How Do Rent-to-Own Home Agreements Work?

Symbol of the house with silver key on vintage wooden background.

For most people, getting married and buying a house are two of their main goals and dreams in life. While most people’s ideas of the perfect home and family are completely different, it is normal to want a home to call your own. Reaching your goals is not impossible, even if you are someone who has less than perfect credit.

There are several ways to purchase a home, including saving up to buy one, taking out a mortgage from a bank, broker, or other financial institution, taking out a personal loan, and rent-to-own home agreements. Each of these has different consequences, and it is important to understand how they work.

Rent-to-Own Home Agreements

Rent-to-Own Home Agreements are great for people who want to go ahead and buy their own homes before they have great credit. Getting a mortgage can be difficult, especially if you don’t have a good credit score or a large enough down payment. Personal loans are limited, and you may not be able to borrow enough to purchase real estate. With Rent-to-Own Home Agreements, you can avoid those problems.

Rent-to-Own Home Agreements Process

Rent-to-Own Home Agreements are simple in nature. Someone who has entered into a rent-to-own agreement is paying rent like a regular tenant, but with the ability to buy the property under certain agreed upon conditions. There are two parts to rent-to-own home agreements:

  • a standard lease agreement between the owner and the person taking over the property and
  • an option to buy the property

However, rent-to-own home agreements are more complicated than regular lease agreements, where neither party has a real commitment. Anyone entering into a rent-to-own home agreement needs to be very careful about protecting their rights to make sure they are really working toward their homeownership goals.

Here are some of the most important caveats when it comes to renting to own:

  • The agreement is basically a contract, and the person who wishes to rent to own is required to pay rent for at least a certain amount of time.
  • There are two basic ways a Rent-to-Own Home Agreement allows renters to buy the property — renters either have the option to purchase the property when the lease expires or, if there is a lease-purchase agreement, the renter is required to buy the property as part of the contract. In the first instance, the renter has the option to buy but is not obligated.
  • Sometimes — but not always — some of the rent payments will be applied to the purchase price of the home.
  • Depending on the contract, you may be required to maintain the property while you rent, repairing fixtures, taking care of the lawn, and performing other jobs that a landlord is often responsible for.

Non-refundable Upfront Fees

When you enter a rent-to-own agreement, you will be required to pay a fee upfront, usually between 2.5% and 7% of the total purchase price, that will give you the option of purchasing the property later. This fee may be called the option consideration, the option fee, or option money.

Advantages and Disadvantages of Lease-option vs Lease-purchase

Again, the lease-option gives you the option of buying the home at the end of the lease, but if you choose, you can just walk away at that point. You will lose your upfront fees and you won’t have anything extra to show for your time paying rent, but you can make the choice to move on to a better option without any extra fees or punishment.

With a lease-purchase contract, you are obligated to buy the home as part of the terms of the contract. If it turns out that you cannot afford the property, or if you have to move, or if you just really hated living in the house, you are still required to buy the home under the terms of the contract.

Purchase Price Agreements

This is tricky in a rent-to-own situation. Is the purchase price going to be determined by the current market value or the value at the time you finally purchase the home at the end of the contract? Often in rent-to-own situations, the purchase price is higher than the current market value, but you may be able to lock in a lower price if you negotiate.

Applying Rent to the Principal Balance

Many people are shocked at the end of the rent-to-own period when they discover that their rent payments were not applied to the purchase price. Sometimes the credit is equal to a certain percentage of the rent, and the rent is higher to accommodate for that. You may even be able to have your option money applied to the principal as part of the contract.

Home Maintenance and Expenses

Most landlords pay for repairs and maintenance, but you need to make sure to note what the contract says. You may be responsible for all of those duties plus homeowner’s association fees and other fees. You should also carry renter’s insurance so you are protected in case anything happens.

Renting vs. Owning Your Home

The first thing you need to decide is if you should rent or own your home right now. Even if your eventual goal is to own a house, you need to consider your current situation and goals before making a decision. Buying a house takes some time, and by the time you get started, you can feel confident that you are making the right decision for yourself and your family at the same time. When you rent a place, you can simply apply with the landlord/owner, hand over your deposit and first month’s rent, and move in. When you purchase a home, you will need to go through several steps and be patient.

Saving Money is Always Important

You can use a rent vs buy calculator to compare your rental costs to your expected mortgage costs. You can plug in the amount of the down payment, how long you plan to pay on your home and current interest rates. There are times when you can save a lot of money by renting. If you can cut down on your monthly expenses, you can pay down some of your other debt, save up for a down payment for your home, or take care of other important financial obligations while you save money.

How Long Will You be Staying in Your Current Location?

There may be many reasons that you don’t expect to be in the same location for very long. You may plan to move to a neighborhood with better schools when you have children, or you may be wanting to move closer to your family when you get a chance. Some people are in a job where they know they can expect to be relocated within a certain amount of time. While it is not always necessarily true, you will probably spend less money renting if you are only going to be in a specific home for a few years.

Other Factors That Make a Difference

There are some differences you have to consider when estimating the difference between renting and owning. Renter’s insurance may cost less than homeowner’s insurance, and utilities will cost more in a big old house. You can get a security deposit back, but the down payment on the house is part of the house price. The rent vs buy calculator also takes into account factors such as fluctuating home prices and the accumulation of equity when you make mortgage payments.

Deciding Whether to Stay in Your Rental

Sometimes through no fault of your own, you find that you are unable to pay your rent and you don’t have another place to go. You could be facing eviction and a black mark on your credit report. In those cases, it might be best for you to take out a rent loan. So you and your family can stay there while you recover from whatever financial disaster has occurred. You may be able to take out a security deposit loan, backed by the money you paid when you moved in, a good credit rent loan, if your credit is good, or a bad credit rent loan, even if your credit is not good or you don’t have much history. If you don’t want to stay in your rental but can’t afford a house, Rent-to-Own Home Agreements might be a good alternative.

Before You Take Out a Mortgage

A mortgage is just a loan for real property, such as a house and/or a piece of land. Just like with any loan, you will have to pay interest on your loan. And the lower the amount of interest, the less money you will end up paying. This is especially important when you consider the amount you are borrowing. Before you even consider trying to find a lender so you can get a mortgage, you should evaluate your current circumstances. There are a lot of factors a lender will consider before offering you a loan, and it helps if you are prepared.

Your Income

This is one of the most important considerations for any loan. Because it speaks to your ability to pay back the loan. The lender will want to know that you are earning enough money to be able to afford your monthly mortgage payment. And that means that you need to be able to prove that you earn not just the mortgage amount but that you have enough left over to pay your other bills and expenses. Your lender will want to know your work history, too. Because they want to know that you are able to stay in a job long enough to pay off the mortgage.

Your Savings

Your lender will want to see that you have savings. Because this proves that you are proficient at managing your money. Also, you should have some savings to put toward a down payment. As a homeowner, you also might need to pay for your own repairs now that you are no longer renting.

Your Down Payment

How much money are you willing and able to commit to your mortgage down payment? Anything you pay down at the beginning is money you won’t have to pay interest on later. Also, you can get a better interest rate with a bigger down payment. Besides that, when you put a big chunk of your own money down at the beginning, lenders know you’re really committed.

Credit History

Do you have a history of making regular on-time payments? If not, lenders will think you aren’t reliable. If you can, you should start early in building your credit history. So that future potential lenders will look on you favorably.

How Much You Already Owe

Lenders look at how much money you owe and how much credit you still have left on your credit cards. Every debt means another monthly payment, and lenders don’t want to give someone money who’s already drowning in debt.

Your New Home

Even though you are the one who will be living there, lenders care a lot about the property you’re purchasing. If you can’t pay, they want to be able to take the house and get their investment back. Most lenders will require you to get an inspection and carry homeowner’s insurance and mortgage insurance (although you can cancel your mortgage insurance once you have 20% equity in your home).

Choosing a Mortgage Lender

It never hurts to start boosting your credit before shopping around for a mortgage lender. Once you do finally start, shopping around for the best. The most trustworthy lender with the best rates can save you money and stress. Even if you don’t feel very secure because of your credit history, it still makes sense to put yourself in the best position possible when buying a new home. When you go through the pre-approval process, you can make multiple inquiries without affecting your credit score as long as you do it within a two week period. You will get different options depending on what kind of rate you are looking for and how much you qualify for.

It’s important that you go to the right lender when taking out a mortgage loan. Our advice is to consider the following lenders brought to you by Fiona, our trusted partner. By putting in your information, you will be able to see the lenders you may qualify for, and you may even get offers from them:


Mortgage Tips

Especially if you have never purchased your own home before, the process can seem overwhelming. There are several steps you need to take and there is also a lot of waiting in between. Here are some mortgage tips to make the process smoother and less stressful.

Start Saving Early

You don’t need to start saving for your new house. Go ahead and start as soon as you start earning money. Keep the money in a special account that you don’t let yourself touch until you need it.

Compare Your Loan Options

There are different kinds of loans based on whether you can get government backing and how much you can afford to make as a down payment. Making a bigger down payment may get you better loan terms and will also cut down on your monthly payments.

  • A conventional type of mortgage is basically regular home loans that aren’t backed by the government. You may be able to put down as little as 3% for your down payment.
  • If you take out an FHA loan, you can put down as little as 3.5%. And the loan will be backed by the Federal Housing Administration, meaning you might be able to get better terms.
  • VA Loans are guaranteed by the Department of Veterans Affairs and may not require a down payment at all.
  • Rent-to-Own Home Agreements will be based on the terms of the contract. And will be decided between you and the seller.
  • You may also be able to choose between adjustable-rate loans, where the interest rate varies depending on the economy, and fixed-rate loans, which never change. In the beginning, your payments go mostly toward interest.

And don’t forget One of the most important things to know – what factors mortgage lenders are looking at.

Find Programs for Local and State Assistance

Especially if you are buying a home for the first time, you may be able to get help with your down payment, closing costs, and lower interest rates.

Get a Preapproval Letter

When you have a letter in hand, you will know how much you can spend. And under what terms when you approach a seller to make an offer.

Find a Good Buyer’s Agent

It can make a world of difference to go through the home buying process with a good real estate agent by your side. Your agent can help you make sure you are getting the house and neighborhood you want. And answer any questions about the process as you go through it.

Make Sure you Budget the Other Necessary Expenses

When you buy a house, you have to consider closing costs, moving expenses, and other necessary expenses. You may have to buy new curtains, rugs, furniture, and other important items to make your new house a home.

Taking Out a Personal Loan for Large Purchases Instead of a Home Mortgage

When you take out a personal loan, you can use the money for anything you want instead of being committed to buying something specific. If you don’t use the property as collateral, you can only borrow up to about $50,000 with a personal loan. But if you can’t use traditional methods, this might be the best way for you to purchase a home. The terms of your loan will depend on your creditworthiness.

Conclusion

There are a lot of ways to buy a home, depending on your current financial situation. You may be able to get a house mortgage or a personal loan for a large purchase, or you may be able to enter into a rent-to-own home agreement. Whichever you decide is best, make sure you understand what you’re agreeing to so you can protect your interests.

How to End Your Mortgage PMI Payments Immediately?

Female hands holding small house, natural background

When you get a house mortgage with a down payment that is less than 20%, the lender will require you to buy private mortgage insurance. The same would be true if you refinanced with less than 20% equity. However, mortgage PMI payments can be expensive so it’s best to remove them as soon as you can.

Ways to Get Rid of Your Mortgage PMI Payments

There are different ways to get rid of your mortgage PMI payments, depending on your situation.

Pay Down Mortgage for Automatic Termination of PMI

This is not going to be the fastest way to get your mortgage PMI payments over with, but under the rules, mortgage lenders are required to drop PMI when your balance reaches 78% of the original purchase price, and you haven’t missed any payments and are in good standing. The lender also requires you to stop the PMI at the halfway point of your amortization schedule. For example, if you have a 30-year loan this midpoint is 15 years. The lender needs to cancel the PMI then, even if your balance hasn’t reached the percentage point. This is called final termination. Removing PMI in this manner works for those with traditional mortgages who have paid according to the payment schedule. Remember, you need to be up to date on payments.

Request PMI Cancelation When Your Balances Reaches 80%

Instead of just waiting for an automatic cancellation, a faster option is to ask the servicer to cancel PMI once the loan balance is at 80% of the home’s original value. If you are going to be making your payments as scheduled, you will be able to find this date on your PMI disclosure form. You can also request this from the servicer. If you have some cash on hand, you can get to this point faster by making some extra payments. You can also prepay the principal on the loan and reduce the balance. This will help you build some equity faster to get to this point and help you save on interest payments. Even something as small as an extra $50 a month can mean a big drop in your balance and interest over the term of the loan.

Some people decide to do a lump sum toward the principal or make just an extra mortgage payment every year. In order to estimate the amount, your balance needs to be eligible for cancellation, just multiply the original home price by 0.8. To cancel your PMI, you need to send a request to your lender in writing, be current on payments and have a good payment history. You may also need to meet other requirements for the lender, such as making sure there aren’t any liens on the home. You may also need to get a home appraisal. If, by chance, your home value has lowered, it’s possible you won’t be able to cancel PMI.

Refinance to Get Rid of Your Mortgage PMI Payments

If mortgage rates are low then you may want to consider a refinance for a number of benefits. Mortgage refinancing can save on interest costs or reduce your monthly payments. In addition to helping you save money, refinancing may enable you to get rid of your PMI. If your new mortgage balance is below 80% of the home value then you can get even more savings. In order for this refinancing strategy to work, your home needs to have gained value since the last time you got a mortgage. With refinancing, you want to weigh the closing costs against the potential savings from the new loan terms to see if it is worth it.

Refinancing is a strategy that works well in neighborhoods where home values are rising. If your home value has declined then refinancing may have the opposite effect. It’s possible that, if you want to refinance your mortgage, you may need to add PMI if your home equity has dropped. Refinancing to get rid of your mortgage PMI payments usually doesn’t work well for a new homeowner. Some loans have a requirement that makes you wait at least two years before you are able to refinance to get rid of these payments. If your loan is less than two years old then you can ask about this but it’s not possible that you will be guaranteed approval.

Get a Reappraisal if Your Home Has Gained Value

In an area where homes are increasing in value, your home equity could reach 20% ahead of the schedule.

If this is the case, you may find that it’s worth it to pay for a new appraisal. Let’s suppose you have owned your home for at least five years and the loan balance isn’t more than 80% of the new valuation then you can ask for PMI to be canceled. If you have owned the home for at least two years then the remaining mortgage balance can’t be any greater than 75%.

Appraisals can range between $450 and $600, depending on your area. Some lenders might be willing to accept a broker’s price opinion instead and this can be a much cheaper option for you. If this is the case for you, it’s best to speak with your lender about the potential to cancel your PMI requirement. If you have added some extra amenities or even renovated parts of your home then the home could have also increased in value, which also means more equity. Whether it’s a pool, common upgrades, or an extra room, check to see if it increases your value.

What to Know About Getting Rid of Mortgage PMI Payments

Whether you are paying PMI every month or as part of a lump sum, it’s not fun. However, you should be aware not to make your financial situation worse by trying too hard to get rid of PMI. Many financial experts will agree that it’s important to have some liquidity in case of an emergency. You don’t want to tap into your retirement funds or savings to reach that 20% equity mark. Speak with a financial advisor to make sure you are on the right track to reach it instead of tapping into savings.

As long as you aren’t taking on an FHA loan, you won’t be married to PMI. You are able to drop it once you get that 20% in equity. This means you may only be paying for a few years, depending on how fast your home appreciates. Don’t feel the need to use every last bit of your cash to make a bigger down payment that avoids PMI. You don’t want to be left in a situation that doesn’t provide you with financial flexibility, especially as you move into a new home.

