Sep 25, 2019 | Mortgage
Many mortgage payments are made up of four parts, called PITI. PITI is an acronym that stands for principal, interest, tax, and insurance. It’s important to understand PITI because it is the real number you need to use in order to find out how much mortgage you can afford to pay each month.
One of the biggest mistakes first-time homebuyers make is using only the principal plus interest figure to calculate how much they’ll be paying every month for their mortgage. Then, when the lender comes back and denies them, the prospective buyer is confused. Knowing and understanding PITI will put you back in the driver’s seat with your home buying goal.
Principal
The principal part of your mortgage payment represents the amount of money that you borrow over the terms of the loan. For instance, if you borrow $100,000 and you have 20 years to pay them back, the principal that you’ll pay each month equals $100,000 divided by 20.
Interest
The interest portion of your mortgage payment is the percentage rate that your lender is charging you to borrow from them. Another way of looking at the interest is to think of it as the cost of borrowing money. Interest will be spread out over the length of the loan, just like the principal payment.
Tax
The tax portion of your monthly mortgage payment pays for real estate and/or property taxes. Real estate taxes are assessed by the local government where the properties located. The tax rate is determined by the government and is not influenced by your personal credit score.
Insurance
The insurance part of your monthly mortgage payment pays for homeowner’s insurance and/or private mortgage insurance. If you put less than 20% down on your home purchase, you’re required to have private mortgage insurance. This amount can add considerably to your monthly mortgage payment, so it’s worth it to try to hit that 20% threshold.
Otherwise, you have to wait until your loan to value ratio is 80/20. After that, you can request to drop the private mortgage insurance, but the homeowner’s insurance will still be part of your monthly payment.
Now that you understand what makes up a PITI mortgage payment, you’ll be better prepared to plan for your monthly budget that includes a mortgage payment.
If you are in the market for a new home or interested in listing your current property, be sure to contact your trusted real estate professional.
Sep 17, 2019 | Mortgage
For many Americans, their home is their primary investment. The equity stored in your residence can be a source of available cash for home repairs, upgrades, or for financing the purchase of investment properties. However, few homeowners really understand the process that results in home equity.
What Is Home Equity?
Your monthly mortgage payment goes towards two different amounts. The first is the interest that you pay for the loan. The other is your principal payment or the amount that counts against the initial amount that you borrowed for the purchase. Depending on the details of your loan contract, each payment is generally split between these two types of charges.
Over time the amount that you’ve paid towards the loan’s principal grows your equity position. With each payment, your equity grows as well. Once enough equity is accrued, many lenders allow homeowners to access those funds via an equity line of credit, home equity loan or a cash-out refinance.
You’ll have to pay interest on any monies you withdraw from the second mortgage or higher loan amount upon your refinance. With home equity lines, however, these loans only charge interest on the money that you actually use. You can secure a home equity line of credit for a certain amount and not be liable for a penny in interest until your first withdrawal.
How Can You Calculate Potential Equity?
There are 4 main factors to consider when calculating your home’s equity.
- Home value.
- Monthly mortgage payments.
- Down payment.
- Any liens or additional mortgages on the property.
Imagine your home is currently valued at $300,000. With cash down payment of 20%, your home’s starting equity is equal to your initial $60,000 payment. Each payment slowly increases your equity until you have full financial ownership of your home.
Talk to your lender to understand how interest in applied to each payment. For fixed rate loans, you can easily figure out how much of your mortgage payments are immediately applied to the loan’s principal. An easy way to see this equity build up on a monthly basis is to reference an amortization schedule. Your lender should be able to provide this for you at no charge.
For property owners with liens and additional mortgages, add the value of those items to what’s still due on your primary mortgage loan before completing the calculations.
Home equity is a flexible financial tool that you can use to improve your property, expand your business, or treat yourself to something special. Plan carefully to get the most out of your home equity line of credit.
If you are interested in a buying a new home or listing your current property, be sure to contact your trusted real estate professional.
Sep 13, 2019 | Mortgage
It is a major life decision to buy a home and yet many do not consider how much they will pay on the interest over the life of the loan. All they usually think about is if they can afford to pay the monthly mortgage payments.
It is helpful to learn how different loan structures impact the amount of money wasted on the interest paid for a home loan. Here is a comparison of different loan lengths and payment options to show some helpful ways to reduce the total interest paid.
Standard 30-Year Fixed Mortgage
For a buyer who has a good credit history, purchasing a median-priced home with a significant down payment usually helps get the best mortgage financing. A standard 30-year mortgage on a home requires 360 monthly payments to pay off the loan.
The total cost of the loan includes paying back the principal amount borrowed and all the interest. Over 30 years, the total interest paid can be as much as one-third or more of the principal amount borrowed, depending on the loan interest rate.
Standard 15-Year Fixed Mortgage
Comparing a standard 30-year fixed mortgage with a standard 15-year mortgage shows a surprising result. The differences are that the length of the loan term is less and the monthly mortgage payments are higher. A standard 15-year mortgage on a home requires 180 monthly payments to pay off the loan.
The shorter loan period may reduce the total interest paid to less than one-half of a 30-year mortgage, depending on the loan interest rate. The savings can be in the tens of thousands of dollars.
Payment Techniques That Save Money
A simple way to save money is to pay an extra monthly payment each year and ask the lender to apply the extra payment to reduce the principal amount owed. On a 30-year mortgage, the loan pay-off date is more than two and one-half years sooner, reducing the total interest paid by about 10% percent.
A smaller savings amount is possible without even needing to pay more, just by paying more frequently. Instead of paying a mortgage once per month, make arrangements with the lender to pay half the monthly mortgage payment twice per month. The amount the lender receives monthly, in the two payments, totals the same amount that the lender would receive in one payment.
This technique works because there is a daily calculation of mortgage interest. By making payments more frequently, there are fewer days of use for some of the loaned funds. This tiny change in periodic repayments can be a nice way to save a few thousand extra dollars over the life of a loan.
In addition, since there are 26 two-week periods in one year, you’re getting an extra payment in over the longer months in the year. So you’re paying the equivalent of 13 monthly payments instead of 12. You might not feel it as much since you’re likely making more money in the longer months as well.
If you’d like to do this strategy and the lender won’t accept bi-weekly payments, then just divide the principal and interest portion of your mortgage payment by 12 and add that amount to each regular monthly payment. You’ll save a ton of interest over the life of the loan!
Summary
Think about interest paid as money that could have a better purpose. Choosing a shorter loan period for a home mortgage and increasing the mortgage payment frequency are important things to consider for the savings that they can produce.
If you are in the market for a new home or interested in listing your current property, be sure to contact your trusted real estate professional.
Sep 12, 2019 | Mortgage
Sometimes, things don’t go as planned. Despite the best intentions, there are times when it’s impossible for homeowners to fulfill their mortgage obligations. When your misfortune turns into a foreclosure notice, these tips will help you control the situation and realize the best outcome.
Work With Your Lender
Open the lines of communication with your lender to stall the foreclosure process.
- Call your lender and explain your predicament. Give them specific details about the nature and estimated length of your circumstances. Many lenders are willing to temporarily modify payment terms to temporarily accommodate certain hardships.
- Apply for a loan modification. If your credit rating has improved or market values have shifted in your area, it’s possible to negotiate friendlier terms that lower your monthly payments.
- A forbearance allows you to pause or drastically reduce your mortgage payments for a short period. However, you’ll have to pay everything owed in a lump sum or via larger monthly installments.
It is in your lender’s best interest to keep you in your home. Contact them early to avoid unnecessary issues.
Take Legal Action
Keep the law on your side to ensure you have the best chance at keeping your home.
- If you believe your foreclosure is unlawful or in error, you will have the chance to present your case in court. Respond in writing to the official foreclosure complaint as soon you receive it. This eliminates quick default judgments.
- Talk to a lawyer about your case. Even if you can’t afford to retain one for the trial, invest in a short sit-down session with a knowledgeable legal representative to get the facts straight and ensure you’re ready to present your defense.
- Personal bankruptcy is a final strategy for saving your home. Most chapter 7 and 13 filings allow you to keep your primary residence while reorganizing your debt.
Foreclosure is less of a threat when you understand the laws and procedures that govern the process. Educate yourself on your legal options.
A temporary setback doesn’t have to ruin your entire life. With these tips, you won’t have to lose your dream to foreclosure.
If you are in the market for a new home or interested in listing your current property, be sure to contact your trusted real estate professional for assistance.
Sep 11, 2019 | Mortgage
A reverse mortgage is a way to use the equity value that built up in a home to improve the quality of life for those who have appropriate circumstances when they reach the retirement age of 62 or older. With a reverse mortgage, a person continues to live in their own home and retains the title to it but does not have to make any monthly reverse mortgage payments.
A reverse mortgage may be helpful; however, not everyone qualifies for one. The benefits come with disadvantages as well. Here is a list of the advantages and the disadvantages for reverse mortgages.
Be sure to discuss this option with a qualified professional when thinking about a reverse mortgage before making any commitment.
Reverse Mortgage Advantages
- Reverse mortgage funds may be used to pay off an existing home loan balance. The funds may be taken out in a lump sum or paid in monthly installments for a certain period.
- The reverse mortgage creates a lien on the home but does not require any monthly loan principal or interest payments. This continues as long as the person lives in the home and takes care of it (paying the property taxes, home insurance, HOA fees, etc.)
- Usually, a reverse mortgage has no effect on social security payments or Medicare benefits. It does not usually cause any tax consequences because it is a loan structure, not income.
- If repayment of the loan happens at some point, any equity remaining is still available to the homeowner for any purpose, such as giving something to heirs.
- It is a non-recourse obligation. There is no personal liability to repay the reverse mortgage loan if the equity value in the home is not sufficient to pay it off.
Reverse Mortgage Considerations
- Since a reverse mortgage has no payments, the loan balance increases and the interest accumulates over time.
- A reverse mortgage reduces the equity in the home that would otherwise be available to heirs. If the remaining equity exceeds the loan, the home can be sold off to repay the loan and the balance can then go to the heirs.
- Medicaid eligibility or disability payments (SSI) may be affected.
- A reverse mortgage loan becomes immediately due if certain things happen, such as the death of the homeowner, the homeowner vacates the house for six months or more for a non-medial reason and 12 months or more for a medical reason. It becomes due if the home is no longer the principal residence of the reverse mortgage borrower.
- The loan is immediately due if the homeowner does not pay the property taxes, home insurance premiums, HOA fees, and other things necessary to maintain the home.
Summary
A reverse mortgage is a special financial tool that needs to be used only when appropriate. Typical rates for these loans may be higher than standard home equity lines of credit and other traditional home-refinancing options. Consider all the details very carefully before and as always, consult with your trusted home finance professional to get the best advice for your unique situation.
If you are in the market for a new home or interested in listing your current property, be sure to contact your trusted real estate professional.
Jun 4, 2019 | Mortgage
It’s more common these days to have non-traditional income that doesn’t fall into the W-2 category. Many people work in what is referred to as the “gig economy,” where income might come from a variety of freelance sources.
Other times, people don’t have W-2 income because they are retired or have an independent source of wealth that generates interest income. Still other times, an individual may own their own business and take draws instead of a paycheck. In all these cases, it might seem impossible to qualify for a mortgage, since there’s no W-2 income.
Lenders Are Understanding
Thankfully, many lenders understand when a prospective lender doesn’t have W-2 income. Since it’s becoming more common, lenders have come up with alternative ways to qualify borrowers who want to buy a home. While more paperwork is usually involved, it is still possible to get a mortgage, assuming you work with certain lenders. Your real estate agent can help you in this regard; sourcing lenders that work with non-traditional borrowers.
Rely On Your Tax Returns
Even without W-2 income, you can prove income by relying on your tax returns. If you can show at least two years of qualifying income levels on your tax returns, your lender will have an easier time of finding underwriters for your loan.
Maintain Your Bank Deposits
Some states offer a Bank Statement Loan Program that looks – not at your W-2s – but at your bank deposits for the last 12 to 24 months. These programs are ideal for people who own their own business and take draws rather than paychecks.
Try For An Assumable Mortgage
Sometimes you may be able to find a property that has an assumable loan. In these instances, all you need to do to qualify for the mortgage is to have sufficient money for a down payment, have a decent credit history and be able to prove your income one way or another. Assumable loans can be harder to find, but your real estate agent can help you with that part of your home buying process.
Bear in mind that each of these options require a strong credit history in order to qualify. Credit scores and histories are always the cornerstones of acquiring a mortgage, whatever your income source may be.
Two important partnerships in your quest for a new home are with a trusted real estate agent and a home mortgage provider. Be sure to rely on these professionals to answer all of your real estate and financing questions.
