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What’s Included in a Mortgage Payment?

When you found your dream home, you used an online mortgage calculator to determine what your monthly payments would be.  You may be surprised to know that your mortgage payment is not only the money you owe for buying your home. It actually includes several other payments that must be made on a monthly basis, thereby increasing your monthly mortgage payment.

What’s included in a monthly mortgage payment?housecalc

Principal – A portion of the money you borrowed to buy your home is due each month. Depending on the structure of your loan, your principal amount will increase each time you make a payment.

Interest – The mortgage lender will charge you interest. The amount of interest you pay each month decreases the same amount that the principal increases, keeping the Principal and Interest portion of your mortgage payment the same from month to month.

Real Estate Taxes – When the mortgage lender owns most of your home, they will pay the real estate taxes from your escrow. Each monthly payment will include 1/12 of your total real estate tax bill. The mortgage lender will ensure that the payment is made each month.

Insurance – When the mortgage lender owns most of your home, they will require that you maintain a homeowner’s insurance policy to protect their interest. Each monthly mortgage payment will include 1/12 of the total annual insurance cost and the mortgage lender will ensure that payment is made each month.

Private Mortgage Insurance – Buying a home with a smaller downpayment creates a greater risk for the lender. To compensate for that risk, the lender will require that you pay Private Mortgage Insurance. This will increase your monthly mortgage payment.

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Do Mortgage Rates affect when you buy a home?

The factors that people use to determine when they are ready to buy a home are probably as varied as people themselves. But there are two factors that are prominant in making this decision:

  • Family situation – new baby, new marriage, new job, retirement
  • Financial situation – savings for downpayment, paid off student loans, inheritance

I’d like to suggest that potential buyers consider a third factor – mortgage rates. While there is no magic crystal ball, economists can use historical data and economic data to predict how mortgage rates will change.

Most economists predict that mortgage rates will be about one point higher in 2016 than they are in 2015. How does that affect your buying power?

Waiting to buy your home until 2016 will cost about $59 more per month or $21,260 more over the lifetime of the loan compared to buying a home today.

So what are you waiting for?

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Buying a home with a 203(k) Loan

Don’t Say “No!” Just Because the Home Needs Some Work!

The 203(k) program attempts to revitalize communities and expand homeownership opportunities. It is the Federal Housing Administration’s program for the rehabilitation and repair of single family properties.

When you buy a home, most mortgage financing is based on the appraised value of the property. If a property requires repair, the homebuyer usually has to obtain financing first to purchase the dwelling and then additional financing (usually at a high interest rate) to do the construction.  

 

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What can a 203(k) be used for?

203(k) loans can really make a huge difference for the homebuyer.  With many foreclosures being vandalized, a 203K loan is the ideal tool to buy a home and be able to fix it up to bring it back to market level.  With a 203(k) loan, the borrower can get just one mortgage loan to finance both the purchase and the rehabilitation of the home.  The mortgage amount is based on the projected value of the property with the work completed, rather than just the appraised value. 203(k) can be used to purchase any one- to four-family dwelling that has been completed for at least one year. Homes that have been demolished, or will be demolished as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place. 203(k) can also be used to convert a one-family home to a two-, three-, or four-family dwelling or to decrease a multi-family dwelling to a single family home. Condominiums can be purchased with 203(k) loans with some restrictions. Only the owner/occupant is eligible for the loan and the planned rehabilitation must be limited to the interior of the unit.

 Improvements considered “luxury” improvements are not eligible but painting, room additions, decks are all eligible. All properties purchased with 203(k) funds must meet energy conservation standards and must meet smoke detector standards. These loans are also available for investors but at a higher interest rate.  

How does it work?

You’ll need to find a Renovation Loan Specialist who can help you out.  Here in NJ they will do an appraisal on the property and determine what the value will be based on the repairs.  Once a value has been determined above the sale price, you’ll have X amount of funds to use towards the renovations.  All the work must be done by a state certified contractor.  You submit the bills to the bank and they will pay the contractor.  

What do you do next?

If you’ve found a home that you love, your real estate professional will help you to execute a Sales Contract including a contingency upon the loan approval of your Section 203(k) financing.

At loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property and the Rehabilitation Escrow Account will be established. As construction progresses, funds are released after the work is inspected by a HUD-approved inspector. When all work is completed, you will provide a letter indicating that all work is satisfactorily complete and ready for final inspection.  If there are unused contingency funds or mortgage payment reserves in the Account, the lender must apply the funds to prepay the mortgage principal.

Using a 403(k), you could buy a fixer-upper and end up with the nicest home on the block!

 

For more information:

Dear TZ – I found a great house but it needs a lot of work. Can a 203k help me?

Applying for a 203K loan

 

What every Homebuyer needs to know about 203k

Making an Offer

Finding the right house is a pretty exciting experience. The house feels like a home when you walk in – the rooms are the right size, the floor plan suits you, the location is exactly where you want to be, and you can’t wait to move in!

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So you tell your real estate professional, “Wayne and Jean, this is the one! We want to make an offer!”

You want to ensure that your offer appeals to the sellers:

1. Price. Your REALTORS will help you determine the appropriate sale price for the home. You might be offering close to the list price or you might be a little below. If you’re below list, you’re going to want to provide the comps that you used to determine that the price you’re offering is fair.

2. Terms. Factors in your offer other than the price can impact how it is received by the seller. For example, a close date that is soon or far in the distance might appeal more.

3. Financing. The type of mortgage that you’re securing will also make a difference – some mortgages are quicker to approve and are more likely to approve. You want to provide your pre-approval letter and all documentation to help the sellers view you as a serious buyer.

4. Earnest money. The amount of downpayment that you’re providing might also help the sellers make a decision. If you’re putting down a lot of money, they’ll know that you really are ready, willing, and able to buy the house.

5. Conditions. If you have any contingencies – you need to sell your current home, for example – that may impact the seller’s decision to accept your offer. Some buyers request that the seller pay some or all of the closing costs – that might only appeal to the seller if your offer is strong.  You will want to make your offer contingent upon an inspection and the seller may specify limits to this.

Once you’ve written the offer, your REALTORS may do two more things to strengthen your position, particularly in a home that may have multiple offers.

6. Write a personal letter. When you make an offer to buy a home, you’re essentially entering into a financial agreement with another person. But buying and selling a home is an emotional process as well, and there are times when we’ve asked our buyers to write a personal letter to the seller. This letter can be as short as one or two pages and usually appeals to the seller’s sense of pride in the home. The buyers will describe their family and what their plans are for the home once they move in. Point out the things in the home that you lvoe.

7. Present the offer in person. Some sellers will allow the REALTOR to present an offer in person. This gives us the opportunity to share some personal information about you with the sellers and hopefully persuade them that your offer is not only legitimate but that you will care for the home with the same love that they did. Your agent can also begin negotiations at this point and you might have a signed contract!

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When you find the right home, entrust your offer in the hands of a REALTOR who understands that buying a home is both a financial decision as well as an emotional decision!

 

What is Escrow?

What is Escrow?

When your real estate agent says that money will be “In Escrow,” do you know what they’re talking about?

Escrow is an arrangement in which you pay a third party money for something and then that third party disburses it for you. Typically, some conditions must be met.

Taxes and Insurance

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A common use of escrow is in the payment of property taxes and insurance by a homeowner’s mortgage lender. The mortgage lender collects mortgage payments monthly and included in these payments is enough money to cover the real estate taxes and property insurance. Then, when the taxes and insurance are due, the lender will pay the taxes directly. This gives the lender the assurance that the taxes and insurance will be paid, thus reducing his risk in loaning the money. Every year, the escrow account is analyzed to ensure that the holder of the escrow account has enough money to pay the taxes and insurance but not an excessive amount.

Deposit on a PurchaseHand Putting Deposit Into Piggy Bank

Another common use of escrow is when a potential home buyer provides a deposit on a home he wishes to buy. The deposit money is not given to the home seller until closing so it is held in escrow until the closing. This provides some assurance to the seller that the buyer is actually committed to purchasing the home, but it also allows the buyer the comfort of knowing that the money can’t be taken if the seller doesn’t cooperate.

Unfinished Construction 2963624560_d6570667a0_z

A third situation in which you’ll hear the term escrow is during the negotiation of a home purchase. Imagine that a homeowner has agreed to replace an appliance or complete some construction but it hasn’t happened by closing. In order to prevent delay of closing, the attorneys may make an arrangement in which the seller will deposit  some sum of money in escrow as a sort of security against the appliance or the construction. Then, when the buyer has indicated that the appliance has arrived and is in good condition or that the construction was completed to specification, the money will be returned to the seller.

 

At any time during a real estate transaction, if you don’t understand a term being used, be sure to ask your real estate professional!

 

 

 

 

 

Saving for a Downpayment

Is it time to buy?

With interest rates down and inventory up, there’s little doubt that you’re probably  taking a good, long look at investing in a home of your own as many others are doing. Home ownership brings many benefits so if the only thing keeping you back is a down payment, then today is the day you can get started!

It’s not always easy to save the necessary funds  just get into a house of your own. Here are some simple things you can put into your action plan for saving that down payment money in less time.

Set a Deadline

Setting a deadline can be a powerful motivator to accomplishing great goals, and buying a home is a pretty big goal! So pick a date – one year from today, three years from today, maybe on your 30th birthday. Once you know where you are, it will make setting a timeline easier.

Pay off Debt

If you have any outstanding debt – college loans, credit cards – then your first step is to pay down or pay off as much as you can. Not only will this repair your credit score, but it will also let you save even more money for your downpayment. Take the highest interest rate one first, get it paid off, and then get to work on the next one.

How much do you need?

The bigger your downpayment, the smaller your monthly payment will be. This is a great time to sit down with a mortgage loan officer and with a real estate professional to determine your needs and wants. They’ll help you figure out how much house you can afford and what kind of mortgage you qualify for. Different types of mortgages require different downpayments, and this isn’t a step you can skip.

 money in a jarCreate a “Down Payment” account

Ever see those little ceramic pots with “House Fund” or “Vacation Fund” on them, or the piggy banks with the “do not open ‘till holiday shopping time” labels? By opening a savings account just for your future home purchase, you help lessen the likelihood of tapping into that money for other things. Check with your bank or even local credit unions to see if they offer any special interest rates or programs for first time home owners looking to buy.

Automate your savings

You may have heard the expression “Pay Yourself First.” Money you put into your down payment account is money you’re paying yourself, before you buy your morning coffee or hit the mall. Once you’ve figured out how much you can sock away every month, have that amount automatically withdrawn from your account and put into savings before you even see your paycheck! Most employers can do this in a simple step if you are direct depositing your paychecks. Out of sight, out of spending reach.

 Ask about IRAs

If you have IRAs, check to see if yours has any first time home buyer credits. Some will allow you to invest a considerable amount of pre-tax dollars and withdraw without penalty for home purchases and they often provide more return on your investment than a traditional savings account. Check with your IRA provider or financial advisor first.

 Every little bit counts

This is the fun part. Get a money container for your house. You can make it as decorative or as plain as you like. Use anything from a beautiful glass jar (where you can see your results) to a coffee can (where you can hide your treasure). Make a pact with yourself, your spouse or significant other, and even your kids. Each week, put whatever you can in the jar towards your house fund. From leftover change from the store to a couple of dollars here or there – into the jar it goes. In fact, whatever you’d normally spend, save instead, such as forgoing the coffee house vente latte at $6 a pop every day – that would be $42 a week you could put in your jar. Or pack a lunch instead of buying. You could save $5-$10 or more a day.  Make it a fun thing every day and at the end of the week to count up your accomplishment, put it in an envelope with a deposit slip, and put it in your savings. It’s amazing how fast it can add up when you make it a contest or a fun thing for the whole family!

Everything worth having is worth working for.

Saving for a home of your own can be challenging, but it can be exciting too. The feeling of reward and accomplishment is extraordinary. Start with these steps and very soon you too can enjoy the long term benefits of setting down roots and investing in your future.

What Affects Credit Scores?

When you’re applying for a mortgage, your credit score can have a big impact not only on the mortgage rate you get but also on how much you can borrow. One of the critical first steps in buying a home is ensuring that your credit score is as high as possible to allow you the most flexibility, but many people aren’t aware of how credit scores are calculated.

Your credit score is a numeric value that incorporates all of your credit and payment history into a mathematical equation and calculates the probability of repayment of any future loan. The seven factors that are included in this calculation are:

  1. loan repayment behavior
  2. credit score inquiries
  3. delinquency of loans
  4. length of established credit
  5. composition of credit
  6. quantity of credit already available
  7. amount of outstanding loans

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