Tips for Navigating your Home Loan
FIRST TIME HOME BUYER’S GUIDE TO MORTGAGES
Although purchasing a home can sound like a daunting task, it is easier than you think. First-time homebuyers can enjoy some special advantages that encourage investing in real estate. As a first-time home buyer, you have access to tax breaks, state programs and federally backed loans should you want to put the least amount down.
How do you get qualified to be a first-time home buyer? According to the U.S. Department of Housing and Urban Development (HUD), there are a few ways to be qualified. A first-time buyer could be an individual who has not owned a principal residence for three years. Even if you have owned, but your spouse has not and you are buying together, you can purchase a home together as first-time homebuyers. A single parent who has only owned a home with a former spouse while married is also qualified, along with an individual who has only owned a principal residence not permanently affixed to a permanent foundation, also known as a mobile home.
What loan program would be best for you? Although it is best to consult with your mortgage professional, popular loan programs for first-time home buyers include FHA and Conventional loans. These programs differ based on amount of money down, minimum credit score, mortgage insurance requirements and property standards.
An FHA loan is government-backed and require as little as 3.5% down for most buyers. For some lenders, the credit minimum for an FHA loan is 580, allowing for more flexibility with credit. Even if you have a credit score of 500 to 579, you may be eligible for an FHA loan with a 10% down payment! FHA loans required mortgage insurance always, no matter the loan to value and have stricter appraisal and property standards. Not only is the property’s value assessed, but it is also thoroughly vetted for safety, soundness of construction and adherence to local code restrictions. The only way to get out of the mortgage insurance on an FHA loan is to refinance into a conventional one
A Conventional loan has a minimum of 5% down and a credit minimum of 620. The credit minimum will depend on the lender, as some only go down to 640, however you will not receive a conventional loan with less than a 620 median credit score. Conventional loans require mortgage insurance until you reach 80% Loan-to-value, and it can be removed. In terms of the appraisal and property inspection, the appraiser is looking more for the property’s value and less on the structural soundness and code restrictions.
REFINANCING? - STOP WORRYING ABOUT THE INTEREST RATE!
When many people think about refinancing they have just one thing on their mind - what’s the rate? I am not sure who started this trend of only asking about the interest rate. Perhaps it is just human nature to try to understand complex topics by oversimplifying, but if you’re only concerned about your interest rate, you’re probably leaving money on the table.?
Like all financial plans, a mortgage refinance requires the right strategy and requires a holistic approach to diagnosing your money issues and how we can leverage this new loan to achieve your goals.
BUYING DISCOUNT POINTS - WHEN DO THEY MAKE THE MOST SENSE?
For example, most people have a completely backward understanding of Mortgage Points, or Discount Points. They wrongly believe this is just a “cost” paid to the lender, without realizing that this “cost” actually secures you a below market interest rate that will ultimately save you more money in interest over the life of the loan vs the higher rate with less points.
Now, there is some nuance to the issue of points that requires a borrower to also analyze their goals across time. Will you live in this house forever or will you sell it in a few years? If you are looking to sell your home within the next few years - then buying points likely does not make the most sense - as you will add to your balance and not hold the loan long enough to see the benefit from the purchased lower interest rate.?
On the other hand, if you intend to hold this property for the full loan term and your goal is to pay the least amount, then buying points is almost ALWAYS the smartest option. Let me say that again, if you are looking to save the most money in total payments - that is your new loan balance + your new interest balance* - then buying points down to the lowest available interest rate is the smartest move.?
?*(most people forget, you do not just owe your loan balance, you ALSO owe an “invisible” interest balance - which is of course calculated from your current interest rate, your current loan balance, and the remaining years of your loan.)
OTHER REASONS TO REFINANCE
Other reasons a refinance can be the right strategy include being able to take cash out of the equity in your home to consolidate higher interest debt payments. Instead of paying credit cards, a car loan, your mortgage, and student debt (all with varying interest rates) - a cash out consolidation refinance can help you reduce all those monthly payments into a single monthly payment of your mortgage, often at much lower interest rates too!
With interest rates so low, many people simply want to lower their monthly payment or shorten their loan term. Shortening your loan term means you will pay less in interest over the life of the loan, saving you money.
Things to take into account when considering a refinance - Make sure you, and your co borrower, take an honest and in-depth inventory of the following when considering a refinance: