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Myth 1: Buying a home is always a good investment
Depending on your financial circumstances, needs and life choices, it may be better for you to rent rather than buy. Also, it used to be that property prices would mostly steadily increase so a homeowner would sell their house for a good profit. The crash of the housing market a few years ago evidences that this is not always the case. The housing market of today is quite different.
Also, even when the figures look good on paper, the real story may be different. Say a home purchased in the 70s for the price of $50,000 and sold in 2005 for $300,000 which adds up to what appears to be a $250,000 profit. Although there was a 500% increase in price, it does not factor in a number of factors related to the cost of owning a home.
For instance, based on the price, the annual compound return is just 6.15% annually. Inflation was not also factored in. It reduces the returns to an approximate actual return. There is also mortgage interest, homeowners insurance, taxes and the cost of maintenance and repairs incurred from when the house was bought up to the time it was sold.
In the final analysis, what looks like a sweet deal may actually have been a loss. It does not always work out this way but it is important to understand the figures and understand that you will not necessarily be able to sell your house at a profit should you ever choose to do so.
Myth 2: You will always get added tax deduction for your mortgage interest
Mortgage interest is deductible but it is not always wise for you to take the deduction. This is an individual matter and you should talk to your accountant or mortgage advisor before you decide. To accept the mortgage interest deduction, you have to itemize each deduction as compared to taking a standard deduction. Typically, standard deductions are higher than itemized deductions. It would therefore not make a lot of financial sense to choose to itemize your deductions.
Myth 3: Paying down your mortgage as fast as possible is always best
This advice became popular during the high interest rate 1980s. However, the advice may not have been ideal even at that time. Homeowners tend to focus on the interest rates and get into a panic. However, putting everything you get into paying into your mortgage may not be the best. There may be other uses for the money that would be more profitable.
For instance, you may choose to make long-term investments such as in stocks and bonds that would bring you some very good returns over the years. If you own a business, you can invest into expanding and diversifying it.
The important factor to consider is the rate of return. Work out which ones puts you in a better financial position in the long run: is it the saving you’ll make when you pay down the mortgage or the returns you would make from the investments that you make? Creating wealth is all about making your money work for you.
Bonus Myth: The Perfect Home
There is another myth that those buying a first home are especially susceptible to. It is the myth of the perfect house. With a first home, the focus should be on a home you can afford depending on your financial situation.
While there is nothing wrong with having the highest aspirations about the house that you buy, reality must reign. Otherwise, your mortgage applications will keep on getting turned down because lenders feel you cannot afford the payments or you will get yourself into a corner with a house that you can’t really afford.
If what you can afford is a smaller house, a fixer-upper or a home in a location that is different from what you wanted, take it. You can always remodel and renovate or wait for it to gain value and sell. There are renovation loans that lend buyers the money to buy the home and finance the necessary renovations.
What’s right for you?
When it comes to mortgages especially buying your first home, the fact is that there is no black or white or hard and fast rules that work for everyone. It depends on your individual financial circumstances. Take the time to do thorough research into the options. Listen to your mortgage advisor or broker too and use a mortgage calculator to see both the small and the big picture.
5 Top Home Maintenance Items To Tackle During Spring
Depending on where you live, you might be convinced that Mother Nature is playing a cruel joke on you. But wherever you live, spring is officially here and that means it’s time for sprucing up the old house. Winter keeps us a bit sedentary on the home improvement side, so here are a few home maintenance items to tackle as spring puts the spring back in your step.
Check those gutters. The weight of snow, falling branches, and simply cold temperatures can wreak havoc with your home’s gutters. Grab a ladder (and a buddy) and give your gutters the once-over. Check for blockages caused by debris and leaves, make sure seams are firmly held together, and clear the drainage ways as you prep for spring rains. This article offers key maintenance points for any homeowner looking to clean out their gutters.
Clear that chimney. While the singing chimney sweep from Mary Poppins might not be what you’re looking for, you definitely need one this time of year. Have a professional come out and inspect your chimney, especially following all of the use you’ve given it this past winter. They’ll check the mortar, flue, and ensure you’re good to go before the rains make you wish you’d called sooner. If you’re not quite done with use this winter, check out these tips for eco-friendly chimney use.
Inspect outside water connections. Sometimes those hoses don’t make it inside during the winter. Now’s a good time to check your hoses for rips, tears, and breaks, as well as check the spigots coming out of the house for any cold-related damage. This article will take you through de-winterizing your home, complete with visuals. Remember – thawing still-frozen pipes is a delicate process and to avoid damage, pipes are best thawed slowly. We’d all like Mother Nature to step it up a bit, but this is one place where slow and steady wins the race (and saves your wallet).
Tune-up your cooling system. Before the heat of late spring and summer set in, have a professional come give both your central and window air conditioning units a look-see. While you’re waiting for them to arrive to make sure the winter didn’t do a number on your system, go ahead and replace your air filters. And if you’re in a home where there’s no central cooling, check out this new window AC unit from GE/Quirky called the Aros. It’s controlled from an app on your phone and, in addition to the sleek and modern design, claims to save you energy compared to other units of the same power. Might be worth a look.
Review your roof. The most expensive (and most unwelcomed) damage a home can endure is the damage we can’t see. That’s why inspecting your roof each spring is a must. Houselogic has an extensive checklist for seasonal roof inspections, designed to keep you ahead of costly repairs and keep small problems from becoming big ones. The roof over your head has been good to you. Why not be good to it in return by giving it a little post-winter TLC?
Can You Afford a Mortgage?
Whether you’re a first-time buyer looking for the perfect starter house, or a seasoned
pro trading up to your waterfront dream home, you are probably asking the same questions:
Can I afford this? And is this the right move at the right time?
Of course, you can use a mortgage calculator and ask the experts — lenders, agents,
and mom — but the reality is that you are the only one who truly knows whether you
can afford to buy right now. And, painful as it is, what you need to start with
is a detailed expense breakdown. Analyze what you spend — at least get a full month’s
snapshot. You’ll see where you may have wiggle room in your budget and what you
can afford for housing. (Be sure to count all those little incidental expenses like
dry cleaning and yes, those mid-afternoon Starbucks lattes count in the budget,
This sample budget belongs to a single, 35-year-old woman making $68,000 per year,
renting a two-bedroom apartment. Her monthly pre-tax income is $5,667.
- Car payment
- Credit card payments
- Car insurance
- Health insurance/renters insurance
- Natural gas
- Cell phone
- Home phone + Internet access
- Cable TV
- Gas, dining, clothes, dry cleaning, gifts, other expenses
- Memberships (gym, professional, etc.)
- Property tax/homeowners insurance/condo fees
- Alarm company
The sample budget may not look like your expense snapshot, but by adding and subtracting
your personal budget items with an eye toward true monthly out-of-pocket totals,
you get a pretty good picture. Now, add in all of the expenses where the zeros are
as well as the increased cost of your monthly mortgage payment (formerly rent).
Maintenance costs like condo fees, utilities, the leaky bathroom sink that defies
a simple trip to Home Depot to fix, property taxes,
closing costs, and furniture for your new home all add to the bottom line.
If you figure out that you can afford your projected budget, chances are you’ll
qualify for a mortgage in your range. Lenders will determine how much loan you can
afford by using something called your debt-to-income ratio, which is the ratio of
a borrower’s total debt as a percentage of their total gross income. Basically,
they will look at what’s left in your budget after your monthly bills are paid.
These include credit card payments, car payments, child support, etc.
- Housing ratio (or “front-end ratio”): Lenders want your total mortgage
debt (called PITI — an acronym for Principal, Interest, Taxes, and Insurance) and
condo fees to be no more than 30 percent of your gross monthly income; 28 percent
- Overall debt ratio (or “back-end ratio”): These are revolving monthly
payments, such as credit card, car lease, or loan payments, student loans, child
support, alimony, monthly utilities. (They do not include those lattes, but you
might want to plug in your lifestyle expenses for your own sake.) The ratio should
not be more than 36 percent.
Debt-to-income ratio standards differ from lender to lender, and vary based on your
loan program, but most lenders will give more weight to your
credit history as a factor in determining your particular situation. Here
is a typical ratio for a first-time buyer:
- Monthly gross household income:
- Mortgage debt ratio:
- 28% $1,596.0
- Expenses and overall debt:
- 36% $2,052.0
The mortgage debt of $1,596 is right in line with the current monthly rent payment
in the example above. As long as the monthly debt obligations and household expenses
are no higher than $2,000-2,300, this borrower should have no problem qualifying.
If your credit is stellar, you will be rewarded. Lenders may stretch these ratios
to 38/45, allowing you to purchase more home and take advantage of more lending
programs. And if you are a first-time home-buyer applying for an
FHA or VA loan, you may also be able to qualify with a higher back-end ratio
— up to 41 percent of your monthly gross income — and get approved for these federally-insured
How It Works
So, back to the question: How much home can I afford?
Keeping in mind the variables on debt-to-income ratios and the many lending programs
available, here is a sample breakdown for a mid-range home.
- Monthly gross household income (pre-tax):
- Mortgage debt ratio
- 28% $1,960
- Home price
- 20% down payment
- Interest rate on 30-year mortgage
- Mortgage payment (principle and interest)
Here is an example of a lower price-range home, purchased with the same loan terms
and interest rate:
- Monthly gross household income (pre-tax):
- Mortgage debt ratio
- 28% $1,008
- Home price
- 10% down payment
- Interest rate on 30-year mortgage
- Mortgage payment (P&I)
And the Other Costs…
In addition to the monthly mortgage payment, remember to factor in the added costs
of home purchase and ownership. Since this buyer above did not put 20 percent down,
he will need to add mortgage insurance, also known as PMI, to his monthly payment.
PMI protects lenders against losses that can occur when a borrower defaults on a
loan, and is required for borrowers with a down payment of less than 20 percent
of the purchase price. Buyers also incur
closing costs of 2.5 to 3 percent of the total loan amount. This covers
the cost of title searches, appraisals, legal fees, etc.
So what’s left to apply to the down payment? Using the example above, our first-time
buyer has $15,000 for the down payment on a $150,000 home, and the closing costs
may come to $4,500. The mortgage total just increased to $139,500. Over the 30-year
loan period, this brings the mortgage payment to approximately $866 per month. If
your head is not already spinning, now tack on mortgage insurance (fees vary based
on the loan), homeowners’ taxes and condo fees (if applicable), bringing the total
monthly payment to approximately $1,038. The good news is this is still well in
the range of the acceptable debt ratio.
Keep Some Money in Reserve
Many buyers invest every red cent they have into their new purchase, but it’s a
good idea to keep some emergency cash, or “leaky faucet money,” aside in the event
of emergency repairs or a job loss. So don’t completely raid your savings; with
home ownership, expect the unexpected.
- Qualifying for a Mortgage
- Learning About Mortgage
- Choosing a Mortgage Lender
- Mortgage Roadmap Tips
- Mortgage Checklist
- What to Ask Mortgage Lenders
- Mortgage Fearbusters
© Zillow, Inc. 2009. Originally posted – Can You Afford a Mortgage?
Home loans fall into three categories based on their loan amount: conforming and jumbo loans. If you need a home loan that’s over the conforming limit, you will probably need to get a Jumbo mortgage. If the property is located in one of the designated high-cost areas of the country then your loan would still be considered “conforming”. High-balance loans are preferable to Jumbo Mortgages insomuch as they come with slightly better rates. This is because in 2008 the Jumbo Mortgage sector was failing, and the circumstances for so thry
ae and reducy but for the most part they are not very different than a standard conforming loan.
Jumbo loans offer the same flexibility as conforming loans, however the only difference is that they are not eligible for purchase by Fannie Mae or Freddie Mac and must be sold in the secondary market. This means that the rates for Jumbo loans will be slightly higher than home loans with similar terms that are conforming loans. Sometimes you may hear Jumbo loans referred to as non-conforming loans.
Who Should Get A Jumbo Mortgage?
If you are able to afford a more expensive home, but haven’t saved up enough money to bring the loan down to conforming limits, a jumbo loan is a great option for you.
If you’re looking to find your “forever” home, and know that as time goes on your income will increase, a Jumbo loan could be an affordable home loan option for you. This may be a good way to bypass the “starter home” and prevent you and your family from moving at a later date to a bigger home.
Perhaps you’ve found the perfect home, but it just happens to be in a neighborhood where all the homes are highly priced. A jumbo loan may be the only option you have in order to buy a home, due to the high-value real estate in the area.
Things You Should Know About a Jumbo Loan
A jumbo mortgage is a great way to rapidly build your credit. By making your payments on time, you’ll quickly see your credit score improve.
Due to the large amount of a jumbo loan, it may be more expensive to refinance a jumbo mortgage, mainly because of higher closing costs.
With useful tools like Mortgage Calculators and my informational eBook, I will help get you the home loan that’s right for you in an efficient and comfortable way.
Call me today at (949) 529-0784 apply online for your Jumbo mortgage now.
Jumbo Mortgage Financing
In the United States, a jumbo mortgage is a mortgage with a loan amount above conventional conforming loan limits. This standard is set by the two government-sponsored enterprises Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages.
How Do Lenders View Jumbo Loans? The wholesale mortgage banker / lender is very concerned about the overall jumbo mortgage due to the level of risk associated with lending on such large loan amounts. For example, there is a big difference between lending on one $3million loan vs ten $300,000 mortgages. One several smaller loan amounts, the lender is essentially spreading its risk over multiple properties and borrowers. This risk associated with Jumbo mortgages is why the mortgage rates and down payment requirements are typically more than a traditional conforming loan.
Qualifying For A Jumbo Mortgage:
Business / Employment –
Whether you’re qualifying for a $500,000 loan, or a $5 million mortgage, there is obviously going to be a sizable monthly mortgage payment that the underwriter will want to be sure you can afford over a long period of time. It’s important to be thorough in explaining what you do for a living, the health of the industry and the likelihood of continued employment. A company web site, business licenses (self-employed) and other relevant information are important things to include with a loan application. Some underwriters may even search for your name or company on Google, so it’s smart to have an idea of what type of results and impression they’ll find if they choose to do a little extra digging.
Documentation of assets are critical, and they have to make sense in relation to the income stated on the application. For example, if the borrower states an income of $50,000 a month, then there should be sufficient assets and investments to back it up. If there are any large expenditures or deductions from checking accounts, make sure to have a paper-trail or letter of explanation that clearly details the nature of the transaction.
Credit Scores -
In addition to having high scores and proof of a responsible borrowing history, underwriters may also look for other sizable debts that that the borrower has had a positive experience managing or paying off. Public records and IRS issues will need to be thoroughly documented and explained.
The landscape has changed for appraisals, so don’t be surprised if multiple appraisals are required for financing approval on the property.
Basically, the overall borrower profile and supporting qualifying documentation has to make sense to an underwriter. Especially pertaining to the high net-worth world, the borrower’s lifestyle, assets, credit history and income potential should follow a similar patterns of others who take on the liability of large mortgage debts.
….. The jumbo and super-jumbo mortgage financing industry is always in a state of flux as the supply and demand for these particular loan products can change due to outside market conditions. A good rule-of-thumb to remember when trying to qualify for a non-conforming loan is to have your paperwork organized, as well as a good explanation prepared for anything that may raise potential questions by an underwriter about your ability to repay the mortgage over the term.
Frequently Asked Questions:
Q: Why are rates higher with Jumbo Mortgages? The rates are typically higher with Jumbo Mortgages due to the amount of risk associated with financing a larger property that may be more difficult to sell and recoup losses in the case of a default. Q: What are the down payment requirements for Jumbo Mortgages? Typically, down payments for non-conforming loan amounts can be 20% or higher of the purchase price. Generally speaking, the larger the purchase price, the more money the borrower will have to invest as a down payment. Q: Do I have to pay Private Mortgage Insurance on a Jumbo Mortgage? PMI is only required if he LTV is greater than 80%.
Deciding Between a Fixed vs Adjustable Rate Mortgage
Deciding between a fixed vs adjustable rate mortgage can have a major impact on your home financing, and choosing the best option starts with knowing the pros and cons of each.
Pros & Cons: Fixed Rate Mortgage
The main benefit of a fixed mortgage is that your payment stays the same throughout the loan. However, if rates are high, a fixed mortgage can be an expensive choice since there aren’t any initial rate cuts. And if you want to take advantage of dropping rates, you have to pay extra fees to refinance.
Pros & Cons: Adjustable Rate Mortgages (ARM’s)
An adjustable rate mortgage (ARM) can help you afford a bigger mortgage because the initial rate is usually lower than market rates. If you expect your income to rise or plan to sell the house in under five years, ARMs may be a good option. Plus, if rates begin to fall, you don’t need to refinance because your payments automatically drop with the rates. However, when rates rise, ARM rates and payments can jump significantly, even with caps in place. Your first adjustment can be especially dramatic since caps don’t always apply to the first adjustment.
Interest Rates Are A Major Factor
In the past few years as interest rates dropped, ARMs saved borrowers a lot of money. However, rates are now at historic lows. Thanks to all the government stimulus spending, inflation is expected to rise in the next year, therefore interest rates will rise too. Since a fixed rate guarantees a historically low rate over the long term, many people believe it’s the right choice for the times.
Talk To Your Loan Officer
However, the only way to know for sure is to have an analysis done of your financial situation. If you don’t have much equity, are worried about your job and can’t afford to have your mortgage payments rise, a fixed rate may be best. On the other hand, if you have lots of assets, stable income and can live with some payment fluctuation, you may do better with an ARM—especially if you have some good rate caps in place. As your local mortgage advisor, I’d be happy to perform a free mortgage analysis to help you with this important decision.
Call me today!
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PMI – How To Get Rid of Private Mortgage Insurance
PMI – What Is It, How It Works & How To Get Rid of It
What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) protects the lender in the event that you default on your mortgage payments and your house isn’t worth enough to entirely repay the lender through a foreclosure sale. Unfortunately, you foot the bill for the premiums, and lenders almost always require PMI for loans where the down payment is less than 20%. They add the cost to your mortgage payment each month, in an amount based on how much you’ve borrowed. The good news is that PMI can usually be canceled after your home’s value has risen enough to give you 20% to 25% equity in your house.
When the Law Requires a Lender to Cancel PMI
Some baseline rules about cancellation were established by the federal Homeowners’ Protection Act, which applies to people who bought their homes after July 29, 1999. The Act says that you can ask that your PMI be canceled when you’ve paid down your mortgage to 80% of the loan, if you have a good record of payment and compliance with the terms of your mortgage, you make a written request, and you show that the value of the property hasn’t gone down, nor have you encumbered it with liens (such as a second mortgage). If you meet all these conditions, the lender must grant your request to cancel the PMI.
What’s more, when you’ve paid down your mortgage to 78% of the original loan, the law says that the lender must automatically cancel your PMI. But don’t count on the lender to notice — keep track of the date yourself. Unfortunately, it may take years to get to this point. Thanks to the wonders of amortization, your schedule of payments is front-loaded so that you’re mostly paying off the interest at first.
When You Can Get Your PMI Cancelled
Even if you haven’t paid down your mortgage to one of these legal limits, you can start trying to get your PMI canceled as soon as you suspect that your equity in your home or your home’s value has gone up significantly, perhaps because your home’s value has risen along with other local homes or because you’ve remodeled. Such value-based rises in equity are harder to prove to your lender, and some lenders require you to wait a minimum time (around two years) before they will approve cancellation of PMI on this basis.
How to Get Your PMI Cancelled
The exact procedures for getting your lender to cancel your PMI are largely in the hands of your lender — or, to be more accurate, in the hands of the company from whom your lender buys the insurance (though you’ll never deal with that company directly). You’ll most likely need to:
- Contact your lender to find out the appropriate PMI cancellation procedures. It’s best to write a letter to your mortgage lender, formally requesting guidelines.
- Get your home appraised by a professional to find out its current market value. Your lender may require an appraisal even if you’re asking for a cancellation based on your many payments, since the lender needs reassurance that the home hasn’t declined in value. Although you’ll normally pay the appraiser’s bill, it’s best to use an appraiser whom your lender recommends and whose findings the lender will therefore respect. (Note: Your tax assessment may show an entirely different value from the appraiser’s — don’t be concerned, tax assessments often lag behind, and the tax assessor won’t see the appraiser’s report, thank goodness.)
- Calculate your “loan to value” (LTV) ratio using the results of the appraisal. This is a simple calculation — just divide your loan amount by your home’s value, to get a figure that should be in decimal points. If, for example, your loan is $200,000 and your home is appraised at $250,000, your LTV ratio is 0.8, or 80%.
- Compare your “loan to value” (LTV) ratio to that required by the lender. Most lenders require that your LTV ratio be 80% or lower before they will cancel your PMI. Note: Some lenders express the percentage in reverse, requiring at least 20% equity in the property, for example. When your LTV ratio reaches 78% based on the original value of your home, remember that the Homeowners’ Protection Act may require your lender to cancel your PMI without your asking. If the loan to value ratio is at the percentage required by your lender, follow the lender’s stated procedures for requesting a PMI cancellation. Expect to have to write another letter with your request, stating your home’s current value and your remaining debt amount, and including a copy of the appraisal report.
If Your Lender Refuses to Cancel the PMI
Most lenders recognize that there’s little point in requiring PMI after it’s clear that you’re making your mortgage payments on time and that you have enough equity in your property to cover the loan if the lender has to foreclose. Nevertheless, many home buyers find their lenders to be frustratingly slow to wake up and cancel the coverage. The fact that they’ll have to spend time reviewing your file for no immediate gain and that the insurance company may also drag its feet are probably contributing factors.
If your lender refuses, or is slow to act on your PMI cancellation request, write polite but firm letters requesting action. Such letters are important not only to prod the lender into motion, but to serve as evidence if you’re later forced to take the lender to court. If court action becomes your best option, small claims court can be a good avenue, and you won’t need a lawyer to accompany you.
For more information on cancelling PMI please visit the post on the CFPB website.