IS A 15 YEAR MORTGAGE FOR YOU?

Article courtesy of Realtor.com

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One of the best ways to eliminate your mortgage debt is moving into a 15-year fixed-rate loan. With the average spread a full 1% compared to its 30-year counterpart, a 15-year mortgage can provide an increased rate of acceleration in paying off the biggest obligation of your life.

Can you pull it off?

In most cases, you’re going to need strong income for an approval. How much income? The old 2:1 rule applies. Switching from a 30-year mortgage to a 15-year fixed-rate loan means you’ll pay down the loan in half the amount of time, but it effectively doubles up your payment for each month of the 180-month term. Your income must support all the carrying costs associated with your home including the principal and interest payment, taxes, insurance, (private mortgage insurance, only if applicable) and any other associated carrying cost. In addition, your income will also need to support all the other consumer obligations you might have as well including cars, boats, installment loans, personal loans and any other credit obligations that contain a monthly payment.

The attractiveness of a 15-year mortgage in today’s interest rate environment has mass appeal. The 1% spread in interest rate between the 30-year mortgage and a 15-year mortgage is absolutely real and for many, the thought of being mortgage-free can be very tempting. Consider today’s average 30-year mortgage rate of around 4% on a loan of $400,000—that’s $287,487 in interest paid over 360 months. Comparing that to a 15-year mortgage over 180 months, you’ll pay a mere $97,218 in interest. That’s a shattering savings of $190,268 in interest, but there’s a catch—your monthly mortgage payment is going to be significantly higher.

Here’s how it breaks down. The 30-year mortgage in our case study pencils out to a $1,909 monthly payment covering principal and interest. Weigh that against the 15-year version of that loan, which comes to $2,762 a month in principal and interest, totaling $853 more per month, but going to principal. This is why the income piece makes or breaks the 15-year deal. Independent of your other carrying costs and other credit obligations, you’ll need to be able to show an income of $4,242 a month to offset just a principled interest payment on the 30-year fixed-rate mortgage. Alternatively, to offset the principled interest payment on the 15-year mortgage, you would need an income of $6,137 per month, essentially $1,895 per month more in income, just to be able to pay off your debt faster. As you can see, income is a large driver of debt reduction potential.

What to do if your income isn’t high enough

When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.

Lenders are going to consider the minimum payments you have on all other credit obligations in the following way. Take your total proposed new 15-year mortgage payment and add that number to the minimum payments on all of your consumer obligations and then take that number and divide it by 0.45. This is the income that you’ll need at minimum to offset a 15-year mortgage. Paying off debt can very easily reduce the amount of income you might need and/or the size of the loan you might need as there would be fewer consumer obligations handcuffing your income that could otherwise be used toward supporting a stable mortgage plan.

Can you borrow less?

Borrowing less money is a guaranteed way to keep a lid on your monthly outflow maintaining a healthy alignment with your income, housing and living expenses. Extra cash in the bank? If you have extra cash in the bank beyond your savings reserves that you don’t need for any immediate purpose, using these funds to reduce your mortgage amount could pencil very nicely in reducing the 15-year mortgage payment and interest expense paid over the life of the loan. The concept of the 15-year mortgage is “I’m going to have to hammer, bite, chew and claw my way through a higher mortgage payment in the short term in order for a brighter future.”

Can you generate cash?

If you can’t borrow less, generating cash to do so may open another door. Can you sell an asset such as stocks, or trade out of a money-market fund in order to generate the cash to rid yourself of debt faster? If yes, this is another avenue to explore.

You may also want to explore getting additional funds via selling another property. If you have another property that you’ve been planning to sell such as a previous home, any additional cash proceeds generated by selling that property (depending upon any indebtedness associated with that property) could allow you to borrow less when moving into a 15-year mortgage.

Are you an ideal match for a 15-year mortgage?

Consumers who are in a financial position to handle a higher loan payment while continuing to save money and grow their savings would be well-suited for a 15-year mortgage. The other school of thought is to refinance into a 30-year mortgage and then simply make a larger payment like you would on a 25-year, 20-year or 15-year mortgage every month. This is another fantastic way to save substantial interest over the term of the loan, since the larger-than-anticipated monthly payment you make to your lender will go to principal and you’ll owe less money in interest over the full life of the loan. As cash flow changes, so could the payments made to the loan servicer, as prepayment penalties are virtually nonexistent on bank loans.

There is an important “catch” to taking out a 15-year mortgage—you also decrease your mortgage interest tax deduction benefit. However, if you don’t need the deduction in 15 years anyway, the additional deduction removal may not be beneficial (depending on your tax situation and future income potential).

If your income is poised to rise in the future and/or your debt is planned to decrease and you want to have comfort in knowing by the time your small kids are teenagers that you’ll be mortgage-free, then a 15-year loan could be a smart move. And when your mortgage is paid off, you’ll have control of all of your income again as well.

Proximity to retirement is another factor borrowers should consider when carrying a mortgage into retirement isn’t ideal. These consumers might opt to move into a faster mortgage payoff plan than someone buying a house for the first time.

Keep in mind that to qualify for the best interest rates on a mortgage (which will have a big impact on your monthly payment), you need a great credit score as well.

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HOW MUCH SHOULD YOU TIP YOUR MOVER?

Article courtesy of Realtor.com

movingtruckTip etiquette is a touchy subject under any circumstances. It’s even more fraught with questions when deciding whether to tip your movers.

Because movers are entrusted with your personal possessions and do much of the heavy lifting (pun intended), you may feel obligated to reward them for their hard work.

Although they are being paid to provide a service and to haul your belongings from place to place, they could be worthy of extra recognition for a job well done.

So, yes, please tip your movers if you are happy with your move.

Movers don’t expect a tip and a mover won’t stand in front of your house with an outstretched hand and a raised eyebrow.

However, as with any personal service provided—be it from a waitress or a haircutter—if you are pleased with the outcome, a little extra cash goes a long way in showing your appreciation.

Of course, if the moving service was sub-par, you are not obligated to provide a tip.

“Tipping is not expected and is up to the customer,” said John Bisney, a spokesman for the American Moving and Storage Association.

If you think your movers deserve a tip, what amount should give them? Again, there’s no set rule.

“Opinions on [tipping] are varied,” Bisney said. “One mover said the industry standard was 5%, which is pretty reasonable—if a crew of two movers move you for $500-$750, you might tip a total of $25 to $40, or $10 to $20 for each mover depending on the quality of the move,” Bisney said.

The quality of the move should also factor into your decision on how much to tip. Assess how carefully your items were moved into your new home and adjust your tip up or down depending on the level of service you received.

One other piece of advice: If you decide to tip, divide the cash equally and hand each mover the same amount individually.

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WHY SHOULD I DO A HOME INSPECTION?

Home-inspectBefore buying a home, one of the things you should do is to have the home checked up by a licensed, professional home inspector. Purchasing a home is often the largest investment you will ever make, so why not spend the money to make sure the home is in “working order” and know exactly what you are buying?

A licensed home inspector is a professional who will conduct an inspection of the general condition of the home.  A good home inspector will assist a buyer in understanding exactly what they are about to acquire.  In addition, the home inspector will give the buyer an education on how the systems of the house actually operate.  The inspector will cover features of the house such as electrical wiring, plumbing, roofing, insulation, as well as structural aspects of the home and may reveal issues that are not noticeable to the buyer’s eye.

A home inspection will cost you a little bit of time and money, but in the long run, you’ll be glad you did it.  After closing, you do not want to find yourself saddled with costly repairs that could have been exposed by a home inspector and taken care of by the home seller prior to transferring title.  In addition to exposing possible needed repairs, an inspection can give you a crash course on home maintenance and a checklist of items that need attention to make your home as safe and sound as possible. Don’t skip this important step in the home-buying process – it’s worth every penny.

Lee Springmeyer300

 

Lee Springmeyer
Realtor-Associate
Abbott & Caserta Realtors
201-447-6600 (office)
973-713-1222

leespringmeyer@gmail.com

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Must-Know Info for the Self-Employed Home Buyer

Article courtesy of Realtor.com

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In today’s work universe, we are a nation of independent employees, and it’s the “age of the freelancer,” Fortune magazine has declared.

The self-employed workforce should total 40% of the whole by 2020, says another study—that’s 60 million people!

Are you a self-employed home buyer needing a mortgage? Loans can be tricky to get when something as straight-forward-seeming as what you earned last year gets bogged down in a pile of pay stubs from various clients.

Self-Employed Home Buyer Blues

Julie and Michael Kurtz can’t prove it, but they’re pretty sure their independent status delayed their expected home loan approval by a few weeks this summer—which called into question whether they could close on a new condo in Chicago.

Julia is a freelance editor of technical journals, and Michael is an attorney. He also referees high school and college football; she has a shop on the handmade Web portal, Etsy, as well.

Their story has a happy ending, albeit a stressful one—they ended up getting the keys a few days later than originally planned (which also caused some hiccups for the sellers), due to last-minute requests from the bank.

It would have been better if we’d worked with a loan company where we could have had a personal relationship with the loan officer or broker,” Julia says.

Self-Employed Home Buyer Challenges

Quicken Loans Vice President Bill Banfield notes the unexpected paperwork requests can trip up the prospective self-employed home buyer.

The challenge for those who are self-employed can be in verifying the legitimacy and stabilityof their income,” Banfield says.

And new regulations enacted earlier this year mean that the self-employed face even closer scrutiny, according to the New York Times: Borrowers who have been self-employed for less than two years will find it difficult if not impossible to obtain financing.”

Self-Employed Home Buyer Sticking Points

These are the details that a self-employed home buyer needs to prepare for when seeking a mortgage.

  • Debt-to-income ratios. If your business carries debt and you are the sole proprietor, that could impact how much of a personal loan a bank will extend.
  • Earnings. Freelancers especially often have business deductions that come out of their overall pay. Banfield uses the example of someone who earned $100,000 last year but technically took home only $60,000 after all the business deductions.
  • History. This is the aforementioned “two year” rule. Lenders now want to see you’ve got a somewhat reliable income history, so they know you can make your payments. One year of solopreneurship isn’t much of a history. If you just started out on your own this year, you may want to wait another one before buying.

Self-Employed Home Buyer Tips

Here are some ideas to start you off on the right path when seeking to purchase a home as a self-employed worker.

  • Find good people. Use a mortgage broker and/or underwriter familiar with the challenges of securing loans for the self-employed. We all need someone who can guide us through the process with consistent communication and guide us through the potential paperwork pitfalls.
  • Prepare for paper. You will likely have to submit more paperwork and proofs of income, debt rations and business expenses than someone who is more traditionally employed. Forewarned is forearmed.
  • Drop your debt. That debt-to-income ratio can be a big deal with lenders. Make yours as friendly as possible.
  • Get pre-approval. Yes, we suggest everyone do this. But especially for freelancers—who can struggle to understand where they stand in the mortgage world for all of the above reason—this is a vital step.

The reality is there are going to be a lot of self-employed home buyer mortgage applications as we move forward in this new economy, and the mortgage lenders have to understand this as well if they want to stay in business.

So knowing what you need to do—in advance—will go a long way towards a successful home-buying experience.

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