15 VS. 30 YEAR MORTGAGES

mortageWhich is better: A 30-year fixed-rate mortgage or go for a lower-interest 15-year one?

Typically, 15-year mortgage allows you to pay off your mortgage quicker and save a significant chunk of money on interest. However, a 30-year may be a logical choice for most people because it has more advantages. Let’s take a look at the differences:

  • Payments are less with a 30-year mortgage which enables more consumers to qualify for home purchases.
  • Generally, you can make additional principal payments to pay off your loan faster without penalty.
  • A 15-year loan means you are committed to giving that extra money to your lender each month, whether you can really afford to at the time or not.
  • The higher payments of a 15-year mortgage make little sense if they keep you from building savings or contributing to a 401(k) plan, IRA or college fund.
  • The amortization schedule of 30-year fixed is back-heavy, with early-term payments big on interest and light on principal.
  • A 15-year fixed is always light on interest which lowers its taxpayer benefits.

While it’s true you gain more of a tax break from a 30-year loan, it shouldn’t be the main consideration when deciding on a term. The 30-year borrower pays less in yearly taxes because they pay significantly more in interest.

So it all comes down to choice and circumstances:

  • Choose the 15-year loan if you have the financial wherewithal to assume the payments. Your interest savings will be substantial and you’ll own your home faster.
  • The 30-year loan offers lower payments and greater flexibility. You can always choose to pay more on your mortgage when the money is available.
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DEALING WITH THE DOWN PAYMENT

paymentEver dream of owning a home but don’t think you can because you lack the down payment and closing costs? Here are a few tips:

  • Borrow from your retirement account: A 401(k) or traditional IRA may allow a first-time homebuyers to borrow up to $10,000 for their down payment without incurring a penalty. If you’re self-employed or your employer allows it, you may also be able to borrow up to $50,000 from your current 401(k) and pay yourself back over five years at a reasonable interest rate.
  • Ask family: If you are able to get help from a family member, the lender may ask you to sign a gift-letter form, attesting to the relationship. They may also require your relatives to explain where they got the money and prove that they are financially able to make such a gift.
  • Look for down payment assistance grants: Down payment assistance and community redevelopment programs offer affordable housing opportunities to first-time homebuyers, low-income and moderate-income individuals and families who wish to own a home.
  • Come to a lease/purchase agreement: Homeowners who can’t sell their homes may consider a lease/purchase agreement, where you rent the home you want to buy and a percentage of your rent is applied to the down payment. Make sure you get a contract outlining all the details so both parties are protected.
  • Add it to the wedding registry: Some mortgage companies allow those getting married to set up a down payment registry.
  • Cut back and save: If nothing else, there’s always the old-fashioned “saving for a rainy day.” Try putting aside 10% of each paycheck and eating at home instead of eating out. If you’re married, save the money you would spend on birthday, anniversary and Christmas presents and put it toward your house. You also may need to forget that vacation this year.

These sacrifices may seem significant but they will be worth it once you’re inside your own home.

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UNDERSTANDING ENERGY EFFICIENT MORTGAGES

bulbEnergy Efficient Mortgages (EEMs) were formally introduced by the Federal Housing Administration in 1995 to help consumers save money on utility bills by enabling them to finance the cost of energy-efficiency features for their new or existing homes as part of their FHA-insured home purchase or refinanced mortgage. The U.S. Department of Energy maintains that an EEM is one of the most beneficial programs consumers can use to capitalize on in today’s real estate market.

You can participate without the need to qualify for additional financing because cost-effective energy improvements result in lower utility bills—making more funds available for mortgage payments. You can upgrade windows and doors, install active and passive solar technologies, insulate an attic, replace older heating and cooling systems and fix or replace chimneys, etc.

The maximum cost of improvements you can add to your mortgage is either 5% of the property’s value (not to exceed $8,000) or $4,000, whichever is greater based on your property’s value. FHA requires that you make at least a 3.5% cash investment on your property based on the sale price. The total mortgage amount is based on your home’s value plus the projected cost of energy-efficient improvements.

Experts believe that an EEM can add an additional 15% of a home’s appraised value to the principal of a new loan or refinance, often at no additional cost, no compromise in the loan-to-value ratio for the borrower and perhaps a better rate. Benefits will vary and your lender will be your best source on what benefits you may obtain. Energy efficiency becomes an attractive selling point when you place the property on the market.

You may apply for an EEM with any HUD-approved lender, such as a bank, credit union or mortgage company.Click here for more information on EEMs.

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Good Faith No More: How Will The New Mortgage Rules Affect You?

Article courtesy of Trulia.com

mortgageThe mortgage game might be the same, but the rules have changed to favor homebuyers instead of lenders.

The Consumer Financial Protection Bureau (CFPB) is pinch-hitting for HUD. Its mission: to make sure another housing crisis, like the one from 2008, never happens again. One way to help achieve that goal is to make the buying process clearer to consumers, whether you’re looking at homes for sale in Houston, TX, or Sarasota, FL.

“As of October 3, 2015, when you apply for a new mortgage, you’ll receive new disclosures designed to ease the process of taking out a loan, help you save money, and ensure you know before you owe,” says Tricia McClung, assistant director of mortgage markets for the CFPB.

