Tag Archives: 30 year loan

Buying a House First Time Buyer Guide | Financegirl

I love hearing personal stories and explanations about the home buying experience from people who aren’t really real estate professionals, but who have a very valid story to tell. Another example of a “layman’s story” that I posted previously from the website “The Art of Manliness” had some similar themes, and some different ideas as well as this article below. I hope you enjoy it, and if you have any questions or comments please feel free to reach out to me.

Grady Carter
Realtor®, GRI
Metro Brokers of Oklahoma
Lic. #160723

 

“Buying a house seems like something you’re just supposed to do once you reach a certain age. I’m frequently asked why I don’t own a house yet at 29 years old. My reply is always the same: “my student loans are my mortgage”. But that may not be the case for you…”

Buying a House for Beginners: An Overview of the Process and 22 Terms You Need to Know

Buying a house first time buyer guide

Buying a house seems like something you’re just supposed to do once you reach a certain age. I’m frequently asked why I don’t own a house yet at 29 years old. My reply is always the same: “my student loans are my mortgage”.

But that may not be the case for you – you may be ready to buy a house. Whether you’re ready to buy a home is a personal question that should be answered based on your finances (and other things, like commitment to the area and life choices).

I’m a big proponent of the Dave Ramsey line of thinking when it comes to home ownership – buying a house costs you money in the short term but is an asset in the long term. What does this mean? It means that you need to have money to buy a house. Comparing rent to a mortgage payment is not how you decide whether you should buy a home. In fact, most pros suggest that you have an emergency fund of at least 3-6 months in place and put between 10-20% down when you buy a home.

If you are ready to buy a home, then there are certain things that you need to know. Even if you don’t care to know about this stuff — guess what? You still need to learn about it if you’re buying a home (the same applies if your spouse knows the ins and outs — you still personally need to learn it).

To help you, I’ve included the following below:

  1. an overview of the home-buying process
  2. a flow chart of the home-buying process
  3. 22 terms that you ought to know if you are buying a home.
An Overview of Buying a Home: The Story of a Seller, a Buyer, and a Lender

Seller wants to sell his house and Buyer wants to buy Seller’s house. Buyer isn’t a millionaire, so Buyer needs to get help from the Lender (bank) to finance this big purchase. Lender agrees to give Buyer a loan under certain conditions (these terms are always advantageous to the Lender so the Buyer must read carefully). Seller and Buyer go through negotiations until they reach the most important substantive terms of their agreement (usually this is the price and a few other things). After Seller and Buyer have an agreement in writing, the closing process begins. The Seller and Buyer need to do their own due diligence to make sure that this deal is a good idea for each of them. Additionally, the Lender has to make sure the property is valued as it should be and that the Buyer will most likely keep its promise to pay the mortgage. After all parties involved – the Seller, Buyer, and the Lender – do their due diligence, they can begin to sign papers and transfer the property. However, if there are any hiccups with any of the parties, the deal may be called off. Otherwise, at closing, title to the property is transferred and the deal is complete.

This illustration may be too basic and unnecessary for you, but I believe it’s always good to understand the bigger picture (side note: this is basically how all deals work, including business deals).

Buying a House for Beginners: An Overview of the Process and 22 Terms You Need to Know
JULY 20, 2015 BY NATALIE BACON

Buying a house seems like something you’re just supposed to do once you reach a certain age. I’m frequently asked why I don’t own a house yet at 29 years old. My reply is always the same: “my student loans are my mortgage”.

But that may not be the case for you – you may be ready to buy a house. Whether you’re ready to buy a home is a personal question that should be answered based on your finances (and other things, like commitment to the area and life choices).

I’m a big proponent of the Dave Ramsey line of thinking when it comes to home ownership – buying a house costs you money in the short term but is an asset in the long term. What does this mean? It means that you need to have money to buy a house. Comparing rent to a mortgage payment is not how you decide whether you should buy a home. In fact, most pros suggest that you have an emergency fund of at least 3-6 months in place and put between 10-20% down when you buy a home.

