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2020 Real Estate Trends: What You Need to Know

Wow, 2020 has been a challenging year. With so much happening across the country, you might be wondering how the current crisis is impacting real estate trends. Well, surprisingly, median home prices are all the way up to $320,000!1 Will the rest of 2020 bring more of the same results? How will the housing market shake out in the current economic climate?

Whether you’re selling, buying or staying put, here are the 2020 real estate trends you need to know!

Real Estate Trend #1: Home Prices Are Still Rising Slowly

Okay, let’s start with home price trends. In April 2020, home prices grew by a teeny-tiny 0.6% compared to last year—down from the nearly 4% growth rate in March!2 This slower growth trend is likely due to the craziness of the coronavirus and market uncertainty.

But within the third week of May, home prices moved their way back up to a 3% growth rate—almost to pre-COVID levels!3 So there’s a chance that home prices might be regaining some momentum.

Find expert agents to help you buy your home.

National Association of Realtors Chief Economist Lawrence Yun believes home prices will make their way back up to 4% growth overall in 2020.4 So, you’ll likely see home prices continue to creep up, but they probably won’t knock your socks off with rapid growth like we’ve seen in previous years.

National Association of Realtors Chief Economist Lawrence Yun believes home prices will make their way back up to 4% growth overall in 2020.

What Higher Prices Mean for Sellers

A nice profit may be on the horizon! But also keep in mind that a lot of buyers are being priced out of the market at the moment, which could lead to fewer offers for your home. So, what should you do about this? Be aware of your competition.

With less offers to go around, you want your home to really stand out from similar ones in your area. Prepare your home for potential home buyers and work with a real estate agent to help you list your home at the right price.

And be sure to wait for the right offer. Some buyers may try to gut punch you with a low number. If you aren’t in a hurry to move, wait for an offer that gives you the most profit. Remember, the less desperate person always has the upper hand when negotiating!

What Higher Prices Mean for Buyers

If you’re going to buy a home in this expensive market, you absolutely must find out how much house you can really afford. Crunch the numbers yourself with our free mortgage calculator and figure out a monthly payment your budget can handle.

Commit to staying within that budget amount. Don’t rush into a home purchase that doesn’t make financial sense for you no matter how much pressure you feel watching competitors pluck good homes off the market. You could screw up your finances!

If you can’t put down at least 10–20% on a 15-year fixed-rate conventional loan, then you probably can’t afford a house in this market. A down payment that’s less than 10–20% will strangle your budget with massive monthly mortgage payments. But if you want to get prepared to buy and you’re committed to your budget, here are some options to consider:

  • Keep saving. If you stay patient and motivated, you can save for a five-figure down payment by this time next year.
  • Sacrifice some wants. If you can’t afford to buy the house you want, be willing to give up some “nice-to-haves” for your “must-haves.” Find the least expensive home in the best neighborhood you can afford and you can upgrade as your income and savings increase over time.
  • Expand your search. What if the location where you’re planning to buy is what’s busting your budget? You might be surprised at the gem you can find in a less popular neighborhood. Working with a real estate agent who really knows the area is the best way to find a home that fits your budget and lifestyle.

Buying a home can be stressful, but our Home Buyers Guide will streamline the process! It’ll help you think through all the important parts so you can rest easy when your dream home is officially yours.

Real Estate Trend #2: Mortgage Interest Rates Are Super Low

Mortgage interest rates have been trending down—even before the pandemic. In May, the average interest rate for a conventional 15-year fixed-rate mortgage (the cheapest type of mortgage and the only kind we recommend) dropped to 2.69%—the lowest it’s been in over seven years!5

In May, the average interest rate for a conventional 15-year fixed-rate mortgage (the cheapest type of mortgage and the only kind we recommend) dropped to 2.69%—the lowest it’s been in over seven years!

Economist geeks think interest rates will continue to stay low until the economy is close to normal again. But interest rates probably won’t go so low as to hit rock bottom since lenders still have high demand from current homeowners to refinance their mortgages at lower rates.6

If you want to refinance or get a smart mortgage that helps you pay off your home fast, talk to our friends at Churchill Mortgage.

What Lower Rates Mean for Sellers

If interest rates stay low, buyers will be more motivated to buy your home sooner than later. But if interest rates do start to increase later in the year, just plan for your house to be on the market a little longer. A mortgage is a big commitment, and adding higher interest rates to the mix will make many buyers pause.

An experienced real estate agent can help you set the right expectations on how much money to sell your house for and how long you’ll have to wait for the best offer.

What Lower Rates Mean for Buyers

Even though interest rates are super low, be smart and go for a conventional 15-year fixed-rate mortgage (unless you can buy with cash). Avoid getting locked into paying the extra interest and fees that come with rip-off mortgages like FHA, VA, USDA and adjustable-rate ones. That way, you’ll know exactly what your payment will be over the life of the loan and you’ll pay it off faster!

Real Estate Trend #3: Millennial Home Buyers Are the Majority

That’s right, our final trend is about who is buying homes. And once again, millennials took the lead as the largest group (38%) of home buyers last year.7

What is a millennial exactly? Well, the technical answer is anyone born between 1980 and 1998. The easiest way to spot a millennial home buyer? They can’t wait to post a pic of their new home on Instagram!

What Millennial Buyers Mean for Sellers

Here are three important words: Know your buyer. In a nutshell, millennials are internet savvy and do their research before house shopping. Here are some tips:

  • Upgrade your online listing. Virtually all millennials (98%) use the internet for their home search—and 78% of them found the home they purchased on a mobile device last year.8 So, make the best possible impression on the internet by investing in high quality listing photos. You might even need to take video footage to give potential buyers a digital tour of your home.
  • Highlight perks over size. Yes, square footage matters. But millennials are more concerned about their commuting costs and how close their new home is to schools. In fact, most millennial buyers said they were least likely to compromise on school and neighborhood quality when deciding which home to buy.9 So, highlight the benefits of your home’s fabulous location instead of wasting time trying to sell on its size.
     
  • Know popular features. Here are some of the top home features millennials want: laundry room (86%), patio (81%), garage storage (80%) and a walk-in pantry (79%).10 If you’re thinking of making some upgrades to your home, choosing one of those might have millennials showering you with offers when you’re ready to sell.

What Millennial Buyers Mean for Buyers

Okay, if you’re looking for a three-bedroom, single-family home in the suburbs, expect to have a lot of competition. You may have to reprioritize what you want in a dream home. Follow these tips:

  • Know what you want. Decide what you absolutely need in a home. If you’re married and house hunting, you and your spouse need to agree on must-haves. Compare your individual lists and combine them for your real estate agent to use as the foundation of your home search.
  • Write a letter. Sending a personal story to your seller might be just the thing that makes you stand out from similar offers. Nashville couple Abby and John included a personal letter when they made an offer on their home. “We sent the sellers a personal letter with our offer,” Abby said. “The best thing you can do is to include in the letter things you love about their house. If they have a deck or screened-in porch, tell them how you envision using the space. We did that and the sellers accepted our offer—out of multiple offers—within 24 hours.”
  • Hire an experienced pro. Last year, 92% of millennial home buyers used real estate agents to purchase their homes.11 Think they’re onto something? You bet! Save yourself the stress of trying to buy on your own. Get the help of a real estate pro so the home-buying process is smooth for everyone involved.

What if I’m Not Buying or Selling a Home This Year?

You may be thinking, All this is great, but I’m not going anywhere anytime soon. We hear you, and here’s what you should know for now:

1. Equity is unlikely to decrease through 2020.

With most housing markets at low risk for a downturn, the 2020 Housing and Mortgage Market Review estimates home prices will continue to rise for the next couple of years.12 Woo-hoo for sellers! If you sell your house before 2023, you’ll likely still make a nice profit. Continue to monitor how much your home is worth to make sure your equity (what your home is worth minus how much you owe on it) is going up.

2. From what we can see, the real estate market isn’t going to crash.

With the uncertainty around our current economic crisis and price growth slowing down, some folks are wondering about the future of the housing market and if it could collapse again. Well, it’s impossible to know for sure, but economists suggest a housing crash is unlikely.

After all, the super low mortgage rates are motivating buyers to enter the market, which increases demand. But there’s still a record-low supply of home listings. This is keeping home buying somewhat competitive and allowing home price growth to stay steady.13

3. Regardless of your neighborhood, buyers are interested.

Since home prices have experienced rapid growth over the past few years, some buyers may be less choosy. In fact, determined ones might be willing to consider neighborhoods that don’t have easy access to highways or aren’t in close proximity to a big city. If you think you live in an unpopular neighborhood or believe your home isn’t what buyers are looking for, think again. Now may be your perfect time to consider selling.

Take Control of the Trends With a Top-Notch Real Estate Agent

Whether you’re selling or buying, you can take advantage of the current trends by partnering with a professional real estate agent. Through our Endorsed Local Providers (ELP) program, our team will match you with agents we recommend in your area. Our real estate ELPs are top-performing professionals in your market who’ve earned our seal of trust by actually caring about your financial goals.

Find your real estate agent today!

Posted on https://www.daveramsey.com/blog

Categories
Mortgage Tips

Get All the Facts about PMI

When it comes to buying a home, whether it is your first time or your fifth, it is always important to know all the facts. With the large number of mortgage programs available that allow buyers to purchase a home with a down payment below 20%, you can never have too much information about Private Mortgage Insurance (PMI).

What is PMI?

Freddie Mac defines PMI as:

“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.

Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”

As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. Freddie Mac goes on to explain that:

“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.” 

According to the National Association of Realtors, the average down payment for all buyers last year was 10%. For first-time buyers, that number dropped to 6%, while repeat buyers put down 14% (no doubt aided by the sale of their home). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.

Here’s an example of the cost of a mortgage on a $200,000 home with a 5% down payment & PMI, compared to a 20% down payment without PMI:

The larger the down payment you can make, the lower your monthly housing cost will be, but Freddie Mac urges you to remember:

“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”

Bottom Line

If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and to help you make the best decision for you and your family.

 

Posted by The KCM Crew

Categories
Mortgage Tips

The No. 1 Tip To Pay Off Your Mortgage Early

Your home is a great source of pride. By implementing this tactic, you can call it all yours even sooner.

Your loan term might be fixed, but it doesn’t have to dictate when you’ll be mortgage-free. Find out how to speed up the process.

A lot can happen in 30 years. Kids become adults, jobs change, and life goals are accomplished and reset. Change during such a lengthy period is inevitable. But if you’re a homeowner, there’s one thing that won’t change: Your obligation to make a monthly mortgage payment.

The good news? A loan term doesn’t have to dictate when you free yourself from this financial commitment. There are a few tried-and-true ways to cut the ties early while lowering the total amount paid in the process. Follow these recommendations, including the No. 1 tip to pay off your mortgage early on your home, whether it’s in Seattle, WA, or Boston, MA.

5. Refinance into a 15-year mortgage

Cutting your loan term in half is a big financial step, but the benefits are substantial. Not only will you shorten the payoff time, but you’ll also be rewarded with a lower rate and pay significantly less in interest over the life of the loan.

The key here is determining whether you can shoulder the larger monthly cost that comes with a 15-year mortgage. Pamela Capalad, CFP and founder of Brunch and Budget, explains, “The downside is, you’ve locked in a much higher monthly payment. Make sure you have the cash flow to afford this new monthly payment on a regular basis.”

Not completely confident in your ability to commit to a higher monthly payment? Fake a 15-year mortgage by challenging yourself to make the payments you would be making if you had locked into a 15-year mortgage. Then, if financial circumstances change, you still have the flexibility to return to a lower monthly payment.

4. Refinance into a lower rate but keep payments the same

The benefits of refinancing your loan but sticking to the same payments are twofold: You will pay less in interest over the life of the loan and create a shorter path to mortgage freedom. Plus, it’s not as drastic as jumping from a 30-year mortgage to a 15-year mortgage.

However, it’s important to do a bit of research before you refinance. Closing costs for refinancing are generally lower than if you were to purchase a new home, but they’re still an added expense. Your new interest rate should be low enough to negate the cost of refinancing, or you should be planning on staying put long enough to reap the benefits of a smaller rate. (Use the Trulia refinance calculator to see if this is a good choice for you.)

3. Get rid of private mortgage insurance (PMI)

If you financed more than 80% of your conventional mortgage, chances are, you are paying private mortgage insurance to protect the lender in case of default. Redirecting this amount — usually 0.05%–1% of the loan amount annually — to the principal on your mortgage can have a big impact over time.

You can request to get rid of PMI once you reach an 80% loan-to-value ratio, but the lender is required to remove it after you’ve reached a 78% loan-to-value ratio. You can speed up the process by increasing your equity through home upgrades, or, if the home has already increased in value for other reasons, you can opt to refinance. Some lenders may even allow you to get an appraisal to show the new value and your increased equity — without paying for a refinance.

2. Put those windfalls to work

Maybe your monthly budget doesn’t have wiggle room and paying the costs to refinance isn’t in the cards. There’s another option.

Tax returns, bonus checks, and inheritance payments present the opportunity to pay off a chunk of your mortgage without feeling the pain in your monthly budget. This could mean thousands of additional dollars chipping away at this massive financial responsibility each year. Sometimes your money could be better spent elsewhere — like paying off high-interest debt — but if wiping out your mortgage early is a priority, this is a great place to start.

1. Make extra or higher principal payments

Jennifer Harper, CFP and director of Bridge Financial Planning, says one small change can make a world of difference. “Even small [additional] principal payments add up over time! On a $150,000 loan for 30 years at 3.75%, with no additional payments, more than $100,000 will be paid in interest over the course of the loan. By adding just $100 per month in principal payments, the total interest paid is reduced by nearly $25,000 and the loan will be paid off more than six years sooner!”

