10 States Where Foreclosure Woes Linger

Foreclosure rates across the country continue to improve, but these 10 states are still struggling with above-average residential foreclosures.

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2 Times an Adjustable-Rate Mortgage Makes Perfect Sense

The interest rate on your loans determines how expensive it is to borrow money. The higher the interest rate, the more expensive the loan.

With a conventional, 30-year fixed-rate mortgage, borrowers with the best credit can expect to receive a 4.23% interest rate on that loan. The average homebuyer borrows about $222,000 when they take out a mortgage, which means paying a staggering $168,690 in interest over the term of the loan.

When you need to repay balances in the hundreds of thousands of dollars, even half a point of interest can make a huge difference in how expensive your mortgage is. If you borrowed the same amount but had a rate of 4.73% rate, you’d pay $192,190 in interest — or almost $24,000 more for the same loan.

Given that interest rates make such a big impact on how much your mortgage costs, it makes sense to do what you can to get the lowest rate possible. And this is where adjustable-rate mortgages can start to look appealing. In two cases especially, it makes perfect sense to go with an ARM: when you plan to pay off your mortgage quickly, or you plan to move out of the home within a few years.

Adjustable-Rate Mortgages Can Allow You to Borrow at Lower Rates

An adjustable-rate mortgage, also known as an ARM, is a home loan with a variable interest rate. That means the rate will change over the life of the loan.

ARMs are usually set up as 3/1, 5/1, 7/1, or 10/1. The first number indicates the length of the fixed rate period. If you look at a 3/1 ARM, the initial fixed rate period lasts 3 years. The second shows how often the interest rate will adjust after the initial period.

Some ARMs come with interest rate caps, meaning there’s a limit to how high the rate can adjust. And their initial rate is often much lower than traditional fixed-rate loans.

This can help you buy a home and start paying your mortgage at a lower monthly cost than you could manage with a fixed-rate mortgage. Borrowers with the best credit scores can access a 5/1 ARM with an interest rate of 3.24% right now.

The Risks ARMs Pose to Average Homebuyers

“The main advantage of an ARM is the low, initial interest rate,” explains Meg Bartelt, CFP, MSFP, and founder of Flow Financial Planning. “But the primary risk is that the interest rate can rise to an unknown amount after the initial, fixed period of just a few years expires.”

Homebuyers can enjoy extremely low interest rates for a month, a quarter, or 1, 5, 7, or 10 years, depending on the term of their adjustable-rate mortgage. But borrowers have no control over the interest rate after that.

The rate can rise to levels that make your mortgage unaffordable. Remember our earlier example, where just half a point of interest could mean making the entire mortgage $24,000 more expensive?

ARMs adjust their rates periodically, and the new rate is partly determined by a broad measure of interest rates known as an index. When the index rises, so does your own interest rate — and your monthly mortgage payment goes up with it.

The variable nature of the interest rate makes it difficult to plan ahead as your mortgage payment won’t be static or stable.

“Imagine at the end of year 5, rates start going up and your mortgage payment is suddenly much higher than it used to be,” says Mark Struthers, a CFA and CFP who runs Sona Financial. “What if your partner loses their job and you need both incomes to pay the mortgage?” he asks. In this situation, you could be stuck if you don’t have the credit score to refinance and get away from the higher rate, or the cash flow to handle the extra cost.

“Once you get in this spiral, it is tough to get out,” says Struthers. “The spiral just gets tighter.”

And yes, adjustable-rate mortgages can go down. While that’s possible, it’s more likely that the rate will rise. And some ARMs will limit how high and how low your rate can go.

Struthers puts it plainly: “ARMs are higher-risk loans. If you can handle the risk, you can benefit. If you can’t, it can crush you. Most people do not put themselves in a position to handle the risk.”

Who Can Make an ARM Work in Their Favor?

That doesn’t mean no one can benefit from adjustable-rate mortgages. They do come with the benefit of the lower initial interest rate. “If you plan to pay off the mortgage during that initial fixed period, you eliminate the risk [of getting stuck with a rising interest rate],” says Bartelt.

That’s exactly what she and her husband did when they bought their own home.

“In my situation, we had enough savings to buy our house with cash. But the cash was largely in investments, and selling all the investments would push our income into significantly higher tax brackets due to the gains, with all the cascading unpleasant tax effects,” Bartelt explains.

“By taking an ARM, we can spread the sale of those investments out over 5 years, minimizing the income increase in each year. That keeps our tax bracket lower,” she says. “We avoided increasing our marginal tax rate by double digits in the year of the purchase of our home.”

She notes that another benefit of taking the ARM in her situation was the fact that she and her husband could continue to pay the mortgage past that initial 5 years if they chose to do so. “The interest rate won’t be as favorable as if we’d initially locked in a fixed rate,” she admits. “But that option still exists, and having options is power.”

Planning for a Quick Sale? An ARM Might Work for You

Another way ARMs can provide benefits to homeowners? If you won’t live in the home for long. Buying the home and also selling it before the initial rate period expires could provide you with a way to access the lowest possible rate without having to deal with the eventual rise in mortgage payment when the rate increases.

“ARMs are typically best for those who are fairly certain they won’t be in the house for a long period of time,” says Cary Cates, CFP and founder of Cates Tax Advisory. “An example would be a person who has to move every two to four years for their job.”

He says you could view taking out an ARM as a way to pay “tax-deductible rent” if you already know you don’t want to stay in the house for more than a few years. “This is an aggressive strategy,” he explains, “but as long as the house appreciates enough in value to cover the initial costs of buying, then you could walk away only paying tax-deductible interest, which I am comparing to rent in this situation.”

Cates says you’re obviously not actually paying rent, but you can mentally frame your mortgage payment that way. But you need to know the risk is owing on your mortgage if you go to sell and the home hasn’t realized enough appreciation to cover what you spent to buy.
He also reminds potential homebuyers that you take on the risk of staying in the home longer than you expected to. You could end up dealing with the rising interest rate if you can’t sell or refinance.

What You Need to Know Before Taking an ARM

Before applying for an adjustable-rate mortgage, make sure you ask questions like:

  • What is the initial fixed-interest rate? How does that compare to another mortgage option, and is it worth taking on a riskier mortgage to get the initial fixed rate?
  • How long is the initial fixed rate period?
  • How often will the ARM adjust after the initial rate period?
  • Are there limits to how much your ARM’s rate can drop?
  • How high can the ARM’s rate go? How high can your monthly mortgage payment go?
  • If the mortgage’s interest hit the maximum rate, could you afford the monthly payment?
  • Do you have a plan for selling the home within the initial rate period if you want to sell before paying the adjusted rate?
  • Could you pay off the mortgage without selling if you did not want to pay the adjusted rate?

Do your due diligence and understand the risks and potential pitfalls before making a final decision. But depending on your specific situation, your finances, and your plans for the next 5 years, you could make an ARM work for you.

The post 2 Times an Adjustable-Rate Mortgage Makes Perfect Sense appeared first on MagnifyMoney.

3 Easy Ways to Pay Off Your Mortgage Faster

These tips are your ticket to mortgage-free living.

As long as you’re alive, you have to live somewhere and, generally speaking, you have two options: Rent an apartment (or a home) and line your landlord’s pocket; or buy a home, and over time, hopefully line your own.

This premise is one of David Bach’s most important messages. The author of the New York Times bestseller “The Automatic Millionaire,” is a firm believer in the idea that real estate is critical to building wealth. In fact, he says buying a home is one of the three most important actions people can take in pursuit of financial security.

“I’ve been a lifelong proponent of home ownership,” says Bach, author of 11 best selling books. “How do you build real wealth on an ordinary income? It’s not very sexy, but it’s a simple, timeless approach: Buy a home.”

It’s not merely the act of purchasing a home that Bach advocates. The secrets to financial success that he offers in “The Automatic Millionaire,” include urging readers to pay their homes off early via an approach he calls “automatic debt-free home ownership.”

It may sound radical to some, but according to Bach, who spent nine years as a financial adviser at Morgan Stanley, the common denominator among all of his clients who were able to retire early was that they had paid off their homes early.

Here’s Bach’s approach to debt-free home ownership.

1. Establish a Biweekly Mortgage Payment Plan

A biweekly payment plan is exactly what the name implies. Instead of only making monthly mortgage payments, split the payment down the middle and pay half every two weeks.

When you make a payment every two weeks, (instead of just one per month,) you end up making one extra month’s worth of payments annually. In other words, over the span of a year, you’re making 26 half payments, which is the equivalent of 13 full payments.

“By doing this, something miraculous will happen. Depending on your interest rate, you can end up paying off your mortgage early — somewhere between five and ten years early” he says in the book.

Additional Benefits of Biweekly Payments

The biweekly payment approach also saves the homeowner thousands, if not hundreds of thousands of dollars, in interest. (Having a good credit score can help you save on interest, too. If you don’t know where your credit stands, you can get your two free credit scores, updated every 14 days, on Credit.com.)

In his book Bach provides the example of a 30-year-mortgage on a $250,000 home. If the interest rate on that mortgage is 5%, then the interest paid over the life of the loan will be about $233,139. When paid biweekly, the same mortgage instead costs about $188,722 — a savings of more than $44,000.

Establishing a biweekly payment plan merely requires calling your lender. If the mortgage is held by a large bank, they may refer you to a third-party that handles payment processing.

But one critical point Bach makes in the book is this: Before signing onto biweekly mortgage payments ask the servicing company what the fee is for the program and what they do with your money when they receive it. The second question is particularly important because some companies hang onto the extra money you’re putting toward the mortgage and send it to your mortgage holder all at once at the end of the month.

You want the extra payments applied to your mortgage as soon as possible, so that you’re paying down the mortgage faster.

You also cannot just split your monthly mortgage payment in half yourself (without talking to your mortgage holder, bank or other servicing company) and mail in payments every two weeks. The bank may send the extra payment back to you, unsure of what to do with it.

This trick can also work for paying down your credit card balance faster. (Here are some other tips for paying off credit card debt.)

2. Pay Extra Each Month

The next approach to debt-free home ownership outlined in Bach’s book is a plan he calls “No-Fee Approach No. 1.” It involves merely adding 10% to whatever your monthly mortgage payment happens to be. If your monthly payment is $1,342, pay an extra $134 dollars each month. (Sending the bank $1,467 per month instead of $1,342.)

This approach leads to paying off a home in 25 years, instead of 30, saving about $44,000. However, Bach urges making the extra 10% automatic, so that you don’t come up with excuses not to do it. In other words, have the $1,467 automatically deducted from your checking account each month.

3. Make One Extra Payment Each Year

Pick one month each year and pay the mortgage twice. Translation: Send the bank one extra payment a year.

Try doing this with some of your tax refund, suggests Bach. But no matter when you choose to do it, don’t simply send the bank a check for double the normal mortgage amount.

According to Bach this will confuse the bank. He advises writing two checks. Send one in with your mortgage coupon and the other with a letter explaining that you want the money applied to your principal.

The big takeaway according to Bach is that if you don’t buy a home, you won’t get on the escalator to wealth that home ownership provides. He says this message is particularly important for millennials who have been shying away from home ownership.

“The critical point is that one — you can buy a home. Two — you should buy a home. And three — you will be glad that you did,” says Bach.

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Buying a House When You Have Student Loan Debt

Student loan debt is a reality for many people wishing to buy homes. Fortunately, it does not have to be a deal-breaker. But there’s no getting around the fact that a large amount of student loan debt will certainly influence how much financing a lender will be willing to offer you.

In the past, mortgage lenders were able to give people with student loans a bit of a break by disregarding the monthly payment from a student loan if that loan was to be deferred for at least one year after closing on the home purchase. But that all changed in 2015 when the Federal Housing Authority, Fannie Mae, and Freddie Mac began requiring lenders to factor student debt payments into the equation, regardless of whether the loans were in forbearance or deferment. Today by law, mortgage lenders across the country must consider a prospective homebuyer’s student loan obligations when calculating their ability to repay their mortgage.

The reason for the regulation change is simple: with a $1.3 million student loan crisis on our hands, there is concern homebuyers with student loans will have trouble making either their mortgage payments, student loan payments, or both once the student loans become due.

So, how are student loans factored into a homebuyer’s mortgage application?

Anytime you apply for a mortgage loan, the lender must calculate your all-important debt-to-income ratio. This is the ratio of your total monthly debt payments versus your total monthly income.

In most cases, mortgage lenders now must include 1% of your total student loan balance reflected on the applicant’s credit report as part of your monthly debt obligation.

Here is an example:

Let’s say you have outstanding student loans totaling $40,000.

The lender will take 1% of that total to calculate your estimated monthly student loan payment. In this case, that number would be $400.

That $400 loan payment has to be included as part of the mortgage applicant’s monthly debt expenses, even if the loan is deferred or in forbearance.

Are Student Loans a Mortgage Deal Breaker? Not Always.

If you are applying for a “conventional” mortgage, you must meet the lending standards published by Fannie Mae or Freddie Mac. What Fannie and Freddie say goes because these are the two government-backed companies that make it possible for thousands of banks and mortgage lenders to offer home financing.

In order for these banks and mortgage lenders to get their hands on Fannie and Freddie funding for their mortgage loans, they have to adhere to Fannie and Freddie’s rules when it comes to vetting mortgage loan applicants. And that means making sure borrowers have a reasonable ability to repay the loans that they are offered.

To find out how much borrowers can afford, Fannie and Freddie require that a borrower’s monthly housing expenses (that includes the new mortgage, property taxes, and any applicable mortgage insurance) to be no more than 43% of their gross monthly income.

On top of that, they will also look at other debt reported on your credit report, such as credit cards, car loans, and, yes, those student loans. You cannot go over 49% of your gross income once you factor in all of your monthly debt obligations.

For example, if you earn $5,000 per month, your monthly housing expense cannot go above $2,150 per month (that’s 43% of $5,000). And your total monthly expenses can’t go above $2,450/month (that’s 49% of $5,000). Let’s put together a hypothetical scenario:

Monthly gross income = $5,000/month

Estimated housing expenses: $2,150
Monthly student loan payment: $400
Monthly credit card payments: $200
Monthly car payment: $200

Total monthly housing expenses = $2,150

$2,150/$5,000 = 43%

Total monthly housing expenses AND debt payments = $2,950

$2,950/$5,000 = 59%

So what do you think? Does this applicant appear to qualify for that mortgage?

At first glance, yes! The housing expense is at or below the 43% limit, right?

However, once you factor in the rest of this person’s debt obligations, it jumps to 59% of the income — way above the threshold. And these other monthly obligations are not beyond the norm of a typical household.

What Can I Do to Qualify for a Mortgage Loan If I Have Student Debt?

So what can this person do to qualify? If they want to get that $325,000 mortgage, the key will be lowering their monthly debt obligations by at least $500. That would put them under the 49% debt-to-income threshold they would need to qualify. But that’s easier said than done.

Option 1: You can purchase a lower priced home.

This borrower could simply take the loan they can qualify for and find a home in their price range. In some higher priced real estate markets it may be simply impossible to find a home in a lower price range. To see how much mortgage you could qualify for, try out MagnifyMoney’s home affordability calculator.

Option 2: Try to refinance your student loans to get a lower monthly payment.

Let’s say you have a federal student loan in which the balance is $30,000 at a rate of 7.5% assuming a 10-year payback. The total monthly payment would be $356 per month. What if you refinanced the same student loan, dropped the rate to 6%, and extended the term to 20 years? The new monthly payment would drop to $214.93 per month. That’s a $142 dollar per month savings.

You could potentially look at student loan refinance options that would allow you to reduce your loan rate or extend the repayment period. If you have a credit score over 740, the savings can be even higher because you may qualify for a lower rate refi loan. Companies like SoFi, Purefy, and LendKey offer the best rates for student loans, and MagnifyMoney has a full list of great student loan refi companies.

There are, of course, pros and cons when it comes to refinancing student loans. If you have federal loan debt and you refinance with a private lender, you’re losing all the federal repayment protections that come with federal student loans. On the other hand, your options to refinance to a lower rate by consolidating federal loans aren’t that great. Student debt consolidation loan rates are rarely much better, as they are simply an average of your existing loan rates.

Option 3: Move aggressively to eliminate your credit card and auto loan debt.

To pay down credit debt, consider a balance transfer. Many credit card issuers offer 0% introductory balance transfers. This means they will charge you 0% interest for an advertised period of time (up to 18 months) on any balances you transfer from other credit cards. That buys you additional time to pay down your principal debt without interest accumulating the whole time and dragging you down.

Apply for one or two of these credit cards simultaneously. If approved for a balance transfer, transfer the balance of your highest rate card immediately. Then commit to paying it off. Make the minimum payments on the other cards in the meantime. Focus on paying off one credit card at a time. You will pay a fee of 3% in some cases on the total balance of the transfer. But the cost can be well worth it if the strategy is executed properly.

Third, if the car note is a finance and not a lease, there’s a mortgage lending “loophole” you can take advantage of. A mortgage lender is allowed to omit any installment loan that has less than 10 payments remaining. A car is an installment loan. So if your car loan has less than 10 payments left, the mortgage lender will remove these from your monthly obligations. In our hypothetical case above, that will give this applicant an additional $200 per month of purchasing power. Maybe you can reallocate the funds from the down payment and put it toward reducing the car note.

If the car is a lease, you can ask mom or dad to refinance the lease out of your name.

Option 4: Ask your parents to co-sign on your mortgage loan.

Some might not like this idea, but you can ask mom or dad to co-sign for you on the purchase of the house. But there are a few things you want to make sure of before moving forward with this scenario.

For one, do your parents intend to purchase their own home in the near future? If so, make sure you speak with a mortgage lender prior to moving forward with this idea to make sure they would still qualify for both home purchases. Another detail to keep in mind is that the only way to get your parents off the loan would be to refinance that mortgage. There will be costs associated with the refinance of a few thousand dollars, so budget accordingly.

With one or a combination of these theories there is no doubt you will be able to reduce the monthly expenses to be able to qualify for a mortgage and buy a home.

The best piece of advice when planning to buy a home is to start preparing for the process at least a year ahead of time. Fail to plan, plan to fail. Don’t be afraid to allow a mortgage lender to run your credit and do a thorough mortgage analysis.

The only way a mortgage lender can give you factual advice on what you need to do to qualify is to run your credit. Most applicants don’t want their credit run because they fear the inquiry will make their credit score drop. In many cases, the score does not drop at all. In fact, credit inquiries account for only 10% of your overall credit score.

In the unlikely event your credit score drops a few points, it’s a worthy exchange. You have a year to make those points go up. You also have a year to make the adjustments necessary to make your purchase process a smooth one. Do keep in mind that it is best to shop for mortgage lenders and perform credit inquiries within a week of each other.

You should also compare rates on the same day if at all possible. Mortgage rates are driven by the 10-year treasury note traded on Wall Street. It goes up and down with the markets, and we’ve all seen some pretty dramatic swings in the markets from time to time. The only way to make an “apples-to-apples” comparison is to compare rates from each lender on the same day. Always request an itemization of the fees to go along with the rate quote.

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Is a 50-Year Mortgage a Good Move?

Sure, it will keep your monthly payments low, but it will end up costing you a lot in the long run. Here are the pros and cons of a 50-year mortgage.

Are you looking to afford a new mortgage? A 50-year mortgage may be an option, but here are some things to consider when looking at a long mortgage term.

These loans are not bought and sold by Fannie Mae or Freddie Mac. They are smaller banks and portfolio lenders that offer unique financing and, as a result, will charge an additional premium. You can expect your interest rate and fees to be above market. By above market, we mean at least three quarters of a discount point higher in rate than the Freddie Mac mortgage market survey. This type of loan effectively is an interest-only mortgage that is similar to the interest on the loans that were available before the financial crisis.

The 50-year mortgage is pretty much what it sounds like — your loan is amortized over 50 years, similar to the way a 30-year, fixed mortgage is amortized over 30 years. At the end of the loan term, the loan is paid in full. A 30-year, fixed-rate mortgage typically translates to paying double the amount of money you originally borrowed. With a 50-year mortgage you will pay almost four times the amount of interest on the amount originally borrowed. Yes, such a loan term would be incredibly expensive — the cost of having a lower monthly mortgage payment.

Are You Biting Off More Than You Can Chew?

If you are comparing a 30-year mortgage to a 50-year mortgage, you might be trying to purchase more than you can handle — not a prudent move if you’re trying to take on something affordable. While the mortgage payment might be affordable, it would also be an incredibly expensive financing vehicle. For all intents and purposes, this is practically an interest-only mortgage

Interest-only loans can be beneficial for a consumer who has big liquidity in the bank, excellent credit and is otherwise sophisticated in mortgage finance, while looking for cash flow. (Don’t know where your credit stands? You can get your two free credit scores, updated every 14 days, right here on Credit.com.) For everyone else, a 30-year fixed rate mortgage is substantially less expensive than its 50-year counterpart.

If you were thinking about this type of financing, you may want to reconsider and speak with a professional — someone who can guide you on what type of income may be needed to qualify for the purchase of a home.

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8 Questions to Ask Yourself When Deciding to Rent or Buy a House

Buying a home isn't for everyone. These questions will help you sort out whether it's a good financial move for you.

If you’re at the age when your peers are making major life moves — getting married, having kids and buying homes – you might be feeling it’s time to join them. Or you may simply just be at that stage all on your own.

Either way, plenty of young adults are starting to get the home-buying itch. While there are a lot of appealing benefits to homeownership, taking on that kind of debt is not without risk. The decision to rent vs. buy is one you should make carefully.

If you’re trying to figure out your next move, consider asking yourself these eight questions. The answers should steer you in the right direction.

1. What Is My Top Financial Priority?

Buying a home will slow down your ability to make progress on other financial goals. You’ll need to focus on lowering expenses or increasing your income so you can afford a down payment and monthly mortgage payments. (This guide can help you understand more about how to determine your down payment on a home.)

That extra cash will be funneled toward your mortgage rather than paying off credit cards or student loans if you have them. Other financial goals, such as saving for retirement and building an emergency fund, may also have to take a back seat.

Assess your competing financial goals and decide which ones take priority. Buying a house might come first in your book, or perhaps you’ll decide to work toward other money goals before committing to a mortgage.

2. Do I Have Savings For a Down Payment & Closing Costs?

Renting requires some savings – you’ll need enough cash to cover the first month’s rent and the deposit.

To buy a home, however, the minimum you’ll need to have saved is usually 6% or more of the home’s value. Even FHA loans require a minimum down payment of 3.5%, and closing costs add another 2-3% to the costs.

But that’s the minimum; a 20% down payment is better to give you a decent amount of equity and avoid private mortgage insurance.

If you don’t have sufficient savings, you’ll need to focus on saving for a down payment before you’re in a position to buy. And even if you do have savings, it’s worth it to think through the best use of those savings and whether you’d rather allocate that cash to other goals.

3. How Do Home & Rent Prices Compare?

Housing markets also affect whether it’s a better idea to rent versus buy. If you’re facing sky-high rent prices that climb each year, a mortgage starts making a lot of sense. On the other hand, if you want to live in an expensive area, you could be priced out of buying a home (especially without extensive savings).

4. How Long Do I Plan to Live Here?

The longer you live in a home, the more likely it is that the financial investment of buying a property will pay off.

If you like your city, have a steady job, and are ready to live in the same space for a few years, buying is often more cost effective, but not always. You may want to crunch the numbers to see how long you’d need to live in a home to break even on your initial costs.

5. Will I Qualify for a Good Deal on a Mortgage?

You’ll need a decent income and good credit to qualify for the lowest rates and best terms on mortgage loans. It’s sometimes possible to get a mortgage if you have bad credit, but you’ll pay a lot more over time. (Haven’t checked where your credit stands? Now’s the time. You can get your two free credit scores, updated every 14 days, on Credit.com.)

Think of it this way: most mortgages last 30 years. With that in mind, you may see that it’s financially worth it to spend a few months to a year rebuilding your credit if it means qualifying for a lower interest rate for those 30 years. For example, if you boost your credit score by 50 points – from the mid-600s to over 700 – you could qualify for a mortgage rate that’s 80+ basis points lower, according to MyFICO.com.

6. What Other Costs Will I Be Responsible for as a Homeowner?

When comparing costs of renting versus buying, make sure you’re including home-owning costs beyond mortgage principal and interest.

There are escrow costs, homeowner’s insurance, and property taxes. You can expect home maintenance costs to equal 1-3% of your home’s sale price each year. Then there are homeowners’ association fees and new utility costs such as trash collection and water. Meanwhile, renters are usually not responsible for any of these costs.

7. Am I Comfortable with the Risks of Owning a Home?

It’s a popular argument that owning is smarter than renting because you’re investing in a home. But as with any investment, owning a home has its own inherent risks.

There are no guarantees you’ll get a good return on your investment. Just ask the many homeowners who defaulted on their homes after the 2008 mortgage crisis. And even in a strong housing market, there are the everyday risks of unemployment or other financial hardships.

8. How Would Renting vs. Owning Affect my Lifestyle?

Guiding forces in your decision to rent or own are your lifestyle and values. For many, the freedom of choice, privacy, and control that come with owning a home are big selling points. Other people might prefer the convenience, flexibility, and short-term commitment that comes with renting.

Know what you want and choose a housing setup that will help you achieve it. Owning a home can be an admirable accomplishment for some people. Maybe it will be for you, too. Only you know the answer.

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This Common Mistake Can Kill Your Mortgage

If you're thinking about buying a home, you'll want to avoid this common mortgage mistake.

In order to qualify for a mortgage, you need to show your lender that you have a down payment and access to funds for closing. This money needs to come from documentable sources prior to moving it from your bank account to your escrow account. Unfortunately, a lot of people don’t do this, which can end up creating unnecessary challenges during the underwriting process.

Lenders are going to require at least 60 days of asset documentation from each source that your money comes from. This is required because your mortgage lender will need to verify that the money promised does exist and is eligible for use.

Let’s say you’ve put your money into escrow and, as requested, are doing your best to document the movement of money from the account going to escrow. This entails providing a bank statement specifically showing the money leaving your account and the money being accepted by escrow through an EMD (earnest money deposit).

If you can’t get a bank statement, though — say it’s the middle of the month and new statements are not out yet — the next best thing is to get a bank printout confirming the transaction and confirming the amount of money remaining in the account. (There are literally dozens of other things you also should be thinking about during the home buying process. Here are 50 ways you can get ready for buying your home.)

How a Bank Printout Can Help You Close

The bank printout must show the date of the transaction and the current timestamp of the printout, confirming that the money has been moved prior to the printout date. If the bank printout does not have this information, it will automatically halt the closing process of your loan and delay your loan contingency removal or extend your close of escrow date.

This method can be used for both your down payment and funds for cash to close. This is to provide authenticity for your account and to show clearly on paper that the account is yours and the money is yours to use. Banks and lenders require this information to be clear cut and “in your face.” Never assume that “common sense” will be enough.

Documents & Other Items You’ll Want to Avoid

Providing any of the following items in lieu of the bank printout will not work:

  • A bank statement with someone else’s name on it
  • Bank statement in trust
  • Pictures of bank statements taken from a smartphone or snapshot application
  • Bank printout with no timestamp and date

In addition, the bank printout and timestamp must show the remaining balance that is left in your account. For example, if you had $130,000 in assets and your down payment from this account was $50,000, your account statement should now show $80,000 remaining.

If you are looking to purchase a home, talk to a seasoned loan professional who can walk you through properly documenting the money required to buy your home. Also, take a few minutes to check your credit scores so you’ll know going in what kinds of terms you’re eligible for. You can get your two free credit scores, updated every 14 days, at Credit.com.

Image: GlobalStock

 

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Buying a House? You May Want to Avoid the 30% Rule

The 30% rule is a good place to start, but it’s not always the best gauge of how much should you spend on housing.

Ask someone the question, “How much should I spend on a house?” and there’s a good chance that they will respond with the 30% rule.

The 30% rule, which says not to spend more than 30% of your income on housing, is a good place to start, but it’s not always the best gauge of how much should you spend on housing. You don’t want to base your entire financial situation on it — especially since it’s not exactly clear what that 30% includes.

What Is the 30% Rule?

The 30% rule has been around since the 1930s, according to the Census Bureau. Back then, policymakers were trying to make housing affordable. They came up with the idea that you could spend about 30% of your income on housing and still have enough left for other expenses.

Over time, those numbers started to get used in home loans as well. A rough sketch of what you could afford, in terms of monthly payment, could be obtained by estimating 30% of your income.

Is the 30% Rule Right for You?

When deciding on your own 30% rule, it’s probably a good idea to base it on your take-home pay, rather than your gross income. Let’s say you bring home $3,500 a month. According to the 30% rule, that means you shouldn’t spend more than $1,050 on your housing payment.

Some folks like to use their gross income for this calculation, but that can get you into trouble in the long run. If you base what you spend on housing on an amount that you might not be bringing home, that can stress your budget.

Think about it: If your pre-tax pay is $3,800 a month, that lifts your max housing payment to $1,140. That’s $90 more per month. But the reality is that you are bringing home $300 less than your gross income. Trying to come up with another $90 a month could put a strain on your budget.

Don’t Forget About Extra Costs

You can use a mortgage calculator to figure out how much you should spend on housing. However, such calculators typically just include principal and interest. This doesn’t take into account other monthly homeownership costs.

If you’re thinking of buying an expensive house, don’t forget about other costs like insurance and taxes.

Experts suggest that you base your 30% figure on all your monthly payment costs, not just the principal and interest.

What Percentage of Income Should Be Spent on Housing?

But it goes beyond that for some homebuyers. When looking into buying a home or an affordable place to rent, don’t just base your estimates on your monthly payment. You should also include estimated utility costs and an estimate for maintenance and repairs.

HouseLogic suggests you budget between 1% and 3% of your home’s purchase price annually for repairs and maintenance. I like the idea of budgeting 2%. So, on a $200,000 home, that means you can expect to pay $4,000 for repairs and maintenance — about $333.33 per month.

Once you start adding in all the other aspects of homeownership, suddenly that 30% rule is less cut-and-dry. If you’re more conservative, adding up all the monthly costs of homeownership and keeping it all under 30% makes sense.

You’re less likely to overspend that way. But it might mean a smaller, less expensive home.

Consider the 28/36 Qualifying Ratio

Instead of relying on the 30% rule to answer the question, “How much should I spend on a house?”, consider using the 28/36 qualifying ratio.

According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.

So, if you make $3,800 in take-home pay, your monthly payment should be no more than $1,064. But, things get stickier when you calculate the 36% part of the ratio. Your total debt payments shouldn’t exceed $1,368. That leaves you about $304 for payments of other debts.

Let’s say your credit card and auto loan payments total $500. That means you’re going to have to adjust your expectations for what you can expect to pay for a mortgage. In fact, if your lender insists on the 36 part of the ratio, you have $196 less you can spend on your mortgage payment. And that might mean a less expensive house.

When figuring out what percentage of income you should spend on housing, base the calculations on your take-home pay. Even though Re/Max says many lenders use your gross pay for the 28/36 qualifying ratio, this way you’ll play it safe.

How Much Should I Spend on a House?

Everyone has to answer the “How much should I spend on a house?” question for themselves. However, the biggest reason to ditch the 30% rule is that you might not be comfortable with it.

Are you really comfortable spending 30% of your income each month on your housing? When you consider your other payment obligations, does it makes sense for you to spend so much on housing?

If you aren’t sure about the 30% rule, use your own rule. You might be more comfortable with 25% on all of your housing costs. Or perhaps you modify the rule. Maybe you spend 20% on mortgage and interest and keep your total housing costs to 25% or 28%.

No matter what you decide, the important thing is to be responsible with your finances. Only spend what you feel comfortable with on housing or rent.

Image: Portra

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How to Prepare Your Budget for Buying Your First Home

You're going to need more than just a down payment.

With the beginning of spring and more interest-rate hikes coming up, a lot of people are wondering if it’s time to make the jump from renter to homeowner. Of course, making such a move involves much more than browsing real estate listings and cobbling together enough for a down payment.

One of the most important things a first-time homebuyer can do is prepare their budget for this big financial event. We asked our partners and money-savers extraordinaire at Clark.com to share some of their best budgeting tips for people looking to buy a home this year. Here are Clark.com Managing Editor Alex Sadler’s responses, edited for length.

What Tweaks Should People Make to Their Budgets in Preparation for Buying a Home?

First of all, there’s a whole lot more that goes into buying a home than many people realize. I’m actually going through the process right now, and believe me, it ain’t like walking into a leasing office and signing up for an apartment.

When you’re preparing your finances for buying a house, here are a few steps you need to take first.

  • Get your credit in shape: The higher your credit score, the better deal you’ll get on a mortgage. The goal is to get approved for the lowest interest rate possible, so before you apply, make sure your credit is in good shape. [Editor’s note: If you’re not sure where your credit stands, we’ve got you covered. You can get your free credit report snapshot on Credit.com, and it’s updated every 14 days.]
  • Have enough saved for a down payment – and then some: A good amount to shoot for is 20% of the purchase price. If you put down less money, you still may be able to get a loan, but it’ll come with higher monthly payments. Plus, typically when you put down any less than 20%, you’ll need to have private mortgage insurance, which is another monthly bill to prepare for.
  • Prepare for other upfront costs: Home inspection (a few hundred dollars), closing costs (estimate between 2% to 5% of purchase price) and extra cash. Some lenders may require you to have some cash in the bank after the purchase is complete, maybe two to six months’ worth of mortgage payments.

In terms of your monthly budget once you’re in the house, a good rule of thumb is to spend no more than 25% of your income on housing – including mortgage payments, private mortgage insurance (PMI, if you need it), property taxes, homeowners insurance — all the monthly bills specifically tied to the house.

What Are Things Renters Don’t Have to Budget for but Homeowners Do?

Buying a house is exciting, but you need to go ahead and prepare yourself for unexpected expenses — that’s just the reality of owning a home. No more calling the landlord or leasing office to come fix something. Whether it’s a broken light bulb or a busted HVAC, the cost of that repair is coming out your pocket. Basically, you should overestimate how much money you’ll need to cover all of your expenses each month.

Give yourself a cushion to fall back on — cash savings you can dip into to pay for an unexpected repair or to cover your bills in case you lose your job or can’t work for a period of time for whatever reason.

A few other costs that come with owning a home: property taxes, homeowners insurance, disaster insurance required for homes in certain areas, higher bills (utilities, heating, air conditioning), maintenance — any and everything is your responsibility.

The bigger the house, the more expensive every single bill will be. Keeping up with regular maintenance is crucial in order to avoid bigger, more expensive repairs down the road

What Are Tips for Transitioning Your Budget From That of a Renter’s to a Homeowner’s?

Come up with a monthly budget to cover all of your expenses as a homeowner, and start living on that amount now. It will force you to save the money that you won’t have the luxury of spending once you own that house. Send it directly into savings so you don’t give yourself a chance to spend it.

How Can Homebuyers Make Sure They’re Not Biting Off More Than They Can Chew?

Just because you can qualify for a bigger house doesn’t mean you should buy one. The financial risks are extremely serious.

No one plans for unexpected setbacks like job loss, emergencies, medical issues — and if you aren’t prepared financially, one big unexpected event can be devastating not only to your short-term financial health but also your long-term finances. If you can’t pay the mortgage payments, the lender is coming after your house. If you have nothing to save each month, you’re giving up retirement savings and everything else that comes with being financially independent.

Bottom line: Buy less house than you can afford. And even on a less serious scale, you don’t want to live in a house that you can’t afford to furnish, or you can’t afford to take vacations because you have nothing left to spend or save each month.

Image: Geber86

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Time for Your Final Walk-Through? Make Sure You Have This Checklist

You're almost ready to close on your new home. Make sure you don't miss anything on your final walk-through with this handy checklist.

A few days before you sign the documents to finalize your purchase of a home, you’ll have the chance to take one last look through the property. The final walk-through is your last opportunity to confirm that the house is in similar or better condition than it was when it went under contract, and it’s also your chance to make sure no new issues have cropped up since the inspection.

What Should I Look for During My Final Walk-Through?

It has probably been weeks since you’ve seen the home and it’s exciting to walk through it again. You may be tempted to start mentally arranging furniture and picking out new paint colors while you’re there, but it’s in your best interest to put those feelings aside for now. This is your last chance to look for issues and work with the seller to address them before the home is officially yours. You should plan to spend 30 minutes to an hour walking through the home, paying careful attention to its condition.

In today’s competitive housing market, many buyers are waiving their home inspection to make a stronger offer. If that’s the case, it is especially important to focus on bigger red-flag items during your walk-through.

Before you head off to see your new home, it’s important you make sure you have your contract, inspection summary, a notepad, a camera, any photos you took of damage that needed repair, a cell phone and charger (to easily check that all electrical outlets are working) and, of course, your real estate agent. Make sure to coordinate with the sellers before deciding on a date. If you go too early they may not have finished moving out, and if you go too late, you may not have enough time to remedy any large issues that you spot.

Here are the big things to look for when making your final walk-through.

  • Are all agreed-upon repair items completed? (Ask to see receipts.)
  • Has the previous owner removed all debris, garbage and unwanted items? (Keep in mind, the house will likely not be professionally cleaned and will need a once-over when you move in.)
  • Has the yard been maintained?
  • Are all agreed-upon appliances still in the house and are they working properly?
  • Does the home still contain all furniture included with the purchase?
  • Are there any major holes or damages as a result of the previous owner moving out? (Normal wear and tear like nail holes can be expected.)

Here are some other things to look for once you have checked the above.

  • Do all lights and switches still work? (Keep in mind the home has likely been vacant for 30 or more days. If light switches don’t work, it could be due to burnt-out bulbs, which you’ll likely need to replace yourself.)
  • Do all power outlets work? (Use your cell phone and charger to quickly test whether outlets work).
  • Are appliances in working order?
  • Do toilets flush?
  • Do sinks, showers and tub spouts run? Can you spot any leaks?
  • Is there hot water?
  • Do sink and tub drain stoppers function?
  • Do all windows and doors open and close smoothly? And are all screens present and attached properly? Be sure to check that window latches and door locks are working properly.
  • Do the heat and air conditioning work?

And remember, your lender might run a final credit check before you close. You should keep an eye on your credit during this critical time. You can view a free credit report snapshot, which is updated every 14 days, on Credit.com.

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