The truth is when it comes to a mortgage, what you can buy, and what you can afford are not usually the same thing. For most of us, the wisest way to make sure we buy a house we can afford is to create a budget built around purchasing a home.

The golden rule in home buying is not to buy more house than you can afford. Of course, this will vary widely from person to person. In early 2020 the average cost of a new home in the United States was over $360,000. This, of course, means that many pay well over that while some pay less. No matter where you fall on that continuum buying a house will likely be the single most important purchase you’ll ever make. 

The first part of finding out what you can afford is to get a pre-approval letter from the bank. 

To learn more about pre-approval letters, go to https://www.investopedia.com/terms/p/preapproval.asp.

However, just because you are pre-approved for a certain amount doesn’t necessarily mean you can afford that amount, and it is possible you could be setting yourself up for financial ruin in the long run.

Creating a budget that will affirm a home purchase requires more than making sure you can afford the monthly payment. You need to figure your debt to income ratio, which can be done by dividing your monthly expenses by your gross income. 

On top of that, you need to consider other ongoing costs, which include homeowners insurance, property taxes, maintenance, and repairs. You also need to plan on putting 20% of the home price down as a down payment out of pocket. Otherwise, you will get stuck with yet another cost called private mortgage insurance. The mortgage company requires this insurance if you cannot make the full 20% down payment to protect them should you default on the loan.

To learn more about down payments, go to https://www.investopedia.com/terms/d/down_payment.asp.

When considering buying a home, you should be aware of what’s called the 28% rule. This means your mortgage payment shouldn’t be any more than 28% of your gross income every month. If you are dealing with the FHA (Federal Housing Association), they allow up to 31%. And all your other debts must be put into the formula. This leads us right into the debt to income ratio.

The other very important issue that lenders will look at is your overall debt to income ratio. Here is an example of how to figure this out, if your mortgage payment is $1,000 a month and all your other debts total another $1,000 a month, your overall debt obligation is $2,000. If your overall gross income is $6,000, then your debt to income ratio is 33%. Generally speaking, the absolute highest debt to income ratio any lender will accept is 43%. 

Getting pre-approved for a mortgage amount is only the very first part of the home buying process. There are also ongoing costs, including homeowners insurance, property taxes, utilities like water, trash, electricity, and general upkeep and maintenance. Making sure that you have taken into account all of these other factors, as well as making sure you have a clear idea of how much each one will realistically cost, is the only way you can know for sure whether you can genuinely afford any particular home.

Just because the bank approves you for a certain amount doesn’t mean you will actually be able to afford a house that costs that much. The truth is once you begin to add these expenses into the picture, a house that seems affordable on paper can quickly rise out of your range. It’s very easy to go from a $1,500 a month mortgage payment, which will seem reasonable, to another $1,500 a month in related expenses, and now your monthly obligations have doubled. 

Earlier, we mentioned down payments. Now let’s drill down on them a little more. Despite what you may have heard, nearly every lender is going to require at least 20% paid out of pocket for a down payment. The truth is, if you are unable to pay the full 20% down payment, there is still a way you can buy a home. In this case, the lender will require you to obtain what is called Private Mortgage Insurance or PMI. Because this insurance’s cost is added to your mortgage payments, the cost of this insurance can easily boost the monthly payment by up to 1% or more. This is another critical issue to consider in figuring out your actual budget for purchasing a home.

For more information on private mortgage insurance, go to  https://www.bankrate.com/mortgages/basics-of-private-mortgage-insurance-pmi/.

The main factors that decide how much you will pay in private mortgage insurance include your home’s size, credit score, and the likelihood of your home’s value to appreciate over time. Even if you know you can’t pay the full 20% down payment, put up as much as you can. Even 10% will dramatically reduce your interest and monthly payments over the long term.

Another good way to gauge what you can afford is through the down payment. If you have enough for 20% of one home, but prefer another home where you can only afford a 10% down payment, then your best bet is to go with the first house that allows you to cover the full 20% down. Your interest and payments will work out much better on that one than the more expensive one.

The other issue to take into account are what is referred to as closing costs. These typically run from 2 percent to 5 percent of the overall mortgage cost. Though they are usually expected to be paid out of pocket, many mortgages can work the closing costs into the mortgage itself. On a $200,000 home, you can expect to pay between $4,000 to $10,000 in closing costs, and even if those are worked into the mortgage, they still increase your monthly payments, and you pay interest on that money as well.

The more money that is tagged onto that mortgage, the longer it will take to realize a profit or return on investment (ROI) for your home. The faster you pay down what is owed on the house versus what the house is worth, the quicker you get into equity. This is a state whereby your home is worth MORE than you owe on it. This equity puts you in a much better financial situation and can be used as collateral for another loan, or you can refinance the mortgage and take that equity out in a lump sum cash payment. That equity can be a lifesaver if you get into financial trouble down the road. For many Americans, equity is the only true wealth they will ever obtain. It can also be used as the down payment toward a new home in the future, thus not requiring any ‘out of pocket’ cash while also offering you an opportunity to purchase a new and larger home.

Another important concern is the overall size of the property and the shape the property is in. The truth is that bigger is not always better, and if you are not a handy type person, you don’t need to buy a fixer-upper. You must be honest with yourself about the condition of the house you want to buy as well as the land it sits on. A 3000 square foot driveway will be a real chore to shovel every time it snows. Even though the house looks amazing on the outside, if it requires extensive renovation in every room before one could really live there, that’s a lot of extra time and expense you must take into account. 

We mentioned the utility bills earlier, but there are locations and situations where these can end up varying wildly. It is vitally important that you get some idea of how much they will cost, at the very least a ballpark figure, so you can be realistic about what your budget can afford if you purchase the home.

Buying a home is still part of the American dream, but if you don’t take the time to think it through properly and make sure you are purchasing a home you can truly afford, it can quickly turn into a financial nightmare that you may not be able to easily overcome. By taking into account all of the additional costs and other important issues listed here, you should be able to create a realistic home purchasing budget that will quickly and easily let you know if the home you are thinking about buying is a home you can truly afford.

With interest rates falling to close to all-time lows, you may be thinking about refinancing your mortgage. But you may be wondering if that’s a good idea and how to decide if it’s a good financial move at this time or not. In this article, we are going to give you the indicators you need to pay attention to that will help you decide if this is a good move for you.

First of all, let’s define exactly what refinancing is. The refinancing process involves paying off the current mortgage you have on a property and opening a new mortgage at a different interest rate. The goal in most cases is to get a lower overall interest rate that will lower your monthly payments and the overall amount you pay for the home (when you include interest). 

The other important thing to consider is that refinancing can be used to roll other loans into the mortgage and take advantage of any equity that you may already have in the property.  

For a great article explaining these key points go to https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/.

Before you jump into a refinance feet first, there are a few key points that can be strong indicators about whether a refinance is a good financial option for you at this time. 

So the number one reason most people refinance is to get a lower interest rate, so the number one indicator is when interest rates go down. When rates drop to near market lows refinancing is a real opportunity for you to save thousands of dollars, and this is an important time to take advantage of this opportunity. 

Part of this process will require you to take the time to shop around and find the best mortgage provider that has the ability to give you the very lowest rates available.

For help finding the right mortgage provider go to:https://www.nerdwallet.com/best/mortgages/tips-for-finding-best-refinance-mortgage-lender

The other key here is to know if you currently have an adjustable-rate interest mortgage or a fixed interest rate mortgage FRM). An adjustable-rate interest mortgage (ARM) means that the interest rate you are paying can change periodically as the market changes. As you can imagine, it's not a very advisable type of mortgage to have, and one great reason to refinance is to get out from under an ARM and into an FRM at a really low-interest rate. This will stabilize your payments and potentially save you thousands of dollars over the course of your mortgage.

Another way to save thousands on a refinance is to shorten the length of your mortgage. Doing this may cause higher monthly payments, but the overall amount you end up paying back on the mortgage loan can be significantly smaller. 

Let’s say you have a 30-year mortgage and you discover you can get a much lower interest rate on a 15-year note. A refinance while raising your monthly payments will dramatically reduce the amount you pay overall because of the massive reduction in interest and cutting the number of payments in half.

Another key indicator is equity. If the value of your home has increased because the market values have changed, you could take advantage of a cash-out refinance, which will allow you to take cash out of your equity NOW while at the same time taking advantage of a lower interest rate if that is available. 

Another concern is your PMI or private mortgage insurance that you may have been required to purchase. If you were unable to put down 20% at the time of purchase, the mortgage company likely required you to carry private mortgage insurance. However, in most cases, once the equity has grown in your home, you can refinance and drop those pesky PMI payments altogether. 

Now, here are some things to think about that might not be in your favor for refinancing.

First and foremost, how long will you be in the home? If you are not planning to live there long term, it’s unlikely that the reduction in monthly payments and reduced interest rates will be of much benefit to you. The key is that you need to be staying long enough to recover the refinance costs. That is what is referred to as the break-even point. If you are not planning to stay long enough to reach that break-even point, it is really not very beneficial for you to consider a refinance. 

Sometimes the short term benefits are not worth the long term costs. If you have a 30-year mortgage and you’ve been paying on it for five years, and then you refinance at a lower rate for another 30-year note, you are basically starting over from scratch. Yes, you lowered your monthly payments, but you also extended the number of payments another five years because you refinanced at 30 years again.

