Category Archives: Mortgages

Buying a home….Get a Pre Approval Letter

Pre qualified vs pre approved, which is better?

You’ve decided to buy a home…. there’s a lot to know first.

  • You’ve checked and rechecked your budget, and have decided on a price point you can pay
  • You’ve got 20% plus set aside for the down-payment and closing costs
  • You’ve compared interest rates and lenders and have decided on a reputable one
  • You’ve given the lender all necessary data and are waiting….They check your Credit Score and plug in all the data and on an income to debt ratio decide if you’re a risk or not.
  • They call you — Yes, you are Pre-Qualified.  More data, more checking, more, more, more.
  • Back and forth phone calls, and then they call to let you know how much they will allow you to borrow, and approximately how much your monthly payment will be using their ‘borrowed figure’. There will be an interest rate based on the figures.
  • Their figure may be more…or less than yours.  If it’s more, you don’t need to purchase a home that high.  Keep within your  budget comfort zone.  If their figure is lower, you’ll have to think less… smaller, different neighborhood etc.  Not such a bad thing, really.
  • You are now ‘Pre Approved’….meaning you are approved to get a loan for ‘X’ amount.  Once you are pre approved, ask the lender for a letter verifying that.  Have it with you when looking at homes, and should you decide to make an offer on one, show…but don’t give… the seller/realtor your Pre Approval letter.  It shows them you are a serious buyer, and have already done your due diligence in securing the mortgage loan for the amount shown in the letter.
  • Sometimes, if another buyer is interested in the same home, and offers a close figure to yours, the seller is apt to choose you, because you’ve gone that next step done – the pre approval.
  • Again, know it is better to get a smaller home, with a smaller mortgage – one you can comfortably handle within your budget, leaving some wiggle room in the budget for incidentals and ‘what-ifs’.  Where as if you buy too much home, finding too late you can’t handle the payments – you end up being house poor – or worse, losing it completely.
  • Remember:  Staying within your own set limits for mortgage payments, maybe by buying a smaller home, allows you to set aside money each month for not only everything else in your budget, but also those extras…… painting, redecorating, new roof etc.
  • Don’t end up “House Poor”.  Think ahead.

 

Shave Over 2 Years Off Your 30 Year Mortgage

Save thousands of dollars…. and it’s free to do

This can be done at any time during your mortgage loan….but the earlier, the better.

Open a checking account, specifically for your mortgage.  Have a beginning balance of 2 months equal to your mortgage payment.  Then call your mortgage lender and tell them you want to change from a monthly payment plan to a bi-weekly payment plan.

Grab a pen and paper, now divide the amount of your mortgage by 12 and round up the figure. Each month, continue depositing your mortgage payment into the checking account, plus the rounded up figure and as the bi-weekly payments are withdrawn, you’ll notice that each 14 days the lender will withdraw 1/2 of the mortgage payment.  In 1 month, a full payment is made, but in 2 half payments.

Twice each year, usually Spring and Fall, an extra half payment is made (in those 2 months, a third 1/2 payment is withdrawn)…this makes payment numbers 25 and 26.  These 2 half payments go directly to your principle. This is why it is imperative to have that extra cushion of 2 months to start the process, as well as the extra ’rounded up’ figure each month in the account, making sure you’re not short of the extra payment amount in your account.

Example: You have a 30 year mortgage.  Each year (12) months, there are 12 payments.

There are 52 weeks in a year.

But, with a bi-weekly payment plan (every 14 days), in those same 12 months there are 26 payments (52 weeks divided by 2 equals 26).  That extra 1/2 payment and 1/2 payment going directly to the principle, over a 30 year mortgage, saves 2 1/2 years of payments making that same mortgage loan a 27 1/2 year mortgage.

But the real savings is the interest you save over the years…… Thousands of dollars saved!  And all it takes is a phone call to set it up.

The important thing is to have that cushion in the beginning, as well as the ’rounded up’ figure in the account.  It insures the money is in the account when the lender withdraws it. A good idea is to have a year at a glance calendar….. once the by-weekly is set up, circle the first bi-weekly payment on the calendar, and follow through the year circling each date at 2 week intervals.  You will see the two months where that third 1/2 payment comes up.  It’s easy.

