The SCOOP! Blog by ChangeMyRate.com®

Thinking about buying a house? Before you do, you might want to work on boosting your credit score.

 

A new study by real estate research site Zillow found that a borrower with a fair credit score (640-679) would pay about $720 more per year in mortgage costs for the same home than a borrower with an excellent score of above 760.

 

The analysis found that nationally, a borrower with an excellent credit score could get a 30-year fixed-rate mortgage of 4.5% for a median priced U.S. home of $213,100 with a 20% down payment. The borrower with fair credit would qualify for a 5.1% rate, according to Zillow’s analysis of quotes offered to borrowers on Zillow Mortgages between March 25-May 5.

 

Over the lifetime of that 30-year mortgage, the fair credit borrower would pay $21,000 more for the typical home.

 

"When you buy a home, your financial history determines your financial future," said Zillow senior economist Aaron Terrazas in a statement.

 

The penalty for having a lower credit score grows for homebuyers in more expensive markets.

 

For example, a buyer with a fair credit score in San Jose, where the median home value is $1.3 million, would wind up paying about $129,000 more over the course of the 30-year loan than a borrower with an excellent score, according to Zillow's analysis. 

 

The study does note that "these estimates likely represent the maximum impact of fair versus excellent credit, because credit scores aren’t set in stone." Borrowers can also secure lower rates with a larger down payment and few buyers pay out the full 30-year term on a loan.

 

"Homeowners do have the option to refinance their loan if their credit improves, but as mortgage rates rise this may be a less attractive option," Terraza said.

 

How to boost your credit score

There are ways to raise your credit score in a relatively short time.

 

The personal finance website Nerd Wallet recommends these 3 steps to improving your credit score in a short time:

 

1. Fix errors on your credit reports

2. Stay well below your credit limit

3. Deal with past-due bills

 

By addressing these issues it’s possible for a borrower with a low credit score to boost it by as much as 100 points, according to NerdWallet.

Source: To view the original article click here                Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 20th, 2018 6:37 AM

The housing market has been going up, and as a result, a lot of investors and homeowners are finding themselves benefitting from substantial appreciation on their home values. Investors often approach me with the problem of too much "lazy" equity in their homes.

Sophisticated investors know the amount of equity they have in their properties and closely monitor the return on equity of their investment — that is, the percentage of return in comparison to the amount of deployable equity, or how much they would net after a liquidation. This is different from the return on investment, which is the amount the initial capital investment makes off a down payment.

With the rise in home prices, people are looking to optimize the equity trapped in their home. In this situation, there are three options for redeploying the equity: sell the property, cash-out refinance, or take out a home equity line of credit (HELOC). Consider the strategy known as mortgage recasting or rate arbitrage on of those options in order to pay down your current mortgage.

First, let’s talk about good debt versus bad debt. An 18% interest rate paid on something like a credit card is bad debt. But taking a 4% HELOC or loan from your life insurance policy can be good debt. Especially if you are putting the loan proceeds into private note fund at 10%, an apartment private placement at 15%, a rental property at 25% or another higher risk/return partnership or development at 30%. What you do with the liquidity from your mortgage debt is what really matters — just don’t buy jet skis or other doodads with the money.

You assume when you buy a house that it will go up in price. Historically this has been true, but it’s not guaranteed to go up in the future. Mortgage debt is how most people can afford homeownership, whether or not they are responsible enough to commit to a 30-year loan or can afford the monthly payment. The unavoidability of mortgage debt is one of the myths I blindly followed to buy my first primary residence in 2009. You hear of it often from bankers and lenders, most of whom are simply acting as salesmen for big banks and get compensated when you originate a loan. They are not always acting as a fiduciary.

A traditional mortgage is where you have a 30-year amortization schedule where you make payments in the same amount for 30 years and all the interest is paid upfront. In the first few years, a huge majority of your payment is going toward interest. When the majority of homeowners move before the end of the 30-year mortgage, brokers love it because they get compensated with origination fees when a new loan or refinance happens, and banks love it because the amortization clock has been extended and the customer is again put into the front-loaded majority interest portion of an amortized loan.

Mortgage rate arbitrage turns the tables on this situation.

Take out a HELOC — credit borrowed against the equity in your home or any other loan that is based on simple interest, not amortized interest. This is a liquid line of credit that you can put money into and out of without penalty. Many people call these “debt-destruction weapons,” which is illustrated when you take a spreadsheet and compare simple interest and amortized interest against you.

In this strategy, you are taking money out of your HELOC (simple interest) to pay off your mortgage (amortized interest). This pushes down your interest paid every day since the HELOC with simple interest is calculated with an average daily rate (ADR). If you are paying 5% on your HELOC, you are paying 5%/365 or 0.0137% per day. Your ADR is 0.0137%. If you borrowed $100,000, you are paying 0.000137 x $100,000, or $13.70 per day.

On the flip side, amortized loans are front-loaded with interest and great benefit your lender, not you.

Mortgage Rate Arbitrage Key Considerations

1. Calculate your low-stress frequency. To reduce the headache of making payments to your mortgage with amortized interest every day or week, you need to figure out what is an effective amount to “chunk” these payments to your mortgage from the HELOC. Most people start out in quarterly to annual increments.

2. Your frequency dictates how much you are going to take from your HELOC to apply to your mortgage payment. Be sure you are maintaining a positive cash flow status in your personal budget.

3. An advanced strategy is to put your income into your HELOC and utilize your HELOC as your checking account.

4. Before you begin, evaluate how stable your monthly income and expenses are. Someone in a stable government job might want to be a little more aggressive and pay off your mortgage with bigger amounts from your HELOC. If your employment is unstable or your salary irregular, you might want to calculate a rolling 6- or 12-month average and base your chunking amount on that. Often this requires a cash flow plan in the form of a spreadsheet and a little financial guidance from someone who has employed this strategy before.

Though a sound strategy for many, this mortgage rate arbitrage process is not right for everyone. Avoid if:

• You need to have positive cash flow in your personal finances due to low income or budget is too tight.

• You do not have a credit score of 620 or higher needed to secure a HELOC.

• You do not have enough equity in your home to obtain a HELOC.

• You are an incredibly efficient, sophisticated investor already growing your money at greater than 15% per year. You might be better off investing in what you do best.

In the end, mortgage lenders are trying to extract every bit of revenue they can via amortization of loans. By using simple interest in the form of HELOCs to pay down your current amortized debt, you can more quickly pay down the principal on your loans, saving significant money over the lifetime of your loan.

Source: To view the original article click here                Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 19th, 2018 8:52 AM

A discount point is essentially prepaid interest: You pay an upfront fee to lower the interest rate on your mortgage.

 

When you take out a mortgage loan, you run into a lot of closing costs, and few are optional. Most lenders, however, will give you the option to buy mortgage discount points, which can lower your interest rate. You may also get the chance to receive a negative point credit, though this will raise your interest rate. 

Here’s the lowdown on what mortgage points are, how they work and when you should and shouldn’t use them.

What are mortgage points?

A mortgage point can be either positive or negative, though positive points are much more common. Buying a positive, or discount, point or receiving a negative point changes your mortgage interest rate. Each kind of point costs 1% of your mortgage loan amount. For example, if you have a $100,000 mortgage, you’d pay $1,000 for one discount point.


How do discount points work?


A discount point is essentially prepaid interest: You pay an upfront fee to lower the interest rate on your mortgage. Because purchasing points lowers your interest rate, buying them is often known as “buying down the rate.”

Discount points may be tax-deductible if the purchase is for your primary residence. Before buying points, you should have your lender give you an estimate for both scenarios — your mortgage closing costs if you buy points and if you don’t — says Ann Thompson, a divisional sales executive at Bank of America. She recommends then taking these two estimates to your tax professional to learn if points are tax-deductible for you and how each option would affect your overall tax situation.


How do negative points work?


Negative points, sometimes called rebate points, are different: The lender offers to give you a credit by paying some of your fees in exchange for a higher interest rate.

This is sometimes called a no-cost mortgage. Negative points can be paid either to a broker as part of his or her compensation or to the borrower to cover closing costs. When a lender offers you negative points, it is effectively saying it’ll cover some of your mortgage fees and charge you a higher interest rate in return.

The credit from negative points cannot exceed the mortgage closing costs, and these points can’t be used as part of a down payment. Thompson says points can be used to cover some nonrecurring closing costs, such as bank and title fees, but they can’t cover recurring fees like interest or property tax.

Why would you willingly take a higher interest rate? If you’re short on money needed for closing costs, “you may want to pay a little bit more in interest over the life of the loan to have some of that covered,” Thompson says. Another reason might be if you want to hang onto some cash for improvements before you move in and can afford a higher monthly payment.

How much is a point worth?


There’s no set amount for how much a point will lower or increase your rate, Thompson says. It varies by the type of loan, the lender and prevailing rates, since mortgage rates fluctuate daily.

On the day of the interview with Thompson, buying a point on a fixed-rate loan lowered the rate by a quarter of a percentage point. On an adjustable-rate mortgage, the rate would drop three-eighths of a percentage point.

At Guaranteed Rate, a national lender, the savings are similar: Buying one point will typically lower your rate a quarter, or perhaps three-eighths, of a percentage point, says Dan Gjeldum, senior vice president of mortgage lending.

 

When should pay points?

Deciding whether to buy mortgage discount points is always a case-by-case decision, though it typically comes down to two factors: time and money. How long will you stay in the house, and how much can you afford to pay to close your mortgage?

The key factor is how long you think you’ll stay in the home. Then you can calculate at what point you’ll break even on the cost of the points (use our calculator here for a personalized recommendation on whether to buy points).

 

“I don’t personally ever encourage paying points simply because of the fact that it does take so long to make it up, especially for a first-time home buyer,” Gjeldum says. While it can make financial sense for some, first-time home buyers generally don’t hold the mortgage long enough to make up the upfront expense, he says.

“While it can make financial sense for some people to buy discount points, first-time home buyers generally don’t hold the mortgage long enough to make up the upfront expense.”

 

That money may be better spent on improvements like paint, landscaping or new carpets, he adds.

It may make sense to buy points when you’re purchasing a long-term investment property or a home you plan to hold for many years, Thompson says, since you’ll reap savings after breaking even.

Here’s an example from Thompson to help demonstrate how long it can take to benefit from buying a point. Say you’re taking out a $400,000 loan. Since one point equals 1% of the loan, buying one discount point would cost you $4,000. So first, decide whether you can afford to pay that $4,000 on top of your existing closing costs.

Based on mortgage rates the day she was interviewed, Thompson said buying a point would save you roughly $57 a month on your mortgage bill. By dividing the cost of the point ($4,000) by the monthly cost ($57), you determine how many months it would take you to make up the cost of buying the point. In this example, it’s about 70 months, or almost six years.

That means if you planned to stay in the home for six years, you’d break even, and any longer than that, you’d save money. But if you moved out before then, you’d have lost money.

Gjeldum says buying points makes sense if the seller is willing to pay for it. Gjeldum and Thompson both say that if an employer is relocating you for work and offering to pay points to buy down your interest rate, it could also be worthwhile since you’re not the one shelling out money.

The total closing costs you’ll pay can vary greatly according to your home’s purchase price. The average homebuyer will pay between about 2% and 5% of the loan amount in closing fees.

 

Your lender is required to outline your closing costs in the Loan Estimate and this Closing Disclosure you receive before the big settlement day. Take the time to review them closely and ask questions about things you don’t understand.

 

Source: To view the original article click here                Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 18th, 2018 5:31 AM

To get the best FHA mortgage rate, check your credit report, consider making a larger down payment, reduce debt, shop more than one lender and explore state assistance programs.

FHA loans are backed by the government, so you might think the interest rates are regulated. But FHA mortgage rates vary by lender — they’re not set by the Federal Housing Administration. That means you’ll have to do a little work to get the best interest rate on an FHA mortgage. Here’s how.

1.  Check your credit report

It’s important to make sure your credit report and score properly reflect you. Why? While FHA guidelines say that borrowers can qualify with a credit score as low as 500, lenders make their own rules about what they’ll accept. And the higher your credit score, the better your interest rate will be.

 

So pull your free credit report, which the three primary credit agencies are mandated to provide you once a year without charge. In fact, you can get all three at once if you’re about to apply for an FHA loan.

 

Once you get your report, look for mistakes and omissions. For example, a bad-debt collection that you don’t recognize. Or a credit account that you’ve paid perfectly for quite some time but doesn’t show up on the report.

If you find an error in your favor and get it corrected, it might boost your credit score and earn you a lower interest rate.

 

2. Make a bigger down payment

FHA mortgages allow down payments as low as 3.5%. But putting down just a little bit more can improve your interest rate. Lenders consider loan-to-value when pricing a loan. A larger down payment lowers your LTV while positioning you as a more-trusted borrower.

 

You can plug some numbers into the NerdWallet loan-to-value calculator to consider different scenarios.

