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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 $453,100 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.
Home Equity Loans: What questions should you ask before applying?
If your home’s current market is worth more than the total amount of your remaining mortgage payments, then you’ve built up equity in your home. Many people who have equity in their homes are able to apply for home equity loans and use that portion of equity–or ownership–as collateral for the loan.
Remember when home mortgages were upside-down? Home values are making a comeback after the Great Recession and borrowers are taking advantage of the opportunity to withdraw cash for major expenses or improvements. If you’re in the market for a home equity loan, here are some things you’ll want to consider before you sign on the dotted line:
Do you have enough equity in your home?
Your combined loan-to-value ratio (CLTV) plays a critical role in the approval of an equity loan. Your CLTV ratio is the calculation of your current loan balance plus the additional equity loan amount divided by the appraised value of your home. Generally, lenders require your CLTV to be 85% or less.
What type of home equity loan do you need?
Home Equity Loan
The traditional home equity loan offers the borrower a single lump sum to be repaid over a specific period of time, up to 30 years, at a fixed interest rate. Home equity loans are generally used for large expenses, like replacing a roof or paying off credit card debt, and are ideal for borrowers who need cash for a one-time event. It’s often referred to as a second mortgage, complete with closing costs and notarized signatures.
Home Equity Line of Credit
A home equity line of credit (HELOC) is another type of home equity loan where the lender approves smaller sums of cash up to a fixed amount, similar to a credit card. Its flexibility allows the borrower to withdraw cash as needed and pay interest only on the amount that is withdrawn. Although repayment doesn’t begin until a predetermined date in the future, there is often an annual fee. HELOCs are ruled by adjustable interest rates, but they can be converted to a fixed rate loan once the repayment period begins.
HELOCs are ideal for borrowers who need frequent access to cash to pay contractors during a remodel or even a recurring quarterly tuition bill. They also offer the benefit of not having to pay interest on the loan amount until it’s actually withdrawn.
A mortgage is a mortgage
Regardless of the outstanding amount, the term, or the interest rate, a home equity loan or a HELOC is still a second mortgage. Just as in your first mortgage, the interest you pay is usually tax-deductible, to a certain limit, and rates are generally lower than you’d be charged on a credit card.
You shouldn’t forget, however, that the second loan is secured by your home, which subjects your property to additional risk. You can be foreclosed upon if you’re unable to make your monthly mortgage payments. Be sure to treat your home equity loan or HELOC with just as much importance and seriousness as your first mortgage.
Applying for a second mortgage could be a wise financial decision and a step forward in helping to organize your finances. Consider all of your options and consult with a financial advisor to see if a home equity loan might be a good fit for managing some of your larger expenses.
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.
“I spent $50,000 on home improvements but my home’s appraised value only increased by $35,000?”
If you’ve been in the mortgage business, you’ve had to address or handle a question like the one above. As a capitalist society in the United States, we all want to see a return on investment! As a homeowner, when you do a home improvement you will increase the value of your home, however, it’s not typically dollar for dollar. So, spending $50k on finishing your basement, doesn’t increase your home’s value by $50k. Unless you are completing an above grade addition to your home, historical data supports that you’ll receive approximately 70% return on investment. Some items, such as landscaping and fences, return far less than 70%.
The key to home improvements is simple, do it for your enjoyment and not for a resale value. Remember, it’s called “HOME” improvements and not “HOUSE” improvements. It’s your HOME. The improvements you’re doing are for you/your family.
So, when you’re thinking about investing in your home, consider it to be investing in your level of enjoyment from your home and not just in the value. If you do that, you’ll always feel good about it!