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Mortgages

Buying a house is probably the biggest purchase you’re going to make. If you’re going to buy a home soon, taking the time to get a financial plan in order can be a huge step in helping you reach your goal. It can also provide you a way to make home ownership a relatively enjoyable experience.

The key to saving money on your mortgage is to get the best possible mortgage for your family’s finances. Learn how to save tens of thousands on interest and pay off your mortgage sooner.

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What You Need to Know About Mortgages

Learn from a mortgage loan officer what you need to know before you buy a house.

Buying a house is typically the biggest purchase couples make. You two can be ahead of the curve and save tens of thousands of dollars by learning the essentials about mortgages.

I’m not a professional financial expert so I compiled a list of questions that home buyers may have and sent them to Coastal Federal Credit Union.

They came through and one of their mortgage loan officers took the time to answer my questions about buying a home and getting a mortgage that works with your budget.

(Note: Minor editing to make format it for this post)

Saving Enough to Buy a House

While saving for a down payment is a necessary step if you want to buy a house you can afford, there are other expenses you need to be aware. Preparing ahead for these costs will make the process go a lot of smoother for the two of you and your budget.

What mistakes have you seen first time home buyers make when purchasing? 

  • Failing to plan. We encourage you to sit down with a lender first before starting the homebuying process. Get preapproved before you shop
  • Not working with a good realtor. Have a buyer’s agent, rather than calling the seller’s agent on a the sign from a home you saw
  • Not getting all the recommended inspections. Again, a good buyer’s agent can guide you through the process, and help you choose the inspections that will best protect you
  • Not Tapping into your network. Look to family and trusted friends for recommendations for both your lender and an agent.

Besides the down payment, what are some typical costs that home-buyers needs to plan and save for?

  • Moving expenses
  • turning on utilities
  • furnishings, appliances
  • maintenance items / tools
  • décor
  • sometimes there are repairs that are needed that the sellers didn’t cover

One bit of advice we give our members is to avoid buying things before closing, especially if you are using credit, because the added credit balances could affect their final credit check prior to closing the mortgage. Consider whether they have to buy out the remainder of a lease if they are renting.

For a couple looking to buy there first home, how would you advised them to plan? What numbers should they think about and run BEFORE they shop around for a lender? 

Start with the lender in order to get an understanding of how much home you can realistically afford. Go in knowing how much you spend on household and reoccurring expenses now, including rent; how much they owe on other loans and what your disposable income is .

Shop lenders for the first time homebuyer program that works best for you. Look for a lender that’s willing to hold your hand through the process.

Mortgage Interest Rates, APRS, Origination Fees, and Points

Besides saving for your house, it’s important to understand all the terms of your mortgage. That means becoming familiar with the jargon that lenders use.

When shopping around looking at various lenders’ sites, typically I see the interest rate and APR given. What exactly is the difference between the two? 

APR is a tool to standardize the comparison from one loan to the next. It is the annualized cost of the loan, including all of the interest and lender’s fees. The CFPB recommends that borrowers should always use APR for the best comparison. The interest rate is a component of APR.

What are origination points and how do they work? 

Origination and points are two different things. Origination is the lender’s fee and covers a variety of the services they provide in preparing the loan. Fees range from 0 to 1% of the total loan. Discount points are prepaid interest and are used to buy down the rate. Both origination fees and discount points vary from lender to lender.

Thoughts on Buying a House

What other questions do you have about buying a home or mortgages?

How Much House You Can (Really) Afford

learn to calculate how much home mortgage you can afford

With our baby’s arrival and my returning to work, we’re focusing our attention on two of our goals for this year – paying off the student loan and buying a house.

As we begin the process one of our first steps is seeing how much of a mortgage we can comfortably afford and figuring a down payment goal.

If you’re also in the market for buying a home, I hope our notes can help you two be better prepared.

True Housing Costs

When figuring out how much we can afford on a house, we tried to keep in mind that there are certain expenses to owning a home.

Lenders typically focus on the actual mortgage payments, but it’s up to you to look at related housing costs like utilities, house maintenance (yard care, small projects), and a house emergency fund (replace roof, HVAC).

We discovered this when we bought our town home. We have a homeowner’s association fee that has gone up every year since we moved in.

Since we are looking at older homes for our next place, we have to factor in some buffer money for possible repairs. Thankfully we have friends who live around where we hope to buy, so we have some idea of what we can expect. (Though you certainly can’t plan for everything!)

Calculating Monthly Expenses and Budget

Now take another step back – what other obligations and goals do you two have? Owning a house is one of our personal goals, but it’s not the only one.

Our monthly budget has to have enough room in it so:

You may have similar goals or you may not – the point is many lenders when calculating how much house you can afford don’t take these factors into account. They may simply look at your income and your debt as the biggest factors. That’s why it truly pays for the two of you to go ahead and run the numbers for yourselves.

For us we take a fairly conservative position with the mortgage. When looking at houses, we’re basing our maximum limit on just my husband’s net income.

Examining the Down Payment

We want to make a much bigger down payment this time around with the goal of having a mortgage that is less than what we are currently paying.

The advantage of a bigger home down payment is that it will reduce your monthly mortgage payment. If you put 20% or more, you can avoid paying the additional expense of private mortgage insurance. You may also get a better deal with the lender on your interest rate.

Thoughts on Home Ownership

Enough from me, I’d love to hear from you. For those who already are home owners, what costs have you had to deal with that you didn’t expect? Besides mortgage payments, what have been your housing costs?

Just When We Thought Our Bills Were Going Down

It looks like one of our bills will be increasing starting this month. Imagine the joy on our faces when we got an update from Wells Fargo about our mortgage payments for the next year. It looks like we’re having an increase. Having a fixed rate mortgage doesn’t necessarily mean that our payments to Wells Fargo remain the same through out the loan. Why? Besides sending in the mortgage payment, we’re also sending in money to escrow.

What is Escrow? How Does It Work?

When you get a mortgage, if your down payment is less than 20% your lender will typically have you open an escrow account to handle your property taxes and homeowner’s insurance. This amount is estimated and then broken down into monthly payments, added to your mortgage payments. In addition to those bills, our escrow also takes care of our mortgage insurance premium (MIP) that we owe as we got an FHA loan on the house. Instead of cutting checks to several places, Wells Fargo makes these payments on our behalf as they are due.

The disadvantage of not doing this ourselves is that we don’t earn any interest on the money as it’s being saved. However looking at the balance it’s not really a huge deal. Perhaps down the line, we may want to take care of those bills ourselves and get a small bump in our savings. For now, though, Wells Fargo is handling it.

Looking at Our Payment Options

After reviewing the changes, I noticed that the increase is due to a slight increase in our property tax bill and the new premiums for our home insurance. As you may remember, we were reevaluating our home insurance coverage to make sure we were getting a good deal and found that we were under-insured for our house should a fire happen. The insurance wouldn’t be enough to cover the interior rebuild.

The total increase for our escrow account portion would be around 12%.   Wells Fargo is giving us two options:

  • Pay the shortage now and our mortgage payment goes up.
  • Spread the additional payments out through the year. 

So either way, our mortgage increases. To keep our cash flow steady we went with the latter option and I already adjusted our bill pay service to the new amount.

Thoughts on Mortgage Payments

I’d like to hear from you about how your mortgage payments are going? How frequently have your payments changed through the years? How big or small are the changes?

Get Your Money Right Before Buying a House

Prepare Your Finances Before Buying a House

Today’s post is based on a response to a comment I made on another personal finance blog. With The Debt Movement in full swing (sign up for a chance to win money to pay off some of your debts), I’ve been stopping by and checking out the site to get motivated and inspired by the debt reduction posts.

One post, called, Is Your Goal to Get Out of Debt or To Stay Out of Debt, grabbed me and I went ahead and read the whole piece.

As you know, we’ve paid off debts like credit cards and the car loan. We’re now working on paying off the last student loan. Our goal is to go ahead and get out of debt, which includes paying the mortgage off much earlier than the 30 year loan term.

Anyways, I decided to leave my comment about staying out of debt. I got a notification that someone replied. It was Jarim Person-Lynn, the author of the post. What he asked me got me thinking:

Thanks so much! If I may ask, are you purchasing real estate in cash as well with you and your husband’s awesome dual income?

