale lenders when examining loan options for a potential customer.  Wholesale lenders (which have approved the mortgage broker as a partner) will supply rate sheets or the raw data to populate loan pricing software.

In this sense, wholesale lenders are just like wholesale suppliers in a retail market. They can have specialties such as “jumbo loans” and rate or pricing differences will certainly exist amongst them.

The graph below represents the wholesale price from three different wholesalers available to a mortgage broker. For our purposes, we’ll imagine there are just three different wholesale lenders being considered for a particular loan.  Truth is, there could be many more options considered by one mortgage broker.

Mortgage broker wholesale pricing

To grasp the concept of how this process works we are omitting the actual interest rates.  Rather, we are going to focus on their relative position to each other. Note the Y-axis is simply “Interest Rate” and void of specific numbers.

In the case above, Wholesale Lender 1 is offering the lowest wholesale rate given the mortgage customer’s credit, income, and other criteria. In contrast, Wholesale Lender 3 is providing the highest wholesale rate.  Lower rates are always better when other things such as origination fees and discount points are held constant.

With an understanding of the mortgage broker’s “suppliers,” let’s move on to how the mortgage broker makes money.

A mortgage broker adds margin

A mortgage broker will add a retail margin, or markup, to each wholesale rate.  These two items, when combined, determine the final interest rate presented to the mortgage customer.

Industry compliance and several other factors ensure that a specific mortgage broker earns the same markup on each loan they could offer.  As a result, the same margin is added on top of each wholesale rate.

Mortgagebrokeraddsmargin

With the retail margins added to each wholesale price, the relative attractiveness does not change. Wholesale Lender 1 + broker margin is still the most attractive loan option.  Said another way, this wholesale price and the margin combined will result in the lowest rate for the mortgage customer.

A mortgage broker presents their best option

Mortgage brokers want to present their best option to increase their chances of winning the loan business. They are indifferent as to which option they provide because they generate the same margin in all cases. In this sense, a mortgage broker does “shop” rates in some way. But there is MUCH more to the story.

Mortgagebrokersbestoption

The fact is, there are many wholesale lenders and a mortgage broker selects a certain number with which to partner. While a mortgage broker may have access to many wholesale lenders, they will NEVER have complete representation.

Other mortgage brokers have their own best options

Each mortgage broker has an individual set of wholesale relationships. These relationships can be based on familiarity, proximity, or any other factor.

Additionally, each mortgage broker must be approved by a wholesale lender in order to offer their products and terms. Some wholesale lenders enforce minimum production requirements in order for mortgage brokers to remain “active” with them. Further, certain mortgage brokers can receive better/worse wholesale pricing based on a range of factors including quality of submissions and volume of transactions monthly/quarterly.

As a result of these factors, each mortgage broker will have access to a “best wholesale price.” Said another way, they will each have a different starting point with which to build their retail rate.

Otherbrokerswholesalelenders

Mortgage Broker 1 has presented the wholesale price that is lowest from his stable of options. Mortgage Broker 2 has access to a lower wholesale price. Mortgage Broker 3 has access to a less favorable wholesale price – the worst of the bunch.

If we assumed (wrongly, btw) that retail margins are all the same, then we see (below) how a wholesale price is related to a lower rate.  In these cases, the wholesale price is the main determinant of interest rate for the consumer.

wholesalewithretailmargin

When presented with these options, we should choose to work with Mortgage Broker 2.  Due to their exclusive access to the lowest wholesale price (amongst the three), they will provide the lowest interest rate.

A lower interest rate results in lower monthly mortgage payments – who wouldn’t want that?

Retail margins differ between mortgage brokers

Mortgage brokers generate revenue only when they produce loans. All expenses, such as loan officer commissions, office overhead, and marketing/advertising, are paid for from this transactional revenue. As a result, each mortgage broker requires a different retail margin to maintain profitability and the range can be significant.  

Operational overhead is one of the most common reasons why retail margins range. A mortgage broker with a large executive team (drawing hefty salaries) will result in the need for larger retail margins.

A mortgage broker paying a hefty monthly “marketing expense” to a real estate office can also be a contributing factor. These monthly fees, called MSAs, are masked from compliance regulators by associating them with “joint marketing activities.”  While the legality of them may be increasingly questionable, the funds required to repay this large expense increases the retail margins charged.

Applying the logic from above, let’s take a look at how our Mortgage Brokers made out in a competitive environment.

DifferentRetailMargins

Mortgage Broker 2 ends up being the worst choice for a mortgage borrower.  The large retail margin results in the highest interest rate compared to both other options.

Mortgage Broker 3 ends up with the lowest rate for a mortgage borrower.  Their low retail margin means they can provide the best interest rate, resulting in the lowest payment compared to the other two options.

Shopping between mortgage brokers is vital

According to the Freddie Mac April 2018 Insight, shopping just one additional source for a mortgage can result in savings approaching $2,000.  Shopping up to five sources can result in savings that approach $4,000.

While these numbers may seem significant, we see rates vary by as much as 0.50% between mortgage brokers. This difference presents a more significant opportunity than the Freddie Mac April Insight suggests.

Because mortgage brokers can’t represent every single wholesale option and inevitably have a differing retail margin, they can only partially act in the best interest of a customer.

Despite advances in technology and efficiency, mortgage shopping is a vital part of the mortgage process and should be done in each and every instance.

Purchase Mortgages MortgageCS

3 keys to understanding purchase mortgages

Wondering how to buy a home and don’t know where to start?  You aren’t alone in your quest to understand the home-buying process.  Those looking to buy a home can quickly become overwhelmed resulting in burnout.  The best way to avoid information overload is to walk before you run.  Here are the 3 keys to understanding purchase mortgages.

Key 1: What is a mortgage?

A mortgage loan is a loan that is used to purchase a home.   A borrower will obtain a mortgage from a bank or other lending institution in lieu of using all cash to purchase the home.  Just as someone could finance the purchase of a car, would-be homebuyers can finance the purchase of a home.

When a mortgage is used by a borrower, the bank or lending institution will place a lien on the property’s title.  This is not a bad thing! When mortgages are secured by a home’s title, they become less risky.  Lower risk means the banks will offer more favorable interest rates when compared to personal loans that are not secured by any property. Lower interest rates will translate into lower payments, and that is a great thing!

The exact term “mortgage” refers to a specific document that is created and recorded as a public record:

A mortgage is a legal document creating a lien on a property after an agreement is reached between a borrower and lender. The mortgage becomes a public record document at the county’s office and secures a property as collateral in consideration for funds borrowed.

How does a mortgage help homebuyers?

Without mortgage loans, buying a home with cash would be the only option. Yikes!

With mortgage loans, buying a home is much more manageable. Would-be buyers will use cash to pay only a portion of the home’s purchase price.  This is called the down payment.  It is also typical that a buyer will pay at least a portion of the closing costs out of their cash.  Take a look below for a simple example regarding a $200,000 home purchase.

Purchase mortgages

 

In the example above, purchasing a $200,000 home results in a $160,000 mortgage and $50,000 cash required at closing.  This $50,000 includes $40,000 for a down payment and $10,000 as closing costs.

Key 2: What is a debt ratio?

Debt ratios matter a great deal when qualifying for a purchase mortgage.  The bank or lender requires proof that you can manage your soon-to-be housing payment. They’ll look for this proof by comparing your monthly debts to your monthly income and establishing a debt ratio. Your monthly debts will be obtained from your credit report and your monthly income will be calculated using paystubs and recent W2 statements.

Once a debt ratio is calculated, it is typically converted into a percentage. A debt ratio that is too high will either restrict the loan programs you may have access to or disqualify you completely. Yikes!

Two different debt ratio calculations?

The front-end debt ratio examines all debts except for those associated with the new housing payment. The back-end debt ratio will examine all debts and include a soon-to-be housing payment. A back-end debt ratio below 43 percent is typically low enough to have access to virtually all loan programs. Once a debt ratio exceeds 43 percent, loan program availability will be reduced drastically.

 

MortgageCS Debt Ratio

Debt Ratio Example

Assume you earn $10,000 monthly and have a car payment of $400 and student loan payments of $400 each month.  Your front end ratio will be ($400+$400)/$6,400 = 12.5%.  This number is far below the typical requirement of 31% for FHA loan front-end debt ratios.

Add in a new housing payment of $1,600 and the back-end debt ratio becomes ($800 + $1,600)/$6,400 = 37.5%.  This ratio is approaching the limit for of 43% but still within a reasonable range to obtain access to most loan programs.

Important Tip: When calculating a debt ratio, mortgage lenders will use gross income (income before taxes). 

Key 3: What goes into a mortgage payment?

A monthly mortgage payment is typically made up of four key components: principal, interest, taxes, and insurance. These four items are commonly referred to as PITI.  Phonetically, PITI is pronounced “pity.”

PITI explained

Principal and interest will be calculated based on your starting loan balance and the interest rate associated with your loan.  Taxes refers to the real estate taxes associated with the property.  Insurance refers to the cost of the homeowners insurance required to protect the property. Homeowners insurance is a requirement when a mortgage is used to buy a property.  This is because the mortgage lender needs to ensure the collateral (your home) is protected.

 

Mortgage PITI

 

If you put down less than 20 percent of the purchase price when you buy a home you may need to add mortgage insurance to this number.  You also may need to add monthly association dues if you purchase a condo, townhouse or any property included in an association.  Since you know the basics of PITI now, these are simple to add to your monthly required payment.

What’s next?

You now have a firm understanding of mortgages, debt ratios and the components of a mortgage payment. Armed with this information, you can now continue your learning with ease – good luck!

Mortgage Down Payments

Mortgage down payments

At first glance, it may seem as though large mortgage down payments and short loan terms are the key to saving money on a mortgage, but each of these decisions has its own benefits and shortfalls. We can help you put them in perspective so you can make the best choice with respect to your circumstances.

Deciding on a loan and mortgage down payment amount for your upcoming home purchase isn’t always easy. Several factors can impact which loan program you can, or should, use. Understanding options early on is a great way to save time and be sure you start the loan process in the right direction.

Review Your Finances And Credit

With so many types of loans and down payments available, how do you know which one is right for you?

Start by being honest with yourself about your finances.

How much money do you have for the mortgage down payment and closing costs?

Keep in mind that you need to save about 3% of the cost of the house for closing expenses. While you won’t need a down payment for VA and USDA loans, you will typically need a 3.5% down payment plus closing costs for FHA loans, and 5 to 20% down plus closing costs for conventional loans. A recent report from Ellie Mae found that the median mortgage down payment amount is 5% today, compared to 20% just 10 years ago!

To put that in perspective, a family buying a $400,000 home would have put down $80,000 10 years ago and just $20,000 today.  Quite a difference!

Have you taken care of your credit?

If your credit score is less than 620, you will not qualify for a conventional loan. If it is less than 740, your conventional loan interest rate will be higher than it could otherwise be. FHA requirements allow someone with a lower credit scores to purchase a home, as do other government-backed loans. Regardless of the loan program, a higher credit score is always better – so do what you can now to ensure you have the highest score possible when it comes time to obtain your mortgage loan.

Look At The Timing Of Loan Processing

Government-backed loans may require more inspections than conventional loans. Because of this, they could take longer to process. If you need to move in a hurry, government-backed loans may present unnecessary challenges. Remember that missing or out-dated paperwork is one of the top reasons for loan delays. So, be sure to stay on top of your documentation to ensure a smooth closing.

Look At Savings And Opportunity Costs

You may have a 20% down payment saved along with closing costs, but do you really want to spend it now? For conventional loans, you can put 20% down and avoid private mortgage insurance (PMI).  But you can also put as little as 5% down with PMI. Let’s look at an example to understand the costs and benefits of these two programs. For this example, we’ll consider these two options when purchasing a $250,000 home using a 30-year fixed rate loan at 3.5%.

