Be sure to check the specifics of your loan-payment details to avoid overpaying.
By MSN Real Estate partner Wed 10:25 AM, 3/19/2014
Buying a home with a mortgage comes with plenty of strings attached, aside from just interest and principal.
While you’ll have a general sense as to what your monthly mortgage payment will be, this complacency likely prevents you from reading over the specifics of your mortgage statement. By simply writing a check each month and skipping over the details on your statement, you’re missing out on a variety of potential savings.
First, examine the line item “unapplied funds” on your statement and make sure the balance is zero. The reason money would be in the unapplied funds account is if you made a partial mortgage payment that didn’t cover the entire amount. For example, you might be making payments every two weeks or an extra $50 here and there with the goal of paying your mortgage off faster. If you don’t tell the bank to direct this money toward the principal, it’ll sit in the account.
“The bank can still put toward principal, even if it’s not the full payment, but you have to tell them first,” says Dani Babb, founder and CEO of The Babb Group.
Alternatively, the bank would rather put that money toward interest, which is essentially giving them free money, because interest is calculated based on the new principal amount. If you’re not making a dent in your principal, you won’t see your interest expense drop.
Next, double-check the escrow balance to see if you have an impound account. With loans, the bank adds up your insurance and taxes for the year, divides by 12 and adds this amount to your monthly mortgage payment. However, if you switch insurance companies or your property taxes change, the bank may still charge you the old amount, unless you tell the bank. If you need help with regards to the terms of your property taxes, you may always consult professional property tax services for help.
“Sometimes the mortgage company over assess and ends up owing you money,” Babb says.
Additionally, be cognizant of how much you are paying for private mortgage insurance, which typically ranges from 0.3 percent to 1.15 percent of the loan. This is charged when the loan-to-value ratio is higher than 80 percent. In other words, when you don’t make at least a 20 percent down payment on the loan, this insurance is charged to compensate the lender for taking on additional risk.
As you pay off your mortgage and should your home increase in value, your loan-to-value ratio fluctuates, sometimes falling into the threshold where private mortgage insurance is not charged. If you fail to keep an eye on this, you’ll end up paying private mortgage insurance for no reason.
“Homes appreciate much faster than the time it takes to pay down 20 percent of your loan,” Babb says. “But if you have equity, you can get the home reappraised and have the private mortgage insurance taken off.”
Finally, if you have a variable-rate mortgage, periodically check the reset date, which is when the loan’s interest rate changes from fixed to adjustable. Generally, this switch happens several years into the mortgage, but if you’re not careful, you could be blindsided by a painful payment increase.
Have you been confused about credit and how it works? Take a look at some of the most common myths, along with simple ways to give your score a boost.
Want to get a handle on your credit? Well, first you’ll have to learn what factors impact your credit score. Unfortunately, there are a number of myths that can cause your brain to spin like the Tasmanian Devil from information overload.
Let’s take a look at those fallacies. Then we’ll explain what actually affects your credit score, and what you can do to improve it. Here are some common credit score myths:
1. My employment history will make or break my credit
Your employment history has nothing to do with your credit score, but some lenders may review it to determine if you are stable enough to repay a loan. Frequent job changes or layoffs may indicate otherwise.
2. The more money I make or save, the higher my credit score will be
It’s not what you make, but how you spend it. And how much money you have in savings has nothing to do with FICO’s credit scoring equation. However, some lenders may consider these factors to determine the likelihood that you will default on a loan.
3. Poor credit will keep me from getting a loan
This is false because there are a lot of greedy lenders who will be willing to lend you money — at a very high interest rate.
4. Bad credit never goes away
With sound debt-management practices, the negative marks will eventually vanish. Late payments, bankruptcies, foreclosures and collections typically remain on your credit report for seven years. (The exceptions are Chapter 7 bankruptcies and tax liens, which remain for 10 years and indefinitely, respectively.)
And even before they drop from your credit reports, their impact diminishes over time.
5. All credit scores are created equal
Each of the three major credit bureaus produces a FICO score based on the information it has about your credit history. “That FICO score is calculated by a mathematical equation that evaluates many types of information from your credit report,” myFICO says. Some things are known about how that works, but the specifics are a well-kept secret.
The credit bureaus also produce other types of credit scores, although FICO scores are the ones most widely used by lenders. MyFICO notes that “it’s important to understand that not every credit score you can buy online is a true FICO score.”
And, not every FICO score you buy is the one your lender will see.
6. Having too many credit cards will wreck my credit
While excessive credit card applications in a short window of time can create issues, having a variety of magic plastic in your wallet won’t necessarily hurt your credit score.
However, it becomes a problem when the balances spiral out of control and your debt-to-available-credit ratio skyrockets.
7. Pulling my credit will lower my credit score
The only inquiries that impact your credit score are those that are made to obtain credit.
8. Where I live has an impact on my credit score
This couldn’t be further from the truth, unless of course you can’t afford to pay the mortgage or rent where you reside.
If you’re interested in a comprehensive list of what’s not included in your credit score, check out this myFICO post.
How your FICO score is calculated
Now that you have a better understanding of the factors that have no bearing on your FICO credit score, let’s take a look at what does:
- Payment history — 35 percent of your credit score is determined by whether or not you make timely payments.
- Amounts owed — 30 percent of your credit score is based on your debt.
- Length of credit history — 15 percent is based on how long each of your credit accounts has been in existence. In the case of your FICO score, old age isn’t always a bad thing.
- Types of credit in use — 10 percent is based on the types of credit accounts you have open. These include credit cards, installment loans, mortgage loans and auto loans.
- New credit — 10 percent is determined by the amount of inquiries recently submitted for new credit. Try to keep this number as low as possible or your credit score could take a dip.
Find your score
You can visit AnnualCreditReport.com to pull a free copy of your three credit reports. But to view your FICO scores, you’ll likely have to cough up some cash. An alternative is a site like Credit Karma, which provides non-FICO TransUnion scores for free.
And if you’ve recently been denied credit or gotten an unfavorable interest rate, you’re also legally entitled to a free credit score. Some financial institutions also provide them to customers.
Does your credit score need a boost?
Start by examining your credit reports for errors. If you notice any, use this template provided by the Federal Trade Commission and follow the corresponding instructions to get the dispute process started.
Spare yourself headaches by staying away from companies claiming to have some sort of magic wand that can repair your credit in a flash.
The next step is to establish a realistic budget and debt-management plan that will force you to get a handle on your spending and reduce those outstanding balances.
This post comes from Allison Martin at partner site Money Talks News.
If you’re thinking of buying a residential or commercial property, read this before plunging in. These mortgage-buying tips will save you money and heartache.
By Marilyn Lewis, Money Talk News
With interest rates still low and the recession receding in the distance, plenty of people are window shopping the real estate listings and wondering, “Is now the time to finally buy a home?”
If you’re among them, or if you are thinking of refinancing your mortgage, don’t plunge in until you’ve watched Money Talks News financial expert Stacy Johnson explain the golden rules of mortgage shopping. After that, read on for more information that will save you money and heartache.
1. Check your credit
Your first move – long before you start home shopping – is to find out where you stand with mortgage lenders and how to improve your position.
Check your credit reports for problems or errors. It takes time to fix any errors, so get going as much as a year before applying for a mortgage.
A cleaned-up credit report can raise your FICO score. With a score above 760 (FICO scores range from 300 to 850), you’ll enjoy the best mortgage offers and interest rates. The lower your rate, the cheaper your house payments will be.
To see how much money a stronger credit score could save you, plug your numbers into this calculator at myFICO.com. You’ll also see the score ranges — 660-679, for example.
Suppose someone with a score between 760 and 850 gets a 30-year mortgage for $300,000 at 4 percent. The monthly payment will be $1,440 a month.
Homebuyers with lower scores can’t get that great rate. With a score in the 620-639 range, you might pay about 5.6 percent. That’s a $1,729 monthly payment — $289 more.
2. Meet with lenders
Now you’re ready to meet with a mortgage lender or broker – or several — to ask their advice on how to boost your credit score. These early chats also prepare you for mortgage shopping, letting you see and compare lenders’ styles, knowledge and helpfulness.
ASK ME…. what documents you’ll need to submit when you apply. New federal mortgage rules make it harder to get a mortgage. You’ll be judged on eight points:
- Income and assets.
- Child support or alimony obligations.
- Credit history.
- Monthly payments on debts.
- What you can afford to pay monthly on a mortgage.
- Other mortgage costs, like home and mortgage insurance and property taxes.
- Your remaining income.
For the best rates, all of your monthly payments must be less than 43 percent of your pretax monthly income.
3. Pull your credit score
Your FICO score is different from your credit report. You’ll need to know your score to see your progress improving it.
It’s hard to get a free FICO score. You’ll see ads for so-called free credit scores, but these aren’t the scores lenders see. They might do, though, if you only need a benchmark to watch how your efforts are improving it.
FICO charges $20 for your score, and it may not be exactly the same score that lenders see. Money Talks News founder Stacy Johnson suggests one way around the cost: Sign up for a free trial of FICO’s ScoreWatch to get your free score, and then cancel.
4. Beef up your score
There’s plenty you can do to quickly raise a low credit score.
Making an effort to raise your score matters, especially if your score is near the top or bottom of a credit score range.
For example, with a score of 745, you’re near the top of the 700-759 range. With effort, you might gain enough points to move into the highest category, 760-850, giving you access to lower interest rates.
Or suppose your score is 766. Credit scores bounce around all the time; you don’t want yours dropping below 760, which puts you in the less desirable 700-759 category. Try to boost your score at least into the safe middle of the 760-850 range.
“Building a Better Credit Report” from the Federal Trade Commission can help.
5. First the mortgage, then the house
You’re probably itching to start shopping for a home. That’s fun, but keep your head on straight. Shop for the mortgage first. Looking for a home often gets emotions and fantasies all fired up, tempting shoppers to spend more than they can afford.
Don’t let emotions hijack your home purchase, causing you to overpay or stretch beyond your means.
Window shopping? Fine. But stay sober. Mortgage shopping first lets you know what you can afford, including all the other big expenses of homeownership — taxes, insurance, homeowner fees, bank fees, repairs, appliances, maintenance and improvements.
- Estimate mortgage payments (use calculators located below)
6. Get pre-approved, NOT pre-qualified
Here’s the difference, as the National Association of Realtors explains it:
Pre-qualifying is just a quick credit check based on the information an individual provides. A pre-approval, however, means a mortgage professional has checked the employment history, verified funds, studied an individual’s credit record and so forth. Getting pre-approved rather than pre-qualified saves a lot of heartache.
By pre-approving your loan, the bank commits to lending you up to a specific amount. That can impress sellers. And it helps when you’re competing with other buyers for a home.
The bad news: Fewer banks are pre-approving mortgages lately. But that doesn’t mean you shouldn’t try and shop around. (Call/email/text me!!!)
7. Now shop
Now that you know what you can afford to pay for a home, you can finally start shopping. Here are sources for guidance on shopping:
8. Hold off applying for credit
Applying for new credit is a tricky thing. It can help improve your credit score – in the long term. But if you open a new credit card or take out another loan too near the time of your mortgage application, your credit score could dip and affect your interest rate.
However, applying for mortgages won’t have much impact. MyFICO says:
Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
Also, obtaining your own credit score or reports won’t hurt, says personal finance expert Liz Weston:
A credit check could hurt you if you asked a friend at a bank or car dealership to pull your credit reports. Such transactions probably would be coded as “hard” inquiries, or as applications for credit, which could ding your scores.
BUT, checking your own credit is otherwise a non-event.
9. Wait to make big purchases
Buying furniture, appliances, a car or any substantial purchase outside your regular monthly expenses could kill your mortgage loan. Before your loan closes, a lender makes a final credit check. New debts could change your eligibility. Says The New York Times:
“We tell our clients about this upfront, and keep reminding them through the entire process not to go buy a new bed or a refrigerator,” said Michael Daversa, the president and founder of Atlantic Residential Mortgage, which is based in Westport, Conn. “What you’re supposed to do is keep everything status quo.”
By Amy Hoak, MarketWatch
Home buyers, prepare for sticker shock.
Prices of homes are expected to tick up again this year, and mortgage rates are due to creep up, too. And that’s on top of the increases already experienced over the past year.
A median-priced, three-bedroom home bought in the fourth quarter of 2013 costs a homeowner 21% more a month, compared with one bought a year before, according to an analysis by RealtyTrac, a housing data provider. That monthly cost includes mortgage, insurance, taxes and maintenance, and subtracts the estimated income-tax benefit.
“There’s no doubt about how affordability has been affected here in the past year or so,” said Loren Haley, a Redfin agent in Silicon Valley. “Prices have been driven up so quickly and intensely; there are a lot more buyers in the market than there is inventory.”
Every real-estate market is different.
Despite a more competitive market, it’s important that buyers keep a sense of perspective. And if your goal is to move into a new home this year, there are things you can do to position yourself to get the best deal possible — even if bargains are becoming rarer.
“It’s not fair to say it’s a huge shock … we’re still well above normal levels of affordability,” said Mark Fleming, chief economist for CoreLogic, a provider of consumer, financial and property information.
The National Association of Realtors’s national Housing Affordability Index dropped to 175.8 in 2013, from 196.5 in 2012. But, for comparison’s sake, the index reading was 107.6 in 2006, around the peak of the housing bubble. The higher the number, the more affordable the market. The index is based on the relationship between median home prices, median family incomes and the average mortgage interest rate.
While prices are expected to rise, early indications suggest that the increases won’t be quite as steep as last year. And although mortgage rates are expected to increase, their rise so far has been somewhat gradual. The 30-year fixed-rate mortgage averaged 4.3% in February; it averaged 3.53% for February 2013, according to Freddie Mac data.
Fleming also points out that if you own a home already, and plan to sell it to finance a new one, you’ll see even less of an impact on affordability. While the price of the home you’re buying will be more expensive than last year, you’ll be able to sell your home for more, too.
Most importantly, remember that every market is different. Yes, inventory shortages are widespread, but shopping in the red-hot Silicon Valley market is different than shopping in Chicago. And while finding a home may be a challenge where inventory is tight, the more attractive of a buyer you are, the more negotiation chips you have with a seller.
Heed the following six pieces of advice while home shopping this year.
1. Sooner is better
Of course, you should make sure that you focus on a home that fits your needs, with access to the school districts or other amenities you desire, Fleming said. But once you’ve done that, decided how much you can afford and found the place you want to buy, make a move — and quickly.
“Sooner is better than later because interest rates will probably rise this year and house prices will rise some more,” he said. So start soon. “If you’re thinking about doing it this year, do it early.”
2. Hire an expert
Many people hire the first real-estate agent they meet with. That’s a huge mistake, said Charlie Young, chief executive of ERA Real Estate. Interview a few agents who work in the neighborhoods you’re interested in, and make sure they have relevant expertise. For example, if you’re looking for a starter house, don’t choose someone who focuses mainly in luxury homes. These agents are utilizing a Real Estate Agent Marketing Service to inform buyers and sellers of their expertise and to get the leads they specialize in.
Ask buyer’s agents what the list-to-sales price ratio (the difference between what the home is listed for and what it eventually sells for) is in the neighborhood — and what their personal list-to-sales price ratio is, Young said. That will give you a sense of the agent’s negotiating skills. Then, ask them about the neighborhood, what the near facilities are, companies, schools, and repair services like plumbing services, furnace repair (just go to the site go to url to know more), or AC services (available at Abraham AC and Heating Services, Inc`s website). You can visit sites like https://friendsandfamilyhvac.com/furnace-repair-in-corona-ca/ to get an idea.
Strong knowledge of the market is key. “In this kind of market, where inventory is low, the ability for a Realtor to help you find homes that may come on the market is going to be important,” said Steve Berkowitz, chief executive of Move, Inc., which operates the website Realtor.com. The earlier you know about a property, the more time you have to consider it and prepare a competitive bid.
3. Know the market
A good real estate agent will also be able to tell you if a list price is misleading, Haley said. For example, if it’s listed for $500,000 but is in a neighborhood where homes are getting five to 10 offers and it’s more likely that the home will sell for $600,000, your agent should be able to tell you that up front.
And they can tell you how tight the inventory is where you want to live, including how long homes typically last on the market. That’s the best indicator of how fast you’ll need to make a decision — and how hard it will be to find a home to meet your needs.
4. Know your finances
Understand what you can afford. That’s different than what a mortgage broker says that you can qualify for, Young said.
It’s important to think about how large of a mortgage bill you’d feel comfortable paying each month, he said. When bidding wars get intense, it can be tempting to blow your budget, but you may regret the decision later.
Some buyers also might consider adjustable-rate mortgages to finance their home more affordably, especially those who plan on living in the home for a shorter period, say, five to 10 years, Young said. If you go this route, just make sure you can deal with the interest-rate resets scheduled after the introductory period. Otherwise, if your plans change, you could be in for an entirely different kind of sticker shock.
5. Be an attractive buyer
Get preapproved for a mortgage before shopping, Young said. Sellers will take you more seriously, an important point when they’re getting multiple offers.
For sellers, the best offer isn’t always synonymous with the highest bid. In general, the fewer contingencies you have on the contract, the better, Haley said. “When we’re looking at five or 10 different offers, having the highest price is great, but we’re also looking for the highest certainty of closing,” she said.
A contingency that you need to have a contract on your current home before completing the transaction, for example, could put you at a disadvantage when you’re competing with a buyer who doesn’t make that stipulation. But tread lightly when giving up conditions: A home inspection contingency, for example, could save you from buying a home fraught with problems found during an inspector’s exam.
6. Consider other neighborhoods
For many prospective buyers, increasing home prices and mortgage rates won’t restrict them from buying this year. But they might need to make some compromises.
Aside from buying a smaller or less desirable home, you might also consider buying in a different location. The next town over may be more affordable than the area you originally were considering, Young said. Compare real estate taxes from city to city as well; there could be a big difference between the taxes you will pay for one house versus another across the street.
- May be cheaper than a mortgage payment
- Fewer (if any) maintenance costs
- No down payment required (less deposit)
- No real estate taxes (renters insurance optional)
- Less stress (who cares, it’s not yours!)
- Freedom to move or downsize when necessary
- No risk of home price depreciation
- Some utility bills may be included
- “Free” amenities such as pool, gym, security
- Money can be used for other, more profitable investments
- Can’t be foreclosed on
- Rental payment may exceed monthly cost of mortgage
- No ownership or wealth creation
- Payments never stop when renting
- Rent will rise over time
- Must deal with a landlord or management company
- No tax benefits
- Rules, regulations, and limitations
- More temporary, less stability
- Always at the mercy of the property owner
- Pets may not be allowed
- You can build home equity and wealth
- Status- Status-Status
- Sizable tax deductions possible
- Your space, your rules (pets welcome)
- Ability to remodel, expand, tear down
- You get a pest control deal with bigfootpestcontrol.com
- Pride of ownership (social status, accomplishment)
- Potentially better for children, family structure
- Mortgage can improve your credit history/score
- Ability to borrow against your home (HELOC or cash-out)
- No more monthly payments once mortgage paid off
- Fixed payments (if you choose a fixed mortgage)
- Mortgages are the cheapest loans available
- No landlord
- Can exclude capital gains when you sell (partially)
- Inflation hedge
- Can rent out to others
- Can sell and use proceeds for bigger/better home
- Retirement nest egg
- It’s the American Dream!
- Home prices may lose value
- Could overpay for your property
- Obtaining a mortgage (and finding a home) is a hassle
- Not everyone qualifies for a mortgage
- You must pay taxes and homeowners insurance
- Total housing payment can be more expensive
- Mortgage payment can rise (if an ARM)
- Sizable down payment necessary
- Maintenance costs can be excessive
- Pricey HOA dues (if applicable)
- You’re “stuck” in a home (long-term commitment)
- Increased liability and responsibility
- Transactional costs of buying and selling
- Ownership is stressful!
- Taxes and insurance generally rise
- Your home can be damaged or destroyed (and not fully insured)
- Can be foreclosed on and lose your home
The bond market short-squeeze is making it cheaper to get a mortgage
– Ben Eisen, January 30, 2014, 1:27 PM
Bonds have staged an incredible rally this month, pushing Treasury prices higher. Yields on the benchmark 10-year note 10_YEAR +0.26% are down from over 3% at the beginning of the year, to 2.7% on Thursday. As yields fall this month, you may have noticed it’s getting cheaper to take out a mortgage.
But a good portion of the bond rally can be explained by the way investors positioned their holdings going into 2014, and a resulting short-squeeze as they unwind their positions.
As we rang in the new year, investors celebrated by betting that rates would continue to rise — a sentiment shared by nearly everyone, from Wall Street traders to your grandmother. Investors get short if they think rates are going to rise, and the CFTC Commitments of Traders report showed that investor net positioning was among its most short in recent years at the end of 2013.
Take a look at the below chart, courtesy of LPL Financial, which has a great note to clients about the phenomenon this week. The green line dips deep into negative territory at the end of 2013:
That bearish positioning for higher rates caught investors on the wrong side of the trade as Treasury yields took their cue from some negative indicators and started dropping. First, a disappointing employment report showed the weakest job creation in three years. Then, worries about growth in emerging markets pushed investors into the safety of U.S. government debt. We’ve also seen signs that pension investors are moving back into bonds, helping support the market.
When rates began to point lower and prices higher, investors who had gotten short the market began to unwind their positions and buy the very government debt they were holding their nose at, helping accelerate gains in the market. That’s often called short covering, or a short squeeze. Anthony Valeri, market strategist with LPL Financial, writes in a note:
“As bond prices rise and interest rates fall, defensively positioned investors may see their portfolios likely lag benchmark performance. Investors then would likely buy to get closer to their benchmark in order to limit underperformance to a benchmark. Bond buys to get portfolios closer to neutral may have aided bonds in early 2014. When coupled with fundamental drivers, positioning and sentiment can be a potent combination.”
But as the chart above shows, the negative positioning has been largely reversed. The next logical question is whether the rally will continue and your mortgage rate will keep falling. The short answer to that: The market moves in mysterious ways, so trying to time a market reversal may catch you offsides, just like those traders who got short-squeezed.
Since you asked, though: The more neutral positioning of investors doesn’t necessarily mean the market will reverse. It just means that the direction of yields will revert back toward the fundamental data and underlying economic outlook that generally drives the market.
That economic outlook is a bit more murky than it was heading into the new year. Even if the economic data in the U.S. becomes stronger, the outlook for emerging markets is bleaker. The Federal Reserve’s withdrawal of its bond-buying stimulus, which is poised to continue winding down this year, has helped pull capital out of emerging markets as investors exit those markets. Strategists say that if the bond market takes its cue from emerging markets, Treasurys may continue to gain.