Huh. To be honest I never really considered that option (I also never considered our dual income awesome, but now I do). While I do think that buying a house with cash is a fantastic option to have, I don’t think that getting a mortgage is in itself bad. I do, however, believe that getting into heavy, unmanageable debt for a place is bad.

For those looking to buy a house with a mortgage, I wanted share some advice based on our experience (the good and the bad).

Want to Buy a House? Think 15 Years or Less

If you want to buy a certain house and you can’t afford a 15 year fixed rate mortgage on it, then you shouldn’t buy it. There I said it. Even if you plan on getting a 30 year mortgage on a plan, give yourself a buffer when you’re house hunting.

I’m going to tell you something that most people may already know, but during the process of buying a house they somehow forget – lenders are in it for the money. When they give you numbers, they tend to give your higher estimates because that increases their cut. However at the end of the day, it’s YOU that has to pay this mortgage every month. You have to look at the whole picture and plan accordingly.

We want to have this buffer because if you want a life outside of the mortgage you have got to include a safety margin into your calculations.

If you don’t have a buffer then you’ll be living paycheck to paycheck for decades with that mortgage around your neck.

Check Your Numbers (Twice!)

Now it’s time to pull up a spreadsheet or fire up an online calculator. We’re going to look at the your finances as if we were the lender and THEN we’re going to look at them as the ones who actually foot the bill. This is another way to make sure you have a good safety margin on your mortgage loan amount.  We’ll look at the Debt to Income Ratio and the Loan to Value Ratio.

Debt to Income Ratio

Having a high amount of debt can ruin your chances of getting a loan. Lenders want to know that you can make these payments for years down the line (so they get paid) and your debt to income ratio is one thing they analyze. Your debt to income ratio is calculated by simply taking all your debt (student loans, credit cards, car loans, etc) and dividing that amount by your income.

Now conventional wisdom said that if your debt to income was 36% or less then you were good. Let’s be honest though – do you think that works in the REAL world, where bad stuff happens? Seriously, do you think that you could afford a bump in the road if your debt was that high? I don’t.

I’ve seen, heard, and read about people who have lost their homes houses because a financial setback that snowballed into a mess. Please do yourself a big favor and look beyond 36%. Try to shoot for 25% or less with the ratio and make sure you’ve paid off high interest debt like credit cards off before you buy a home.

Loan to Value Ratio

The loan-to-value (LTV) ratio is basically the mortgage loan amount you’re hoping to get divided by the appraised value of the property you’re considering to buy. Don’t buy more house that you can afford. Try to see if you can get a mortgage that is at least 80% or less of the house’s value.

Think Bigger on Your Down Payment

Aim big when you’re figuring out a down payment for a house. The advantage of a bigger home down payment  is that it will reduce your monthly mortgage payment. If you put 20% or more, you can avoid paying private mortgage insurance. You can also get a better deal on your interest rate if your down payment is larger.

If you two are having a hard time getting a down payment ready while taking care of your other financial obligations, you may want to hold off on getting a home. Buying a home can be a great experience, but it can also be a nightmare. If you’re not in a position to buy a home, don’t stress out. Renting can be a wise choice for many people (either for the short term or the long term, depending on the city you live in). Don’t be impatient; wait for the right time.

Your Thoughts on Buying a House

I’m calling all current and past home loaners to please help first time buyers out. What advice do you have about qualifying for a mortgage? Did you rely on the estimates from the lenders or did you run the numbers yourself? Did you receive any pressure from your real estate agent to get a more expensive house? If so, how did you cope with it?

Photo Credit: Oracio Alvarado

Are Bi-Weekly Payment Programs a Good Option?

By Tali Wee of Zillow

Paying off a mortgage can be overwhelming for homeowners. Many options and recommendations exist for homeowners who want to pay their principal faster than the terms of their loan in order to save money on interest. Although savings are desirable, paying more than the mortgage payment isn’t feasible for all homeowners. In fact, just paying the monthly mortgage can be challenging for some.

Many homeowners enroll in bi-weekly payment programs to assist in paying their mortgages promptly, with extra funds toward their principals and less stress.

