Author: Felecia Roberts

When purchasing or building a home, investors and individuals must carefully consider the range of available loan options. Mortgage products each have advantages and disadvantages—some loans have smaller fees and lower interest rates while requiring large down payments, whereas others have small upfront fees but will cost thousands more throughout its life. There are loans for expensive properties, executive homes, and Veteran-specific home loans. If you’re even casually thinking about purchasing property, it is essential to review your loan options. This will allow you to understand the real cost of your mortgage—both upfront and over time.

 

Department of Veterans Affairs (VA) Home Loans

VA loans are available to veterans who have little cash but a good credit score. There are no strict limits on credit eligibility or debt-to-income ratios for borrowers, and veterans will need to obtain a Certificate of Eligibility through their lenders or the VA Loan Eligibility Center. Most underwriting items are left to the discretion of the lender, meaning there may be some variability in these loans. This is an excellent financing option for veterans, but those considering this type of loan should continue to consider other options. If you have cash and great credit, you will likely be able to find a better rate with a conventional loan.

 

Federal Housing Administration (FHA) Loans

An FHA loan is a great choice for those new to the housing market who might have few funds and a lot of debt. An FHA loan is the most forgiving of credit problems and low credit scores. Borrowers can finance up to 96.5% of the cost of their home, and the fees lenders can collect are strictly limited. An FHA loan requires both a down payment and a monthly loan insurance premium payment. Borrowers will also need mortgage insurance, which will add to the overall costs of over the life of the loan. However, the upfront portion can be financed into the loan, lowering the initial borrowing cost.

 

Conventional Loans

These loans necessitate higher down payments, better credit, and a lower income-to-debt ratio than FHA loans. Borrowers with excellent credit may only have to pay 5% down, but historically, borrowers have needed to pay 20% down. Conventional loans aren’t insured, but homeowners with this type of financing will pay a monthly premium based on the loan amount and credit score. Mortgage insurance may be canceled after two years if the home value has increased to provide 20% equity. However, if you have bad credit and several monthly debt payments, this may not be the loan option for you.

 

United States Department of Agriculture (USDA) Loans

USDA loans provide the best deal of all available mortgage products. Unfortunately, not everybody lives in an area qualifying for a USDA loan. Rates are set by lenders, but they are low and do not always require a down payment. However, there are several qualifying characteristics borrowers must have. Their income cannot exceed 115% of the median income for the area, and the home must be in an area targeted for rural development—often very out-of-the-way places that may not have good infrastructure. Finally, the home must meet USDA’s exacting standards, which can be difficult. However, if you find that you qualify for this type of loan, it is undoubtedly the best choice for your money.

 

Jumbo Loans

Jumbo loans are what you might expect—jumbo. These loans are used to purchase mansions and estates, which often exceed the borrowable amount through Fannie Mae or Freddie Mac. However, qualifying for this type of loan can be very difficult. A borrower’s credit score must be 700 or better, and the down payments are between 20% and 30%, which is meant to prove the borrower’s high income. There is no insurance for this type of mortgage, so lenders are often hesitant about providing this type of funding.

Mortgage choices should consider more than down payment and interest. Before making any decisions, utilize a mortgage calculator to determine if any of these choices is sustainable. Additionally, borrowers should understand that mortgage rates have been raising steadily for the past several months. Rates are rending in the high 4% range, and any rate under 6% is considered good, historically. However, both governmental and consumer behavior is only going to drive mortgage rates up. If you’re strongly considering purchasing a home soon, do it now—your rates will be lower, and your loan will accrue less interest over its lifetime, potentially saving you thousands of dollars.

 

 

There are countless tips and strategies on how to reduce your monthly mortgage payments, but comparatively few on how to save money on a new mortgage when buying a home. Too many home buyers don’t even know about some of these options, much less give them serious consideration when finalizing the details of the mortgage with their home lender.

 

Buying Points on the Mortgage

There are two different kinds of “points” that people buy: origination points and discount points. Origination points offset the lender’s cost of processing the loan in exchange for a lower interest rate. Discount points is even simpler in that you’re making a one-time upfront payment to lower the interest rate on the loan. Often, the type of points you’re buying depends on the standard or default loan terms offered by the lender. Some lenders like to market a no closing-cost mortgage but then also offer the option to buy discount points when the borrower realizes lower interest rates are available to them. Either way, you’re paying more upfront to reduce the overall cost of the loan.

On a related note, due to their specific closing costs and loan terms, different lenders offer more generous terms than others when it comes to buying points. Fortunately, there’s a key metric that simplifies the decision to buy points. Ask the home lender what the breakeven date is for the points you’re considering buying. The longer you plan on staying in the home, the more sense it will make to buy points.

 

Minimizing and Negotiating Closing Costs

Even apart from covering the origination fees and paying down your interest rate, there are other ways to save money on a home loan by minimizing closing costs. Some of the taxes and governmental fees are unavoidable, but many closing costs are negotiable either directly through the lender or through the third-party vendor. This includes the inspection, survey, appraisal, notary, escrow fees, and title insurance.

When available, the most effective way to lower closing costs is to make an all-cash offer. Not taking out a mortgage completely eliminates the underwriting fees and many of the insurance requirements that come with a mortgage. It also makes you a much more attractive buyer to a prospective seller. More real estate investors are also buying properties in cash rather than trying to finance and manage multiple properties, especially as interest rates continue to rise and the cost calculations for taking on additional mortgage debt look less favorable. Similarly, some millennials are getting an edge up on the housing market by using a parent’s home equity to make an all-cash offer. Then, they can work out the mortgage and repayment mechanism after the home is purchased.

As with buying points, many of the most popular strategies for reducing closing costs have trade-offs that you’ll need to be prepared for. Closing at the end of the month will reduce the prepaid interest you’ll need to pay as part of the closing, but it will also reduce the time until your first mortgage payment. It also creates additional logistical stress and hassles as most buyers and lenders are trying to close at the end of the month as well.

 

Working with Reduced Real Estate Commissions

The total real estate commission on a home sale is negotiated between the seller and the seller’s real estate agent. This leaves few options  for the buyer to proactively reduce the commission paid out of the sales price. It also mistakenly creates the impression that there is nothing at all a buyer can do to possibly reduce the traditional 6% commission paid on the home purchase. Whatever the commission on a home sale, it’s typically split between the seller and buyer agents. Thus, it may be important that you choose a realtor who’s willing to work with non-traditional real estate agency commissions.

The good news is that this isn’t an issue for most realtors who are primarily concerned with keeping you as a client and getting referrals to your network of your friends and family. Nevertheless, you can’t take it for granted. In rare cases, we’ve heard stories that a buyer’s real estate agent may avoid showing a home or try to persuade the buyers away from a home because the agent knows that the seller and the property doesn’t have the full 6% commission. This means you may end up with a bigger mortgage for less house—as well as missing out on the actual home of your dreams.

 

We’ve all heard the saying: “Real estate is an investment.” Rather than throwing money away on rent, homeowners are able to pay down the cost of their houses through mortgages, which go directly into the property’s ownership. Similarly, real estate assets usually increase in value over time, allowing investors and homeowners to make money on strategically-purchased properties. Few people, however, understand how they can use their current homes to purchase second homes. As with most investments, real estate allows homeowners to utilize lines of credit. In refinancing your home, you can fund children’s educations, other large-scale investments, and second homes. Home equity, as realized through a refinanced home, is one of the best ways to expand your investment.

In simple terms, home equity is the market value of a homeowner’s unencumbered property interest. This number is the difference between the home’s fair market value, as determined by an appraisal, and the outstanding balance of all liens on the property. Equity increases as the debtor, the homeowner, makes payments toward the mortgage balance. Equity will also increase as the property value appreciates. Homeowners may acquire equity from their down payment and the principal portion of any payments made against the mortgage, as well as from property value increases. This line of credit is often used as collateral for a home equity loan or home equity line of credit, also known as HELOC. This financing is provided by a lender who agrees to provide credit using the home itself as insurance.

 

Home Equity Lines of Credit

HELOC is an excellent financial tool. Homeowners can receive a line of credit for up to 90% of the appraised value with no closing costs. The appraisal itself is often the only out-of-pocket cost, and no reserves are necessary. The best pricing is awarded to those with credit scores over 740, but HELOC is available to most individuals with credit scores over 700. The interest rate is often significantly lower than most loans, starting at 3.75% for the first six months and dropping to the prime rate for the remaining repayment period. Users can submit interest-only payments for the first ten years, after which they will pay the principal plus interest for the last twenty years. The HELOC must remain open for three years, but the balance can remain $0 if you have utilized all funds.

Utilizing home equity or HELOC can be a scary experience for homeowners. In most cases, a home is a consumer’s most valuable asset, and failure to repay a HELOC or home equity loans can result in foreclosure. In fact, HELOC abuse is often cited as a major cause of the subprime mortgage crisis in 2007. However, the money available through this type of refinancing is generous, and lenders are often more willing to provide these funds than other types of loans—using a home as collateral is meant to guarantee prompt repayment. If you are looking for ways to finance the purchase of a second home—or, perhaps, a remodel, education, or large medical bills—HELOC and home equity loans should be carefully and strategically considered.