What is PMI?

Also known as PMI, this insurance policy protects the lender from losing their investment should you end up in foreclosure. PMI is based on both the amount of your down payment and your credit score, and ranges from 0.3% to 1.5% of the original loan amount per year. This amounts to around $100/month or more (depending on the size of your mortgage), so it’s a healthy added monthly expense!

Your lender must automatically cancel your PMI when your loan principle balance drops below 78% of the home’s original value. This typically takes several years, and is an added incentive to pay down your loan principle. Keep close track of your loan balance, and contact your lender when your balance reaches 80% of your home’s value, so you can request a cancellation and get this monthly expense off your budget.

Can I get rid of PMI sooner?

You have two other options to cancel your PMI before reaching the 78% mark of your current mortgage balance: refinancing or getting a new appraisal.

If the market has been good, and you believe your home’s value has increased significantly, refinancing may leave you with enough equity to meet the 20% rule. Especially if you have done any home improvements that increased your value, this could be a good solution. Check with a lender to run some numbers and see if this option will work for you.

Some lenders will consider a new appraisal in meeting the 20% threshold. You will have to pay for it yourself, but considering the monthly cost of PMI, it may be worth it to you. Check with your lender before spending the money to see if they will consider this possibility.

Our advice?

Do your best to have 20% ready, or as close as possible, for your down payment so you can avoid this add-on mortgage expense! If you are already paying on a mortgage that includes PMI, work on paying down your principle faster than your scheduled payment are achieving. Even paying an extra $50 a month can dramatically drop your principle balance over time.

When mortgage rates are low, as they continue to be, refinancing can get your out of not only PMI, but offer you a lower monthly payment for even more savings. If you bought your home a few years ago, say with only 10% down, and you have made improvements to its value, you can likely refinance and avoid PMI.

As always, your finances and budget are in your control if you stay on top of things and pay attention to your options.

The post Ouch! Why do I have to pay Private Mortgage Insurance?! appeared first on Morrison Realtors.

When people are buying a new home, they are usually focused on location, square footage, and number of bedrooms, and often leave the financial side to their loan officer to figure out. Homeowners do need to be thinking about how much mortgage they can truly afford. Considering that 76 million Americans are struggling financially and describe themselves as, “barely getting by” and “living paycheck to paycheck”, a major investment like a home can push people over the edge into financial crisis. We don’t want to happen to you, so consider this advice:

Stick to the 25% Rule

Most financial planners recommend keeping the amount you spend on housing to 25% of your monthly budget. However, the Bureau of Labor Statistics reports that the average American couple spends over 31% of their budget on housing, and single people send nearly 36%. Bankrate reports that more than 80% of current homeowners say their monthly mortgage payment is the primary reason they cannot save as much money as they would like, and parents especially have a hard time reaching their financial goals amidst the cost demands of children’s needs and activities.

A very straightforward way to keep your mortgage in check is to follow the 25% Rule. Including maintenance, keep your housing payments to 25% of your household budget. Conversely, most banks use the debt-to-income (DTI) ratio to determine what you can afford, and this limit is much higher. Yes, your home is an investment in the future, and real estate has been proven to be a good one. However, the market is always fluctuating, and you cannot guarantee your return or its timeframe. Having too much of your net worth (assets) tied up in your home is a risky proposition.

Save for a Down Payment

The down payment you put toward your home purchase plays a key role in what you can afford, your monthly mortgage payment, and the amount of equity you establish in your home purchase at the outset.

Ideally, having 20% in hand to put toward the purchase price is the best idea. With this amount, you are not only reducing your monthly payments and establishing decent equity right away, but you can avoid being required to pay mortgage insurance.

When your down payment is less than 20%, your costs rise. Your lender will likely require you to pay for private mortgage insurance, which averages close to 1% of the total loan amount. You will pay this as part of your mortgage payments until you have built up 20% equity in the home. It might not sound like a lot, but on a $240,000 home, that is $200 per month, a significant amount that could otherwise be going toward an emergency fund and savings.

Closing Costs

Every loan that is originated with a traditional lender involves closing costs. These costs cover loan origination and other processing fees, as well as other costs involved in the transfer of title and ownership. Amounting to several thousand dollars, if these costs are worked into the amount of your mortgage loan, your monthly payment just went up. Further, for closing costs to be worthwhile, you need to stay in the loan and/or the home for at least five years.

Plan for Home Expenses

The cost of homeownership doesn’t stop at your monthly mortgage payment. While many mortgage products roll in Property Taxes and Homeowner’s Insurance, some don’t require it. Additionally, Association Fees and other expenses need to be budgeted for.

Keep in mind all the other costs associated with homeownership: insurances, utilities, maintenance, and upkeep. If you are moving further away from your job, you will have associated commuting expenses, and your children’s educational requirements may involve higher costs. Routine maintenance and upkeep need to be planned for, and the surprise need for a new refrigerator might demand quick cash. Generally, budgeting 1% of the total cost of the home covers annual upkeep, not including big-ticket items such as a new roof or heating system.

All the expenses associated with home ownership should be estimated before you determine a monthly mortgage payment that will work for you.

Other Considerations

Taking on a larger financial burden than you can afford has wide-ranging consequences. We all like to think the worst won’t happen, but the reality is that people get sick, life circumstances change, and jobs can be lost. We all know we should have an emergency fund, yet half of Americans say they would be hard-pressed to handle an unexpected $500 bill. If you keep your home, and the monthly mortgage payment, affordable in the first place, you will be in better shape to handle what life throws at you. When your mortgage doesn’t drain you every month, you can also keep up with your other bills and avoid excess credit debt, leaving more money in the bank and savings for the future.

Beyond the weekly and monthly financial demands, taking on larger payments than you can handle significantly impacts your life long-term. Your savings will suffer, and other financial goals such as saving for your children’s education or your retirement will take a backseat. When these needs catch up to you, you will be left unprepared. Being clear on your overall financial priorities, planning for the unexpected, and setting savings goals are important factors to consider as you think about a new mortgage.

The post How Much Mortgage You Can Really Afford? appeared first on Morrison Realtors.

Pre-Approval vs. Pre-Qualification

They may sound like basically the same thing, but there is a big difference between getting a pre-approval from a lender and having been pre-qualified for a mortgage loan.

Getting a pre-qualification for a mortgage is quite simple – you call or visit a potential lender, provide some basic income and expense information, and the lender tells you the range of mortgages, and potential mortgage programs, that would work for you. With information like your annual income, approximate credit score, and current debts, a lender can give you a sense for what you can afford to purchase. Many times, you can even complete this process online through a lender’s website.

Pre-qualification is not approval for a mortgage loan. The process is really just a casual conversation between you and a lender, and there is no commitment that lender will move forward with you to provide a mortgage. Think of it like calling your auto mechanic because your car is acting funny. You describe what is happening, and they give you an idea of what it might be and the corresponding cost. However, until it’s actually in the shop, up on the lift, and fully inspected, is the actual work required and the subsequent costs known. A mechanic would never commit to the estimate given over the phone without a full inspection. Without providing hard and fast documentation of your income and expenses, and without a current and complete credit report, a lender cannot give you any formal approval. What a pre-qualification conversation is good for is to give you an idea of what prices range you can be looking in – what you can manage to pay for based on the monthly mortgage payment you can afford. So while this is a fine idea to get your started, once you are ready to seriously go house-hunting, you will want to take the time and effort to get pre-approved.

Pre-Approval Confirms You are Ready to Buy a Home

Unlike the quick and easy method of pre-qualification, getting pre-approved for a mortgage is a much more in-depth process. You will need to provide a number of income and expense documents to a lender, a full credit report will need to be run, and some form of mortgage application will need to be completed where you will provide employment history and other personal information. Getting pre-approved is fairly detailed, and may take a few days to complete, so plan accordingly. Once you receive a pre-approval, the lender will give you a formal letter stating what price range and loan product you have been pre-approved for. With this letter in hand, you are ready to talk to a realtor and go house hunting in earnest.

You will need to do all this anyway if you are planning to buy a property, so getting the process started out of the gate is a great idea. Not only will you have a realistic picture of what you can afford to shop for, but once you find a home you want to make an offer on, you will be ready to do so. Getting pre-approved is definitely worth your effort before making an offer on a property!

If you are planning to work with a real estate agent in your home search, they will likely want you to have pre-approval documentation. A professional real estate agent knows that your interest in a property will not be taken seriously if you cannot prove you can actually purchase the house. Also, it makes no sense for them to show you a $400,000 home if you can only afford a $250,000 home, and vice versa. Having a pre-approval letter in hand is a powerful tool if you find yourself in a multiple-offer situation as well. If another buyer has not been pre-approved, or cannot demonstrate the same financial strength you can, it puts you in the better buying position to the seller. Sellers do not want to mess around or waste their energies, they are interested in serious buyers only these days, so indicate that you are one.

Another good reason to get pre-approval is that once you find the home of your dreams, without pre-approval you will need to scramble to find a lender. This means you are at the mercy of who you can find quickly, and what loan product will work. You may also be able to close on the property faster as much of the leg work on the lending side will have been completed.

When you are ready to get pre-approved, be ready to provide your lender with the following documents:

• Your most recent paystubs over the last 30 calendar days
• Your last 2 years of tax returns
• The most recent statements from all checking, savings, investment and retirement accounts
• Details on any alimony, child support or other payments you are required by law to make
• If you are self-employed, you will also be asked to provide the previous 2 years’ business tax returns, as well as your personal tax returns, and a current Profit & Loss statement
• Tax bills for any real estate you currently own.

If you have questions, or need help with getting ready to go house hunting – we are here to assist you. Please give us a call, and we’ll help you get ready to go house hunting!

The post Pre-Qualifying vs. Pre-Approval: What Buyers Need to Know appeared first on Morrison Realtors.