Requirements to Cancel PMI

No matter how you are canceling your PMI, there will be different requirements. Any PMI cancellation must be done in writing. You need to have a good payment history and be current on your payments. You will need to make sure that you don’t have any liens on the home and have to prove this. For example, you can’t have a home equity line of credit. An appraisal can be helpful to demonstrate that the loan balance isn’t too high compared to the home’s current value.

How Does Mortgage Insurance Work?

While you may be paying mortgage insurance, it only covers the lender. There are different types of mortgage insurance and each will work a little differently, depending on your type of home buying options.

PMI for a Conventional Mortgage

Many lenders will still offer conventional mortgages with low down payment requirements and some are as low as 3%. A lender will require that you pay for this private mortgage insurance, also known as PMI if you have a down payment that is less than 20%. Before you buy a home, it’s best to use a PMI calculator in order to estimate the cost of your PMI. This will vary according to the size of the loan, your credit score, and some other factors. Typically, this will be added to your monthly mortgage payment.

FHA Mortgage Insurance Premiums

FHA loans are insured by the Federal Housing Administration. And these loans have down payments as low as 3.5% and there are easier credit qualifications when compared to conventional loans. This loan requires you to pay mortgage insurance upfront and an annual payment, regardless of what you have for a down payment. The upfront premium will be 1.75% of the loan amount. The annual premiums can range from 0.45% to 1.05% of the outstanding balance. You will pay this for the life of the FHA loan.

USDA Mortgage Insurance

USDA loans, backed by the U.S. Department of Agriculture, usually are 0% down loans for suburban and rural homebuyers. There can be two different charges for mortgage insurance, including an upfront guarantee fee paid in the beginning and an annual fee you need to pay for the life of the loan. The federal government will evaluate the fee each fiscal year and can change it. However, your fee doesn’t fluctuate and they are fixed when the loan closes.

VA Mortgage Insurance

VA loans, similar to other government-backed loans, don’t have any down payments and feature low-interest rates for retired, disabled, and active military members. While these loans don’t require mortgage insurance, many borrowers will pay a funding fee that is between 1.25% and 3.3% of the loan amount. This fee will depend on a variety of different factors, including whether or not you have applied for a loan before and how big your down payment is.

What Does Mortgage Insurance Do?

Mortgage insurance is designed to reimburse the lender if you default on your home loan. You, as the borrower, are responsible for paying the mortgage PMI payments. When a company sells the insurance it’s known as private mortgage insurance. However, the government does sell mortgage insurance as well. This means PMI doesn’t apply to all mortgages with down payments below 20%. For example, government-backed VA and FHA loans with low down payment requirements have different rules. There may also be private lenders that sometimes offer conventional loans with a small down payment option that also don’t need PMI. There can usually be other higher interest costs.

How much your mortgage PMI payments are will depend on your credit score and your down payment.

Can You Avoid Mortgage Insurance?

The main way to avoid mortgage PMI payments is to make a down payment that equals 20%, or one-fifth, of the purchase price of the home. For example, if the home costs $180,000 then you would need to pay at least $36,000 to avoid paying PMI. While it’s the easiest way to avoid mortgage insurance, a down payment of this size may not be a feasible option.

Another option to avoid paying this is for qualified borrowers to get a piggyback mortgage. A home equity loan or second mortgage is taken out at the same time as the first mortgage. This means that 80% of the purchase price is then covered by the first mortgage, 10% is covered by the second loan, and then the final 10% is covered by the down payment. This will eliminate the need for PMI. With a home valued at $180,000, the first mortgage would be $144,000, the second mortgage would be about $18,000, and your down payment would be $18,000. This may be a more feasible option when saving.

A final option is the option of lender paid mortgage insurance where the cost of PMI is included in your interest rate for the life of the loan. While you are technically avoiding PMI payments, this means you are paying more in interest over the life of the loan.

Know Your Rights about Mortgage PMI Payments

Those who are making mortgage PMI payments should be aware of their rights under the Homeowners Protection Act. This is a federal law that will protect you from excessive PMI charges. This means you have the right to get rid of your payments once you have built up a certain amount of equity in the home. Lenders will all have different rules for canceling PMI but they have to let you do so. Before you get a mortgage with PMI, ask for an explanation of PMI rules and the schedule and make sure you understand it. This will help you actually track progress toward ending the payment. If you feel like your lender isn’t following the rules for getting rid of PMI, you can report the situation to the Consumer Financial Protection Bureau.

Reasons to Avoid PMI

There are plenty of reasons to avoid PMI and to get rid of mortgage PMI payments as soon as you can.

Cost

PMI will cost you on the entire amount yearly. You could pay up to $1,000 a year on a $100,000 loan, depending on your PMI fee.

No Longer Deductible

PMI used to be deductible on taxes, but only for certain people. This is no longer the case and it’s not deductible for anyone.

Heirs Get Nothing

Homeowners may hear the word “insurance” and think that their kids or spouse will get some money if they die, which is not the case at all. The lending institution is the only one that benefits from this policy. And the proceeds are paid directly to the lender. If you want to protect your heirs then you need to get a separate insurance policy.

Giving Away Money

You are going to have to pay PMI until your equity reaches 20%. This can take a while and the mount of money you are paying is equivalent to giving it away. If you take the money you are spending on PMI and invest it, you can easily grow the money.

Hard to Cancel

While there are different ways to get rid of your mortgage PMI payments, sometimes it can be hard to eliminate. You can’t just not send in the payment once you get your equity to 20%. You need to draft a formal letter and have a formal appraisal before you are able to cancel it. This could take a while, depending on the lender. And during the time you are working on this, you still have to make the payments.

Payment Can Go On and On

Some lenders will require you to maintain the PMI for a predetermined period of time. This means that even after you have met the required equity, you are still going to have to keep paying for the mortgage insurance. In order to prevent this from happening to you, you need to read the fine print on your PMI contact carefully.

In Conclusion

There are some ways to avoid PMI but in many instances, it isn’t feasible for a borrower. This is why a borrower may be looking for a way to end mortgage PMI payments immediately. There are four different ways to do this, depending on your financial situation and the type of loan you have. There are reasons to avoid PMI so it’s best to get to the point where you can cancel it as soon as possible, as long as you aren’t getting into worse financial shape by doing so.


Cash Out Refinance to Use Your Home Like A Bank

You may love your home and want to remain there. You may also need remodeling or renovation to make it livable or to meet a change of life. Maybe you need to widen doors to accommodate a wheelchair. Perhaps you need to add a mother-in-law apartment. Perhaps you need to replace your furnishings. One of the simplest ways to pay for these needs is a cash-out refinance mortgage to replace your existing mortgage. You can obtain a new home loan that provides funds for more than you owe for the home with the difference going to you in cash. A traditional refinancing mortgage simply gives you a mortgage loan in the same amount that owe, but a cash-out refinance lets you access home equity.

Everything You Should Know About Cash-out Refinance

Cash-Out refinancing loan differs from a home equity loan though. You can join the 8.2 million homeowners already benefitting from a cash-out refinance mortgage as of June 2019.

You will pay a slightly higher interest rate and the cash-out limit will range between 80 to 90 percent of your home’s equity. While you may wish you could get all the home’s equity, this does mean you can borrow against it without depleting it. That also means you still have a bit of equity for a rainy day. Do not laugh. You will have at least 10 percent left meaning that if you need to access a few thousand dollars quickly, you will still have that money to access via a home equity line of credit. It is like keeping a few thousand dollars in your back pocket. Still, if you really want the full 100 percent of your equity right away, if you obtain a cash-out refinance loan guaranteed by the US Department of Veterans Affairs.

You can add the costs of a new mortgage to the amount refinanced so you do not have to pay anything out of pocket at closing. You can end up with a higher interest rate or longer loan term though. Also, you could end up paying more in interest through the life of the loan.

Now, do not get too excited. You won’t get cash right away. You still have to go through an underwriting process, the appraisal and your lender has to approve refinancing. Once you close, you get three days to cancel the loan in case you decide you have changed your mind – guaranteed by the Truth in Lending Act. Three to five days after your closing, you get your cash.

Reasons You Might Need a Cash-Out Refinance Mortgage

While the most common expense for these cash-out refinance loans is home renovations or improvements, you can also use the money for many other reasons.

Debt consolidation: You can use the equity in your home for a very low-interest rate debt consolidation loan. This will also raise your credit score by letting you completely pay off your credit cards. This instantly reduces your credit utilization ratio.

Medical bills: Skip the medical credit card and its high-interest rates. You can use the equity in your home to pay medical expenses.

School expenses: Perhaps you want to attend a school or vocational program that does not offer financial aid packages. Leverage the home equity you have to pay for it.

Vacation: Take that trip around the world with your spouse or family. You can see Paris and enjoy it using your home equity.

Tax deductions: Use a cash-out refinance mortgage to leverage the interest deduction available if you use the money to buy, build, or renovate your home.

Reasons to Avoid Using a Cash-out Refinance Mortgage

To be honest, there are just as many reasons not to take out a cash-out refinance mortgage. You should only use this option for financing if you absolutely must.

Foreclosure risk: You open yourself to the risk of foreclosure because your home becomes the collateral. If you fail to make the payments, you lose your house. While it is possible to use the cash-out refinance loan to pay off your credit card debts, this is frowned upon in the financial world because you repay an unsecured debt with a secured one.

New terms: You completely reset your mortgage. It will have different terms than the original. You could end up with a higher interest rate and you will pay new loan fees. Read all documentation carefully before you sign anything.

Closing costs: Yep, it is just like when you bought your home initially. You pay closing costs again. This ranges from two to five percent of the mortgage.

Private mortgage insurance: Remember the private mortgage insurance (PMI) you had to purchase when you first bought your home? If you tap into more than 80 percent of your home’s value, you have to obtain PMI again. This costs between 0.55 to 2.25 percent of the loan amount annually.

Bad habits: Start a good habit by working and silently earning money to pay your bills, rather than continuing a bad habit of using a loan pay off your debts while you continue to charge to your credit cards.

An Example of How a Cash-Out Refinance Mortgage Works

In this example scenario, your home has a value of $300,000, but you still owe $100,000. Your lender requires you to leave 20 percent equity, so you can only get a loan for $160,000 or 80 percent of $200,000 of your equity. You can typically obtain a lower interest rate on your mortgage.

Example of How a Cash-Out Refinance Mortgage Works

Difference Between a Reverse Mortgage and Cash-Out Refinancing

A reverse mortgage lets you borrow against your home’s equity without mortgage payments. You accumulate the interest on a reverse mortgage and pay the full balance when you sell your home or move out. Your heirs must pay it when you die if you die before you have paid it off. That may sound morbid, but you must be aged 62 or older to qualify for a reverse mortgage and the home must be your primary residence. You also must have substantial equity in it or own it outright.

Difference Between a Home Equity Line of Credit and Cash-Out Refinancing

A Home Equity Line of Credit (HELOC) looks like a second mortgage on paper but works like a credit card. You can draw from your HELOC funds when you want to take money out instead of a mortgage that requires you to take funds out in a lump sum. For example, you can purchase the items for your wedding and use it again six months later to purchase a car. Unlike a credit card, you do not pay it back and re-obtain the credit. Once you use your credit limit, your HELOC closes. Until you pay it all back, your house is your collateral.

Two Kinds of Refinance

Rate-and-term refinance: You will get a lower interest rate and new loan terms, but only the same amount of money as you currently owe.

Cash-out refinance: You may get a lower interest rate, but you will also get at least 80 percent of your equity in the loan on top of your new mortgage. You must get your home appraised to determine the home’s value for the loan-to-value ratio which determines one variable in the formula to decide for what amount of loan you qualify.

Remember Your Credit Score Still Matters

While your equity helps you qualify, you still need to know your credit score and it still needs to be about a 620. You can do a few things to raise your score if it is not quite up to par.

Pay your bills early or on time six months in a row. This increases your score by about 20 points.

Check your credit report for errors. Correct the errors by filing a correction request or requesting an investigation of any piece of data that looks questionable. If you do not recognize a credit line or show that the debt was paid, then you need to file a request with the credit bureau through which you obtained the credit report. Each credit bureau provides its own copy of your credit report. Different creditors report to different bureaus so they do not all have the same information.

Pay off your largest credit card debt, if possible. Make a lump-sum payment. This instantly reduces your debt-to-income ratio.

Your credit score is one of the biggest influencing factors that determine the interest rate you obtain. The higher you can get your credit score, the more easily you can obtain a lower interest rate. So, you need a high credit score to save money in the long run.

Specific Requirements for a Cash-out Refinance Loan

Each and every financial lender sets its requirements for refinancing qualifications. Most banks do have some typical requirements though. These include credit scores, debt-to-income ratio minimums, and required equity level.

A Credit Score Of At Least 620

If you just want a new interest rate and loan terms, you only need a credit score of about 580. If you want to get a cash-out loan though, you need a credit score of at least 620.

A Very Healthy Debt-To-Income (DTI) Ratio

You will need a DTI of less than 50 percent. The term DTI ratio refers to the amount of monthly debts and payments divided by the total monthly income.

Here is an example. Let’s say you pay $1,500 in housing and other bills each month. Your monthly household income is $4,000. To calculate your DTI ratio, divide $1,500 by $4,000.

1500/4000 = 37.5 percent

That means you would have the required DTI ratio of less than 50 percent.

Equity in Your Home

Your lender will require you to have a sizeable amount of equity to qualify for a cash-out refinance. Keep in mind that you cannot cash out 100 percent of the equity without a VA refinance. Plan accordingly since you will need to calculate ahead of time that 80 percent of your equity will cover the amount you need.

If it is so you can renovate your home, make sure you would have enough money to do the work by obtaining a few estimates from area contractors first. You may need a different type of loan to cover all of the work.

Getting Your Loan Approval

By now, you have probably prepped yourself rather fully. You complete your application for a cash-out refinance. It could take a few days before your lender decides whether to approve the refinance loan. It could take a few weeks. You may have to provide additional paperwork including bank statements, pay stubs and/or W-2s to prove your DTI ratio. Once you are approved, you head toward your closing. A few days after it, you get the loan monies. Remember, you will still have closing costs, just as if you were purchasing a house again. Your loan check goes directly to the bank first since you have to pay off your original mortgage amount first. That includes the closing costs, real estate taxes, homeowner’s insurance and other items you may have bundled into the loan request. After that, the remaining funds belong to you.

Your Loan Terms Change Vastly

Lookout. Your new mortgage may not resemble at all your original one. You get all-new terms. If your credit score went down since you obtained your original mortgage, you will not obtain the favorable rates you once did. Your loan terms change, too, so you may end up with a different time period in which to pay back the loan. You start over with a new payment amortization schedule that ensures you will pay off the mortgage principal and interest in a timely manner.

Interest rates

You can get a cash-out refinance with a fixed-rate mortgage or an adjustable-rate mortgage. Which one you choose depends on your financial situation. With respect to HELOCs, you will get a variable interest rate that changes in tandem with the U.S. Prime Rate. You can learn this rate before applying by checking The Wall Street Journal. As the index decreases or increases, so will your interest rate.

If that option does not sound attractive, you can also obtain a fixed-rate loan so that throughout the life of the loan, you will have one interest rate that will never vary.

Combining Nifty Options

Let’s say you have a lot to do to renovate your home and you really need to get a new car. You can combine loan products to maximize what you can withdraw.

