Why your down payment should be at least 20 percent

 

If you’re like most people, you’re planning to have a mortgage in order to pay for your house. It’s almost unavoidable to buy a home without financing.

Conventional wisdom until a couple of decades ago was that a home buyer needed to save at least 20 percent to put down on a house. Recently, though, many people have gotten away from that rule of thumb. In order to promote home ownership, some programs require much less. There are some options that offer zero down.

Simple math

For the sake of this example, the home you’re buying is $200,000. The interest rate is 4 percent. Taxes are 1.5 percent. Private mortgage insurance (more on that later) is 0.5 percent.

Rates calculated using: zillow.com

Lower mortgage payments
Simple math dictates that the more you put down, the less your monthly payment will be. All things being equal, your mortgage payment drops $191 if you have 20 percent down as opposed to zero down. As a new homeowner, that will definitely help your monthly budget.

No mortgage-insurance fees
Private mortgage insurance (PMI) protects the lender in case you cannot pay the mortgage. PMI is required if your down payment is less than 20 percent in most cases. Your lender requires the fee be paid until you reach 20 percent equity in your home. Mortgage insurance can be expensive, ranging from 0.5 to 1 percent of the home's value annually.

Lower interest rate
With a larger down payment, you could qualify for lower interest rates, a fact not taken into account in the example above. Using the same example, if your interest rate dropped to 3.5 percent, your monthly mortgage payment would be $926.80 and the total interest payment would be $98,649.74. Compared to the 10 percent down payment in our example, you’d save $30,715 over the life of the loan in interest and PMI payments just by paying an extra $10,000 down.

Patience pays

As stated, the example above is simple math, but there’s nothing simple about mortgage math. Ask your REALTOR® and mortgage lender to crunch the numbers for you. Patience pays: taking the time to save money for a down payment offers solid return on investment. Over a 30-year mortgage, having a bigger down payment can save you tens of thousands of dollars on your starter home, helps you build equity faster and puts you on firmer financial footing.

Pre-qualified and pre-approved are not the same

When you’re buying a home, there is a certain chronological order in the process. Arranging for a mortgage before finding the home you want to buy seems like it would be out of order, but it is to your advantage to take this step prior to making an offer.

There are two terms with which you should be familiar: pre-qualified and pre-approved. The two terms are often used interchangeably, but there is a difference.

What is pre-qualifying and why should you do it?

For pre-qualification, the mortgage professional reviews your finances, credit report and income to make an estimate of the amount for which you would qualify. After reviewing the information, the lender will issue a pre-approval certificate on company letterhead indicating that they have reviewed your finances and the amount of loan which you could qualify for.

Many lenders allow you to pre-qualify over the phone. This is good information to have, of course, because you’ll know the price range of the homes you should be looking for during your search. But remember this … it is not a guarantee of a loan. There still may be issues to resolve and the closing can take several weeks to complete.

Why pre-approval is better.

For a pre-approval, your loan application actually goes through the process of underwriting. The bank commits to lend you up to a certain amount, contingent upon the appraisal and the house qualifying for the loan.

There are two advantages associated with pre-approving for a home loan. First, it is a time saver. The closing process could be completed in one to two weeks when all you only need is an appraisal; while it can take between 30 and 45 days when you have to go through the entire loan process. Secondly, being pre-approved is attractive to sellers, particularly when they need to move quickly. If your offer is close to that of another potential buyer, being pre-approved may convince the seller to accept your offer.

If you have more questions about mortgage financing and shopping for a new home, please contact me. As your real estate professional, I am here to help with all of your home buying or selling needs.

Six Tips for First-Time Homebuyers

A house is the biggest investment that most people will ever make. The decision to buy should not be taken lightly. Any time you buy a house it can be stressful, but buying one for the first time can be daunting. Here are a few tips to make your first-home purchase go more smoothly.

1: Determine your housing budget - Making sure that you can afford a house is the first step in the process. Fannie Mae recommends that buyers spend no more than 28 percent of their income on housing costs. Don't forget to add mortgage insurance, property taxes and homeowner's association fees. Use a mortgage calculator to determine what the approximate costs will be. Make sure to ask your real estate professional about taxes and fees.

2: Know your needs before you start looking - This requires a little self-analysis and planning. Think about what's important to you and your lifestyle. It's not really that difficult to determine whether you want to live in the country, suburbs or in the city. But if you don't want to be bothered with lawn and home maintenance, opt for a condo. If you're planning a family, you probably want a house with a lot of living space. Take a look at your employment situation, too. If there's a possibility of being transferred, you'll want to buy something that is likely to sell quickly.

3: Understand the additional costs of owning a home -There's more to consider than just a monthly mortgage payment. Your budget needs to include insurance, utilities, repairs, maintenance, lawn and landscaping.

4: Read the fine print -Everything is important in a contract, so read all the clauses and fine print before committing to a mortgage. Rates can vary greatly depending upon where you go and what programs are available, so don't be afraid to shop around for the best rate. The rate in the mortgage lender’s ad isn't always what you'll pay; lenders add points, private mortgage insurance and closing costs, which add to the cost of the mortgage. It never hurts to have a lawyer look at any contract.

5: Ask for full disclosure and a home inspection -Investing in a home inspection can save you money and stress in the long run.

While most states require the seller to disclose potential problems with the property, they may not always know about the homes entire history.

6: Understand the taxes -Make sure that you know if your property taxes are rolled into your monthly mortgage payment or if you will be responsible for paying them yearly. Don't forget that you can often deduct the property taxes, points and interest paid on a mortgage. Keep all paperwork for your annual federal or state income tax return. If you use an accountant to prepare your taxes, schedule a meeting to learn more about the these types of deductions.

If you have any questions about anything involved, during the home buying process, you can rely on the knowledge and experience of a real estate professional, like me.

 

Advantages and disadvantages of the short sale

Over the past few years, the short sale has become a more common option for homeowners, who may be upside down in their mortgages. An alternative to foreclosure, the short sale involves homeowners making the decision to sell their property for less than what they owe on the mortgage.

This decision is a difficult one to be sure. If you find yourself in that situation, be sure to ask your real estate agent about the advantages and disadvantages of a short sale. Before making this decision, you should understand what the long-term effects of a short sale may be.

Advantages

The most obvious advantage to a short sale is that it may help your credit rating by preventing a foreclosure from appearing on your credit report.

Because the mortgage lender will be compensated for the home, they are more likely to approve a short sale rather than going through the expense of a foreclosure. Short sale homes typically sell for more than a foreclosure, offering another advantage to the lender.

Opting for a short sale may allow you a bit more time to make future living arrangements. With a foreclosure, you’ll get about 30 days to vacate; you may get 90 days or more in a short sale situation.

Disadvantages

While a short sale doesn’t appear as a foreclosure on your credit report, it will appear as a closed account, which can lower your credit rating by as much as 150 points, making it more difficult to purchase a home in the immediate future. By comparison, a foreclosure on your credit report can prevent you from qualifying for a home loan for seven years or more.

You will have to move out of your home and seek new housing - with a short sale on your credit report.

Depending on regulations in your state, the lender may require a deficiency note, which requires you to repay the amount still owed on the mortgage after the sale. This debt will almost always go on your credit report if not repaid.

There are also some tax implications to a short sale; the amount of the debt that is cancelled may be taxed.

Be sure to talk to your mortgage lender and your REALTOR about short sale options. These professionals can help you make the best decisions possible when it comes to selling your home, reestablishing your credit, and getting back on the road to homeownership as soon as possible.

CFPB Releases New Mortgage Rulings

The Consumer Financial Protection Bureau (CFPB) has recently issued new Mortgage rules. These rules cover a lot of territory, but the part of the 804 page document discussing changes to borrower affordability is generating the most attention.
The focus on affordability is due to the recent housing bubble – or the period of self-reinforcing increase in home prices. This led to poorly enforced rules that allowed lenders to award loans to individuals who were unable to afford them leading to a burst in early 2007.

In response to the real estate bust and credit crisis led to the Dodd-Frank bill passing into law in 2010 some see this law as a knee jerk response that ordered the CFPB to define “qualified mortgages” or mortgages that lenders can award with minimal risk and these rules are to go into effect on Jan 10 2014.

These new rules have declared that qualified loans can no longer include any of the following::
·      interest-only;
·      balloon payment;
·      negative amortization;
·      term exceeding 30 years;
·      zero documentation;
·    lender fees exceeding 3 percent of the loan amount (unless that amount is less than $100,000); or low "teaser" rate on an adjustable-rate mortgage (ARM)

There are few loans being issued today that include any of these listed loan options and these new rules should help alleviate some of the excessive stringency in the current market.

Moving Day Meals

We all know that moving day is a challenge with planning, logistics and the physical (and emotional) strain. Planning meals is one thing that may slip through the cracks.

Finding their way

Be sure to identify restaurants in the area. This is particularly helpful if you’re  moving across country. Useful apps like yelp.com and urban spoon can make this easy. While you’re at it, look up the address of a local grocery store.

Open first box

You’ll want to pack a “first opened” box. It does not get packed into a moving van and is the first one moved to the kitchen where it is easy to find. Inside will be the essentials: first aid kit, medications, toiletries, trash bags and the items necessary to make the first meal in your new home. Don’t forget that utensils and plates to serve the first meal should be added to this box.

Keep it simple

The first meal at a new home should be easy to make and served without a lot of hassle. One of the easiest things to make is pasta. Sauce in the jar doesn’t have to be refrigerated. Dry pasta is easy to transport and store. The best thing is that it can be made in one pan.

For lunch or for summer days, you might suggest making sandwiches or hoagies, which do require a quick trip to the grocery store.

Having the first meal in the new home is one of the best ways to transition to a new area. Having a planned meal, with all the essentials to make and serve it, will help to ease the stress.

Housing Market Rebound Stays Steady

Across the housing industry, the cautious consensus seems to be that the market rebound is steadily moving forward.

Market is 52% back to “normal”

Jed Kolko, Trulia’s Chief Economist, blogs on The Huffington Post.

This month Kolko posted about Trulia’s Housing Barometer, which looks at three indicators — construction starts, existing home sales and the delinquency-plus-foreclosure rate — and compares them to both their worst level and to their pre-bubble “normal” levels.

The December 2012 barometer indicated positive signs:

• Construction starts were at a 54-month high, the highest since June 2008 — putting construction starts 47% back to normal


• Existing home sales were down slightly — dropping about 1% from the previous month, existing home sales were still at their second-highest level since November 2009 and if distressed sales were left out, home sales were up 26% year-over-year in December


• Delinquency + foreclosure rate was steady — just barely down from the previous month, December’s rate of mortgages that were delinquent or in foreclosure is the lowest it’s been in four years, and 41% back to normal

Taken together, these three indicators show a market that is 52% back to normal — compared to just 27% back to normal in December 2011.

(Read Jed Kolko’s complete article on The Huffington Post, here)                

Home prices increase is the biggest in 6 1/2 years

According to CoreLogic, U.S. home prices rose 7.4% in November 2012 — the largest annual percent increase in six and a half years. Rising home prices are considered to be key to the housing market recovery. CoreLogic is forecasting home prices to continue to rise in 2013 by another six percent.

(via Investors.com)

Lead with your head

Even as many indicators — including data for housing starts and permits and the National Association of Home Builders/Wells Fargo Index of traffic of prospective buyers — show the housing market is recovering, experts recommend that home buyers and sellers make strategic rather than speculative decisions.

Robert Shiller, professor of economics and finance at Yale and one of the economists behind the S&P/Case-Shiller Home Price Index, wrote the following last week in The New York Times,

The bottom line for potential home buyers or sellers is probably this: Don’t do anything dramatic or difficult. There is too much uncertainty to justify any aggressive speculative moves right now. If you have personal reasons for getting into or out of the housing market, go ahead. Otherwise, don’t stay up worrying about home prices any more than you do about stock prices.

(Read Shiller’s full article on The New York Times, here)