Fha Loans Va Loans And Usda Loans
In addition to the standard 30-year and 15-year loans, you might have other options.
FHA Loans: These are government-backed loans that might be an option for lower-income buyers or individuals with lower credit scores. FHA loans allow you to have a credit score as low as 500, and you can also make a down payment as low as 3.5%, making them attractive for first-time homebuyers.
VA Loans: These loans are available for military service members and veterans and are backed by the Department of Veteran Affairs. VA loans require no down payment or mortgage insurance. However, these loans do require a VA funding fee that changes annually.
USDA Loans: These loans are backed by the U.S. Department of Agriculture and are mainly for rural borrowers who cant qualify for traditional loans. No down payment is required, although there are income and property value limits.
How Can I Qualify To Borrow More
If youre disappointed by the how much can I borrow results, remember that there are many factors at work. Small improvements in one or more can make a substantial difference:
A bigger down payment always helps. The more money you put down, the better youll look in the eyes of the lender.
Be a tactical buyer. If school districts wont play a role in your family for years, consider finding a home in a transitioning neighborhood maybe buying a starter home rather than a forever home. Youll likely get a better home value and wont need to borrow as much.
Reduce debt even a little. Paying off or down a credit card or two can help in several ways. Your debt-to-income ratio will go down and you may even get a nice bump in your credit score.
Choose An Accelerated Option For Your Mortgage Payments
An accelerated payment option lets you make weekly or biweekly payments. With this option, youre putting more money toward your mortgage than with a monthly payment.
Accelerated payments can save you money on interest charges. By accelerating your payments, you make the equivalent of one extra monthly payment per year.
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Improve Your Credit Score
Regardless of the loan you choose, youre likely to get a better mortgage rate if you have a higher credit score. Similar to making a bigger down payment on your mortgage, a high credit score can help you qualify for better rates and lower monthly payments.
To a lender, your credit score is indicative of your riskthe lower the score, the higher the risk. That’s why lenders may charge higher interest rates to applicants with lower credit scores. If you apply for a loan and have a good credit score, you’re more likely to be offered a low interest rate. However, if you already have a loan, its not too late to improve your credit score and qualify for better rates with a mortgage refinance.
To improve your credit score, first go over your credit report to see if you have any outstanding balances. Consider paying those and be sure to make your payments on time every month. Also look for and correct any errors on your credit report as these can negatively impact your credit. While a high credit score is ideal for mortgage approval, some affordable lending programs do accept lower credit scores.
Maintain A Good Credit Score
Whether you’re taking out a conventional loan, FHA loan, VA loan, or some other type, the foundation of a low mortgage rate begins with keeping your as high as possible. Lenders look at your credit score as a roadmap to your creditworthiness. A high score proves you’re likely to repay your loan. And a low score means you’re a riskier bet — which means higher interest charges for you. One of the first things a loan officer will check is your credit score. It may be an imperfect system, but it helps the lender get a sense of what kind of borrower you will be.
The three credit bureaus tend to be quite secretive about how their scores are calculated. FICO credit scores are calculated as follows:
- 35% is based on your payment history
- 30% is based on your
- 15% is based on length of credit history
- 10% is based on new credit accounts
- 10% is based on credit mix
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Potential Benefits Of Lowering Your Payments
Lowering your monthly mortgage payment by refinancing to a lower rate or extending your loan term can make it easier to pay your mortgage on time every month while also possibly covering your other debts and expenses. And if youre concerned about your ability to make your current mortgage payment in the future, lowering your monthly payment now can help relieve that pressure.
Downsize Your Home Or Sublet
If the above measures are not sufficient or viable, you can consider moving to a smaller and more affordable house, and reduce your liability. This is of course the last recourse, but it is an important option, especially if you fear foreclosure owing to your financial situation.
You can also explore the option of subletting a part of your house for some period until you can afford to meet your mortgage commitments on your own. This way you will get some temporary relief and would not have to let go of the house.
Professional mortgage brokerage firms can be of great assistance in evaluating these options to lower your monthly payments on mortgage and can provide you expert advice for choosing the right course of action.
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Consider A Reverse Mortgage
A reverse mortgage is a type of loan available to seniors with equity in their homes.
While risky, a reverse mortgage could be explored if you face dire trouble in paying your mortgage, said Allec. Under a reverse mortgage, you often wont need to pay any monthly payment to the bank. In fact, the bank may actually pay you! However, the bank is paying you in order to buy your house back from you. With careful planning, a reverse mortgage could be a financial lifeline. Without it, a reverse mortgage could lead to losing your house, so proceed with extreme caution and consult a financial advisor before taking this path.
What Goes Into Your Monthly Mortgage Payment
Your monthly mortgage payment is made up of five key components. As with everything, there are exceptions to the rule, which well discuss in a bit.
In the end, lowering your monthly mortgage payment comes down to simply doing the math.
Your Monthly Mortgage Payment = Principal + Interest + PMI + Homeowners Insurance + Property Taxes
These are the five categories of payment youre making every time you make a payment. Lets break down this formula.
What You Owe The Lender: Principal + Interest
Principal and interest go toward the loan itself. In the beginning, nearly all of your payment goes toward paying the interest on the mortgage, but as time goes on, more and more of it will go toward paying down the principal.
What You Must Pay To Protect Your Lender: PMI + Homeowners Insurance + Property Taxes
Your lender will require you to make certain purchases to protect its loan in the case of default. This practice reduces risk and makes your mortgage more affordable. One of these is PMI, or private mortgage insurance, which is in place to protect the lender in the case of a mortgage default.
Your lender will also require you to keep homeowners insurance in place for the duration of the mortgage. Thats because they want to be sure that, if your home is damaged, there will be money to repair it, so that its resale value is not reduced.
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Appeal Your Property Taxes
If you have an escrow account on your mortgage, then youre probably paying for your property taxes as part of your monthly mortgage payment.
Your property taxes are based on the tax assessment conducted by your county. The assessor determines the value of your home and land after putting it through a deep analysis. If the assessor values your home too highly, youll end up paying more taxes than you really have to.
You can usually find out the assessed value of your property by looking at your tax bill or visiting your local county recording offices website. If you think your home is overvalued, you can protest the assessment. Come prepared with a list of recently sold comparable homes or an appraisal if you have one. A reduced assessment could mean lower property taxes and a lower monthly mortgage payment.
What Happens When You Make A Lump
When you make a lump-sum payment on your mortgage, your lender usually applies it to your principal. In other words, your mortgage balance will go down, but your payment amount and due dates won’t change.
Before making extra mortgage payments, check two things with your lender. Make sure there are no prepayment penalties, and confirm that your extra payments will be applied to your principal balance, not toward interest.
You could send in an extra mortgage payment every month, but you’ll still be required to make a mortgage payment the following month. The only thing that changes is that you’ll pay off your mortgage sooner than you’d originally planned, and you’ll save money on interest, to boot.
For example, let’s say you’re five years into a 30-year mortgage at a 3.5% annual percentage rate , with a $500,000 balance remaining. If you used a $10,000 lump sum to pay down your mortgage, you’d shave off 10 monthsand $13,500 in interestfrom your original payment plan.
However, your normal monthly payment would still be due the next month. You can’t pay ahead on your mortgage to take breaks on your payments later if you run into a tough financial patch. If you’re worried about being able to make your payments in the future, though, another option might help you: recasting your mortgage.
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Set Up Automatic Mortgage Payments
Sometimes, the simplest things can save you money. Some lenders offer a lower interest rate for customers who set up an automatic mortgage payment. Just keep in mind that, if you close your account or change banks, your original lending bank could remove the interest rate discount applied for setting up an automatic mortgage payment.
Other Ways To Use Your Extra Cash
Making a lump-sum mortgage payment isn’t your only option if you’re fortunate enough to have extra money. If you choose to pay down your mortgage, you will have opportunity coststhe value of what your money could have done if you hadnt used it to pay down your mortgage. Here are some of the other things you could do with that extra cash:
- Upgrade your home
- Invest the money for potentially higher returns
- Save for emergencies, college, vacations, retirement, etc.
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You Can Make Changes In Your Payment
The length of a mortgage loan typically caps at 30 years. Throughout those years, the amount of interest you pay accrues .
At today’s mortgage rates, a 30-year fixed-rate conventional loan at the 2016 mortgage loan limit of $647,200 would require about three hundred thousand dollars in interest payments in order to pay of the loan.
Thats a lot of interest to pay.
These three methods below wont lower your payment today, but theyll yield significant long-term savings by chipping away your loans principal balance.
The smaller your balance, the less interest youll pay to the bank.
Top Ways To Get The Lowest Mortgage Rates Possible
Homeownership can be an expensive endeavor, but there are ways to ensure that your mortgage is actually affordable.
If youre in the process of buying a home, the best things to do are:
- Increase your credit score
- Make as large of a down payment as you can afford
- Buy a less expensive home
- Choose an interest-only mortgage
- Get an adjustable-rate mortgage
- Take out a 40- or 50-year fixed-rate mortgage
If you already have a mortgage and are looking to lower your payment, try these tactics:
- Pay extra toward your principal whenever you can
- Eliminate your PMI
- Have your property taxes reassessed
- Find cheaper homeowners insurance
- Rent out part of your home
- Refinance your mortgage
- Apply for a loan modification
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When Mortgage Payments Start
The first mortgage payment is due one full month after the last day of the month in which the home purchase closed. Unlike rent, due on the first day of the month for that month, mortgage payments are paid in arrears, on the first day of the month but for the previous month.
Say a closing occurs on January 25. The closing costs will include the accrued interest until the end of January. The first full mortgage payment, which is for the month of February, is then due March 1.
As an example, lets assume you take an initial mortgage of $240,000, on a $300,000 purchase with a 20% down payment. Your monthly payment works out to $1,077.71 under a 30-year fixed-rate mortgage with a 3.5% interest rate. This calculation only includes principal and interest but does not include property taxes and insurance.
Your daily interest is $23.01. This is calculated by first multiplying the $240,000 loan by the 3.5% interest rate, then dividing by 365. If the mortgage closes on January 25, you owe $161.10 for the seven days of accrued interest for the remainder of the month. The next monthly payment, which is the full monthly payment of $1,077.71, is due on March 1 and covers the February mortgage payment.
Understand And Utilize Mortgage Points
Whenever people are curious about how much their mortgages cost are going to cost them, lenders will provide them with quotes that include loan rates and points. Stephanie McElheny, the Assistant Director of Financial Planning at Hefren-Tillotson in Pittsburgh, says that one point is equal to 1 percent of the loan amount .
McElheny adds, there are two kinds of points, discount and origination fees:
- Discount: prepaid interest on the mortgage the more you pay, the lower the interest rate.
- Origination fee: charged by the lender to cover the costs of making the loan.
If you plan on staying in your home for the foreseeable future, it may be worth paying for these points since youll end-up saving money on the interest rate of your mortgage. You could save that extra cash each month and put it towards your overall mortgage payment.
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Increase The Period For Paying Back The Loan
Increasing the term of your mortgage will cut the monthly mortgage payments for all but interest-only mortgages. The downside is that, it does mean you pay more interest in the long run. However, you can still overpay if you are ever able to and potentially pay the whole thing back over the original time period. If you do need to take more time, or spend a few months paying a bit less, it wont be a problem for your lender.
In A Short Sale Do I Have To Pay The Difference Between The Sale Price And How Much I Owe
In some states, you could be liable for the difference, and the mortgage company can try to collect that debt. If you can’t pay your mortgage and want to opt for a short sale without owing the difference, negotiate with your mortgage lender to forgive the difference, and ask for a release of liability.
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Refinance With A Lower Interest Rate
A lower interest rate can mean big savings. For example, on a $200,000 30-year-fixed loan, reducing the interest rate 1% can mean a monthly savings of almost $120.
If youre looking to lower your mortgage payment, keep an eye on the market. Look for rates that are lower than your current interest rate. When mortgage rates drop, contact your lender to lock your rate.
Another way to get a lower rate is to buy down your rate with points. Mortgage discount points are upfront prepaid interest paid as a part of your closing costs to get a lower rate. Each point is 1% of the loan amount. For example, on a $200,000 loan, one point would cost you $2,000 at closing. One mortgage point generally results in an interest rate reduction of .25% to .5%.
Whether discount points make sense for you is generally a matter of how long you plan to stay in the home. If you only see yourself in the home for a few more years, its probably less expensive to pay a slightly higher interest rate. However, reducing your rate by half a percent could save you thousands over the course of a 30-year loan.
Keep in mind that mortgage refinances are different from a mortgage recast, which is a lump-sum payment you pay toward your remaining principal. Both, however, may give you an opportunity to cut down on your mortgage bill.
Get approved to refinance.
Example Of Mortgage Interest Over Time
To illustrate how amortization works, consider a traditional, fixed-rate mortgage for $100,000 at an annual interest rate of 2% and a time to maturity of 30 years.
The monthly mortgage payment would be fixed at $369.62.
The first payment would include an interest charge of $166.67 and a principal repayment of $202.95. The outstanding mortgage balance after this payment would be $99,797.05.
The next payment would be equal to the first, $369.62, but with a different proportion of interest to principal. The interest charge for the second payment would be $166.33, while $203.29 will go toward the principal.
This example applies to a basic, fixed-rate loan. If you have a variable- or adjustable-rate mortgage, it is also likely to apply a greater portion of your monthly payment to interest at the outset and a smaller portion as time goes on. However, your monthly payments will also adjust periodically, based on prevailing interest rates and the terms of your loan.
There is also a less common type of mortgage, called an interest-only mortgage, in which the entirety of your payment goes toward interest for a certain period of time, with none going toward principal.
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