If you are ready to buy a home, then there are certain things that you need to know. Even if you don’t care to know about this stuff — guess what? You still need to learn about it if you’re buying a home (the same applies if your spouse knows the ins and outs — you still personally need to learn it).
To help you, I’ve included the following below:

an overview of the home-buying process
a flow chart of the home-buying process
22 terms that you ought to know if you are buying a home.
An Overview of Buying a Home: The Story of a Seller, a Buyer, and a Lender

Seller wants to sell his house and Buyer wants to buy Seller’s house. Buyer isn’t a millionaire, so Buyer needs to get help from the Lender (bank) to finance this big purchase. Lender agrees to give Buyer a loan under certain conditions (these terms are always advantageous to the Lender so the Buyer must read carefully). Seller and Buyer go through negotiations until they reach the most important substantive terms of their agreement (usually this is the price and a few other things). After Seller and Buyer have an agreement in writing, the closing process begins. The Seller and Buyer need to do their own due diligence to make sure that this deal is a good idea for each of them. Additionally, the Lender has to make sure the property is valued as it should be and that the Buyer will most likely keep its promise to pay the mortgage. After all parties involved – the Seller, Buyer, and the Lender – do their due diligence, they can begin to sign papers and transfer the property. However, if there are any hiccups with any of the parties, the deal may be called off. Otherwise, at closing, title to the property is transferred and the deal is complete.

This illustration may be too basic and unnecessary for you, but I believe it’s always good to understand the bigger picture (side note: this is basically how all deals work, including business deals).
Home Buying Process Flow Chart

Here is a chart that I created to demonstrate what a typical home-buying process might look like in a little bit more detail.

Home Buying Flow Chart

 

Real Estate Jargon: 22 Home Buying Terms

Now to the good stuff. Here is a list of 22 terms you need to know before you buy a house (when I originally started writing this post, I thought I could do it in 10 items – turns out there is a ton of stuff you need to need to know).

Real Estate Agent
A real estate agent is a licensed professional who helps the buyer or seller in the house-purchasing process. Most agents work for a real estate broker or realtor. As a buyer, you want to hire a good real estate agent when you are buying a house.

Pre-qualified and Pre-approval
Getting pre-qualified is the first step in the mortgage process (it’s usually pretty simple). You give your lender your overall financial picture, the lender evaluates your information, and then the lender gives you an idea of the mortgage amount that you will qualify for. Note, that – is not a done deal – you may not in fact qualify for the loan for which you are pre-approved (it’s a general idea).

Pre-approval is the second step in the mortgage process. You complete a mortgage application and provide detailed information to the lender (although you will not yet have a house picked out most likely, so the property information can be left blank). The lender will approve you for a specific amount and you will get a better idea of your interest rate. This puts you at an advantage with a seller because the seller will know you’re one step closer to getting a mortgage.

If you get pre-qualified and pre-approved before you pick out a home, then you can move quicker on purchasing a house (you won’t have to make your offer contingent on obtaining financing, which is especially valuable in a competitive market).

Proof of Employment and Income
You will have to provide proof of employment and proof of income to qualify for your mortgage. This shows the lender that you are creditworthy. It’s usually not great to quit your job during the home-buying process for this reason. Some lenders may ask for employment verification later in the home-buying process, so your approval could actually change if you take a lesser paying job during the home-buying process.

3 Types of Loans: Conventional, FHA, and VA
A conventional loan is a loan that is not backed by the government (meaning that the government doesn’t make any guarantee that you will pay the mortgage), and therefore, carries private mortgage insurance if you put less than 20% down. Conventional loans adhere to guidelines set by Fannie Mae and Freddie Mac and are available to everyone, but are more difficult to qualify for than VA or FHA loans (you need better credit and a steady income, for example).