In a nutshell, the mortgage process should now be more transparent to consumers and include information that helps homebuyers figure out what they can afford to buy. The new rules, called “Know Before You Owe,” help borrowers — in most cases, anyway.

Here’s an overview of the changes and what they mean for you.

Some history

Before the new mortgage disclosures went into effect, homebuyers were presented with the TMI (too much information) version of mortgage documents: a Truth-in-Lending disclosure with the Good Faith Estimate and then another Truth-in-Lending disclosure with the HUD-1 Settlement Statement. And those were just the forms’ names. As you can imagine, it was a tad complicated. And lenders didn’t even have to disclose everything.

“The old Good Faith Estimate and the HUD-1 did not spell out the two most important things to most consumers: knowing what their new payment will be and how much cash will be required at closing,” says California mortgage consultant Greg Cook.

The change

The CFPB replaced the four documents with two simpler ones: the Loan Estimate and the Closing Disclosure. The new forms “help you shop for the best deal and avoid costly surprises at closing,” says McClung.

Homebuyers now have “a better perspective of the true cost of their loan instead of having to compare multiple documents with conflicting figures,” says Frank Berriz, CEO of California Members Title Insurance Co.

The three-day-wait rule

The new CFPB mortgage disclosure rules call for a three-day period to allow buyers to look over and become familiar with the Closing Disclosure before they get to the settlement table. This marks “the biggest overhaul of the mortgage process in decades,” says Amiel Hagai Steuerman, president of Cypress Mortgage in Illinois.

The three-day period “gives you time to ask your lender all the questions you might have about the terms of your mortgage, as well as consult with an adviser or housing counselor,” says Tricia McClung.

“Borrowers will know every tax, fee, and risk. And they will know if there are any penalties for paying off the loan early or whether there is a balloon payment at the end,” says Gloria Shulman, a California mortgage broker.

The mulligan, or the do-over

If the loan product changes during the three-day review period, you must start over and take another three days to review those changes. Just what triggers the additional three-day period includes the following:

  • If the annual percentage rate (APR) increases by more than ⅛ of a percent for a fixed-rate loan and ¼ of a percent for an adjustable loan. (If the APR decreases, the additional three-day period is not required.)
  • If a prepayment penalty is added.
  • If the basic loan changes, such as from a fixed rate to an adjustable one.

Minor changes such as a typo on a closing document or the discovery at walk-through of a bedroom window that won’t open — causing you to want a credit from the buyer — won’t trigger the extra three-day wait.

But even still, “Problems could arise with the three-day disclosure period, creating a domino effect,” says Frank Berriz. “If a closing is delayed by the buyer, it will directly impact the closing of the house the seller is trying to buy.”

The new normal: a 45-day closing?

A typical closing takes 30 days, but many lenders now assume they’ll need more time to close. “In the early going, consumers might expect to see the mortgage process lengthened — approximately 45 days to close rather than the previous 30 — as the new disclosure rule is implemented,” says Sharon Voss, real estate agent and president of the Orlando Regional REALTOR® Association.

“A consumer in a hurry is not going to have an easy time of it,” says Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage. “Most of the waiting periods are mandatory; they cannot be waived.”

This three-day rule, although well-intentioned, could cause you to lose out. If you’re in a hot market and it takes 45 days to close, a cash buyer who’s ready to close quickly might be a lot more attractive, leaving you to clear the game board and start a whole new one.

But once the dust settles, the closing time frame should adjust. “We expect to get back to previous processing times within a few months,” says Fleming.

Dealing with a longer closing period

Gloria Shulman offers two tips to help ensure you aren’t burned by a longer closing:

  • Ask for a rate lock longer than 30 days.
  • Avoid any loan that does not waive the per diem charge for late closings.

 

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YOUR MORTGAGE: PAY ATTENTION TO THE POINTS

mortgageIn terms of your mortgage, a point is an additional loan fee that is paid to the lender in exchange for a lower interest rate. It’s called “buying down,” and it allows you to reduce your rate for the life of the loan.

Let’s say you secured a mortgage loan for $500,000 without points, at 4.6% on a 30-year mortgage, your payment would be approximately $2,560 a month. If you paid two points ($10,000), the interest rate would go down to 4.1% and the monthly payment would decrease to around $2,415, a savings of $145 a month.

It would take you about eight years to recoup the money you paid up front. If you are planning on staying in your home a while, this will save you money in the long-run. Before deciding, ask yourself:

  • How long will I keep the home?
  • Do I have extra money to pay points?
  • Could that money be better used for something else?

Some may suggest that a smarter option is to invest that $10,000 because you could do much better than your $140 savings, but you have to weigh the variables.*

Here are three simple rules of thumb in determining your particular course of action:

  • If you plan to stay in the house for less than three years, do not pay points
  • If you plan to stay in the house for more than five years, pay 1 to 2 points
  • If you’ll be in the house for three to five years, paying points doesn’t make a significant difference

Since points are interest-payment related, they may be deductible on your taxes in the year that you close. See your tax advisor for details.

Mortgage points can add up to valuable savings over the course of your loan, but the future isn’t always predictable. Even if you “plan” on staying in your home for 20 years, changes in your career or family life could alter that plan.

* The above example is for illustrative purposes only. Be sure to check with your financial or tax advisor regarding your particular situation.

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