3. Pay off a credit card

Another key measure lenders consider is your debt-to-income ratio, which is how much you owe, divided by your monthly earnings.

 

Got a credit card that still has a balance due? Work to pay it off. There can be two positive results: You’ll lower your debt-to-income ratio, and quite likely improve your credit score.

Here’s a DTI calculator that can help you work the numbers.

4. Don’t stop after the first lender

Getting a “yes” from a lender is a great feeling, and many people stop right there. But it’s smart to continue shopping for better deals. Think about it: You know you can qualify, you’ve got an approval in your back pocket, so what’s the downside?

Sure, it takes time and more paperwork. But finding a lender that offers you a better FHA mortgage rate reduces the interest you pay over the life of the loan. That can mean a lower monthly payment and saving thousands of dollars.

Use that as an incentive to shop around.

5. Explore state first-time home buyer programs

We saved it for last. Perhaps the best tip of all. Explore first-time home buyer assistance programs offered by your state’s housing authority. Many of these nonprofit agencies combine FHA mortgages with down payment and closing cost assistance. We’re talking free money, in the form of grants.

Not only that, but these state-sponsored programs often offer even more favorable FHA mortgage rates through associated local lenders.

Source: To view the original article click here                Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 17th, 2018 8:51 AM

Purchasing your first home is a major milestone and not a decision to be taken lightly. It’s a huge financial commitment that can take months of preparation — searching for the right home, making an offer, going through the mortgage application process and closing on the home. Then you have the actual business of home ownership, which is a whole other story.

 

But in order for this to go as smoothly as possible, it’s a good idea to have your affairs in order before you become a homeowner. Here are five signs you might be ready.

 

1. You Have Financial Stability

 

Financial stability is one of the most important contributing factors to successful homeownership. You need to have a steady source of income that can easily cover your mortgage payment — experts recommend that your home cost no more than 20 to 30% of your monthly income. You’ll also want to minimize any debt or financial obligations that can reduce your ability to afford a mortgage. Finally, you’ll need income or savings to afford home repairs, furniture and other assorted expenses.

 

If you’re already emptying your bank account to pay your rent, you may need to reduce your expenses or increase your income and savings before you’re ready to buy.

 

“You shouldn’t spend to your limit and end up with a new home and nothing in the bank,” Chris Taylor, a real estate broker with Advantage Real Estate, said. “You need to have a plan and a comfortable buffer so that if the unexpected happens, you have the money to make repairs.”

 

Want to know more about mortgages? There’s a lot to learn and our mortgage learning center can be a good place to start.

 

2. You Have Enough for a Down Payment

 

Almost all home sales require some sort of down payment. Depending on loan type, down payments can range from 5 to 20% of the cost of your home. The more money you can provide for a down payment, the less you will owe on your mortgage.

 

Down payments can increase the odds of getting approved for a loan and help you secure better interest rates, Randy Hopper, senior vice president of Mortgage Lending at Navy Federal Credit Union, said. “It is, therefore, critically important to factor into your budget the source of your down payment.”

 

Many lenders, agencies and nonprofits provide assistance programs and financing options that can help potential homeowners come up with their down payment. Be sure to shop around and research the available options. And when it comes time to settle on a price? Consider checking out this guide to help you know the best tactics for negotiating.

 

3. You Have Strong Credit

 

Strong credit is essential to securing a mortgage. A good credit score can help you secure a better interest rate, which can save you thousands over the life of a loan. The better your credit score, the better your odds of landing your dream home with a reasonable interest rate.

 

Building or improving your credit takes time, and it’s best to start well before you begin touring houses. “Make 100% of your payments on time,” Hopper said. “You should avoid opening too many accounts at once. And always check each of your credit reports for errors.”

 

 

Not sure where your credit is at? Now is the time to find out. You can see two of your credit scores for free on Credit.com and you can see your full credit reports from the three major credit bureaus (also free) on AnnualCreditReport.com. If you find that things aren’t in the best shape, you can focus on repairing your credit yourself or turn to a professional credit repair expert for help. Either way, if you can wait to apply for a loan until your credit is in decent shape, your wallet will likely thank you.

 

4. You’re Ready for a Long-Term Commitment

 

House hunters are often primarily focused on the type of home they want. But consider that you’ll be making a long-term commitment to both your home and the geographic region. Pay attention to the home values in the neighborhood, the quality of schools, recreation options and any other priorities. Building value in your home and putting down roots requires years of commitment, so make sure you're ready.

 

“There are costs associated with acquiring your loan, closing on the sale and then moving in — and this is not to mention the physical items you’ll most likely end up purchasing,” Hopper said. “On average, it can take about five years to break even on these costs, so I recommend thinking ahead and asking yourself if you will still be in the home beyond five years.”

 

5. You’re Prepared for Home Maintenance

 

You don’t have to be an expert handyman to own a home. But if you can’t operate a plunger, you may not be ready. Homes need maintenance and TLC to retain their function and value, and if you can’t handle repairs, you’ll at least need to be able to afford someone who can.

 

“Calling a plumber on a Saturday night is going to be costly,” Taylor said. “If you have the ability to watch a few YouTube videos and figure out minor repairs, you’re in good shape. It’s also important to know when you’re in over your head and need to consult an expert.”

 

Source: To view the original article click here                Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 16th, 2018 7:14 AM

Home buyers are leaving serious money on the table.

According to new research from Freddie Mac, the average borrower could save $1,500 just by getting one extra rate quote when applying for their mortgage. With five quotes, they could save $3,000 or more.

But Freddie Mac’s report shows buyers just aren’t doing it. In fact, less than half of today’s borrowers shop around for rates when getting a mortgage or refinancing. “Worse,” Freddie Mac reported, “many consumers do not seem to realize that the rates offered by lending institutions vary widely.”

In fact, according to David Edmondson, senior loan officer at Flagstar Bank in Boston, interest rates vary from one-eighth percent to a half-percent from lender to lender. On a $300,000 loan, a half-percent difference means more than $1,000 in savings per year.

Why Aren't People Shopping?

Most people would jump at the chance to have an extra $1,000 in their pockets, so what’s holding today’s buyers back? Freddie Mac’s researchers point to Nobel Prize winner Richard Thaler’s economic theory.

“His research into seemingly irrational economic behaviors finds that in general consumers search too little, get confused while evaluating complex alternatives and are slow to switch from past choices, even if it costs them,” Freddie Mac reported. “These types of behavior apply to more complex tasks such as taking out a mortgage and can lead to borrowers relying solely on their existing banking relationship or a single referral from a real estate agent or a friend.”