 

 

 

 

 

Buying vs Renting

Not Everyone Fits Into The Same Mold.

Most people will rent living space at least for a while.  Some will choose to always rent….for varied reasons.  After all, buying a home isn’t for everyone.  Figure which mold you fit in.  Whether you rent or purchase, homeowners/renters insurance, renewable annually, is a must.  It covers your possessions, in case of fire, theft, or other disaster.  You will receive a policy with proof of coverage and dates of same. Read it carefully,  There’s small print and many exclusions. if any questions, ask.  This is an important document.  Keep it in a safe place.

Sometimes the cost of rent is just that…the cost of the space.  Or it can include utilities, heat, hot water. Know which you’re paying for…although you shouldn’t be wasteful either way, if you’re paying utilities on your own, you’ll receive a monthly bill for each utility.  If so, these are things you can easily reduce, by turning down heat/AC when not at home, turning off lights when not in use, and not letting hot water run unnecessarily.  Common sense savings.

Although renting usually costs more monthly, it works best for some.  It means when something breaks, you call the landlord, there is no outside maintenance for you.  A plus for many. The downside, when you pay your rent, it’s gone, you don’t see any part of that money again.

Buying a home means you need a ‘down payment’…. usually 20% of the cost of the home.  It can be purchased with less of a down payment, but if so, mortgage insurance is required, and is paid each month until you have made mortgage payments which equal 20% of the cost of the home.  This can take years, and it adds to the monthly cost.  It is why, although it will take longer before you buy, saving up for the 20% down payment is a better idea. Adding to the 20% down payment, there will be legal costs at the closing.  Do your homework first so there won’t be any surprises at closing.

Although buying has the initial expense, the mortgage is usually cheaper than renting, and a portion of your mortgage payment…a small amount at first but it grows… will go into an equity account each month….for you.  If you own, you replace, repair, and maintain inside and outside the property. If you sell, any gain over the original cost as well as any equity accrued will go in your pocket.

This 20% is what holds many back from purchasing even if it’s something they’d like to do.  It is why budgeting and saving is so important, adding yet another specific savings account to add to your budget.

Whichever you decide, for whatever reasons you do, your rent or mortgage should not be more than 1/3 of your monthly income….because you don’t want to become ‘House Poor’.

 

Ask Yourself Questions Before You Buy A Home

Don’t buy too much house.

You’ve saved enough for a 20% (or more) down payment on a home.  You’ve been scanning mortgage lender sites and interest rates along with neighborhoods you’d like to live in, real estate lawyers etc.  So much to do….but first…. check with lenders and get your best rate (which is tied into your credit score, along with your income to debt ratio).

The mortgage lender will let you know, by crunching numbers and information you have provided, and come up with a figure which they say you can afford to pay for a home…a monthly payment including principal, interest, taxes and insurance (PITI). The thing is, it is at the high end of the spectrum, and if you buy a home at that price, you may find yourself in financial trouble….meaning you are buying too much house, thus you will be house poor.

Think ahead.  Are you single? Staying single? Married? Children? No children? Maybe children? Will the answers be the same in 5-7 years? Questions like these and answers for them need to be considered in the size and cost equation of the house you’re thinking of buying.  You want to stay at the very least 7-10 years in a home…maybe more. Maybe it will be the one and only house you ever buy.

Say you’re single, and may find the perfect little house for yourself, or a really nice one bedroom condo, but if you get married, and expect a baby, ohhh, twins… will there be enough room for them and all the stuff they need? Would it be better to buy a home with 2 bedrooms to carry you along so you can stay and grow equity in the house? If you have two bedrooms, while single you can use one as an office/study/den…then should you marry and have even two children, even a boy and girl can share a room while young.

On the other hand, if your family is complete, and say you have 4 children, 2 girls, 2 boys, but ages spaced far apart, if you purchase a 5 bedroom home, before you know it, the kids will be off to college or on their own, and you have a huge house to rattle around in, along with the upkeep of it.  Yes, you can sell it, but some of the ‘McMansions” are hard to sell.

So, think ahead. Go over your budget thoroughly, and only buy a house at the figure you are financially comfortable with paying each month for the next 30 years. And, yes, it can be lower than what the lender says ‘you can afford’.

Remember, you will want to redecorate, paint, maybe a new piece of furniture.  A hammock, picnic table, grill etc. And the cost of yard upkeep of a house means lawnmower, snowblower etc, or landscaper, called HOA fees if you buy a condo.

Get a pre-approval letter from the lender, and bring it along to open houses….do not give it to the realtor there, you keep it, but show it to them to let them know you are a serious buyer who has also gone that one step further to get approval from your lender.  It may be the clincher that gets you ‘the home of your dreams’.

The idea is to buy the nicest house you can, in or near the neighborhood you like, and make it your own…. without using a bigger portion of your monthly budget than ‘you’ can comfortably afford.  You don’t want to have sleepless nights worrying about the large mortgage payment, when a smaller, still perfect house, will serve you just the same.

 

 

Have Your Money Work For You

Ways to have your net worth add up on its’ own

Bank interest is compounded on a daily, monthly, or annual basis.  Daily is best.  As time moves forward, your interest is gaining interest.  Keep adding to the account and it will add up faster.

Make additional payments to your mortgage.  Be sure you make them as ‘Principal Only’ payments.  Make them in any amount and as often as you can.  They will not only reduce the length of the loan, but they will save interest charges as well….if you do this often enough, you can save thousands of dollars over the length of the loan.

Most who have a mortgage have it for 30 years.  From the second payment on, you can pay it off in 27 1/2 years….saving 2 1/2 years, and thousands in interest.  Tell the lender that instead of paying your mortgage monthly, you want to pay it bi-weekly, (1/2 the mortgage amount 2 x a month plus 2 more half payments a year, as the calendar falls,…which totals 26 payments).  It’s just a phone call and they can switch it over.  With a regular 30 year loan, it’s 12 payments per year.  Bi-weekly payments are made every 14 days (52 weeks divided by 2 = 26 payments a year. The 25th and 26th equals an additional full payment…credited totally towards the principal only.  It’s just a matter of setting it up, and it saves thousands in interest costs.  Twice a year, usually May and October, but as the calendar falls, there is the extra 1/2 payment needed, so make sure it’s in your account to cover it.  You should make a habit of checking on available totals.

If you are disciplined with your credit card (paying in full and on time), this, of course, will save rollover interest fees and late fees.  But should you need to make a purchase which is necessary yet a little more costly than usual, check your closing date, and make the purchase a day or two later than that. In that way, you’ll have the entire billing cycle, plus the two or so weeks after that but before that purchase is due to be paid.  It gives you a few weeks extra to put money aside to pay in full when the bill does comes in.

If you pay your car insurance in full when the bill comes due, you can usually save 5% on your comprehensive coverage — a savings of about $40.-50. annually.  With a good driving record, there is a discount, as well as others…. check with your insurance agent to make sure you’re getting all the discounts you deserve.

 

Mortgage Dictionary – Some Terms To Know

Buying a home? ….terms to be familiar with.

  • Offer to purchase – You’ve found a home you’d like to buy – to ‘hold’ it, sign an Offer To Purchase and put approximately $1,000 down.
  • Home Inspection – It’s a wise idea to have the home inspected (approximately $500.  Both inside and outside is checked for any issues that need repair: insulation,  heating/AC, roof,  appliances, plumbing, etc,… You’re informed of anything that may be a cost issue for you.  If repairs will be costly, now is the time to back out, or have – in writing – that the owner will pay for the repairs. If you back out, your Offer to Purchase money is returned in full.
  • Down Payment – This along with the Offer to Purchase money, totaling (usually 20%), is now your Down Payment….It cannot be refunded.  If you are at this step, you’re buying the home. If you back out, the seller gets the down payment to keep.
  • Closing Costs – Depending on the cost of the home, closing costs usually run around $5,000. more or less.  These are costs for Registry of Deeds, R.E. Lawyer, Title Search and incidentals related to the closing of the property.
  • Homestead Act – Important to get at the time of closing.  The cost is $35. for $300,000. coverage in the event that you are sued up to that amount.  Let your lawyer know beforehand, and remind him/her again before the closing, that you want to get it, and have the $35. to give the lawyer at that time,  It’s also done at the Registry of Deeds, and is more than worth the charge.  It’s an important document, keep it safe.
  • Interest Rate – Choose a fixed over a variable.  Fixed stays the same, and you know what your paying all along.  A varied changes, sometimes dramatically, and can raise the mortgage payments.  If your Credit Score is high, you can get a lower (1/4 – 1/2%) rate.
  • PITI – Principal, Interest, R.E. Taxes, Insurance – Your mortgage will equal these four items… Principal and Interest is the part of the figure which is the actual mortgage figure reducing your loan.  Real Estate Taxes and Insurance are a part of the total figure, but held by the lender and they pay the taxes and insurance from the money held (escrow), when these bills become due. Taxes and Insurance may change occasionally.  The principal and interest figure remain the same, and each payment reduces the loan.
  • Mortgage Insurance – protects the lender if you default on your mortgage payments…it does not protect you. If you put a down payment of 20% or more, you don’t have to buy/pay for this.  But… any less than 20% down, means you must get Mortgage Insurance and make payments to it, until 20% of the cost of your home is paid. Try not to do this. Put 20% or more down. The more money you put down, the less the mortgage payment each month.
  • Condo Fees –  If you purchased a free standing home, you don’t have condo fees.  If you purchased a condo, the condo association charges fees for maintenance and upkeep of the building and land.  These are in addition to and separate from any mortgage related costs
  • Equity – principal and interest are paid either monthly or bi-weekly.  In the beginning of the loan, you’re paying almost all interest, and very little principal.  Each month, a bit more of the principal is paid and a bit less of the interest — over time, the principal outweighs the interest.  When the loan is paid in full, and the home is sold, the amount of principal is yours, if it’s sold for more than you paid, the difference is yours too minus closing costs. Equity is sort of a savings account for you.  It’s the best reason over renting (with rent, you pay it, it’s all gone). with buying, the principal paid comes back to you when sold.
  • Escrow – The ‘name’ of the account held by the lender holding the taxes and insurance part of your mortgage payment until the payments are due – they’re paid from that account by the lender, who will let you know the taxes and insurance have been paid.

 

 

The “Budget Filing System”

Keeping categories separate lets you see at a glance.

Save first. Once you’ve put your savings into their allotted accounts, separate your budgeted money into three categories… Rent/Mortgage, Regular Bills, and Occasional Bills.  Open a checking account for each one.  Doing so, keeps you ‘on target’ with money in each when the bill comes in.

Rent/Mortgage:  Meaning your ‘overhead expense’ – Rent, or if you have a mortgage (which includes PITI (Principal, Interest, R.E. Taxes, Insurance), and Condo Fees if you own a condo.

Regular Bills:  Meaning monthly bills, the ‘Have to’s’ … Heat, Light, Food, Health Insurance Premiums, Phone, Car or transit costs, internet.

Occasional Bills: Meaning annual, semi-annual insurances, RMV excise tax etc.  Clothing, entertainment, gift giving are in this category too, however, these can be trimmed to the bone, or omitted.  Get along with the clothing you have, Drastically cut entertainment and gift giving. Your goal here is to get out of debt, save every penny you can.  You can do this.

After having made your budget, figure how much of your income should go in each category, and deposit that amount in the appropriate account each payday.  When paying a particular bill, withdraw it from…only…that account category.

Doing so keeps things in order. It allows you to, at a glance, know exactly if, and where, you’re falling short and the need to re-evaluate your budget…immediately.

A suggestion for all, but especially the rent/mortgage account – begin with a ‘cushion’… some extra money. Costs rise – the cushion will help while you re-evaluate your budget accordingly.

Rent/Mortgage Account -start out with, or add to it – an extra month or two of your ‘overhead’ cost….this insures the roof over your head, meaning there is excess there should condo fees or real estate taxes rise….or if your rent rises, it also means, should you move, money is there for that ‘overlap’ of the moving month, and the deposit needed for the new place.

Continually check and recheck your budget. Recalculate so there is always enough in each account….seeing at a glance where your spending can be whittled down. When done regularly it takes about 15 minutes, keeping you financially savvy and aware of where your money goes.