Whether it is art, that classic car or real estate, the answer is always “whatever someone is willing to pay for it.” With more demand than supply in the housing market, prices have risen and will likely continue to rise for the remainder the year.
When you’re shopping for a home, don’t be surprised when your Realtor and Loan Officer tell you that you’ll need to pay for an appraisal. Not to be confused with a professional home inspection, an appraisal determines the value of a home, while an inspection determines the condition of the home. When you’re shopping for a [...]
Potential Homeowners looking to finance a home purchase will want to be sure to ask the following questions.
Here are some questions to help you make a decision about when to refinance.
Another way many folks get themselves into financial turmoil is by acquiring many credit cards over time. Try to just stick with one or two credit cards and work on making those payments as stringently as you can for as long as you can maintain. Banks will appreciate your effort to pay on time—they will also appreciate your modesty in regards to “collecting” cards.
Preserving your credit score as much as you can is something that will make all your effort worth it when it comes to buying a home. You will thank yourself if you take the time and elbow grease to prepare for this endeavor. When you open more than one or two credit cards, they can weigh down your credit score. In fact, some institutions do not fully “delete” you from their system even when you’ve paid out. It’s advisable to contact your lenders once you’ve paid in full and do what it takes to remove any negatives from your credit score.
You can set yourself up for success when buying a home by staying on top of your taxes. Ignoring your obligations is never a smart thing to do, no matter who you are. If you are looking to buy a home in the near future, it is imperative you pay what you owe in taxes each year, as required. Those of us who want to invest in our futures and family need pay extra attention to keeping up with taxes.
Overall, lenders will appreciate any effort you put into having a good payment record and a solid credit score. Buying and owning a home is one of the most rewarding ventures you’ll ever enjoy. Preparing as best as you can will ensure your family’s financial security.
Pay a lower rate in the beginning. Initially, you can probably expect to pay a lower interest rate with an ARM. If you plan to sell your home within a few years, this can save you a considerable amount of money in the long run. For example, an ARM might make sense for those who frequently relocate due to a job or military service.
Hang on to your money. Less interest means more money in your pocket. This creates an opportunity to build a savings or invest the money.
The possibility of rates dipping even lower. With an ARM, your rate is often tied to the market rate. If rates drop, you can end up saving even more money over time.
Caps provide extra reassurance. There are two types of interest rate caps. Periodic (or annual) caps limit interest rate increases between adjustment periods, which generally occur in a 12-month cycle. Lifetime caps limit rate increases over the loan's lifetime.
Despite their benefits, however, adjustable mortgage rates are not without drawbacks. For every advantage, there is a specific disadvantage.
Interest rates are vulnerable to market fluctuations. Many home buyers are turned off by the fact that ARM interest rates are directly tied to market ups and down. When rates are low, the only place they can go is up. This makes adjustable rate mortgages unpredictable.
Big first rate increases. Many ARMs do not include caps for initial annual increases. This first jump often results in a big hike in interest.
Rates eventually exceed those of fixed rate mortgages. If you plan to stay in your home for more than five years, you will end up paying more in the long run with an ARM than you would with a fixed rate mortgage.
Higher refinancing costs. If you start out with an ARM and wish to refinance later, it will probably cost you quite a bit. In the past, many homeowners unable to afford their ARMs ended up losing their homes to foreclosure because they could not come up with the money necessary to refinance.
The difficulty of setting a regular household budget. If you like to keep your financial ducks in a row, an ARM may not be for you. Because rates are subject to change, your mortgage payment can rise and fall. This makes it tough to maintain control over your household expenses and regular bills.
Before you buy, it is best to speak with an experienced mortgage broker. An expert can help you weigh the pros and cons of an ARM versus those of a fixed rate.
Doing the Math
As an example, assume a borrower is looking to finance $160,000. To get an accurate calculation, you must also factor in the borrower's tax rate and the loan's interest rate. In this case, taxes are 25 percent and interest rates are at five percent for a 30-year loan, and four-and-a-half percent for a 15-year loan.
With a 30-year mortgage, the borrower will end up paying $859 per month plus taxes and insurance. Over the loan's lifetime, the borrower will also pay interest in the amount of $149,211, bringing the total price of the home to $309,211.
With a 15-year mortgage, the borrower's mortgage payments will be $1,224 per month, which is $365 higher than the 30-year mortgage. On the other hand, the borrower will pay just $60,318 in interest over the life of the loan, bringing the total price to $220,318. This is a savings of $88,893.
Other Things to Consider
Although the math is fairly straightforward, life is not always so clear cut. Before you finance what will likely be the most significant purchase of your life, consider several other important factors.
Can You Afford a Higher Payment?
If your budget is always stretched thin, a 15-year mortgage might not be for you. It is better to pay more interest over time than to fall behind on your mortgage. Aside from the obvious foreclosure risks, missing too many payments can wreak havoc on your personal credit. If you dislike the thought of paying more interest, you can pay down your loan faster by making double payments whenever you have the funds.
What Are Your Long-Term Investment Goals?
Do not sacrifice your other assets and investments just to pay off your home more quickly. Before you pick one term over the other, think hard about the state of your investments. If you are nearing retirement age, financial planning experts like Kerry Hannon of Forbes.com recommend taking less risks with your money. If a 15-year mortgage will stretch your budget too thin, you won't have anything left over to contribute to your retirement funds. If retirement is a long way off, you can probably afford to take on a bit more risk. In that case, a 15-year mortgage makes more sense.
Because buying a home involves such a significant amount of money, it is always wise to consult with a knowledgeable mortgage lending expert before making a final decision. Your lender can advise you of the pros and cons of the various mortgage options so you feel confident about your choice.
If you have a more generous budget, consider updating appliances. Buyers often look for energy efficient appliances that will save them money on their utility bills.
After the kitchen, a bathroom is the next space most likely to show signs of age. Outdated décor and tired fixtures are very obvious in relatively small spaces. Most home owners have enough do-it-yourself skills to upgrade lighting fixtures and swap out toilet sets. If you are feeling a little more ambitious, you can also install new sinks and flooring. Peel and stick vinyl tiles are an easy, affordable option.
Modern life requires a great deal of storage space. In past generations, families made do with tiny closets and perhaps a small storage shed. If you have an older home, make the most of your storage space by installing organization systems in closets and pantries.
Although it is under your feet, flooring is just as important as any other home décor. If you have neutral carpeting, it is probably a good idea to keep it, as many buyers prefer to select carpeting that suits their personal style. A thorough professional cleaning might be all you need to make your floors more appealing. If you have hardwood, you can have it stripped and refinished for a fairly reasonable fee.
Add to Your Home's Curb Appeal
First impressions are just as important in real estate as they are in relationships. Your home's exterior is the first thing potential buyers see. A simple coat of paint or some new landscaping can drastically improve a property's market value.
Clean Up the Clutter
Decluttering is probably the easiest and least expensive way to boost your home's value. Although you might adore your extensive collection of porcelain souvenirs, too many decorations can detract from a home's special features. If potential buyers can't picture themselves living in a space, they are less likely to make an offer.
Get a Home Inspection
Most mortgage lenders require buyers to obtain a home inspection before they will approve a loan. By hiring a qualified inspector to conduct your own pre-sale inspection, you can identify problematic areas ahead of time. A professional inspector can point out issues with a home's roof, electrical systems, water drainage, and other critical areas. Addressing issues early on can bump up your home's price.
The FHA Does Not Actually Loan Money
Many people mistakenly believe that the FHA is the entity that actually extends credit for home financing. On the contrary, the FHA merely guarantees the loan, which reduces the risk to lenders, such as banks, credit unions, and mortgage companies. If the home owner defaults on the loan, the federal government will pay the lender the entire remaining balance. Because the loan is backed by the federal government, banks can relax their lending requirements, which opens the door for more consumers to obtain financing.
Who Is Eligible?
You do not need perfect credit or a large down payment to qualify for an FHA loan. Although the FHA does not require a minimum credit score, lenders are permitted to impose their own requirements over FHA guidelines. To qualify for an FHA loan, borrowers must maintain a credit score of at least 580 if they plan on putting down 3.5 percent toward the purchase of their home.
Buyers must also possess a certain debt-to-income ratio, which demonstrates to lenders that they make enough money to cover the cost of their mortgage payment each month. The down payment does not have to come from the borrowers' personal savings, although many people tap into savings accounts to finance their home. If you don't have enough money saved up, you can borrow from a family member or take out a loan against your retirement savings. It is also common for young couples to use wedding money or a gift from parents to put toward a down payment.
Borrowers who wish to finance home purchases greater than $625,000 are required to make a down payment of at least 10 percent.
Do I Have to Be a First-time Buyer?
This is one of the most common misconceptions about FHA loans. Whether you are buying your very first home or your fourth, you can apply for an FHA loan. These loans are, however, restricted to consumers who plan to use their house as a single-family home. FHA loans are not available for investment properties.
What Are FHA Mortgage Insurance Premiums?
Under FHA guidelines, borrowers who own less than 20 percent equity in their home must pay mortgage insurance. With an FHA loan, there are actually two types of mortgage insurance: up front mortgage insurance premiums (UPMIP) and annual mortgage insurance premiums – typically abbreviated simply as MIP. The "up front" insurance is a percentage of the total home purchase, which is rolled into the cost of the home and added to the buyer's monthly payments. Similarly, the MIP payments are spread out over the life of the loan and paid in monthly installments. Together, these two insurance premiums can tack on quite a bit of money to the home buyer's monthly mortgage payments. Because the majority of home buyers put down far less than 20 percent toward the purchase of their home, most people end up paying mortgage insurance for several years. Once you own at least 20 percent of your home, you can cancel the policy.