But it might be simpler than that. According to Anthony Casa, president of Garden State Home Loans and chairman of the Association of Independent Mortgage Experts, home buying is often just overwhelming.

“If you're a home buyer, it's a pretty overwhelming process,” Casa said. “You have home inspections. Then you have to get the mortgage loan. The idea of sitting there and talking to three to four different mortgage companies to get your quotes, it can be a little bit overwhelming to go through that process.”

Not getting started early enough can also prevent buyers from shopping around, Edmondson said.

“The No. 1 reason for not rate shopping is that buyers wait to the last minute,” said David Edmondson. “Buyers often don’t think about the terms of the mortgage until they have signed a purchase agreement. Once that happens, they are dealing with deadlines and often end up going with whomever their Realtor recommends. While this can be quick and convenient, it could be costly as well.”

Casa agreed that timing has a lot to do with it  especially in a hot market.

“Unfortunately because of the moving parts, lack of familiarity with the process, and also the pace that you have to get things done, many buyers will go with that first person they get referred to,” Casa said. “Unfortunately they're going to pay a very, very high premium over the life of the loan for doing that.”

Why Rate Shopping Works

Mortgage rates vary greatly  from day to day and lender to lender. According to Freddie Mac’s data, in a single week borrowers received rates anywhere from 4.2% to 4.8%.

“If borrowers only search once, some will get lucky and get a low rate, others will get a high rate, and many will get a rate around 4.5%,” the report stated.

On average, buyers who get one extra quote will save anywhere from $966 to $2,086 over the life of their loan. For five quotes, buyers will save $2,089 to $3,904. “If you shop around, you could get as much as a full three-quarters of a percent difference,” Casa said. “It's a game-changer.”

Rate shopping is especially important in today’s market, as home prices continue to rise. “Shopping around and getting the lowest rate is what's going to expand your budget and allow you to buy more house,” Casa said.

According to Ric Edelman, whose Edelman Financial Services offers financial and investing advice, the varied nature of the mortgage industry is also a reason to shop around.

“Some companies, for marketing reasons, choose to emphasize certain kinds of buyers or certain kinds of loans,” Edelman said. “For that reason, you need to shop around, just like you would for any other product.”

Veterans United, for example, specializes in loans for military and former military members, while other mortgage companies focus more on first-time home buyers, rural home loans or other niche markets. Some lenders even offer professional loans for buyers with specific jobs, like lawyers, doctors, teachers or other types of public servants. As Edelman said, shopping around can help borrowers find better-fit loans  as well as rates  for their unique situations.

Pro Tips For Mortgage Shopping

It’s clear that shopping around can help home buyers save. But what does that rate shopping actually look like? What can buyers do to get the best deal in today’s competitive market?

From scoping out fees to simply staying consistent, here’s how industry experts recommend buyers get the best rate in today’s market:

Pay attention to fees.

“Ultimately you need to figure out the monthly payment you are comfortable making, instead of focusing so much on just the interest rate. A borrower could be tempted to choose one lender offering a 4.125% interest rate over another lender offering a 4.25%, but the place with the lower interest rate could also have the highest closing costs and title fees in the market.”  Mat Ishbia, president and CEO of United Wholesale Mortgage

Get a full breakdown of fees and costs.

“Origination fees are another cost that will frequently vary from lender to lender. Lenders will have different names for these fees, such as underwriter fee, processing fee, origination fee, etc. However, it is important to compare total lender fees when comparing one lender with another. You can easily review fees when you have the loan estimates. A buyer may think they are saving a little on the interest rate, when in reality they are paying a much higher upfront fee. Ask each lender for an official, written loan estimate of rates and fees based on your particular situation.”  Edmondson

Consistency is key.

“You just need to make sure you're comparing apples to apples. You need to ask what the interest rate for 30-year fixed rate is so that you know, with each mortgage company or bank, they're quoting you for the same kind of product.” — Edelman

Start early.

“It is important to think ahead. Before meeting with a Realtor, shop around with three to four different lenders to find out what they can offer you.”  Edmondson

Know your scenario.

“What's your credit score? What kind of home are you buying? What's your purchase price? How big of a loan are you looking at? Define your scenario, and connect with three to four different loan officers from three to four different companies and say, ‘Here's my scenario. I don't need you to do a whole application. I don't need to have you have to pull my credit; I know this is my situation. Based upon these parameters and what my closing date is, what can you do for me on a 30-year fixed? What are your options?" — Casa

Lock your rate.

“Once you have a house under contract, double check with each lender to see if any of their terms have changed. Once you have compared your options, ask to lock into the best rate that works for you. That way you’ll avoid the rate or fees from changing while the loan is being underwritten.”  Edmondson

Consider a broker.

“When you go to a mortgage lender, you're only dealing with that one institution's products. When you go to a mortgage broker, they work with dozens of lenders and they can shop the loan for you to show you the rates available from a variety of sources and showing you the best that's available for your situation.”  Edelman

Think hard about paying points.

“You should be wary of paying points. A point is a prepayment of the loan interest. So, one way to get the interest rate of the loan down is to make a big cash payment up front in the form of points. You need to recognize that by paying points, or prepaying the interest, you need to stay in the house long enough for that to be of value. Your lender or mortgage broker should be able to show you how many years you need to stay in the house for paying points to be worthwhile.”  Edelman

Source: To view the original article click here                Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 15th, 2018 7:29 AM

The pros and cons of home equity loans, including a home equity line of credit or HELOC, home equity loan and cash-out refinance, are confusing to some borrowers.

Determining which type of equity loan is best for you depends on several factors:
  • How much equity you have.
  • How much you want to borrow.
  • When you plan to repay the money.
  • Whether you want a fixed or flexible term.
  • The interest rate on your current mortgage.

Home equity line of credit

A HELOC is a credit line secured by your home. Most HELOCs have an adjustable rate, interest-only payments for a specified time, and a 10-year “draw” period, during which the borrower can access the funds.

After the draw period ends, the outstanding balance must be repaid. Typically, the repayment period is a 15-year term.

Homeowners with adequate income who don’t tip the debt overload scale can qualify for this type of loan. They can find this type of financing for 80 percent of combined loan to value or even 85 percent or 90 percent combined loan to value.

Combined loan to value, or CLTV

Lenders calculate the combined loan to value by adding all mortgage debt and dividing the total by the home’s current appraised value.

Formula: (Amount owed on primary mortgage + second mortgage) / appraised value

Example: Morgan owes $60,000 on the primary mortgage and has a HELOC for up to $15,000. The house is worth $100,000. The CLTV is 75%: ($60,000 + $15,000) / $100,000 = 0.75

The good and bad of a HELOC

Compared with a first mortgage, a HELOC can be a good way to borrow a small sum for a short time, says Justin Lopatin, vice president of residential lending at PERL Mortgage in Chicago. For example, you might borrow $20,000 that you plan to repay within three to five years.

One bad thing about a HELOC is it can be “very tempting” to access it, even if it’s not necessary, says Alan Moore, CEO of AdvicePay, a payment-processing platform for financial advisers.

“You have to carefully consider: What are your long-term goals? What is the money for?” Moore says. “Realistically, having easy access to money is not always a good thing.”

Home equity loans are less common

A home equity loan, like a first mortgage, allows you to borrow a specific sum for a set term at a fixed or variable rate. That’s why these loans are sometimes called second mortgages.

Home equity loans aren’t common, but some banks offer them.

Hybrid equity loans with fixed rates and terms

An alternative is a HELOC that’s structured like a fixed-rate home equity loan.

Kelly Kockos, senior vice president of home equity for Wells Fargo in San Francisco, says the bank offers a HELOC with a fully amortizing payment, which means the loan is repaid in full if all the payments are made through the draw period.

“With every payment you make, you pay down a little bit of principal and a little bit of interest. So, when you get to the end of your draw period, you don’t have a big payment shock,” Kockos says.

fixed-rate advance option allows the borrower to lock in a portion of the credit line at a fixed rate and term. If interest rates change, the advance can be unlocked to float down to a lower rate, Kockos says.

Want only one mortgage? Go with a cash-out refi

A cash-out refinance is an entirely new first mortgage with cash back.

This option appeals to homeowners who want to refinance and take out cash at the same time.

“It’s a good way to grab equity and keep it all in one loan,” Moore says.

He cautions, however, that any loan or cash-out strategy must have a clear purpose. Don’t take the cash just because you can.

Lenders typically limit the cash-out refinance to 80 percent of the home’s value, says Jay Voorhees, broker and founder of JVM Lending, a mortgage company in Walnut Creek, California.

Check fees and interest rates

It’s important to compare closing costs and home equity loan rates. Fees might be higher for a cash-out refinance than they are for a HELOC, but the interest rate might be lower for a cash-out refinance.

The ability to lock in a low fixed rate is an advantage of a cash-out refinance, Voorhees says. “Whenever your payback period is going to be relatively slow, it behooves you to have a fixed rate because it’s much safer,” he says.

Your current interest rate matters

Your new monthly payment might be higher or lower than your current payment, depending on your interest rates, loan balances and repayment terms.

For example, if your existing mortgage has a very low rate and you go for a cash-out refi, you could end up paying a higher rate on your entire loan, not just the cash-out portion.

“If you bought (your home) in 2012 or 2013 and got a rate in the 3s, you may not want to touch that because it’s such a pristine loan that can’t be beat,” Lopatin says. “If you purchased (before then) and maybe haven’t refinanced, it may make sense to roll everything into one loan.”

Source: To view the original article click here                Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 14th, 2018 7:04 AM

Even when a seller and buyer agree on a price for a home, the deal can collapse if the property appraises for less than that price.

For example, let’s say a seller lists his house for $325,000, the buyer offers $275,000, but they settle on $300,000. A week before closing, the appraisal comes in at $265,000. That’s the maximum price for which the lender is willing to offer a mortgage.

Who’s going to make up the $35,000 difference?

In this case, the seller has already come down on the price and doesn’t want to lower it again. And the buyer may not have enough cash to cover the shortfall, or does not want to pay more for the house than its appraised value.

As a result, the deal falls through.

What causes a low appraisal

Short appraisals are common in declining housing markets because the lack of recent comparable home sales in the area, or “comps,” make it hard for appraisers to determine the current market value of a property.

When home sales slow down, good comps “age” quickly. Add foreclosures and short sales to the mix and appraisals can run all over the map.

The Home Valuation Code of Conduct, or HVCC, which went into effect in May 2009, compounded the problem. The HVCC prohibits Fannie Mae and Freddie Mac lenders from having direct contact with appraisers.

As a result, most lenders work through appraisal management companies, or AMCs, whose pool of residential appraisers includes those with limited training or little familiarity with the geographic area being appraised.

Know how to protect yourself

You can protect yourself from low appraisals. Here are some suggestions for buyers and sellers.

If you’re a buyer:

  • Tell your lender to find an appraiser who comes from your county, or perhaps a neighboring county. After all, you’re paying for the appraisal.
  • Ask that the appraiser have a residential appraiser certification and a professional designation. Examples include the Appraisal Institute’s senior residential appraiser, or SRA, or member of the Appraisal Institute, or MAI, designations.
  • Meet the appraiser when he inspects the home, and share your knowledge of recent short sales and foreclosures that could skew the comps. You can speak with your appraiser; the prohibition applies only to your lender.
If you’re a seller:
  • Get an appraisal before you list a home. Search for a qualified appraiser in your area on the Appraisal Institute site.
  • Use the appraisal to set a realistic listing price for your home.
  • Give a copy of your prelisting appraisal to the buyer’s appraiser.
  • Question a low appraisal. There’s always a chance the appraiser or a supervisor will take into account new or overlooked information.

Source: To view the original article click here                Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 13th, 2018 7:53 AM


Learn how you can qualify for an FHA loan with a low down payment and flexible approval requirements.

For most Americans, the purchase of a home is made possible with a mortgage. However, saving a 20 percent down payment is an unattainable goal for many would-be buyers in areas with high home prices. Compounding the challenge are strict underwriting requirements, including some that were put into place to protect the housing market from a crash. Underwriting is the process mortgage lenders use to determine whether to approve a loan, based on the borrower’s risk profile.

The Federal Housing Administration, or FHA, loan program was created to help Americans buy homes following the Great Depression, and it remains a popular choice for people who need an affordable mortgage option. FHA loans are a popular solution because they allow for smaller down payments, while also resolving some of the underwriting challenges borrowers face. FHA mortgages are made by lenders and insured by the Federal Housing Administration, a U.S. government agency. With a government guarantee, the lender can offer more flexibility in its underwriting requirements, including credit guidelines and the size of the down payment.

“If a borrower has good credit but limited cash on hand, other government-backed loans are available for less money down,” says Stephen Moye, senior loan officer for Citywide Home Loans. “For a borrower with a bankruptcy, foreclosure or other credit issue, the FHA loan has a much lower barrier to entry.”

This guide explains the FHA loan process and offers recommendations of lenders that can meet your home buying needs. 

How FHA Loans Work

An FHA loan works like any other mortgage in that the lender that approves your application pays for the home you want to purchase and you repay that lender, with interest, over time. A mortgage is a secured loan and the house is the collateral. Your name will appear on the deed, but the lender will keep a lien against it until the loan is repaid in full. If you default, the lender has the right to sell the property and recover the balance due.

FHA loans are made by lenders, just like traditional mortgages. The difference is that FHA loans have a government guarantee. This guarantee allows lenders to loan to borrowers who might not qualify for a conventional mortgage.

Traditional conventional mortgage lenders typically expect a 20 percent down payment, but the FHA minimum down payment requirement is 3.5 percent. FHA loans have lower credit score requirements and may allow a higher debt-to-income, or DTI, ratio.

Qualifications

General FHA loan requirements include:

  • The loan must be for a property used for your primary residence.
  • The property must be appraised by an FHA-approved appraiser.
  • The property must be safe, sound and secure, in compliance with minimum property standards as defined by the U.S. Department of Housing and Urban Development, or HUD.
  • You must have a valid Social Security number and be a legal resident of the U.S.
  • You must have a minimum credit score of 580 with a down payment of at least 3.5 percent, or a minimum credit score of 500 with a down payment of at least 10 percent.
  • You may not have delinquent federal debt or judgments, or debt associated with past FHA loans.
  • You must have steady employment history.
  • You must make a down payment of at least 3.5 percent of the purchase price. If the down payment was gifted by a family member, documentation is required.
  • You must have a DTI ratio that does not exceed limits.
  • Any judgments or collections on the credit report must be resolved or satisfactorily explained.
  • Any required waiting period has passed, as follows:

 

Event

Waiting period

Waiting period with extenuating circumstances (nonrecurring events beyond
  your control that result in sudden, significant, prolonged reduction in
  income or a catastrophic increase in financial obligations)


 

Chapter 7 or 11 bankruptcy


 

 

Four years


 

 

Two years


 

 

Chapter 13 bankruptcy


 

 

Two years from discharge, or

 
four years from
  dismissal


 

 

Two years


 

 

Multiple bankruptcies


 

 

Five years if more than one filing in last seven years. Most
  recent bankruptcy must have been caused by extenuating circumstances.


 

 

Three years from most recent discharge or dismissal


 

 

Foreclosure


 

 

Seven years


 

 

Three years, with additional requirements after three years up
  to seven years:


 
90 percent maximum
  loan-to-value purchase, principal residence, limited cash-out refinance


 

 

Deed-in-lieu of foreclosure, preforeclosure sale (short-sale),
  or charge-off of mortgage account


 

 

Four years


 

 

Two years


 

Debt-to-Income Ratio Limits

Two DTI ratio figures are calculated when considering an FHA mortgage.

The front-end DTI ratio is your total monthly housing expense, which includes the mortgage principal and interest, mortgage insurance, homeowners insurance, property taxes and applicable homeowners association fees, divided by your total monthly income. The back-end DTI ratio is your total monthly debt obligation, including housing, minimum credit card payments, auto loans, student loans and any other required monthly debt payment, divided by your total monthly income.

Standard FHA front- and back-end DTI limits are 31 percent and 43 percent, respectively. If you earn $3,500 per month, your front-end DTI cannot exceed $1,085 and the sum of all your monthly debt obligations cannot exceed $1,505.

Applications for borrowers with lower salaries and higher DTIs are manually underwritten. Manual underwriting means that your lender assigns a person to review your loan application and documents, versus running your information through an automated underwriting system. Manually underwritten FHA loans allow for front- and back-end DTI ratios of up to 40 percent and 50 percent, respectively. To qualify for these higher DTI limits, you will need to meet other requirements.

FHA Loan Limits for 2018

FHA loan limits are based on median local home values, county by county. Where the median local home value exceeds the baseline loan limit, the limit is raised. Most of the U.S. is subject to standard loan limits:

Home type

Standard FHA loan limits


 

One-unit property


 

 

$424,100


 

 

Two-unit property


 

 

$543,000


 

 

Three-unit property


 

 

$656,350


 

 

Four-unit property


 

 

$815,650


 

Loan limits are higher in high-cost areas including San Francisco, New York City and Washington, D.C.

Home type

High-cost FHA loan limits


 

One-unit property


 

 

$636,150


 

 

Two-unit property


 

 

$814,500


 

 

Three-unit property


 

 

$984,525


 

 

Four-unit property


 

 

$1,223,475


 

Special exception loan limits apply in a select few very high-cost areas, such as Honolulu, Hawaii.

Home type

Max special exception FHA loan limits


 

One-unit property


 

 

$721,050


 

 

Two-unit property


 

 

$923,050


 

 

Three-unit property


 

 

$1,115,800


 

 

Four-unit property


 

 

$1,386,650


 

You can use HUD’s FHA loan limit lookup tool to find out the limit in your county.

Loan Terms

The loan term is the number of years you will make payments. Typical mortgage loan terms are 10, 15, 20 or 30 years. FHA loan terms depend on the lender. One lender may offer only 15- or 30-year loans, while another may offer a customizable term between eight and 30 years.

Interest Rate Types

The two main types of mortgage interest rates are fixed and adjustable.

Fixed-rate mortgage: Fixed-rate loans are the most popular type of mortgage. With a fixed-rate loan, the interest does not change over the life of the mortgage. The advantage of a fixed-rate loan is a predictable payment set for the life of the mortgage. The disadvantage is that even if market conditions cause rates to fall in the future, the rate will not change.

Adjustable-rate mortgage: With an adjustable-rate mortgage, also called an ARM, the interest rate fluctuates along with a benchmark rate. The primary advantage of an ARM is that it often starts out at a rate that is lower than the lowest available rate on a fixed-rate mortgage. Not all FHA lenders offer ARMs.

With the most popular type of ARM, the hybrid ARM, the rate is fixed for a few years at the beginning of the loan and then adjusts periodically according to market conditions. For the early years of the loan, you might save money on interest. However, when the adjustable rate kicks in, the rate on an ARM is usually higher than the rate available for a fixed-rate loan.

With an interest-only ARM, you make only interest payments for a period of time. In this case, the principal balance does not go down during this time. After this interest-only payment period is over, you have to start paying on the principal of the loan.

If you choose a payment option ARM, you have some flexibility to choose your payment amount (often set once a year) from the following options:
  • A traditional principal plus interest payment (loan balance goes down each month)
  • An interest-only payment (loan principal balance does not go down each month)
  • A payment that is less than the interest (loan balance increases)

You can save money in the short term with a payment option ARM by making low payments. However, at some point, the required payment could spike depending on the payment option you choose. The lender will recalculate, or recast, the required payment amount at periodic intervals, based on the remaining loan term and the loan balance. If your balance has grown and the remaining number of years on the loan has gone down, your required payment will increase considerably.

When comparing loan options, keep in mind that the annual percentage rate, or APR, on your loan is not the same as the interest rate. The APR is a measure of the total annual cost of the loan, including the mortgage interest, points, fees and any additional costs. Mortgage points are a fee you can pay at the start of the mortgage to lower your interest rate for the duration of your mortgage.

Each point costs 1 percent of your total loan amount. The interest rate reduction depends on the lender, but it is common to lower your interest rate by 0.25 percent in exchange for every point purchased.

Since costs vary from one lender to the next, you should compare APRs to make a meaningful comparison between similar loans.

Mortgage Insurance

Whether your lender requires mortgage insurance hinges on your loan-to-value ratio, or LTV. This number refers to how much you’re borrowing compared to the value of the property. Mortgage insurance is typically required on any mortgage with a loan-to-value ratio of more than 80 percent. It protects the lender from losses if you default on the loan. If you make a 3.5 percent down payment, your LTV is 96.5 percent and will be higher if additional costs are rolled into the loan.

Private mortgage insurance, or PMI, is one of the most important aspects of FHA loans to understand because it can make FHA loans more costly than conventional mortgages. FHA lending standards are less stringent than conventional mortgage lending standards, so FHA borrowers pay two different mortgage insurance premiums, or MIPs: upfront MIP and annual MIP.

Upfront MIP is 1.75 percent of the loan amount. This may be paid at closing or rolled into the loan.

Annual MIP depends on the loan size, loan term, LTV ratio and annual outstanding loan balance (see the chart below).

For example, if the loan is less than $625,500, the term is more than 15 years and the down payment is lower than 5 percent, the premium is equal to 0.85 percent of the outstanding balance. Annual MIP is calculated each year, based on the current outstanding loan balance, and divided into 12 equal monthly payments (which are added to your regular payments).

Annual MIP

Loan term of more than 15 years

Base loan amount

LTV ratio

MIP factor

Duration

Less than or equal to $625,000

= 90 percent

0.0080

11 years

> 90 percent but = 95 percent

0.0080

Life of loan

> 95 percent

0.0085

Life of loan

Greater than $625,000

= 90 percent

0.10

11 years

> 90 percent but = 95 percent

0.10

Life of loan

> 95 percent

0.105

Life of loan

Loan term of less than or equal to 15 years

Base loan amount

LTV ratio

MIP factor

Duration

Less than or equal to $625,000

= 90 percent

0.0045

11 years

> 90 percent

0.0070

Life of loan

Greater than $625,000

= 78 percent

0.0045

11 years

> 78 percent but = 90 percent

0.0070

11 years

> 90 percent

0.0095

Life of loan

Borrowers who make a down payment of 10 percent or more will pay annual MIP for 11 years; borrowers who make smaller down payments are obligated to pay this premium for the entire mortgage term.

Here’s what these costs might look like for a typical borrower:


 

Home purchase price


 

 

$175,000


 

 

Down payment (3.5 percent)


 

 

$6,125


 

 

Base loan amount


 

 

$168,875


 

 

Closing costs (2 percent)


 

 

$3,378


 

 

Upfront MIP


 

 

$2,955


 

 

Total amount financed with upfront MIP and closing costs rolled
  into loan


 

 

$175,208


 

 

Annual MIP first year


 

 

$1,489, or $124 per month


 

If this loan has an interest rate of 5 percent, the principal, interest and MIP monthly payment in year one is $1,065. This figure does not include property taxes, homeowners insurance or homeowners association fees if required.

Hawaiian Home Lands loans are not subject to either form of MIP, and Indian Lands are not subject to upfront MIP.

Applying for an FHA Loan

The process of obtaining an FHA loan is largely the same as the process for obtaining any other mortgage. The main difference is that the search for a suitable lender is limited to those that offer FHA loans. As with any borrowing decision, it’s helpful to compare the loan terms you may qualify for with multiple FHA-approved lenders before committing to a mortgage. You can then move on to the next steps to get prequalifed or preapproved for a loan.

Prequalification: You’ll supply basic information to the lender about your debt, income and assets. No verification or credit check are performed. This allows you to start your home search with a general idea of the loan size and terms you might qualify for.

Preapproval: You’ll provide more detailed information and documentation to the lender about your income, assets, debts and regular expenses. The lender will check your credit and tell you what loan amount and terms you qualify for. Preapproval does not guarantee loan approval, but can alert you to problems in your credit report so that you are not surprised during the application process.

Application: If you are preapproved, the lender will confirm all of the details you provided and may require up-to-date documentation. If you were not preapproved, you’ll begin the process. The lender will now require details about the specific property you want to buy.

Loan estimate: Within three business days after you apply, the lender will give you a loan estimate. This is a standard three-page document that explains the terms and details of your loan. If you apply with multiple lenders, you can compare loan estimates and choose the best one. You must notify the lender within 10 business days if you intend to proceed.

Processing: After you notify the lender of your desire to proceed, the lender will verify all your financial information and order a property appraisal and title report.

Additional documentation: If questions arise during loan processing, the lender may ask you to submit additional documentation.

Appraisal: An appraisal lets the lender and borrower know the value of the home. For an FHA loan, the lender will choose a professional HUD-approved appraiser to evaluate the property you want to buy and give an opinion of its value. By law, the lender must provide a copy of the appraisal to you no later than three days before closing.

Underwriting: Once the application and appraisal are complete, a loan underwriter will evaluate the entire package and determine whether the loan is acceptable. It must meet guidelines set by the FHA and the lender.

Closing disclosure: The lender will provide a closing disclosure at least three business days before your loan closes. This is a standard, five-page form that describes the final details of the loan. You can compare it to your loan estimate to find out whether any terms or details have changed.

Insurance: Before your loan closes, you will need to purchase homeowners insurance that is effective no later than your closing date. You must bring proof of insurance to your closing.

Closing: To close your loan, you’ll meet with your lender’s closing agent. At this meeting, you’ll show identification and proof of insurance, sign all the necessary documents and deliver a cashier’s check for the down payment and closing costs. Then you will receive the keys to the home.

For more information about the mortgage process, including how interest rates are determined and details about additional costs and fees, see the U.S. News Mortgage Guide.

Choosing an FHA Lender

To find the best FHA mortgage lender to meet your needs, you should consider criteria including:

  • Product offerings
  • Eligibility requirements
  • Interest rates
  • Closing costs
  • Customer satisfaction

Product Offerings

Product offerings include loan terms and loan types. A large menu of product offerings may mean that the lender is more likely to have the right loan to meet your needs. Examples of popular product offerings include:

  • 15-year fixed rate
  • 20-year fixed rate
  • 30-year fixed rate
  • 5/1 ARM
  • 7/1 ARM
  • 10/1 ARM

Eligibility Requirements

While a 3.5 percent-down FHA loan is technically available if you have a FICO score as low as 580, lender guidelines vary. You should verify that you can qualify for each lender’s FHA loan offerings before applying in order to minimize credit inquiries and save time.

Although the FHA will guarantee the loan, not all lenders will make loans to borrowers who meet only the minimum requirements. Research the lender’s minimum credit score and maximum DTI ratio requirements.

Interest Rates

Compare APRs from one lender to the next. Since this figure includes the interest rate, points and other fees, the APR will be higher than the interest rate and is a more accurate measure of the true cost of the loan. Even a few tenths of a percent can equate to thousands of dollars saved over the life of a loan.

While fixed rates don’t tend to be widely different from one lender to the next, you may find a broader range of options on adjustable-rate mortgages, so if you’re shopping for an ARM, pay special attention to the APR.

Virtually all FHA lenders offer fixed-rate loans, but not all offer adjustable-rate loans.

Closing Costs

You can shop for a lender that has lower closing costs than the competition. Some common closing costs you can expect include:
  • Application fee
  • Origination fee
  • Appraisal fee
  • Credit report fee
  • Title search fee
  • Title insurance fee

You might find detailed closing costs on a lender’s website, or you may need to talk to the lender’s representative or apply for a loan in order to get a more clear picture of the lender’s costs. Since an application does not obligate you to a loan, you may wish to apply with multiple lenders before making a choice. Some lenders are willing to negotiate or waive certain costs in order to gain your business.

Evaluate closing costs along with the interest rate to determine the total cost of the loan over time. Low closing costs and a high interest rate could cost more over time than higher closing costs and a lower interest rate. Remember, if you roll closing costs into your loan, you will pay interest on those costs.

Customer Satisfaction

To measure past customer satisfaction, check with market research company J.D. Power. In its 2017 U.S. Primary Mortgage Origination Satisfaction Study, J.D. Power surveyed customers to measure satisfaction in six key areas:
  • Loan offerings
  • Application and approval process
  • Interaction
  • Loan closing
  • Onboarding
  • Problem resolution

Each factor is rated on a scale of zero to five. A lender with an overall score of five is rated “among the best.” A score of four means its rating is “better than most.” A three means “about average,” and a two means “the rest.”

Not every lender is included in the J.D. Power report. You should review these and other lenders with the Better Business Bureau.

To view the original article click here                   Apply to Buy a Home                      Apply to Refinance

 

 

Posted by Jackie A. Graves, President on May 12th, 2018 8:32 AM

Did you think that when you stopped renting and started owning your, you'd finally be done with deposits? Think again. When you buy a residence with a down payment of less than 20%, your lender may require you to make a deposit on your homeowners insurance, private mortgage insurance, any required additional insurance (like flood insurance) and your property taxes. 

How It Works

An impound account (also called an escrow account, depending on where you live) is simply an account maintained by the mortgage company to collect insurance and tax payments that are necessary for you to keep your home, but are not technically part of the mortgage. The lender divides the annual cost of each type of insurance into a monthly amount and adds it to your mortgage payment.

Required Mortgage Impounds

Since borrowers who make low down payments are considered to be a higher risk (smaller down payment equals less personal stake in the property; plus, they often have less income, as well), lenders want some level of assurance that the state will not foreclose because of non-payment of property taxes, and that borrowers won't be without homeowners insurance in the event that the property is damaged. An impound account ensures that the only person who will become owner of the house in case of default will be the lender.

Optional Mortgage Impounds

Even if an impound account is not required, one can be elected at the loan signing. But is that a good idea?

On the down side, it's locking up money that might be better used elsewhere. Not all states require lenders to pay interest on the funds held in impound accounts, and those that do may not pay as much as individuals could earn by investing the money on their own. Not surprisingly, some consumers would rather set money aside in a high-interest savings account, or some other investment.

Further, if the mortgage company does not pay bills – like property taxes and homeowners insurance – when they are due, the homeowner will still be on the hook. Therefore, homeowners should be aware of the due dates for these payments and monitor their impound accounts carefully.

On the other hand: Although the impound account is designed to protect the lender, it can also be beneficial for the borrower. By paying for big-ticket housing expenses gradually throughout the year, borrowers avoid the sticker shock of paying large bills once or twice a year and are assured that the money to pay those bills will be there when they need it.

Monitoring Your Impound Account

Your monthly mortgage statement will probably show the balance in your impound account, making it easy for you to keep a close eye on it. Federal regulations also help borrowers out in this area by requiring lenders to review borrowers' impound accounts annually to ensure that the correct amount of money is being collected. If too little is being collected, the lender will start asking you for more; if too much money is accumulating in the account, the excess funds are legally required to be refunded to the borrower.

Additional Considerations

The cash amount that fixed-rate borrowers think of as their monthly payment is still subject to change – this is one of the biggest issues with impound accounts. Since homeowners insurance and property taxes can vary, monthly payment amounts can fluctuate, affecting monthly cash flow with little warning.

(Read "Understanding the Mortgage Payment Structure" for more information.)

Required impound accounts also decrease the amount of money borrowers can place in an emergency fund. The lender keeps a little extra in your impound account, in order to ensure the extra cushion needed in order to keep making insurance and tax payments if you stop making your monthly mortgage payments. This cushion is collected when you acquire the loan. Thus, the startup costs associated with impound accounts can increase the amount of cash buyers need in order to purchase a residence in the first place.

Buyers don't need to maintain impound accounts forever, though. Once sufficient equity (often 20%) in the residence is achieved, lenders can often be convinced to ditch the impound account.

The Bottom Line

For many homeowners, mortgage impounds are a necessary evil. Without them, lenders might not be willing to give mortgages to borrowers who can afford only low down payments. The best way to deal with impound accounts is to understand how they work, monitor them carefully – and get rid of them when you can.

To view the original article click here                   Apply to Buy a Home                      Apply to Refinance

Posted by Jackie A. Graves, President on May 11th, 2018 4:49 AM

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