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

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Three reasons millennials don’t shop for mortgages

Ben Stucker March 5, 2019 12:59 pmApril 24, 2019

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!

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

Ben Stucker February 19, 2019 2:41 pmApril 20, 2019

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.

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.

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.

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.

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.

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.

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.

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Why margins matter in a HELOC

Ben Stucker January 3, 2019 11:57 amApril 20, 2019

Let’s take a look at what a margin is and why margins matter in a HELOC (Home Equity Line of Credit). For the purpose of this post on April 20th, 2018, we’ll be using the HELOC page found here.

HELOC margins range

What we see on the HELOC page is that margins can range quite a bit. In some cases, margins are as low as -1.25. Other margins show as high as +1.00. What does this mean when it comes to a HELOC and why is it important?

A real-world HELOC example

Let’s take a look at an analysis for a client that may be interested in obtaining a $100,000 line of credit. Here it is:

In this particular analysis, we will be comparing a “High Margin” and “Lower Margin” line of credit. In both cases, the Prime Rate is the same because it is not set by the bank. The margin, on the other hand, is set by the bank offering the line of credit. This is where you see a range of options.

The High Margin HELOC

The High Margin HELOC shows a margin of 0.50 percent. When we add this number to the prime rate, we can see that our effective interest rate is 5.25%. This interest rate will be charged until the prime rate moves up or down. Any movement in the prime rate will simply move the Interest Rate by the same amount.

In this specific case, a client borrowing $100,000 at a 5.25% rate will need to pay $437.50 each month.

Lower Margin HELOC

When we compare the lower margin line of credit, with a margin of -1.25%, we see that the same client may end up paying just $291.67 per month. This lower margin results in a savings of nearly $146.00 each month.

2018 Tax Rules may make this more important

Historically, any interest associated with a line of credit could be written off against income. Said another way, a homeowner who obtained a line of credit wasn’t “really” paying the interest rate they were given. This is because they were able to deduct the interest payments from their earned income and receive a tax refund as a result.

The new tax laws starting in 2018 have changed the laws for HELOCs. Now, there are many instances where the interest paid towards a HELOC may no longer be tax deductible. Due to this, it is more important than ever to consider savings that may be available from a HELOC with a lower margin.

HELOCs for Wealth Management Clients

Next, let’s examine a $250,000 Home Equity Line of Credit.

The same margins from above show that a savings of $364.58 is possible between a high margin HELOC and lower margin HELOC.

Cost and Shopping HELOCs

Home Equity Lines of Credit are easy to obtain and the costs to obtain them are either $0 or less than a few hundred dollars. All else equal, it is important to understand how shopping the margins between HELOCs can have a substantial impact on monthly free cash flow.

If you’d like to evaluate lines of credit in the Philadelphia area, go here.

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How does a Home Equity Line Of Credit work?

Ben Stucker December 10, 2018 10:00 amApril 20, 2019

When it comes to home finance, it pays to know your options. Homeowners looking to access cash often use a Home Equity Line of Credit (HELOC, for short). How a Home Equity Line Of Credit works is different than a traditional mortgage.

Let’s take a look at how they work and what they can do for you.

What is a HELOC?

A HELOC is a common type of second mortgage. Homeowners obtaining a HELOC often have a need for additional cash. Typical uses are debt consolidation, home remodeling or accessing cash to purchase another property.

A unique structure

HELOCs are different because they have a unique structure. For the first 10 years, the loans are in a draw period. During the draw period, homeowners can access any portion of the available cash on demand and pay only the interest on the funds in use each month.

During a draw period, homeowners can also pay back funds at any time. If more cash is needed, the funds which were recently paid back can be accessed again. In this sense, a HELOC is similar to a credit card. Different from a credit card, however, HELOCs come with relatively favorable interest rates (only slightly above traditional mortgage rates).

Adjustable rates

HELOCs also come with adjustable rates that follow the prime rate published in the Wall Street Journal. Rates can vary each month and will be impacted by the prime rate and the margin (more on margin in a moment).

When the draw period ends after 10 years, a payback period begins. During the payback period, funds can no longer be accessed from the HELOC. The outstanding balance is converted to a regularly amortizing loan spread over 20 years. Said another way, the balance is converted to a “normal” 20-year mortgage. At the start of the payback period, the interest rate is typically fixed and will remain so during the next 20 years.

Shopping a HELOC

Virtually all banks, lenders and credit unions will use the prime rate as the core component of determining the interest rate during the draw period. This is called the “index.” A bank will also set a “margin” for the draw period. Banks may offer a promotional margin for an initial period. For example, a bank may offer “Prime minus 0.50% for 6 months, then Prime plus 0.25% onwards.”

