If You Want to Be a Homeowner, Go to College and Get a Degree

Posted on June 21st, 2021

Assuming you want to become a homeowner, it’s probably best to go to college, even if you have to take out costly student loans in the process.

You may have read articles over the past several years that talk about snowballing student loan debt and the inability to afford a mortgage as a result.

While this might be true in some cases, it turns out you’re still more likely to buy a home if you obtain at least a bachelor’s degree.

The Benefits Outweigh the Costs

student loan homeowners

A commentary (since removed) from mortgage financier Fannie Mae revealed that those who go to college are more likely to become homeowners than those who simply graduate from high school.

The most probable homeowners are those with a college education and no student loans, with a likelihood of homeownership that is 43% higher than high school graduates without student loans.

Meanwhile, student loan holders with bachelor’s degrees are still 27% more likely to become homeowners relative to those debt-free high school graduates.

There is a catch though – if you don’t actually complete your bachelor’s degree and simply wind up with student loans, you’re actually worse off than those who simply called it quits after high school.

This last group is 32% less likely to own a home than a debt-free high school graduate. They’re also more likely to be behind on student loan payments, which isn’t very surprising.

The takeaway here is that it pays to go to college, even if it costs and arm and a leg.

The idea being that college grads get paid more and are eventually able to qualify for mortgages to purchase homes.

Don’t Be Discouraged If You Have Student Loans and Need a Mortgage

As noted, student loan debt has increased substantially in recent years and its effects may not yet be evident in the homeownership numbers.

Additionally, the majority of those surveyed by Fannie Mae had student loan debt that accounted for 10% or less of their monthly income. Others might not be so lucky.

If you have outstanding student loans, you can still get approved for a mortgage. It just might affect how much you can afford because it will be factored into your DTI ratio.

Many student loans are deferred to help recent graduates get up and running before they are gainfully employed. However, mortgage lenders know these individuals will eventually have to repay their loans.

As a result, lenders must still account for the student loan repayment when qualifying you for a mortgage to ensure your home loan is actually affordable.

Of course, it depends on the type of mortgage you apply for.

Fannie Mae Student Loan Guidelines

When it comes to Fannie Mae (conforming loans), if the student loan payment amount is listed on the credit report, it can be used for qualifying purposes. End of story.

If the payment isn’t listed on the credit report, or shows $0, or is deferred, different rules apply.

For those in an income-driven payment plan, and documentation shows the actual monthly payment is zero, the lender may qualify the borrower with a $0 payment.

For student loans that are deferred or in forbearance, a payment equal to 1% of the outstanding balance can be used to determine the monthly payment.

So if there’s a $25,000 student loan, $250 is added to your monthly liabilities to calculate your DTI, even if it’s lower than the actual fully-amortizing payment.

Lenders are also able to calculate a payment that will fully amortize the loan based on the documented loan repayment terms, which may result in a lower monthly liability.

While this may seem harsh, it used to be 2%, or $500 in our example above.

But Fannie determined that actual monthly payments were generally less than 2% of the total balance.

The old policy also required lenders to use the greater of the actual monthly payment or 1% of the balance, unless the payment was fully-amortized and not subject to any future adjustments. But this made no sense either.

Freddie Mac Student Loan Rules

If the student loan(s) is in repayment, deferment, or forbearance, Freddie Mac breaks it down into two options.

For loans with a monthly payment greater than zero, the actual payment amount found on the credit report or other file documentation can be used.

If the monthly payment amount reported on the credit report is $0, the lender must use 0.5% of the outstanding loan balance as the payment for qualifying purposes.

So using our same example from above, a $125 payment would be factored into your DTI to determine if you qualify.

This could make it easier to qualify for a Freddie Mac-backed mortgage versus a Fannie Mae loan.

Additionally, it might be possible to exclude the student loan payment from your DTI ratio if there are 10 or less monthly payments remaining.

FHA Student Loan Guidelines

HUD just announced new changes on June 18th, 2021 that may make it easier to qualify for an FHA loan if you have student loan debt.

Regardless of payment status, when the payment is above $0 the lender must use the payment amount reported on the credit report or the actual documented payment.

If the payment amount listed is zero, 0.5% of the outstanding loan balance is used to calculate the payment, similar to Freddie Mac.

So again, it’d be a payment of $125 using our example of $25,000 in debt.

Prior to this change, the FHA used 1% of the balance, so the $25,000 loan would have resulted in a $250 per month liability for your DTI ratio.

Obviously this can have a huge effect on what you can afford.  And apparently more than 80% of FHA-insured mortgages are for first-time home buyers.

Additionally, the FHA estimates that nearly half (45%) of these borrowers have student loan debt, with people of color the most impacted.

This explains the easing of the rule, and pales in comparison to the old requirement of 2% of the outstanding balance if no payment was found!

VA Student Loan Rules

When it comes to VA loans, student loan payments can be ignored if payments won’t begin for more than 12 months from loan closing.

This can be a huge advantage if your liabilities would push you over the allowable max DTI ratio.

But if student loan repayment has started or is scheduled to begin within 12 months from the date of the VA loan closing, the lender must count the actual or anticipated monthly payment.

They use a formula that calculates each loan at a rate of five percent of the outstanding balance divided by 12 (months).

So using our $25,000 example, it’d be $104.17. However, if a higher payment amount is listed on the credit report, such as $150, it must be used.

If the payment listed on the credit report is lower than the threshold payment calculation above, a statement from the student loan servicer that reflects the actual payment may be permitted.

USDA Student Loan Guidelines

For USDA loans, the actual student loan payment can be used if it’s fixed (and has a fixed term) without future payment adjustments.

If no payment is reported or it is deferred, 0.5% of the loan balance is used unless there is evidence that it’s a fixed payment.

Using our $25,000 example, it’d be $125, similar to the other loan types listed above.

If you’re close to maxing out with regard to DTI, an experienced mortgage broker or lender might be able to get you approved using a mortgage that has a more forgiving policy with regard to student loan debt.

Don’t give up until you consider several scenarios and exhaust all your options.

But also make sure you factor in any student loan debt early on in the mortgage discovery process so you don’t overlook this key qualification aspect.

A good rule of thumb might be to calculate your DTI using 1% of your student loan balance for the monthly payment, even if it turns out you can use a lower documented payment. This way you’ll still qualify in the worst-case scenario.

Also watch out for lender overlays that call for higher minimum monthly payments than the guidelines actually require.

Source: thetruthaboutmortgage.com

3 Reasons Why Putting Less Down Can Raise Your Mortgage Payment

Posted on June 17th, 2021

If you’re in the market to purchase a new home, perhaps because mortgage rates are low and you’re an extremely brave individual, you may be thinking low down payment all the way.

Heck, for many borrowers these days, a low down payment is the only way to play, with home prices surging to new all-time highs in record fashion.

In case you hadn’t heard, zero down mortgages are mostly extinct, other than VA loans and USDA loans.

But there are still other low-down payment options, such as the ever-popular FHA loan, which only requires 3.5% down, along with conventional mortgage options that call for just 3% down.

While these low-down payment mortgages can make homeownership more accessible, your mortgage payment will rise, which obviously erodes your affordability.

There are actually three ways a low down payment can increase your mortgage payment, which could even put your loan in jeopardy.

Let’s explore these issues to determine if putting down more money might be the better move.

Less Money Down = Larger Loan Amount

  • The most obvious downside to a lower down payment is a larger loan amount
  • The less you put down, the more you’ll need to borrow from the bank
  • This means paying more each month in the way of principal and interest
  • Pay extra attention to loan amount if it’s close to the conforming limit

First and foremost, if you put less money down on your home purchase, you’ll wind up with a larger mortgage. There’s really no way around it.

For example, if a home is listed for $500,000 and you put down 20%, your loan amount would be $400,000.

If you’re only able to come in with 3%, your loan amount is a significantly higher $485,000.

Simply put, a larger mortgage balance means a higher monthly mortgage payment. So the less you put down upfront, the more you pay each month.

That bigger loan amount also means you’ll pay a lot more interest over the life of the loan.

So this hurts two-fold. Both month-to-month in terms of potential payment stress, and over time via a lot more interest paid.

The upside might be less money trapped in your home, which could be put to use elsewhere for a higher return.

[What mortgage amount can I qualify for?]

More Risk Means a Higher Interest Rate to Compensate

  • Another issue with putting less down is a potentially higher interest rate
  • Lenders charge pricing adjustments that increase as the LTV ratio goes up
  • This could raise your mortgage rate a little or a lot depending on all the factors in play
  • Those with low credit scores could be impacted even more when coming in with a low down payment

Before you go with a low down payment mortgage, consider the mortgage rate impact of doing so.

If you decide to put down just 3-5%, your loan-to-value ratio (LTV) will be pretty high, and that means more risk to the issuing bank or lender.

To compensate for this increased default risk, you will likely be offered a higher interest rate on your mortgage.

Those rock-bottom rates you see advertised often require a 20%+ down payment, similar to how they assume you have an excellent credit score.

So if you don’t put down 20%, and instead opt for 5% or less, you’ll probably be stuck with an inferior mortgage rate.

How much worse will depend on the full loan scenario, including your FICO score, property type, occupancy, and so on.

For example, if the 30-year fixed is averaging 3% for top-tier loan scenarios, you might be offered an interest rate of 3.75%.

That higher interest rate will result in an increased mortgage payment, and more money paid out to the bank via interest.

This additional cost can add up significantly over the life of the loan as well.

And remember, it’s a one-two punch when you consider the larger loan amount coupled with the higher mortgage rate.

To add insult to injury, it could also affect outright eligibility in some cases if you’re debt-to-income ratio (DTI) is near the cutoff.

In other words, you may need to put down more to even get approved for a mortgage to begin with.

Mortgage Insurance Might Be Required

  • One final problem with low-down payment mortgages is the mortgage insurance requirement
  • This applies to most home loans where the down payment is less than 20%
  • This can greatly increase your overall housing payment as well depending on all risk factors
  • And is yet another added cost that can be avoided if you simply put down more money at closing

Finally, if you put down less than 20%, and don’t go with a piggyback second mortgage, you’ll likely be subject to paying mortgage insurance.

This applies to loans backed by Fannie Mae and Freddie Mac, which are the most common.

For FHA loans, this MIP requirement is unavoidable, even if you happen to come in with 20%+.

And note that this insurance protects lenders (not you) from the higher risk of default associated with a low-down payment mortgage.

It will be added on top of your monthly mortgage payment, so you’ll owe even more each month until you pay your loan balance down to 80% LTV (and ask that the insurance be removed).

The good news is it can be avoided by simply coming in with a 20% down payment and not taking out an FHA loan.

Let’s look at an example to put it all in perspective:

Home purchase price: $400,000

20% down: $80,000
$320,000 loan amount @3.75% (30-year fixed)
Monthly mortgage payment: $1481.97
Total interest paid: $213,509.20

5% down: $20,000
$380,000 loan amount @4.375% (30-year fixed)
Monthly mortgage payment: $1897.28
Total interest paid: $303,020.80

Assuming you went with a 30-year fixed mortgage, the 5% down option would result in a monthly mortgage payment more than $400 higher than the 20% down option (before mortgage insurance is even factored in).

Note the higher mortgage rate on the low-down payment loan.

And you’d pay nearly $90,000 more in interest over the life of the loan.

In other words, down payment matters. A lot.

Bonus: The amount you put down can also keep your loan out of the jumbo mortgage realm, which will often make it even cheaper mortgage rate-wise.

So consider that as well if you happen to be close to the conforming loan limit.

And as always, be sure to do plenty of homework and mortgage rate shopping.

If you take the time to gather multiple quotes and consider all scenarios, you may be able to get the best of both worlds, a low-down payment mortgage with a low interest rate.

Learn more by reading my primer on mortgage down payments.

Source: thetruthaboutmortgage.com

Why It Could Be a Great Summer for Mortgage Rates

It’s looking like it could be a really good summer for mortgage rates, after a very uncertain spring made it appear as if the best we had seen was gone forever.

Now this isn’t to say that mortgage rates will hit all-time record lows again, but the fact that they’re slipping back to those levels, even as inflation concerns grow, is a positive.

Mortgage Rates Ebb and Flow Throughout the Year

  • The 30-year fixed has fallen back below 3% and is currently averaging 2.96% per Freddie Mac
  • It was as high as 3.18% in early April when it appeared the best levels were a thing of the past
  • Now we seem to be enjoying a low-rate trend that could get even better as summer progresses
  • There are often periods of strength and weakness with mortgage rates (aka opportunities for borrowers)

If you watch mortgage rates for long enough, you’ll notice that they ebb and flow, just like stocks or other investments.

This is because the mortgage-backed securities (MBS) that drive these prices are actual investments for the traders who purchase and sell them.

There are periods of strength and weakness, which often last weeks or even months, where it seems they either have nowhere to go but up or down.

It can be emotional and psychological, similar to the stock market where traders rush to close their positions after a bad week , only to panic and buy back in as prices rise again.

When we compare that to mortgage rates, it could be the homeowner who locks their rate after a period of rising rates, only to find that the trend reverses.

Of course, it’s very difficult to time the market, so I don’t fault anyone trying to determine that right time to lock it in, or alternatively float for an even better rate.

The point is that often when all hope is lost, there’s a reversal, which seems to come out of nowhere.

That appears to be the case over the past couple weeks, with the 30-year fixed now averaging 2.96% per Freddie Mac, basically its lowest point since February.

If all goes well, we could see it fall back to those early 2021 levels, where it was as low as 2.65% in January.

Mortgage Lenders Are Going to Get Aggressive as Business Slows

  • The traditional home buying season is now coming to a close as summer begins
  • For mortgage lenders coming off record quarters this means severely reduced loan volume
  • Fewer home purchase loans and dwindling refinances could force them to lower their interest rates to drum up business
  • This means they’ll pass more savings onto consumers while reducing their own margins

While the technicals underpinning mortgage rates have been improving for a few weeks now (10-year bond yield back at its lowest point since March), another seasonal dynamic might be working in our favor.

As we approach summer, everyone slows down, gets fatigued, and goes on vacation. Most businesses don’t look forward to this time of year unless they’re in the tourism industry.

This is especially true of real estate and mortgage, as both tend to peak in spring during the traditional home buying season, before grinding to a halt in the warmer months.

Knowing this, mortgage lenders will be forced to get more competitive if they want to keep volume up, an especially difficult task given their record business in the first quarter of 2021.

Ultimately, it’s going to be very tricky for them to keep up the momentum, especially since most homeowners already refinanced, and home sales are being held back by a major lack of inventory.

So what is a lender to do? Well, lower their mortgage rates obviously!

They’ve got profit margins they can play with, and instead of making a ton of money per loan, they can sacrifice some to keep the business coming in.

This might even be more pronounced than usual because lenders have been busier than ever, which allowed them to keep rates artificially inflated.

We Are Entering the Historically Better Time of Year for Mortgage Rates

  • Mortgage rates tend to be highest in April when consumer demand for home loans is strongest
  • Lenders are often busiest during this time of year and charge a premium as a result
  • Once their business slows down they’re essentially forced to become more competitive
  • Rates usually drop as summer progresses and are cheapest in winter

After some research, I discovered that mortgage rates are highest in April, then tend to cruise lower throughout the second half of the year.

While they seem to be cheapest in winter, specifically the month of December, they get pretty low around late summer and early fall too.

This is yet another reason why the best time to buy a home is in August/September.

Anyway, if this trend holds in 2021, we could see the 30-year fixed fall back to those record low levels seen in January.

As noted, we might see even more improvement than in other years due to a major slowdown in business, which should force lenders to compete more aggressively than usual.

For example, United Wholesale Mortgage, the nation’s largest wholesale mortgage lender, recently announced a price match through the month of June.

This tells me they’re doing their best to pick up the expected slack and other lenders will likely follow suit, including the retail banks.

For borrowers, this is great news. If you missed your chance to refinance, or were on the fence about it, you might get a good opportunity this summer or later in the year.

And those who have yet to purchase a home might be able to offset the sky-high price tag with an ultra-low mortgage rate again.

Of course, low rates might be a bit of a double-edged sword for home buyers as they just stoke the flames of an already red-hot housing market.

Read more: 2021 Mortgage Rate Predictions

(photo: Michael Frascella)

Source: thetruthaboutmortgage.com

Thursday Is the Best Day to List Your House

Not that it matters much these days, but apparently Thursday is the best day to list your home for sale.

This is the latest advice from iBuyer and home valuation company Zillow, which noted that 21% of properties are listed on that particular day of the week.

What’s So Great About a Thursday Anyway?

  • Roughly 21% of properties are listed for sale on Thursdays (the most of any other day)
  • The share of homes listed on Thursdays is as high as a third in some markets nationwide (Portland, Seattle)
  • Properties listed on a Thursday typically go pending faster than homes listed on any other day of the week
  • And homes listed on Thursdays are more likely to sell above their asking price

I like Thursdays – ever since college it’s been the unofficial start of the weekend, something I didn’t grasp until, well, college.

Fridays are generally the lighter work days (or school days), with most of the heavy lifting completed earlier in the week.

The other special thing about a Thursday, at least when it comes to real estate, is that open houses and private showings often take place on the weekend, when folks aren’t working.

So if a property is listed just a day or two before, there’s a good chance it’ll be seen very shortly after, as opposed to sitting on the market all week before the prospective buyers start showing up.

Conversely, if you put your property on the market on say a Sunday, for some bizarre reason, it might not get a showing until five or six days later.

By then, it could be seen as a stale listing, at least in today’s lightning fast housing market.

And considering the average time a property spent on the market in April was exactly one week (yes, seven days), a day or two more can be meaningful.

Per Zillow, 21% of homes are listed on a Thursday, with a rate around 33% in Portland and Seattle.

Meanwhile, just 13% of homes are listed on a weekend, which is lower than any individual weekday.

