Still searching for a house? How to protect your down payment money.

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You’ve saved up the typical 5-20% for a down payment, but haven’t yet been able to purchase a house.

What should you do with that money as you continue the search?

The answer depends a great deal on your future plans. Will you call off the search for now and wait for the market to cool down – or do you have hopes of finding your home in the near future?

If you’re taking a break, how long do you plan to wait?

Only a few weeks? Six months? Or perhaps you have kids in school and won’t get serious about moving again until the school year is ending.

At this point, time frame and safety are more important than yield.

Do you hope to need access to your down payment funds in a matter of days?

If you’re still actively searching, you want that money accessible immediately, so a savings account is the best choice. Many financial experts recommend placing that down payment money in a separate account from your regular savings – perhaps even in a different bank. That will reduce the temptation to dip into it for other purposes.

Waiting to buy carries some financial risk.

Although all indicators suggest that the market is cooling, home prices could still rise. Should that be the case, your down payment would need to be larger.

As of July 2021 the median home price in Texas was $191,902, and the year over year increase from 2020 was 12%.

Assuming you plan to purchase at that median, your down payment today would be:

5% = $9,595

10% – $19,190

20% – $38,380

Adding 12% to these numbers would bring them to $10,746, $21,492, and $44,105 respectively.

If you pay a higher price, you may need a higher down payment.

Thus, if you know you plan to wait at least 6 months, you may want to place part of your down payment in a money-market fund, bonds, or another low-volatility investment that will help it grow.

Note that some savings accounts offer higher yields, but have high minimum-deposit requirements.

Other higher-yield investments require a time commitment that would interfere with buying immediately when the perfect house appears. The gain you’d see from higher interest would be wiped out by early withdrawal penalties. Be sure you know and understand all of the terms before placing your money in a CD or other time deposit.

Your best course of action may be to continue saving and putting money away in a savings account for the down payment. After all, the larger your down payment the better terms you’ll qualify for when you get your home mortgage loan.

Always consider the tax consequences.

If you know you will wait longer than 12 months to resume your home search, you could put 100% of your down payment in a market fund or municipal bond. Even waiting 6 months could make it advisable to split the money between a regular savings and a market fund.

However, do consult with your tax advisor before moving forward.

Savings accounts don’t pay much, but…

Your money will be there when you’re ready to use it.

Other investments, such as cryptocurrency and special-purpose acquisition companies, can and often do produce high yields, but they come with the risk of losing it all.

Call us…

We at Homewood Mortgage, the Mike Clover Group, are not tax advisors, nor do we sell investment vehicles.

However, we will be glad to show you how the amount of your down payment might affect the rate and terms we can offer on your home mortgage. We’re known for our low rates, low closing costs, and fast closings, so take the time to get acquainted.

Call us today at 800-223-7409

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If you’re planning to buy a new home – postpone buying a new car

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If you’ve already been pre-approved for a home mortgage loan, your loan officer will have told you not to do anything that will change your financial picture.

That includes making any large purchases, obtaining new credit for any reason, co-signing a loan, or changing employment.

However, if you’re still in the thinking stages about making a home purchase, you should follow the same advice.

When deciding whether you qualify for a home loan – and what interest rate you might be offered – lenders look at your financial history. They want to see that you’re stable and have a proven track record of meeting your financial obligations on time.

Any new financial obligation is risky, and in many cases, a car loan is a sizeable obligation.

Your credit score is one of the first factors lenders consider when analyzing your loan prospects.

That score goes up and down based on your payment history – and one of the factors is the length of time you’ve been making payments to each creditor. The longer the better, so a 5-year-old car loan might raise your scores, while a new loan will lower them.

In fact, any new obligation will lower your scores, at least temporarily.

Depending upon the lender and the size of the monthly obligation, it will take from 2 to 6 months before your credit scores will return to their previous levels.

After 6 months, your on-time payments may serve to raise your credit scores.

To stay on the safe side – if you’re thinking of a home purchase within the next 6 months, it is in your best interests to postpone both the car purchase and any other new obligation.

