Jay Costantino's Blog
Part of buying a home is researching the market and your finances. Most lenders require you to put at least 20 percent down or pay private mortgage insurance (PMI). Since PMI is a cost that does not lower your interest rate or principal, it’s almost always better to save up that hefty down payment. Lenders charge PMI to cover some of their risk if you do not put the 20 percent down to create equity. Conventional loans backed by Fannie Mae and Freddie Mac always require PMI if you do not put 20 percent down.
In some cases, you could avoid PMI by taking out a special loan or a VA loan. VA loans are only available to veterans, but require very little down or even zero down. The VA doesn’t actually give you the loan—it insures your loan against default. Conventional loans not backed by Fannie Mae or Freddie Mac often have higher interest rates. These two programs are also government-insured loans.
Other reasons to avoid paying PMI include:
Tax laws change every year. As of 2017, PMI was no longer deductible, which means that you lose that offset.
The lender is the only beneficiary. If you should die before your loan is paid off, it will pay only the lender and only for the balance on the home.
You pay PMI until the equity on your home reaches 20 percent. If the market was good when you bought the home, but it tanks a couple of years later, you could be stuck paying PMI for many years.
Some lenders require you to pay PMI even after the equity in your home reaches 20 percent. If you do have to take PMI, always read the fine print.
Finally, PMI is difficult to cancel. You will need to write a letter to your lender to cancel the PMI. Until you hear from the lender, you will be stuck paying those premiums every month.
PMI ranges from .5 percent to 1 percent of the amount you borrowed paid out in equal monthly payments every year. Thus, a loan amount of $200,000 could have a $2,000 per year PMI premium, which is about $167 per month added to your mortgage payment until the lender agrees to cancel the premiums.
Saving the Down Payment
In addition to saving for a down payment, you may qualify for some down payment assistance programs such as the first-time home buyer’s program. These programs help you get that 20 percent so that you do not have to pay PMI. If you have a retirement account, you may be able to use money from that account to help with a down payment.
Though it may seem painful to pay such a large chunk of money, it saves you from paying insurance premiums and it lowers the cost of the loan since you don’t pay interest on the down payment and it is applied to the principal.
If you’re a first time homebuyer and want to start weighing your mortgage options, you’ll have much to learn. With so much at stake, you’ll want to make sure you choose the best mortgage for you now, and one that will still suit your needs years into the future.
Sometimes, first time buyers are hesitant to ask questions they may consider too basic because they don’t want to seem inexperienced to lenders, agents, or anyone else they’ll be in contact with throughout the home buying process.
So, in this article, we’ve compiled a list of commonly asked mortgage questions that first time buyers might want to ask before heading into the process of acquiring a home loan.
What is the first step to getting a mortgage?
This question may seem straightforward, however the first step can vary depending on your financial situation. For those who already have saved up for a down payment and built a solid credit score, the first step is probably contacting lenders and getting preapproved or prequalified.
However, if you aren’t sure about your credit score and haven’t saved up for a down payment (ideally, 20% of what you hope to spend on the house), then you should address those matters first.
To find a lender, you can do a simple Google search for the mortgage lenders in your area, or you can ask around to friends and family to find out their experience with their own mortgage lenders.
What does it mean to be pre-qualified and pre-approved?
If you think of the mortgage process in three steps, the first step would be getting pre-qualified. This means you’ve given the lender enough basic information for them to decide which type of mortgage you’re eligible to receive.
Pre-approval includes collecting and verifying further details. At this step, you’ll complete a mortgage application and the lender will run a credit check. Once you’re pre-approved, your file can be moved to the underwriting phase.
What are closing costs?
“Closing costs” is an umbrella term that covers all of the various fees and expenses related to buying or selling a home. As a buyer, you are responsible for paying numerous closing costs. These can include, but are not limited to, underwriting fees, title searches, title insurance, origination fees, taxes, appraisal fees, surveys, and more.
That sounds like a lot to keep track of, however your lender will be able to give you an accurate estimate of the total closing costs when you apply for your loan. In fact, lenders are required to give you a list of these costs within three days of your loan application in the form of a “good faith estimate” of the closing costs.
What will my interest rate be?
The answer to this question is dependent upon numerous factors. The value of the home, your credit score, the amount you put down (down payment), the type of mortgage you have, and whether or not you’re paying private mortgage insurance all factor into the interest rate you’ll receive. Interest rates also will vary slightly between lenders.
You can receive a fixed-rate mortgage that does not fluctuate throughout the repayment term. However, you also typically have the option to refinance to acquire a lower interest rate, however refinancing comes with its own costs.
Thinking of buying a home in the near future? You're going to need a preapproval. This tells real estate agents that you're serious about the home-buying process, and it alerts sellers that you're a solid, low-risk candidate. Preapprovals aren't always easy to score, however. And if you're someone who's had a few credit issues in the past, you may need to improve your credit score before your dream of home-ownership becomes reality.
Here's a checklist of best practices for prepping your credit to gain a preapproval:
Check Your Credit Reports
Before you ever approach a lender for a home loan preapproval, make sure you know what's on your credit reports. You're entitled to one free credit report each year from each of the three different reporting agencies:
Order credit reports for yourself and for anyone who will be a co-applicant on your home loan, and then scour your reports for inaccuracies.
File Immediate Disputes Over Inaccuracies
Any discrepancies you find should be reported immediately. It's an easy process of reporting the issue to the credit bureau and waiting while they go back to the creditor to verify what you've claimed. In most instances, the inaccuracy will be removed within a week or two, though you may have to produce receipts as proof of payment.
Contact Creditors to Offer Settlements
Make a list of old, unpaid debts that are valid and set aside the funds to pay them off, one by one. If you have cash-in-hand, call creditors and ask them to settle for a portion of the balance in cash. Some may be willing to work with you, others may not. But it never hurts to ask.
Pay Current Bills On Time
Stay current on existing accounts. Make sure everything is paid on time, from credit cards to car payments, to ensure you don't lose points on your overall score while you're working toward credit restoration.
Pay Down Your Debt-to-Income Ratio
Your debt-to-income ratio is an indicator of how responsibly you use your credit. The lower your ratio, the easier it will be to obtain a preapproval. Pay down big balances. The more credit you're able to free up, the more attractive you'll look to potential lenders. Prepping your credit to gain a preapproval is surprisingly easy, but it requires the funds necessary to pay off outstanding debts and to pay down current balances.
Start early if you suspect there are items on your credit report that require fixing, and be patient as things circle back around. Credit repair is not an overnight fix, but with steady progress, it won't be long until you have a preapproval for your new dream home.
Most homeowners would love to be able to pay off their mortgage early. However, few see it as a possibility when they take into account their earnings and other bills.
There are, however, a few ways to pay down your mortgage earlier than planned. But first, let’s talk about when it makes sense to try and pay off your mortgage.
When to consider paying off your mortgage early
If you recently got a promotion, have someone move in with you who contributes to paying the bills, or recently got a secondary form of income, you might want to consider making extra payments on your mortgage.
However, having extra money doesn’t always mean you should spend it immediately on your home loan.
First, consider if you have a large enough emergency savings fund. It might be tempting to try and throw any extra money at your mortgage as soon as possible, but there are other financial commitments you should plan for as well.
If you have kids who will be applying to college soon, remember that student aid takes into account their parents’ finances. If your children plan on applying to institutions with high tuition, then your equity will be counted against you.
Refinancing to pay your mortgage early
Refinancing your home loan is one option if you’re considering increasing the payments on your mortgage. If you can refinance a 30-year loan to a 15-year loan with a lower interest rate, you’ll save money in two ways--your lower interest rate and the fact that you’ll be accruing interest for less time.
There is a downside to refinancing. Once you refinance, you’re locked into your new payment amount. So, if your higher income isn’t dependable, it might not make sense to commit to a higher monthly payment that you aren’t sure you’re going to be able to keep paying.
There’s also the matter of refinancing costs. Just like the costs associated with signing on your mortgage, you’ll have to pay closing costs on refinancing. You’ll need to weigh the cost of refinancing against the amount you’ll save on interest over the term of your mortgage to see if it truly makes sense to go through the refinancing process.
Paying more on your current loan
Even if you aren’t sure that refinancing is the best option, there are other ways you can make payments on your mortgage to pay it off years sooner than your term length.
One of the common methods is to simply make thirteen payments each year instead of twelve. To do this, homeowners often use their tax returns or savings to make the thirteenth payment. Over a thirty year mortgage, this could save you over full two years of added interest.
A second option is to make two bi-weekly payments rather than one monthly payment. By making biweekly payments you have the ability to make 26 payments in a year. If you were to just make two payments per month then you would make 24 total payments. Over time, those two extra payments per year add up.
Applying for a mortgage may seem like a long, stressful process at first. Fortunately, we're here to help you take the guesswork out of submitting a mortgage application.
Now, let's take a look at three tips to help you streamline the mortgage application process.
1. Ask Questions
A bank or credit union likely will ask you to provide a wide range of information as part of the mortgage application cycle. And as you complete a mortgage application, you may have questions along the way too.
Remember, a lender is happy to help you in any way possible. If you ever have concerns or questions as you complete a mortgage application, you should reach out to a lender for expert support. That way, you can reduce the risk of potential problems down the line that otherwise could slow down the mortgage application process.
Even a single mistake on a mortgage application may prevent you from getting a mortgage. Perhaps even worse, a delayed mortgage application may force you to miss out on an opportunity to acquire your dream house. But if you reach out to a lender as you complete your mortgage application, you can gain the insights you need to quickly and effortlessly finalize the necessary documentation to obtain a mortgage.
2. Be Thorough
A mortgage application may require you to look back at your financial and employment histories and provide information that a lender will use to determine whether to approve or deny your submission. Meanwhile, you should be ready to provide a lender with any requested information to ensure a seamless application process.
As a homebuyer, it is your responsibility to include accurate information on your mortgage application. In fact, failure to do so may cause a lender to reject your mortgage application. If you allocate the necessary time and resources to dot every I and cross every T on your mortgage application, you can boost the likelihood of a fast approval.
3. Shop Around
For homebuyers, it is crucial to check out all of the mortgage options that are available. If you meet with a variety of banks and credit unions, you can review myriad mortgage options and select a mortgage that complements your finances.
Banks and credit unions generally provide a broad array of fixed- and adjustable-rate mortgages. If you learn about all of the mortgage options at your disposal, you can find one that enables you to purchase your dream house without breaking your budget.
Of course, once you are approved for a mortgage and are ready to launch your house search, you may want to hire a real estate agent as well. A real estate agent will offer plenty of guidance at each stage of the homebuying journey. In addition, a real estate agent can make it easy for you to find a top-notch residence at a budget-friendly price in any housing market, at any time.
Start the mortgage application process today, and you can move one step closer to acquiring your dream residence.