10 Essential Mortgage Questions

When you apply for a mortgage, you are confronting issues that rarely come up in your everyday life.

The decisions you make now can affect your life for up to 30 years. To make sure they are good ones, be sure you know the answers to these essential mortgage questions:

1. How much house can I afford to buy?

A standard rule for lenders is that your monthly mortgage payment should not exceed 28% of your income before taxes. In some cases, this means that you may be approved for a higher amount than is realistic for your budget. Be honest with yourself about your financial commitments each month for mortgage, insurance, utilities and other costs associated with the home. Don’t decide whether or not you can afford a home on how much you were approved for.

2. Do I qualify for an FHA mortgage?

FHA mortgages are backed by the Federal Housing Authority and can be a far more economical choice for most buyers. Because of the reduced risk to lenders, they have more flexibility in what products they can offer you when it comes to credit scores, down payment, income and other requirements. To qualify for an FHA loan, you must be a first-time buyer and be approved by an FHA-approved lender.

3. Do I have to put money down?

A number of loan programs require no down payment at all. The VA loan is the most common, but there are many available to other borrowers as well. However, a decent down payment will lower your monthly payments and also increase your chances of being approved for a loan.

4. What is PMI?

PMI is the insurance you probably need to have if your down payment is less than 20 percent of the home value. When the down payment is larger, this can eliminate the need for PMI. On a $100,000 loan, you'd pay as much as $1,000 a year for PMI, or $83.33 a month.

5. Is a 15 or 30 year mortgage a better fit?

Short term mortgages are paid off sooner and usually come with lower interest rates. A 30-year mortgage will give you lower payments, however, which may work better with your budget.

6. Is a fixed or adjustable rate mortgage better for me?

In a low-interest market like we are currently experiencing, a fixed rate makes sense. However, if rates go up, you might do better with an ARM, which gives low rates at first but then adjusts to market rates later on.

7. What is the difference between the rate and APR?

The interest rate is what lenders use to calculate the mortgage payment. The APR is the actual cost of the loan. For instance, a loan with an interest rate of 5% may actually be higher once closing costs are added in.

8. What are discount points?

If the rate seems high, you can choose to pay discount points as a part of your closing costs to get a lower rate. A point is equal to one percent of the loan. If you have a $100,000 loan with two points, the charge will be $2,000. Knowing about these in advance can make it easier to assure that you can afford the loan.

9. What documentation do I need to get a loan?

You'll need your tax returns, pay stubs, bank statements and a few other documents to start. If documents are missing, such as your taxes from last year, the process will take longer.

10. How many lenders do I need to talk to?

FICO scoring allows you to consult as many as you want during a normal shopping period without adversely affecting your rating. Talk to a number of lenders to tie in the best rate.

By having these and other mortgage questions out of the way before you start, you can assure the best rate and a loan that will work for you through the length of your mortgage. Compare lenders and find the lowest rates by visiting our comparison tables at BestCashCow.com

Mortgage Rates at Three-Year Lows: The Time to Lock in Is Now

Now is the time to lock in your mortgage.

If you are thinking of refinancing your home or buying a new home, there is no better time than right now to lock in a low mortgage rate. That is because rates for both purchase and refinance mortgages are near historic lows, which means you could save a lot of money by applying for your loan today, before rates begin to rise. Interestingly, recent data from the Mortgage Bankers Association show consumers have been slow to lock in rates this spring - a move that could wind up costing you tens or even hundreds of thousands of dollars over the life of your loan.

Lock in Now for Greatest Savings

Mortgage rates tend to rise and fall based on the economy as well as the guidance from the Federal Reserve Bank, which meets regularly to review interest rates and decide if it is time to raise them or lower them. Currently, the rate has a range of 0.25 percent to 0.5 percent, which means there's very little chance the rates will go down. But based on the growing strength of the economy, there is a much better chance rates could go up - and that means locking in a rate now is critical.

Beyond historically low rates, there are other great reasons to lock in now. Mortgage lenders are offering some pretty amazing deals to home buyers and homeowners who want to refinance, including low closing costs and a wide range of point options to help rates stay as low as possible. Refinancing an existing mortgage can be a really smart financial move, especially if your current rate is a point or more above current rates. The savings from refinancing can be even more substantial if you plan on staying in your home for several years or more.

Finding the best mortgage product for your needs takes a little research, but our rate tables can provide you with a good starting point. Just remember: When comparing mortgages for a new home purchase or to refinance an existing mortgage, be sure to compare all the same variables - not just rate, but the length (or term) of the mortgage, the points you will need to pay upfront and other closing costs. Only by comparing "apples to apples" can you make sure the mortgage you are getting is the best for your needs. Another tip: Be realistic about what you can afford. When rates are very low, it can be tempting to take out a bigger mortgage than you really need. Know the amount you need, and stick to it. Take a few moments right now to visit the rate tables and learn more about the low rates being offered by leading lenders. Then take the next step and lock in your rate. Considering an average mortgage can affect your finances for the next 30 years, it could be one of the wisest financial moves you will ever make.