Interest is the price homeowners pay for borrowing money to purchase their homes.  For the first several years of the loan, the majority of monthly mortgage payments go directly toward paying off interest.  In order to get out of debt sooner, homeowners need to pay extra funds toward the balance of their principals during those beginning years.  The faster the principal is paid, the less the homeowner pays in interest, reducing the overall cost of homeownership. One way to pay the principal off faster is to pay two half-payments every two weeks, rather than a full payment each month.

What Is a Bi-Weekly Payment Program?

Bi-weekly payment programs are offered by lenders, loan providers and third-party services to collect mortgage payments every two weeks, rather than monthly. Each payment is for half of the monthly mortgage cost. Splitting the mortgage into two smaller payments can be more feasible for some homeowners.

Enrolling in a bi-weekly payment program is not free. These programs generally cost an initial fee for activation and then an additional fee upon payment every two weeks. The enrollment fees range anywhere from $150-$500 and payments cost $5-$20 each.

What Are the Benefits of Bi-Weekly Payment Programs?

Despite the cost, bi-weekly payment programs are more manageable for some homeowners. The payment schedule corresponds with standard paycheck schedules. These programs work well for homeowners who don’t excel at budgeting, have little expendable income or struggle remembering to pay their mortgage on time. As money is earned it’s sent to the lender, without the risk of overspending before the mortgage is due.

Most bi-weekly plans require automatic fund transfers to prevent late payments. These scheduled electronic transfers assist homeowners to stay on track with their mortgages, prevent late fees and protect their credit.

Bi-Weekly Payment Programs Reduce Interest Costs

Because bi-weekly payment programs require half-payments every other week, homeowners end up making 26 half-payments each year. Compared with the traditional 12 monthly payments, bi-weekly mortgage payers make 13 full payments per year. The additional full payment goes directly toward paying down the mortgage’s principal. The sooner and faster the homeowner pays the principal, the less overall interest is paid. Also, making one additional payment toward the principal each year can decrease the length of the loan by years.

 Is a Bi-Weekly Payment Program a Good Option?

The choice to enroll in a bi-weekly payment program is heavily related to a homeowner’s payment preferences, circumstances and financial priorities.  The decision to pay off a mortgage early is the primary indicator of bi-weekly payment plans being selected by homeowners. Borrowers have numerous opinions revolving around the choice to pay off a mortgage ahead of schedule.  If getting out of debt and paying off the mortgage as soon as possible is a top priority, then perhaps a bi-weekly program is perfect to help manage that goal. However, if the homeowner has multiple other financial goals to focus on, then bi-weekly payments may not be the best use of their money.

Some factors that may influence a homeowner to not pay the mortgage off ahead of schedule are: student loan debt, savings for children’s education, plans for short-term home-ownership, low income, low interest rate or more lucrative investment options.

Alternatives to Bi-Weekly Payment Programs

If homeowners decide not to pay off their mortgages early, they may still benefit from making reduced mortgage payments twice a month. Some loan providers accept two half-payments each month, free of charge. These are not considered bi-weekly payment programs and do not accumulate an additional mortgage payment per year. If smaller payments upon payday are more feasible than one large monthly payment, check to see whether the loan servicer allows such arrangements.

Homeowners who are interested in paying off their mortgages early should consider alternatives to bi-weekly payment programs. Simply make an extra payment directly to the principal balance each year. When homeowners receive unscheduled income such as a commission check or tax refund they can apply it toward their principal without previously arranged savings plans.

Another method is to pay 1/12th of a monthly payment in addition to each month’s payment. This additional payment adds up to one extra full payment per year. The sooner the principal balance reduces, the less total interest is paid. Therefore, 12 small additions monthly are more beneficial than one full payment at the end of the year.

To avoid the costs of an official bi-weekly payment program, homeowners can devise their own bi-weekly system. Create a savings account and transfer half of a monthly payment to it with each paycheck. When the full mortgage payment is due, write a check out of the savings account. This financial management plan can eliminate the stress of budgeting for homeowners choosing to pay on or ahead of schedule. An automatic payment plan can be arranged with most loan providers to avoid late payments.

The decision to use bi-weekly payment programs should be made by the individual homeowner with all financial priorities and options considered.