215-399-9769
Compare HELOCs using a margin

Why margins matter in a HELOC

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.

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!

save on your mortgage payment

Reduce your mortgage payment in 2018: 3 options

If you like what you see, please let us know by sharing (use links above), thanks!

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.

Thanks for reading, and we hope you found this valuable.  Share with your network below!

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!

Purchase Mortgages Part 3: What goes into a mortgage payment?

When it comes to buying a home, it isn’t just the loan amount and interest rate that will impact your monthly payment. Additional items such as property insurance and taxes can increase a required monthly payment by as much as 35%.  If you are planning to put down less than 20%, you’ll also want to factor in paying for mortgage insurance each month.

What goes into a mortgage payment?

The good news is that virtually every mortgage payment is made up of the same key ingredients. They are principal, interest, taxes and insurance. These four items are typically referred to as PITI – which, when spoken, sounds like “pity”.

The bad news is that certain factors of your monthly payment will not be within your control.  Namely, the property taxes and property insurance. These factors can change (likely increase) over time and will usually be paid each month along with the principal and interest on your loan.

When you are shopping for a home, keep your eye on the amount of property tax required each year.  Property tax amounts can vary between properties and across state, town or county lines.

Now that you are armed with a better understanding of PITI, be sure to understand the basics of a mortgage and learn about debt ratios.  Once you have a handle on these three topics, you’ll be well on your way to becoming a savvy mortgage shopper and homeowner.

Looking to get your mortgage shopping started (or double check your rate and program)? Ask your Realtor for access to MortgageCS so you can shop your mortgage terms without the requirement of giving up your personal contact information (and save 90% of the time it takes to shop elsewhere!).

Related Posts in this Series

Part 1: What is a mortgage?

Part 2: What is a debt ratio?

 

Purchase Mortgages Part 2: How much can I afford?

When a mortgage lender qualifies a borrower, they will examine income and monthly debts to establish a debt ratio. If you are wondering what a debt ratio is, and how it is calculated, take a look at this graphic and read on.

Mortgage Debt Ratios

A debt ratio compares monthly debts to income and then generates a number that is usually converted to a percentage. If your debt ratio is too high, you may not qualify for certain loan programs…or worse, may not qualify for a loan at all!

Lenders will typically run two different debt ratio calculations. The “front-end” ratio will examine all debts except for your housing payment. The “back end” ratio will examine all debts and include a soon-to-be housing payment.

For the purpose of this introduction, the graphic below considers only the “back-end” ratio which includes the soon-to-be mortgage payment in the calculation.

Let’s also take a look at an example. Assume you earn $5,000 each month and have a student loan payment of $400 and a car payment of $250 each month as well.  Your front end ratio will be $650/$5,000 = 13%.  This number is far below the typical requirement of 31% for FHA loan front end ratios.

Now consider adding in your new housing payment (including the mortgage payment, taxes, insurance, and mortgage insurance) of $1,500.  Including this debt will generate a back end ratio of ($650 + $1,500)/$5,000 = 43%, the limit for most FHA back-end ratios.

Tip: Remember to use gross income when it comes to calculating a debt ratio. Gross income is the amount of income BEFORE taxes and other items, such as health insurance or 401k contributions, are taken out. 

In part one of this series, we learned a bit about the relationship between the purchase price, down payment and loan amount of a purchase mortgage. Now that we have a better understanding of debt ratios, we will take a look at what actually makes up a mortgage payment – and it may be more than you think!

Related Posts in this Series

Part 1: What is a mortgage? 

Part 3: What makes up a mortgage payment?

Purchase Mortgages Part 1: What is a mortgage?

If you are looking to purchase a home this spring or summer, you may be searching for an easy way to learn about your mortgage options. Or, you may be wondering what a mortgage is and know nothing about them at all!

Regardless of your current knowledge base, a quick primer on purchase mortgages can save time, money and quite a bit of frustration!

In this series of posts, we’ll cover three concepts using real numbers and supporting images. The goal is to give you a clear understanding of purchase mortgage basics – so you can easily apply new learnings as you continue your journey! Now, let’s get started!

What is a mortgage?

When it comes to purchasing a home, you’ll need to pay the current property owner for the home and cover the related costs associated with the sale transaction. Understanding how the closing costs, down payment and loan amount are related to the home sale price is an important first step in understanding purchase mortgage options. 

If you are looking for a more technical definition, please read on.

A mortgage is legal document that creates a lien on a property after an agreement is reached between a lender and a borrower. The mortgage is recorded as a public record document at the local county’s office and secures the subject property as the collateral in consideration for a loan. 

Now that we know a bit more about the cash needed to buy a home and how those funds will be allocated, it is time to examine home affordability by taking a look at something called a debt ratio.

Next Up

Part 2: How much can I afford? 

Part 3: What makes up a mortgage payment? 

Prequalification letters: How they help you, your Realtor and the seller

If you are searching for a home this spring, you’ll need a prequalification letter to prove you have your finances in order. Without one, your offer to buy a home is likely to fall flat, very flat.

So, what is a prequalification letter (aka “prequal”) and why is it so important? Let’s take a look at three different perspectives to understand how this one document can play such an important role in kicking off a real estate transaction.

Prequalification letters guide the mortgage borrower

The term “mortgage borrower” refers to you. When you purchase a home, you will likely require a mortgage and therefore, you will become the mortgage borrower. So how much can you actually borrow?

While we could break out the calculators and scratch paper (or Excel), there is no need to because the lender handles it all. Said another way, the lender that prequalifies you will ask a series of questions and obtain your credit report. This process allows the lender to create a prequalification letter that includes, among other things, your maximum loan size.

Note: While the maximum loan size is great to know, please do not confuse it with being anything other than just that – a maximum. Be sure to budget your own finances to ensure you can comfortably manage your new monthly mortgage payment.

In summary, a prequalification letter for a mortgage borrower provides the confidence to know (preliminarily) that they can qualify for the mortgage amount needed to purchase a particular home.

Realtors identify serious shoppers

Having a prequalification letter in hand when first connecting with a Realtor indicates you have done your homework and are a serious shopper. Without a prequal letter, there is virtually no way for a Realtor to confirm (or deny) your ability to purchase a home.

This is important because a Realtor has just 24 hours in a day and 7 days in a week (just like you and me). Despite the fact that the best Realtors make us feel like we are their only clients, they are often juggling multiple transactions simultaneously.

Realtors need to be selective with their time. Home shoppers that show up with a prequal in-hand will always get more attention than those that show up empty-handed.

Sellers look for prequalification letters

We are currently in a seller’s market, where high competition exists for a limited supply of homes. Based on this, home sellers will likely receive multiple offers from a range of prospective buyers.

When a seller receives multiple offers simultaneously, one would think that the highest priced offer always wins. While that may typically be the case, other factors, such as down payment amount, loan program selection and other contingencies are also compared to determine the likelihood of a smooth transaction.

Tip: Contingencies are conditions that must be met prior to the sale of a property.  While many contingencies are negotiable, standard ones include a buyer’s home inspection and the buyer successfully obtaining a loan or financing to purchase the property. 

When a seller is evaluating a range of offers, any offer lacking a prequalification letter will be devalued regardless of the purchase price offered. As a matter of fact, it is virtually a requirement these days that an offer to purchase a property include a prequalification letter.

Related posts:

Wondering if all Lenders offer the same interest rate? Look here.

Concerned about increasing interest rates? Look here.