Combine a home equity line of credit (HELOC) with a cash-out refinance or rate-and-term refinance. You can leverage all of your home equity by combining the two without needing to being a veteran to qualify for a VA loan. If you choose a rate-and-term refinance, you will only get better terms. If you choose a cash-out refinance loan, you will get about 80 percent of your equity in cash from the loan. You can then obtain a HELOC for the other 20 percent.

You handily obtain all 100 percent of the equity this way. This lets you fully use what you have built up. While you will pay closing costs on the refinance loan, you will not typically on the HELOC.

Look for the Best offer

Do not pick a lender at random. You need to shop around for rates, but you also need an easy way to do that. You should visit Loanry. It’s not a lender. Loanry is a loan mall. You can find a loan for any need and any credit rating. If you need cash now for a loan, it is a great place to start.

Here’s how it works in a nutshell. You complete a short, simple form with essential information like your name, email address, desired loan amount, the last four digits of your Social Security number, your birthday, and zip code. Loanry sends you an email of the potential lenders that best match your situation. You choose for which loans to apply. If you’re interested, enter your information and see if you qualify for any of their loans:


Basically, Loanry just helps take the leg work out of finding a loan. Rather than you needing to phone every bank in town or look them up online, you can have Loanry do all the work.

In Conclusion

You have a number of options when it comes to refinancing your house mortgage. You might just adjust your interest rate and terms, or obtain a cash-out refinancing mortgage or take out a HELOC.  And you have a number of ways to fund household renovations, a new car or numerous other large financial needs. Start researching today at Loanry.

No Closing Cost Mortgage: We All Like No Cost

A no closing cost mortgage can be a bit confusing but it’s one of the residential mortgage types that are available to you. With this term, you may think that the fees are being paid by someone else or being waived completely. With a no closing cost mortgage, you are instead paying the closing cost with your loan balance instead of out of pocket. Not every bit of your closing costs will be able to get folded into your loan. But the closing costs you pay at the signing will be less than with a traditional mortgage.

What Are the Closing Costs?

Every house mortgage will come with some closing costs. Closing costs can be pretty high and typically range from about 2% to 5% of the loan amount. It may be helpful for you to calculate the closing costs for your particular situation so you can get an idea. If you are purchasing a $250,000 home then you may be paying anywhere from $5,000 to $12,500 at the settlement table for closing costs. The closing costs vary with your specific situation and location. Common closing costs include the appraisal cost, title insurance, tax service provider fees, taxes, and prepaid costs, such as homeowners insurance and property tax. Lenders can also add loan origination fees and application fees that can increase the closing costs.

There really isn’t a way to get a home without closing costs. You have the decision whether or not you pay them with cash when you are signing the loan or add them into the monthly mortgage payment. However, there are ways to reduce the closing costs by negotiating third-party charges and lender fees. It’s also possible to qualify for housing grants or closing cost assistance in some areas. Many of the grants can be free money and you don’t need to prepay them unless you move or refinance. If you have a military connection, VA loans have a limit on the closing costs that are allowed.

How Does a No Closing Cost Mortgage Work?

There are two different ways that lenders structure no closing costs mortgages. The differences are subtle but the result is the same.

1. A lender can have you finance the closing costs. With this loan, the lender just adds your closing costs to the total loan balance. The monthly payments will be higher because you are now paying the closing costs with interest for the full length of the term.

2. The second option is that the lender absorbs the closing costs but you have a higher interest rate. This also means you will be paying more each month since your total interest costs will be higher over the life of the loan.

No matter how the lender does it, your monthly payment will increase slightly. You will pay less at closing time but pay more over the life of the loan.

Pros and Cons of a No Closing Cost Mortgage

One of the main advantages of using this type of loan is the upfront savings. With this loan, it helps a borrower who is short on funds to close. This is helpful if you have made a large down payment and already paid out of pocket for your inspection and appraisal. You may still want to have some cash on hand to make upgrades and renovations once you move into the home. You may not need the cash on hand for home improvements but may need it for other expenses, such as medical expenses. Maybe you would rather have the peace of mind that having a large emergency fund brings.

Assigning a dollar amount to the savings will depend on the purchase price and closing costs. If paying for closing costs out of pocket would drain your cash then a no closing cost mortgage can be the obvious choice. However, you should weigh the original savings against what you may pay in interest over the loan when you have a higher rate. Even just a small fraction of a point can cost you thousands of dollars over the loan term.

For example, Buyer A has a 4% rate, while Buyer B has a 4.25% rate. Both are purchasing a $250,000 home. Buyer A pays $179,674 in interest while Buyer B pays $192,746. This is a difference of $13,072. You then have to add this interest to the additional interest Buyer B is paying for the closing costs in the loan. Financing the closing costs can make it harder to qualify for a loan and the higher interest rates can mean a bigger monthly payment, which could push your budget. If your borrower qualifications are already tight then the higher interest rate could be an issue.

Debt to Income Ratio

Your debt-to-income ratio is the percentage of your income that is going toward paying your debt each month. Many lenders like to see a number of 43% or less. This figure will include what you are spending on your mortgage, as well as student loans, credit cards, and any other debts you have. If you are accepting a higher rate to pay for the closing costs then this will increase your monthly payment. When you are increasing your monthly payment, you have a higher debt obligation.

Even if you are okay with the extra interest and are getting a no closing cost mortgage, it doesn’t mean that you don’t have any money due at the table. Your lender may allow you to have a loan that covers customary closing fees, such as tax recording or escrow. However, you may still have to pay for things typically charged as closing costs, such as private mortgage insurance, transfer fees, or real estate taxes.

Is A No Closing Cost Mortgage Right for You?

If you are considering a no closing cost mortgage then you should think through the decision carefully. You should weigh the pros and cons and keep some things in mind. What is your motivation for getting the no closing cost loan? How much are you saving by not paying any closing costs upfront? What is the new loan rate and how much does it affect your monthly payments? How long do you plan to stay in the home?

The decision on whether or not a no closing cost mortgage is right for you is going to depend on how long you plan on staying in the home. If you are going to stay in the home for the full mortgage term then you will end up paying more for the closing costs, in the long run, thanks to the interest rate. However, if you plan on moving within a few years of buying then the financial impact of the higher interest rate may not matter as much. If you have short-term plans with the financing then not paying closing costs may be a good strategy. However, if you think of this home as your forever home, it’s probably best to pay closing costs upfront, instead of throughout the life of the loan.

Things to Consider with a No Closing Cost Mortgage

You can use different mortgage calculators to determine if a no closing cost mortgage is right for you but there are also some other things to consider.

Do you have enough for closing costs? Many people are only eligible for a loan if they can agree to have a certain amount for a down payment. This can be the bulk of savings for many people and there just isn’t enough to pay for closing costs. Instead of having to dip into an emergency fund or savings, a no closing cost mortgage may be the only way that you can go through with the purchase. If this is the case, you have to decide if the price of this type of mortgage is right for you or if you should save more before you purchase a home.

How long will you be in the home? This can help you determine the break-even point of how long you will be in the home with the added monthly payments. If closing costs are $10,000 then it may take you about 8.3 years to break even. After this, you are paying more than if you would have just paid the closing costs upfront.

Is there an early repayment penalty clause? If you decide to go the higher interest rate route while thinking that you can pay off the loan ahead of the break-even point, you need to check if this is an option. Many mortgage contracts have a penalty for the early repayment of a loan. If your lender does have this, it could make it harder to avoid paying closing costs upfront and avoid paying even more over the course of the loan.

Examples of Closing Costs

  • Loan Origination Fee: The origination fee is so that the lender can prepare your loan. The average fee is about 1% of the loan.
  • Appraisal Fee: During the appraisal process, a professional comes to the property to assess the value. Many appraisers charge $300 to $500 for their services.
  • Title Fees: The document you receive when you buy your home is the deed. The title shows that the seller legally transferred ownership of the property to you. Title insurance saves you from any errors in the records of your property or home.
  • Credit Report Fee: Lenders need to check your credit score and some lenders will pass the fee of checking the score back to you during closing. These fees can range from $25 to $50 depending on your state and your lender.
  • Prepaid Interest: The lender can ask that you pay the first month’s interest upfront during the closing. This will depend on the interest rate and that depends on the type of loan you have and your credit.
  • Discount Points: These are optional and this is the fee you would pay the lender in exchange for a lower interest rate. Each point costs 1% of the total loan amount and you are able to buy multiple points.

Are There Other Ways to Get Rid of Closing Costs?

If you are hoping to avoid closing costs then a no closing cost mortgage may not be the only thing that will work for you. You can also take other routes to help manage some of the costs. One of the first things you want to do is ask the lender to waive some of the closing fees. It doesn’t hurt to ask but don’t expect too much. A more realistic solution can be to ask the seller to cover some of the closing costs by using a concession. A seller concession works by determining the closing costs you want the seller to pay.

If the seller agrees then that amount is added to the purchase price. You get a mortgage for the new purchase price and then the original purchase price is paid to the seller and the differences go to the closing cost. This is a legal way to roll the closing cost expenses into your loan, which wouldn’t normally be allowed unless you are refinancing. However, it’s still important to note that if you are rolling the closing costs into the loan, you are paying interest on them. When you increase the total loan amount, you are increasing the monthly payment as well.

Even with a seller concession, you still need to bring money to closing. The number of seller concessions you can have will depend on the loan type. If you want to ask the seller to pick up some of the closing costs, be sure to get help from your real estate agent. Agents are able to help with negotiations for seller concessions once your offer has been accepted.

Reducing Closing Costs

Besides a seller concession, there are ways to reduce the closing costs you are paying.

Compare Costs

Lenders have different fees. So it’s even more of a reason to go mortgage loan shoppingAnd see which lender offers the lowest closing costs. You can ask a lender to match lower closing costs you see offered elsewhere. There are some services in the closing costs that you are allowed to shop around for before committing. You don’t have to go with the provider the lender suggests if you can find a lower price.

Compare different mortgage lenders here on Loanry. Enter your information below and you will get a list of lenders who may give you a loan, based on the information you put in.


Evaluate the Loan Estimate

Don’t just go through the loan estimate right away. Take the time to evaluate each item with the lender and question what each fee covers. This can be a good way to identify any unnecessary or padded fees. Keep an eye out for fees that have a similar name. This could mean the lender is likely charging twice for the same thing.

Negotiate Fees with the Lender

Once you have a handle on the fees you are paying then you are able to start negotiating. Ask for more vague fees to be knocked off the final total. Ask the lender to give you a closing disclosure form when it’s available. This details the final closing costs. Compare it to what was on the loan estimate and then ask the lender to justify the discrepancies.

Delay the Closing

You can minimize the prepaid daily insurance charges by closing toward the end of the month. Plan ahead and try to schedule your closing when you will have to pay less money upfront.

Save on Points

If you are buying in a low-interest rate environment then you likely don’t need extra points. Paying for points can add up fast so save that money and pay it toward the closing costs.

Alternative Lower Cost Loans

A no closing cost mortgage isn’t the only way to save money. And you may find that there are alternative loans out there to decrease the amount of cash you need upfront.

FHA Loans: These loans are offered by private lenders but are insured by the Federal Housing Administration. Under this program, you can have as little as 3.5% down on a home, saving you money on upfront costs.

VA Loans: These loans are offered to veterans and service members but may be loans that don’t require any down payment.

USDA Loans: These loans are backed by the U.S. Department of Agriculture and are designed for borrowers in rural areas defined by the agency. Under this program, borrowers may be able to take out a loan without making a down payment.

Final Thoughts

A no closing cost mortgage allows you to bundle many of the closing costs into your loan. This way, you end up paying more over the life of the loan in interest. But you don’t have to have a large amount of cash upfront. This may make sense for you depending on if you have the funds for closing, how long you are going to be in the home, and how the structure of your mortgage. There are ways to lower closing costs so you aren’t stuck paying a huge fee upfront. Or having to bundle it into the loan. There may also be alternative lower-cost loans that don’t require large down payments. So you don’t have to bring as much cash to the signing table. Always shop around for your mortgage options so you are picking the right one for your situation.

The Ultimate First Time Home Buying Guide

If you are in the market to buy a new home, whether it’s your first time or you have forgotten about some of the details, this home buying guide can help you prepare for the journey ahead.

What Is a First Time Homebuyer?

When planning a first time home buying guide, it helps to define who a first-time homebuyer is. It makes sense that a first-time homebuyer refers to someone who hasn’t purchased a home before. The definition can actually be broader than that. Those who can’t scrape together enough of a down payment can be eligible for assistance through different first-time homebuyer loan programs and grants. In order to qualify for many of the programs, prospective homebuyers must not have owned a home for at least the last three years. You don’t need to be a complete novice in order to qualify as a first-time homebuyer and to utilize a first time home buying guide.

Should You Buy a Home?

If you are researching a home buying guide then you are likely ready to move forward in the home buying process. There are some signs that show you are ready for homeownership.

Your Credit Score Has Improved

Some renters may be locked out of homeownership because of their credit score and not being able to qualify for a residential mortgage. A low credit score is a common reason why many renters can’t make the jump to owning a home. Too much debt and a history of late payments can hurt your score. If you have worked on your credit score then it may be time to start looking for a home. The better your credit score, the better the loan terms and interest rates will be.

You Are Good at Managing Debt

One thing lenders look for when screening applicants is the debt-to-income ratio. If you previously had a higher ratio and have since paid off some of your high balances then you may be in a better place to get a mortgage. This also gives you some more wiggle room in your budget so you can build up an emergency fund for any home repairs.

You Have Money Set Aside for the Extra Costs of Owning a Home

When renting, if there is an issue with the property then you don’t have to worry about paying for it since it’s the landlord’s responsibility. You also don’t have to pay for homeowners insurance or property taxes. However, when you own a home then all the costs are your responsibility. If you have set some money aside then you may have enough extra money to handle these additional expenses that come with homeownership. If you are putting everything you have into the down payment then you don’t have any money for potential repairs or improvements you need to make.

You Can Afford the Down Payment and Closing Costs

A first-time buyer won’t have the proceeds from the sale of another home to help fund the down payment on a new one. This is one of the main reasons why it’s hard to buy your first home. The down payment will depend on the house mortgage you get for your home.

You Are Ready to Settle Down

There are a lot of upfront costs associated with buying a home so it’s best to stay for a few years so you can recover those costs. If you plan on moving in a few years then homeownership may not be right for you.

Step by Step First Time Home Buying Guide

No matter if it’s your first time or your fifth time buying a home, there are some steps to take in following a home buying guide.

Assess Your Personal Finances

The first step in a home buying guide is by looking at your finances. You don’t want to just start looking at listings and open houses without first looking at your personal finances. The smart approach is to check your credit score and reports, look at your budget, and figure out your ability to make a down payment and save for closing costs. There may also need to be an earnest money deposit for you to consider. Some states require a deposit of 10% of the purchase price, while other states allow just a few hundred dollars.

Start organizing your paperwork in order to show lenders your financial stability. This means gathering bank statements, federal tax returns, pay stubs, W-2 forms, and a list of assets and debts. Lenders will check your credit report and verify your income. During this time when you are looking at your finances, you can see if you are eligible for first-time homebuyer programs and grants that could help with closing costs or a down payment. Start to become familiar with different mortgage types and down payment requirements. You don’t want to base decisions on emotion so you need to do your research during this stage.

Get Mortgage Quotes

You want to get mortgage quotes from at least three different lenders so you can compare terms and interest rates. Ideally, you want the lowest interest rate because the less money you spend on your mortgage then the more money you have in your budget for repairs and maintenance that come with homeownership. There will be different loan programs that have different requirements. If you are having trouble getting a mortgage, even with different requirements, you may need to spend time working on finances before you can move forward with a home purchase.

