Linda D. Dempsey's Blog
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Most are familiar with the key components of a mortgage: how much you're borrowing, what your interest rate is, how many years you'll be paying your mortgage back. There are many, however, who do not understand some of the finer details, including what prepayment penalties are and how they may affect you when you're buying or selling a home.
What are Prepayment Penalties?
In the simplest terms, a prepayment penalty may apply if you pay off your mortgage early. Prepaying can mean either making additional payments that bring down your balance quicker, refinancing your mortgage, or selling the home and therefore paying off the balance of the loan. The reason banks apply these penalties is to recoup some of their lost revenue when years of interest are not collected due to an early payoff.
Not all mortgages come with penalties and those that do often specify when and how the penalties will apply. For example, many borrowers will not be penalized if the prepayment results from selling the home, but will apply from refinancing or from making additional payments. Others have a limit to how much can be paid early via additional payments during any given year. It's also common for prepayment penalties to only apply during the first several years.
Avoiding the Harshest Penalties
For first-time mortgage applicants, it pays to take the time to find your lender before you choose a home. That way, you'll have plenty of time to read all the documentation, ask questions, and consult an attorney to ensure you're getting terms you can agree to in good faith. Keep in mind, however, that mortgage contracts are not final until you've selected a home and have documents drawn up specifically for that purchase. You may want to have an attorney present during the closing to make sure all the final paperwork matches your expectations.
For sellers, it's best to understand whether prepayment penalties will apply long before contemplating the sale of your home. However, if you missed the opportunity to do your due diligence when signing the mortgage documents, it's not too late. Start by talking with your lender to understand which, if any, penalties you may be subject to. If the penalties are steep enough, now may not be the best time to sell or you may want to keep these expenses in mind when pricing your home. Others may be able to port their mortgage to a new home, or transfer it to a new property to avoid penalties.
No matter which side of the deal you are on, a qualified real estate agent can help you navigate the process to make sure you're getting the most from the arrangement while also working around tricky situations. To learn more or to get started, feel free to send in your inquiries, so we can get started on your homebuying or home selling journey today.
Whether you’ve been saving up for a while or you’re just getting started, getting into a home might be easier than you think. If you’re looking to buy a home, but you just aren’t sure about tying all your savings into a house, check out the various loan options with low down payment requirements.
The Myth of 20%
A lot of misconceptions exist about the down payment required to buy a home. Particularly about the "20% down" rule. Even though many potential homebuyers think they need to save up that 20% — and they delay buying a home because they haven’t been able to — it’s actually not a rule. While it is a suggestion, and necessary for obtaining a “conventional” loan, it’s not required to buy a house. Some first-time buyers have the mistaken impression that having that 20% down somehow balances out a lack of stellar credit history, guarantees a better rate or a bigger loan.
None of this is true. It does improve your ability to qualify for a loan from a regular lender because it makes your loan easier for them to sell on the secondary market. Even with a 20% down payment, you’ll have to meet the 43% or less debt-to-income ratio to qualify for a loan. It also, however, means that you do not have to buy private mortgage insurance (PMI), which saves you the monthly outgo toward that premium.
On a side note, PMI is not your homeowner’s insurance. It is the coverage you pay for to protect your lender in case you default on your loan.
Buying with Less than 20%
You can buy a home with less than twenty percent down, and in some cases, with zero down.
Here’s the skinny:
A Conventional 97 loan is one you may not have heard of. It is available through Fannie Mae and is a fixed-rate loan that requires just three percent down. The best part is that the down payment can come entirely from gifts by blood-related or marriage-related donors. A Conventional 97 loan cannot be greater than $484,350 (the number changes annually), requires a better than average credit score and is useful only for a single-unit dwelling. Conventional 97 loans are available to first time and returning homebuyers.
- The HomeReady™ Mortgage is a specialty option among low- and no-down-payment mortgages. Backed by Fannie Mae, most US lenders offer it. The HomeReady™ mortgage boasts below-market mortgage rates, lower mortgage insurance fees and innovative underwriting practices. In fact, the income of everybody living in the house may qualify for mortgage-approval. That means if your parents live with you, your income and theirs are added together.
- The Federal Housing Administration, or FHA, insured mortgage requires just 3.5% in down payment. Also, FHA loan guidelines regarding credit scores are more liberal. Borrowers that have a lower FICO score can still qualify for an FHA loan when they have a reasonable explanation for why their score is lower.
- Active duty and honorably discharged U.S. Military members and surviving spouses are eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans offer a zero down payment options. In areas with a higher cost of living, VA loans are even available above the one million dollar mark.
- The no-money-down, 100% financing option available to non-military borrowers is offered through the U.S. Department of Agriculture. This Rural Development Guaranteed Housing Loan is also available to buyers in qualifying suburban neighborhoods. For many borrowers, the USDA loan is their lowest cost option.
While not everyone qualifies for a lower or zero down payment loan, if you are interested in home ownership and tentative about investing a big down payment, one of these options may be right for you. Ask your mortgage broker to explain the options to you for the home of your dreams.
It’s hard to overstate the importance of credit scores when it comes to buying a home. Along with your down payment, your credit score is a deciding factor of getting approved and securing a low interest rate.
Credit can be complicated. And, if you want to buy a home in the near future, it can seem daunting to try and increase your score while saving for a down payment.
However, it is possible to significantly increase your score in the months leading up to applying for a loan.
In today’s post, we’re going to talk about some ways to give your credit score a quick boost so that you can secure the best rate on your mortgage.
Should I focus on increasing my score or save for a down payment?
If you’re planning on buying a home, you might be faced with a difficult decision: to pay off old debt or to save a larger down payment.
As a general rule, it’s better to pay off smaller loans and debt before taking out larger loans. If you have multiple loans that you’re paying off that are around the same balance, focus on whichever one has the highest interest rate.
If you have low-interest loans that you can easily afford to continue paying while you save, then it’s often worth saving more for a down payment.
Remember that if you are able to save up 20% of your mortgage, you’ll be able to avoid paying PMI (private mortgage insurance). This will save you quite a bit over the span of your loan.
Starting with no credit
If you’ve avoided loans and credit cards thus far in your life but want to save for a home, you might run into the issue of not having a credit history.
To confront this issue, it’s often a good idea to open a credit card that has good rewards and use it for your everyday expenses like groceries. Then, set up the card to auto-pay the balance in full each month to avoid paying interest.
This method allows you to save money (you’d have to buy groceries and gas anyway) while building credit.
Correct credit report errors
Each of the main credit bureaus will have a slightly different method for calculating your credit score. Their information can also vary.
Each year, you’re entitled to one free report from each of the main bureaus. Take advantage of these free reports. They’re different from free credit checks that you can get from websites like Credit Karma because they’re much more detailed.
Go through the report line by line and make sure there aren’t any accounts you don’t recognize. It is not uncommon for people to find out that a scammer or even a family member has taken out a line of credit in their name.
Avoid opening several new accounts
Our final tip for boosting your credit score is to avoid opening up multiple accounts in the 6 months leading up to your mortgage application.
Opening multiple accounts is a red flag to lenders. It can show that you might be in a time of financial hardship and can temporarily lower your score.
Deciding to pay off your mortgage can be a confusing decision to make. You might be wondering about how you would take care of other financial debts or emergencies should they arise. Deciding to pay or not to pay off your mortgage early should be a decision made by you. The economic circumstances around you should determine this decision at the time.
It is tempting to continue paying for a mortgage in bits because of the benefits homeowners enjoy. As a homeowner though, there are situations when you find yourself considering the ‘paying down' option. Before you make such a financial decision though, you should speak to your financial advisor and be certain it's the best decision to make.
Pay off your mortgage early under any of these circumstances listed below:
So many people plan for retirement—it's a period when you want to be as comfortable as possible. Taking steps and putting things in place before you retire is one of the best financial decisions anyone can make. While making your retirement plan, it's advisable you consider paying off on your mortgage. The reason behind this is as soon as you come into retirement, your steady monthly inflow reduces (most of the time). You may have more available time on your hands to go on vacation and treat yourself out. Having the thought of mortgage payments over your head at this period might be a burden. Pay off the mortgage before retirement and reduce what you must worry about when you retire.
When you come into a significant amount of cash
When you get a large cash amount, and you have settled all your bills and taken out some for investment, if you still have enough left, it's advisable to use it to pay off your mortgage. Using an inheritance or insurance payout against your mortgage is useful, you might not get another opportunity to pay down that mortgage. However, your mortgage may have early liquidation fees which you have to consider. Where there is none, there's a higher incentive to pay off part or all of it.
Possible increase in the interest rate
The fear of an increased interest rate on an adjustable mortgage would make you consider paying off your mortgage especially if it's at a period when you can afford the money.
If you just happen to be the kind of person who is not risk inclined and would rather have one investment as opposed to having several investments that might yield more increase, it's better you pay off your home's mortgage as soon as you can.
Minimal tax benefit
A lot of the time people drag their feet as regards paying off the mortgage early because of the tax advantage they enjoy from having a mortgage. If your tax benefit is minimal or none — meaning you are not benefiting from a tax deduction for mortgage interest — it's advisable that you pay off your mortgage.
Paying off your mortgage is a personal choice that involves you looking at your whole financial picture to determine if it will be a wise decision. Speak to your financial planner for more insight.