And then if you factor in the additional closing costs and other sometimes out of pocket costs, it can really end up being a wash in the long run.

While we are at it, the other thing to think about here is the closing costs overall. In many cases, they can be rolled into the new loan, but they can still be quite sizeable, and when everything is said and done, they can cause your savings to become almost nonexistent. 

Another concern is a little-known fee some lenders use that is referred to as the prepayment penalty. This fee is usually based on what is called a prepay penalty term and does not extend to the entire life of the loan. However, the fee can be very hefty, often being 80% of six months of the interest on your original loan. If you are not out of the prepay penalty loan period, you should likely wait until that time has cleared. 

Sometimes tapping into the equity of your home via a refinance is not a great idea. Think about this; you have maxed out all of your department store and credit cards, you are barely getting by and drowning in debt, then suddenly the value of your home increases, and you have a nice bit of equity. So you start thinking that equity would be a great opportunity to get you out of debt.

By the same token, you must be honest with yourself. If you haven’t been able to curb your spending or your income is not increasing, you could do this and then easily turn around 6-12 months later and be right back in the same boat. Only this time, all your equity will be gone.

Another important factor to consider in refinancing is your personal credit score. If your personal credit score has gone up even as little as 20 points, it can lower the interest rate on a refinance and create huge savings for you of thousands of dollars.

The minimum credit score requirements vary from lender to lender but normally fall between 600 and 640. Here are some of the current bottoms scale interest rate requirements:

• FHA cashout and streamline - 600

• FHA standard refinance - 600

• Conventional cash-out refinance - 640

• Conventional/standard refinance - 620

Another thing to consider is how quickly, after the purchase of your home, you can do a refinance. There is no law or set time, but most experts say you should wait until you at least have a little equity built up in the property. The main reason is if you don’t have much equity in the property and have a high debt to loan ratio, lenders are automatically going to offer higher interest rates, which will be utterly counterproductive to what you are trying to accomplish in most instances.

The other thing of note here is that waiting at least several months allows the potential new lenders to see that you are making the payments on time and keeping current, which will give you that much of a better chance to get a lower interest rate. 

Another key factor to take into account here is the amount of interest you will actually be able to reduce. This can get a little tricky because if your mortgage is only for, say, $200,000, then a 1% reduction isn’t really going to amount to too much actual savings. However, if you have a $1 million mortgage, then a 1% interest rate reduction will be quite a bit of extra money back in your pocket.

To figure out how much you can save, just use this handy mortgage interest calculator located here:

https://www.nerdwallet.com/mortgages/refinance-calculator

Also of note is how long this process can take and all the headaches involved. Typically a refinance is done in 30-45 days. However, in some cases, it can take longer. Another important thing to think about is all the paperwork required by the mortgage company to do the refinance. The following are the key pieces of paperwork you will need:

• Proof of income

• Two months of bank statements

• Profit/loss statement if self-employed

• Bankruptcy paperwork if needed

• Two years of W-2’s

And there could be even more depending on your current situation. Gathering all of that together can, at times, be a real headache.

The most important part of this is to make sure you take your time and find the RIGHT mortgage lender that can offer you the best rates and the best customer service. They should be able to answer all your questions and help you with the process to make the entire thing a win/win situation. 

Take a good look at the indicators we have outlined here, and then decide for yourself if refinancing is in your best interest or not. There are many factors to take into account, so be informed and take your time. It could end up being one of the best financial moves you ever make.

Have you ever wondered exactly what a FICO score is and what it actually means? If so, this article is for you. Let’s take a look at this and drill down on it.

FICO stands for Fair Isaac Corporation, and it was first used in 1989. The concept behind the FICO score is to help lenders, in a standardized way, interpret an individual’s credit report and decide whether they want to give you a loan or not.

 So this begs the question, what is the difference between a FICO score and a standard credit report? The way it works is that the FICO score is basically a summary of your entire credit report. On a regular credit report, ALL of your credit history is listed. Good credit goes back ten years, and any negative credit is recorded for seven years. Any lines of credit you have, whether they are auto loans, credit cards, department store cards, mortgages even unpaid doctor bills, will show up.

The FICO score is a number that represents your overall credit, including the good and the bad.

So basically, there are five key facets that make up your FICO score. And they are: 

35% of your score is made up of your payment history, meaning how current you are on your payments, if you were late, how many times, etc.

30% of your score is made up of the amount of money you still owe on your accounts. That means how much you owe on your mortgage and car loan as well as your credit cards and department store cards. The lower the amount of activated credit you have, the better.

15% of your FICO score is based on the length of your credit history. When you have longer credit lines like credit cards, it's best to keep them open and paid off.  Just charge a couple of times a year on it and then pay it off, and that will look better on your FICO score. Doing so will be to the benefit of your FICO score.

10% of your FICO score is made up of new credit. Anything opened up in the last two years falls in this category. And the worse you’ll look to potential lenders, the more applications you have filled out in the previous 24 months. As these actions move past the two-year mark, they will have a lot less impact on your FICO score.  

10% of your FICO score is based on what is called your credit mix. A nice blend of a mortgage, a car loan, and a few credit cards looks solid. However, certain types of loans, like payday loans, look much worse. Payday loans look desperate to most potential lenders.

So how would you go about getting your FICO score? Your credit card company can help you get your score. There are numerous other sources, some that cost money and some that are free. If you have an American Express card, you can go to their website and check your FICO score at any time.

If you want a copy of your complete credit report from the BIG THREE credit reporting agencies, including Experian, Equifax, and TransUnion, federal law allows you to receive one from each bureau free of charge once per year. Because of the COVID-19 pandemic, a special mandate is in place that allows you to get a free report once per week through April of 2021.

 Despite the myths surrounding it, your credit score does not go down when you check it yourself. Inquiries CAN reduce your credit score but only certain kinds of inquiries. There are two types; Soft Inquiries and Hard Inquiries. Let me explain these two types of inquiries.

A soft inquiry is when either you check your credit yourself or if a potential lender checks it in an effort to pre-approve you for a line of credit. A hard inquiry happens when a potential lender checks on your credit to see if you will meet their criteria. This occurs when you are trying to get a mortgage or perhaps a new credit card. Each one of these hard inquiries will lower your score slightly.

So how can you go about improving your FICO score?

Unfortunately, there is no fast and simple method to improve your score. Despite what many of the charlatan type companies try to sell to the general public unless there is actual INCORRECT INFORMATION on your credit report, there is just no quick way to get negative items taken off and thus boost your credit score.

Now, if there is some incorrect negative information on your credit report, all you have to do is write a letter to each one of the credit bureaus explaining the situation and asking them to take it off. By law, they must do it.

One key way to get a higher FICO score is to pay in full and always pay on time. Another key is to keep your credit utilization rate low. One trick to doing this is to request a credit increase on your credit cards every nine months but DO NOT use the new higher limit. When you get the higher credit limit, you instantly increase your UNUSED credit, thus boosting that area of your credit score.

Keeping your credit cards and other credit lines open for an extended period of time is also another key to boosting your FICO credit score. The longer, the better, as the old saying goes. Even if you have cards with little or no rewards on them, do NOT close them out. Keep them open and use them once or twice per year and pay off the balance. Just use them enough to keep them active but always pay them off in full and on time. No exceptions.

Do not open new lines of credit unless you absolutely have to, like in the case of a mortgage. Otherwise, it’s best to stay away from new credit cards or lines of credit, as they will reflect poorly on your credit report. It is important to be disciplined in your use of credit and money if having a high FICO score is your goal. But that discipline WILL pay off (pardon the pun) in the end if you maintain it.

The financial advisor, Dave Ramsey, has a philosophy to try and reach an indeterminable score. This happens when you simply have no open accounts of any kind, and you don’t owe anyone any money.

The undeterminable score is a score of 0.  This is not the same as a bad credit score. However, it can take anywhere from 8-14 months to reach this undeterminable score. Beware, though, as Dave Ramsey is the ONLY person who makes this claim.

The problem is until you reach that 0 score, your credit score will make it harder to get apartment leases, lower insurance premiums, and even some jobs. And you can forget about a mortgage.

As far as raising your FICO score involved, it stands to reason that focusing on the two keys that make up the highest percentage of the FICO score would be to your benefit. Sixty-five percent of your FICO score is made up of your payment history and how much credit you have available but unused. So even if your history to date hasn’t been that great, step one would be to pay in full as much as you can and ALWAYS pay on time.

I would also get a copy of your credit report and scrutinize it with a fine-tooth comb to make 100% sure there are no mistakes there. They do happen, more often than you probably think. If you can find 3 to 5 errors in your payment history that can be cleared up quickly, your score could jump up very quickly.

The second strategy I would utilize is to ask all your creditors for a credit increase every nine months. Doing this will increase the amount of credit you have available but under no circumstances should you use that credit. Keep paying in full and on time every month. What will happen is you will automatically be utilizing less of your available credit once you get an increase, and that will quickly show up as an increase in your overall FICO score.

These two strategies alone can significantly impact your FICO score, which can literally open many new doors for you through the availability of new credit and new financial opportunities. It won’t take as long as you think, believe me. Just continue to be diligent and disciplined and focus on the two core strategies that make up 65% of your FICO score. The rest of the factors will take care of themselves if you do.

I hope you have found this guide to FICO scores helpful. If you use this information to your advantage, I guarantee you will eventually get the results you are looking for.