Get Preapproved For a Mortgage

Once you have gotten quotes from some lenders it’s time to get preapproved. When you are preapproved, this puts you in a stronger position to make an offer on the home. The preapproval letter will tell you how much you are qualified to borrow, the loan program you are using, and the expected down payment you will make. The final approval will take place after an underwriter verifies the information you give and there are conditions that are met. Preapproval letters help you in a competitive market and will help sellers take you more seriously.

Find a Good Real Estate Agent

Real estate agents can help tremendously with the home buying process. Agents who work in a particular market know the area and can give you insight into the neighborhoods and school districts. When you are ready to start looking at homes, interview agents and hire one once you find the right fit. You can consider a buyer’s agent who will not only help you find the right home but also negotiate the best offer and recommend professionals whose interests align with yours. Listing agents will usually represent the seller and the main goal for this agent is to get the best purchase price on the home. The buyer’s agent will help from the buyer’s perspective so it’s best to work with someone who represents your own interests.

Start Shopping for the Home

This is where the fun part begins. Have a list of top requirements that you can give to your agent so you aren’t wasting your time looking at homes that won’t meet your needs. When you begin to view homes, take photos and notes since it can be hard to remember all the unique features when you start to look at several properties. In addition to looking at the home itself, you also want to look at the neighborhood. See how traffic flows and get a sense of the character. Talk to neighbors and check crime statistics in the neighborhood.

For a home you are considering, see if you can get a copy of any homeowners association documents so you know what the rules are and if this will work for you. Doing as much research and due diligence as you can ahead of time will help you avoid any mistakes in the process. If you buy a home without researching the schools and later find out they aren’t the best, you will be disappointed. Never purchase a home without seeing it first.

Make an Offer

Once you find the home you love it’s time to make an offer. This can be an exciting time but it’s also a nail-biting part of the process. Your agent should run an analysis of other comparable listings that have recently sold in order to help you make an offer that is competitive. Your offer will include the offer price, deadline for the seller to respond, and any contingencies you want to request. Contingencies, such as those for the home inspection, financing, and appraisal, give you the ability to walk away from the deal without any penalty if certain conditions are met.

Negotiate Closing Costs

Within days of applying for a mortgage, you will get a loan estimate that details the loan terms, along with estimated closing costs. Some closing costs are negotiable. For example, your lender may charge underwriting fees or an origination fee that is discounted or waived if you ask. The seller may also pick up some of the costs. You may be able to get the closing costs rolled into your mortgage but then you will usually pay a higher interest rate. It’s important to understand there is some wiggle room to negotiate on certain services.

Get a Home Inspection

An inspection only takes about three hours and can range in cost but it’s important. Home inspectors will usually check the home’s roof, physical structure, and heating, plumbing, and electrical systems. However, an inspector usually won’t look for mold or lead paint. Your real estate agent can recommend a good inspector or you can find one on your own with a little research.

It’s always good to put a contingency clause in place that will allow you to cancel the deal without any penalty if the home inspection uncovers major problems and the seller won’t address them. You and your agent should be present during the inspection so you can ask questions. Even if a typical home inspection won’t cover it, you can also have someone inspect for mold if you are concerned about it. You can ask the seller to purchase a one-year home warranty at closing. This can be reassuring for first time buyers with a tight budget.

Get Insurance and Finalize Your Move-In Details

Homeowner’s insurance will be required by your lender and is necessary to help protect your big investment. Premiums can vary so, just like with lenders, you want to get quotes from multiple prospective companies. Figure out your needs and make sure that you get enough coverage for you to rebuild your home if it’s damaged or destroyed. If your home is located in a flood zone, you will need to get flood insurance as well. As you start to prepare for move-in day, contact local utilities to arrange for a new service for your move-in date. You can also start to hire movers and start the packing process. There are a lot of upfront costs when it comes to buying a home and there could even be some unpredictable ones after move-in day. It’s a good idea to have an emergency fund for any surprise repairs or maintenance.

Time for Closing

You will have to get updated financial paperwork and paystubs before you close to prove your employment status hasn’t changed and you can make your mortgage payments. Within 24 hours of closing, buyers will do a final walkthrough of the property to make sure repairs, if the seller was responsible for them, were made and the home is vacant. At closing, you will sign a lot of paperwork to finalize the loan and transfer ownership. You will be required to wire funds or bring a cashier’s check for the down payment and must also have your identification.

Your lender and real estate agent will walk you through the process and it’s okay to take your time as you review documents. You are committing to the largest financial transaction you will likely make in your life Three days before closing, you will get a form that outlines the fees and the loan. Compare it to your initial loan estimate to make sure you aren’t being charged unexpected fees and that your personal information is correct.

Your Guide to Understanding the Mortgage Process

Benefits of Owning a Home

A home buying guide can only help you so much if you don’t realize the potential benefits of owning a home.

Owning a home is an investment. Unlike many purchases that decrease in value, homes appreciate over time. Even though local markets have different factors, the national median home price goes up each year. Every time you pay your mortgage, the debt amount goes down and the value of your home continues to rise.

With homeownership, you can take advantage of tax benefits. The biggest tax benefit is the option to deduct interest payments from your income tax return. This is especially important at the start of the mortgage when a lot of the monthly payment is applied to your interest.

Depending on the mortgage you choose, you can help stabilize your housing costs. If you have a fixed-rate mortgage then you have the same payment for your entire term, while rental payments for nearby properties can continue to rise.

You get more control over your living space. Renting usually doesn’t allow you to have a lot of options when it comes to personalizing your living space. With homeownership, you can make improvements to your home. Home improvements can actually lead to increased home value, both in your daily home life and financially. With the power of equity, you get the extra finances you need to reinvest in your home when cash funds aren’t an option.

Different Types of Mortgages

Part of following a home buying guide is figuring out different types of mortgages you can get.

Conforming Loan: The conforming mortgage loan is what many people think of when they think of a home loan. This type of loan is a good choice for homebuyers who have a good credit score and can save for a down payment of at least 10%. Conforming loans can come with fixed rates, where your interest rate never goes up or down and you pay the same amount every month. It can also be available with an adjustable rate, where the interest rate changes based on the market.

FHA Loan: FHA loans are a popular choice with first-time buyers because they require a smaller down payment and have more flexibility when it comes to underwriting. Those with below-average credit can also get approved.

VA Loans: VA loans can be useful to those in the military. They are available to veterans and active members of the U.S. military. The rates usually beat all other common loan types.

USDA Loan: These loans are for those who are in rural areas and these loans don’t require large cash down payment.

Avoiding Homebuyer Mistakes with a Home Buying Guide

Even if you are following a home buying guide, it can be easy to make some mistakes. Make sure to avoid them so the process goes smoothly.

Talking to Only One Lender

This is a big mistake and can leave thousands of dollars on the table. The more you shop around, the better position you are in to compare to make sure you are getting a good deal and the lowest possible rate. When it comes to where to shop for a mortgage, there are plenty of options. You can choose to go to your bank, the local credit union, or even use an online lender.

If you want to look into the best online lenders, you can fill out the form below and Loanry will match you with lenders who may be willing to give you a loan based on the information you provide. Start here:


Buying More Home than You Can Afford

It can be easy to fall in love with a home that can stretch your budget. Overextending yourself is not a good idea. When you buy a home that exceeds your budget, it will put you at risk of losing your home if you reach tough financial times. There will be less wiggle room in your budget for expenses or other bills.

Moving Too Quickly

Buying a home can be a complex process and there are a lot of steps in the home buying guide. A big mistake you can make is not planning far enough ahead for the purchase. Rushing the process can mean you don’t have enough saved for a down payment and closing costs and you are aren’t addressing issues on your credit report.

Draining Your Savings

Spending all your savings on the down payment and closing costs can be an issue. While it may be nice to put down 20% so you can avoid mortgage insurance, you want to have savings left for needed repairs or an emergency fund. Paying mortgage insurance may not be ideal but if you deplete your savings to make a bigger down payment, it’s riskier.

Not Paying Attention to the Neighborhood

If you are fixating on the home, you could wind up in a neighborhood you don’t like. Selecting the right neighborhood is important for your family and life. Be sure to discuss with your real estate agent about school ratings and crime stats. Visit the neighborhood at different times to get a sense of neighbor interactions, traffic, and the overall vibe.

Making a Decision Based on Emotion

Buying a home can be a big milestone. It can be easy to get attached and make an emotional decision. Remember that you are making probably the largest investment of your life. Emotional decisions can lead to overpaying for a home or stretching your budget.

Not Sticking to Your Budget

It’s best to look at properties that cost less than the amount for which you were preapproved. Even though you may technically be able to afford your preapproval amount, that’s the ceiling and it won’t account for other monthly problems or expenses. Shopping with a firm budget in mind can help when it comes to making an offer. When you find a home you love, it’s tempting to make a high-priced offer thinking that it will help you win but sticking to your budget can ensure you avoid a mortgage payment that is hard to afford.

Getting Your Down Payment

Your down payment is a big part of a home buying guide. It’s the cash you pay upfront to get a home loan.

Many people believe that you need a 20% down payment. While there are benefits to having a 20% down payment and lenders do like to see this, this is not the only way to buy a home. A 20% down payment has some benefits, such as putting more equity into your home right off the bat and a lower monthly payment, but there is also a caveat. The down payment is not the only upfront money you have to worry about. The closing costs can be a huge chunk as well.

There are some other low down payment alternatives for you to consider. Different mortgages have lower rates and it’s possible to buy a home with as little as 3% down.

You will need to decide the right down payment for you. It may sound like an easier decision to just go with a lower option but a lower down payment can make you a bigger risk in the eyes of a lender. This is why mortgages with lower down payment requirements are backed by the government. Instead of requiring mortgage insurance, some of the options will include a funding fee or an upfront guarantee fee. Whatever it is called, a fee is a fee. If you are considered a higher risk then you will likely pay a higher interest rate for the life of the loan, in addition to these other fees.

Calculating Your Mortgage Payment

It’s easy to calculate your mortgage payment if it just includes principal and interest. For this, you can use a bare-bones calculator. However, this is rarely the case. There are a lot of costs that can be built into your monthly mortgage payment. There are some key components that could play a role when you are calculating your monthly payment.

Principal

This would be the home’s purchase price minus any down payment. It the amount you are borrowing for the home.

Interest

This is what the lender charges to loan you the money for the home. Interest rates are expressed as a percentage.

Property Taxes

This is the annual tax assessed by state and local government authorities on your land and home. Property taxes may sometimes be separate from your mortgage payment or added in.

Mortgage Insurance

If the down payment is less than 20% then you may be required to have mortgage insurance. This insurance protects the lender in case you default on the mortgage. Once the equity in your home reaches the 20% threshold then the insurance is cancelled, unless you have an FHA loan.

Homeowners Association Fee

If your home is part of an HOA then a fee is paid to the organization that helps with property improvements, upkeep, and shared amenities. This can also be separated from your mortgage payment occasionally.

Final Thoughts

If you are a first-time homebuyer, it’s important to follow the steps in a home buying guide. Even if you have bought a home before but it has been a while, a home buying guide can help you plan ahead so you are ready for the process. There are many benefits of buying a home and some signs that mean you could be ready for homeownership. Consider different mortgage options available to you, especially if your credit score isn’t the best. You also want to avoid common mistakes that can happen during the home buying process so you are taking advantage of the lowest rates available.

FHA Loans: Your Complete Guide

A FHA Loan (Federal Housing Administration) is a mortgage given by an FHA-approved lender and then insured by the FHA. FHA loans are a house mortgage created for low- and moderate-income borrowers since they require a lower minimum down payment and don’t require a high credit score when compared to conventional loans.

In 2019, you only needed to have a down payment of 3.5% and needed a credit score of 580. However, you can still qualify if your credit score is between 500 and 579 but you will need a larger down payment. With FHA loans, down payments can come from a financial gift from family, savings, or down payment assistance. These factors make FHA loans a popular choice for first-time homebuyers. It’s important to note that the Federal Housing Administration actually doesn’t lend you the money but instead guarantees the loan. You still get the loan from a traditional lender, such as a bank. You pay for this additional insurance through a mortgage insurance premium and the lender has less risk because the FHA pays the claim to the lender if you default on the loan.

Different types of loans cater to different needs of borrowers. To find out everything you need to know about FHA loans, and if they are right for your, just keep reading.

How an FHA Loan Works

With an FHA loan, there are two types of mortgage insurance premiums you pay: the upfront mortgage insurance premium and the annual mortgage insurance premium. The upfront premium is 1.75% of the base loan amount and is paid at the time of closing or rolled into the loan. The payments are deposited into an escrow account that is set up by the U.S Treasury Department. The funds are used to make mortgage payments in case you default. You also make the annual payments every month. These payments can vary as a percentage of the base loan amount depending on the loan length, the amount, and the original loan-to-value ratio.

These mortgage premiums can’t be canceled in most instances. The only way to get rid of the premiums is to refinance with a non-FHA loan or to sell the home. Even though they are popular for first-time homebuyers, repeat buyers can get FHA loans if they’re using the loan for a primary residence.

How to Qualify for an FHA Loanfha credit scores

In order to qualify for FHA loans, borrowers will need to meet some lending guidelines.

Borrowers will need a credit score of 500 to 579 with a 10% down payment or a score of 580 or higher with a 3.5% down payment. Borrowers also need an employment history for the last two years that can be verified with pay stubs, bank statements, or federal tax returns. FHA loans need to be used for a primary residence. The property will need to be appraised by an FH- approved appraiser and meet certain property guidelines. Your monthly mortgage payments can’t exceed 31% of your monthly income. Some lenders do allow a ratio of 40% in certain cases. If you have experienced bankruptcy then you will need to wait 12 months to two years to apply. However, lenders can make some exceptions on waiting periods.

Special Considerations for FHA Loans

The lender you choose will evaluate your qualifications for an FHA loan just as it would any other mortgage application. Instead of using your credit report, lenders look at payment history records and work history. You are able to qualify for an FHA loan even if you have gone through foreclosure or bankruptcy if you have re-established good credit. In general, the lower the credit score and the lower down payment you have, the higher the interest rate will be.

When you buy a home, you will still be responsible for certain out-of-pocket costs, such as attorney fees, appraisal costs, and origination fees. One of the advantages of FHA loans is that the seller, homebuilder, or lender can pay some of these at closing on your behalf. If a seller is having a hard time finding a buyer then he or she may offer to help you out at closing in order to sweeten the deal.

Your lender will need to be approved by the FHA and you need to show steady employment history or that you have worked for the same employer for the past two years. If you are self-employed, you can use documented tax returns and profit and loss statements. If you have been self-employed for less than two years then you could be eligible if you have a solid work and income history for the two years that precede your self-employment.


Types of FHA Loans

The FHA also insures other loan programs that are offered by private lenders.

FHA 203(k) Loans

This type of FHA loan allows a homebuyer to purchase a home and renovate it with just one single mortgage. Homeowners can also use this program to refinance their current mortgage and add the remodeling projects into a new loan. There are two types of FHA 203(k) loans. The limited 203(k) has an easier application process and the improvements or repairs must total $35,000 or less. The standard loan will require you to fill out some extra paperwork and is needed if the improvements cost more than $5,000 but the total value of the property still falls within the FHA mortgage limit for the area.

Home Equity Conversion Mortgage

A home equity conversion mortgage (HECM) is the most popular type of reverse mortgage. A HECM will allow older homeowners above the age of 62 with a significant amount of equity or who own their homes to withdraw some of the home equity. The amount that can be withdrawn can depend on the borrower, the current interest rate, the appreciated value of the home, and the mortgage limit.