Debt-to-income ratio is another determining factor.

You probably have a budget that tells you what you can and can’t afford to purchase each month. To calculate that budget you start with your projected income, deduct your fixed expenses, and see what is left over for food, clothing, entertainment, and other optional purchases.

Your lender does much the same thing, except the lender calculates the percentages.

This is called debt-to-income ratio. It is calculated by dividing your monthly obligations by your pre-tax monthly income. While different lenders use different guidelines, in general, the overall percentage should be no more than 36%. Of that, your monthly housing costs should be no greater than 28%.

For example, if you earn $3,000 per month, your monthly housing cost should be no more than $840. Your entire debt load, including credit cards, car loans, school loans, etc. should be no more than $1,080.

If you really need that new car…

Talk with your mortgage lender before taking any action. See where you stand at the moment and get his or her advice on how to proceed. Find out how that new obligation would affect your chance of obtaining a home mortgage loan – and how it would affect the interest rate you’d be offered.

Informed decisions are the best decisions, so get the facts before you proceed.

The Mike Closer Group is here to help.

We at Homewood Mortgage, the Mike Clover Group, will be happy to give you the facts and advice you need to make a good decision. We’ll also be happy to get you pre-approved for a mortgage loan, so you can shop with confidence.

Call us today at 800-223-7409

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Refinancing: Which lender should you choose?

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If you’ve been watching interest rates coming down and thinking about a refinance, you may be wondering whether to go back to your current lender or look around for a new one.

The beauty of refinancing with your current lender is that you probably won’t need to jump through so many hoops to get the job done. That being the case, you’ll probably get it done faster than you would if you started over. You might also not be required to pay for an appraisal, unless you’re asking for cash out.

In addition, your current lender might offer lower fees, just to keep your business. Then again, some companies only offer the best deals to new customers. It’s wise not to assume anything.

In spite of the convenience, it’s a good idea to shop for your refinance lender.

First, do check to see what your current lender will offer. Look at the interest rate, the points (if any), the closing costs, the repayment terms, and the documentation required. Get a written good faith estimate, so you can compare offerings point by point.

Closing costs on a home mortgage loan can range between 2% and 6% of the loan amount. On a $250,000 refinance, that’s a $10,000 spread, so it’s well worth your time to go shopping.

With your current lender’s information in hand, check with one or two other lenders.

Ask each for a good faith estimate, and ask what documentation will be required. Will they need a new appraisal if they refinance the current amount, or only if you want cash out?

Note that a lender won’t give you an absolute rate and terms unless you fill out an application and they have your documentation, so if saving time is your priority and your current lender makes an attractive offer, you may choose to stay with them.

Also note: Lenders’ widely advertised rates are generally the best they have to offer. Those rates and terms are reserved for those with excellent credit, low to debt to income ratios, and steady employment.

If you like your current lender but someone else offers a better rate and terms…

Contact your current lender to see if they’ll match the offer you found elsewhere. If you’ve been a good customer, they might be willing.

If you refinance your mortgage loan with a new lender, you don’t have to contact your current lender.

Your new lender will take care of paying off the previous lender as part of your loan closing. All you’ll need to do is give your new lender your loan number, so they can request the payoff.

Before you decide to refinance…

Compare the cost of the new loan to the dollars you’ll save each month. Then calculate how many months it will take to “repay” yourself the cost of the loan. If you plan to move within a year or two, it may not be worth the effort. If you plan to stay indefinitely, it probably is.

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Why Refinance Your Mortgage in 2021?

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If you have a home mortgage, you’ve probably been getting letters from a variety of mortgage companies, urging you to refinance right now.

Should you pay attention to them?

Yes. There are several reasons why you should, although rather than respond to the advertising from unknown companies, you should contact your current lender or another you know to be reputable.

The first reason to refinance your current mortgage loan is to save money.

Consider refinancing if your mortgage interest rate would be reduced.

Home mortgage interest rates are at historic lows, so if your credit is good and you can qualify for the low rate, you should look into it. Compare what you’re paying now to current rates to see how many dollars you would save each month. Then weigh the cost of the new loan.

If the monthly savings will outweigh the new loan charges within 2 or 3 years and you plan to stay in your home for the foreseeable future, then a refinance is worth considering.

Keep in mind that dropping from 4% to 3% on a 30-year fixed rate loan, you’ll save $56 per month on every $100,000 you owe.

If you have an adjustable-rate mortgage, refinancing into a low-interest fixed rate is always wise.

As far too many people learned during the mortgage crisis, adjustable-rate loans are high risk. We can never predict what will happen in the financial markets, so your payment could begin to drastically increase.

You may have needed it in order to qualify, but if you’ve maintained your credit rating and now have some equity, do consider refinancing now, while mortgage interest rates are at all-time lows.

If payments on credit card debt are eating up your cash-flow, it could be wise to refinance to wipe out that debt.

If you have sufficient equity to pay off your credit card debt by refinancing your home mortgage, it is something to consider. Credit card interest is usually much higher than the mortgage interest you’d pay on a refinance, and you’d be down to one payment.

This is only wise if you have the self-control to avoid running up new credit card debt.

If you want to save more for retirement, consider refinancing to reduce your monthly payment.

By reducing your mortgage payment, you may be able to make higher contributions to a 401(k). This is especially beneficial if your employer matches your contribution.

If you have little to no equity but want to reduce your payments by reducing your interest rate, there IS help for you.

The Freddie Mac Enhanced Relief Refinance program (https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/enhanced-relief-refinance-mortgage) will allow you to refinance the unpaid principal balance on your home, plus closing costs up to $5,000, and cash back up to $250. There are no appraisals or minimum credit scores required.

The program is available to those who applied for their current mortgages after November 1, 2018. Eligibility hinges on having made timely payments for at least the past 6 months, and not having been more than a month late more than once in the previous 12 months.

If you think refinancing your home mortgage loan might be right for you, call us. We at Homewood Mortgage, the Mike Clover Group, will be happy to help you determine how much you could save, so you can make a wise decision.

Call us today at 800-223-7409

 

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Can your home help you lower your income tax obligation?

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The answer is “It depends.” Now that the standard deduction has been raised to $12,400 for individuals, $18,600 for heads of household, and $24,800 for married couples filing jointly, you may gain more by taking the standard deduction.

However, it pays to check before you file. Take some time to do the calculations.

Here’s a rundown on the tax breaks available to homeowners who itemize.

Mortgage Interest is first, foremost, and largest. Couples filing jointly can still deduct interest on up to $1 Million in mortgage debt if they purchased prior to December 15, 2017. For loans after that date, only the interest on the first $750,000 of mortgage debt is deductible.

Since interest makes up the bulk of the payment in the early years of a mortgage, you may gain from this deduction, at least for a few years after a purchase or refinance.

Your mortgage lender sends a statement at the end of each year showing how much you paid in interest, and if they’re escrowed, how much you paid for property taxes and homeowner’s insurance. If your debt is $750,000 or less and your mortgage interest is more than the standard deduction, do itemize. If the debt is higher, ask your financial advisor for help in doing the calculations.

Mortgage Points are still deductible, but note that they must be discount points, not origination points. Points are, after all, just pre-paid interest.

Private Mortgage Insurance is deductible for some borrowers. It is fully deductible if your adjusted gross income is less than $100,000. Between $100,000 and $109,000 it is 90% deductible.

Interest on Home Equity loans is deductible – again, with restrictions. The interest is only deductible if home improvements are the purpose of the loan. You cannot deduct interest on a home equity loan used to fund a vacation or your daughter’s wedding. Deductibility is further limited by the limits on deducting home mortgage interest. You may only deduct interest on $750,000 of debt on both loans combined.

Property taxes offer limited relief. There’s a $10,000 cap on tax deductions, whether property tax, state and local income tax, or deductible sales tax. You are allowed to bundle tax from all the real estate you own and deduct up to $10,000.

Pet-related home deductions…

  • When you are required to move for work, you’re entitled to a deduction for moving expenses. You’re also entitled to deduct the cost of moving your pets. Talk with your tax preparer about the requirements.
  • Purchase and care of a guard dog for your business premises is deductible even if your business is in your home.
  • Pest control – I was amazed to read this one, but purchase and care of a cat who “patrols” your premises for vermin is deductible. This is especially true if special circumstances apply. For instance: living next door to a landfill.

Tax credits are even nicer than deductions, and energy-efficient upgrades qualify.

If you added solar panels or a solar-powered water heater in 2020, do look into taking this 26% credit on the cost of purchase and installation. To qualify, solar panels must provide half of the energy used by the home (only your primary residence) and they can’t be used to heat your hot tub or pool.

Unless the rules change once again, the credit for 2021 purchases will drop to 22% before being eliminated.

You can take a home office deduction even if you don’t itemize…

While you are no longer allowed to claim this deduction if you’re a W-2 employee with access to an office elsewhere, self-employed individuals who work from home are entitled to the deduction on Schedule C – Business income and expense.

There are two ways to calculate the deduction. One is to calculate mortgage interest, taxes, insurance, and utilities, then use a percentage of the square footage to find the expense attributable to the home office. The other is to take the simplified deduction – $5 per square foot of office space, up to 300 square feet.

Do note that it must be a dedicated home office – used only for work. If you have a desk in the corner of your TV room, it isn’t deductible.

Is it time for you to take out a home equity loan to purchase solar equipment?

If you’ve been thinking about it, 2021 is the time to do it, before the credit expires. So call us …

Homewood Mortgage – the Mike Clover Group

Call us today at 800-223-7409

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Fleeing the city? Consider a USDA home mortgage loan.

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What? You’re not a farmer. Why and how could you get a home loan offered by the U.S. Department of Agriculture?

The idea that you have to be a farmer to be eligible for a USDA backed home loan is a widely held misconception.

That isn’t so. In fact, you don’t even have to live in a rural area. Homes located in communities with populations of up to 35,000 are eligible. Here in Texas, that means you could obtain a USDA backed loan almost anywhere outside of the metro areas of Dallas-Fort Worth, Austin, Killeen, San Antonio, Houston, and Corpus Christie.

To see if the location you want is eligible, check out the USDA eligibility map at: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

The next misconception deals with eligibility. USDA loans are advertised as being for low to moderate income borrowers. However, the accuracy of that statement depends on your definite of moderate.

In most locations, the income limit for households with one to four people is $90,300. For households of five to eight people, it is $119,200.

You may have thought of USDA loans as being subsidized housing for very low-income individuals, and that is partially true.  However, there are two types of USDA loans. Direct housing loans are for low-income individuals, while moderate-income buyers are eligible for guaranteed loans.

USDA loans are NOT reserved for first-time buyers.

This is another misconception. The fact is, you can use the USDA program repeatedly, as long as you sell the first home before you close on the next. In other words, you can have only one USDA mortgage loan at a time.

Loan changes make it easier than ever to qualify for a USDA home mortgage loan.

In response to COVID-19, regulations have been relaxed and some parts of the application process have been streamlined. Also, in most cases, borrowers must have a credit score of only 640 to be eligible. Other types of loans typically require a score of 700 or higher.

The best thing about USDA Loans? The interest rates!

While interest rats for traditional home loans are at all-time lows – now hovering around 3% – USDA loans offer even lower rates. On September 1, USDA Direct Home Loans for Single Family housing were at 2.5% for low and very-low income borrowers. In addition, the fees are low, and some USDA loans require no down payment.

If you’re thinking of fleeing the city, think about making application for a USDA home mortgage loan.

If you’d like to know more about the program, your eligibility, and the areas where the house you choose will be eligible, contact us at Homewood Mortgage, the Mike Clover Group. We’ll be happy to help you secure your certificate of eligibility.

Perhaps you live in a rural community and want to invest in a business.

USDA is also offering incentives to encourage private investment in rural communities. They’ve made changes to several business loan programs in an effort to help private businesses grow, add employees, and boost local economies.

We’d love to answer your questions about the programs available to you as a homeowner or as a business person.

Call us today at 800-223-7409

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2020 Mortgage Myths

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2020 Mortgage Myths

Life in 2020 is a time of confusion, especially for the real estate and mortgage industries. What are the rules this week? Will interest rates continue to fall or are they going up soon? How has the pandemic affected home sales? Should I sell or refinance?

On top of the questions, several myths have been circulating, and it’s time to put them to rest. Here are a few of the most damaging or confusing:

#1 – “Every borrower can get a low interest rate this year.”

No – that’s not true. The factors that affect individual interest rates have not changed. Borrowers with high credit scores, a good down payment, verifiable steady income, etc. will get the best rates, just as they always have.

Other borrowers will likely pay less than they would have when rates were higher across the board, but they won’t see the lowest advertised rates.

In addition, lenders are tightening up their regulations regarding credit scores. Most will not offer a loan to a borrower with less than a 620 score, and some have raised the bar even higher.

That brings us to Myth #2… “It’s easier than ever to get a home mortgage.”

No, it’s more difficult, because most lenders are being more careful than ever. The bank’s have less cash flow than they did last year, simply because approximately 8% of homeowners were granted forbearance in the face of COVID-19. Others went into foreclosure.

Banks want to be assured that the loans they make will result in regular monthly payments coming in. As a precaution, they’re checking employment and assets several times during the loan process. This is in addition to imposing stricter requirements at pre-approval.

This, combined with the fact that lenders are busier because more people are trying to buy or refinance, is slowing the closing process. If you’re buying a home, be sure to ask your lender how long the closing process will take before you write an offer specifying a closing date.

The third myth – “Refinancing is always the smart thing to do.”

It might be – but it might not be. It all depends upon the difference between your current rate and the rate you could get on a new loan, the refinancing cost (generally 2%-6%) and how long you intend to stay in the house.

The cost of refinancing, by the way, just went up for many people. Fannie Mae and Freddie Mac just announced that as of September 1, they’ll be imposing a 0.5% refinancing fee. The lenders can absorb the fee or pass it along to the borrowers.

Before you commit to refinancing, find out how much you would save on each monthly payment. Then look at your good faith estimate to see the cost of your new loan. Divide the cost by the monthly savings to see how many months it will take to recoup the cost of the loan.

For example: If your new loan will cost $4,500 and you’ll save $100 per month, it will take 45 months to break even. If you’re moving in 3 years, don’t refinance!

Myth #4 has been around for a long time… “You should find a house before you apply for a mortgage.”

That’s never been wise, and it’s even less wise today.

In most markets we’re experiencing a shortage of homes for sale. That means home sellers don’t have to wait around to see if you’ll be able to get a loan.

In fact, many agents won’t even show homes to potential buyers who aren’t pre-approved. They know it will be a waste of time because their offers will be passed over for offers from buyers who are pre-approved. In addition, many sellers are worried about the pandemic and don’t want to let buyers into their homes without knowing they have the ability to purchase.

If you want to buy a home in 2020 (or any other year) your first stop should be with a mortgage lender. A bonus benefit of pre-approval is that you’ll know just how much you can pay, so can avoid the heartache of falling in love with a home that’s out of your reach.

Myth #5 deals with the meaning of forbearance. Hint: It does NOT mean forgiveness.

Some people mistakenly believe that getting forbearance means not having to repay the loan. Who knows how that got started. It definitely isn’t true!

Forbearance is nothing more than a “time out” from making payments without negatively impacting your credit rating or incurring late fees. At the time you are granted forbearance, you’ll come to a repayment agreement with your loan servicer.

Those with loans backed by Fannie Mae and Freddie Mac can opt to repay the missed payments at the end of the loan – or when the house is sold or refinanced. In other situations, the borrower will have agreed to make up the missed payments at the end of the forbearance period or over a specified number of months.

When you want true answers to your mortgage loan questions, call us. We at Homewood Mortgage, the Mike Clover Group, will be glad be glad to assist. We’ll also be glad to get you pre-approved before you go shopping, or to show you how much you might save by refinancing.

Call us today at 800-223-7409

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Appraisal waivers – a benefit from COVID-19?

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Homeowners refinancing today are often surprised to hear that they’ve been granted an appraisal waiver – saving them hundreds of dollars.

But what is it, and why are banks offering it?

Being granted an appraisal waiver means that you won’t be required to have an appraiser come into your house to assess it’s worth. If you’d have an appraisal in the past, you know that the appraiser looks into every room, checks light switches, turns on appliances to see that they run, and turns on faucets to check water pressure. He or she checks for cracked windows, loose handrails, peeling paint, and much more.

Then, after taking measurements and drawing your floor plan, the appraiser returns to an office to fill out a comparison form and weigh the various features of your house against others that have sold and closed recently.

This process gives the lender assurance that the house is worth as much or more than they are lending you. It also costs you, as the homeowner, anywhere from $200 to $750, depending upon the size of the house and where you live.

So why would the banks waive that appraisal?

The primary reason right now is COVID-19. They’re doing all they can to reduce human interaction. They hope this will help stop the spread of the virus.

But – doesn’t this increase the bank’s risk?

Possibly, and that’s why appraisal wavers are not offered to everyone. In fact, in most cases they’re only offered to homeowners who are refinancing with no cash out and a history of making payments on time. Home buyers may be offered this option if they have excellent credit, a sizeable bank account, and solid income.

Banks do not go into funding blind. They have their own in-house software that evaluates properties when offering an appraisal waiver.

Borrowers face uncertainty either way. A lender’s “software estimate” may come in higher or lower than the actual value. But – so might an in-person appraisal. If you have been granted an appraisal waver and the estimate comes in low, you always have the option of requesting a traditional appraisal.

Note that not all lenders offer the appraisal waiver option. However, loans backed by Freddie, Fannie, or the VA do, as long as specific guidelines are followed.

If you’d like to know more or learn whether you could refinance with an appraisal waiver, give us a call at Homewood Mortgage, The Mike Clover Group. We’ll be glad to talk with you.

Call us today at 800-223-7409

 

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Changes in mortgage lending, thanks to COVID-19

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The pandemic has affected almost every other aspect of our lives. Of course it has affected mortgage lending.

First, the good news: mortgage interest rates are at their lowest levels in decades.

The bad news is that getting a mortgage loan has become more complicated and difficult.

It starts with the fact that the banks are afraid.

So many homeowners have taken forbearance that their cash flow is down. Now they’re worried that some of those homeowners will eventually go into foreclosure. They’re also afraid new borrowers could lose their employment and be forced into forbearance or default.

Forbearance isn’t a gift or a debt forgiveness. The payments will have to be made up at some time in the future. But for the present moment, every payment not coming in affects the bank’s liquidity.

The result of this fear is that banks have tightened their requirements. They want more money down and they require higher credit scores than they did just a few months ago. If your score is 580, you probably won’t get a loan. The minimum for FHA loans appears now to be 620, but some lenders are refusing to lend to anyone with scores under 680 or 700.

You’ll have to prove (repeatedly) that you can pay your mortgage payments.

The traditional “You must have steady income” requirement hasn’t gone away. That means even a loan in progress will come to a halt if you lose your job. Fortunately, due to the nature of unemployment these days, when you go back to work and receive your first paycheck, the loan can go forward.

Prior to the pandemic, lenders verified employment status two or three times before approving a loan. Now they verify as many as ten times – sometimes every 3 days.

The second roadblock is the virus itself.

Due to fear of COVID-19, offices are under-staffed, and some employees are working from home. That makes underwriting more difficult. Regional lock-down orders also make it more difficult to get information from Counties and title companies, and to arrange for a home inspection or an appraisal.

Some lenders are now using drive-by appraisals. That could be fine – or it could be terrible.

You can probably deal with your mortgage lender entirely by phone, email, and internet connections. However, you will probably have to sign the final documents in front of a notary. Due to social distancing requirements, some closings are now being done with masks and gloves – on the hood of a car.

Note that I said “probably.” A new on-line notarization service is gaining ground in some places. It’s a bit complicated, but we’ve heard that it works.

Record low interest rates make this a good time to refinance or take out a home equity loan, but…

Don’t do either without serious thought.

If you’re thinking or refinancing, first consider how long you intend to stay in your home.

Refinancing does cost money, so do the math before you jump. Closing costs will wipe out savings on your monthly payments if you plan to sell within the next couple of years. Do the math and compare your monthly savings with the cost of refinancing. If you’ll recoup the costs within 24 months and you plan to stay put for 5 or 10 years, then yes – go for it!

Taking out a home equity line of credit is a good way to consolidate high-interest debt and reduce your monthly outlay. It’s also a good way to fund needed repairs or remodeling. But do be careful.

If you use the home equity loan to wipe out credit card debt, stop using those cards for anything beyond what you can repay when the statement arrives.

If you use the loan to improve your house, be careful not to over-improve. Unless you plan to remain in your house for the next 20 years, don’t improve beyond the norm for your neighborhood. When it’s time to sell, the “best” house in a neighborhood often sells for less than you’d expect. This is because the neighborhood itself sets the upper limits on a home’s market value.

If you’re ready to purchase, refinance, or take out a home equity line of credit, give us a call at Homewood Mortgage, the Mike Clover Group.

We’ll be glad to discuss your situation, answer your questions, and get you pre-approved for a loan, if you’re ready act.

Call us today at 800-223-7409

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Do you like the idea of a no-fee mortgage?

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Of course. Most people do, at least until they learn the cost.

If you’ve seen the ads for no-fee mortgages, you might think they’re just what you need. And for a few people, they are.

However, nothing is really free.

To begin with, “no-fee” doesn’t mean the borrower only needs to come to closing with the down payment funds. Certain costs, such as those for credit reports, recording, flood service, appraisals, inspections, property tax and insurance reserves, and private mortgage insurance are provided by third-party vendors and are paid separately from the lender’s fees.

Some of these costs, such as insurance and property tax deposits, can be covered by rolling them into the loan balance. But then, or course, the borrower will pay interest on those funds.

Next, there’s the trade-off.

No-fee mortgages almost always carry a higher interest rate than you’d pay if you paid the lender’s regular fees. In the long run, that means your loan will cost more if you opt to pay no fees.

As an example: Closing costs across the U.S. are generally 2% to 5% of the loan amount. Taking the middle road, let’s say 3 ½%. On a $200,000 mortgage, that would come to $7,000.

Interest rates go up and down, but for this example we’ll use 4% with fees and 4.5% with no fees.

At 4%, your payment will be $954.83. Raising that by ½% brings it to $1,013.37, or $58.54 per month. Over the life of a 30-year mortgage, it will cost $21,074 – or $14,074 more.

Since it costs more in the long run, why would anyone want a no-fee mortgage?

Because they are sure they’ll want the loan only for a short time. Using the figures in our example, you’d be saving money if you sold or refinanced in less than 10 years.

If you plan to move in just a year or two, saving the fees is a smart move. It’s similarly wise if you know your income and/or credit rating is going to improve or if you believe interest rates will continue to fall, so you plan to refinance in just a couple of years.

It’s always wise to do the calculations, consider your plans, and weigh the pros and cons before making a major decision.

Here at Homewood Mortgage, the Mike Clover Group, we keep our fees on the low end – at about 2%.

As always, we’ll be glad to go over your options with you and do the math so you can make the right decision for your individual situation.

Call us today at 800-223-7409

 

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