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How do credit unions stack up against larger lenders for home loans?
You’ve finally decided to put down some roots and purchase a home. It may be a big house with a white picket fence, a fixer-upper in the suburbs, or a condo in the city. Regardless, this purchase is one of the most significant financial decisions you’ll make in your lifetime.
To finance your dream home, you’ll likely need to take out a mortgage, as most home buyers do. There’s tons of competition among mortgage lenders, but at an even higher level, you’ll need to decide between applying through a bank or a credit union.
Credit unions have been expanding their presence in the mortgage business and are not only highly competitive in their offerings, but provide benefits that commercial banks simply can’t match. Here are three reasons you might consider joining the growing number of homeowners that value the advantages of a credit union:
They’re not for profit
Banks are responsible to investors who expect a return on their investment. Credit unions, on the other hand, pass any profits back to their members in the form of savings. That translates to lower interest rates and a lower total cost. Whether you’re borrowing a hundred or five hundred thousand dollars, even a quarter point will make a significant difference in the interest you pay over the life of the loan.
Also, unlike a bank, a credit union doesn’t charge their members the Intangible Tax on a mortgage loan, which positively impacts the total cost. This tax of $3 per thousand dollars borrowed amounts to $900 in savings on a $300k loan. The credit union’s mission is to serve the members of their community, not earn a profit from them.
They’re more accommodating and offer greater flexibility
Credit unions value their relationship with their members. You won’t simply be an account number. A credit union will work with its members to find a suitable mortgage solution that meets your needs.
Credit Unions also work hard to make the stressful mortgage process a more positive experience. They scan documents for more efficient processing, and are more than happy to close a loan at a member’s home, office, or the branch. The flexibility and accommodations they offer are just part of their culture and their desire to deliver superior service to their members.
They invest in their members
Credit unions also work to better educate their members on financial services and transactions. Your mortgage is debt that you’ll likely carry for the next 30 years. It’s incredibly important to understand the requirements of the loan, the process, the fees, and the answers to all of your other questions. They’ll also offer guidance on the type of loan that’s the best fit for a member’s circumstances.
Credit unions are solely devoted to helping people build a healthy financial future. Members quickly learn their credit union will be of service to them, even during a financial crisis. They take pride in building the community they’re a part of and invest in its future.
Banks still hold the biggest piece of the mortgage loan pie, but credit unions are making some significant headway. You should consider all of your choices and be sure to shop around to find the most favorable deal. Just remember that your neighborhood credit union may just be the best route to your dream home.
Should you buy a house when you’re under 30?
Buying a home is a huge milestone on the way to achieving the American Dream, but when you’re under 30, is it always a good idea? Most people view home ownership at any age to be a reflection of financial stability and a wise investment. When you’re under 30, it’s especially admirable and a pretty good indication that you have your act together.
There’s plenty to consider when you want to buy a home at the tender age of twenty-something, though. You’re young in your career, still learning to manage your finances and facing the hard truth about life’s unpredictability. Let’s look at some things you should consider before you rent a U-Haul and move down the road to home ownership.
What are your long-term plans? Buying a home is not a spur-of-the-moment decision. If you expect a return on your investment, be prepared to stay put for at least five to seven years, as a rule of thumb. You should also be in a position of stability in terms of your career and be on a path to financial advancement.
Calculate your monthly expenses. Are you still digging yourself out of student loan debt? Is your credit card debt under control? How much is your car payment? If you already owe tens of thousands of dollars, compounding it with a mortgage may be spreading your financial responsibilities a little too thin. Be honest with yourself and don’t bite off more than you can chew.
Are you able to purchase a home without exhausting your emergency fund? Your emergency fund is for unexpected costs. It’s critical that you have a financial cushion for surprise expenses that may otherwise devastate your finances. It’s even more important when you own a home. Costly home repairs are one reason, but if you’re laid off from your job or diagnosed with a serious illness, you’ll still need to continue to pay your mortgage and avoid foreclosure.
Can you afford to put down 20% and avoid Private Mortgage Insurance? Private mortgage insurance (PMI) protects the lender in the event your home falls into foreclosure. PMI usually ranges from 0.3% to 1.5% of the original loan amount per year, although it depends on the amount of your down payment and your credit score. Here’s a crazy thought: Put down 20% and avoid PMI altogether.
How’s your credit rating? Your credit score significantly impacts the interest rate on your home loan. Be sure to request a copy of your credit history before you apply for a mortgage. Review it and resolve any discrepancies. You might even think about taking some time to improve your score in order to secure a better interest rate.
How much do you know about mortgages? Rates may currently be at an all-time low, but you should still compare mortgage rates and talk to a trusted mortgage broker about loan options. There are first-time home-buyer loans, fixed and adjustable interest rates, and some that even offer down payment and closing cost assistance. They all have different features and requirements, so work with a knowledgeable broker who can find you the best deal.
Study the housing market before you buy. Is it a buyer or a seller’s market? You want to pay a fair price for your home, so make sure you’re not buying when houses are in high demand, and prices are inflated. Recognizing trends or changes in your local market could help you find a well-priced buying opportunity before anyone else.
Realize this won’t be your ultimate dream home. Your first home won’t likely be everything you want it to be, but a smart investment coupled with a few years of appreciation may lead you there. Seriously consider resale or rental value when choosing not only home features, but location as well.
Purchasing a home is a big deal, and it’s easy to get caught up in all the excitement. Consider these tips, take your time, and you’ll be sure to find your piece of the American Dream.
7 mistakes to avoid when purchasing your first home
You’ve been looking at online home listings for months, driving through neighborhoods on the weekends, and saving every spare dime for a down payment. You’re ready to make the home-buying plunge.
Buying a house is one of the most exciting—and stressful—times in your life. You’re eager to find your dream home and start the next chapter of your life, but let’s be serious. A home is a big investment, and you can’t afford to make a hasty, uninformed, or emotional decision.
Here are a few of the most common blunders homebuyers make and how you can avoid them, or at least learn from their mistakes.
1. Failing to check your credit report
Amazingly, the Federal Trade Commission’s last large-scale study of credit reports found that 26 percent of consumers had at least one inaccuracy in their credit report. Not all of those errors would have impacted their credit rating to the point that it resulted in a higher mortgage interest rate, but it certainly would have for some.
It’s critical to review your credit report at least three months before you plan to apply for a home loan. If you find an error, you’ll have time to dispute it and have it corrected before lenders check your credit report for preapproval. If your credit report is clean, it will improve your credit score and likely impact the interest rate on your mortgage. All consumers can access a free copy of their credit report annually from annualcreditreport.com.
2. Skipping the mortgage pre-approval
There’s pre-qualified and pre-approval. Both show the seller that you’re a serious buyer, but pre-approval requires a credit check and the submission of supporting documentation for income and assets. It will also help you save time by allowing you only to view homes that you already know you can afford instead of falling in love with one that’s outside of your price range. Put in an offer, and a buyer who already has pre-approval has a leg up on a buyer who doesn’t.
3. Missing the Hidden Costs
Once you find your dream home, most buyers simply calculate their mortgage payment and say, “Sure, I can afford that.” When reality sinks in, you soon figure out that you’ll need to pay taxes, insurance, utilities, HOA and maintenance fees. These are the hidden costs that may just push you over the top of your budget. If you’re a first-time homebuyer, it might be the closing costs, appraisal fees, escrow fees, and moving costs, among others. You can’t forget about the added costs that come with purchasing a home and the extra responsibility of being a homeowner.
Ask the sellers about their summer and winter utility costs, HOA fees, and property taxes. Talk with your insurance agent about the cost of a homeowner’s insurance policy and ask your broker for an estimation of your closing costs. Gather as many quotes and estimates as you can so that you can make a more informed decision about whether you can afford to purchase this home. It’s better to know the truth sooner than later.
4. Waiting for everything on your wish list
In the real world, when do we get everything we want? Even when you’re spending $100K, $300K or $500K, there will always be compromise. Here’s our advice: Keep an open mind. It’s unlikely that any one home will have everything on your wish list. You’ll need to separate those wishes into wants, like a fireplace or a fenced yard, and needs, like a garage or four bedrooms. You might even label some of them deal breakers, such as a specific town, school district, or its proximity to your office.
Flexibility is a critical component in the house-hunting processes. The goal is to find the home with the most wants and needs that still fits within your budget.
5. Assuming the neighborhood is just fine
You may have found love in a home, but if the neighborhood isn’t up to par, it could be a costly mistake. With a house comes the neighborhood, so take a good look around before you buy—and do your research. Not everything a homebuyer should consider is out in the open.
Think about the reasons you’re purchasing this home. Do you have children? The quality of schools in the area might be an important factor to consider. Visit the schools personally and take a tour. Review information, rankings, test scores and other analytics online. Drive through the neighborhood at different times of the day and chat with parents as they wait for their kids to come home on the school bus.
Does the neighborhood feel safe at night? Check the local crime reports and registered sex offender list. How’s the local shopping? Where’s the nearest grocery store or park? These are all questions you should investigate before purchasing a home.
6. Not considering the resale value of your home
You’re buying a home, not selling one, so why worry about resale value? It’s simple. Sooner or later you’re going to want to sell this home, and you’ll need someone to buy it. Don’t buy the home with the railroad tracks running through the backyard just because it has a gourmet kitchen that you’ve fallen in love with. There’s a reason it’s priced below market value and a bonus if you can close in 30 days.
The best approach is to look for a home that offers the general preferences of a typical homebuyer. You can paint, decorate and furnish to add your personal style, but when you’re ready to sell, whether in a year due to a job transfer, or in 40 years when you retire to the beach, your home will appeal to the highest number of prospective buyers.
7. Letting your emotions rule your decision
The decision to purchase a home should be made primarily with your head, not your heart. Yes, you should love your new home. After all, you’re investing a ton of money to own it, and you’ll be living in it every single day. But, you shouldn’t be so enamored that you’re blinded to what it can do to your budget. When you’re already spending such a large amount of money, another $10K or $15K doesn’t seem like very much, but it can put you in a tighter financial situation than you’re prepared to handle. One layoff, job change, illness, or any other situation that causes a reduction in salary can easily cause your dream home to become a burden.
One recommended guideline is to spend no more than one-third of your monthly income on housing costs, which includes your total mortgage payment, taxes, and insurance–no matter how tempting it is.
What is a Jumbo loan?
If you’ve ever purchased a home, you know that there are a variety of mortgage loans available to buyers. There are FHA, VA, construction, and subprime loans, fixed–rate, adjustable-rate, and interest only loans. There’s also one called a jumbo loan, which clearly implies it’s going to be huge. Wouldn’t you agree?
If you’re thinking about a jumbo loan, there are a few things you should know. After all, you’re investing in your dream home, and it’s important to be well educated on the type of debt you’re taking on to help fund it.
Conforming vs. non-conforming loans
A conforming loan is one whose loan amount falls within the servicing limits for Fannie Mae and Freddie Mac. In other words, it’s the maximum loan amount that can be purchased from lenders by Fannie Mae and Freddie Mac, two government-sponsored agencies, and sold to investors for the purpose of providing liquidity in the mortgage markets. This frees up the cash necessary for lenders to continue writing real estate loans for other borrowers.
Currently, the conforming loan amount is $424,100 for a single-family home in all States, except for Hawaii and Alaska and a few federally designated high-cost markets.
Regardless of its high credit quality, if the mortgage amount exceeds the conforming loan limit, it is considered a jumbo loan or a non-conforming loan. Jumbo loans are not eligible for purchase by Fannie Mae or Freddie Mac and the lender bears all the risk.
Jumbo loan requirements
Because jumbo loans have higher purchase limits, they’re typically used to purchase luxury homes, vacation homes, or even investment properties. While traditional mortgage loans have strict lending standards, jumbo loans have even more demanding requirements.
Jumbo loans pose an additional amount of risk for lenders, mainly due to the size of the loan. That’s one reason that the down payment requirement is typically 20%. Generally, if a jumbo mortgage loan defaults, a home of that caliber is unlikely to sell quickly and for full price. The lender mitigates some of the risk by requiring a certain amount of equity in the home. Interest rates for jumbo loans are typically a little higher than conforming loan rates as well. Most often, a 1/4 to 1/2 percent increase would be a fair expectation.
Borrowers will also be required to demonstrate financial strength, too. Their debt-to-income ratio should be roughly 45 percent, and they’ll need to plan on a required reserve amount that could potentially be as high as 20 percent of the value of the loan.
If you are able to meet the requirements, a jumbo loan might be the right fit for your financial situation. Of course, there are other options. Be sure to speak with your lender to help you decide which product meets your mortgage needs best.
Adding it up – how to determine what your total monthly payment will be
Ready to take the leap into home ownership? Hopefully, you’ve saved enough money for a down payment, met with an advisor at your local credit union to discuss your finances, and have already been pre-approved for a mortgage. If so, congratulations, you’re well on your way!
The process can be exciting, but let’s slow down for just a minute. Regardless of the amount for which you’ve been approved, you need to look at your monthly expenses and realistically think about what you can manage. A mortgage payment is a big responsibility.
One number new homebuyers focus on is what their monthly payment will be. Sometimes homebuyers are surprised when they close on a home and find out that their mortgage payment is higher than what they originally thought. Buying a home should be a happy time, so let’s take a look at what will make up your actual monthly payment.
What will my payment include?
There is more to your mortgage payment than simply the cost of your new home. Your payment can be divided into two components: principal and interest. The principal is the amount of money that you borrowed; the interest is the amount of money the lender charges for lending you the money. In the early years, the majority of your mortgage payment will be paying down interest, and only a small percentage will go to accumulating equity in your home. Over time, however, the principal portion of your mortgage payment will increase, and the interest portion will decrease.
Your total monthly payment might also include homeowner’s insurance and property taxes that may be held in an escrow account. You make the payments to the lender in your mortgage payment and when the bill comes due, the lender will make the payment from your escrow account.
An escrow account is an account that is set up by your lender on your behalf. A portion of each mortgage payment will be deposited into your escrow account to pay for certain property-related expenses that are only due once or twice per year. Because the lender is in charge of making the payment, they can make sure it’s made on time and the property is not at risk.
Was your down payment less than 20% of the purchase price of your home? If it was, your mortgage payment will likely also include mortgage insurance. Mortgage insurance lowers the risk to the lender, so you can be approved for a loan that you might not otherwise qualify. It protects the lender in case you fall behind on your payments. The cost of mortgage insurance varies, but your lender will be able to discuss it with you during the loan process.
No surprises here!
When you’re aware of all that’s included, you can better budget for your monthly expenses. No one wants to be surprised when it comes to their finances, especially when you’re locked into a 30-year loan. Visit your local credit union for more information, answers to your questions, or help calculating your estimated monthly mortgage cost.
4 reasons to buy a home instead of renting
The financial benefits of buying a home compared with renting have yoyoed over the years, especially of late. If you’re sitting on the fence, here are four circumstances in which it may be a better bet to buy.
If interest rates remain low
From a financing perspective, if this isn’t the best time to buy a house, it’s pretty darn close.
The average interest rate on a 30-year fixed mortgage, the most common variety, has hovered below or near 4% for several months now. For comparison’s sake, if you bought 10 years ago, the average interest rate was 6.41%. In 1996, it was 7.81%, and in 1981 it was a whopping 16.63%.
Although the Federal Reserve has begun to inch rates upward, it is likely that it will do so slowly and that it will be a while before the cost of borrowing to buy a home stops being historically low.
If home prices level off
Home prices rose steadily in the 1970s, ’80s, ’90s and 2000s before plunging around 2007, and in the past few years they have been climbing again. Different markets have seen different trends, of course, but generally what’s at play is supply and demand: More potential buyers than houses available means sellers can dictate terms and get top dollar.
But something interesting is happening: The oft-told story that millennials are renting for longer or living with their parents nowadays is not entirely accurate. No, people in this age group (born between 1981 and 1997) want very much to own a home, but they are putting it off because of real and imagined difficulties in affording it.
That could mean fewer potential buyers and a cooling of the upward surge in home prices. While others wait, you could pounce.
If rental costs continue rising
Real estate researcher Reis Inc. reports that apartment rents rose 4.6% in 2015. In hot housing markets such as California and the Pacific Northwest, rents are going up by about 14% per year. According to Zillow, the median asking price nationwide for a rental was $1,575 per month in early 2016.
The monthly payment on a $200,000 mortgage — about the average in the U.S. — with a 4% interest rate would be just over $950. Even with taxes, insurance and maintenance, it’s tough to make a financial case in favor of renting.
If you want to save money
Home values over the past 70 years have generally tracked with inflation. Yes, you could make more money in the stock market. But we’re talking real life, not investment advice. Consider two things:
- Your rent is locked in for a year or two, then will go up. Your mortgage payment can be the same for 30 years.
- If you are raising a family, it seems all but impossible to save money. But when you sell the house after 30 years (or 20 or 10), someone will hand you hundreds of thousands of dollars, money that could put the kids through college or finance your retirement.
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