Option 1: A $50,000 (20%) mortgage down payment results in a $200,000 beginning mortgage balance. This will translate to a $898 monthly payment in principal and interest.

Option 2: A $12,500 (5%) mortgage down payment results in a $237,500 beginning mortgage balance. This will translate to a $1,167 monthly payment in principal, interest and mortgage insurance.  Mortgage insurance makes up $101 of this total payment.

Many people would want to pay less per month, so they would choose the first option. However, that in order to save $269 a month, you would have to reduce your savings by $37,500! At $269 a month savings, it will take you 139 months—almost 12 years—to recoup this money. That’s a lot of time to live without a substantial nest egg!

Then, you have to look at opportunity costs. Said another way, what else might you want to do with this money? Perhaps you’ll be able to easily agree to a attend a friend’s destination wedding? Or maybe you’ll have the opportunity to buy the sailboat you’ve always wanted.  Maybe you are more practical and the money could be better off in an investment account? Regardless of what you do with it, the $269 a month savings has an opportunity cost worth considering.

Look At Length Of The Loan

Should you apply for a 15-year or a 30-year mortgage?

After looking at the numbers, most people agree the substantial savings in interest makes a 15-year loan an attractive option. In reality, affording a 15-year mortgage is more difficult and may result in being house poor, meaning that you can afford your house but little else.

Think of the opportunity costs associated with selecting a shorter term loan with a higher payment: A higher monthly housing payment results in less funds for investments, smaller retirement accounts and less resources to support a growing family.

Also consider how long you intend to stay in the home.

If you feel confident that you will remain in the home for years to come, then a shorter loan might be worth the interest savings. [See more here] On the other hand, if you plan to move on quickly, it might be better to use the monthly savings that comes with a longer term loan towards other things, even if it means simply saving the money for your next move.

If you aren’t sure, you can always go with a 30-year mortgage and make larger payments to pay off the loan faster.  Following a 15-year schedule by paying extra payments gives you a shorter loan with the flexibility to fall back to a 30-year schedule if needed. Remember that in these cases, once you pay money into your mortgage you need to “ask” for it back by applying for a new loan or second mortgage to access the equity.

With so many options available, it is important to compare rates and programs. In this way, you can determine which combination works best for you. At today’s low rates, you are sure to find many good choices so it is hard to go wrong!

Mortgage Shopping Confidence from MortgageCS

Gain mortgage shopping confidence

Mortgages can seem complicated and intimidating, particularly in a world when we can “one click order” online.   How can you find out what you don’t know…but really should? How can you increase your mortgage shopping confidence?

When consumers shop for mostly anything, they evaluate the item or service they’re considering based on a predetermined set of criteria. Some considerations are easy, while others are more complicated. Mortgages tend to fall into the latter category. This is typically due to the intimidation factor and the perceived complexity of the product.

Mortgage loans come with an inherent, internal language the everyday consumer rarely encounters. If you wandered around a mortgage company, you’d hear phrases such as, “Where’s that VOD?” Not surprisingly, many of these phrases would be meaningless to you.

On the other hand, when someone decides they want to go out for a coffee, the choices are a bit more familiar sounding, and the decision most likely boils down to a matter of location and price. It’s pretty simple. While loan officers might wish the mortgage process were as easy as ordering a cup of coffee, it’s typically not.

Due to the varying factors of a mortgage transaction, borrowers should compare lenders based upon quoted interest rates and responsiveness, quality and trust. Consumers should approach mortgage education by explaining their needs and what they are looking to accomplish.

In this manner, they can find out more about the lender’s mortgage process and how loans are issued.

Finding a good mortgage loan officer

There is plenty of material online about how to shop around for the best deal on a mortgage. Certainly you want the best rate at the lowest cost, but you also need to consider the reputation of the companies you’re interviewing. But perhaps the process needs to be reversed.

When you call a loan officer and ask about a rate quote, the loan officer knows there’s competition.  He then provides the best available offering without considering all the details. The loan officer doesn’t have any reason to thoroughly evaluate your situation, so he falls into an all-too-familiar trap.  He provides a quote to win your attention potentially resulting in a bait-and-switch.

Here’s the problem with that: The quote alone doesn’t help lift the veil off the mortgage process or account for long term needs. It won’t ensure consumers make the right loan choice.  It won’t ensure that you come away from the closing with a clear understanding of what’s just happened and why. Yikes!

How can you, as a consumer, know what to ask to gain mortgage shopping confidence?

The surest path to pure mortgage nirvana is by communicating openly with the loan officers to facilitate learning early. This will be the best way to increase your mortgage shopping confidence.

Instead of considering only the interest rates, you should include a description as to what you are looking for.  Here’s an example: “Here’s my situation. I want low monthly payments, but I also want to save on long-term interest. I’m retiring in about 15 years and I want to be mortgage free.”

With this information, the loan officers know to quote you a rate on a program that matches your goals.  Surprisingly, that doesn’t necessarily mean a 15-year fixed rate loan.

A loan officer could suggest a 20-year loan, and set up a payment schedule that allows you to prepay just a little bit each month.  This would give you the security of a lower payment if ever needed. The extra payment would be applied directly toward the loan balance and would not go to interest.

Did you even know a 20-year loan was an option? Probably not, because most information you read is about either 30- or 15-year fixed rate loans. Instead of asking for a 15-year fixed rate and the associated fees, try explaining your current situation and what you want to accomplish.

Experienced loan officers know to include this information automatically, but unfortunately most get into a rate-and-fee game, leaving borrowers confused.

Another mortgage shopping example

“I need a quote for a duplex I’m thinking of buying.”

The loan officer answers and even sends a cost estimate showing how much down payment you will need, along with a list of anticipated closing costs. You get your quote, hang up and dial another mortgage company. Doesn’t that sound like fun? NOT!

Instead, how about saying: “I’m going to buy a duplex and live in one of the units. The current rent for each unit is $1,500 per month. I want the rental income to cover my mortgage, property taxes and insurance plus a little extra cash each month.”

Now, that’s a plan. Your loan officer will explain your options and what your monthly payments will be. He’ll also help structure a prepayment plan to retire the mortgage sooner, saving you long-term interest.

The loan officer in the second scenario will explain why each option is offered and how it meets your requirements. You may not have known how much your payments would be or whether the rental income could cover your mortgage payments.

You also may not have known your interest rate would be better because you plan to live in the property rather than renting it. By the end of the conversation, you’ll know how mortgages work and how they can be crafted around your exact situation.

Mortgage Shopping Confidence

By communicating your goals along with your rate request you’ll WIN at this process we refer to as the mortgage maze. You’ll also end up comfortable with the loan program you’ve selected. Now THAT is a WIN because you’ll increase your mortgage shopping confidence!

 

Paying Off a Home Early: Calculations and Considerations

Should you make a point of paying off a home early? While it would be nice to save on interest and put monthly house payments behind you, early repayment isn’t a one-size-fits-all solution.

About Mortgages

It’s good to get a mortgage. Seriously, without the ability to finance such a large purchase, the real estate market wouldn’t be what it is today and it would instead be controlled by the very well-off.

Banks have been financing real estate since there was real estate to be purchased. Mortgages help fuel the economy in many other areas as well. When people obtain a mortgage to purchase a home, multiple parties benefit.  This can include the appraiser, the real estate agent and even home remodelers. Real estate investors in particular can benefit from the ability to finance investment properties. Mortgage interest is also one of few expenses that are tax deductible.

While the utility of a mortgage is well-defined, it is a debt. So, shouldn’t you strive to pay it off as soon as possible?

Does it make sense to aggressively pay down your mortgage loan? If so, what are the incentives for doing so? Are there any other considerations that need to be made?

If you’re like most homeowners, your monthly mortgage payment is probably your single largest recurring expense. It makes good sense to eliminate that payment and free up cash to be used for other goals such as paying off other debt, saving for college or investing for retirement.

Most mortgage loans today are amortized over 30 years, yet the reality is that few 30-year loans ever actually last that long. Mortgages are refinanced, and homes are sold long before the loans can be paid off.

In the light of this backdrop, let’s take a look at the calculations and considerations of paying a home off early.

Paying Down Pros

If you have ever looked at a mortgage amortization schedule, you understand that far more interest is paid in the early stages of a loan repayment period. If we examine a 30-year loan amount of $300,000 and use a 3.5% rate, we will see that only $472 of the $1,347 monthly payment goes towards principal in the first payment! Nearly twice as much, $875, goes towards interest in this same period.

Mortgage payments are more heavily weighted with interest than principal early on, because the interest rate is applied to the outstanding loan balance. As the mortgage is gradually paid down, the interest rate is applied to an increasingly lower loan amount.

As a result, after five years of making the mortgage payment, the outstanding loan balance has decreased by less than $40,000.  This is despite the fact that more than $80,000 in mortgage payments have been made over that same time period. At the end of five years, the loan balance is $262,234. The interest is an expense and goes to the lender, not toward the homeowner’s equity.

That’s why many borrowers make extra payments on their loans in order to send more to principal sooner and save on interest. Today, there are no prepayment penalties whatsoever on any government-backed or conventional loans. This means that anyone can pay against a mortgage at any time they choose. With an accelerated payoff, homeowner equity is increased. By how much?

Let’s take that same $1,437 payment. By making just one extra payment per year, after five years the loan balance drops to $254,245 instead of $262,234. The one extra payment made each year goes directly toward the loan balance. After 10 years of making one extra payment? The loan balance is $206,611 vs. $224,114. This math can be applied to any property type, whether it be a primary residence, a second home or an investment property. Mortgage amortization works the very same way in all cases.

Paying Down Cons

If paying down a mortgage makes sense, are there ever times when it may not be the best option?

Yes, there are a couple. With rates as low as they have been recently, you could be leveraging your borrowing costs nearly as low as they can go. When a 15-year fixed rate is in the 2.50% range or so, that’s cheap. Instead of paying down your low-interest mortgage, take a look at how your retirement fund is coming along. Yes, getting rid of your mortgage before you retire is the single biggest thing you can do, but can you have the best of both worlds?

When you retire after having devoted your extra funds to paying down the mortgage, without a healthy retirement fund you’ll be “house rich and cash poor.” You may instead be able to find investments now that will provide a higher rate of return over time, or you may want to purchase a rental property with those extra funds.

Feel Good Time

Finally, let’s admit that no longer having a mortgage and still having a safe, secure roof over your head could bring a lot of self-satisfaction. It simply feels good not to have a mortgage payment every month.- and as humans we often makes decisions based on what feels good, not what is mathematically sound.

Also, there’s no mortgage balance to pass along to your heirs when there is no mortgage. It’s an emotional advantage that other retirees may not have as they use their retirement and social security income to make the mortgage payments each month.

Finally, weighing the pros and cons of paying down a mortgage should warrant a meeting with your financial planner or wealth manager. The mortgage is typically your biggest expense and accounts for a large portion of your income. If you are considering paying down your mortgage quickly, take some time out and review your options with someone who can help you see the bigger picture and the long-term benefits and costs of being mortgage free.

Buying Your First Home: 5 Steps to Success

If you’re considering buying a home but you aren’t quite sure where to start, you’re not alone. Our step-by-step guide can walk you through the process with ease.

 

For those who are getting tired of renting and have decided it might very well be time to buy, it’s important to understand the buying process, what type of property is best for you and the type of financing you’ll need. Here is a step-by-step program for those who see a first home purchase in their future.

Step 1: Think it through

It’s important, early on, to understand the pros and cons of buying versus renting. It’s not always in one’s best interest to buy a home instead of renting. While there is certainly time to change one’s mind during the home buying process, it helps to understand the benefits and downfalls of owning a home before applying for a mortgage.

Pros of home ownership

  • Each month, as you make a mortgage payment, you’re contributing to your own financial stability in the form of increased equity in the property. Over time, your equity grows and it belongs to you, not to your landlord.
  • Mortgage interest is tax deductible, whereas rent payments are not. Property taxes may also be tax deductible for those who itemize.
  • The property belongs to you and you can have pets, paint the walls whatever color you like, and create your own kitchen.
  • When financing with a fixed-rate loan, your monthly payment will never change.
  • You won’t have a landlord who can increase your rent each year.

Cons of home ownership

  • You’re not as mobile as you once were. As a renter, you had the option to change your scenery and move across town, or to another city each time your lease was up for renewal.
  • When the heater broke down in your apartment, you called your landlord. When the heater breaks down in your own home, you’re the landlord.
  • You no longer have the free access to a fitness center, pool or other amenities offered by your apartment building.
  • If you make a poor decision when selecting an apartment, you can always move when your lease expires. If you make a poor decision when buying a home, the consequences will be much more severe – negatively impacting your finances significantly.

Step 2: Credit and lifestyle check

At the very beginning of this process, it’s important to check your credit report. When consumers pull their own credit report, they should be looking for errors or mistakes that might be incorrectly lowering credit scores.

Fortunately, it’s no secret that credit files can be rife with errors. Similar names can pop up on one another’s reports, and old accounts can show as open and in collection when they’ve actually been paid in full.

Consumers should regularly check their credit regardless of whether or not they’re looking to purchase a home, and free credit reports can be obtained annually at a website supported by the three main credit repositories: Experian, Equifax and TransUnion. The site is www.annualcreditreport.com.

Consider your lifestyle to help focus in on a neighborhood and property type that will best suit your needs. Do you want to live the high-rise condo life downtown, or does a neighborhood and your own lawn sound better? Are school districts a priority for you? What about your commute to work?

These and other questions should be settled before you seriously begin your home search.

Step 3: Understand your finances

How much are you comfortable paying each month? Remember that when you begin the mortgage process, how much you qualify for and what you’re comfortable paying can be two very different amounts. It pays to get prequalified early on, but stay in your comfort zone and don’t get carried away taking on a payment that is too high for your own good.

Use MortgageCS to get a feel for current mortgage rates and for the program that best matches your available down payment amount. By the time you close on a home, rates will more than likely be different than they are now, but you need to familiarize yourself with credit markets and monthly payments.

As always, keep your personal information safe during this early stage. Uninvited pressure from a loan officer or multiple credit pulls over time can create unnecessary issues and stress. Using MortgageCS to ensure your personal information remains protected is a great way to understand your options and find a trusted source for your financing without the hassle.

Don’t forget about homeowners insurance. Contact your insurance agent and get a quote on coverage for your new home. Your lender will require a minimum amount of coverage required, but speak with your agent about any additional coverage options you might want to add to your policy.

Step 4: Get organized

Begin gathering your financial documents. Once you’ve selected the loan officer you’re going to work with, they will provide a list of required items. This list will include bank and investment account statements, and income tax returns might be required along with W2 forms and paycheck stubs. You’ll need to update these items once you get closer to a loan approval, but gathering them early lets you know if there is anything missing that you’ll need to track down.

Step 5: Find the property!

Looking at many different properties can be exciting and frustrating at the same time. Once you have an accepted sales contract on a property, follow the requests of your real estate agent, loan officer and loan processor when additional information or action is required. Most sales contracts conclude in 45 days or less. Don’t assume anything during this critical time and be sure to keep the communications line up and working!

How fast?

You can follow these 5 steps in 5 months, or in almost any time frame, but giving yourself enough time to complete each step will help create a stress-free experience.

Ask anyone who has been through the home buying process before and they’ll tell you that spending more time shopping for homes with a preapproval letter is far better than chasing down loan documentation at the last minute. So plan ahead and make the process as easy as it can be!