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“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!
What it means to have a “friend in the industry”
“I have a friend in the industry.”
It’s safe to say that in the world of mortgage, we have all heard this one before. When someone broadcasts this to you, the real question is, “What does having a friend in the industry mean?” It could mean, “A realtor lives down the street from me.” It could mean, “My son’s basketball coach is an appraiser.” Or it could even mean, “I know someone at church who works for the bank.”
We all have “friends” in the industry – not just the mortgage industry either, but in many industries. And working in the industry doesn’t make them all experts. Having a friend in the industry and having a trusted advisor to help you determine your mortgage options are two completely different things. Just because you have that “friend” in the industry, it doesn’t mean that you’ve shared your financial situation with them. Most people tend to keep their private business…well, private. However, by having a relationship with someone who is a trusted advisor, and who puts your interests above all else, that’s really having a friend in the industry.
If you’re looking for a “friend in the industry”, let us know because we are here to help!
Todd’s Mortgage Minute: “How are rates?” Hmmm…
I’ve been in lending for almost 20 years and a question I receive from friends, family, and acquaintances alike is often the same, “how are the rates?” Well, this all depends on many factors, but it is mostly dependent on what YOUR situation is and what YOU’RE trying to accomplish.
You’d have to have lived under a rock the last couple of years not to know how low rates have been — and not just low, but HISTORICALLY LOW. But, over the last three months, it’s been well publicized that “rates are going up”…again, from a historical low. Just because rates are rising doesn’t mean they’re high, it just means they’re higher in some capacity than what they were yesterday. Not to mention many factors go into determining the rates, as well: credit scores, loan to value, type of occupancy, length of loan term, etc.
So consider this: if you’re trying to purchase a new home and you’ve found the house of your dreams AND it’s in your budget, then the rates should be good for you! Or, if you’re looking to refinance your current mortgage to save money each month by securing a lower payment and rate, then the rates should be good for you, too!
Remember, none of us in the industry can tell or predict what the rates will be tomorrow or anytime in the future, we can only share what they are today, and if it meets your needs and is better than what you have, I would say the rates are good!
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.
What to Know About Home Equity Loans
If you’re a homeowner, you have a powerful tool in your financial arsenal: the home equity loan.
Home equity loans allow some consumers to borrow a large amount of money relatively easily and cheaply. But they aren’t right for all situations. Here’s a bit more about how they work and when they’re a good option.
How home equity loans work
A home equity loan is a loan secured by the value of the borrower’s house. Sometimes called second mortgages, home equity loans come with favorable terms because they’re low risk for lenders. To qualify for one, you’ll need significant equity in your home — that’s the difference between what your home is worth and what you owe on it.
Lenders use a figure called loan-to-value ratio, or LTV, to help determine which loan applicants qualify. For example, if your house is worth $250,000 and your mortgage balance is $150,000, you have $100,000 in equity. Your LTV, which is the amount you currently owe on the house divided by its current value, is 60%. The lower the LTV on your first mortgage, the easier it is to qualify for a second.
Keep in mind that a home equity loan is different from a home equity line of credit, also called a HELOC. Home equity loans are installment loans with fixed payments, like auto loans; HELOCs are revolving debt with variable payments, like credit cards.
Pros and cons
Home equity loans have a number of advantages over personal loans and some other kinds of debt:
- They typically have lower interest rates.
- They’re easier to qualify for, even if you have average credit.
- Interest payments are tax-deductible in most cases.
- They offer potentially high loan amounts, depending on the home equity available.
There are also some downsides to home equity loans:
- If you miss payments on your loan, the lender can foreclose on your home.
- If your home value drops, you could end up with high LTV or even “underwater” on your mortgage, owing more than the home is worth. And if you were to sell your home, you would owe your lender the difference between the sale price and your mortgage at closing.
How to use a home equity loan
Because home equity loans can provide a large amount of money, borrowers tend to use them to pay major expenses, such as:
- College tuition.
- Large medical bills.
- Home improvements or major repairs.
Some homeowners use home equity loans to consolidate higher-interest debt, such as credit card debt. However, that’s considered a risky move by consumer groups like the Consumer Financial Protection Bureau, since failing to make payments on a second mortgage can lead to foreclosure.
Many factors should inform your decision about taking out a home equity loan, including the state of the real-estate market in your area and whether you have better ways to raise money. Talk with a representative at your local bank or credit union for more information.
Most importantly, make sure a home equity loan suits your long-term goals, as well as your more immediate needs.
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