Energy Efficient Mortgage Program

Energy efficient mortgages are backed by the FHA and are used by buyers to purchase homes that are already energy efficient or to buy and remodel older homes with energy-efficient upgrades. The cost of the upgrades can be rolled into the loan without the need for a larger down payment.

FHA Section 245(a) Loan: This program is for borrowers whose incomes will increase over time. You start out with a smaller monthly payment and then gradually go up. There are different plans available with different increments.

Conventional Loans Versus FHA Loans

The government, unlike FHA loans, doesn’t insure conventional loans. Qualifying for a conventional loan will require a higher credit score, a larger down payment, and a solid income.

You can get more down payment help with an FHA loan. Since the FHA allows financial gifts or down payment assistance it can be much easier to scrape together your payment. Conventional lenders may restrict the amount of your down payment that can come from a gift. FHA loans can have lower interest rates than conventional loans. When the interest rates are lower, you pay less over time.

FHA loans have different mortgage insurance requirements. Those who get an FHA loan need to pay an upfront mortgage insurance premium and an annual mortgage insurance premium. With a conventional loan, private mortgage insurance is only required if you put less than 20% down. There will be just one monthly payment instead of two. There are also different rules for when you can stop paying insurance. For a conventional loan, you can stop paying but you won’t be able to with an FHA loan.

What about the Interest Rate of an FHA Loan?

FHA loans can be either adjustable or fixed-rate loans. With a fixed-rate loan, the rate won’t go up and down so the mortgage payment is predictable and stable throughout the life of the loan. With an adjustable-rate mortgage, the interest rate will move along with the market. The interest rate and the monthly payments can adjust periodically. The interest rate can be lower with an adjustable rate but can go up over time and there are no guarantees.

Finding an FHA Lender

Finding an FHA lender is an important step in getting an FHA loan. These tips can help you find the best FHA lender for your needs.

Shop Around

Lenders offer FHA home loans, not the federal government. Each lender does offer its own fees and rates so you need to shop around. Shopping around is one of the best mortgage tips you can pay attention to. You will want to compare your FHA mortgage lenders to find the top lenders before you go forward. Your current bank or credit union may be an FHA-approved lender so it helps to check. You may want to consider working with a mortgage broker who specializes in FHA loans because they will be in the best position to offer meaningful and accurate advice and can guide you in your homeownership goals. Since you aren’t able to drop the premiums you want a lender who can help you compare all the costs of FHA loans.

If you think that this all process is incredibly daunting, you can do is let Loanry try to help you. We make it easy for consumers to find the right lenders for their needs and avoid falling victim to scams. Put in your information and see which lenders may offer a loan for you:

=

Know Your Credit Score

It’s important that you understand your credit score before you apply. Your credit score may be better than you think and this may allow you to qualify for a conventional mortgage. Your lender options can be limited if your credit score is low. You will need a larger down payment if your credit score is lower as well. Knowing your credit score is helpful because you may need time to improve your credit score before you apply.

Understand How Closing Costs Work

Since the U.S. Department of Housing and Urban Development oversees the FHA loans, there is a cap at 3% of 5% of the loan amount for closing costs. The FHA allows homebuilders and sellers to pay some of the closing costs. If you think you will need help with covering these then you may be able to qualify for down payment assistance or help with closing costs. Many states have their own mortgage programs that can be paired with FHA loans and the programs can also cover the upfront costs.

Know Your APR

Your APR (annual percentage rate) will have an impact on your mortgage. The APR will determine how much interest you pay in your monthly payment and thus over the life of the loan. It can be easy to believe that all FHA loans have the same APR but that isn’t true. Each lender sets its own and there is a lot of variance between lenders. You can use an APR calculator to help you determine any long-term costs of your mortgage before you pick a lender.

Advantages of FHA Loans

There are some instances when an FHA loan may be right and they offer a number of advantages.

Small Down Payment

FHA loans allow you to get a home with a smaller down payment. This gives you more borrowing options.

You Can Use Others’ Money

It will be easier to use gifts for your down payment and closing costs if you choose FHA financing.

No Prepayment Penalty

There may not be a prepayment penalty, which can be a big plus for certain borrowers. You never know what can happen. Maybe you somehow get a lot of money, or you simply decide you want to get rid of this dept much earlier than you though you would. So it is great when you do not have to pay additionally.

Assumable Loans

A buyer can take over the loan if it is assumable. This means he or she will pick up where you left off and benefit from lower interest costs if you sell your home.

A Chance to Reset

If there is a recent bankruptcy in your past then it will be easier to get approved for an FHA loan. You only need two to three years after financial hardship.

Improvements and Repairs

Certain FHA loans can be used to pay for home improvements. If you are looking at a property that needs improvements then these programs make it easier to fund your purchase and improvements in just one loan.

Disadvantages of FHA Loans

FHA loans do have some disadvantages, as does every loan type offered.

Low Down Payment

A low down payment may seem like a great idea but it can also be a disadvantage. Putting only 3.5% down can mean you aren’t yet on solid financial ground and taking on a home can be risky. The more you borrow, the more interest you will pay and it will make your home more expensive.

Upfront Insurance

When you are putting less than 20% down, you will have upfront insurance costs. FHA loans have two types of insurance. A bigger loan means a larger monthly payment.

Ongoing Insurance: Not only will you have upfront insurance but you will also be paying for insurance monthly. The extra cost means you pay more each month. You aren’t able to cancel this insurance with an FHA loan.

Limited Choices

There are limited choices for when you can use an FHA loan. This may not be a problem but sometimes an adjustable-rate loan or an interest-only mortgage can be a better fit.

Loan Limits

Another disadvantage of FHA loans is there are outside limits on how much you are able to borrow. The region you live in sets these limits. The lower-cost areas have a lower limit than usual FHA loans. Higher-cost areas have higher limits. There are also special exception areas, such as Hawaii and Alaska, where the high construction costs make the limits higher. You can look up the loan limit on the FHA website.

Property Limitations

Getting an FHA loan approved will require a property that meets certain standards. For example, basic health and safety requirements will need to be met. If you are searching for a fixer-upper or a major bargain then FHA loans may not be right. For a property that is move-in ready, it’s not a problem. If you are buying a condo, it can be challenging. If there aren’t enough units in your development that are owner-occupied then an FHA loan may not be the best option. The loan can’t be used for investment or rental properties and the property needs to be used as your primary residence.

Qualifying

FHA loans don’t always get approved. You still need a minimum credit score and you still need to have documentation of sufficient income to repay the loan. You must meet this certain credit score unless you are planning to have a larger down payment.

Seller Hesitation

In some situations, FHA loans can be a disadvantage when you are looking for a home. Sellers like to know about potential buyers and a FHA loan won’t always signal strength. A seller may fear that there are extra requirements that are going to slow down the process. If you are buying in a hot market, this may not be to your advantage and you can miss out on some great properties.

FHA Loan Relief

Once you have an FHA loan, you may be eligible for loan relief if you have experienced a financial hardship, such as an increase in living expenses or a loss of income. The FHA-HAMP program can help you avoid foreclosure on the property by permanently lowering the monthly mortgage to a more affordable level. In order to become a full participant in the program, you need to successfully complete a trial payment plan where you make three scheduled payments on time at the lower modified amount.

Is an FHA Loan Right for You?

FHA loans can be an ideal choice if you want a low down payment and your credit score isn’t perfect. If you aren’t able to qualify for a conventional loan then an FHA loan may be the right choice. If you are able to afford a larger down payment then you want to consider getting a conventional loan. The mortgage insurance costs can make an FHA loan more expensive. You still need to shop around carefully in order to find the best option and lender for you.

An FHA loan won’t help you if your credit score is less than 500. If your credit score is less than 500, you will need some time to work on improving your credit score before you apply. An FHA loan won’t be best for those who are shopping on the higher end of the price spectrum and it’s not designed to. The program was created to support low- and moderate-income homebuyers, especially those with limited cash reserves for a down payment.

How Much Home Can You Afford?

In order to determine how much home you can afford for your residential mortgage, you will need to understand back-end versus front-end debt ratio. The front-end ratio is a percentage of your gross monthly income and shows the payment you can realistically and reasonably afford from a lender’s point of view. The back-end ratio reflects the new payment for the mortgage but also your recurring debt. It will be higher than the front-end ratio.

Your mortgage amount will depend a great deal on interest rates. Interest rates can change daily or even hourly. Your down payment also affects how much home you can afford. First-time homebuyers benefit from not putting everything they have toward a down payment so they have money for other costs associated with a home, such as maintenance. First-time homebuyers can also underestimate the cost of maintenance and other homeownership needs.

Do A Trial Run

Before you jump into homeownership, try setting aside the additional amount you would pay for a mortgage every month to see how you do. For example, if your rent is $800 and you plan to pay $1,200 on your mortgage then set aside the extra $400 per month for three to six months. If you can’t do that for a few months then you can’t afford that mortgage amount.

If you feel more comfortable borrowing less than the amount shown for any preapproval amount you get then do so. You don’t want to make the mistake of taking out a mortgage that you aren’t able to afford. A dream home may be able to wait. You probably don’t need the most expensive home you are qualified to buy. Consider a starter home as your first home. Work first on building equity and security for yourself and your family.

Tips on Saving for a Home

Even if you choose an FHA loan, you need to still save some for a home. With FHA loans, you will need to save less for a down payment but you still need some money and consider the closing costs, property taxes, ongoing repairs, and maintenance. This can be a lot to take on so you should save up as much as you can before you buy a home.

Determine How Much You Need

Meet with a mortgage loan officer to know what loans you qualify for, home much home you can afford, and how much of a down payment you will need. This will help you determine how much you need to save and it could be a lot less than you think, especially with an FHA loan.

Get Debt Under Control

Your debt can make it harder to save for a home since a chunk of your income is going toward your debt. The debt load can also make it harder when applying for a mortgage. If you have debt, and most people do, do what you can to reduce it. Consider refinancing debt to lower payments. If you have a credit card with a high balance then pay off as much as can and consider if it makes sense to transfer your balance to a lower-interest card.

Consider if It Makes Sense to Put Retirement Savings on Hold

You may not be able to do this if you are close to retirement. However, if you are young and contribute some of your income to a retirement plan then consider diverting this toward your down payment and costs for the home. It should only be for the short term since saving for retirement is important. However, it can make a big difference in how much money you have to put toward a home.

Use Technology

Apps can help you remember to send a portion of your paycheck to your savings account. You can also use apps that will round up your purchase to the nearest dollar and then take the spare change and add it to an investment account. Spare change can add up over time.

Ask for Gift Money

With an FHA loan, you can use gift money toward your down payment. Ask your family for money for your birthday and other special occasions instead of a gift. While not everyone will oblige, some of your relatives may like knowing they are helping you toward your dream of owning a home.

Get a Side Hustle

In this economy, there is a lot you can do as a side hustle. Consider some time every week doing your side hustle so that you can make some extra cash that you can put away toward your home.

Mortgage Loan Statistical Overview: By the Numbers

Final Thoughts

FHA loans can be a good option for certain homebuyers. In order to qualify for a FHA loan, you typically need a lower credit score and down payment than a conventional mortgage. There are some advantages and disadvantages of FHA loans. And while they can help a lot of first-time homebuyers, they may not be an option for everyone. Regardless of whether or not you choose an FHA loan, you need to know how much home you can afford. There are different things you can do in order to save up for a home.

What Are the Pros and Cons of Prepaying Your Mortgage?


Owning a home is a dream many people have, and it is a significant investment. Taking a mortgage allows many people to start the critical step of purchasing a home. Depending on the kind of mortgage you go for, it can become a burden for many people because of the monthly payments. You want to negotiate a mortgage that will not require that you pay for the rest of your life. You may, therefore, grapple with the question of whether or not you should make prepayments on your mortgage has a way of clearing the balance faster. However, is it a good idea?

There is no yes or no answer when it comes to mortgage prepayment. If you prepay your mortgage early, you will save a lot of money with regards to the interest you will have to pay. You get to increase the equity in your home, and best of all, you own the home sooner.

However, there are specific considerations you need to have, including whether or not you could put your money to better use elsewhere. You may, for example, settle other debts. And you could also think about saving for retirement so that you ensure that you are comfortable in the future. You may also put aside money in your emergency savings account for those situations when you may require a lot of cash upfront. If you do not have all these factors in place, you may want to rethink prepaying your mortgage. It is a decision you must only make once you have all your financial needs in place.

Understanding How the Mortgage Structure Works

You are thinking about applying for a residential mortgage, but you do not have the relevant knowledge around it. To be able to negotiate the best rates, you must take the time to understand what you are getting into. Applying for a mortgage can be tricky for most people. If you do it wrong, it could mean that you spend the rest of your life paying off the debt.

A house mortgage is a loan that you take to purchase a home. You have the principal amount, loan repayment term, and interest. You will also need to consider the taxes and insurance that may apply to the loan. Shop around for the best mortgage lender, meaning that you have to take the time to do your due diligence. You must also be ready for the lender to look into your financial background and your credit score. The best mortgage tips we could ever give you is to factor in how much money you have so that you only apply for what you can afford. You have other expenses that you need to take care of, and it would not make sense for you to take on additional obligations without having the budget in place.

Be realistic about what you can afford, and only look for a loan that you know you can service comfortably. You may have to put down an amount for the down payment, after which the lender will require that you make monthly payments, until the payoff date. The lender will give you an amortization schedule, which will provide you with a breakdown of the loan. Initially, you will be paying off the interest, and towards the end, the principal amount.


Why Would You Want to Make Prepayments On a Mortgage?

Paying a mortgage early is a strategy many people will use to offset their loans quickly. You will accrue several benefits, which we will highlight below. Such includes the ability to save thousands of dollars in interest. You also get to eliminate long-term debt. There is also the aspect that the sooner you pay off your mortgage, the earlier you own your home.

What Is the Process of Prepaying a Mortgage?

You must understand how prepayment works. When you make prepayments on your mortgage, you get to reduce the interest you will pay over the loan term period.

When you are looking for a mortgage lender, and sure you have a good understanding of their penalties. Most will not penalize borrowers if they decide to repay their mortgage early. You must also ensure that whatever prepayment you make goes into the principal, and not the interest. If you do not let the mortgage lender know in advance that you would like the money to go to the principal amount, they may apply it to the interest. You will, therefore, be servicing the interest payments, which works for the lender but will not help you offset your loan earlier.

What Are the Advantages of Prepaying Your Mortgage?

There are several advantages to prepaying your mortgage, and we will look at them in more detail below.

You Reduce Your Loan Cost

By prepaying your mortgage, you get to reduce the total cost of the loan. If, for example, you took a loan for about $100,000 for a 30-year loan at 4%, you will need to pay $477 every month. If you decide to make an extra payment within that year and end up with 13 instead of 12 payments, you will save over $10,000 over the loan period. You also get to reduce the loan repayment term by up to four years. If you can double the payments, you can take care of the 30-year loan within 11 years. Make sure that you negotiate with the bank to put the extra payments on the principal amount so that the extras do not go to the interest. Making early payments on your interest does not mean that you will gain equity to your home faster.

You must also be careful about prepayment penalties, and must, therefore, be very clear about this before you start making any prepayment.

It Will Affect Your Taxes and Interest

The advantage of prepaying your mortgage is that you will receive tax breaks. If you pay it off entirely, the same does not apply. You, however, get to benefit from paying less interest on what you would eventually spend on the final loan. It would, therefore, make more sense to pay off your loan early. It is doubtful whether the tax incentives would outweigh the benefit of paying less interest.

You Get to Pay Off Your Loan Sooner (And Save on Interest)

Prepaying your mortgage will mean that you get to reduce the time you will need to pay off the loan. You also get to ensure that you have better cash flow in the future. If you have a young family, you will have many concerns among them being able to pay school fees, college fees tuition, among others. You are, therefore, better off facing these years without having the burden of mortgage payments as well. What you will enjoy is the peace of mind, and an ability to handle your financial obligations more comfortably.

Резултат слика за prepaying mortgage infographic

It Helps Build Home Equity Faster

You calculate your home equity by subtracting what you owe on the loan, from the market value of your home. If, for example, the market value of your home is $500000, your mortgage balance is $300,000, then the equity in your home is only $200,000. You therefor get to increase your home equity by reducing the mortgage balance, which you can hasten by making larger payments. The best thing about having home equity is that you can use it to apply for a home equity line of credit or loan.

It Will Impact On Your Credit Score

If you have less debt and can make your monthly payments, it will help improve your credit score. Credit reference Bureaus will base your credit score on your ability to handle your financial obligations. Showing that you can comfortably make mortgage payments is, therefore, a fantastic way to raise your credit score. A good credit score is essential, especially if you hope to apply for loans in the future. Moneylenders will want to know whether you are capable of making payments, and one way of knowing is by looking at your credit score.

Prepaying Your Mortgage Is a Good Option If You Are a Poor Saver

Different people will handle money in different ways. For some, immediately they receive the money they will run to the bank and save it for some future projects. And for others, the money will go into investment options. For some, it will go towards settling debts or paying off certain financial obligations.

Yet, some people receive cash and immediately go on a shopping spree, and within no time, they will have nothing remaining. If you are someone who is not capable of saving, then prepaying your mortgage may be the best option. You are better off spending the cash, reducing your principal mortgage amount instead of wasting it on frivolous activities.

Disadvantages of Prepaying Your Mortgage

But let’s look at the flip side as well. As with anything, prepaying your mortgage and answer to the question “Should you do it?” is not all black and white. Here are some disadvantages you should know about if you are thinking about paying off your mortgage earlier.

You May Incur Penalties

We have already talked about lenders who will impose a penalty if you make your mortgage payments early. We would, therefore, recommend that you take the time to read the documents properly before you sign up for a house mortgage. You will avoid any issues concerning the notice.

You Lose Out On the Tax Deductible Benefits

When you prepay your loan, you reduce your mortgage interest. You will note that any payments you make towards your loan in the initial stages go towards paying off the interest. If we are to go back to the example above of mortgage for $300,000 over 30 years at 4% interest. You could deduct $10,920 in tax benefits.

However, the law now requires that you itemize your deductions, which may be an inconvenience for many homeowners. The standard deduction is $12,200, $18,350, and $24,400 for individuals, heads of households, and couples who are filing jointly, respectively. After 2017, you could only deduct interest on the first $750000, while in the preceding years, you could do it for up to 1 million dollars.

You May Lack Money to Invest in Other Projects

Prepaying your mortgage means that you do not have money left over for investing in other Ventures. You could lose fantastic opportunities in things such as real estate investment trusts, stocks, bonds, among others. Talk to your financial advisor about where you can put your extra money so that you get better financial Returns. It will also depend on your financial risk Tolerance levels.

You May Be Better Off Paying Higher Interest Debts

Instead of prepaying your mortgage, you may want to think about paying off higher interest debts. You may, for example, have student loans or credit card loans that attract very high-interest rates. It would make more financial sense to pay off such, and then make prepayments on a mortgage only when you have the financial capacity to do so.

You May Ignore Other Financial Goals

Other than investing or paying off high-interest debts, there are many other financial goals many individuals have. One such purpose is ensuring that you have retirement savings, which will help you live a more comfortable life, once you leave formal employment.

You must also ensure that you have emergency funds that can cover up to six months of your bare living essentials.

How Do You Make the Decision On Whether to Prepay Your Mortgage?

As we have already seen above, deciding on whether to prepay your mortgage is a weighty one. You must weigh the savings vs. opportunities, as well as determining the best places to use the available money. You must also have a good understanding of your credit profile and your ability to make more money in the future. Other things to consider include exposure to inflation, lost tax benefits, the returns you will forgo on investments, among others.

Prepaying your mortgage means that you can comfortably take care of your financial obligations. You must also save, put something aside for the emergency fund as well as towards your retirement years. You can build home equity by reducing the mortgage amount.  If, however, you need cash quickly, turning your home into money may be more complicated than you could anticipate. The value of your home also depends on the market, and in times of market volatility, the value of your home may be lower.  What you may have bought for $200,000 could at a particular time cost as low as $100,000.

How to Pay Off Your Mortgage Early

Paying off your mortgage early is a great accomplishment because it gives you a level of financial independence. It allows you to plan for your money without having to worry about mortgage payments. However, it ties up your cash, and you are not able to put it on other areas, which would give you higher Returns.

Many financial advisors are wary about telling their clients to settle the mortgage early. They feel you are better off putting your money to better use elsewhere. You do, however, need financial discipline to be able to realize your financial goals. There are times you will have to make some sacrifices so that you get to keep a large part of your income.

Your age will also determine what kind of decision you make with regards to prepaying your mortgage. If you are young and have the potential to earn money over a long time, you should think about aggressively investing the money. However, if you are close to retirement age, it would make more sense for you to pay off the mortgage. So how can you pay off your mortgage early?

Think About Refinancing to Shorter-Term Loans

You can refinance a 30-year loan to 10 or 15 years. You must, however, factor in that your monthly payments will be more, unless, you can negotiate for lower interest rates.

Reconfigure Your Payments

Looking for mortgage refinancing is not always the best option. Talk to your financial lender to help you reconfigure the payments to lower terms. Look at the various time frames and how they could impact your monthly payments. Think about the penalties, and channel your money to paying off the principal.

Резултат слика за mortgage us infographic

Pay A Bit More or Add an Extra Payment

You have the option of adding a little more money to your monthly payments. You could also look at the year as having 13 months instead of 12 so that you make one extra payment every year.

Lump-Sum Payments

You can opt to make a lump sum payment towards the principal amount anytime you have some extra cash. It will help you reduce the loan term, and you must keep a close watch on the payoff date.

Factors to Consider If You Want to Pay Off the House Mortgage Faster

There are several factors you need to consider when thinking of paying off the house mortgage quickly, and these include: –

  • Understand what you owe, and how much interest you will pay
  • Set goals of paying off the mortgage faster, and work towards it. Setting financial goals is vital because it helps you determine better use for your money
  • Consider the interest rates you pay for all your that’s including credit cards, among others.
  • Think about paying the high-interest rate loans first before prepaying your mortgage
  • If you can afford it, make weekly or bi-weekly payments instead of monthly. It will allow you to make a full extra payment every year thereby enabling you to pay off the mortgage faster
  • If you have some extra money, consider making lump payments on the principal

Tips for Paying Off a Mortgage Faster

Mistakes to Avoid When Taking a Mortgage

There are several costly mistakes one can make when taking a mortgage. These include: –

Committing Too Much to The Mortgage Payments

The typical household has very many home related costs that you must meet before investing your money to mortgage payments. It could be tuition, replacing your car, shopping for groceries, among others. You must contain your expenditure to less than 28% of your pre-tax income. It will then determine how much you can put aside for your mortgage payments.

Not Understanding What It Means to Own a Home

There are so many other costs you will incur from owning a home that it may come as a surprise to you as a new homeowner. Routine maintenance will take up to 2% of your home purchase price. While this does not apply to every year, the costs may vary, whether upwards or downwards. You may, for example, need to replace the roof, fix the furnace, install a new water heater system, among others. The amount you spend on Renovations will depend on how old the house is. You will also need to factor in property taxes insurance, among others. You must factor in these costs when you are budgeting for the mortgage prepayment.

Taking The First Loan Offer That Comes Your Way

We cannot emphasize this enough; you must shop around for the best lender when you are thinking of applying for a mortgage. You must also pay attention to any other fees that may accompany the loan amount you receive. There are some hidden costs that you will only discover once you have put your signature on the dotted line. Talk to someone who has a good understanding of mortgages, even if it requires that you set aside some money to pay a financial advisor.

Find a reputable lender, an open and honest one, with whom you can communicate all your questions and concerns. Open communication is extremely important, and you need to trust your lender that they are telling you everything you need to know. If you’re interested in getting offers, please fill out the form below:


Not Paying Attention to APR

We all know that lenders like to hype the fact that they are offering very low-interest rates. What does not accompany the marketing language is the fact that you will end up paying high fees in other areas. Do a comparison of the annual percentage rates (APR) because it will show you the actual cost of your loan. It will take into consideration the principal amount, interest, origination fees, and closing costs, among others.

Not Paying Attention to Your Credit Report

It is interesting to note that few people pay attention to their credit reports. Yet, you can get your credit report from the credit Bureaus or even online. You must spend time checking your report and correct any issues before you apply for a mortgage. The lender may reject you, and a bad report will stay on your credit score for a long time.

Not Paying Attention to Your Down Payment

Most lenders will require that you make a down payment before they disperse the final loan amount to you. You must, therefore, look for a way to finance it, if you do not already have sufficient savings to take care of this cost.

Not Insuring the Mortgage

You must take insurance for the loan you receive for your home so that if anything happens to you, you do not leave your family in financial Straits. Your family will get monetary benefits if you take life insurance. It also protects them from inheriting the loan if you die. Other policies, such as critical illness insurance, will assume liability if you are not able to make payments due to significant illness.

Floating Vs. Fixed-Rate Loans

If you take a floating rate loan, you will pay varying interest amounts depending on the market situation. Sometimes you may pay a lower amount other times; it may be higher. Fixed-rate loans, on the other hand, are fixed and will not fluctuate. From the beginning, you know how much you pay every month, thus allowing you to budget better.

Not Paying Attention to The Penalties

It all goes back to reading the fine print before you sign on the dotted line. There are specific penalties you face, as we have already stated above, including the payment or lump sum penalties. In other situations, if you’re not able to make the payments, a bank can employ specific recovery strategies to get back their money. It is not uncommon for clients to complain about very harsh treatment from specific lenders, anytime they were not able to pay back the amounts on time.

Ignoring Customer Reviews

Reading customer reviews and even talking to some customers can help you avoid a bad lender. Carefully read and listen to what they have to say so that you know what to expect.

Final Thoughts

Buying a home is an essential component because, quite honestly, no one wants to pay rent for the rest of their lives. You must, however, take the time to shop around for a suitable lender who will give you the best mortgage rates available. Prepaying your mortgage allows you to get rid of the debt burden early, but there are specific considerations you must have.

We have looked at the advantages and disadvantages of paying off your mortgage early. We have also shared with you mistakes to avoid when taking a mortgage. The most critical thing to do is to understand the mortgage structure. You must not tie up your money because you could be putting it to other uses, such as paying off high-interest rate debts. You must also ensure that you save for retirement, as well as set aside something in your emergency fund. Before making any financial obligations, you must talk to a financial expert to guide you through the process.

About the Author – jamie a

Is It Better To Pay off Your Mortgage or Save For Retirement?

You may be wondering whether you should be paying off your mortgage or saving for your retirement. Opting for either one is the right choice because it helps you save or invest for the future. We will take a more in-depth look at the pay off your mortgage vs. save for retirement discussion in our article below.

Option One: Pay Off Your Mortgage

You have decided to buy a house as a future investment. Deciding to take a mortgage is a weighty one, and it is not a matter to take lightly. You must take into consideration the fact that you will be paying thousands of dollars in interest. All these even before you start paying off the principal amount.

You decide to take the mortgage and are now nearing the end of the mortgage payments. You have several payment options available, and maybe wondering whether it would be a good idea to do it at once. At the beginning of the payments, most of the money goes towards settling the interest. You will find that you are not making many inroads with regard to the principal amount. If you decide to make extra payments early, you get to reduce the interest faster, before starting to pay the principal amount. You also get to make smaller payments towards the end, which will assist with meeting your payment obligations.

You could also opt to make payments later, and service the loan principal. While it will not reduce the total interest faster, you get to build on your home equity. You also end up with shorter loan terms in the long run. You must, therefore, decide which makes the best sense for you.

What You Should Know About Mortgage

The one thing about mortgage interest is that it is slightly different from other types of debt. It is tax-deductible, and you can end up with quite a bit of saving.

If you take the non-standard or adjustable-rate mortgage and are working towards settling the principal amount, it could be an advantage for you. You get to build your home equity using adjustable-rate loans, making it easier to seek refinancing for a fixed-rate mortgage.

There are times when the local real estate market will go down. You may see zero appreciation, and in the worst-case scenario, depreciation. Paying down your house mortgage is one way of keeping your head above the water. You will, however, find it difficult to sell, or refinance the home, as well as obtain any other credit.

Advantages and Disadvantages of Paying Off Mortgage Before You Retire

You may opt not to pay off your mortgage despite having the assets to do so. You then decide to take this money and invest it somewhere else. What you should know is that you are investing in cash that is not yours. It may, however, be a good idea to invest elsewhere, but only after taking into consideration the Taxes, risks, and rate of a return, among others. You may, for example, find that what you get from your Investments exceeds the final amount you will pay in interest. It will be a better idea to invest and use that money to pay off your mortgage.

Let us look at the advantages and disadvantages you will enjoy if you pay off the mortgage before you retire below.

Advantages of Paying Off Mortgage

One of the main benefits you will enjoy if you pay off your mortgage is that it is risk-free. You have the option of investment vehicles such as treasury Securities, and bank certificates, among others.

Stocks are another excellent option for anyone who is looking to invest long-term. You have the potential of earning a higher return that will most likely exceed your mortgage cost. If you are borrowing the money from a bank to invest, you must be aware of the risks you face. If you mismanage your investments, you could get meager returns. You may, therefore, want to engage the services of a professional, who will give you the right advice, allowing you to make rational, non-emotional decisions.

Pay close attention to aspects other than interest when you are taking a loan. Getting into debt is heavily dependent on your ability to pay back the money in the future. You may be basing it on your income levels, but life can be unpredictable. In the future, you may find yourself in a situation where you cannot service your loans. You may, therefore, find that it helps to pay off your mortgage earlier, especially if you are nearing the retirement age. If you have the right investments, you will continue to get an income even after you retire. You can then continue to pay your mortgage way into your retirement.

Choosing to pay off your mortgage early may be a good option for anyone who is not a good saver. Some people cannot save, and anytime they see money, they want to spend it immediately. If you are such an individual and you come across some extra cash, you should think about paying off your mortgage early.

Tips for Paying Off a Mortgage Faster

Disadvantages of Paying Off the Mortgage

As with everything, there is a flip side when it comes to paying off your mortgage earlier. It’s important to consider these arguments as well, especially if you are making plans for the future and deciding whether this is the right thing to do.

You Must Maintain Some Liquidity

When you pay off your mortgage very early, you will reduce your liquidity. Having funds in your investment or bank account makes it easier for you to access cash whenever you need it. If your home provides you with home equity, if you need money urgently, you may not be able to access it that fast. Once you pay off your mortgage, you should sign up for a home equity line of credit. You get additional liquidity, thus access to funds whenever you need it.

Liquidity is essential, especially when you have a personal emergency or an economic downturn.

You Must Make the Right Call

Unless you have a background in finance, you may need to get the services of a financial advisor to walk you through the whole process. You may be thinking that Investments are a good option. But your financial adviser may be able to point out certain disadvantages that you are not aware of. There is also no guarantee in investments, and you may end up losing all your money.

What Assets Can You Use To Pay Off Your Mortgage When You Retire

You may retire while still having mortgage payments to make. You have the following options for liquidating assets to pay off your mortgage.

  • Look at the risk-free investments in your portfolio, and let them be the first option if you have to liquidate assets. Your taxable savings account is one such option.
  • You can also look at risky investments that you have in taxable accounts. You work off the basis that this investment has the potential to earn you good returns, and you do not mind trading them in so that you pay off your mortgage.
  • Those who are above the age of 59 can get access to tax-deferred accounts to pay off the mortgage. You must, however, note that making withdrawals from the tax-deferred account will make you liable to taxation at the end of the year. You will find yourself in a higher tax bracket, especially if you go for money out of 401k, or IRA.

Reasons Why You May Not Want To Pay Off Your Mortgage Early

Many people struggle with prioritizing their money requirements. You may, for example, be struggling with a credit card interest rate that is higher than what you pay for a mortgage. You may also be wondering whether you should save for the future, or pay your child’s education, among others. All this will have an impact on your ability to take and keep up with the mortgage payments.

Taking a mortgage also provides the double-edged sword conundrum. You know that owning your home will give you peace of mind. Yet, you know that before you pay it off, you will have sleepless nights wondering how to pay for it. There is a level of financial insecurity as long as the mortgage payments are hanging over your head. You may, however, opt to go for a mortgage, and we would advise that you take the low fixed-rate mortgage.  There are specific situations where you may need smart mortgage tips, by prioritizing the extra mortgage payments, and these include:

Pending Debts

You have other pending debts that you should not put off. Such include car loans, school loans, home equity lines of credit, credit card debt, among others. Some credit card debts may give you leeway with regards to 0% interest rates for the first 18 months. Missing a payment after could impact very negatively on your credit score. The interest rate may also be high, and you do not want to incur the penalties. So, if you belong to this huge number of Americans who have debts awaiting to be paid off, maybe you should consider dealing with them first.

Lack of an Emergency Fund

Financial experts will advise you to have an emergency fund. It should be able to tide you over between 6 to 12 months before you think about making early payments on your mortgage. Without a doubt, it can be difficult to save this amount of money, if you have other debts as well as the regular mortgage payments.

When You Are Not Putting Aside Savings

Do not make any extra payments on your mortgage if you are not saving some of your income. Cash needs are ever-present, and you do not want to find yourself cash-strapped because you use up everything that comes into your account. Have a 5-year plan for regular expenses such as vacations, weddings, education, among others. Financial experts say that you should save up to 20% of your gross income annually.

You Are Looking At Other Investment Options

Investing your money into other vehicles is a good idea. There are several options available, including stocks, bonds, and government treasuries.

Option 2: Save For Retirement

Paying off your mortgage is an excellent option, especially if you can do it earlier. Once you no longer have to worry about the mortgage debt, you can start saving for your retirement. However, you also have the option of saving for retirement with or without mortgage payoff. The compound interest you will enjoy on your savings will give you more value in the future. The longer you save, the more interest resulting in a better payout on your retirement.

The Experts recommend that you start saving for your retirement from a very early age. The truth does not necessarily apply to take a mortgage when you are still young. Although, if you can do both, it would definitely not hurt you. The earlier you start, the more you can absorb the impacts of market fluctuations on your product portfolio.

Saving For Retirement: What You Need To Know

Unless you have old money or are very wealthy; you may need to set aside some money for your retirement years. The reality is that some people do not save any money, and may eventually become a burden to other people.

It is never too early to start saving, and you have various options available to you. You have options such as Social Security, IRA, and 401k, among others.

The main challenge most people have with saving for retirement years is they barely have enough to meet their daily expenses. They also cannot put aside anything every month in savings due to their daily living expenses.

So What Can You Do To Start Saving?

Start small; you can try and set aside something every month towards your retirement. You will find that you get into a saving habit that will help you create a nest egg for your Golden Years. The financial experts will offer no fee, no minimum retirement accounts.

Get a financial advisor who can give you the best investment options. Think about investment risks for anything you decide to sink your money into. You may, for example, find that investing in risky areas such as biotech, leveraged funds, and gold may give fantastic returns. They are, however, not the best for someone who is just starting the journey of saving or investing their money. You may want to consider things such as index funds to invest. Also, you must be realistic about investment. And you must be aware that if there is a downturn in the market, you could lose your money.

With retirement savings, it is not so much about how much you put aside, but the amount of time you give it to mature. You get to enjoy compound interest thus giving you better Returns.

Types of Retirement Plans Available

There are various retirement plans you can consider, and these include –

  • The employer funds pensions or defined benefits, and you will get a monthly benefit until you retire. You will find fewer companies offering them nowadays because many employers are not willing to promise a hefty payment to their employees once they retire.
  • Cash balance plans where you get a promise of a certain amount depending on your contribution and the returns from the investments. Many companies are now gravitating to cash balance as opposed to pensions
  • Profit-sharing plans where the employer agrees to share the company products as an incentive for productivity. It leaves you at the mercy of your employer to decide what they feel you need to get
  • Defined contribution plans like the 401k, where both you and your employer will contribute.
  • Federal Government plans are for civilian employees and include social Security, thrift savings plan, or a basic defined benefit plan
  • The simplified employee pension plan is for small business owners. Only the employer can make contributions, and it is set up like a trust fund.
  • Solo 401k plan is for the business owner and the spouse
  • Nonqualified deferred is mostly for top Executives and may have the option of employer only, or employee and employer contributions
  • Cash value insurance plan will give a death benefit while allowing you to save for your retirement needs

A Combination of Option 1 And 2

Financial experts say that if you can afford it, you should find a compromise between saving for retirement and making mortgage payments. The right adviser will tell you where to find the compromise and how best to benefit from it. You can, for example, take a mortgage and try to make small additional payments as you go down the years. The benefit is you reduce the interest, thus allowing you to focus on the principal amount at a later stage.

If the market fluctuations are unpredictable, and there is a downward spiral, you can consider down-paying, so that you do not lose your investment funds.

Резултат слика за paying off mortgage in retirement infographic

A Better Choice: Paying Off a Mortgage or Saving for Retirement

There is no simple answer to the mortgage versus savings for retirement conundrum. It comes down to the individuals and the circumstances within which you find yourself. You may want to talk to a financial expert to give you advice and help you plan for your future. One thing you should not do, however, is to sacrifice your long-term savings by focusing too much on paying off your mortgage. You must also have a plan of action which will guide your activities in paying off the debt you have currently. Some experts say that you should not bother with saving for retirement until you finish all your debts. Once you get rid of the Debt burden, you can then direct as much as 15% to your retirement savings.

You may, for example, want to think about other retirement options to pay off your mortgage. If you are struggling with the high-interest rates, do away with it by, for example, looking at refinancing options.

Before choosing whether to pay off your mortgage or save for retirement, you must put your finances in order. Ensure that you have an emergency fund that can take care of your expenses for up to six months. If your employer has the 401k savings option, try and match your employer’s contributions so that you save as much as possible.

The other option is to rank your debts according to the amount. You can then pay off the smaller ones first and then go onto the larger ones. Consider paying the minimum amount for any debt you have. You get to remain current with the payments. Any other money you get after paying off such debts will go into making extra payments and the high-interest debts until you finish the payments. You will eliminate your debts faster, but it will largely depend on how much you can put aside for the extra payments.

You must also think about the pros and cons, or why the option is the best, to make sure that you cover all your bases.

Final Thoughts

The decision on whether to save retirement or pay off your mortgage first is an individual choice. Very wealthy people who have a set future will not worry too much about retirement. They have a source of income for the rest of their lives can live their lives free of worry about the days they stop working.

The average American, on the other hand, has to struggle with debt payment as a daily requirement of life. You may find that what you have leftover after taking care of all your financial obligations does not allow you to put aside anything for retirement. However, financial experts will say that you should try very much and put aside something every month for your later years. What you need to do is get into the habit of saving. Other experts also say that you must take care of your debt obligations before you save for your retirement. Only you can decide what you need to do, but you must look at the pros and cons of each side of the coin. You must also do your research and take advantage of the best plans available.

The best thing you can do is find a compromise between the two options and work towards realizing your goals. The ability to pay off your mortgage, while putting aside something for retirement is something many people can only dream about.


Mortgage Broker Fees Explained: Home Loans 101

Shopping around for a house mortgage is an important step of the process. However, many people don’t have time to contact different lenders and look at all the little details so they choose to go with a mortgage broker instead. Before you decide to go with a mortgage broker, you should understand how mortgage broker fees work so you can make sure it’s the right decision for you.

What Does a Mortgage Broker Do?

When you go to the bank to get a loan, the bank offers you only the loans they carry. Since it’s only one institution, the loan options can be limited and may not suit your needs.

If you go to a mortgage broker, he or she can have a variety of loan options from various lenders. It’s the mortgage broker’s job to find the best mortgage rate tailored to you and this is why they charge mortgage broker fees. For example, if you need to get a house but can’t afford more than 5% down payment then your mortgage broker should approach lenders that have those terms.

How Do Mortgage Broker Fees Work?

Unlike a loan offer, a mortgage broker doesn’t work for a bank. Brokers are independent and must have a license. They will charge a fee for their service, which can be paid by you as the borrower or the lender. The fee will usually be a small percentage of the loan, which varies between 1% and 2%. If you are paying these fees, the dollar amount can be paid upfront or added into the loan. Mortgage brokers will need to disclose fees upfront and only charge what is disclosed. Every fee should be itemized and the mortgage broker will need to tell you exactly why each fee is being charged. Fee costs will vary depending on the number and size of the loans.

The Dodd-Frank Act put in new regulations on how mortgage brokers get paid and how the fees work. Prior to this, lenders could compensate brokers if the brokers could get their clients to agree to high interest rate loans and then sign off on the fees. There were few laws in place in order to protect clients. As a result of this, there is more protection for clients. Now mortgage brokers can’t charge hidden fees, can’t tie the pay to your loans’ interest rate, can’t get paid for steering you in the direction of an affiliated business, and can’t be paid by both you and the lender. Unless you pay the cost upfront, mortgage brokers will generally not receive payment unless there is a closed deal.

Lender Paid Compensation

With a lender paid fee, a broker will connect a homebuyer to a mortgage lender and then the lender will pay the broker. Brokers can receive different compensation from different lenders. For a homebuyer, this structure can work out because they don’t have to pay for the broker when the deal is closed. However, you will still cover the commission indirectly, usually by paying a higher interest rate.

A drawback to this payment structure is that brokers can be biased by the compensation given by different lenders. A responsible broker should be offering the most affordable option, regardless of the commission they are getting paid. Unfortunately, not all brokers can be so honest and if the broker is going to prioritize their own profit then the homebuyer can end up paying a lot more than what is needed.

Borrower Paid Compensation

When a mortgage broker users a borrower paid fee schedule, the homebuyer pays for the broker’s services when they close on the loan. This payment will come in the form of an origination fee. The fee will vary based on your state of residence, your broker, the complexity and size of the loan, the housing market, fee caps, and more. Borrower compensation also isn’t always in the form of origination fees and can just be another miscellaneous fee. Even if the borrower is paying this fee, it’s still advantageous to borrowers since it will remove the broker’s temptation to choose a more expensive lender who gives them higher compensation. The broker is more motivated to choose an affordable lender since they will be paid the same.

Which Mortgage Broker Fee Structure Is Right for You?

Regardless of the compensation structure, you will end up paying the broker’s fees in one way or another. The right fee structure for you will depend on whether you want to make the payment over the course of the loan or upfront. If you are able to have the money upfront then a borrower paid compensation option can be your best bet. This way you can avoid inflating your loan payments. You also won’t have to worry about whether or not the recommendations were just influenced by the broker’s desire for higher compensation.

Fee schedules can vary by different brokers. If you want to get a good deal, you will have to comparison shop. Be sure to look at the whole picture, including other lender fees and the interest rate for the best overall value. Brokers will not usually have a salary or any base pay. Brokers get paid by commission. If you see a broker advertising a no-cost loan, this should make you suspicious. Ask how a broker is being compensated if they aren’t disclosing that information to you.

Do You Need a Mortgage Broker?

Since there are mortgage broker fees, you may be wondering if you actually need the services of a mortgage broker. There are pros and cons to using their services but it’s helpful to know that mortgages can be complicated and it can be difficult to actually crunch all the numbers yourself.

Pros of Working with a Mortgage Broker

Резултат слика за mortgage broker fees infographic

Brokers will give you all of your options. Many homebuyers just choose a loan from the bank where they already have a checking account but it helps to know all your loan options from a variety of lenders. Shopping around is the key to finding the best deal and a broker can deliver a more ideal loan than one bank ever could. Brokers are able to save you time. While it’s possible to compare all your options on your own, it can be time-consuming.

Brokers can handle all the negotiations with the lenders and many have relationships with certain banks that allow you to speed up the process. If you are in a rush then using a broker can help. Brokers will give you specialized attention and factor in your specific characteristics to match your application to the best lender for your circumstances. This can be helpful if you are an abnormal candidate but it can also help even if you do have good credit.

Cons of Working with a Mortgage Broker

No matter where you get the loan from, there will be fees. These can be in the form of appraisal fees, origination fees, and application fees. Some mortgage brokers can get some of the fees waived. However, brokers still charge their own mortgage broker fees. Mortgage broker fees are usually paid by you but in some cases can be paid by the lender. Whether it is added to the loan or paid upfront, it can still be a chunk of change. You need to know what your mortgage broker is charging you and weigh it against the benefits. Mortgage brokers are independent from banks but they can still have biases. Some brokers can have a long history of dealing with a certain lender and favor them. In some cases, the lender may pay the mortgage broker fee, which sounds great unless the loan has undesirable terms.

Different Mortgage Broker Fees

Mortgage brokers may have different ways of naming their fees. Here are some that you may find.

Loan Origination Fees

Some brokers will add their fees to the origination fees by the lender. If this is the case, you want to ask for a breakdown. Loan origination fees will be a percentage of the loan.

Yield Spread Premium

This is a fee that lenders pay brokers for getting the client to agree on an interest that is higher than the going market rate. If you are going to choose this deal with your broker then check to see if the interest rate is competitive. If the broker is not charging you this fee then someone is paying this fee.

Upfront Fees

This fee will usually be charged if a borrower is looking for a jumbo loan. They are typically charged as a flat fee for setting up the loan. If the broker isn’t charging this fee then check to make sure the broker isn’t getting a yield spread premium from the lender.

Administration Fees

In some cases, a mortgage broker will add administrative fees to the standard fee. If you see these fees on your agreement, ask to have them be waived. Unless you are at high risk due to your credit profile, you can usually negotiate your way out of these types of fees.

How Do You Find a Mortgage Broker?

Mortgage broker fees are important but it should only be one factor when you are shopping for a broker.

The best way to find a broker is by asking relatives and friends for referrals and make sure they have actually used the mortgage broker. Learn what you can about the services, communication style, and approach to clients to make sure it’s the right fit for you. You can also ask your real estate agent. Some real estate companies do have an in-house mortgage broker as part of their service but you don’t need to be obligated to go with that individual or company.

There are some different questions you can ask. Ask how the application process works. One of the main reasons for using a broker is to make the home buying process easier. The best mortgage brokers can provide information on the application process, such as a comprehensive list of documents you need to complete an application. The broker should take into account your personal circumstances and ask questions about your situation so they can find the best solution. Find out how long the entire process will take. You want to know what to expect and if the broker can guarantee on-time closings. Check the track record of the broker. Does he or she have a good reputation? How long has he or she been in business? Read reviews and ask for references.

Mistakes You Should Avoid When Buying a House

There are a lot of mortgage tips out there but there are some mistakes you should avoid when getting a mortgage, whether you are a first-time buyer or looking to refinance.

Not Getting Pre-Approved

Not shopping for a mortgage until you have already found your dream home can be a big mistake since you can be too late. Many sellers require a pre-approval notice be given with an offer and the process can take days or even weeks. It’s best to apply for pre-approval before you look at any available properties. When you do this extra step to prepare your finances, you are ready to submit an offer quickly when you find the perfect home.

Borrowing Your Max Amount

The pre-approval can help you figure out how much you can afford to spend. Many buyers believe that the amount on their pre-approval letter means that is the amount they can spend. Instead, it’s better to think of the loan amounts as a range. You may have the ability to borrow that much but you don’t necessarily want to go that far. It’s best to do some budgeting on your own. Look at your income and expenses in order to figure out how much you would be comfortable putting toward a mortgage each month. Use that number and play around with a mortgage calculator until you land on the price of how much home you should really be buying.

Overestimating Abilities

Buyers may be willing to take on remodeling and repairs in order to get a lower sale price. The repairs may require more money, time, and skills than buyers have. If you are looking at a fixer-upper property that will need a lot of care, make sure that you are honest about your abilities. Do you have previous remodeling experiences? Can you afford professional help? What will happen if there are unforeseen expenses and problems?

Not Reading the Fine Print

You should be reading everything you are signing in full. This is easier said than done so it’s easy to skip a section. This mistake can cost you a lot. When you are negotiating an offer, you need to know exactly what you are agreeing to before you sign. The mortgage broker fees are just one of the things you need to understand when getting a mortgage.

Not Getting an Inspection

Inspections are there for the buyer’s benefit and skipping inspections may not give you more bargaining power. If you choose to waive any inspections then you agree to take financial responsibility for any repairs that can come up, even if the problems pre-date your ownership. Weigh your options carefully if you decide to not get an inspection.

Forgetting about the Closing Costs

Budgeting to get a home isn’t just about what you can afford as the monthly mortgage payment and down payment. You also need to consider closing costs. Closings costs are paid at settlement and include the fees needed for the transaction. The exact amount you will pay at closing will depend on your property but it usually between 2% and 5% of the purchase price.

What Is the Mortgage Process?

Where to shop for a mortgage and understanding mortgage broker fees are just two parts of the mortgage process.

Finding a Lender

The first step is to find a lender. This is where you may want to work with a mortgage broker and you need to understand mortgage broker fees. Finding the right mortgage and mortgage provider is essential if you want to have a positive home buying experience. Be sure to shop your options first.

In this step, Loanry can help you. Allow us to present you with mortgage loan options. Put your information down below and see if you qualify for a loan with any of the lenders:


Getting pre-approved and starting to look for a home

The second step is getting pre-approved. This will make it easier to move quickly on a home you want and can give you an idea of how much home you can afford.

The next step is the fun part where you get to look at homes. Have a list to help you keep focused on your must-haves so you don’t get overwhelmed.

Making an Offer

Once you have found a home you want, you then will need to make an offer. The right real estate agent is important. Offers aren’t just about the asking price. You may have the seller agree to leave the washer or dryer and other appliances instead of a lower asking price.

Applying for the mortgage

Next, you will be doing all the paperwork. If they accept your offer, you need to complete the application and submit documentation about your financial history and income. An underwriter, whose job it is to verify everything needed for the loan, then evaluates these documents. The lender requirements will need to be met and there are also government guidelines that need to be followed. During this whole process, you could be asked questions about your financial past. Be sure to answer as completely and honestly as possible, even though it is a tedious process.

Closing

Then you will come to the closing. The good news is you are almost done with all the paperwork and then the last stage involves legal details and small print. You will need to pay attention to everything that is happening during the closing process and all the documents that you are signing.

Your Guide to Understanding the Mortgage Process

Conclusion

A mortgage broker can help you when it comes to where to shop for a mortgage and finding the best deal for your situation. Brokers do have mortgage broker fees that you will need to understand when it comes to getting the deal. Some of the time the lender pays mortgage broker fees and other times borrower pays these fees. There are advantages and disadvantages of working with a mortgage broker that you will want to weigh out. You also want to make sure you are getting a broker that will give you the best deal and really help you with your application process. Whether or not you work with a broker, be sure to avoid some home buying mistakes and know the mortgage process in order to make sure it all goes smoothly.

What Credit Score Does a Mortgage Lender Require?

When thinking about purchasing a new house or refinancing your mortgage, you need to think about the credit score required by mortgage lender. The credit score required by mortgage lender can make or break your loan approval and will carry the most weight when it comes to determining your mortgage rate.

Lenders will rely on credit scores to measure your payment default risk. Other actors include down payment, assets, income, and property tax. Credit scores aren’t a perfect indicator but these scores do tell lenders a lot about you. The higher your score, the lower the interest rate, and the more loan options you will have.

What Credit Score Do Mortgage Lenders Use?

Mortgage lenders will use FICO scores, just like many other finance companies, as the credit score required by mortgage lender. While they use the FICO score, lenders will pull one version from each of the three major credit bureaus (TransUnion, Experian, and Equifax), in order to create what is called a tri-merge credit report. The mid score is used for qualifying and mortgage rates.

For example, if the credit scores from the report are 650, 680, and 720, then the lender would use the 680 score. If you only have two scores then the lender will only use the lower of the two for qualification purposes. If you only have one score then the lender will use that one. However, not all lenders will approve a borrower with just a single credit score since this means there is limited credit history.

FICO Score Factors

Why Know Your Credit Score before Applying for a Mortgage?

You should check your credit score three to six months before you apply for a mortgage to know exactly where you stand. During this time, you can also keep an eye on daily mortgage rates. This can give you time to fix any problems or errors that may come up and get to the minimum credit score required by mortgage lender.

It also helps to know the credit score range so you know what you need to do before you apply for a mortgage.

  • A 740 or higher is considered a great score
  • A score between 680 and 739 is an average score
  • Between 620 and 679 is a fair score
  • A score between 580 and 619 is a poor score
  • Anything below a 579 is considered a bad credit score

What Does a Low Credit Score Mean?

The credit score required by mortgage lender differs. However, a lower score can mean a few things. A lower credit score will mean higher mortgage rates. This means you will pay more each month. This is because of risk. The lower your credit score, then statistics say the higher chance you will default on the mortgage. Many lenders may not want your business if your credit score is too low. If you do get approved with a sub-par credit score then you will have a much higher mortgage payment and could be throwing money out the window.

FHA loans require a score as low as 500 but you will need to have at least a 10% down payment when your score is that low. You are able to qualify with just a 5.4% down payment with a 580 score or higher.

If you are choosing to go with a conventional mortgage than a score below 620 is typically considered subprime. This means that you can have a harder time qualifying for a mortgage and if you do, you will have higher rates.

What Is a Subprime Mortgage?

Subprime mortgages will refer to loans extended to a borrower with a higher risk than those that are referred to as prime. A prime borrower has little risk. A subprime borrower may have a lower credit score, a lower income, or higher debt load. There are two instances where a borrower may be considered subprime. This can be poor credit or no established credit.

Subprime Mortgage Loans For Bad Credit Borrowers

What Credit Score Required by Mortgage Lender Is Considered Good?

A credit score of 720 used to be good enough for a house mortgage but now a score between 740 and 760 is needed in order to secure the lowest pricing and to ensure that you qualify for the home loans that are available. FICO scores can go as high as 850 so a score within this range isn’t considered perfect. Even though credit scoring is just one of the factors that are used to judge borrowing capacity, it can impact how much you borrow and the max loan-to-value ratio. Therefore, good credit can get you better mortgage terms and conditions. 

How Your Credit Score Affects Your Interest Rates

Even if you have the credit score required by mortgage lender and can get approved for a mortgage, you need to know how your credit score will affect your interest rate.

A score of 579 or lower will mean that you will likely have an interest rate that is 2% higher than the current lowest rate. If your score is poor, you can expect an interest rate that is 1% higher than the lowest rate available. If you have a fair credit score then your interest is likely only going to be slightly affected and rates could be about .5% higher than the lowest rates. For the average credit score, rates won’t be affected too much. If you have a great credit score then you will be offered the best rates a mortgage company has to offer.

One of the easiest ways to see how your credit score affects your interest rates is with a real-world example. Take the average sale price of $366,000 with 20% down and a 30-year mortgage. There are two interest rates to use for this example: 5.76% and 4.17%. When your interest rate is 5.76%, your monthly payment will be $1,711 and the amount you will pay over the life of the loan is $615,802. If your interest rate is 4.17% then your monthly payment drops to $1,427 with a savings of $284 a month. The amount you pay over the life of the loan drops to $513,619 and you save $102,183 over the same time period. As you can see, there is a huge difference and there are plenty of things you can do with those savings.

Different Types of Loans

The credit score required by the mortgage lender will depend on different types of loans.

FHA Loan

For many first time homebuyers, they think they can’t qualify for a mortgage. But you may be able to qualify for a FHA loan. The Federal Housing Administration backs these loans. While the FHA doesn’t issue the loans, they will insure them in case the borrower defaults on the loan. This will reduce the risk of the lender, allowing them to reduce the credit score needed. You only need a 580 score or higher. A score lower may be possible but it can be unlikely.

VA Loans

VA loans are for veterans. Like FHA loans, the VA doesn’t act as a lender but will guarantee the loans. The biggest benefit of a VA loan is that there isn’t a down payment required and PMI is not required. Since there isn’t a down payment requirement and no minimum credit score needed, it offers many veterans with poor credit the opportunity to be a homeowner.

USDA Loans

These loans typically require a credit score of 620 or higher. These loans have some other basic eligibility requirements, which cover income, property usage, and home location.

Conventional Loans

This is a common loan type and you have probably heard of this before. A conventional loan is any mortgage that is offered by a private lender and isn’t guaranteed by a government agency. These are the most popular type of mortgage used today. Many conventional loan lenders will require a minimum score of 620 to 640. A higher credit score is even better. Conventional loans do usually require a higher down payment than most loans that are government-backed. Many lenders will require at least 5% down.

What Else Does Your Credit Score Affect?

Your credit score directly affects your loan eligibility but it can also affect the size of your down payment. With an FHA loan, you may be able to qualify for a lower down payment if your credit score is higher. If your score falls between 500 and 579 then you may have to put up 10% as long as you can even find a lender that approves your application. If your credit score affects your interest rate then you can expect a higher monthly payment. A higher monthly payment means that you may not have enough money in your budget every month in order to spend on other things. If you don’t have 20% down and your lender requires private mortgage insurance then your PMI premium can also be affected by your credit score. Lower scores will pay more in premiums.

Other Factors Lenders Consider

The credit score required by the mortgage lender is just one of the factors that lenders consider when applying for a residential mortgageThere are other factors to consider when taking out a mortgage.

Loan-to-Value Ratio

This ratio is about the relationship between the value of the property and the size of the loan against it. If you want to purchase a home that costs $240,000 and it appraises at $300,000 then the loan-to-value ratio would be 80%. A larger down payment can result in a lower LTV ratio. The lower the ratio, the better when looking at it from a lender’s perspective.

Down Payment Size

Many loans require a down payment. If you are able to put up a larger down payment, this may mean a lower interest rate.

Debt-to-Income Ratio

This ratio measure how much of your income is being used to pay debts each month. Lenders will calculate this by adding up monthly debt payments and then divide these payments by your total gross monthly income. The more money you have to pay out each month means that you may be more likely to default on the mortgage.

Employment History and Income

In order to qualify for a house mortgage, you need to have a stable income and steady job and you need to be able to provide proof. Lenders will review pay stubs, bank statements, and tax returns in order to assess your level of risk. Your current income will also be a key factor in determining how much home you can afford.

How to Improve Your Credit Score

Since you need a good credit score required by the mortgage lender, it is important to know ways to improve your score.

When you are beginning the process of improving your credit score, remember that it’s a marathon and not a sprint. However, improving your credit score will be worth the effort.

Make Sure Reports Are Accurate

The first step in improving your credit score is checking credit reports. Everyone will have three credit reports or one from each major credit bureau. Credit reports can have mistakes on them. Since the score is based on data that is in the report, it’s important that the reports have accurate data. You are entitled to a free copy once a year of all three of your credit reports so make sure that you use them. Is your personal information accurate? Are all your accounts being reported? Or, are there missing or late payments reported that you remember making? Are there applications or accounts you don’t recognize? Is there information from decades ago that still shows on the report? A credit report from one agency may have an error but another report might not so it helps to go through each one with a highlighter.

Figure Out What You Need to Improve

Just having an error on your credit report may not necessarily mean you have bad credit. So you will need to figure out what you can improve. If your credit report is accurate and you have a bad score then it’s important to understand why. There are different factors that impact your score. This includes payment history, amount of debt, the age of accounts, account mix, and history of credit.

Create a Plan

Once you know what you have done wrong, you can work on a plan to improve the score. In order to begin improving the score, aim to keep any credit card balances on the low end, along with other types of revolving credit you have. Start paying down debt instead of just moving it around. However, don’t close any unused credit cards as a quick fix. Don’t open new accounts or apply for a loan to increase the available credit you already have.

Fix Late Payments

Closing an account won’t make any late payments disappear. You have to get yourself back on track. Be sure to set up payment due date alerts so you can get organized. Check your payment due dates in relation to your paycheck schedule and change any that need it.

Build a Strong Credit Age

If you have a shorter credit history then there isn’t much that you can do to improve your credit. You can piggyback on a family member’s credit card if they have a good, long history of on-time payments. Be added as an authorized user in order to do this. However, if you don’t have anyone then wait it out and don’t close any of your accounts. A good age of credit history is five years or more.

Clear up Any Collections

Start paying off your debt instead of just transferring it to a new account. Contact the debt collector that is listed on the credit report to see if they would be willing to stop reporting the debt in exchange for any full payment.

Get a Credit Card

If you haven’t had a credit card before then your score can be suffering because of the account mix factor. When you do have a credit card, make sure your payments are on time. Late payments will likely hurt you more than anything. If you already have a good credit score and are looking to improve it then there could be many credit card options out there for you. If you have a poor credit, you can get a secured card. A secured credit card is one where you make a deposit into a checking account that will secure the line of credit you get.

Limit Any Credit Applications

The 10% discount that you get when you sign up for a store credit card may seem worth it but your credit score can take a hit when you apply, whether or not you get approved. A hard inquiry can impact your score for a full year, although it will start improving quickly. While the hit is small, if you apply for a few credit cards or are on the edge of two credit score tiers then it can be a lot more significant. Keep in mind that soft inquiries won’t affect your credit score. They are done when a lender is looking to give you a higher credit line or someone is checking your report as part of a background check. A soft inquiry can happen without your permission so it doesn’t affect your credit.

Work on Fixing Your Credit Utilization Ratio

If your credit card balance is 30% or more of your credit limit each month then your score is suffering. This affects your score even if you are paying off balances each month by your payment due date. It’s the statement balance that is being reported to the credit bureaus. So keep an eye out for balances and consider pre-paying a balance if you know you will be close to that mark. There is a difference between the credit utilization ratio and debt-to-income ratio. The credit utilization ratio is the thing that affects your credit score. The debt-to-income ratio can be used by lenders and can be a factor when deciding whether or not you get a loan or credit.

Conclusion

The credit score required by mortgage lender will vary depending on the lender and the type of loan you are applying for. Lenders use FICO credit scores, so it’s a good idea to check your score before you apply for a mortgage. This will help you know where you stand on the scale. Your credit score affects a lot of different things as it relates to mortgages. If you know the credit score required by a mortgage lender, you can start doing different things to improve your credit score so you can meet those minimums.

Shopping for mortgage loans for your credit score will save you a lot of time, effort, and inquiries on your credit report. Make sure you only take into account reputable lenders. You can enter your information below and you may get an offer from a lender whose criteria you meet: