Currently, there is a huge amount of untapped cash that is hiding as home equity in this country.

Specifically, there is 5.8 trillion in untapped equity in homes throughout the United States of America. In just the past year, the average equity available is $14,700, with the current draw available of $113,000.

The reality is homeowners in the United States of America are getting wealthier all the time; however, in this climate, they're much less likely to tap into this equity than at any other time in real estate history. Home values are still rising; but, people are taking less and less out of home equity, and we see much fewer home equity lines of credit.

To figure out the tappable amount of wealth, you take the appraised value of the home minus 20%, Which is what most lenders will require borrowers to produce to have a safety net on an equity loan. In the first quarter of last year, this amount grew by 7% when compared to previous quarters. 

Black Knight mortgage software and analytics company says that this is the single largest growth since the company began tracking in 2005 and is also up 16.5% when compared to just one year ago.

What it does reveal is it there is now 5.8 trillion dollars in untapped equity in the market. This is a huge volume and the highest ever recorded, With the average mortgage holder having $14,700 in usable equity over the past year.

However, variable interest rate mortgages are much riskier because of the variations in the interest rate. Most Americans shy away from variable-rate interest rates for a good reason; there’s too much uncertainty in the market, which creates uncertainty in their personal finances and their life in general.

80% of this equity lands in the laps of homeowners whose interest rate is below 4.5%, putting them in an excellent financial situation. And 60% of it is held by people with below 4% interest rates. In today's marketplace, the average rate on a 30-year fixed mortgage is around 4.8%.

What's going on is the homeowners who are using the equity in their homes are doing it through cash-out refinances instead of equity loans. Even though these are done at a higher interest rate, it's still safer in the long haul for the consumer. Yet, only 1.17% of what was available was used in the last first quarter which is the lowest in over four years.

The truth is, at least in speculation, many Americans may not know how much equity they have in their homes because they probably don't sit around and study the numbers. Also, there are fears among the average consumer that there will be a repeat of 2008; they don't want to be on the wrong side of that if another bubble occurs.

With the pain of the housing crash that happened over ten years ago still in the hearts of many, most consumers are very leery of tapping into their equity and using it like an ATM, which is the way millions of us were doing it before the bubble of 2008. So many people lost their homes to foreclosure, and many families were destroyed.

The homeowners of today were children in the 2008 crash and watched their parents lose their homes, and they're very determined not to put themselves, or their families and children through the same horror.

To discover how to use home equity credit wisely, go here

https://www.discover.com/home-loans/articles/how-to-use-your-home-equity-loan-wisely/

In reality, consumer expectations of home price growth have declined in the last 12 months. Consumers expressed high optimism about the potential direction of their financial situations and the economy in general over the previous year.

There are two keys to help you use your home equity to your financial advantage.

Key #1 - If you have good credit, you can use the equity in your home to refinance to get a much lower interest rate; this means you will pay less money every month and less money in the long term of the loan. 

Key #2 - One way you can do this is you can receive an instant advance, have a huge lump sum of money and use the home equity as your collateral. This will be set up over a fixed amount of time with a fixed interest rate. You can be required to make payments every month.

You can also do what is called a home equity line of credit, which operates as an open-ended loan, somewhat like a credit card. You only use it when you need it, but it goes against the equity in your home. Unfortunately, with a loan like this, the rates are often variable, and your payments will change with interest rate changes.

Deciding which one is best for you just comes down to your personal needs and financial situation. You get the advantage of a secured fixed rate and a  fixed payment every month when you used a large lump sum amount and take it all at once. However, you get much more flexibility when you get a line of credit, but then you have to deal with the variable interest rate and the variable payments.

The bottom line is, it's crucial that you use this money wisely. When you do a home equity interest loan, you're putting your family's home up as collateral; it’s very important that you understand that. Because of the way this works, you're putting yourself at high risk if you overspend and cannot make the payments; that’s why it's vital as you begin this process by being clear about why you need the money and not use it as an open-ended ATM.

Any debt that you take on should be used to improve your financial situation or to cover an extremely necessary or emergency purchase that potentially has a lasting value at least as long as the amount of time it would take you to pay back the loan. If you are considering using a home equity loan for vacations, gifts, or spur-of-the-moment purchases, those a probably not a wise use of a loan. 