Another way to do this is by making biweekly mortgage payments. Instead of making 12 monthly payments, this equals out to 26 half-payments — or 13 full payments — per year. But beware, explains Harper, not all loan servicers make it easy to apply these extra payments to the principal. Make sure to speak to yours and ensure they aren’t simply holding on to the extra money and applying it toward the interest.

The bottom line: Choose what works for you

Which method should you choose to pay down your mortgage faster? That depends, explains Pamela Capalad.

“Choose the option that resonates the most with you based on your current financial situation and any possible changes you foresee. If you have a steady job or career that you feel confident will last in the long term, it might make sense to refinance to a shorter term. If your income is a bit less consistent, you may want the flexibility of making additional payments when you can.”

Posted by Kayla Albert on Trulia

 

Categories
Mortgage Tips

Veterans: Get 100% Financing on Home Loans up to $1 Million

If you’ve served in the U.S. military, you can get a loan backed by the U.S. Department of Veterans Affairs with no down payment.

As the financial crisis gets further behind us, mortgage options get more flexible. One loan program that’s often overlooked is a VA loan. If you’ve served in the U.S. military, you can get a loan backed by the U.S. Department of Veterans Affairs (VA) with no down payment.

VA loan features

This may be a surprise: VA loans aren’t actually made by the VA. They are made by mortgage lenders, and the VA backs the loans, which enables lenders to be more flexible when making these loans.

Features of VA mortgages include:

  • Financing for up to 100 percent of a home’s value. The national loan limit is $417,000, but can go up to $1,000,000 in high-cost areas. VA loan limits for your area are available on the VA site, and a VA lender can also give you local VA loan limits.
  • The ability to finance most of your closing costs, including appraisal, credit report, title insurance, lender origination fee, recording fees, and survey fees. These represent the bulk of the closing costs in most home purchase transactions.
  • The ability to finance the one-time VA funding fee that’s required on all VA loans, and the ability to have this fee waived for certain circumstances, such as injury and disability.
  • No mortgage insurance. This is a material benefit that will save hundreds of dollars per month compared to other government-backed programs like FHA loans, which come with high mortgage insurance fees.
  • No prepayment penalty if you pay off the loan early.
  • Loans for a primary residence only.
  • A wide variety of fixed- or adjustable-rate mortgage loan programs.

Who’s eligible for VA loans?

It’s important to work with a VA loan specialist so they are familiar with the criteria of who exactly qualifies for VA loans. To be eligible for a VA loan, you must be one of the following:

  • Veteran.
  • Active duty service member.
  • Current or former National Guard or Reserve member who has been activated for federal active service.
  • Current National Guard or Reserve member who has never been activated for federal active service.
  • Discharged member of the National Guard or Selected Reserve who has never been activated for federal active service.
  • Surviving spouse receiving Dependency & Indemnity Compensation (DIC) benefits.
  • Surviving spouse who isn’t receiving DIC benefits.

If you’re in any of these categories, you can search for VA lenders to help you find a loan.

You will, however, need to provide your lender with a Certificate of Eligibility (COE) to verify that you’re eligible for a VA loan. The COEs for each category of eligible VA borrower have different requirements.

An expert VA lender can also help you obtain the correct COE based on your circumstances. If you fall into one of the eligible categories but don’t know how to get your COE, ask a lender to help you.

The VA loan approval process

Getting your VA loan approved is mostly the same as getting a non-VA loan approved. A lender will calculate your total proposed monthly housing cost plus all other monthly debt — like payments on credit cards, cars, and student loans — and compare it to your income. They’ll want to see that these total monthly costs don’t exceed 43 percent of your monthly income — although in certain cases, the automated loan underwriting engines lenders are required to use for VA loans might allow monthly costs to go as high as 50 percent of income.

Lenders will also look at your credit scores. Each lender will vary in terms of the credit score they require, but generally a score of 620 or better is required to qualify for a VA loan.

If you’re buying a condo, the VA must approve the condo project. The agency maintains a database of pre-approved condos, and if the condo you want isn’t on this list, you’ll need to work with your lender to get the condo approved.

This can add considerable time to the transaction, so make sure you do this research before writing an offer. And make sure your real estate agent is aware you’re getting a VA loan.

Posted by Julian Hebron on Zillow

Categories
Mortgage Tips

4 Ways Mortgage Lenders Can Help You Buy a Home

KittisakJirasittichai/iStock

In the long home-buying journey, lenders are often pegged as the bad guy—the villain who holds the purse strings and decides whether (or not) to loosen ’em up and grant you a mortgage.

OK. Let’s take a step back. This bad rep is mostly a bad rap. Because the reality is that lenders make homeownership possible for the majority of Americans who do not have the ready cash to buy a home. And even if you’re a less-than-ideal home buyer, because of bad credit or lack of a down payment, they can actually help your loan go through.

Here are five ways lenders can assist you on the path to homeownership, and some recommendations as to how you can make the most of this relationship.

1. Lenders can get you pre-approved

If you know you’re ready to buy—before you’ve even seen the inside of a single house—it’s wise to head to a lender to get pre-approved for a mortgage, pronto. This means lenders check your financial history and determine how much money they’re willing to loan you to buy a home. “You want to apply before you’re entirely under the gun,” says Steven Bogan, regional managing director for Glendenning Mortgage Corporationin Haddonfield, NJ. “If you wait until you’ve made an offer on a house, you could run into problems.”

Pre-approval is proof to home sellers—and yourself!—that you won’t have problems getting the loan you need, once that special house comes your way. It is best to seek a pre-approval at least a month or two in advance, Bogan says. Requirements for approval in a post-housing bubble world can create headaches even for stellar borrowers.

But don’t start too early. Pre-approvals are only good for 30 to 60 days, so make sure you’re really ready to hit the pavement and start looking for houses. Still, don’t stress if your pre-approval expires; getting it re-upped isn’t a big deal.

“We usually just need to run your credit again, maybe get an updated pay stub or bank statement, and you’re good to go,” says Bogan.

2. If you can’t get pre-approved, lenders can show you how

So what if you apply for pre-approval and get denied? It hurts, but don’t worry—the pre-approval process isn’t a one-shot deal. Most lenders will be happy to work with you, even if you aren’t pre-approved right off the bat.

“The majority of lenders will give buyers a step-by-step path they need to follow to get up to approval,” says Bogan. And that usually involves boosting your credit score (more on that next).

3. Lenders can help you boost your credit score

One of the most common reasons home buyers don’t get approval is a lousy credit score—the all-important numerical summary of how reliable they’ve been paying off debts, from credit cards to college loans. You want a simple equation? The lower your score, the less likely you are to get a loan. The good news is that you can take action to boost your credit score. A credit repair company will show you the ropes, but will charge for those services.

You’ve actually got a free credit-boosting guide at your disposal: the lenders who just passed you up for a loan. In most cases, they’ll be happy to show you what you need to do to boost your credit score. And while it usually takes a few months for the credit bureaus to record these changes, lenders have another ace up their sleeve: They can do a “rapid re-score” that corrects and updates info on your credit report in a matter of days.

4. Lenders can help atypical borrowers

Many home buyers are employed, earning a regular W-2 income—a generally safe bet for lenders. But If you’re self-employed, a contractor or running your own business, and your income is more prone to valleys and peaks, a good relationship with a lender can help you cut past reservations about your loanworthiness. “Basically, we’re just going to look at the last two years of tax returns, instead of W-2’s and pay stubs,” says Bogan.

However, Bogan does recommend applying even earlier if you’re a non-W-2 wage earner, since there is more paperwork and more of an investigative process into your earnings. And unlike everyone else, you’ll need to consider your timing. “Say, for example, 2016 tax returns are almost due, and it was a great year incomewise. It would probably be in your advantage to wait until after you’ve filed your taxes to apply for a mortgage,” Bogan says.

No matter what your situation, though, to get the best help, you’re actually going to have to call. “You absolutely want to talk with somebody in person,” says Bogan. So skip the online forms, and ask your friends and family (or your Realtor®, if you have one already) to recommend someone you can sit down with to get the process rolling.

Posted by Angela Colley on realtor.com

Categories
Mortgage Tips

Have You Put Aside Enough for Closing Costs?

There are many potential homebuyers, and even sellers, who believe that you need at least a 20% down payment in order to buy a home, or move on to their next home. Time after time, we have dispelled this myth by showing that there are many loan programs that allow you to put down as little as 3% (or 0% with a VA loan).

If you have saved up your down payment and are ready to start your home search, one other piece of the puzzle is to make sure that you have saved enough for your closing costs.

Freddie Mac defines closing costs as:

“Closing costs, also called settlement fees, will need to be paid when you obtain a mortgage.  These are fees charged by people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction. Closing costs are typically between 2 and 5% of your purchase price.”

We’ve recently heard from many first-time homebuyers that they wished that someone had let them know that closing costs could be so high. If you think about it, with a low down payment program, your closing costs could equal the amount that you saved for your down payment.

Here is a list of just some of the fees/costs that may be included in your closing costs, depending on where the home you wish to purchase is located:

  • Government recording costs
  • Appraisal fees
  • Credit report fees
  • Lender origination fees
  • Title services (insurance, search fees)
  • Tax service fees
  • Survey fees
  • Attorney fees
  • Underwriting fees

Is there any way to avoid paying closing costs?

