Do You Know the Real Cost of Renting vs. Buying? [INFOGRAPHIC]

Some Highlights:

  • Historically, the choice between renting or buying a home has been a close decision.
  • Looking at the percentage of income needed to rent a median-priced home today (30%), vs. the percentage needed to buy a median-priced home (15%), the choice becomes obvious.
  • Every market is different. Before you renew your lease again, find out if you could use your housing costs to own a home of your own!

 

Posted by The KCM Crew

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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

 

Everything You Need to Know About Jumbo Mortgages

Jumbo mortgages are more flexible than many home buyers realize, and typically have lower rates than most other available mortgages today. The guide below will help you understand what a jumbo loan is, and whether it’s right for your financial situation.

African elephant female and her baby elephant balancing on a blue balls.; Shutterstock ID 169100474; PO: Cat Overman; Job: blog post

African elephant female and her baby elephant balancing on a blue balls.; Shutterstock ID 169100474; PO: Cat Overman; Job: blog post

Origin of the term “jumbo mortgage”

Jumbo mortgages are also called non-conforming mortgages. These are loans that lenders make when a borrower doesn’t “conform” to the guidelines of Fannie Mae and Freddie Mac. Created by Congress in 1938 and 1970, respectively, Fannie Mae and Freddie Mac provide stability and affordability to the mortgage market by buying “conforming” mortgages from lenders, giving lenders liquidity to make more mortgages.

Fannie and Freddie only buy mortgages meeting their guidelines for down payment, credit score, post-closing reserves and, of course, loan size.

In 2015, the conforming loan size limit is $417,000 nationwide, with exceptions as high as $625,500 in certain high-priced markets.

Loans greater than these limits are usually called jumbo mortgages or non-conforming mortgages.

Jumbo rates lower than conforming rates

Historically, non-conforming loans had rates at least 0.25 percent higher than conforming loans because lenders were perceived as taking more risk making non-conforming loans that couldn’t be sold to government-backed Fannie Mae and Freddie Mac, and this risk translated into higher consumer rates.

However, a conforming/non-conforming rate paradox has been in effect the past two years, making non-conforming loan rates lower than conforming rates.

Conforming rates haven’t fallen materially because investors in mortgage bonds that underpin Fannie/Freddie conforming loans have been betting that the U.S. economy is slowly improving. Meanwhile the economy hasn’t improved enough for the Federal Reserve to hike the rates that ultimately impact how much banks must pay to depositors. So banks currently pay less to depositors, and can therefore offer lower rates on non-conforming loans.

The result of this (greatly simplified) market dynamic is that non-conforming rates have been about 0.25 percent lower than conforming rates for the past two years.

Jumbo approvals have gotten easier

In addition to non-conforming rates being lower, non-conforming loan approvals have some flexibility that conforming loans don’t have:

  • Less than 20 percent down with no mortgage insurance. Down payments on non-conforming loans have become more flexible, and can now be as little as 10-percent down for loan amounts of $1 million and sometimes higher, translating into a $1.1 million purchase price or higher. Unlike conforming loans, these low-down jumbo programs don’t require mortgage insurance. The tradeoff for this flexibility is that most lenders will offer a rate that’s 0.25-percent higher and require 30- to 36-percent debt-to-income ratios for these low-down jumbos.
  • Higher debt-to-income ratio. For anything 20 percent down or greater, lenders will verify that your total monthly housing payment plus all other monthly bills doesn’t exceed 43 percent of your income. This is a hard limit on conforming loans, but there can be some flexibility on non-conforming loans. For example, if you documented substantial savings left over after the loan closed, you might be able to get a non-conforming loan with a debt-to-income ratio of 46 percent.
  • Flexible income calculations. Non-conforming income calculations can be more logical than conforming. For example, if you were in the same industry for 15 years and recently started your own business in that industry, a conforming loan would require you to show two years of filed self-employed tax returns. A non-conforming loan might only require one year of filed returns if you could demonstrate that the business was stable or growing.
  • Credit scores. The requirements are about the same for conforming and non-conforming. A credit score down to 680 generally gets you most available loan options, albeit with a higher rate than you’d get with a top-tier credit score of 780 or greater.
  • Money left over after loan closing. This is often called reserves or post-closing liquidity. Non-conforming loans will be more stringent than conforming. Typically, lenders want to see 12 months of reserves after the close, half liquid (in a checking or savings account) and half calculated from retirement assets — compared to about six months’ reserves for conforming. Non-conforming exceptions are available if your debt-to-income ratio is low and your down payment is high.

Lower your payment as you pay down your loan

Some large banks that keep their jumbo loans (instead of selling the loans after they close) have begun offering a re-amortization feature on jumbo loans over $417,000. Re-amortization means that your payment will decrease as you pay your loan down. Depending on the lender, a loan balance pay-down from $5,000 to $20,000 will trigger a payment recalculation. This feature enables higher earners to lower their monthly budget as they chip away at their loan balance using extra income such as bonuses or stock compensation.