Is an Assumable Mortgage a Good Idea?

On September 21, 2014   /   Home Finance  
Tags: , , ,
home buyer

By: Michele Lerner for Realtor.com

Looking for an alternative to a traditional mortgage?

An assumable mortgage is a loan that allows a buyer to take over a seller’s current loan, typically with no change to the terms or interest rate.

When interest rates are low or falling, borrowers aren’t interested in taking on a loan with a higher interest rate than what a broker could offer.

But, if you’re purchasing a home with an established loan at 3.75% and mortgage rates have risen to 5.5%, you may want to consider an assumable loan.

Why consider an assumable mortgage

The top benefit to assuming a loan is a lower interest rate than you could get by applying on your own. In addition, your closing costs will be reduced. You’ll still have to pay some fees for the loan qualification process.

If you’re assuming an FHA loan, you won’t need to pay upfront mortgage insurance costs—just the ongoing mortgage insurance payments for the life of the loan.

One other advantage of an assumable loan is that you’ll be paying only the remainder of the seller’s loan.

Some simple math gives you a good example: if a seller borrowed $200,000 for their home purchase in 2011 at 4.2% with a 30-year loan, their monthly principal and interest payments are $978. If you were to borrow $200,000 at 5.2% with a 30-year loan, your monthly principal and interest payments would be $1,098.

In addition, because the seller has already repaid the initial three years of the loan, you would only need to make payments for the remaining 27 years of their loan. The sellers will have paid down $24,562 in interest after three years of payments.

By assuming the loan, you’d save $43,268 over the 30-year loan thanks to the difference in interest rates—plus the interest that the owners have already paid ($24,562)—for a total savings of $67,830.

Assumable mortgage options

Conventional loans are rarely eligible for assumption—most typically require the loan to be paid in full when the property is sold or transferred to another owner. VA and FHA loans are eligible for assumption, but there are a couple of additional requirements:
?FHA and VA loans both require the borrower to be approved for the loan.
?VA loans allow a non-veteran to take over the loan, but the sellers are still responsible for the loan if the new borrower defaults. If a veteran assumes the loan, the sellers are not responsible for the loan after settlement occurs.

Obstacles to an assumable mortgage

Before you run out to capitalize on someone else’s favorable loan, realize that a loan assumption isn’t always on the table.

In addition, you’ll typically need significant cash or to take out a second mortgage if the current home price is more than the remaining mortgage.

For example, if the sellers have made three years of payments as in the example above, their remaining principle due is $189,353. If the home appreciated in value and you buy it for $250,000, you’ll need extra cash as your down payment in order to assume the loan.

Alternatively, you can make a smaller down payment and finance some of the additional cost with a second loan, but be aware that second mortgages are more difficult to qualify for and typically have a higher interest rate than a first mortgage.

A good lender will help you decide whether a loan assumption or a traditional finance makes the most sense for your home purchase.

Back to Top

How to Pay Off Your Mortgage Before You Retire

On September 14, 2014   /   Lake Martin Real Estate, Mortgage  
Tags: , , ,
pay off mortgage before retiring

By: Michele Lerner for Realtor.com

For most of your life, preparing for retirement means investing. But as the actual date approaches, you also will need to streamline your budget so your expenses will be as low as possible. If a mortgage payment is your biggest monthly expense, as it is for most people, you might want to try to pay off your mortgage before you retire.

Loan balances for those borrowers also rose, with the median amount rising to $79,000 from $43,400 during those years after adjusting for inflation.

While not everyone can manage it, many older homeowners prefer to pay off their mortgage balance entirely before they retire.

Keep in mind that some expenses of homeownership won’t disappear: you still need to pay for homeowners insurance and property taxes—and if you live in a condo or a home within a homeowners association, you’ll need to keep paying your association dues.

However, eliminating the bulk of your payment, the mortgage principal and interest, can go a long way to smoother cash flow once you stop work.

Ways to Pay Off Your Mortgage

The best way to pay down your home loan depends on your loan terms, balance and budget. In particular, you need to consider your monthly budget and whether you can afford to make larger payments to reduce your mortgage balance.

It’s particularly important to think about how long you plan to keep your home and how far you are into your mortgage.

Refinance

If you’ve been paying off a 30-year fixed-rate loan for 15 or 20 years, you should think carefully about the advantages and disadvantages of refinancing.

In some cases, it’s a smart move to refinance into a shorter term loan of 10 years or even less, but be aware of the transaction fees and closing costs associated with a refinance—typically 2% to 3% of the loan amount. You may be better off applying those closing costs to extra payments on your current loan, especially if you’re near the payoff date.

Early in any home loan repayment you’re mostly paying interest, but by the last few years of your loan, you’re paying mostly principal. If you have refinanced before or bought your home within the last few years, refinancing into a shorter loan term could cause a big jump in your payments.

If you do opt to refinance into a shorter loan, be sure you can comfortably afford the higher payments and that you’ll recoup your costs quickly.

Prepay your loan

Refinancing locks you into a new payment plan, but if you’d rather have some flexibility, you can make extra payments to eliminate your mortgage faster.

You may want to add money to every payment, make an extra payment each year or even make a lump sum payment if you receive a tax refund or bonus.

Not only will you pay off your loan faster, but you’ll save thousands in interest payments.

For example, if you took out a $200,000 loan in 1999 at 4.5%, your principal and interest payments are about $836 per month—and your loan payoff date is 2029.

If you add $250 per month to your payment, you can eliminate your loan in 2025 and save about $13,630 in interest. If you can manage $500 more per month, you can save $21,300 in interest and be mortgage-free in 2023.

Put Mortgage Payoff Decisions in Context

It’s important to consider any decision about your home loan in the context of your other financial goals and commitments. Be sure you are contributing as much as you should to your retirement funds and eliminate non tax-deductible debt before you begin to pay down your mortgage.

Consult a lender and a financial planner to discuss your options on an individual basis.

This story was originally posted on SeniorHousingNet.

Back to Top

How a Bad Home Inspector Can Jeopardize a Sale

On September 7, 2014   /   Home Inspection  
Tags: , ,
home inspection

Home inspection represents a key piece of the home-buying process –– an expert eye that gives an invaluable assessment of the biggest investment a buyer will make (and that a seller has previously made).

A good home inspector can ease the process and make sure there’s no surprises.

A bad home inspector can jeopardize a sale, hurting both sides of the real estate equation.

Here are a few ways to protect yourself against an unqualified home inspector.

A Note for Sellers

A lot of information about inspections aims at buyers, but they can help sellers.

You may even want to invest in an inspection before you put the home on the market, so you can fix potential issues, adjust the price point, or know what to expect at the negotiating table.

Remember to prep as much as you can to make the inspector’s job easier.

What to Look For

When hiring a home inspector, make sure the person doing the inspection is recommended by a reliable source.

You can consult the Better Business Bureau or the American Society of Home Inspectors (ASHI) to find a professional home inspector in your area. Ask friends and relatives who recently bought for recommendations. Your real estate agent might have someone they trust as well.

Find out what kind of qualifications, education, experience and credentials a potential home inspector has and whether they have a license. Do they engage in continuing education? Ask for references from former clients.

A home inspector should also have insurance, so ask what is covered in their insurance. It could be only the cost of the home inspection—or it might be more.

Request a Sample

A good inspector should provide one if you ask. He or she may offer an inspection checklist, but that doesn’t include enough detail to show what clients can expect in a report.

If the sample report is only a few pages long, this is an indication the prospective home inspector isn’t thorough enough. Some agencies may include a sample report on their website, so you don’t even have to ask.

Also, ask if you may accompany the inspector as he checks out the house. Agencies like HUD and the ASHI encourage this, so a buyer can see the home through expert eyes.

If an inspector balks at this request, it’s a red flag.

Customer Service

Does an inspector pick up the phone when you call, or return calls in a timely manner? Does the company take the time to answer your questions? Your purchase is a huge investment, and you deserve someone who will help you make a wise one.

If issues arise the seller needs to fix, what’s the inspector’s police on re-checking the property? Can you ask questions about the home inspection after they’ve sent you the report?

Good customer service will be a positive recommendation and will enable you to find someone you can trust.

What to Expect

Know what you’re getting for your money.

The average home inspection costs $300 to $500. You get what you pay for, so don’t try to economize on a home inspection.

A so-called bargain might end up costing you more in the long run if they miss “surprises” like foundation issues or electrical problems.

You should receive a report in about 24 hours, with photos, anywhere from 20 to 65 pages.

Based on an earlier version by Wendy Dickstein.

Back to Top

How to Negotiate Your Closing Costs

On August 30, 2014   /   Finance, Mortgage  
Tags: , , , ,
negotiate closing costs

By: Craig Donofrio for Realtor.com

At the end of the home-buying process, you will be faced with closing costs, the fees due at signing required to complete a home sale. Closing costs can be expensive, but some of those fees may be negotiable.

Check the Market Temperature

The nature of the housing market may dictate whether the buyer or the seller picks up various closing costs.

If it’s a buyer’s market—a bit cold and homes aren’t selling well—sellers may be more willing to bargain and take on some closing costs.

If it’s a seller’s market—the market is hot and homes are selling quickly—the seller has the advantage and little incentive to give the buyer a break.

However, you shouldn’t accept any fishy-looking fees without asking first.

Which Closing Costs Are Negotiable?

When you apply for a loan, your lender or mortgage broker must provide a good faith estimate (GFE) of fees due at closing.

This is a very useful tool, but bear in mind these are estimates—not guarantees. Compare the GFE to the final closing costs statement and the HUD-1 settlement statement to look for big differences.

Some fees are generated by third parties and typically don’t change very much, no matter where you find your loan. Then there are additional expenses you can’t control, like taxes and government fees.

Other fees may be junk fees—costs that are put in by the lender to pad out the bill. These fees should be able to be negotiated or waived.

Negotiable fees are generally found in the 800s section of the GFE. They may include the following:

  • Title Insurance: The lender will recommend one, but you don’t need to accept it. You can shop around, compare fees, and go with the one that suits you best. However, you can’t have this waived.
  • Commitment fee: These are just there to make sure you don’t jump to another lender. Ask to have it waived. If you can’t, negotiate that if the loan falls through due to the lender, the fee will not be charged.
  • Application fee: Some loans have an application fee. Ask your lender if they will waive or credit this fee towards closing costs.
  • Miscellaneous fees: Ask exactly what these are for, especially if they are high.
  • Courier and mail fees: With almost everything being digital, your lender should provide evidence these fees were necessary.
  • Discount points: These increase your closing costs but reduce your interest rate. If you have discount points and your closing costs are too high, you may want to eliminate them. Talk it over with your lender and be sure to figure out the new monthly mortgage payments if you do.

Just Ask If You Have Questions

It is your right to question anything on your HUD-1 and GFE documents, so do ask questions if you feel a cost is too high or doesn’t make sense.

Simply asking the lender to explain certain fees might be enough for the lender to waive them, particularly if they were junk fees to begin with.

Don’t Get Intimidated by Closing Costs

Even if your closing costs rise significantly beyond your GFE, you may feel pressured to accept them to avoid losing the home to another buyer.

Don’t!

Many lenders would rather close a deal instead of going through the process again with another buyer. Use that to your advantage and be prepared to walk away from the table.

As you review your closing costs, be your own advocate. It’s a good idea to visit a few different lenders and compare GFEs.

Always make sure you receive a thorough explanation for any fees that seem unusual, unnecessary or just too costly.

Updated from an earlier version by Emmet Pierce.

Back to Top

Must-Know Info for the Self-Employed Home Buyer

On August 24, 2014   /   Finance, Mortgage  
Tags: , ,
happy couple

By: Anne Miller for Realtor.com

In today’s work universe, we are a nation of independent employees, and it’s the “age of the freelancer,” Fortune magazine has declared.

The self-employed workforce should total 40% of the whole by 2020, says another study—that’s 60 million people!

Are you a self-employed home buyer needing a mortgage? Loans can be tricky to get when something as straight-forward-seeming as what you earned last year gets bogged down in a pile of pay stubs from various clients.

Self-Employed Home Buyer Blues

Julie and Michael Kurtz can’t prove it, but they’re pretty sure their independent status delayed their expected home loan approval by a few weeks this summer—which called into question whether they could close on a new condo in Chicago.

Julia is a freelance editor of technical journals, and Michael is an attorney. He also referees high school and college football; she has a shop on the handmade Web portal, Etsy, as well.

Their story has a happy ending, albeit a stressful one—they ended up getting the keys a few days later than originally planned (which also caused some hiccups for the sellers), due to last-minute requests from the bank.

“It would have been better if we’d worked with a loan company where we could have had a personal relationship with the loan officer or broker,” Julia says.

Self-Employed Home Buyer Challenges

Quicken Loans Vice President Bill Banfield notes the unexpected paperwork requests can trip up the prospective self-employed home buyer.

“The challenge for those who are self-employed can be in verifying the legitimacy and stability of their income,” Banfield says.

And new regulations enacted earlier this year mean that the self-employed face even closer scrutiny, according to the New York Times: “Borrowers who have been self-employed for less than two years will find it difficult if not impossible to obtain financing.”

Self-Employed Home Buyer Sticking Points

These are the details that a self-employed home buyer needs to prepare for when seeking a mortgage.

  • Debt-to-income ratios. If your business carries debt and you are the sole proprietor, that could impact how much of a personal loan a bank will extend.
  • Earnings. Freelancers especially often have business deductions that come out of their overall pay. Banfield uses the example of someone who earned $100,000 last year but technically took home only $60,000 after all the business deductions.
  • History. This is the aforementioned “two year” rule. Lenders now want to see you’ve got a somewhat reliable income history, so they know you can make your payments. One year of solopreneurship isn’t much of a history. If you just started out on your own this year, you may want to wait another one before buying.

Self-Employed Home Buyer Tips

Here are some ideas to start you off on the right path when seeking to purchase a home as a self-employed worker.

  • Find good people. Use a mortgage broker and/or underwriter familiar with the challenges of securing loans for the self-employed. We all need someone who can guide us through the process with consistent communication and guide us through the potential paperwork pitfalls.
  • Prepare for paper. You will likely have to submit more paperwork and proofs of income, debt rations and business expenses than someone who is more traditionally employed. Forewarned is forearmed.
  • Drop your debt. That debt-to-income ratio can be a big deal with lenders. Make yours as friendly as possible.
  • Get pre-approval. Yes, we suggest everyone do this. But especially for freelancers—who can struggle to understand where they stand in the mortgage world for all of the above reason—this is a vital step.

The reality is there are going to be a lot of self-employed home buyer mortgage applications as we move forward in this new economy, and the mortgage lenders have to understand this as well if they want to stay in business.

So knowing what you need to do—in advance—will go a long way towards a successful home-buying experience.

Back to Top