An FHA loan is a loan insured by the Federal Housing Administration (this means that if you default, the FHA will repay the note to the bank). Because the loan is insured, the lender typically offers a low down payment required (3.5%, for example) and low closing costs. Anyone can apply for an FHA loan and an FHA loan is easier to qualify for than a conventional loan. Instead of PMI on your FHA loan, you will have MIP (mortgage insurance premium), which stays with the life of the loan. That means that unlike a conventional loan where you can remove the PMI, on an FHA loan, you cannot remove the insurance without refinancing the entire loan (which you have to qualify for in order to do).

A VA loan is guaranteed by the Veterans Administration and is available only to certain borrowers through VA-approved lenders. Usually, you need to be in the military or a veteran to qualify. VA loans do not carry PMI and there is no money down required.

Adjustable rate vs. Fixed rate
An adjustable rate mortgage (ARM) offers homebuyers with a low interest rate on their loan for an initial period, after which time, the interest rate increases or fluctuates for the remainder of the loan. This loan transfers the risk of rising interest rates to the buyer.

A fixed rate mortgage means that the interest rate on the mortgage is fixed at a specific rate for the entire life of the loan. For example, if you have a 15 year fixed mortgage at 4%, this means that your loan is for 15 years and your interest rate will be 4% for the full 15 years, regardless of the market.

PM (and MIP)
PMI stands for private mortgage insurance. As part of qualifying for a conventional loan, you will have to get PMI if you put down less than 20%. Once your equity in your home reaches 20%, you can get the PMI removed (lowering your monthly mortgage payment). However, with an FHA loan, the insurance stays on the loan for the life of the loan, regardless of the equity in the loan. The private insurance on an FHA loan is called mortgage insurance premium (MIP). There is no way to avoid MIP on an FHA loan.

15 year and 30 year loan
Lenders issue mortgages on 30 year or 15 year terms. You will be hard pressed to find a lender issuing a mortgage for a term other than 15 years or 30 years. The advantage of a 15 year mortgage is that you pay significantly less money in interest over the life of the loan than you would under a 15 year mortgage.

Co-signer
Like any other loan, a co-signer on a mortgage means that the person is binding himself to be legally obligated to make the debt payments should you default. So, if you have your mom co-sign on your mortgage and you default, she’s on the hook legally and will have to make payments. Similarly, if she wants to get off your mortgage, she can’t do so without you refinancing. If a co-signer is required, the lender is effectively saying that your financial history isn’t good enough and they want someone else to be on the hook, too.

Amortization Schedule
An amortization schedule is a complete table showing your payments, principal, and interest over the course of the loan.

Prepayment penalty
A prepayment penalty is a clause that will be in your loan documents (if it exists at all). A prepayment clause says that you will pay a penalty for repaying your debt early.

Offers and Counter Offers
When you buy a house, you will make an “offer”, which is an offer to buy the house. The seller may accept your offer or reply with a counter offer, which will state different conditions than what you offered.

Inspection
A home inspection is an examination of a home done by a home inspector to determine the condition of the home at the time of inspection. You will need to pay for a home inspection if you’re buying a house.

Appraisal
A home appraisal is an examination of the value of the property done by a real estate appraiser. An appraiser determines the monetary value of the property. You will need to pay for a home appraisal in order to provide your lender with the value of the property for which you are trying to purchase in order to get financing.

Transfer Documents
“Transfer documents” refers to the documents relating to the transfer of ownership from the seller to the buyer. Most documents will be signed by the seller and delivered to the buyer for your review. Documents include: 1) deed, 2) bill of sale, 3) affidavit of title (or seller’s affidavit), 4) transfer tax declaration, 5) transfer tax declaration, and 6) buyer / seller settlement statement. It’s important that you do your due diligence and read through the transfer documents to make sure everything says what it should say.

Home Loan Documents
“Home loan documents” refers to the documents relating to the mortgage issued by the lender to you, the buyer. These documents include: 1) note, 2) mortgage, 3) loan application, and 3) Truth-In-Lending Disclosure (TILA). There may be other documents included. It’s always a good idea to read the documents yourself and consider having an attorney read them for you, too.

Real Estate Title Documents
The title company and escrow company will also send you documents to review. The title company will send you the title insurance commitment showing that the party who has title is in fact the seller, in addition to any liens on the title. You should review this document and so should your attorney if you have one. The escrow company will also review it to make sure it says what it should say.

Title Insurance
Title insurance protects you and the lender from the possibility that the seller didn’t have free and clear title when the seller sold you the property. Getting title insurance is a standard step in the home-buying process. Your escrow or closing agent will typically help you get title insurance after the purchase agreement is signed.

Home Warranty
A home warranty includes basic coverage over certain things that may go wrong, such as plumbing, electrical, heating, and major appliances. The warranty is for a certain amount of time (like one year) and you have to pay for it up front if you want it.

Closing costs
Closing costs are fees paid at the closing of the transaction. Closing costs can be paid by the buyer or seller and they can be part of the negotiation process. Closing costs can be thousands of dollars, so don’t forget about them!

Escrow (and Monthly Payment)
When you get a mortgage, your lender may require you to set up an escrow account. A monthly escrow amount is added to your mortgage payment. The escrow payments goes toward real property taxes and insurance that you would otherwise have to pay once or twice a year. Instead, you generally will pay a monthly payment and the money sits in escrow to be paid by your lender when it’s due. This escrow payment is above the principal and interest portion of the mortgage payment and is required.

Homeowners Insurance
Most lenders require you to have homeowners insurance in place in order to obtain a mortgage; however, it is not required by law.

Property Tax
Property tax is the amount of money that you are required to pay based on the property’s assessed value. Property tax can be very costly, depending on where you live. This is something you’ll want to consider when calculating how much you plan on spending on your overall homeownership expenses. Property tax payments are usually due annually, but more often than not, they are divided into and included in your monthly escrow payment.

A Final Note!

In a perfect world, I would love to get a 15 year fixed rate mortgage using a conventional loan where I put down 20% (avoiding PMI altogether) in a great neighborhood close to the city (but not too close) with a white picket fence, red door, and black shutters with a boatload of money in the bank to go with it. But here I am, writing about the process and not buying any homes – I’m just trying to pay off my student loans. What’s my point? Take all of this with a grain of salt. My experiences are based off my friends and their experiences as recent homebuyers. I will say that many of my friends wish they knew more about the process before getting into it. There is power in knowing!

Do what’s best for you given your past experiences, current circumstances, and future hopes and dreams. Make good decisions. Buy a house when it’s right for you – and be smart about it. No one said this stuff was sexy – it’s just part of the process and part of being an adult.

Source: Buying a House First Time Buyer Guide | Financegirl

Where 15 Can Beat 30 – What Kind of Loan Should I Get?

With rates changing (if you don’t know about this it’s ok, but they are…) have you wondered how that might affect the loan that you should consider taking out for your home? Well, here is a very wonky article that can help you dive into this under discussed, and very important topic. It might be a good idea to play around with a mortgage calculator to see what the difference might be for you.

-Grady

 

The Federal Reserve Board is on track to raise interest rates as soon as today. It’s a move that will mean higher mortgage rates, higher monthly payments, and reduced purchasing power for new borrowers. Homebuyers, who haven’t seen an interest rate increase in nearly 10 years, may be tempted by lower-rate 15-year mortgages.

Where 15 Can Beat 30

A 15-year mortgage is a smart choice for households in housing markets where price increases have been modest, but a tougher call for households in hotter markets.

The Federal Reserve Board is on track to raise interest rates as soon as today. It’s a move that will mean higher mortgage rates, higher monthly payments, and reduced purchasing power for new borrowers. Homebuyers, who haven’t seen an interest rate increase in nearly 10 years, may be tempted by lower-rate 15-year mortgages. But do the advantages of a 15-year mortgage outweigh the costs? The answer depends partly on where you live.

We’ve crunched the numbers for the largest U.S. metros, and found that:

  • With the median US household income, a 30-year mortgage allows homebuyers to purchase 46% more house, but a 15-year mortgage provides triple the paid equity in just 5 years.
  • Homebuyers in areas where prices have a history of rising will benefit greatly from faster equity-building with a 15-year mortgage.
  • Buyers in areas with historically slow growing to flat housing prices will benefit less from shorter-term mortgages and potentially more from the borrowing power of a 30-year loan.

The Tradeoffs Between 30- and 15-year Mortgages

In general, 30-year mortgages have three advantages:

  • Monthly payments are lower
  • Borrowing power is higher
  • Tax benefits are greater

The primary advantage of a 30-year mortgage is lower monthly payments. On the median valued U.S. home, a 30-year mortgage comes with a payment that is $320, or 27%, lower than a 15-year mortgage. Lower payments also mean that a borrower’s debt-to-income (DTI) ratio is lower than a 15–year loan. This allows middle class buyers (a household earning the U.S. median income) to borrow $77,000, or 46%, more with a 30-year mortgage than a 15-year. Last, borrowers with a 30-year mortgage can write off nearly $68,000 more than a 15-year mortgage via the mortgage-interest deduction on their federal income taxes.

Trulia 15v30

A 15-year mortgage has three advantages over a 30-year mortgage:

  • Equity builds faster
  • Interest rates are lower
  • Loan term is shorter

The primary advantage of a 15-year mortgage is that a larger share of each monthly payment goes towards paying off the loan principal. After five years (the number of years the average young household moves), equity gained from paying off the loan balance is more than $39,000, or three-times greater with a 15-year mortgage on the median value home. In addition, the 15-year rate is 3.36%, compared with 4.12% for a 30-year note. And over the loan term, borrowers with 15-year mortgages pay just under $40,000 in interest with a 15-year compared to over $107,000 with a 30-year on the median value home.

In Bargain Markets, 15-year Mortgages Are A Homebuyer’s Best Bet For Equity

Home equity can come from three sources: down payment, principal reduction, and home value appreciation. This means that in markets with slow appreciation, a larger share of equity will come from homeowners paying down the loan balance when compared to home value appreciation. In such markets, 15-year loans offer a relatively faster route to building equity.

Trulia_15yrmortgage_LineGraph

We’ve identified the 10 markets in the country where, after five years of ownership, homeowners will have the most equity from principal reduction relative to home price appreciation. At the top of the list are markets exclusively in the Bargain Belt (Midwest and Southeast). In each of these markets, 15-year mortgages can provide over twice the equity relative to home price appreciation. For example, homeowners in Dayton, Ohio, can earn $22,018 in equity from mortgage payments with a 15-year mortgage, which is 2.37-times greater than the $9,295 gained from price appreciation. With a 30-year mortgage, payments would net households just $7,393. Clearly, household in these markets would gain much more equity by paying down their mortgage principle with a 15-year loan than from home value appreciation.

Markets where Principal Repayment is Key to Equity Growth
# U.S. Metro 5-year Equity from Principal Repayment, 15-year 5-year Equity from Principal Repayment, 30-Year 5-year Equity from Home Value Appreciation 5-year Principal Repayment Relative to Appreciation, 15-year* 5-year Principal Repayment Relative to Appreciation, 30-year
1 Dayton, OH $22,018 $7,393 $9,295 2.37 0.80
2 Cleveland, OH $26,906 $9,034 $11,960 2.25 0.76
3 Toledo, OH $21,193 $7,116 $9,667 2.19 0.74
4 Akron, OH $26,993 $9,063 $12,420 2.17 0.73
5 Rochester, NY $27,704 $9,302 $12,862 2.15 0.72
6 Detroit, MI $13,171 $4,422 $6,180 2.13 0.72
7 Greensboro-High Point, NC $24,924 $8,369 $11,778 2.12 0.71
8 Lake County-Kenosha County, IL-WI $43,508 $14,608 $20,620 2.11 0.71
9 Memphis, TN $23,289 $7,819 $11,093 2.10 0.70
10 Winston-Salem, NC $26,544 $8,912 $12,668 2.10 0.70

In Pricey Markets, 15-year Mortgages Are A Tougher Call

In markets with strong home price appreciation, deciding between a 15-year and 30-year mortgage is a tougher call. Like bargain markets, 15-year loans provide more equity from principal repayment than from appreciation. The difference, however, is much smaller. In pricey San Francisco and San Jose, Calif., 15-year mortgages provide just 1.35 times more equity from principal payoff than appreciation. Still, the difference in equity from principal repayment is great between a 30-year and a 15-year mortgage. For example, households in Orange County would stand to gain nearly $100,000 more in equity after 5 years by choosing a 15-year mortgage.

Markets where Appreciation Drives Equity Growth
# U.S. Metro 5-year Equity from Principal Repayment, 15-year 5-year Equity from Principal Repayment, 30-Year 5-year Equity from Home Value Appreciation 5-year Principal Repayment Relative to Appreciation, 15-year 5-year Principal Repayment Relative to Appreciation, 30-year
1 San Francisco, CA $247,382 $83,061 $184,397 1.34 0.45
2 San Jose, CA $203,060 $68,179 $150,088 1.35 0.45
3 Orange County, CA $139,362 $46,792 $96,300 1.45 0.49
4 Los Angeles, CA $112,946 $37,922 $76,446 1.48 0.50
5 Oakland, CA $136,768 $45,921 $92,323 1.48 0.50
6 San Diego, CA $106,895 $35,891 $72,083 1.48 0.50
7 Ventura County, CA $111,904 $37,573 $73,109 1.53 0.51
8 Boston, MA $90,176 $30,277 $58,567 1.54 0.52
9 Austin, TX $50,860 $17,077 $32,778 1.55 0.52
10 Charleston, SC $44,599 $14,975 $28,684 1.55 0.52

Even though 15-year mortgages provide more equity through loan repayment than appreciation, they also come at the expense of borrowing power. In high-priced markets, the difference in nominal terms can be substantial. For example, middle class families in San Francisco (households making the median income of $104,000 per year) could purchase a $628,000 home with a 30-year mortgage but only a $430,000 home with a 15-year. This makes house hunting hard when the median priced home costs more than $1 million. As a results, this could be the difference between buying their dream-home or a starter for some households.

To show why households in expensive housing markets have a much tougher decision, we’ve put together a scatterplot of median home values for each of the 100 largest U.S. metros and matched it with the relative amount of equity a household can gain from payments on a 15-year mortgage. As you can see, households in cheaper markets (bottom axis) stand to gain relatively more equity (left axis) from paying down their mortgage with a 15-year note than through home value appreciation when compared to pricier markets. For example, households in affordable Cleveland, which has a median home value of $123,000, can reap 2.25 times the equity from loan repayment than appreciation. In San Francisco, the land of million dollar homes, the added value is only 1.34 times the equity.

Trulia scatter 30v15

The takeaway: 15-year mortgages are a great option for those wanting to build equity, regardless of how expensive or how fast growing a market is. However, in places with historically low appreciation, 15-year mortgages are a much better deal for building equity because it’s about the only way to do so though paying of the loan balance. On the other hand, in areas with historically high price appreciation that also happen to be expensive, households need to consider the tradeoffs between the borrowing power of 30-year mortgages, expected equity from home price appreciation, and whether or not they will use equity from their existing home as a down payment on their next one.

Methodology

To compare 30- and 15-year mortgages, we estimate the amount of equity a household would gain from both appreciation and from paying off the principal after 5-years of homeownership of the median valued home. We estimate this separately for each of the 100 largest U.S. metros, and use an annualized 20-year Federal Housing Finance Administration (FHFA) house price growth rate to project home values 5 years into the future. Last, we compare the nominal and relative amount of equity a household would gain by choosing either a 30- or 15-year mortgage and comparing that to the expected gain in equity from home value appreciation.

Source: Where 15 Can Beat 30 – Trulia’s Blog

 

If you have questions of concerns please feel free to reach out to me: