How to Pay Off Your Mortgage Before You Retire

On September 14, 2014   /   Lake Martin Real Estate, Mortgage  
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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.

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How to Negotiate Your Closing Costs

On August 30, 2014   /   Finance, Mortgage  
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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.

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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.

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Can I Take Over a Seller’s Loan?

On May 3, 2014   /   Home Finance, Mortgage, Real Estate News  
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assuming mortgage

By: Angela Colley for Realtor.com

Traditionally, when you buy a home, you apply for a mortgage through a lender, find a home for sale, and use a combination of your down payment and the loan amount to purchase the home. It is a tried and true method, but what if you want to skip the buying and selling process and simply take over another homeowner’s loan?

With certain loans you may be able to do that, but there is a lot to consider before assuming a loan.

The Basics

“In days long past, some mortgages were fully assumable with no qualifying required by the new borrowers at all,” said Ron Bork, senior loan officer for EverBank. Today, things are different. “Conventional mortgages are typically not assumable,” he said.

Some government-backed loans, such as Federal Housing Authority loans, are assumable, but you will have to meet the lender’s requirements and you may have to “come up with the difference between the existing balance and the purchase price,” Bork said.

What to Consider

You should start by comparing the loan amount to the value of the home.

“The balance of the loan needs to match up with the amount available for the remainder of the purchase price,” Bork said. Otherwise, you will have to pay to cover the difference.

You should also consider the current interest rates. If the interest rate on the assumed loan is close to or lower than current interest rates, it may make sense to assume it. If the interest rate is much higher, you may end up paying more in the long run.

Finally, make sure you completely understand the terms of the loan. Is the interest rate adjustable? Are there any surprise fees or balloon payments? Don’t take on a loan unless you know the terms.

Meeting the Lender’s Qualifications

When you take over a loan, “Lenders will undoubtedly use the same underwriting guidelines that they normally do,” Bork said. Meaning, you will have to be able to qualify for the loan before you can take it over.

The lender will look at your credit history and scores. While different lenders have different requirements for credit, having good scores with no delinquent accounts will give you the highest chance of approval.

Lenders will also look at your income and debt-to-income ratio. If you are carrying too many other debts, or if your income isn’t high enough to safely cover the mortgage payments every month, you may not be approved to take over the loan.

Exceptions

If you co-own a property with someone else, you may not need to go through the process of assuming the loan. For example, if you and your spouse get a divorce, you can continue to live in the home and make payments as long as your name is on the loan and title before the divorce.

If you co-own a home with a spouse or family member and that person passes away, you may also be able to simply keep the loan and home the way they are. However, ask an attorney or lender to look over the documents and facts with you to make sure.

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Student Loans Can Affect a Mortgage Approval

On March 20, 2014   /   Mortgage, Real Estate News  
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student loans

Student Loans Can Affect a Mortgage Approval

By: Michele Lerner at Realtor.com

Student loans are not necessarily an obstacle to homeownership, but your payments will be taken into consideration when you apply for a mortgage.

The decision of a lender to offer you financing when you apply for a mortgage is based on a variety of factors that are used to evaluate your likelihood to repay the loan. While your credit score, income, assets and job history are all elements of your credit profile, lenders must also check that your debt-to-income ratio falls within their loan programs’ guidelines.

Student Loan Repayment

If you have student loans and want to buy a home, you will need to be vigilant about making your loan payments on time. A delinquency on a student loan will not only damage your credit score, it could also stop you from qualifying for a home loan. This is particularly true if you have a government-backed student loan and apply for a loan from the Federal Housing Administration, Veterans Affairs, or the U.S. Department of Agriculture Rural Development, because your lender will check the federal Credit Alert Verification Reporting System database to make sure you are not in default on any government obligations.

If you can consolidate your student loans or refinance them into a longer repayment term, you may be able to reduce the size of your monthly payments, which will make it easier to qualify for a mortgage. Better yet, pay off your student loan as quickly as possible by reducing other expenses and paying more than the minimum payment.

Mortgage Qualifications and Student Loans

Many young people lack a long credit history, so on-time student loan payments can actually add to a positive credit report. On the other hand, student loan payments are part of the debt-to-income ratio, which compares all recurring minimum monthly payments to your gross income. Most lenders require a maximum debt-to-income ratio of 43%, although FHA lenders are sometimes a little more flexible if you have compensating factors such as a high credit score, a solid job history or additional assets in the bank. For example, if your monthly income is $4,000 and you have a monthly student loan payment of $400, your other monthly bills, including a car payment, credit card payment and mortgage payment including principal, interest, property taxes, homeowners insurance and a condo or homeowners association fee must be less than $1,320 to stay within the 43% debt-to-income ratio.

If your ratio is too high, you will either have to reduce your debt or increase your income or, ideally, do both. It may be possible to pay off your credit card debt or your car loan or negotiate with your student loan provider for a lower monthly payment. Remember, though, that if you reduce your loan payment, you will be paying more in interest over the life of the loan.

Other options to consider include bringing in a co-signer on your home loan or finding a way to make a bigger down payment to reduce the amount of money you need to borrow to finance your home.

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