When loans are quoted by lenders, most buyers pay attention to the interest rate but not so much to the points that may be charged along with the rate.
A point is one-percent of the mortgage amount and considered pre-paid interest that affects the yield on the loan. Buyers or sellers can pay points, but there can be limits based on underwriting guidelines for different types of loans.
A lower note-rate would obviously make the payments less. However, with a little analysis, you can determine how much points paid up-front can save a borrower or whether you’ll recapture the additional costs in the anticipated time in the home.
In the example below, two choices are compared; a 4.25% loan with no points vs. a 4.00% loan with one point. If the buyer stays in the home at least 69 months, he will recover the $2,700 cost for the point on the lower interest rate.
If the purchaser stays ten years, he’ll save two thousand dollars beyond the $2700 cost of the point. A less obvious advantage will be realized because the unpaid balance on the lower interest rate loan results in an additional $1,780 savings, for a total of close to $3800 in 10 years.
This is an example of a permanent buy-down but temporary buy-downs are also available. A trusted mortgage advisor can help you determine alternatives.
The Mortgage Debt Forgiveness Act, originally passed in 2007, was extended three times to protect homeowners from paying income tax on debt that was relieved due to foreclosure, short sales or deed in lieu of foreclosure.
The law expired on December 31, 2016 and unless it is extended again, homeowners with debt relief in 2017 may be subject to tax.
A homeowner might feel a sense of relief without the obligation of a delinquent mortgage but just because the payments are no longer due doesn’t mean that there isn’t another obligation that replaces it. If a lender cancels or forgives debt, a taxpayer must include the cancelled amount in their income for tax purposes depending on the circumstances. The tax significance could be serious.
This previously allowed relief only applied to a taxpayers’ acquisition indebtedness of their principal residence which did not include second homes and investment property. The maximum amount was limited to $2 million of mortgage debt forgiveness or $1 million if filing separately.
Due to the serious consequences involved in short sales and foreclosures, it is advised that homeowners faced with this possibility should seek expert advice from their legal and tax professionals.
There could be some legitimate reasons for not buying a home but indecision is not one of them. Indecision is rooted in not having enough information to move forward to own a home or continue renting.
If you keep renting, at the end of the year, you have had a place to live and a pile of receipts that helped the landlord pay for his house. Deciding to buy a home will give you a place to live that is yours and all the things that come with that.
When you consider principal reduction, appreciation and tax savings, your monthly cost of housing could be much less than the rent you’re paying. The principal reduction included in each payment is like a forced savings account that increases as your mortgage balance decreases. Your equity in the property will also grow due to appreciation as the home goes up in value. The equity is part of your net worth and an investment in your family’s future.
The income tax savings can be an additional financial consideration if the combined interest and property taxes are greater than the allowable standard deduction.
Trends are showing that both tenants and homeowners are staying in their homes longer. It’s been said that whether you rent or own, you’re paying for the home. Do you really want to buy the home for your landlord? Check out your numbers on a Rent vs. Own app and then call me to help make it happen.
Regardless of what a lender quotes on mortgage rates, the actual rate a borrower pays is based on a number of variables. Lenders determine whether to loan money and at what rate based on the risk involved with the transaction.
Factors that increase the risk that the loan will be repaid will proportionately increase the interest rate charged to the borrower. If the risk becomes too high, the loan will not be approved.
- Loan Amounts – conventional mortgages above conforming limits as set by Fannie Mae and Freddie Mac are considered jumbo loans and generally have a higher interest rate.
- FICO Score – the lowest interest rate is reserved for the highest score; the lower the score, the higher the rate the borrower will pay.
- Occupancy – borrowers occupying a home as their principal residence are considered a better loan risk than second homes and investment properties.
- Loan Purpose – purchase transactions generally have the lowest interest rate with refinancing for better rates and terms being priced slightly higher. An even higher rate might be charged for refinancing and taking cash out of the property.
- Debt-to-Income Ratio – a borrower’s monthly liabilities divided by their gross monthly income develops a ratio that helps lenders to assess the borrower’s ability to repay the mortgage.
- Property Type – some types of property are considered higher risk than others which could adversely affect the rate.
- Loan-to-Value Ratio– the lower the amount of the loan compared to the appraised value of the property, (generally) the lower the interest rate.
Any combination of these factors could affect a borrower’s ability to secure a mortgage at the rate initially quoted. Pre-approval by a trusted mortgage professional can be the best way to know what rate you can expect to pay. Please call for a recommendation of a trusted mortgage professional.
Having a mortgage pre-approval ready to submit with a prospective buyer’s purchase offer is good for everyone in the transaction. It saves time and removes the uncertainty of knowing whether the buyer will be qualified after negotiating a contract. The direct benefits include:
- Looking at the “right” homes – In the right price range and condition to qualify for the kind of mortgage that will be used
- Find the best loan – rate, term, type
- Uncover credit issues early – time to cure possible problems
- Negotiating power – price, terms, & timing
- Close quicker – verifications have been made
- Avoid loan pre-approval as the basis for a counter-offer – Listing agents and Sellers usually expect to see a mortgage pre-approval submitted along with an offer, so a missing pre-approval is likely to result in a counter-offer being received even if it’s the only flaw of the original offer.
- In a multiple offer scenario it may be to your competitive advantage and the lack of it could disqualify your offer from consideration.
There is a significant difference in having a trusted mortgage professional take a loan application and run all the necessary verifications compared to going through calculators on a lender’s website. Beside the peace of mind, the cost of being pre-approved is a bargain and generally, limited to the cost of the credit report.
Even if a person has been pre-approved, a second opinion from a different lender may be a good option. It can verify that a loan program is competitive or you may discover that you can improve on it. Either way, it’s time wisely spent. Contact me if you’d like a recommendation of a trusted mortgage officer.