[The Best Time to Buy a Home Is in August and September]

Also List Your Home Before Labor Day If Possible

  • Listing during the week of April 22nd resulted in the best chance of selling above asking
  • The worst weeks of the year to sell recently were in mid- and late October
  • Homes sold the slowest during the week ending September 1st (Labor Day 2019)
  • Early-mid fall is the time when homes tend to sit on the market the longest

While day of the week can play a role, especially if the housing market isn’t bananas, the time of year is probably a lot more important.

Generally speaking, Labor Day tends to represent the end to the traditional home shopping season, which begins in spring.

This is mostly a weather-driven phenomenon, largely because it’s difficult to sell a home during a cold winter when it’s snowing outside.

But in areas of the country where the temperature is nice year-round, it may not be much of a factor.

For example, you might be able to get away with listing a home in Southern California or Florida at any time throughout the year without a noticeable difference in demand and/or sales price.

However, to maximize your chances of a high selling price, list on a Thursday before Labor Day.

As you can see from the chart below, properties sold faster and were more likely to go above list in April for the metro of Los Angeles, based on pre-pandemic 2019 data.

time of year home sale

The same held true in many other markets, while late summer and fall tend to perform the worst.

This is typically because families are settled for the school year, assuming they have children, and other prospective buyers might be traveling and/or beginning to hunker down for winter.

In fact, Zillow even refers to that time of year as the “fall stall,” when days on market rise and asking prices fall.

Forget About Dates, Focus on the Details

  • Dates can certainly play a role in real estate but aren’t the be all, end all
  • Sellers can see success any time of year if they do their homework and use a good agent
  • A home sale can also fall flat during peak selling months if the listing and/or agent is poor
  • And it may not always be convenient to sell at a certain time of year anyway

While “best” days and months of the year are interesting and fun to read about it, perhaps more important is listing your property with care.

That means selecting a competent real estate agent, making necessary repairs ahead of time, staging your property using the latest trends, and even ordering a home inspection for yourself before a buyer does.

All of these things can easily eclipse the value of a specific list date, whether it’s a Monday or a Thursday, an April or an October.

If you don’t take the time to do your homework, clean and stage your home, address any red flags, and so on, it might not matter what day or month you list.

Sure, Sunday is the worst day to list for a quick sale, with properties remaining on the market a full eight days longer than homes listed on a Thursday.

And homes listed on a Sunday (and Saturday for that matter) were less likely to sell above ask. Fortunately, this issue can probably be easily remedied, but not the time of year if life has its say.

Ultimately, understand that there are better and worse times to sell a home throughout the year depending on your individual market, but if you can’t time it perfectly, at least get all the other details right.

Read more: 12 Home Selling Tips for 2021

Source: thetruthaboutmortgage.com

Do Mortgage Payments Go Down Over Time?

Mortgage Q&A: “Do mortgage payments decrease?”

While everyone always seems to focus on mortgage payments adjusting higher, there are a number of reasons why a mortgage payment may actually decrease over time.

No really, there are, so let’s take a look at how this pleasant surprise could happen, shall we…

Mortgage Payments Can Decrease on ARMs

  • While perhaps not as common as the payment going up
  • Monthly payments can drop if you have an adjustable-rate mortgage
  • But you’ll need the associated mortgage index to decline in the process
  • And your lender may have a built-in floor, so basically don’t bank on it

If you have an adjustable-rate mortgage, there’s a possibility the interest rate can adjust both up or down over time, though the chances of it going down are typically a lot lower.

Still, it is viable to take out an ARM, hold it throughout its initial fixed-rate period, then wind up with a lower rate once it becomes adjustable.

You may remember that now infamous interest rate reset chart, the one that showed billions of dollars worth of mortgages resetting from their fixed-rate period into their scary adjustable period.

Well, the damage wasn’t nearly as bad as it originally appeared because many of the mortgage indexes tied to those loans plummeted to rock-bottom levels and/or all-time lows.

As a result, some homeowners who stayed in those seemingly “exploding ARMs” may have actually seen their mortgage payments fall. And the savings could have been significant.

For example, say you took out a 5/1 ARM set at 3.5% for the first 60 months with a margin of 2.25% tied to the 12-month LIBOR.

After five years, the rate may have fallen to around 2.5% with the LIBOR index down to just 0.25%.

Yes, it is possible to lower your mortgage rate without refinancing!

When You Pay Down Your Mortgage (But It’s Not Automatic)

  • Payments can also go down if you make a large lump sum payment
  • But you’ll need to get your mortgage lender to recast your loan
  • Doing so will allow them to re-amortize it based on a lower outstanding balance coupled with your original loan term
  • Without a recast, extra payments won’t automatically lower future payments

If you decide to pay off a large chunk of your mortgage, you can ask the mortgage lender to recast your loan (if they allow it).

This essentially re-amortizes the mortgage so the new, smaller balance is broken down over the remaining months left on the loan.

Your monthly mortgage payment is adjusted lower to reflect the smaller outstanding principal balance, but your mortgage rate doesn’t change.

While this could increase household cash flow, you may be better suited to pay off your mortgage early by making your old, higher monthly payment despite the lower balance.

[Pay off the mortgage or invest instead?]

Keep in mind that mortgage payments won’t decrease automatically simply by making extra payments. All that will accomplish is a quicker payoff period and interest savings.

For example, if you pay an extra $500 per month on a $300,000 mortgage set at 4%, you’ll pay off the loan 11 years and 8 months early. But payments will be the same every month until the loan is paid in full.

In other words, future payments won’t go down to reflect earlier ones, but because the loan will be paid off sooner than scheduled, you will save more than $92,000 in interest over the life of the shortened loan.

Similarly, a mortgage payment doesn’t just decrease over time as it is paid off, like it might be with a credit card or revolving account like a HELOC.

Instead, the monthly payment is pre-determined for the life of the loan, even if you chip away at it along the way.

If You Refinance Your Home Loan to a Lower Rate

  • This is the most common reason why mortgage payments drop
  • And largely why homeowners choose to refinance their mortgages
  • If interest rates are low and you’re looking for some payment relief
  • It might be time to trade in your old home loan for a new one via a refinance

Here’s a no-brainer. If you want a lower mortgage payment, look into a rate and term refinance.

Because mortgage rates are very low at the moment, your mortgage payment will probably decrease significantly if you refinance now, assuming you haven’t done so recently.

This is one of the most popular and easiest ways to lower your mortgage payment with minimal effort.

It just requires a little bit of work on your end in terms of shopping around, submitting a loan application, getting approved, and making it to the finish line.

For example, if your current interest rate is set at 4%, it might be possible to refinance it down to 3%, which depending on the loan amount could lower your payment significantly and save you a ton in interest too.

However, it’s not always a good time to refinance. Sometimes rates can be higher, and other times the closing costs might exceed the benefit, especially if you don’t plan to stay in the property for the long-haul.

[When to refinance a mortgage?]

If you’re not sure whether to refinance or not, consider the refinance rule of thumb argument.

Shop Your Homeowners Insurance, Look Into a Tax Reassessment

  • You can also look beyond your mortgage rate to gain payment relief
  • It might be possible to lower your payment by shopping around for homeowners insurance
  • Or getting a tax reassessment if you feel your property value has dropped
  • A simple escrow surplus can also result in a lower payment

Lastly, be sure to shop your homeowner’s insurance each year, as it is typically included in your mortgage payment.

If you can snag a lower home insurance premium, your mortgage payment may decrease as a result. Another pretty simple way to save money…

Assuming you didn’t waive escrows, your loan servicer will collect a portion of property taxes and homeowners insurance with each principal and interest payment, then pay these items on your behalf.

If either decrease from a year earlier, your total housing payment may go down as well after they run their annual escrow analysis.

Also look into a tax reassessment of your home if you feel it is overvalued.

If property values have been on the decline, you may be able to save some money on property taxes by asking your county recorder’s office to reassess your property.

Of course, it doesn’t always work out as planned so tread cautiously.

Remember, a mortgage payment is typically expressed as PITI, which stands for principal, interest, taxes, and insurance.

Take the time to address each component if you want to save money on your monthly housing costs.

See also: Do mortgage payments increase?

Source: thetruthaboutmortgage.com

How Many Mortgage Quotes Should I Get?

Mortgage Q&A: “How many mortgage quotes should I get?”

When it comes to getting the best deal on your mortgage, you can never shop too much.

Just like any other product you may comparison shop for, the more time you put in, the better deal you’ll probably receive.

Sure, it’s a pain in the you know what, but you’re not shopping for a plasma TV.

This is your mortgage, most likely one of the largest financial decisions you’ll make in your life.

And one that can affect your pocketbook for years and years to come depending on how long you keep it.

So not spending a considerable amount of time shopping for one would be very ill advised.  Don’t be one of the many individuals who obtains just one mortgage quote!

Look At Mortgage Rates Online and Track Weekly Averages

  • There’s no specific number of quotes needed to score the best deal
  • But the more mortgage quotes you receive the better your odds of finding that low rate
  • A study from Freddie Mac found that even two quotes as opposed to one can save you thousands over the loan term
  • And 5+ quotes from different lenders has the ability to save you even more

These days, we’ve got the luxury of using the Internet to comparison shop.

Back when, you had to scour the phonebook and make phone call after phone call to check on prices and availability.

I remember doing this to buy a pair of high-tops when I was around 10-years old.

I spent a considerable amount of time trying to track down a pair at the lowest price, phoning up dozens of different shoe stores.

To be honest, I can’t even remember if I got the shoes, but I certainly put in the necessary legwork to ensure I wouldn’t overpay. And those were just shoes…

Nowadays, a simple click of the mouse will allow you do most of that tedious work, though you’ll still have to vet the broker or lender after the fact to make sure the quote is legit and they’re a reliable source.

I recommend checking as many channels as possible to see where mortgage rates are currently pricing.

You can check out today’s mortgage rates from a variety of online lenders, as well as look up weekly averages from the Mortgage Bankers Association (MBA), Freddie Mac, Bankrate, and also Zillow.

Watch them for a few weeks to get a good idea as to how they move and why. But note that they are just averages in most cases, not necessarily a perfect science or ultimately what you’ll receive.

And because mortgage rates can change daily, they may be a little outdated. But they’re still worthwhile to track market averages over time.

Once you have a better idea of what most banks and mortgage lenders are charging for everyday loan scenarios, you’ll need to decide on a loan program as well.

Do you want the standard 30-year fixed, or are you a little more daring and thinking an adjustable-rate mortgage could suit you better?

[30-year fixed vs. ARM]

Knowing which product you’re after will make your search a lot easier, though you can still narrow it down to a couple products and rate shop accordingly.

Calls Banks, Mortgage Brokers, Credit Unions, Online Lenders, You Name It

  • There are plenty of options to gather mortgage quotes
  • Including your own bank, credit union, or competing banks
  • Along with independent mortgage brokers and mortgage bankers
  • And a slew of online mortgage lenders that make the process quick and easy

Assuming you followed step one above, you should know what most banks and lenders are charging for a typical loan scenario for a variety of home loan programs.

Great! Now it’s time to get your hands on real mortgage rate quotes.

You may be in for a surprise, as those rates you see or hear on TV are often either best case scenario or simply advertising rates aimed at drawing you in.

For example, the rates you see on TV or online may be for a borrower with an 800 credit score and a 40% down payment on an owner-occupied single-family residence. Oh, and a couple mortgage points must be paid at closing too.

Of course, your loan scenario may not be so “vanilla,” so the mortgage rate your quoted could shock you somewhat.

Fret not though; this is why you’re mortgage rate shopping to begin with.

If you’d like, you could start with your local bank or credit union just to get your feet wet. You know, the company where you have your checking and/or savings account.

They probably know the most about you, so they’ll be able to give you a Loan Estimate or pre-approval letter pretty easily to determine how much you can afford and at what rate.

Typically, they offer discounts to existing customers who agree to things like automatic billpay, knowing you’re good for that mortgage payment every month because of the money you’ve got in their bank.

Of course, a lot of times they probably won’t offer the best deal, even with some of those perks thrown in because they’re a big name.

So don’t stop there. Find a mortgage broker or two (I recommend three) and get rate quotes from them as well. See how they stack up against your bank/credit union and go from there.

A broker can shop rates on your behalf, which cuts out some of the legwork, but you still need to compare mortgage brokers too!

Then check out the countless online mortgage lenders out there, many of which won’t be household names.

While you may not have heard of them, there’s a decent chance they can offer lower mortgage rates due to that lack of advertising and the reduced overhead.

If you’re comfortable working with a mortgage lender remotely, they could offer a much better deal than the brick-and-mortar, big name shops.

[Why are mortgage rates different?]

Negotiate, Negotiate, Negotiate Once You Collect Your Quotes

  • The beauty of multiple mortgage quotes is you create competition
  • It gives you the real ability to negotiate your rate and fees
  • Without another quote to compare it to you won’t have much of an argument
  • Other than begging or ignoring them until they agree to lower their price

The beauty of receiving multiple rate quotes is that you can negotiate. With just one, there’s not much you can do aside from asking/pleading for a lower rate. Well, you can lie too.

But if you’ve got multiple companies vying for your precious business, you can pit them against each other until one comes out on top by offering the lowest rate with the best terms.

Additionally, there are mortgage lender that offer low-rate guarantees, so having other quotes in hand could help you land those deals.

You’ll also grow more confident as you discuss rates and fees with multiple lenders, learning the mortgage lingo as you go.

This should aid in negotiating more effectively if you actually know what you’re talking about and aren’t fooled by the nonsense they’re spouting.

Just be sure to look at all the details when comparing offers, including all costs (lender and third-party fees), the interest rate, and the APR.

[Mortgage rate vs. APR]

It’s not always easy to get an apples-to-apples comparison, so you may actually have to do some math to choose the best deal.

And remember, while price is definitely important, you need a competent bank or broker with the ability to close your home loan!

I know, the whole process is annoying, but as mentioned earlier, this is a huge financial decision, so a little homework can go a long way.

Those who put in the time and effort might get their money’s worth, potentially tenfold.

Read more:  10 Ways to Save Money on Your Next Mortgage

Source: thetruthaboutmortgage.com

Nation’s Top Wholesale Mortgage Lender Launches New Line of Adjustable-Rate Mortgages

Posted on May 13th, 2021

Declaring that ARMs are back, United Wholesale Mortgage (UWM) has just rolled out a new line of adjustable-rate mortgages for its mortgage broker partners.

The new offering from the nation’s largest wholesale mortgage lender includes a 5-, 7-, and 10-year ARM to flank the usual fixed-rate options, such as the very popular 30-year fixed and the shorter-term 15-year fixed.

What makes these loans interesting is the fact that they come with significantly better pricing than fixed-rate mortgages currently available with other lenders.

And that might be enough to change the ARM argument, which has been decidedly dour for years now thanks to record low fixed mortgage rates.

How Long Will You Actually Keep Your Home Loan?

  • Something like 90% of purchase mortgages are 30-year fixed loans
  • And roughly 80% of all mortgages including refinances are 30-year fixed loans
  • Yet less than 10% of borrowers actually keep their home loan for more than seven years
  • This means the bulk of homeowners with a mortgage are overpaying for the perceived safety of a fixed interest rate

UWM aptly points out that fewer than 10% of borrowers stay in the same mortgage for more than seven years, yet something like 80% of mortgagors hold 30-year fixed mortgages.

In other words, a large majority are paying too much for their home loan, yet never actually receiving the benefit of an interest rate that is fixed for the life of the loan.

And because many adjustable-rate mortgages come with a lengthy initial fixed-rate period, many of these homeowners could actually benefit from an ARM without ever worrying about a rate adjustment.

UWM notes that pricing on its 7-year ARM could be anywhere from 50 to 75 basis points (.50%-0.75%) better than a 30-year fixed loan.

For example, if a 30-year fixed is priced at 3%, it might be possible to get a 7-year ARM for 2.25%.

If we’re talking about a $350,000 loan amount, that’s a payment difference of about $140 per month and roughly $18,000 in interest saved over 84 months.

That’s the draw of an ARM – to save you money while also providing a lower monthly payment while you hold the thing.

And if you get rid of it during the fixed-rate period, which in the case of these loans is 5, 7, or 10 years, you essentially win.

Are ARMs Set to Get Popular Again?

  • Adjustable-rate mortgages have mostly been a home loan choice for the very rich lately
  • The ARM share was just 3.8% of total mortgage applications last week per the MBA
  • That may begin to change as mortgage rates rise and lenders embrace ARMs again
  • UWM has been a leader in mortgage innovation so this could be a sign of things to come in the industry

Chances are ARMs will gain in popularity as fixed rates begin to rise, assuming that happens over the next few years.

They may appeal to both new home buyers who want a lower interest rate, and existing homeowners who want to tap equity via a cash out refinance.

The adjustable-rate mortgage was super popular during the housing boom in the early 2000s, though they often featured extra-risky options like interest-only payments and negative amortization.

While an ARM is still a risk to some degree, given you don’t really know where interest rates will be at first adjustment, those who do have a clear vision can benefit, as illustrated above.

UWM’s suite of ARMs are all tied to the newly-launched Secured Overnight Financing Rate, otherwise known as SOFR, the LIBOR’s replacement.

Additionally, they all adjust every six months once they become adjustable, meaning they are 5/6, 7/6, and 10/6 ARMs.

This can be slightly more stressful than an annually adjusting ARM, such as the popular 5/1 ARM or 7/1 ARM.

The good news is the cap at each adjustment is just 1%, meaning the interest rate can’t increase by any more than one percent every six months.

And remember, the first adjustments don’t start for 60, 84, or 120 months, respectively, which as UWM noted, shouldn’t affect many homeowners who either sell their homes or refinance before that time.

The new ARMs are available on primary, second, and investment properties, for purchases, rate and term refinances, and cash out refis.

They are conventional loans (backed by Fannie Mae or Freddie Mac) and a minimum FICO score of 640 is required, with a maximum loan-to-value (LTV) ratio of 95% is permitted.

UWM has been a bit of a vanguard in the mortgage space, so there’s a good chance other mortgage lenders will soon follow suit and begin offering ARMs at a discount to their fixed-rate counterparts.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Do Mortgage Payments Increase?

Mortgage Q&A: “Do mortgage payments increase?”

While this sounds like a no-brainer question, it’s actually a little more complicated than it appears.

You see, there a number of different reasons why a mortgage payment can increase, aside from the obvious interest rate change. But let’s start with the obvious and go from there.

And yes, even if you have a fixed-rate mortgage your monthly payment can increase.

While that might sound like bad news, it’s good to know what’s coming so you can prepare accordingly.

Mortgage Payments Can Increase with Interest Rate Adjustments

  • If you have an ARM your monthly payment can go up or down
  • This is possible each time it adjusts, whether every six months or annually
  • To avoid this payment surprise, simply choose a fixed-rate mortgage instead
  • FRMs are actually pricing very close to ARMs anyway so it could be in your best interest just to stick with a 15- or 30-year fixed

Here’s the easy one. If you happen to have an adjustable-rate mortgage, your mortgage rate has the ability to adjust both up or down, as determined by the interest rate caps.

It can move up or down once it initially becomes adjustable (after the initial teaser rate period ends), periodically (every year or two times a year) and throughout the life of the loan (by a certain maximum number, such as 5% up or down).

For example, if you take out a 5/1 ARM, it’s first adjustment will take place after 60 months.

At this time, it could rise fairly significantly depending on the caps in place, which might be 1-2% higher than the start rate.

So if your ARM started at 3%, it might jump to 5% at its first adjustment.

On a $300,000 loan amount, we’re talking about a monthly payment increase of nearly $350. Ouch!

Simply put, when the interest rate on your mortgage goes up, your monthly mortgage payments increase. Pretty standard stuff here.

To avoid this potential pitfall, simply go with a fixed-rate mortgage instead of an ARM and you won’t ever have to worry about it.

Or you can refinance your home loan before your first interest rate adjustment to another ARM. Or go with a fixed-rate mortgage instead.

Or simply sell your home before the adjustable period begins. Plenty of options really.

Mortgage Payments Increase When the Interest-Only Period Ends

  • Your payment can also surge higher if you have an interest-only loan
  • At that time it becomes fully-amortizing, meaning both principal and interest payments must be made
  • It’s doubly expensive because you’ve been deferring interest for years prior to that
  • This explains why these loans are a lot less popular today and considered non-QM loans

Another common reason for mortgage payments increasing is when the interest-only period ends, an issue that was common prior to the last housing crisis.

Typically, an interest-only home loan becomes fully amortized after 10 years.

In other words, after a decade you won’t be able to make just the interest-only payment.

You will have to make principal and interest payments to ensure the loan balance is actually paid down.

And guess what – the fully amortized payment will be significantly higher than the interest-only payment, especially if you deferred principal payments for a full 10 years.

Simply put, you’ll be paying the entire beginning loan balance in 20 years instead of 30, assuming the loan term was for 30 years, because interest-only payments mean the original loan amount remains untouched.

This can result in a big monthly payment increase, forcing many borrowers to refinance their mortgages.

Just hope interest rates are favorable when this time comes or you could be in for a rude awakening.

Mortgage Payments Increase When Taxes or Insurance Go Up

  • If your mortgage has an impound account your total housing payment could go up
  • An impound account results in homeowners insurance and property taxes being paid monthly
  • If those costs rise from year to year your total payment due could also increase
  • You’ll receive an escrow analysis annually letting you know if/when this may happen

Then there’s the issue of property taxes and homeowners insurance, assuming you have an impound account.

Even if you’ve got a fixed-rate mortgage, your mortgage payment can increase if the cost of property taxes and insurance rise, and they’re included in your monthly housing payment.

And guess what, these costs do tend to go up year after year, just like everything else.

A mortgage payment is often expressed using the acronym PITI, which stands for principal, interest, taxes, and insurance.

With a fixed-rate mortgage, the principal and interest amounts won’t change throughout the life of the loan. That’s the good news.

However, there are cases when both the homeowners insurance and property taxes can increase, though this only affects your mortgage payments if they are escrowed.

Keep an eye out for an annual escrow analysis which breaks down how much money you’ve got in your account, along with the projected cost of your taxes and insurance.

It may say something like “escrow account has a shortage,” and as such, your new payment will be X to cover that deficit.

You can typically elect to begin making the higher mortgage payment to cover the shortfall, or pay a lump sum to boost your escrow account reserves so your monthly payment won’t change.

Fortunately these annual payment fluctuations will probably be minor relative to an ARM’s interest rate resetting or an interest-only period ending.

Ultimately, it’s usually quite nominal because the difference is spread out over 12 months and typically not all that large to begin with.

But it’s still good to be prepared and budget accordingly as your housing payments will likely rise over time.

The takeaway here is to consider all housing costs before determining if you should buy a home, and make sure you know how much you can afford well before beginning your property search.

You’d be surprised at how the costs can pile up once you factor in the insurance, taxes, and everyday maintenance, along with the unexpected.

At the same time, mortgage payments have the ability to go down for a number of reasons as well, so it’s not all bad news.

And remember, thanks to our friend inflation, your monthly mortgage payment might seem like a drop in the bucket a decade from now, while renters may not see such relief.

Read more: When do mortgage payments start?

Source: thetruthaboutmortgage.com

How to Negotiate Lower Rent With a Potential Landlord

It starts with determining your leverage.

By Alex Starace for MyFirstApartment.com

When you’re looking for an apartment, you might be under the impression that the list price is the only price. In some cases, that’s true. But if you’re a bit savvier, you could end up negotiating your way into a great deal. Before you approach the landlord, however, make sure you’ve done your homework.

Determine your leverage     

Are you in a tight or loose rental market? In tight markets — where there are more renters than available apartments — it’s unlikely a potential landlord will negotiate. Why? If three or four other people are willing to pay list price for the apartment, a landlord has little motivation to lower the price for you.

A good way to determine whether you’re in a tight rental market is to browse apartment listings for a few days. How many open units are in each building? How quickly do listings disappear? The longer the listings are on the market and the more listings per building, the looser the market. Another way to tell: Have you had any apartment showings canceled because the place was suddenly rented? If not, this again points to a looser market.

In loose markets, landlords will be anxious to rent their place, even at a rate lower than list price. After all, an empty unit is a money-sink for landlords. If you’re offering to fill the vacancy, the landlord might be happy to lower the price, especially if the choice is between renting to you or letting the apartment sit on the market a month longer.

Can you demonstrate that you are a responsible person? Even in a tight market you can have personal leverage. Landlords want security and predictability. In the long run, these things save a landlord a lot of money. If you can demonstrate that you have these qualities — the primary attributes landlords look for are a steady job and good credit — you may get a landlord to knock a bit off your rent or to make other concessions.

Can you show commitment to staying? If you’re planning on staying in the apartment for two or three years or longer, that’s a big benefit in a landlord’s eyes. When a landlord has to rent an apartment to a new tenant every year, he or she loses a lot in transaction costs (repainting, brokers fees, professional cleaning fees), as well as in the simple effort of finding a new tenant. So if you’re planning on staying a while, highlight this when discussing what makes you a great potential renter.

Negotiate from strength

After you have determined where your points of leverage are, it’s time to make your move. When approaching the landlord, the key is to be confident and calm. Avoid hyper-aggressiveness or a mouse-like timidity. A good way to strike the right balance and show confidence is to know your stuff. Know what an average apartment rents for in the neighborhood. Compare the amenities in the apartment to those available in nearby complexes. Have in mind a price you think is fair for your potential place, and have reasons why — whether it’s because the kitchen is too small, or it doesn’t provide parking, or it’s simply too expense relative to comparable places in the neighborhood. And emphasize your points of leverage — that you’ll be a responsible, long-term tenant.

When negotiating, ask for an even lower price than you’re hoping to pay. Do this for two reasons: First, you might end up getting it. Second, if the landlord is at all interested in bargaining, you’ll likely need to meet halfway between your initial offer and the list price. If you give a low (but not unreasonable) initial offer, meeting somewhere in the middle will be a win for you, and both you and the landlord will feel like you’ve made a good deal.

In the end, successful negotiating is all about knowing the market, doing research about the specific apartment in your sights and negotiating calmly and rationally. If you do all this, you have a good chance of paying lower monthly rent. Good luck!

 Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com

What Is a Mortgagee? Hint: It’s Not a Typo

Are You a Mortgagee or Mortgagor?

It’s mortgage Q&A time! Today’s question: “What is a mortgagee?”

No, it’s not a typo. I didn’t leave an extra “e” on the word mortgage by mistake, though it may appear that way.

Despite its striking appearance, it’s actually a completely different word, somehow, simply with the mere addition of the letter E.

Don’t ask me how or why, I don’t claim to be an expert in word origins.

Seems like a good way to confuse a lot of people though, and it has probably been successful in that department for years now.

You can blame the British English language for that, or maybe American English.

Anyway, let’s stop beating up on the English language and define the darn thing, shall we.

A “mortgagee” is the entity that originates (makes) and sometimes holds the mortgage, otherwise known as the bank or the mortgage lender.

They lend money so individuals like you and I can purchase real estate without draining our bank accounts.

It could also be your loan servicer, the entity that sends you a mortgage bill each month, and perhaps an escrow analysis each year if your loan has impounds.

The mortgagee extends financing to the “mortgagor,” who is the homeowner or borrower in the transaction.

So if you’re reading this and you aren’t a bank, you are the mortgagor. It’s as simple as that.

Another way to remember this rather confusing word jumble; Who is the mortgagee? Not me!!

Mortgagor Rhymes with Borrower, Kind Of

mortgagor

  • Here’s a handy way to remember the word mortgagor
  • It kind of rhymes with the word borrower…
  • Or even the word homeowner, which is also accurate if you hold a mortgage on your property

I was trying to think of a good association so homeowners can remember which one they are, instead of having to look it up every time they come across the word.

I believe I came up with a semi-decent, not great one. Mortgagor rhymes with borrower, kind of. Right? Not really, but they look and end similar, no?

Anyway, the real property (real estate) acts as collateral for the mortgage, and the mortgagee obtains a security interest in exchange for providing financing (a home loan) to the mortgagor.

If the mortgagor doesn’t make their mortgage payments as agreed, the mortgagee has the right to take possession of the property in question, typically through a process we’ve all at least heard of called foreclosure.

Assuming that happens, the property can eventually be sold by the mortgage lender to a third party to pay off any attached liens, or mortgages.

So if you’re still not sure, you are probably the mortgagor, also known as the homeowner with a mortgage. And your lender is the mortgagee. Yippee!

What makes this particular issue even more confusing is that it’s the other way around when it comes to related words like renters and landlords.

Yep, for some reason a landlord is known as a “lessor,” whereas the renter/tenant is known as the “lessee.” In other words, it’s the exact opposite for renters than it is for homeowners.

But I suppose it makes sense that both landlord and mortgage borrower are property owners.

What About a Mortgagee Clause?

mortgagee clause

  • An important document you may come across when dealing with homeowners insurance
  • Stipulates who the lender (mortgagee) is in the event there is damage to the subject property
  • Protects the lender’s interest if/when an insurance claim is filed
  • Since they are often the majority owner of the property

You may have also heard the term “mortgagee clause” when going through the home loan process.

It refers to a document that protects the lender’s interest in the property in the event of any damage or loss.

It contains important information about the mortgagee/lender, including name, address, etc. so the homeowners insurance company knows exactly who has ownership in the event of a claim.

Remember, while you are technically the homeowner, the bank probably still has quite a bit of exposure to your property if you put down a small down payment.

For example, if you come in with just a 3% down payment, and the bank grants you a mortgage for 97% of the home’s value, they are a lot more exposed than you are.

This is why hazard insurance is required when you take out a mortgage, to protect the lender if something bad happens to the property.

Conversely, if you buy a home with cash, as opposed to taking advantage of the low mortgage rates on offer, it’s your choice to insure it or not.

But more than likely, you’ll want insurance coverage on your property regardless.

In summary:

Mortgagee: Bank or mortgage lender
Mortgagor: Borrower/homeowner (probably you!)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com