In this case, if the prime rate is currently 5%, the initial rate will be 4.5%. It is important to note that if prime increases, so will the effective interest rate. The promotional margin simply reflects a relative adjustment to the published prime rate.

Why a HELOC?

There are several reasons why you may consider a HELOC over a traditional refinance.

Maintain your great interest rate

It is no secret that mortgage interest rates have increased since their historic lows. While they may still be low, rates in the 3% range aren’t coming back anytime soon.

Homeowners looking to access additional cash may be hesitant to refinance out of their low rate – and rightfully so! The HELOC, as a second mortgage on the property, is a great option to maintain your first loan and still gain access to cash. As a second mortgage, the loan operates independently of any first mortgage on a property.

Low costs to obtain

The transaction costs associated with a HELOC are significantly lower than a traditional refinance. The costs of a HELOC are typically limited to an appraisal (around $350).

In contrast to a traditional refinance that involves an appraisal, title charges, lender charges and other fees, HELOCs come out as a far less expensive option.

It is worth noting that many banks offering HELOCs will also require a borrower to open a checking account. If it is not a requirement to obtain a HELOC, it is often a requirement to obtain the promotional rate.

Flexibility

The flexibility provided by a HELOC during the draw period makes them extremely advantageous. In addition to the flexibility of taking money on demand, the flexibility to pay it back and draw again is unique. This is in stark contrast to “closed-ended” mortgages (like your first mortgage) where payments are made and funds cannot be withdrawn.

Flexibility also comes in the form of lower monthly payments. For most HELOCs, the minimum required payment is equal to the interest accrued during the prior month. In contrast to a traditional mortgage that requires interest and principal, HELOCs provide for a significantly lower payment.

HELOCs also allow some or all of the principal balance to be paid off at any time with no penalty (unless stated otherwise in their terms). This feature allows HELOC borrowers to use them for short-term cash needs – such as cash to purchase and flip a house or buy a car.

Qualifying for a HELOC

Qualifying for a HELOC is similar to most traditional mortgage products.

A homeowner looking to obtain a HELOC will need to have good credit, documented income and some type of assets for reserves. Additionally, banks will require that the total amount borrowed against the home does not exceed 80% (or in some cases 90%) of the home value.

HELOCs can be a flexible way to obtain cash without disrupting a current first mortgage. With mortgage rates inevitably rising in the future, HELOCs will certainly maintain their place as a viable home financing product.

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Refinance when rates are up? Maybe.

Ben Stucker September 20, 2018 11:33 amApril 24, 2019

Refinancing when mortgage rates drop is usually an easy decision. A reduction in payment and the advantages of paying less interest can make great sense. What happens when rates increase? Does it ever make sense to refinance when rates are up? The answer is “maybe.”

Let’s take a look at how amortization can be used to win when rates are up.

Amortization

In addition to the interest rate and loan amount, the loan term impacts your monthly mortgage payment. Most mortgages are spread over 30 years or 360 months. In these cases, the loan is amortizing across 360 payments. The shorter the amortization time, the higher the payments will be when all else is held equal. This is because the same debt will need to be paid off in a shorter period of time.

For an extreme example, assume you pay $100,000 in 10 equal payments. Without any interest at all, you will pay $10,000 per payment. Whoa. When the payment schedule is set to 360 months, the amount drops to just $278. This, again, is without factoring in interest. The same loan amount spread over more months results in a lower payment.

Amortization can benefit you

When it comes to understanding how amortization can benefit you, an example speaks mountains of truth. Let’s examine the pros and cons by looking at the Smith family’s options. (Note: the Smith family is fictitious in this case).

Amortization Example

The Smith’s purchased their home ten years ago. At the time, the home was valued at 300,000 and they put $60,000 down. As a result, they started with a $240,000 mortgage. Their mortgage broker was able to obtain a rate of 3.5% for a 30-year mortgage. Their monthly mortgage payment has been $1,078 for the last ten years. This amount does not include real estate taxes or homeowners insurance.

The Smith’s have been making regular payments without contributing extra on a monthly basis. As a result, the Smith’s have $185,000 remaining to pay in the next 20 years.

Increasing cash flow with a refinance

The Smith’s have decided it may be time to refinance. They wonder if reducing their monthly mortgage payment is possible.

They learn a new mortgage at 4.375% is available. The new mortgage doesn’t require the Smith’s to pay anything out of pocket but will increase their loan to $187,000 to cover some closing costs.

If the Smith’s obtain this new loan, they’ll reduce their mortgage payment to $933, saving about $145 each month. While the Smith’s are interested in freeing up $145 each month, they wonder what else they have to consider when increasing cash flow in this way.

