Showing posts with label Mortgage. Show all posts

Friday, July 19, 2024

What is the difference between a mortgage interest rate and an APR?

Muhammad Ahmad July 19, 2024 0

Mortgage

What is the difference between a mortgage interest rate and an APR?

An annual percentage rate (APR) reflects the mortgage interest rate plus other charges.

There are many costs associated with taking out a mortgage. These include:

The interest rate

Points

Fees

Other charges

The difference between a mortgage interest rate and an APR lies in their scope of costs.

What is a mortgage interest rate?

The interest rate represents the annual cost of borrowing money, expressed as a percentage. It solely reflects the cost of borrowing and does not include fees or other charges associated with the loan.

What is a mortgage APR?

The APR, or annual percentage rate, provides a broader view of borrowing costs than the interest rate alone. It encompasses the interest rate, points, mortgage broker fees, and other charges required to secure the loan. Consequently, the APR is typically higher than the interest rate.

Tip: Exercise caution when comparing loan options to ensure you understand the differences in terms being offered:

When comparing adjustable-rate mortgage (ARM) loans, note that the maximum interest rate is not reflected in the APR.

Be mindful when comparing APRs between different types of loans, such as fixed-rate versus adjustable-rate mortgages.

Be cautious when comparing the APR of loans like home equity lines of credit (HELOCs) that exclude certain fees to closed-end loans.

When selecting a loan, consider factors beyond the APR. Understanding how interest rates and APRs vary, especially for loans with adjustable rates, can help you make an informed decision.

Monday, May 27, 2024

10 first-time homebuyer tips: How to get that house

Muhammad Ahmad May 27, 2024 0

Mortgage

10 first-time homebuyer tips: How to get that house

The U.S. housing market is more difficult than ever for those looking to buy a home because mortgage rates are almost at a 23-year high, home prices are almost at an all-time high, and supply is scarce nationwide. Still, for consumers who are organized and diligent in their research, becoming a first-time homeowner might be a realistic ambition. Here are some money-saving tips that will help you get started on the right track toward becoming a house buyer.

House-hunting tips for first-time home buyers

1. Check your credit (and work on it)
Your mortgage interest rate will be better the higher your credit score.

Take out your reports.
Obtain free credit reports from Equifax, Experian, and TransUnion to gain a comprehensive understanding of your credit status and the reasons behind it. Ralph DiBugnara, the president of Home Qualified, an online resource for homebuyers in New York City, advises looking for any errors or past-due bills that may have gone to collections. "These obligations may put obstacles in your home loan application. If something is wrong, contact the creditor to try to resolve it.

Restore your credit, then keep an eye on it.
Your available credit, including credit card limits, overdraft protection amounts, and any other lines of credit you may have, and the portion of that credit you currently use, play a significant role in determining your credit score. One important factor is your credit utilization ratio, or how near your credit limit your outstanding credit card balances are. It is calculated by dividing the total amount of credit you have by the total debt you have on credit.

According to Lindsey Shores, assistant manager of real estate originations at Schools First Federal Credit Union in Sacramento, California, "your credit utilization ratio should be 30 percent or less." "Many people have to budget for and strive to pay down this amount to reach it." Try to pay off your balances if you have more than that amount.

As you move forward, concentrate on keeping them low. Additionally, you should ensure you pay all your bills on time because late payments hurt your credit score.

Monitor your credit regularly using any of the many free services available, such as those provided by Bankrate and numerous banks. Additionally, consider signing up for a credit monitoring service if you haven't already done so. DiBugnara states, "You'll get notified if suspicious activity on your report or your credit score changes."

2. Streamline your spending plan
According to Lauren Lindsay, an independent financial planner based in Houston, "One lesson from the [2008 housing] crash is that just because the bank approves you for a certain amount, it doesn't mean you can afford it."

Another thing to think about is that if you look for homes below your budget, you can negotiate over the asking price in the event of a bidding war, which is not unheard of in the current market.

When creating your budget, consider not only the amount of housing you can afford but also the ongoing expenses you will have to pay after buying a property.

The three main monthly costs of homeownership are mortgage, insurance, and property taxes; however, you may also have to pay for utilities and possibly HOA dues. Additionally, it is a good idea to budget money regularly for upkeep and unforeseen repairs.

"Generally speaking, I advise clients to budget between one and three percent of their property's worth annually for housing-related expenses," says Pittsburgh-based Innovate Wealth managing partner and certified financial planner Steve Sivak. If the house you purchase is more significant, older, or has features like a pool that requires much upkeep, you may need to budget extra money.

3. Take into account your requirements and desires
Scouting neighborhoods should be done early because finding the perfect place and address can take longer than you think.

"Explore that region by car and foot at various hours of the day and night," advises Bill Golden, an associate broker and Realtor with Keller Williams Realty Intown Atlanta. "This will assist you in determining your preferences."

This is a good time to identify the neighborhood and refine your preferences for the actual house. What kind of home are you trying to find? What can you give up on? Which ones are absolute musts? Your list of needs and wants will be more informed if you consider the aspects of your current residence that you like and dislike.

4. Establish financial arrangements
You should prove to prospective lenders that you have a steady source of income, regardless of your current income level.

According to Tom Hecker, a loan officer with Cherry Creek Mortgage in Greenwood Village, Colorado, "Lenders will scrutinize your income and how much you earn monthly. They will look for a two-year employment history and want consistent income—whether you receive a salary, hourly pay, or are self-employed."

If you work for yourself, expect more scrutiny than someone who receives a salary or hourly rate.

Mortgage lenders usually examine your bank statements for the previous two months and your credit report when evaluating your application, considering your liquid assets and general financial well-being. Make sure to deposit any funds from other assets, like a gift for a down payment, into your checking or savings accounts before the 60-day period expires. This allows the money to "season."

Furthermore, DiBugnara advises against taking out new loans, credit accounts, or accruing additional debt. Any of those actions might negatively impact your credit report.

Advice for selecting the ideal mortgage

5. Mortgage lenders that compare prices

You ought to be aware of the monthly payment you can comfortably afford, the areas you can afford, and the amount of the down payment. It's now time to start looking for a mortgage. Take into account these elements:

Comparative analysis: Examine mortgage rates offered by at least three different providers and various mortgage types.
What other people are saying: Read online customer reviews to get an idea of what it's like to work with a particular lender.
Relationships with the lender: DiBugnara notes that while "competitive rates and service are still available in this market," it is essential to monitor lenders' responsiveness and communication closely.
The conditions of the mortgage: It's also a good idea to pay attention to all the mortgage terms, not just the rates lenders quote you. What late fees are there? What is the expected cost of closing? Is there a penalty for early payments? Will you receive a better deal if you can obtain a mortgage from the bank where you currently have accounts? Sometimes, if the other terms are better overall, it makes sense to go with a loan with a slightly higher rate.

6. Obtain preapproval
Upon selecting a lender, proceed to obtain preapproval for a mortgage. Your income and financial situation must be documented, so organizing your paperwork beforehand can make the process go more smoothly.

A preapproval letter from a lender specifying exactly how much it will loan you, as opposed to prequalification, is an estimate of the loan size you can get. Possessing a preapproval will make you more competitive when putting in an offer on a home and will streamline the process when it comes time to apply for a loan after your offer is accepted.

DiBugnara notes that preapprovals typically expire after 90 days, so find out from your lender how long theirs will last. To find problems to address, you should apply for preapproval as soon as possible if you're a first-time homebuyer with a lot of debt or mediocre credit.

Hecker advises following a budget and savings plan and making on-time payments on all debts after a preapproval-approval void additional debt or making any extraordinary purchases."

7. Seek assistance for a down payment.
One of the numerous first-time homebuyer and down payment assistance programs available at the local, regional, and federal levels may cover your down payment or closing costs. These programs can cap the price of the home and are usually only available to borrowers whose income falls below a given threshold (depending on their location).

Numerous state housing finance agency mortgages for first-time homebuyers and those with low to moderate incomes are paired with many of these programs. To be eligible for the help, which can come as an outright grant, a low-rate or forgivable loan, or both, you usually have to receive one of these HFA loans. However, this is only sometimes the case.

Your loan officer will often be able to tell you about the various programs available and what you might be able to combine with your mortgage.

Advice for purchasing your first house

8. Assist a real estate representative

Hiring a real estate agent or Realtor is the next step for first-time homebuyers after they have a preapproval letter and their financing sorted out.

An experienced real estate agent who is particularly knowledgeable about the area you're looking to buy in can advise you on market conditions and whether the homes you want to make offers on are priced appropriately. In addition to advocating on your behalf during price and terms negotiations, your agent can spot possible problems in a neighborhood or house that you are unaware of.
Asking friends, family, or coworkers for recommendations is a good place to start. Interview a few potential agents to get a sense of who might be a good fit in terms of expertise and personality.

Golden advises against choosing an agent at random and instead suggests choosing one who works in the general area you're looking into and with whom you feel comfortable. "A good Realtor will stay on top of that and get you to see new listings as soon as they become available." Offers "come up every day."

9. Engage in negotiations with the vendor
Always be confident in your ability to bargain a price with sellers, even when you've found the house of your dreams. This can be challenging in booming real estate markets, as we have seen over the last two years. Still, in some areas of the nation, conditions are becoming more balanced between buyers and sellers as interest rates rise and sales decline.

Furthermore, it never hurts to inquire, mainly if the house has been listed for a while and you're a strong contender. Consider making a lower offer than the asking price or requesting concessions, like the seller paying a portion of the closing costs or repairs.

You can negotiate a better price if you can persuade the seller to accept some of these conditions.

10. Create a contract.
When you locate a property and get ready to submit an offer, be specific about any circumstances or terms that will let you back out of the agreement. These may include the home inspection, which may turn up expensive problems, or the denial of your mortgage application. Once your offer is accepted, you and the seller will sign a formal purchase and sale agreement, including these contingencies. You will have an out if the transaction doesn't go as planned and will receive your earnest money deposit back if these terms are spelled out in writing with deadlines.

Before you close on the house, get quotes from contractors for any repairs or improvements the property might require if there is a problem, advises DiBugnara. By conducting this research, you can budget for those costs and gain time to finish the work before moving in.

In Summary
First-time homebuyers may find the process intimidating and never-ending. However, you can maintain focus and complete the task by breaking the process down into manageable steps and taking each individually. Working with a reputable real estate agent and researching beforehand will help you remain focused. You can improve your chances of getting approved for a loan and obtaining your first house by maintaining stable finances and avoiding other large-scale purchases.

Friday, April 5, 2024

Should you buy a second home?

Muhammad Ahmad April 05, 2024 0

Mortgage

Should you buy a second home?

Key takeaways

Before you decide to buy a second home, think about how much it will cost you and whether you'd be OK with staying in one place for vacations for a long time.

Before you buy a second home to rent out, you should know the rules.

Buying a second home can help you spread your investments, make extra money, and have a place for family get-togethers.

During the worst pandemic, the market for second homes went through the roof. Things are very different now, though. Another study from Redfin shows that many people are changing their minds about buying a second home. The number of people looking for mortgages for second homes is at its lowest level in seven years. This is mainly because housing costs are high, and people have to go to work every day.

The lower demand may be good news for those who want to buy another home. There is more power to negotiate when there is less competition. Wait to get a second home. Read on to see if you're ready for the long-term duties that come with it.

Important considerations before buying a second home

Full financial Impact

Having a second home means you are twice responsible for all the money matters. For instance, if your primary house has a problem with a sewer pipe and your second home's HVAC system needs repair soon after, you'll get two huge bills right after each other.

Besides accidents, though, you'll have to pay twice as much for everyday things:

Second mortgage payment, which includes property taxes and homeowner's insurance

Utilities

Upkeep

HOA fees

Travel costs to get to the home

Rental management fees

Keep your big-picture goals in mind', says Daniel R. Hill, president and CEO of the Richmond, Virginia-based investment advisory firm D.R. Hill Wealth Strategies, LLC. You can afford these costs right now.

Before buying a new home, Hill tells his clients to think about these money issues:

Are you saving at least 15% of your current income for retirement?

Are monthly cash funds available for six months (preferably nine months)?

Are you out of credit card debt?

Is your current home paid off?

If applicable, have you established a college fund for your children?

Hill says you might feel safer buying a vacation home if you check all these boxes.

Financing options

Judith Corprew, executive vice president and top compliance and risk officer at Patriot Bank in Stamford, Connecticut, says that before giving you a loan, banks will check to see if your income is enough to cover your costs. Get ready for your income, job history, assets, and debts to be looked at, along with your credit report.

It's similar to applying for a mortgage. Depending on your loan type, it may be faster. Some options are:

Mortgage for a second home

Home equity loan on the house you already own

Home equity line of credit (HELOC) on the house you already own

Get cash out when you refinance your present mortgage.

Credit card or other high-interest debt can look better on your credit report to lenders if you use a HELOC or other low-interest products to combine your debts into one smaller payment. John Sweeney, founder and managing partner at Momentum Capital Partners in Boston, says this.

Ability to travel to other destinations

If you've lived in Clearwater Beach for ten summers, the warm Gulf waters might not appeal to you as much as the trouble and cost of storm season. In the same way, a 10-hour drive through beautiful scenery to a house in the mountains can quickly become a chore after a while.

The question is: Do you want to spend much time on vacation in one place? It might make sense if your family loves the place so much. But consider whether you'd instead plan several trips to different areas or stay in the same place every summer (or every other weekend).

Renting out your second home

Collecting rent money is one smart way to pay for your vacation home. You should know the rules, though, before you buy. Remember that laws change from state to state, city to city, and neighborhood to neighborhood. What is OK in one area might not be OK in another.

On the other hand, Airbnb is against the law in New York City unless the apartment is rented out for more than 30 days or by a regular resident.

People who want to buy a condo should check to see if the rules allow renters or rentals like Airbnb. The same is true for HOA rules. In some countries, homeowners' associations are trying to limit short-term renters.

In addition to rent, owners should plan for cleaning services, insurance, and general upkeep costs. Since you can't be sure that the rent will come in, you can pay for all these costs, like the monthly mortgage, on your own.

You might also have to give up the time you want to spend in the house to attract buyers, which could make having a second home less appealing and pointless. What would you do if you wanted to be there during spring break but could get a rental fee covering many of your property taxes?

As it turns out, the time you want to be there is probably when there are the most renters, says Timothy Parker, managing partner at Regency Wealth Management in New Jersey. "When we look at the numbers with our clients, we often tell them they should rent a house for a week or a month instead of becoming landlords." It's often less expensive and easier to do.

Taxes on vacation homes

The IRS classifies a vacation home as a rental or personal residence. It is a personal domicile if it is rented for no more than 14 days per year; if it is rented for more than 14 days, it is classified as rental property. Generally, rental income must be reported, irrespective of its classification.

Importantly, you will not be eligible for the mortgage interest tax deduction if your vacation home is categorized as a rental property. Nevertheless, if your rental expenses surpass your rental revenue, you may be eligible to deduct losses on your rental. These losses should be detailed on Schedule E of Form 1040.

Consult with a seasoned tax expert regarding your prospective liabilities and deductions. Remember that you may only deduct interest paid on $750,000 or less in mortgage payments across your residences.

Long-term potential for investment

As anyone who recalls the 2007-2009 housing crisis can attest, home values cannot be guaranteed. Following the apex of the housing market in 2006, national home values plummeted 33%, eroding equity and forcing borrowers into foreclosure.

Numerous specialists concur that residential real estate is not the optimal asset class for wealth accumulation despite its potential for appreciation. Those seeking to accumulate funds for retirement or other long-term objectives may find a secondary residence to be an unsuitable investment basket. Conduct thorough research on the local housing market to ascertain whether it has established itself as an attractive destination for vacationers and other purchasers of secondary homes.

Reasons for owning a second home

Despite the time and money invested, there are numerous excellent reasons to purchase a second property, such as the following:

A second residence lets you diversify your investments beyond conventional stocks, bonds, and 401(k) plans. Additionally, a second residence can function as a buy-and-hold investment and be a valuable legacy to future generations, given that real estate generally appreciates in value.

Possibility of working there full time: You can eventually convert a secondary residence into your primary residence, thereby preventing the need to relocate during retirement.

Produce passive revenue: You can generate passive income by listing your property on rental platforms such as Airbnb, VRBO, or any similar website, provided that the area has lenient regulations concerning short-term rentals.

Provide a venue for all family gatherings and reunions: A second residence can serve as the focal point for family and friends to convene and detach themselves from the pressures of everyday existence.

Would you benefit from purchasing a second home?

Consider the advantages and disadvantages of deciding whether or not to purchase a second property. The benefit of owning a second property is having a vacation destination to which you can return year after year without making reservations. Additionally, a secondary residence may serve as a valuable financial asset, potentially augmenting one's wealth in the long run in the event of a substantial appreciation in its value.

However, you must also consider your financial situation. Are the costs associated with second-home ownership, including ongoing maintenance, upkeep, and property taxes, within your financial means? Expenses of this nature may impose a financial burden on one's budget or restrict the capacity to travel abroad.

Additionally, if you are contemplating purchasing a second property to rent, ensure that the area you prefer does not fall within a jurisdiction where Airbnb-style rentals are prohibited by local law. Additionally, consider the time and effort required to be a landlord and whether or not that is a profession you genuinely wish to pursue.

How to buy a second home

Before purchasing a second residence for which financing is required, ensure you can accommodate a second mortgage payment within your budget. Additionally, you must account for homeowners insurance, utilities, and property taxes in your budget. Before searching for a second residence, you must locate a real estate agent and obtain mortgage pre-approval.