Is It Time To Change The Type Of Loan I Have
Take your prediction on how long youll stay in your current home, then think about the details of your current mortgage. How those factors play off each other could have a role in your refinance decision.
Lets say you bought a home with an adjustable-rate mortgage for an initial term of five years at around 3%. You plan to stay put for several more years. If youre nearing the time when the adjustable rate can reset and move higher, you might benefit from refinancing to a fixed-rate mortgage to get an interest rate that wont fluctuate.
Or, if you know youll be moving in a few years, refinancing to an ARM from a longer-term fixed loan might help you save some money because lenders usually offer lower interest rates on those loans.
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Do I Even Need An Escrow
Unfortunately, I guess I do per the requirements of the mortgage company. Many mortgage companies actually carry similar guidelines so you should check with yours if they require it. I should be able to apply for a waiver as soon as I pay off a little more of the original mortgage value, but not quite yet and it seems like there are a lot of rules behind waiving an escrow.
Who needs rules anyways?!
Hey, its their money. Rules are rules as long as I owe them. I could pay them back now, but then that money wouldnt be working for me. For now, that stays stashed away in investments.
How Does Mortgage Interest Work
With a traditional, fixed-rate mortgage, your monthly payments will remain the same for the life of the loan, which might, for example, be 10, 20, or 30 years.
Initially, your mortgage payment will primarily go toward interest, with a small amount of principal included. As the months and years go by, the principal portion of the payment will steadily increase and the interest portion will decrease. That’s because interest charges are based on the outstanding balance of the mortgage at any given time, and the balance decreases as more principal is repaid. The smaller the mortgage principal, the less interest you’ll be paying.
This process is known as amortization. When you take out a mortgage, your lender can provide you with an amortization schedule, showing the breakdown of interest and principal for every monthly payment, from the first to the last.
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How To Combat Inflation
Periods of inflation can be harmful to individual finances, and that’s what may be happening right now. If you’re having a hard time keeping up with rising living costs, there are a few steps you can take to make things easier.
First, get on a tight budget. Figure out exactly how much money you need to spend on essentials given today’s higher costs, and only once you’ve accounted for those expenses should you allocate money to non-essentials, like entertainment.
Finally, be savvy about credit card usage. There are plenty of cards out there offering generous rewards and cash back for everyday purchases. Research your options and sign up for a card that will put more money in your pocket for essentials like gas and groceries.
Better yet, find a credit card with a sign-up bonus that has a spending threshold you’re likely to qualify for. For example, if you qualify for an offer that will reward you with $200 in bonus cash for spending $1,500 within three months of opening your card, that’s a deal worth chasing — especially if you normally charge $500 worth of expenses or more on a credit card each month.
Unfortunately, high levels of inflation may be with us for quite some time. Do your best to maintain your buying power and steer clear of debt until things settle down.
What Are Todays Mortgage Rates
Todays rates are still low, which is good news for home buyers. The lower your interest rate, the more real estate you get for your dollar.
Remember, theres no perfect amount to spend on your home loan. The decision is personal it depends on how much you make, how much you currently spend each month, and how large of a housing payment youre comfortable with.
So explore your options, check your rates, and pick the right mortgage amount for you.
Should You Make Extra Mortgage Principal Payments
After settling into a home or finding a little more financial flexibility, many homeowners begin asking, should I make extra mortgage payments? After all, making extra payments can save on interest costs and shorten the length of your mortgage bringing you that much closer to owning your home outright.
Yet, while the thought of paying down your mortgage faster and living in your home without a mortgage sounds great, there can be reasons why making extra payments toward the principal might not make sense.
Sometimes its good to make extra mortgage payments, but not always, says Kristi Sullivan of Sullivan Financial Planning in Denver, Colorado. For example, paying an extra $200/month on your mortgage to knock it down from 30 years to 25 years in a house you only imagine living in for another five years does not help you. You will tie up that extra monthly payment and never realize the benefit of it.”
While many agree the thrill of living without a mortgage is liberating, you can accomplish that in more ways than one. So how do you know if it makes sense for you to begin paying a little extra principal each month on your mortgage? It depends on your financial situation and how you manage your discretionary funds.
Accomplishing Your Other Goals
If you choose to refinance to lower your monthly payments, you may also have the opportunity to make additional changes to your loan at the same time. Depending on your circumstances, you may also be able to switch to a fixed-rate mortgage or borrow from a portion of your available home equity. Talk to your lender about what youd like to accomplish and see whats achievable for your situation.
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How Your Credit Score Affects Your Mortgage Eligibility
When it comes to getting a mortgage, your credit score is incredibly important. It determines:
- What loan options you qualify for
- Your interest rate
- Your loan amount and home price range
- Your monthly payment throughout the life of the loan
For example, having a credit score of excellent versus poor could save you over $200 per month on a $200,000 mortgage.
And if your credit score is on the lower end, a few points could make the difference in your ability to buy a house at all.
So, it makes sense to check and monitor your credit scores regularly especially before getting a mortgage or other big loan.
The challenge, however, is that theres conflicting information when it comes to credit scores.
There are three different credit agencies and two credit scoring models. As a result, your credit score can vary a lot depending on whos looking and where they find it.
Refinance To Stop Paying Mortgage Insurance Premiums
If you have a mortgage backed by the Federal Housing Administration you may need to refinance to stop paying the mortgage insurance premiums . For newer FHA loans, you may have to pay mortgage insurance premiums for 11 years or you may have to pay them for the full life of the loan, depending on the amount of your down payment.
Refinancing from an FHA to a conventional loan can help you stop paying mortgage insurance premiums. Look at the costs of refinancing at a higher interest rate, and the closing costs you might have to pay, versus the potential savings in mortgage insurance premiums before you make your decision. Keep in mind that you need at least 20% equity in your home when you get a conventional loan or you will be required to pay for private mortgage insurance.
Some people think about refinancing to remove the private mortgage insurance that comes with many conventional loans. Refinancing is often not required to stop paying PMI however. You can request your lender remove PMI payments from your mortgage bill once your home equity reaches 20%. And lenders are required to remove PMI once your home equity reaches 22%. In both cases you will need to meet certain other requirements, such as having a good payment history, to have the mortgage insurance removed.
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Extend Your Repayment Term
A simple way to lower your mortgage payment is to extend your term . You dont need to refinance your mortgage to do this because most lenders will simply offer this service for a fee of about $250.
If you extend your 15-year mortgage to a 30-year mortgage, your monthly mortgage payment will decrease since you have more time to pay back your loan by stretching out the term. While youll end up paying more interest on your mortgage over time with this option, its best for borrowers who need an immediate solution to cash flow issues.
How The Two Credit Scoring Models Affect Your Score
In the old days, banks and other lenders developed their own scorecards to assess the risk of lending to a particular person.
But these scores could vary drastically from one lender to the next, based on an individual loan officers ability to judge risk.
To solve this issue, the Fair Isaac Corporation introduced the first generalpurpose credit score in 1989.
Known as the FICO Score, it filters through information in your credit reports to calculate your score.
Since then, the company has expanded to offer 28 unique scores that are optimized for various types of credit card, mortgage, and auto lending decisions.
But FICO is no longer the only player in the game.
The other main credit scoring model youre likely to run into is the VantageScore.
Jeff Richardson, vice president for VantageScore Solutions, says the VantageScore system aimed to expand the number of people who receive credit scores, including college students and recent immigrants, and others who might not have used credit or use it sparingly.
According to VantageScore reports, there were approximately 10.5 billion VantageScores used between June 2017 and June 2018.
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Why Shouldn’t I Remortgage
Depending on your circumstances, remortgaging right now might not be the best option for you, and could come with disadvantages. Here are some of the reasons why this might be the case.
Your mortgage debt is really small.
Once your loan falls below a certain amount say around £50,000 it may not be worth switching lender simply because you are less likely to make a saving if the fees are high. In fact, some lenders won’t even take on mortgages below £25,000.
Do have a look but you’ll probably want to look at rates with a small fee, or no fee at all. The smaller your mortgage, the worse the effect of any fees you need to pay. Quite often, you’ll be better remaining on the higher interest rate.
Your early repayment charge is large.
A large early repayment charge could mean that it’d be utter foolishness to move before the end of the incentive period. Do your sums to find out use our ‘Ditch your fix?’ calculator. If it would cost too much to free yourself from your current deal, then it’s all the more important that you do your homework, and be ready to move as soon as you can.
It’s always worth asking your current lender to let you switch to another of its deals by paying a reduced early repayment charge. You’re unlikely to get to move to its top-of-the range deal but as long as it’s better than the one you’re currently on, and doesn’t lock you in for much longer, you have nothing to lose.
Your circumstances have changed.
Your home’s value has dropped.
How Much Should My Mortgage Be In The Real World
All this math can come across as a bit theoretical. And your goal when deciding on your mortgage amount should be more practical. You want a loan that will fit neatly within your lifestyle, needs, and ambitions.
The fact that a lender will give you $x amount because of your DTI, credit score, down payment, and personal finances doesnt necessarily mean you should borrow $x amount.
Yes, most of us borrow up to the maximum were allowed. But that doesnt mean you should.
What are your spending priorities?
It all depends on your lifestyle and priorities. Suppose you love foreign travel or gourmet eating or sailing or shopping. Borrowing the max amount might mean youre sacrificing other luxuries for years to come.
It could be best to settle on a more modest home and a smaller mortgage if that allows you to maintain your current lifestyle.
How secure is your income?
You should also bear in mind how secure your earnings are.
You likely dont want to be saddled with the biggest mortgage possible if youre in a job where firings are commonplace or if you plan to change jobs soon and youre not sure youll earn the same amount.
Lenders have these questions in mind, too. Thats why they typically want to see two years employment history on your mortgage application. They also want to know any income youre using to qualify for the loan will continue for at least three years.
How Will I Know What My Closing Costs Will Be
Fortunately, there are laws that govern real estate transactions including closing costs. Your lender is required to provide you with your closing cost disclosure at least three business days before closing.
That will give you some time to review all the fees to make sure that every one of them is accurate. You might want to read additional info about calculating closing costs.
Take Advantage Of Prepayment Privileges
Pay off your home quicker with mortgages that have prepayment privileges. Lenders offer open, closed and convertible mortgages Opens a popup.. Open mortgages usually have higher interest rates than closed mortgages, but they’re more flexible because you can prepay open mortgages, in part or in full, without a prepayment charge. Closed and convertible mortgages often let you make a 10% to 20% prepayment. Your loan agreement explains when you can make a prepayment, so get the details from your lender beforehand. Also, decide which privileges you want before finalizing your mortgage.
Why Are Credit Card Interest Rates So High
Have you ever wondered why your credit card interest rate is so high? With prime rate near a record low, cardholders are often astonished why their credit card interest rates remain so high. While the interest rate is 19.99% on a typical credit card, prime rate is only 2.7% . Although some credit cards offer low introductory rates, a higher rate kicks in later on often in only six months to a year.
Reason #: Record Low Mortgage Rates
- Despite a recent uptick mortgage rates are lower than they were a year ago
- This has allowed purchasing power to stay strong while home prices rise
- The only increased burden is a higher down payment for prospective buyers
- It may remove some buyers from the picture but not enough to lower prices
Now if reason number one werent reason enough for real estate to be booming, sprinkle in some record low mortgage rates.
To get this straight, theres a short supply of something people want and its on sale from a financing point of view. No wonder everyone is going wild.
While the listing price might be quite a bit higher than it was five or 10 years ago, the fact that mortgage rates are roughly half the price they were then is huge.
This has kept home purchasing power intact despite a big run-up in home prices, basically only making the required down payment an issue for some prospective buyers.
And remember, because theres a limited supply of homes available, it doesnt really matter if some would-be buyers are shut out of the market due to affordability constraints.
There are still enough willing and able buyers to come in and pick up any slack, of which there isnt much of to begin with.
So the bidding war might only have 20 participants instead of 30 thats not going to make any impact whatsoever on the final sales price.
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Reason : You Didn’t Shop Around
Unless you’re a billionaire, you probably value a good deal. And if you want a stellar bargain on your mortgage rate, shopping around is essential.
In fact, you’ll probably want to put your shopping shoes on once you hear this bit of news: failing to shop around — and not researching the rates of different providers — could be a reason your mortgage rate is so high.
“A mortgage — whether it’s a home purchase, a refinancing, or a home equity loan — is a product, just like a car,” so you may have the option to bargain with your lender for a better rate, notes the website of The Federal Reserve, the central banking system of the United States.
“Shopping, comparing, and negotiating may save you thousands of dollars,” says the website.
Fix-it tip: Compare rates for every company you shop around with, and see who offers the best rate. But that’s not all. Arnold says you have to trust your lender, too.
“Shop online to get an idea of average rates, but get quotes from people who are local – people who you can walk into their office and see who they are,” says Arnold. “You’ll also want to get referrals from someone you can trust.”