Extending the loan term

In the example above, the Smiths have determined they can save nearly $150 each month if they were to refinance. They wonder if any issues exist with extending the loan term.

Each family’s timeline and needs are unique. As a result, there is not a single answer to this question. Let’s examine the Smith’s again to see what they come up with.

The Smith’s have lived in their home for ten years. Now, with children in 3rd and 4th grade, they realize they’ve got just 12 years left until they are “empty nesters.” At that time, they plan to move to a smaller home on the coast. In light of this family plan, the Smith’s elect to continue with the refinance transaction.

Regardless of being in their old loan or a new loan, extending the loan term is not a major concern. This is because they plan to sell their home prior to either mortgage being paid off in full. The Smith’s elect to save $150 each month today because that was the best choice for them.

For more on saving money on mortgages – take a look at this recent post.

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Reduce your mortgage payment in 2018: 3 options

Ben Stucker April 17, 2018 12:27 pmApril 24, 2019

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Taking steps to improve financial wellness is a resolution for many of us. Families want to save more and spend less. Between student loan debt and cell phone bills, it can be challenging to find opportunities to save. Homeowners, however, may have several options within reach. These are the three ways to reduce a mortgage payment in 2018.

Reduce your mortgage payment: 3 options

Want to spend less on your mortgage each month? Sure, who wouldn’t!? There are a few ways to obtain relief. Each option has important short and long-term considerations.

Re-cast your mortgage loan

Re-casting a mortgage restarts the mortgage term. Imagine for a moment that you have paid the first ten years of your 30-year mortgage. You will have just twenty years remaining. A recast would spread your remaining balance over thirty years rather than the current remaining term of twenty years. The result is a lower monthly mortgage payment.

Re-casting is different than refinancing. A re-cast can only be done by the lending institution currently servicing your mortgage loan. It may involve a pre-paid interest fee or “re-cast” fee. The charge is typically far less than the cumulative fees associated with a traditional refinance transaction. Another important difference is that a re-cast will typically not require an appraisal. For those that purchased a home at the peak of the market, this may be an important consideration.

Re-casting a mortgage loan will reset the mortgage amortization schedule. [Why this is important] Using the example from above, you would extend your mortgage payments for ten additional years. Rather than paying your slightly higher mortgage payment for twenty years, you’ll pay a lower amount for thirty years. This can make sense for many, particularly those who are likely to move in less than twenty years.

Eliminate mortgage insurance

Mortgage insurance can be required on conventional mortgages or FHA loans. Homebuyers who currently pay mortgage insurance may be able to eliminate the requirement, saving money each month.

Homeowners interested in removing mortgage insurance must meet certain criteria. Depending on the type of loan, the current balance must be equal or less than seventy-eight or eighty percent of the home value. Said another way, homeowners will need to have at least twenty percent equity in their home. Because mortgage insurance can cost $100 or more, this can be a great way to free up cash flow.

The process of eliminating mortgage insurance involves interaction with your current servicing company. By speaking with them, you’ll learn what is needed and how much it may cost. Your loan servicer may require an appraisal to confirm the current value of your home. Your loan servicer may also use the value of your home at the time of purchase. Eliminating mortgage insurance is a simple way to save money each month.

Refinance your mortgage

Reducing a mortgage payment is most commonly achieved with a rate and term refinance. Homeowners will often reduce interest rates and extend loan terms providing for substantial monthly savings. Refinance mortgages are also flexible, allowing many goals to be achieved in one transaction.

The most common way to save money with a refinance is by lowering the interest rate. All else being equal, a lower interest rate will require a lower monthly payment. Since 2007, rates have remained relatively low which means most mortgages are already in the 3.5% to 4.5% range. If your mortgage is in this range, you may not save money by reducing the interest rate alone.

Similar to a re-cast, refinancing into a longer term may also save you money each month in the short term. Similar to the example above, a loan extended from twenty years to thirty years will have a lower monthly payment with all else being equal. Extending the term of a mortgage can save you money each month even when the new interest rate may be higher than your current rate.

When refinancing a current mortgage, it is important to factor in the costs of the transaction as well as the long-term impacts. For example, those within twenty years of retirement may not benefit by obtaining a new 30-year mortgage loan. Additionally, a monthly savings of $50 or $75 may not be enough to warrant a rate and term refinance. Each mortgage scenario is different, and several variables can impact the options available.

There you have it! Three ways to reduce a mortgage payment in 2018.

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Articles, Down Payments, Home Buying, Learning, Loan Programs, Mortgage Topic, Primary Home, Purchase Mortgage, Shopping Mortgages Now, Single Family Home

Mortgage down payments

Ben Stucker November 28, 2017 6:16 pmNovember 28, 2017

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!