One excellent use of a home equity loan is to consolidate your high-interest rate debt. Taking multiple balances from credit cards, old loans, or car loans oh, and making them one payment, and lowering your overall interest rate is a great financial plan. However, you must have the discipline to make this work. It's very easy to rack up those credit cards again and end up putting yourself in an even worse situation.

Another great use of your home equity money could be making improvements to your home. It's important before you begin this process to be clear about how long you intend to stay in this home to make sure that you obtain the benefits of this type of investment. The truth is this type of investment will make your home more valuable and increase your Equity down the road, but you must be sure you're going to be around to reap those benefits.

Another solid use of equity money is to cover education, as in college for your children. Before you reach out for your home equity money, it's important you take a look at any federally sponsored programs that may be available to you at that time. You can deduct up to $2,500 in interest from student loans depending, of course, on your income. Still, you must balance debt against your own personal financial needs for security and retirement.

Have a Plan

In today's uncertain economy and market, it's very important to take your time and have a well-defined plan for using any money that you take out on the equity of your home. Your home is your biggest chance to gain wealth you'll have in your lifetime and will probably be the largest single purchase you'll ever make in your lifetime. If you take out equity money and squander that money, I could put you in a hole that you cannot get out of, at which time you may be facing eviction. 

To avoid the situation, make sure you have a need that fits one of the criteria above before you even consider using your home's Equity money toward anything.  Also, make sure you choose the right form of equity money, whether it be a lump sum or an open line of credit.

Having a well-defined plan well thought out in advance and implementing that plan is your best bet to use your equity money to help improve your financial situation now and in the future. Use the keys we've listed above and work with a financial planner if needed to make sure that you implement your plan properly; it could be one of the best decisions you make in your entire life. 

If you would like to have your home offer accepted and have your home purchase go through without issues, there are a few key factors you need to take into consideration. Just because your home offer is accepted does it mean that you're going to get the house. There are still a few essential things that need to be taken into consideration.

This is very much like an athlete who is training for a competition. You can prepare yourself for the final steps in purchasing the home of your dreams. Every state has different escrow procedures and different rules that must be followed. Still, in this article, I'm going to give you 10 of the most common issues that you will most likely encounter throughout the closing and escrow process. This way, you can prepare yourself in advance to prevent as many of these problems as possible.

Different Kinds of Problems that come up Throughout the Escrow

These include low appraisals, pest damage, claims to title, and defects found by the home inspector during the home inspection. At times the financing can fall through, and there are other points for the buyer or seller may simply just get cold feet. Other issues that may arise are high-risk areas or uninsurability. At times there may be issues with good faith estimates and even other errors that may have been made during the closing.

Damage due to Termite Inspection

There will be a pest inspection done on the home by the lender. This is normally done at a cost to you as the seller; however, it is normally less than $100. What they're looking for is any damage caused by insects such as termites or carpenter ants. This way, the lender's interest is protected in the property. If after the homeowner moves in and they find termite problems or other insect problems, they are going to abandon the property most likely. This ends up leaving the lender in a lurch; whether the lender requires a termite inspection or not will still be in your best interest to get one.

Here is an article about the important keys to a home inspection:https://www.zillow.com/home-buying-guide/home-inspection-checklist/

Once this inspection is done, if it uncovers an infestation of any kind, the problem areas are going to need to be remedied before the escrow can close. If the problem is extremely severe, or perhaps the cellar simply will not pay if you have the areas treated, you can always walk away from the purchase and the agreement with proper contingencies.

The Appraisal Comes in Too Low

An authorized third party will do what is called an appraisal. These appraisals are usually done for tax purposes; they're also done as part of home financing or when you sell a home. Home appraisers use many different methods to properly determine a property's value. This includes the value of other homes in the area.

During the escrow process, the bank will normally have the home appraised. The home appraisal will also be at your expense. Again this is done to help protect the lender as they want to make sure that they are not financing too much money on a home that's not worth that much. This way, if there is a foreclosure and you lose the house, they know that they will be able to cover their losses and ideally even come out ahead. When the appraisal is done, if it comes in too low, the seller of the home most likely will have to lower the cost of the house, or as the buyer, you would have to pay out-of-pocket to cover the difference. Another option, in this case, is to get a different appraiser and attempt to get a second opinion.

The Title has Clouds

To protect the buyer and the lender against any future claims to the property, it is vital to carry what's called title insurance. If the property already has a lien or a claim against it this must be taken care of and completely resolved before the sale of the home can proceed. A home cannot be sold unless it has what is called a clear title, which is a title that does not have a lien or claim against it. What title insurance does is protects against ownership by a third party, a forgery, or any fraud.  It will also cover any judgments or liens that may be on the home and the property.

Normally you'll have to have done what is called a title search and issue this title insurance during the escrow process, and it must be done by the title company. What the title search does is ensures that no one, including the IRS,  or the state, or anyone else, has put a lien or claim on the property. 

Defects are Found During the Home Inspection

Normally any kind of offer to purchase a home will have what is called a home inspection contingency put into the offer. The home inspection is done by a third party who is a licensed home inspector. This home inspector is looking for any defects in the home that they can find. The important key here is to have this contingency put into your contract as the buyer, if you do not and you decide not to purchase the home based on the home inspection you may lose your earnest money. The earnest money is what you deposited at the beginning to show that you had good faith and were interested in purchasing the home.

Another issue if problems are found during a home inspection is that you may need to negotiate directly with the seller to have these issues repaired. This will take time and will cost money. In most cases, however, the seller is the one who's going to have to put out the money to make these repairs. The other option you have is to make the repairs yourself and see if we have the seller credit you the money at closing that does repairs cost. 

The Problem of Cold Feet

Within the contract that you have for home purchase, it should spell out any justifiable reasons why either the buyer or the seller want to back out of the sale and how they can do so without penalty. However, as the seller you wave your contingencies and then decide not to make the purchase, you will most likely lose your earnest money.

What the earnest money is there for is to help compensate the person who is selling the home for the time that the home was not on the market. If you decide to back out of the sale, that's time that they cannot get back in time if they could have been selling the home to someone else. Ultimately this delay increases the amount of time that it takes the seller of the home to get the home sold. It’s basically money to make sure that they're not wasting their time.

Here is how to get pre-approved for a mortgage: https://www.zillow.com/mortgage-learning/pre-approval/

The Financing You have Gotten Falls Through

You should always have a pre-approval before you make an attempt to purchase a home. A pre-approval is a written loan commitment-friendly mortgage company bank or lender. It states that they will provide you with a certain amount towards the purchase of a new home. In most cases, sellers will not accept offers from a buyer who is not already pre-approved. One thing to keep in mind is that a pre-qualification is not the same as a pre-approval.

However, at times throughout the closing of the home issues may arise that affect the financing. You may have had a job situation change, your credit score may have dropped,  or interest rates could have increased dramatically. Should your lender decide not to follow through on the pre-approval they gave you, they do owe you an explanation. Things like religion, national origin, race, and other similar situations should never delay your homeownership.

The Property You're Looking at is in a High-Risk Area

If you are in a high-risk area, there may be a possibility the lender will require you to purchase Hazard insurance, which goes above and beyond the normal homeowner’s insurance that you'll have to carry. As you can imagine, hazard insurance is very costly. Plus, you will be required to pay this monthly during the time of the mortgage.

Uninsurable Properties

If there was a major Insurance claim made on the property, say something like water damage or mold it will normally show up in the record you receive from the insurance company. Because of that, you may not be able to get insurance on the home; it may be too much of a risk for any insurance company. The only option you will have available at this point is if you are an all-cash buyer because lenders simply will not provide a mortgage for homes that are uninsured.

A Difference Between the Estimate in Good Faith and the HUD Document

In most cases, you'll receive a good faith estimate from the lender. This estimate will detail the costs associated with the purchase including closing costs, obtaining financing, etc. You will receive this information twice, the first time is when you get your loan pre-approved, and the second time is when you put an offer on a particular property.

Essentially the good faith estimate is a ballpark rough draft of the information from the HUD form that you will receive at least 24 hours before closing. The bottom line is this good faith estimate should be a very close summation of what you end up paying. Ideally, in most cases, it should be within 10%.

However, if you have an unscrupulous lender that has not been realistic about these estimates, you could have a real problem on your hands. If that's the case your best bet is the contact the seller and make a request for an extension on the closing date so that you may obtain a better source of financing.

Not Closing on Time Because of Errors

The truth is there are many different people involved in this closing process. If anyone makes a mistake, it can cause the escrow to be delayed. If this happens, it is possible that you may have to pay the seller a penalty for every day that the closing is late. Whether this happens or not will depend on whose fault it is and any specifics in your purchase contract. 

The entire deal could fall through if the seller refuses to extend the closing date. Depending on the specifics, the seller could agree to extend the closing date with no penalties to you, the buyer. The seller has a vested interest in making this happen and not having to start all over again themselves.

The bottom line is buying a home is a transferring of ownership from the seller to the buyer. It normally happens in a relatively short amount of time and lots of things have to occur during this period. Because of the many major issues involved, things can at times fall through. Take your time and prepare yourself as best you can by using the information in this article, and hopefully, you won't have any issues.

A mortgage is a substantial financial obligation. Whether you are buying a new home or refinancing your current home after a divorce, it's essential to know the best way to move forward in the mortgage process. In this post, we'll explore some of the most common questions people ask about mortgages after divorce and provide ways that you can help you move forward in the mortgage market after a divorce.

How To Buy A House After A Divorce

A lot of change happens when you're in the midst of a divorce. You might find yourself changing names, splitting assets, and figuring out new living circumstances. Within this madness, you might be wondering what you need in order to buy a new house or refinance your mortgage. Here are the most common factors you'll need to consider as you apply for a new mortgage.

Income

Once you're divorced, your income may look dramatically different than what it looked like with your spouse. If you're buying a home, you'll need to make sure your individual income is enough for the monthly mortgage payment. The lender will want to know your income, and how much of it goes towards paying off debts, child support, and regular living expenses.

Applying for a loan by yourself may cause the amount you're qualified for to dramatically decrease unless you have another family member or partner to co-sign for a more significant loan amount. Once you've determined how much income you'll have to put towards a home, you'll be able to understand if purchasing a new house makes sense for your situation.

Down Payments

Besides having enough money to afford monthly house payments, you'll likely also need a downpayment to purchase a new home. However, this may be difficult depending on the costs of your divorce lawyer and the splitting of assets.

The old downpayment rule recommended that home buyers should put down 20% of the cost. This would mean if your new house costs $100,000, you'll need to put at least $20,000 towards it upfront. However, this has dramatically changed, with most home buyers putting down 5% or less of the cost of the home. Plus, you can't forget the closing costs associated with a house, which can cost anywhere from a few hundred to a few thousand dollars.

Credit Score

You'll also want to make sure your credit score is high enough. Your credit score is determined by a number of factors, including your debt-to-income ratio, the number of accounts you have, and how much you owe on them. If you have a higher credit score than your ex-spouse, this may work in your favor for securing a better mortgage rate. On the other hand, if you don't have any credit, you'll need to spend some time working on re-building before choosing to pursue a mortgage.

The mortgage lender will want to see a score over 620 before they'll give you any type of loan. If your credit score is below 620, it may be difficult for you to get approved no matter what your income looks like or what size down payment you're able to make. However, there are exceptions depending on what type of loan programs or assistance various vendors may offer.

Applying For Your Loan

Once you've determined that you have what is needed to be approved for a mortgage, the next step will be submitting an application. Since there are hundreds of programs available, you'll want to consider what makes the most sense in terms of mortgage rates and the lender's reputation. Remember that house loans are often 15 to 30 years long, which is a substantial amount of time to work with one lender. You'll want to make sure you're choosing the right company to finance the next home of your dreams.

Wait Until The Divorce Is Finalized Before Getting A Mortgage

If you decide to buy a home while you're still in the middle of a divorce, your spouse may try to claim that they have ownership of the property. These assets are considered marital property if they're purchased within the marriage, especially if you use funds from a joint account or funds that were acquired during the marriage.

Instead, it's better to wait until the divorce is finalized to ensure that you won't run into any legal problems owning your own home and to make sure that your new financial situation works to make a large home purchase.

Getting A Mortgage After Divorce

Getting a mortgage after divorce can seem difficult if you don't have the correct credit score or enough income. You'll need to consider your financial situation in order to make sure purchasing another house is worth it for you without taking any unnecessary risks. Thankfully, there are plenty of different types of loans available that may work better depending on what you're looking to purchase and how big of a loan you need.

If you realize that you might not be in a place to purchase a home right after your divorce, that's not a problem. Most people find that they need to rent a home, build up their credit and save a little extra cash before purchasing a home on their own. Either way, understanding how to get a mortgage after a divorce can help you take the appropriate steps to build your new life after your divorce.

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.

If you have decided to purchase a home of your own congratulations! Owning a home is a great investment and could likely be the most important decision you will ever make in your financial life. 

As you have likely already discovered there are different ways to go about obtaining a mortgage loan and with just a little bit of knowledge, you can make sure you choose the option that's best for you. Don't let yourself be overwhelmed, with the handful of simple facts we layout in this article you will quickly know exactly which loan option and which mortgage provider is the best one for your situation.

The two most common types of loans available for homebuyers are FHA loans and conventional loans. An FHA loan is guaranteed by the government, specifically, the Federal Housing Administration and it is referred to as a government-backed loan. 

A conventional loan is one that is backed by either Fannie Mae or Freddie Mac and is also called a conforming loan.  

The key factors that decide which loan is best for you are; down payment, credit score requirements, interest rate, loan limit, and mortgage insurance.  

Down Payment - The down payment is a lump sum amount of money the buyer puts down towards ownership of the home. The balance of what is owed is then carried as a loan or mortgage. 

Credit Score - Whenever you decide to purchase a house, lenders will take a look at your credit score. This 3 digit number is what a lender uses to decide how much risk they'll take in loaning you money and is based on your past history of getting and paying on other loans. The number can range from 800 (very high) to 350 (very low) and is a huge deciding factor in how much a lender will lend as well as the interest rate and the length of the loan.

Most mortgage providers will also look at your FICO score which is another credit scoring tool developed by the Fair Isaac Corporation and operates from 350 points (considered low) to 850 points (considered very high).

There is also a score that is generated from the credit bureaus which include TransUnion, Equifax, and  Experian. All of these different entities base their ratings on similar key issues which are: 

>The credit type you use

>How you use your credit

>Whether you make payments on time

>The length of your credit history

>Your new credit accounts  

 For a break down of how your credit scores are created by these different entities, you can read this. 

Interest Rate - the interest rate is the amount paid to the bank or mortgage provider for the use of ‘their’ money so you can make payments over time. Essentially they pay the lump sum of the cost of the house to the seller then you make smaller monthly payments to the mortgage provider until you pay off the amount they paid to the seller on your behalf PLUS the interest which is a percentage of the amount borrowed.

Loan Limit - the loan limit is the total amount the mortgage provider is willing to lend you toward the purchase of a house.

Mortgage Insurance - mortgage insurance is insurance that offsets losses incurred by the lender should the borrower default on the loan. The insurer decides whether this insurance private or public.

Federal Housing Administration or FHA Loan Specifics

FHA loans offer much fewer restrictions than conventional loan sources do. This can be very beneficial if you are concerned about a less than a stellar credit score or not having a lot for a down payment. 

FHA loans allow you to purchase a home with a credit score as low as 500 but there is normally a requirement of at least 10% down if your credit score is that low. If you have at least a 580 credit score you can get an FHA loan with as little as 3.5% of the total cost of the house as a down payment.  Most lenders have their own minimum score requirements beyond these.

This can make a huge difference in comparison with a conventional loan provider which is normally 20%. The breakdown would look like this:

On a $200,000 house, you would need a lump sum of $40,000 for the down payment on a conventional loan. 

However, if you have at least a 580 credit score, the same $200,000 house would only require a lump sum payment of $7,000 for the down payment.

There is also something called a debt to income ratio or DTI. This is basically how much debt do you already have in relation to your current income. If you are living right up to your means that indicates a high debt to income ratio. If you couple that with a lower credit score (600 or below) your only viable option will be an FHA loan. Conventional lenders want lower DTI and higher credit scores before they will offer much to a potential home buyer.

The loan limits on FHA loans top out at around $700,000 in more affluent areas and as low as $350,000 in rural areas. Traditionally you can get higher loan amounts using conventional loans. 

Interest rates remain competitive on both types of loans with FHA loans sometimes being lower because of the government guarantee. Your credit score and FICO scores will affect your interest rate as well. Other factors that can cause higher interest rates are the economy and general state of the world economy at the time you are purchasing your home.

On FHA loans you will also be required to pay what’s called a mortgage insurance premium which is normally paid for the entire life of the loan unless you pay a 10% or higher down payment then the MIP will drop off after 11 years. You are also required to pay an Upfront Mortgage Premium which in most cases is 1.75% of the amount of your base loan. 

Conventional Loan Providers

Because they are not guaranteed by the government, conventional loan providers as a general rule are going to require at least a 620 credit score and in most cases a 20% down payment. 

There is a way around the 20% down payment requirement and that is to purchase PMI or private mortgage insurance. The payment on this insurance is built into your monthly mortgage payment or paid upfront at closing. The insurance allows the lender to take a bigger risk in allowing you a smaller down payment (as low as 3 %) because the insurance will help offset the losses should you default on your payments and lose the home to repossession. 

“So What Is The Best Loan For Me?”

Taking all of these factors into account, it breaks down like this:

>If you have a credit score of at least 620

>You have a down payment equal to a minimum of 3%

>Or if you  want to avoid the PMI have a down payment of 20%

>If your debt to income ratio is low

>And you want more flexibility in your payment options 

Then a conventional loan provider is a right way to go for you

>If, however, you have a lower credit score

>If you don’t have a lot for a down payment

>And/or your debt to credit ratio is high

Then an FHA loan is going to be the right way for you to go

I hope this article has helped you decide which loan option is the best one for you. At times the process of purchasing a home can seem overwhelming and confusing. By breaking down each step of the process into small doable ‘bites’ it will make the entire experience much less stressful and help you make the best decisions possible for your specific situation.  For a complete guide on first time home buyers please refer to:

https://www.investopedia.com/updates/first-time-home-buyer/

It's estimated that 1 in 5 Americans have mistakes on their personal credit report. Because lenders depend so heavily on these reports in making vital decisions about your mortgage it behooves you to take a moment and make sure yours is correct. Finding and fixing any errors in your credit report can quickly and dramatically increase your credit score which in turn can get you a larger loan, a lower interest rate, and potentially save you many thousands of dollars over the life of your mortgage. To learn how to check your credit report and easily correct any errors you find, please go to:

https://www.credit.com/adv/credit_repair/how-to-fix-errors-on-credit-reports.html

To learn quick and easy tips on how to build your credit which will make a huge difference in how much money mortgage providers will lend you as well as giving you lower interest rates and the best offers you can get, please refer to the following:

https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/building-credit/

What You Should Know Before Choosing to Refinance Your Home

Becoming a homeowner is one of the biggest financial commitments that someone will take on in their lifetime. However, like any loan, the interest rates are likely to change over time. This means that later down the line, there may be a better deal on a similar mortgage that will allow you to pay off your mortgage more quickly. 

When you want to replace an existing mortgage with a new one, this is known as refinancing your home. It’s a good option for those borrowers who are always on the lookout to obtain a better rate and interest term over time. Instead of simply taking out a new mortgage, a refinance will pay off the first loan, allowing space for the second loan to be created.

Refinancing can be a good way to convert a variable loan to a fixed rate, therefore obtaining a lower interest rate--but only for those borrowers with the perfect credit history. It is a risk for borrowers who have found themselves in financial difficulty in the past.

No matter the economic climate, it can be a challenge to make the payments on a home mortgage-- possible high interest rates and the unstable economy can make them even tougher than expected.

For those homeowners who find themselves struggling with managing payments, it may be time to consider refinancing.

Going into a refinance with the right knowledge will prevent the cause for harm later down the line. Not doing so might increase your interest rate instead of lowering it.

In this post we will discuss some of the basic things you will need to know before making the decision to refinance and how to get the best deal possible for you.

What Are the Benefits of Refinancing My Home?

One of the biggest advantage points of a refinance, regardless of the equity, is the reduction in an interest rate. As many people progress through life, they may begin to earn more money meaning they are able to use that money to manage their bills and other financial obligations more quickly. Over time, their credit score will increase.

An increase in a credit score will mean lower rates on any loans taken out. This includes mortgages--so therefore many people will choose to refinance their homes for this very reason. There is a potential to save hundreds of dollars per year due to a lower interest rate alone.

Another reason people may opt to refinance their homes in order to get the money together to cover renovation costs, to buy a new car, or to pay off credit card debts that are impacting on their credit scores. Many homeowners will work to improve the quality and condition of their home to suit their needs after they buy. In doing this, while still continuing to make payments on a mortgage, they are able to take out credit in home equity. This will mean that following a home appraisal, they will likely see the value of their home increase, and therefore the balance owed on the property decreased following a significant renovation.

Finding the correct loan for you will highly depend on your financial goals. Many will want to shorten the term of their loan from a 30- year to a 15-year loan, saving a lot of money on interest charges, while others will want to make the switch from a variable loan to a fixed rate mortgage.

Refinancing will also serve as a way to eliminate private mortgage insurance after reaching  20% equity on your home. A lot of homeowners will choose to opt for a straight rate-and-term refinance that will lower their interest rates giving them a more comfortable repayment term in return.

How Will I Know That It’s a Good Time to Refinance?

If it will help you to save money-- helping you to pay off your mortgage faster, refinancing your home is a good idea. When rates are low, even those who have taken out mortgages fairly recently may be able to reap the benefits of refinancing.

Your monthly savings should offset the cost of the refinancing throughout the duration, so it may not be a good idea to do so if you plan on moving to a new house within the next few years. You want to have the time to recoup the cost over time and moving so quickly after refinancing will not give you the benefits you would hope to achieve.

Knowing exactly when to refinance is not always just about the interest rates that could potentially come with a new rate. You will also need to consider your own credit score being good enough to be able to access these more affordable rates- the best rates are most likely to be offered to those with the best credit score.

So, the answer to the question about knowing when the best time to refinance your home will depend on the equity you have in the home, how long you are looking to stay in your present home, your financial condition, and your financial goals. Once you can crunch the numbers on these questions, you will then have a better idea of when to refinance your home.

How Many Types of Refinancing Are There?

There are a number of types of refinancing that homeowners may choose from. These include:

Change Loan Duration:

Shortening the duration of the loan which helps to reduce interest over time, meaning you will own the home outright quicker, or lengthen the loan to reduce monthly payments.

Change Loan Structure:

Those who used an adjustable rate mortgage to help make the initial payments more affordable are able to transfer to a fixed-rate loan when they build up equity and have more income allowing them to do so.

Cash Out Home Equity:

Allowing homeowners to extract equity from their homes. If equity is taken out to improve the quality of the home (paying for repairs or to make home improvements) the interest may be tax deductible.

Lower Rates:

In the event that mortgage rates decline, homeowners can choose to refinance in order to lower their monthly payments.

How Long Will Refinancing a Mortgage Take?

This factor will depend on the lender, as well as how long additional tasks such as the inspections, appraisals, credit checks and any paperwork needed.

Your lender should provide information about the different loans they offer, as well as the interest rates against each loan. They may also allow you to complete the paperwork online and submit the supporting documents.

Thanks to modern technology, the mortgage application process has accelerated and streamlined significantly with the introduction of online applications, document scanning apps on our smartphones, and e-signatures. This means that the application can be filled out without having to print a single sheet of paper or make one trip to your mortgage lender’s office.

With that, many refinances can be completed within a 30-45 day window.

What Are the Risks of Refinancing My Home?

Possible penalties that may be incurred are one of the major risks of refinancing your home. Some mortgage agreements will have a provision that permits the mortgage company to charge a fee for refinancing. Those fees can come to thousands of dollars.
Make sure to read the small print before finalizing the agreement and ensure that the penalty is covered.

There are going to be some further fees to make yourself aware of before completing a refinancing agreement. This will include bank fees, and the cost of paying an attorney who will help to handle the paperwork that can be daunting to fill out, and to ensure you’re getting the best deal possible.

Shop around before making the commitment or wait for a window for potential free or low fee financing that are sometimes offered by mortgage companies. In the long run, you want to make sure you are getting the best deal possible.

What Else Should I Consider Before I Refinance my Home?

Many people will choose to use the money they get from refinancing to make significant improvements to their home, or to wipe out their credit card debts with a lower interest loan.

What people may fail to recognize is that a refinancing loan is still a debt and racking up card balances again can put you right back to where you were financially. A mortgage debt is kept secure by your home. Any missed mortgage repayments could result in losing your home to foreclosure.

To stop this from happening, a homeowner wanting to borrow money through refinancing needs to investigate whether their needs for cash could potentially be handled by using another form of credit.

In order to make sure you make the best decision for you, talk to a professional mortgage lender who can help to guide you through the whole process from which options are best for you, right through to the closing of your mortgage. Contact us today to discuss your best options.

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Author Bio

Will Foster | First State Bank Mortgage
Senior Loan Officer

I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.

Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.

The mortgage process can be a little confusing and even overwhelming these days with all of the regulations.  I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.