Work with your lender and real estate agent to see if there are any ways to decrease or defer your closing costs. There are no-closing mortgages available, but they end up costing you more in the end with a higher interest rate, or by wrapping the closing costs into the total cost of the mortgage (meaning you’ll end up paying interest on your closing costs).

Home buyers can also negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees in order to get the deal finalized.

Bottom Line

Speak with your lender and agent early and often to determine how much you’ll be responsible for at closing. Finding out you’ll need to come up with thousands of dollars right before closing is not a surprise anyone is ever looking forward to.

Posted by The KCM Crew

 

Categories
Mortgage Tips Uncategorized

Consider This Before Taking Out A Debt Consolidation Loan

woman-man-couch-debt-consolidation-092016-hero

Consolidating debt is about more than combining your current debts into one loan — you’ll have to step back and change your financial habits in order to be successful.

Debt consolidation can look like a great fix for your financial woes, but it may not be the solution you really need.

Debt consolidation is the process of refinancing multiple balances into a single loan. You can take out one loan for the total amount of your current debt, then repay your existing debts with the funds from the new loan. Finally, you’re left with just the new loan to repay.

A debt consolidation loan can help make life a bit easier, reducing the amount of loans and debts you need to track. Making a single payment each month may even save you money in the long run if you can get a lower interest rate than your existing loan rates, and it can help you avoid sweeping a few bills under the rug (raise your hand if you’re renting in Boston, MA, or another pricey market and have felt the burden of a hefty rent in addition to student and car loans).

However, these benefits aren’t guaranteed, and what you save on your interest rate may be canceled out by origination fees and other charges. Consider these factors and be prepared to change the way you spend money before you consider a debt consolidation loan.

 

Debt consolidation won’t necessarily make things easier

The idea behind debt consolidation is a good one. You get to roll all your debt into one loan to focus on and repay. It makes your financial life simpler and may help you pay less on what you owe if you can get a lower interest rate.

But it doesn’t always work out this way. “I’ve worked with plenty of people pre- and postbankruptcy over the years,” says Jason Reiman, a certified financial planner. He’s the founder of Get Financially Fit!, a company based in Tucson, AZ, that helps people with their finances. “A leading indicator of bankruptcy, in my experience, is debt consolidation.”

Reiman says that consolidating loans (with the exception of student loans) usually provides you with a short reprieve. It’s often followed by taking on new debts outside of the ones you’ve already consolidated. Why do people do this? “Debt consolidation typically doesn’t produce the expected results simply because of mindset,” Reiman says. “As humans, we resist change and discomfort.”

And changing your financial habits to not rack up more debt after consolidation can be really uncomfortable. You must change how you behave with your finances, and that could mean going without the luxuries and the standard of living that caused you to get into debt in the first place.

Be prepared to learn and understand how you spend money

“Debt consolidation can look OK mathematically, but it has a tendency to ignore the emotional and psychological aspects,” Reiman says. And those factors do matter as much as — or more than — the numbers.

Your mindset and behavior are at the heart of any financial issue. While a debt consolidation loan can help some people, it won’t do anything for you if you’re not committed to changing your internal thought processes and switching up your spending patterns.

Reiman says that for any solution to be effective, you need to start with the real cause of the problem. Ask yourself a few important questions. “For example,” he suggests, “how did I get into this heavy debt situation in the first place?”

So if debt consolidation isn’t the answer for you because it doesn’t address the root of your financial troubles, what is the solution? Reiman offers one exercise to try. “Get out a piece of paper and a pen,” he says. “Divide the paper into four quadrants: physical, spiritual, mental, and financial. Jot down your thoughts and actions over the past three to five years which may have prompted you to add more debt to your life.” Reiman says we will remember times when things seemed to happen outside of our control. But by taking a look at how we thought and felt at that time, we can see patterns in how we acted and reacted.

“The purpose of this exercise is to help uncover the counterproductive actions,” he explains. “Only when you know how you arrived at your current situation are you able to make solid choices about changing it for the better.”

Clean up your finances before consolidating

If you feel that a debt consolidation loan is an important step in your journey to financial success, make sure you do everything you can to eliminate opportunities to create new debts in the future. Cut up your highest-interest credit cards and use a budgeting system you can stick to. Start building an emergency fund or a savings account with a cash reserve you can draw on if something comes up that your monthly budget can’t handle.

Then sit down and make a plan for how you’ll repay your consolidated loan. Will you cut back on your spending to help make those payments and avoid further debts? Will you work to earn more so you have more cash flow to put toward debt repayment?

Consider other options

Remember, a debt consolidation loan is only one strategy for repaying what you owe. “The process of eliminating small debts one by one, and achieving these small wins, is invaluable,” Reiman says. And he stresses the importance of simply having a plan and tracking your progress.

“If you have multiple debt accounts, consider using a free program like powerpay.org to crunch the numbers,” he says. The site will help you craft a plan of action that most likely doesn’t include consolidation. You can also use various debt payoff strategies, like the debt avalanche or debt snowball, to help you make progress.

“Get accountability and coaching and be open to change,” Reiman says. “It’s difficult but possible.” Your current level of debt might seem insurmountable, but don’t get overwhelmed. Take a deep breath, consider your options, and make a plan. Then dive in!

 

Posted by Kali Hawlk on Trulia

Categories
Mortgage Tips

4 Loans That Affect Your Mortgage Worthiness

If you’re feeling buried beneath debt, remember that loans aren’t necessarily a bad thing — you can use them to prove you’re capable of making timely payments.

Different types of debt can boost your credit score — but overborrowing can hurt you.

When you’re shopping for a mortgage, your credit score is a really big deal; it can make or break your mortgage approval and ultimately determine whether you get that home for sale in Boca Raton, FL. But before you analyze your credit score, it’s important to look at how your existing debt affects that score.

Debt comes in two types: secured and unsecured. When you borrow money to buy a house, the bank can take back the house to recoup its money if you don’t pay the debt. That means the debt is secured — it’s balanced against something you want to keep and gives the bank some measure of security that it can recover the money it lent you. Unsecured debt, on the other hand, means the bank can’t reclaim what you’re buying with the borrowed money. (Credit card debt and student loans are unsecured.)

The following four key consumer loans affect your mortgage worthiness in different ways. Read on to find out what steps you can take to improve your credit if you have these loans (or are considering them), so you can qualify for the best mortgage rates out there.

1. Student loans

Student loans are unsecured debt, but they’re not necessarily bad for your credit score if you pay your bills on time. Because they often take decades to pay off, student loans can actually help your score. Likewise, other loans held (and paid consistently) over a long period raise your score. Student loans will figure into your overall debt-to-income ratio, though, so a large student loan or other loan might affect your ability to qualify for (and afford!) a mortgage.

2. Auto loans

Auto loans are secured debt, because the lender can repossess the car if you don’t pay up. In some cases, auto loans raise your credit score by diversifying the types of debt you carry. And because auto loans are harder to get than credit cards, some mortgage lenders may look favorably on you because you’ve already been approved for a loan that wasn’t a slam-dunk.

3. Payday loans

Payday loans don’t usually show up on your credit report. But if you default on the loan, it could ding your credit. These loans are unsecured — the lender doesn’t have any collateral — and their interest rates are often exorbitant.

4. Existing mortgage loans

Mortgages are the classic example of a secured debt, because the bank has the ultimate collateral — a piece of property. Mortgages, when paid on time, are great for your credit score. However, missed payments on previous mortgages will make your new lender nervous.

If you already have a mortgage and are applying for a second one, the new lender will want to be sure you can afford to pay both bills every month, so they will look closely at your debt-to-income ratio. If your second mortgage is for a rental property, you may expect the rental income to count toward the income side of the equation. However, most lenders won’t count rental income until you’ve been a landlord for two years. Until then, you’ll have to qualify for any additional mortgages by using documented income from other sources.

Posted by Virginia C McGuire on Trulia

Categories
Mortgage Tips

The Do’s and Don’ts of Home Equity Loans

Let your home put up the cash for its own improvements (but not for that new sports car).

Shutterstock ID 179975591;
Shutterstock ID 179975591;

With home values rising, homeowners who have equity, a much-valued resource, might be tempted to tap some of that wealth and use it for other purposes. But depending on your personal situation and how you’d like to use the equity, it may not necessarily be the right thing to do.

Here’s when a home equity loan, which allows you to use the equity of your home as collateral, makes sense — and when it doesn’t.

DON’T: Fund a lifestyle

Remember a decade ago when homeowners yanked cash out of their homes as if they were bottomless piggy banks to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations, and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.

Lesson learned: Don’t squander your equity! A home equity loan should be looked at as an “investment,” and not as “extra cash” when making spending decisions.

DO: Make home improvements

The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (for example, you need a new roof), then a home equity loan might make sense.

Need access to money over a period of time to fund ongoing home improvement projects? Then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go, and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.

DON’T: Pay for basic expenses/bills

This is a no-brainer, but it’s always worth reiterating: basic expenses like groceries, clothing, utilities, and phone bills should be a part of your household budget.

If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.

DO: Consolidate debt

Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers — who doesn’t want to save potentially thousands of dollars in interest?

Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again, and end up in even worse shape.

DON’T: Finance college

This may seem like an attractive use of home equity for those with college-age children. However, the potential consequences down the road could be significant. And risky.

Remember, tapping into your home equity may mean it takes you longer to pay off the loan. It also may delay your retirement, or put you even deeper in debt. Furthermore, as you get older, it will likely be more difficult to earn the money to pay back the loan. Don’t jeopardize your financial security.

Categories
Mortgage Tips

5 Mortgage Misconceptions Set Straight

Looking for a home loan? Make sure you’ve got the facts, then proceed with confidence.

Shutterstock ID 219582628; PO: Cat Overman
Shutterstock ID 219582628; PO: Cat Overman

Getting a mortgage can be a breeze or a slog, depending on what you know about the process. To get organized and set your expectations properly, let’s debunk some common mortgage myths.

Your best credit scores are used in your loan approval

If you’re applying for a mortgage jointly with a co-borrower, logic suggests that your lender would use the highest credit score between both of you.

However, lenders take the middle of three credit scores (from Equifax, TransUnion, and Experian) for each borrower, then use the lowest score between both borrowers’ “middle scores.” So if you had a middle score of 780 and your co-borrower had a middle score of 660, most lenders would qualify and approve you using the 660 credit score.

Rates are tied to credit scores, so in this example, your rate would be based on the 660 credit score, which would push your rate up significantly — or potentially even make you ineligible for the loan.

There are exceptions to this lowest-case-credit-score rule. Most notably, if you have the higher credit score and are also the higher earner, some lenders will allow your higher credit score on the file — but this is mostly for jumbo loans above $417,000.

Ask your lender about exceptions if you have credit score disparity between co-borrowers, but know that these exceptions are rare.

The rate you’re quoted is the rate you’ll get

Unless you’re locking in a rate at the moment it’s quoted, that rate quote can change. Rates are tied to daily trading of mortgage bonds, so most lenders’ rates change throughout each day.

Refinancers can often lock a rate when it’s quoted — as long as you’ve given your lender enough information and documentation to determine if you qualify for the quoted rate.

Homebuyers will often be quoted a rate when you’re beginning your pre-approval process, but a rate lock runs with a borrower and a property. So until you’ve found a home to buy, you can’t lock your rate. And while you’re home shopping, rates will be changing daily, so you’ll need updated quotes from your lender throughout your home shopping process.

Rate quotes also come with an annual percentage rate (APR), which is a federally required disclosure that shows what your rate would be if all loan fees are incorporated into the rate.

This can make you think that APR is the rate you’ll get, but your loan payment will always be based on your locked rate, and the APR is just a disclosure to help you understand fees.

Fixed rate mortgages are always better than adjustable rate mortgages

Many borrowers became conservative in the recessionary years that followed the 2008 financial crisis, and strongly prefer 30-year fixed loans.

For good reason, too: The rate and payment on a 30-year fixed loan can never change. But the longer the rate is fixed for, the higher the rate. So before settling on a 30-year fixed, ask yourself this question: How long am I going to own this home (or keep the loan) for?

Suppose the answer is five years. If you got a 5-year adjustable rate mortgage (ARM) instead of a 30-year fixed, your rate would be about .875 percent lower. On a $200,000 loan, you’d save $146 per month in interest by taking the 5-year ARM. On a $600,000 loan, the monthly interest cost savings is $438.

To optimize your home financing, you want to peg the loan term as closely as you can to your expected time horizon in the home.

Real estate agents don’t care which lender you use

A federal law enacted in 1974 called the Real Estate Settlement Procedures Act (RESPA) prohibits lenders and real estate agents from paying each other fees to refer customers to each other. So as a mortgage shopper, you’re always free to use any lender you choose.

But real estate agents who would represent you as a buyer do care which lender you use. They’ll often suggest that you use a local lender who’s experienced with nuances of your area, such as local taxation rules, settlement procedures, and appraisal methodologies. Each of these areas are part of the loan process, and can delay or kill deals if a non-local lender isn’t experienced enough to handle them.

Likewise, real estate agents representing sellers on homes you’re interested in will often prioritize purchase offers based on the quality of loan approvals. Local lenders who are known and respected by listing agents give your purchase offers more credibility.

Mortgage insurance is always required if you buy with less than 20 percent down

Mortgage insurance is a lender risk premium placed on many home loans when you’re putting less than 20 percent down. In short, it means your total monthly housing cost is higher. But you can buy a home with less than 20 percent down and avoid mortgage insurance.

The most common way to do this is with a combination first and second mortgage — often called a piggyback — where the first mortgage is capped at 80 percent of the home’s value, and the second mortgage is for the balance of what you want to finance.

Comparisons of mortgage insurance vs. piggyback loans that simplify the math can help you make decisions.

Posted by Julian Hebron on Zillow