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.

Buying a home is an exciting time! Interest rates remain at historic lows, and the market has recovered nicely – making it a great time to purchase a home. The process is exhilarating and exhausting all at the same time. There are emotional highs and lows as you search for houses, go through the offer and negotiation process, and work with your lender toward your closing. Here are some basic tips to help you avoid getting overwhelmed, and to be in the best position you can be when you are ready to make an offer.

House Hunting Tips:

1. Location: consider your commutes, convenience of amenities you enjoy, and the importance of schools, emergency services, etc.

2. Have a list of Musts and Wants and Deal Breakers. Remember, you might be able to add Wants later. This list will be invaluable to keep you honest with yourself as the excitement and emotions of home buying comes over you. Use this as a checklist when you look at properties.

3. Do your own research. Today’s internet is full of information and resources. There are mortgage calculators to help you decide a realistic price-point, neighborhood statistics and information, and of course all the homes for sale you could ever want! Start surfing and educate yourself.

4. Get pre-approved for a mortgage. Find out what loan products are available to you, and what you can afford. Being ready with a pre-qualification letter makes you much more interesting to a seller in a competitive market!

5. Be sure you are ready. House-hunting is a challenging and sometime frustrating process. If you really aren’t going to be ready until your oldest graduates next spring, or you really need to save a little more money or pay off debt, then wait.

Of course, partner with an agent you feel comfortable with, who listens to you, and can help you navigate this very important decision! We hope you will contact us so we can show you how we can help you find the home of your dreams!

The post House Hunting Tips for Success appeared first on Morrison Realtors.