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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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Buying a home? Budget for more than just mortgage costs
Buying a home is one of the most important purchases you’ll make in your lifetime so it’s important to make sure you set realistic expectations about how it will affect your monthly budget. Your mortgage payment will make the largest impact, but there are additional costs you should consider before signing on the dotted line.
Bigger house, bigger bills
Chances are you’re living in an apartment or smaller accommodations before purchasing your new home. You probably have a good idea of the types of expenses you’ll incur, but with more square footage, expect those expenses to increase, like heating and air conditioning and gas and electricity. Will you have a luscious green lawn that needs watering? Count on a higher water bill, too. And if you’re looking forward to a second TV in your new man cave then even your cable bill will be bigger!
In the south, a termite bond is often needed. Pest control is recommended quarterly. You may pay homeowner association fees if you live in a subdivision or condominium, plus homeowner’s insurance and higher property taxes. You should also set aside a little cash each month for repairs and maintenance.
When you close on your home, you’ll also have to pay the moving company. Obviously not a monthly cost, but it could be a hefty one that you should consider. There’s also the cost of furniture or appliances that you’ll need…a refrigerator, washer, and dryer, lawnmower, or anything else you’ll need relatively soon. Will you use credit to purchase these items? They can easily turn into monthly expenses by way of a credit card bill, so be sure to account for those payments, too.
Knowing is the key
This list of expenses is not meant to deter you from home ownership. People manage their expenses every day living in their dream homes—and you can, too. If you are aware of the additional expenses you can make the necessary adjustments. Maybe you prioritize some other purchases or even consider a smaller sized home so financially you can live more comfortably within your budget.
Knowing what you can afford is the first step in making a smart, educated decision. By tallying up your monthly expenses along with your mortgage payment before you make a purchase, you’ll be better prepared for happily ever after in your new home.
Todd’s Mortgage Minute: Pre-Qualification vs Pre-Approval. What’s the difference?
Purchasing a home is one of the most important and stressful events you’ll experience in your lifetime. It’s also one of the most exciting. Homeownership offers financial benefits like tax savings and wealth building, but it also offers some social benefits. Homeowners have a stronger sense of belonging and some even say it helps to build a stronger family unit. If you’re ready to take the leap, you’ll need to know exactly where to start.
What’s the difference between pre-qualification and pre-approval?
Although they may sound similar, there is a distinct difference between pre-qualification and pre-approval. Based on a buyer’s credit rating and the amount of income he has verbally communicated to the mortgage lender, a buyer can be pre-qualified for a specific home-buying dollar amount. It is not, however, based on any official verification of income and is not a guarantee of loan approval.
Pre-approval is based on a buyer’s credit rating and submission of an official loan application. When the buyer is pre-approved, his application, which includes documented income and asset information, has already been submitted and reviewed by the underwriter and is a step closer to final approval.
Do you need one vs. the other?
Most real estate agents make it their standard practice to require their clients to be pre-qualified before they begin showing homes. While it can be an anxious and exciting time searching for your dream home, it can also be a stressful time for the seller. Requiring pre-qualification for potential buyers ensures the agent and the seller that the buyers are serious, are ready to move forward, and are respectful of everyone’s time and efforts.
Conversely, having pre-approval prior to viewing any homes is not necessary, nor is it common practice. It could, however, demonstrate a stronger commitment, especially upon submission of an offer. After all, the pre-approval step is substantially farther along in the loan approval process than pre-qualification and could potentially shorten the time it will take to close the loan.
When do you need pre-approval?
When a buyer submits a purchase offer, it will typically include a finance contingency. The finance contingency will identify the number of days in which the buyer must obtain loan pre-approval from the mortgage lender. Typically, the number of days is fifteen, however, it can be any number that the seller and buyer agree upon. During this time, it is critical that the buyer submits a loan application and any supporting documentation to the mortgage lender on a timely basis. By satisfying the contingency and supplying a pre-approval letter, the seller gains a stronger sense of confidence that their buyer’s financials qualify them to purchase the home and that the loan will close.
If you’re in the market to purchase a home, your first step should be to meet with a qualified, reputable mortgage lender to review your financial health, discuss your budget, and obtain a pre-qualification letter. Then, start gathering your supporting documentation so that when you find your dream home, your loan pre-approval will be a smooth and simple process.
What to expect from changes to mortgage application process
If you applied for a mortgage and purchased a home before October 2015, you likely remember the overwhelming amount of loan paperwork you needed to complete and the sometimes confusing language in the documents. Many times the information on the forms overlapped or was not entirely clear, and the process seemed inefficient. If that was your experience, you’re not alone. At the end of the day, it appeared that not all borrowers were entirely confident that they understood the details of what was presented.
“Know Before You Owe”
The Consumer Financial Protection Bureau (CFPB) responded to concerns from homebuyers with the implementation of the TILA-RESPA Integrated Disclosure rule, which is often referred to as “TRID,” but more commonly known as the “Know Before You Owe” rule. This initiative was designed to empower consumers to make more informed mortgage decisions by simplifying the mortgage process.
Two significant changes
The Know Before You Owe Rule made two critical changes to the mortgage process:
First, it consolidated some of the required loan disclosures. The Good Faith Estimate and the initial Truth-in-Lending disclosure were combined to create the new Loan Estimate Form. Under the new rule, the mortgage lender must provide the applicant with a loan estimate, which includes loan terms, amount, payments, and rate, no later than three business days after the application is received. Also, the Closing Disclosure replaced the HUD-1 settlement statement and the Truth-in-Lending disclosure.
Second, it changes some of the timing in the mortgage process. The mortgage lender must now provide the Closing Disclosure to the borrower three business days prior to closing. These three days allow ample time for the borrower to review the loan terms, address any concerns, and make any necessary adjustments. In the case of any change to the document, however, a new Closing Disclosure must be delivered, and the three-day review window must be restarted, which could potentially delay your closing date.
An important step
The changes that accompany the Know Before You Owe rule bring greater clarity and transparency to a historically complicated process. Purchasing your dream home should be an exciting time and the mortgage process, even with all its complexities, shouldn’t dampen that spirit. It’s one of the biggest financial decisions you’ll make in your lifetime, so it’s important that you have a complete understanding of your agreement.
How an appraisal can affect your home loan
After months of searching, you’ve finally found the perfect home and can already picture your family relaxing in the den. The last thing you want is a problem during the loan process to derail your dream. Understanding the home buying process is critical to making things go smoothly, and one key item you need to know is the home appraisal.
What is an appraisal?
When purchasing a home and applying for a mortgage, one of the first steps the lender will do is order an appraisal. The house will need to be evaluated by an independent, unbiased professional appraiser in order to estimate the home’s current market value. A home appraisal is an expert’s opinion of the value of a given property.
What is an appraisal based on?
The value of a home is based on its general condition and age, the location, and it’s size. The number of bedrooms and bathrooms is an important factor, as are any major structural improvements, like remodeled rooms or additions. Amenities are also a consideration—Is there a swimming pool on the property, or a boat dock? Features such as hardwood floors or majestic views are also positive influencers when it comes to value.
The purchase price of comparable properties within in a given radius is one of the most critical components, however. These prices demonstrate what the market is willing to pay for a home similar to the one being appraised and generally carry the most weight.
Because the home will be used as collateral for the mortgage loan, the mortgage company needs to be assured that the amount of money being loaned to the buyer doesn’t exceed the value of the home, should the buyer default on the loan and the bank have to sell the property to recoup their money. The lender will typically order the appraisal, but the cost of the appraisal, generally between $300-$400, is paid by the buyer.
The appraiser will visit the home and conduct a visual inspection of the interior and exterior. He’ll take some measurements and note any conditions that might positively or adversely affect the property’s value. He’ll research recent home sales in the areas and then deliver a final appraisal report that includes an opinion of value.
What if the appraisal is lower than the sale price?
If the appraisal value is lower than the sale price, you’ve reached a fork in the road. The mortgage lender is not willing to approve a loan for more money than the home is worth. You can either use a low appraisal to encourage the seller to lower the price of the home, or you can choose to make a larger down payment so the amount you need to borrow is less than the appraised value of the home.
If you feel strongly that the value was understated, you could also challenge the appraisal or get a second opinion. Sometimes home values are depressed due to foreclosures or short sales in the area. You may be able to convince your appraiser that this was the case with some of the comparables while, at the same time, prove that your home is in significantly better condition than those that were sold at a discount.
What if the appraisal is higher than the sale price?
If the appraisal value is higher than the sale price, this transaction can keep moving along as planned. The expert opinion of the appraiser is that the value of your soon-to-be new home is higher than what you’ve agreed to pay. Congratulations—you already have equity in your new home!
The value of the appraisal
The appraisal process isn’t meant to put a roadblock between you and your dream home. It’s there to protect both you and the lender. You don’t want to unknowingly overpay for a home, especially if you need to sell it in the short-term. It could be worth less than you owe and that’s an unfortunate situation for everyone. From the bank’s perspective, they don’t want to own a house that they can’t sell to cover the outstanding loan balance in the event of a loan default.
In the home-buying process, the appraisal is just one of many things that need to be done in order to get to the closing table. Regardless of whether your appraisal comes in high or low, understanding the process is your best defense to managing the hurdles until you get to your home sweet home.