5 Tips for Buying a Vacation Home

With winter's arrival and the end of year holidays, many of us have or will travel to our favorite vacation destinations. Among all the fun often comes dreams of buying a vacation home in our favorite destination. Owning a vacation home can bring extra comfort and excitement to a trip, but comes with additional responsibilities and expenses. It is very important to know what you are getting into before you buy. Here are five tips for buying a vacation home.

1. Understand why you want to buy a vacation home

  • How much time will you realistically spend there?
    • How far away is the vacation home? Is it easy for you (and your family and friends) to visit frequently? When during the year will you spend time there?
  • Have you spent time there before? Is it a place you love?
    • Vacation homes generally do not make the best investments. And they can be hard to sell. Buying a vacation home makes sense if you are buying it for your enjoyment. If you frequently visit the same place, multiple times a year, year over year, then owning a vacation home in that place may make better financial sense than renting a place or staying in a hotel each time you visit.
  • Do you plan to rent the property when you aren’t there?
    • Rental income can help offset the costs of owning and maintaining a vacation home, but also brings risk of loss and damage.
    • How will you manage the property when you aren’t there? Is there a reliable, responsible property management service available?

2. Work with an experienced agent who knows the area well.

Agents who know the area well can help you find the best property to meet your budget and vacation desires. They also understand the ins, outs, ups and downs of the market, can provide guidance in terms of making a successful offer, and help you identify property managers and other resources.

3. Budget realistically

  • Be sure you can truly afford your desired vacation home. When creating your budget, include maintenance, insurance, utilities, taxes, HOA fees, property management fees, etc. If you plan to rent your vacation home when you aren’t using it, be conservative in estimating rental income in your budget.

4. Understand the tax implications

  • If you have a mortgage on your vacation home, you may be able to deduct the mortgage interest and real estate taxes for your vacation home using Schedule A.
  • Alternatively, if you rent your vacation home at least 15 days per year, you may be able to deduct mortgage interest, real estate taxes, maintenance, depreciation, etc. from your rental income using Schedule E.
  • Check with your accountant or CPA to fully understand the tax implications and requirements specific to your situation.

5. Financing a vacation home is different than financing a primary home

  • Be prepared for higher rates than that for your primary home
    • Rates may be about the same as you can get on your primary home, but you should always be prepared for a higher rate. Second homes often introduce additional risk to the loan, which leads to higher rates to offset the risk.
  • Property requirements vary by loan type, but typically include at least some of the following:
    • Must be located a reasonable distance away from the borrower’s primary residence.
    • Must be occupied by the borrower for some portion of the year.
    • Must be suitable for year-round occupancy.
    • The borrower must have exclusive control over the property.
    • Must not be rental property or a timeshare arrangement.
    • Cannot be subject to any agreements that give a management firm control over the occupancy of the property.
    • May not belong to a rental pool
    • Rental income (from the subject property second home) cannot be used to qualify the borrower
  • Property type makes a big difference in regards to your financing options
    • When buying a single family home for your vacation home, you have the most options – similar to buying a primary residence
    • When buying a condo or condotel, there are fewer options and more requirements for the available options
      • What is a condotel you ask? A condotel is a condo building that has a registration desk, a “rental pool” and central management of rentals, and offers nightly rates for the units. Condotel’s are not subject to management and rental pool restrictions typical to most second home financing programs. Condotel’s are sometimes referred to as “resort condos”.
      • Financing a condotel can be difficult.
        • Many lenders do not have loan products for condotels. Before you get too far along in the buying process, be sure that your lender can support the loan. In many cases, particularly in beach resort areas, specific programs are set up by local lenders. 
        • Even when a lender does have a condotel product, the loan guidelines may not meet your needs. For example, there may be a minimum down payment amount or minimum/maximum loan amount to consider.
      • If your condo building does not have a registration desk, nightly rentals, and most residents live there full time, then your condo likely qualifies for standard condo loan programs, which are very similar to buying a single family residence. The key differences in buying a condo are the need for the condo management or HOA to complete a “condo questionnaire” and provide documentation and meet guidelines for insurance. So, more guidelines and paperwork, but many financing options are typically available.
  • The treatment of rental income for investment properties is different than for a second home
    • Rental income from the property cannot be used to qualify for a conventional loan
    • “Personal use” days must be greater than 14 days or 10% of the days available for rent at a fair price. If your personal use days are less than 14 days or 10% of available days, then the property is considered an investment property

Buying a vacation home is supposed to improve your future vacations! If you find a home that meets your vacation needs and fits your budget, and you are realistic about the financing process, then you should have an enjoyable experience.