As a homeowner, you may fully understand the impact of your mortgage debt on your budget and financial situation. The monthly mortgage payment is often by far the most expensive debt that you are responsible for each month. However, with this payment, you enjoy the mortgage interest tax deduction as well as the ability to accrue more equity in your with regular principal debt reduction. Refinancing a home mortgage will essentially change all aspects of your home mortgage. While there are strategic benefits associated with refinancing a home mortgage payment, it should be done with care because of how significant the impact can be on your current and future finances. These are some of the key instances when refinancing a mortgage makes sense.
When You Have Substantial Equity in the Home
There are two main types of mortgage refinances. One is a rate and term refinance. With this type of refinance, you generally obtain no cash out, and this means that your total home debt changes minimally. You may roll closing costs into the new loan, so you may see only a slight increase in your mortgage debt. The other type of refinance is a cash out refinance. With this type of loan, you may pull equity out of your home up to the lending limits available. In most cases, the combined first and second lien debt cannot exceed approximately 70 to 80 percent of the home’s value. Each loan program is different, so you will need to compare the options to determine which one may provide you with ideal loan terms. With this loan type, your home debt increases. The most common reasons for pulling equity out of a home are to consolidate debts and to improve the home. When you consolidate debts, you may enjoy lower monthly payments overall, and you may also make the interest on your consolidated debts tax deductible. When you improve your home, you may be re-establishing more equity in the home through an improvement in property value.
When You Need to Lower Your Rate
Another reason why you may consider refinancing your loan is to lower the rate. This is often done with both cash out and rate and term refinances. Lowering your mortgage interest rate can result in lower monthly debt payments, and this is particularly true with a rate and term refinance. Lowering the rate can, however, impact your related mortgage interest deduction. If you are dependent on this deduction for your tax liability, you may lower your interest rate with care. Keep in mind that lowering your rate can help you to accrue equity faster.
When You Need to Adjust Your Payment
Almost all refinances will adjust your payment upward or downward. You should always receive several loan quotes and plug the numbers into your budget to ensure that the new payment is affordable. Some people are able to save several hundred dollars or more on their payment by refinancing. For example, if you do a rate and term refinance with a lower interest rate, you may be taking out a new loan with a lower starting principal balance, and you may also enjoy the added impact of less interest. On the other hand, if you adjust your mortgage to a shorter term and the principal balance stays roughly the same, the payments may actually increase.
When You Want to Alter the Loan Term
Many homeowners decide after a few years of ownership that they want to escalate their payments and pay the mortgage off more quickly. For example, you may have received a raise or two over the years, and you may now be able to afford more substantial debt payments. Perhaps you want to retire sooner than you initially planned, and you want to establish the house debt on a faster repayment plan. Refinancing is a great way to set up the debt on a shorter term. Switching to a shorter term means equity will build more quickly.
When You Do Not Plan to Move for a Few Years
Refinancing is not a free process. Many of the same closing costs that you incurred when you originally purchased the home will be in place when you refinance. This includes an appraisal, a title commitment, lender’s fees and more. Generally, you do not want to incur these costs without enjoying significant financial benefit in some way. With this in mind, it is typically not advisable to refinance unless you plan to hold onto the property for several more years.
As you can see, there are many reasons why you may wish to refinance your home loan. Each homeowner has a unique financial situation to consider, and because of this, each will need to review his or her own circumstances to determine if refinancing makes sense. By fully analyzing the pros and cons associated with refinancing, you will be able to determine if now is the right time for you to refinance your mortgage.Read More
Getting A Home Loan If You Don’t Have Good Credit
It is possible to get home loans without a good credit score. However, there are some steps that you must take to make sure you can get a loan. Most banks are hesitant to lend to someone who has a bad credit score. In some cases, you could pay a higher interest rate than clients with a better credit score. One option if you have a bad credit score is to go through the FHA. The FHA (federal housing administration) doesn’t charge excessive interest rates to people with low credit scores.
The Federal Housing Administration:
The Federal Housing Administration offers loans through two organizations. These two organizations are Fannie Mae and Freddie Mac. They both offer conventional mortgages, and it’s possible to get them with a credit score that is below 620. There still are some requirements that you’ll need to meet to get a loan from them if you have bad credit.
The down payment required for federal housing administration loans is relatively low. In fact, it’s possible to pay a down payment as low as 3.5% of the cost of the home. If it’s possible, it is better to pay a larger down payment though. With a larger down payment, you’ll be able to pay off the mortgage more quickly.
Furthermore, the federal housing administration makes it easy to apply for loans. There isn’t much paperwork involved and an approval can be given within 24 hours.
If You Are A Veteran, There Could Be Additional Options:
You may be able to get a VA loan if you have been in the military. In order to get a loan from the VA, it’s typically required to have a credit score of 620. If your “bad credit” is caused by simply lacking a credit history, you can still get a VA loan. The interest rates on VA loans also tend to be low. Furthermore, VA loans make it possible for many people to borrow more money than they would be able to otherwise.
What Types Of Loans Should You Avoid?
Some loans that are offered to people with bad credit have an adjustable rate. This means that a low interest rate is offered at first. However, the interest rate doesn’t remain low. Instead, the interest rate begins to rise during the time that you have the loan. This means that the monthly payments continue to go up. In some cases, the monthly payments can rise to the point that the payments become unaffordable. This can result in foreclosure. Therefore, it is essential to read the fine print of any loan that you apply for.
Tips That Can Increase Your Chances Of Getting A Loan If You Have Bad Credit:
- Always Pay Your Rent On Time:
If all of your rent payments were on time during the past year, your chances of getting a mortgage will be higher. It’s also quite easy to show lenders that this was the case.
- Some Factors Can Help To Mitigate The Effects Of A Bad Credit Score:
If you lost a job in the past and ended up in debt, this scenario is often looked upon differently than the mismanagement of your money. If your financial problems are caused by past job loss, show proof of this to potential lenders. This may make them more likely to consider you.
- Online Research Can Be Effective But Be Cautious:
There are plenty of places where you can search for lenders online. This can help you to find a loan that offers low interest rate and is available to people with bad credit. However, it’s always important to read reviews when doing online research. This can ensure that the lender you choose is legitimate.
It’s a question almost as famous as the one about the chicken crossing the road. Should you rent or buy a house? The unequivocal answer is, yes, you should rent or buy a house because otherwise you’ll be living in your parents’ basement or homeless, and no one wants that for you. The truth is that’s not a question so easily answered, not that it requires complex math and reading of tea leaves but rather that it depends so much on your personal situation and state of mind. In some locations renting might make more sense. Elsewhere, buying might be preferable. Here are some considerations.
But First Let’s Talk About the American Dream
In the mid-19th century, the American Dream was to own 40 acres and a mule. One hundred years later it was a house with a white picket fence and two car garage. Today’s reality, according to Bloomberg, is that homeownership in America, either by choice or limited finances, is at its lowest rate in half a century. The percentage of the population that owns a home has historically run between 62 and 70 percent. In mid-2016 that number stood at 62.9 percent. Starting with the Great Recession in 2008, the winds of change have, indeed, been blowing.
Good Reasons to Rent
Fewer Upfront Costs
If you have limited funds, buying a house might be out of the question because it’s much more expensive to get started. In a rental situation, you can often acquire an apartment lease for nothing more than one month’s rent up front and maybe a security deposit or application fee. While there are a few upside down areas around the country where monthly rent exceeds what you’d pay for a mortgage, that doesn’t change the fact that you’d still need about 20 percent of the purchase price for a downpayment. On a $100,000 house, that’s twenty grand just to get the process started.
The reality in today’s economy is that there are lots of people unsure if they’ll have a job tomorrow. For them, it’s probably better to save money where possible, including on housing, and concentrate on building up an emergency cash reserve to guard against personal financial disasters like medical bills or broken cars.
If, for any reason, you suspect that you’ll be moving again within a few years, buying a home, even if you have the money, might be more trouble than it’s worth. The reality is that it’s a hassle to buy and sell a house. If you plan to start a family, are going through a divorce, or have moved for a temporary job assignment, you’re probably better off to rent until you’re more settled.
Good Reasons to Buy
You Have the Moolah
We mentioned earlier that you would need to put down about 20 percent of a new home’s purchase price in cash. What we didn’t go into detail about is that’s just the start of the upfront costs associated with buying a house. You can also expect to lay out money for property taxes, mortgage insurance, home inspection, appraisal, closing costs, realtor fees, title expenses, and a variety of fees as a long as your arm.
You’re Committed for at Least 5 Years
For buying a house to make financial sense, you need to plan to stay in it at least five years. That’s how long most experts say it takes to recover the initial money dump and for natural appreciation to allow you to sell at a profit. This doesn’t mean you’re guaranteed a profit, but real estate has shown to be a fairly stable appreciating asset over time.
You Like the Numbers
There are plenty of great financial reasons to own a home if you’re in the position to do so. For one, mortgage rates since the Great Recession have remained low. VERY low. The average rate on a 30-year-fixed loan is still under 4 percent. That’s cheap money. Don’t forget you can deduct the mortgage interest and property taxes you pay from what you owe Uncle Sam at tax time. Last, but certainly not least, buying a home is an investment because you build equity in it with every mortgage payment you make. For some, that’s worth the price of admission alone.
The Bottom Line
Regardless of whether you decide to rent or buy, keep in mind that housing expenses should not exceed 25 percent of your take home pay. Go higher than that and you might find yourself financially strapped in other areas. A final thought. If you can afford it and owning a home has always been your dream, don’t be afraid to pull the trigger just because only 63 percent of your fellow Americans are doing the same thing. That’s still a solid majority. But if you’re not ready to put down roots, there should be no pressure to do so. Do what’s best for you.Read More
Forecasting mortgage interest rates for 2017 is like trying to predict the outcome of a contest between an irresistible force and an immovable object. In this case, the irresistible force is the global economy, and the immovable object is the Fed, but in the current environment the Fed has an 800-pound gorilla that they can unleash if they choose.
Interest rates are low relative to our current position in the business cycle, but the fitful character of the recovery has made the Fed reluctant to increase them. They expected three hikes last year but ended up with one in December. Most forecasters expect this dynamic to continue through 2017, with a weak economy hampering the Fed from implementing desired rate hikes, and so predict only a small increase in rates before the end of the year.
This outlook factors in the impact of Brexit and President Trump’s disregard for free trade policies, which both bode ill for global growth in 2017. It also includes the fact that the current recovery has not fueled strong wage growth or led to an increase in first-time home buyers.
More first-time home buyers coming into the market would push rates upward, but this seems unlikely in 2017. Although recent unemployment numbers are encouraging, the labor participation rate remains low, suggesting that new jobs created by the recovery would lure workers from the sidelines before positively impacting wages. Many first-time buyers would also enter the market through a sub-prime mortgage, but that sector continues to suffer from the hangover of the pre-2008 party.
There seems little on the opposite side of the equation to argue that an increase in rates is likely, other than the Fed’s announced preference for higher rates, presumably to have the ability to lower them in the next economic downturn. This assessment ignores the potential impact of both inflation and economic growth.
Inflation was named the Fed’s arch-enemy by Paul Volker and it has never left that position, even though it has only been a theoretical threat throughout the current expansion. However, President Trump’s robust spending plan to rebuild American infrastructure could put enough money into the economy to stimulate inflation. Fed announcements have certainly documented a watchful eye on inflation, and an increase would likely cause the Fed to increase rates quickly, even at the risk of harming a fragile economy.
Of course, President Trump has promised that the economy will no longer be fragile. He and Speaker of the House Paul Ryan are such strong proponents of Regan-era economic policies it is possible they have matching tattoos of the Laffer Curve. A significant reduction in income tax rates could produce robust economic growth. A similar curve theoretically exists in regards to federal regulations, so that a simplification of the tax code in the context of lower rates could have a more pronounced effect. President Trump has already made headway in keeping a campaign promise to reduce federal regulations, and a change in the health care environment may accelerate these results.
If these policies have their intended impact, even without a dilatory awakening of inflation, the Fed would have greater latitude to raise rates. They could do so, without the perceived negative impact of announcing a change by unleashing their 800-pound gorilla, namely the bloated balance sheet inherited from the financial crisis.
This balance sheet includes $1.8 trillion in mortgage-backed securities. The Fed has trimmed its holdings through natural attrition as the underlying mortgages were refinanced due to its own low-interest rate policies. This has created a temporary floor on mortgage rates. However, if the Fed began to sell these instruments prior to maturity it would cause rates to rise.
This would meet the Fed’s policy goals of higher rates, and would fit within a narrative of reducing the size of the Federal government and undoing the legacy of the previous administration. Any need to lower rates in the future could then be met through another episode of quantitative easing rather than rate announcements.
These factors argue in favor of higher mortgage rates in 2017, particularly in the latter part of the year when fiscal and regulatory reform have begun to impact the economy. Forecasts of rates for 30-year fixed mortgages at 4.6 percent may be as much as 75 basis points too low if the Trump Administration implements policies that are successful in stimulating economic growth.Read More
A jumbo loan is not a term most people are familiar with. Yet there are times when a jumbo loan is the perfect fit for your home financing needs.
Before you decide whether a jumbo loan is the right loan vehicle, it is helpful to be aware of how jumbo loan terms and requirements can differ from one county to the next. It is equally important to understand how to prepare yourself for success when seeking a jumbo loan approval.
In this article, learn what you need to know about jumbo loans to take the next step and seek this type of home financing.
Jumbo Loan: Defined
A jumbo loan today is also called a jumbo mortgage and a non-conforming mortgage. The name is fairly self-descriptive. Basically, a jumbo loan exists to finance homes priced above what the conventional mortgage loan limit (Freddie Mac and Fannie Mae) is designed to accommodate.
For comparison purposes, let’s take a look at conventional mortgage loan limits nationwide. According to Bankrate, the United States is divided into 3,143 counties. 2,916 counties limit conventional mortgage loans to $417,000 or less.
108 additional counties have a limit of $625,500. 115 counties have limits that fall between $417,000 and $625,500. And four counties (all in Hawaii) have limits ranging from $657,800 to $721,050.
Here, you can see that the conventional mortgage loan limit relates to average housing costs in different counties. Some counties have higher housing costs than other counties, and in the former category, loan limits are also higher.
Where Jumbo Loans Enter In
But what if you wanted to purchase a home that is priced higher than the conventional loan limit in your county? You can’t get sufficient loan financing via government-financed loan entities (90 percent of all home loans are issued this way).
So what you need is a jumbo mortgage. In most cases, if you are looking at a home priced above $417,000, you are looking at what is considered a “luxury” or “high end” property. Often these property types are priced at $500,000+, plus you may need financing to cover closing costs, renovations, or homeowners insurance premiums.
Here, a jumbo mortgage is definitely the financing vehicle you need. Now you just have to qualify for it!
How to Qualify for a Jumbo Loan
While these requirements may vary somewhat based on the sticker price of the home you wish to purchase, this list from Investopedia outlines general starting requirements to qualify for jumbo mortgage financing:
- Excellent credit. A score of 700+ is typically required just to get your foot in the door. If you can score at 720 or higher, you have a better shot at being approved.
- Proof of income consistency. Tax returns, W-2 forms, or similar evidence plus proof of sufficient liquid assets (6 to 12 months’ worth of mortgage payments) will generally be requested up front during the application process.
- Debt to income ratio (DTI). Your lender will look closely at your debt to income ratio to ensure the addition of a jumbo mortgage will not predispose you towards default. For conventional mortgages, generally the most desirable DTI is 43 percent or lower. You may find your DTI needs to be lower still to qualify for the jumbo version.
- Down payment. In the case of down payments, you will find standards to be more relaxed. Some lenders may be willing to accept a down payment as low as 10 percent when granting a jumbo mortgage, while others may still require 20 percent or higher.
Interest Rates for Jumbo Loans
Jumbo loans generally offer comparable interest rates with conventional mortgage loans. However, where issues can begin to arise is when that time comes each year to file your annual income tax returns.
The IRS only allows homeowners to deduct interest paid on mortgage loans up to a certain amount, which currently is set at $1.1 million per person.
If you are purchasing a home with a partner and the two of you are not married, you may each be able to write off $1.1 million worth of interest paid on your jumbo mortgage. If you are married and purchasing a home using a jumbo mortgage, however, you will be capped at $1.1 million.
In all things tax related, it is always best to consult with your certified public accountant for the latest IRS regulations and requirements.
When shopping for a jumbo loan, it is advisable to seek at least three to five quotes to compare before making your choice. As well, look closely at the interest advantages of fixed versus adjustable rate mortgages to see where you will pay the least interest over the course of your jumbo mortgage loan.Read More
Are you considering buying a home but not sure what type of loan you need? The good news is that there are more options available than one might think. In addition to the conventional loans found at banks and lending institutions, there are also other loans available to eligible homebuyers. You may find that you’re eligible for one of these uniquely helpful mortgage loans. Learn the basics on three home loans that are beneficial to many potential homeowners: FHA, VA, and USDA.
FHA loans are mortgage loans that are offered at banks but insured through the Federal Housing Administration (FHA). One unique feature of the FHA loan is the mortgage insurance requirement. Mortgage insurance guarantees the lender that the FHA will cover the balance of the loan in case the homeowner defaults on the loan.
Because FHA loans are covered by mortgage insurance, the ender is able to offer lower interest rates, making them more attractive to potential homebuyers. Mortgage insurance also allows FHA loans to have more flexible eligibility requirements than conventional mortgage loans. Several eligibility requirements make FHA loans a popular choice among homebuyers.
There are also certain factors consistent with FHA loans.
- Credit scores – While credit scores must be at least 500 for a borrower, homebuyers may be eligible for an FHA loan with much lower scores than are allowable with other types of mortgage loans.
- Down payment – Homebuyers can get an FHA loan with a down payment as low as 3.5 percent. They can also use cash gifts or grants toward the down payment requirement.
- Closing costs – The FHA allows the closing costs to be paid by the lender, seller, or the builder without it affecting the interest rates.
- FHA-approved lenders – A homebuyer can only get an FHA loan through a lender that is approved by the FHA.
- Mortgage insurance premiums – The borrower must pay two types of mortgage insurance premiums. The first type, which is 1.75 percent of the loan amount, must be paid at the time of the loan. The second type, which is based on loan amount, loan term, and loan-to-value ratio, is paid in monthly installments until the loan is paid.
- Additional loan for cash – The FHA offers the 203(k) loan, which allows the borrower to get additional cash for remodeling or making home repairs. The amount is based on the value of the home after the repairs.
- Financial assistance – FHA offers financial assistance programs to borrowers who may be having difficulties making payments.
VA loans, also referred to as the GI Bill, are mortgage loans that are available to U.S. veterans, spouses of U.S. veterans, and similar service members such as National Guard and Reserves. The U.S. Department of Veterans Affairs guarantees these loans as long as they are offered through VA-approved lenders. The following factors are consistent with VA loans.
- VA eligibility – To be eligible for a VA loan, the applicant must by a veteran who served on active duty for at least 181 continuous days during peacetime or 90 days during wartime. Those in National Guards and Reserves must be members for at least six years.
- Interest rates – VA loans typically have the lowest interest rates of all loan types.
- Mortgage insurance – Unlike FHA loans, VA loans do not require the purchase of mortgage insurance.
- Down payment – Homebuyers using VA loans are generally not required to have a down payment.
- Loan guarantees – The VA guarantees a maximum amount of $424,100. Homebuyers can generally borrow an amount equal to the property value plus funding costs.
- Personal property – The VA loan must be for personal property of the veteran or his or her spouse.
- Lenders – Homebuyers must get their money from banks, mortgage companies, savings and loans, or credit unions that are approved through the VA Lender Appraisal Processing Program.
- Credit – Although the VA does not have specific credit score requirements, the lenders typically require a good credit history for the previous 12 months. Bankruptcies, foreclosures or collections can affect eligibility.
The USDA loan is a mortgage loan offered to property owners in rural areas through the United States Department of Agriculture. In addition to being available in all 50 states, the USDA loan is also offered in Puerto Rico, Virgin Islands, and the Western Pacific.
The USDA loan offers two types of home loans. One is aimed at low-income households and the second type, the 502-Guaranteed Program, is aimed at those with an average income. Borrowers can use funding to purchase and prepare sites, relocate a home, renovate and repair a home, or build a home from scratch. Any homes purchased with a USDA loan must meet HUD requirements. Below are requirements and designations found with USDA loans.
- Loan term – USDA loans are set for thirty years.
- Interest rates – Interest rates on USDA are consistent with other government-backed mortgage loans.
- Monthly payments – Monthly payments on USDA loans are lower than conventional mortgage loans through banks and lenders.
- Fees – USDA loans have an annual fee that’s .35 percent of the loan amount. This is paid in monthly installments.
- Credit – Applicants must have middle credit scores of at least 620 to be eligible for a USDA loan.
- Debt-to-Income (DTI) – Applicants must have a maximum DTI of 34 percent/46 percent. However, the USDA prefers around 39 percent/41 percent.
- Location – The home must be in an area that’s eligible through the USDA program.