Tag Archive for: home loan

Who Qualifies as a First-Time Homebuyer?

April 10, 2024

Multiracial couple holding keys and standing outside their new h

We know the story: Part of you is thinking about homeownership, but another part is unsure whether you’ll qualify as a first-time homebuyer. The mortgage process can seem intimidating the first time around, which is completely understandable. You haven’t owned a home before!

Not to worry, though, because Preferred Rate is here to shed some light on what it means to be a first-time homebuyer, the loan programs available to you, and any questions you may have on items like minimum credit scores, down payment assistance, interest rates, closing costs, income limits, and more.

So let’s get to it!

What Is a First-Time Homebuyer?

Let’s start with the basics: First-time homebuyers are generally defined as those who have not owned a primary residence within the past three years. This definition can vary slightly depending on which loan programs you’re considering.

Who Qualifies as a First-Time Homebuyer?

It may sound strange, but contrary to popular belief, the term “first-time homebuyer” refers to more than just people who haven’t owned a home before. You may still be considered a first-time homebuyer if you owned a home in the past but meet certain criteria.

For instance, if you’ve experienced a significant life event that prevented you from purchasing a home in the past three years, such as a divorce or a foreclosure, you could still qualify for some first-time homebuyer loan programs.

Naturally, the qualifications can vary based on the loan program. With a VA loan, offered through the Department of Veterans Affairs, you must be an active-duty service member, veteran, or surviving spouse of either group. A first-time homebuyer would still have to meet all the qualifications for the VA loan as a first-time homebuyer, in addition to proving their eligibility status.

Can You Have Previously Owned a Home?

As we just touched on, yes. There are instances where you might have owned a home before but can still qualify for a first-time homebuyer program. Typically, the most important stipulation is that you can’t have owned a primary residence within the past three years.

What Programs Are Available to First-Time Homebuyers?

There are lots of loan programs created specifically to help first-time homebuyers achieve their goal of owning a single-family house. These programs are often offered through government entities, such as the Federal Housing Administration (an FHA loan), the Department of Veterans Affairs (a VA loan), and the Department of Housing and Urban Development (a HUD loan).

For example, the FHA loan program provides some benefits to first-time homebuyers, including lower down payment requirements and lower minimum credit scores. VA loans also offer those who qualify as a first-time homebuyer—and who are veterans/active-duty service members/surviving spouses—the chance to purchase a home with no down payment. There’s no better form of down payment assistance than that!

You’ve also got Fannie Mae and Freddie Mac. They offer loan programs that assist first-time homebuyers in accessing affordable mortgage options with competitive interest rates and flexible eligibility requirements. These include financing up to 97% of the purchase price, meaning that you make a 3% down payment.

You can also use nontraditional income sources such as alimony payments, Social Security, rental income, and so on, to qualify for these guaranteed loans. A mortgage lender can give you the lowdown on all the attractive loan programs that may be right for you.

Many people also overlook the various incentives for purchasing in rural areas. The U.S. Department of Agriculture offers loans that are guaranteed by the USDA Rural Development Guaranteed Housing Loan Program. These loans generally offer no down payments and lower interest rates if you buy in rural areas.

Do You Need to Be a First-Time Homebuyer to Take Advantage of Down Payment Assistance?

Down payment assistance (DPA) programs are frequently available to first-time homebuyers to help mitigate the upfront costs associated with buying a single-family home. These can include the down payment and closing costs.

You may assume that these programs are normally for first-time buyers, since they may need the most help on their first single-family home purchase. But many DPA programs are open to other buyers as well. These can include those who meet certain income limits, minimum credit scores, and other criteria, regardless of whether they’ve owned a home before. DPA programs tend to vary by location and may be offered at the federal, state, or local levels.

Need More Help with Your Home Purchase?

The term “first-time homebuyer” can apply to more than just individuals who have never owned a home before. Those who haven’t owned a principal residence within the past three years may still qualify for various loan programs and closing cost assistance programs designed to make homeownership more accessible for everyone.

Even with all this information, it’s important to consult a knowledgeable mortgage lender when determining who qualifies as a first-time homebuyer. Our Preferred Rate Mortgage Advisors can guide you through the process and help you discover which loan programs you qualify for.

Whether you’re interested in an FHA loan, a VA loan, or a conventional mortgage, there are almost certainly options out there that will fit your financial situation.

So we’ll leave you with this: Homeownership is within reach for many, many people, regardless of whether you’re a first-time homebuyer or have owned a home before. With the right resources and guidance, you can achieve your dream of owning a home.

Contact a Preferred Rate Mortgage Advisor today to explore your options and get on the path to homeownership!

Don’t Miss These Top 5 Tax Breaks for Homeowners

April 3, 2024

When you own your own home, you want to make sure you take every deduction possible to maximize your tax refund. Many people view these refunds as “found money,” but they’re really not. It’s money that you’re entitled to receive back…as long as you claim the proper deductions.

Owning a home is often considered a cornerstone of the American dream. Beyond the pride and security of homeownership, there are also financial perks that come with it, particularly when it comes to tax benefits. Understanding these tax advantages can mean significant savings and a more efficient financial strategy for many homeowners.

In this blog, we’ll explore how being a homeowner can provide certain tax benefits, from deducting mortgage interest to leveraging home improvement expenses. By the end, you’ll understand how homeownership can positively impact your tax situation and overall financial well-being.

Being a homeowner—especially one with a mortgage or one who has recently carried out major renovations—can certainly thicken that refund when you’re knowledgeable about what counts as a deduction. With that said, it’s only natural to wonder how these improvements, mortgage interest, taxable income, and itemized deductions might impact your tax return and potential tax refund.

We’re completely aware that taxes can get complicated, but that’s why we’re here to help!

Here are some of the most important tax deductions that homeowners can take advantage of.

1. Mortgage Interest Deduction

Here’s one of the main tax benefits of becoming a homeowner: After buying a home, you can claim the interest you’ve paid on your mortgage for the past year, which is tax-deductible (if it meets a few criteria).

If your mortgage fits into any of these three categories, then you can deduct the interest on it:

You took out a mortgage on or before Oct. 13, 1987 (called grandfathered debt).
You (or your spouse if married filing a joint return) took out a mortgage after Oct. 13, 1987, but before Dec. 16, 2017, to buy, build, or significantly improve your home (aka home acquisition debt), and these mortgages—plus any grandfathered debt—totaled $1 million or less ($500,000 or less if married filing separately).
You (or your spouse if married filing a joint return) took out a mortgage after Dec. 15, 2017, to buy, build, or substantially improve your home, and that mortgage—plus any grandfathered debt—totaled $750,000 or less ($375,000 or less if married filing separately).

Your loan servicer will send you a tax form (IRS Form 1098) well before the tax filing deadline summarizing how much you paid toward your mortgage’s principal versus the interest portion of your mortgage payments.

2. Points

If you purchased points for a new mortgage, to refinance an existing mortgage, or paid on loans secured by your second home, these points can be deducted over the term of the loan. If you paid upfront for this rate reduction, you can deduct the points that same year (the year you paid for them).

Like mortgage interest, discount point deductions are limited for homes costing more than $750,000. This limit jumps to $1 million for mortgages originated before Dec. 16, 2017.

A few more rules on the tax benefits of mortgage points:

The points can’t be used to finance standalone fees, such as property taxes. And you must have had the funds to purchase the points. These funds can’t be a gift and can’t come from a loan. The amount you paid for points must be itemized as points on your statement.
You can deduct all your points at once during the tax year when you purchased your home, or you can write off a percentage of your points each year you have your mortgage.
Points that you purchased for refinancing a mortgage can also be tax-deductible, but only over the life of the loan, not all at once. Homeowners who refinance can write off the balance of the old points and begin to amortize the new points. Loan origination points are not deductible.*

3. Home Improvement Loan Interest

It used to be that if you took out a loan to do some major home improvements, you could deduct the interest paid on that loan. That tax break is no longer available, but many people still wrongly assume this interest will be tax-deductible.

However, you can still get a tax benefit from two types of home improvements: home renovations that are considered medical expenses and solar energy installations.

On the medical expenses front, tax-deductible expenses include items like wheelchair ramps, support bars for bathtubs or toilets, doorway modifications, stairway renovations, and warning systems. Essentially, any accessibility item that would make a home safe and inhabitable for someone with specific medical needs will qualify.

The money you pay to install solar energy systems isn’t tax-free, but these systems can save you money on your tax bill. If you make qualified energy-efficient improvements to your home, you may qualify for a tax credit of up to $3,200. You can claim the credit for improvements made through 2032.

As of Jan. 1, 2023, the credit equaled 30% of certain qualified expenses, including:

Qualified energy-efficiency improvements installed during the year
Residential energy property expenses
Home energy audits

There are limits on the allowable annual credit and on the amount of credit for certain types of qualified expenses. The credit is allowed for qualifying property placed in service on or after Jan. 1, 2023, and before Jan. 1, 2033.

The maximum credit you can claim each year:

$1,200 for energy property costs and certain energy-efficient home improvements, with caps on doors ($250 per door and $500 total), windows ($600), and home energy audits ($150)
$2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers

The credit has no lifetime dollar limit. You can claim the maximum annual credit every year that you make eligible improvements until 2033. The credit is also nonrefundable, so you can’t get back more on the credit than you owe in taxes, and you can’t apply any excess credit to future tax years.

Use previous versions of Form 5695 for any improvements installed in 2022 or earlier.

4. Property Taxes

You can deduct up to $10,000 in property taxes paid each year ($5,000 if you’re married filing separately), which includes both state and local taxes.

If you have a mortgage with an escrow account, the amount of real estate property taxes you paid will appear on your annual escrow statement.

This doesn’t include transfer taxes on the sale of your home, HOA assessments, payments on loans that finance energy-efficient home improvements, public assessments, or property taxes you have yet to pay.*

5. Home Equity Loan and Line of Credit Interest

Although you can’t deduct most home improvements, you can deduct home equity loan or home equity line of credit interest if you used home equity proceeds for renovations.

For tax years 2018 through 2025, if home equity loans or lines of credit secured by your main home or second home are used to buy, build, or significantly improve the residence, then the interest you pay on the borrowed funds is classified as home acquisition debt. This means it may be deductible and subject to certain dollar limitations.

Here’s where it gets tricky, though. Interest on the same debt used to pay personal living expenses, such as credit card debts, is not deductible. However, for tax years before 2018 and after 2025, the interest you pay on the borrowed funds for home equity loans or lines of credit secured by your main home or second home may be deductible (subject to certain dollar limitations), regardless of how you use the loan proceeds. For example, if you use a home equity loan or a line of credit to pay personal living expenses, such as credit card debts, you may be able to deduct the interest paid.

There are a couple of other rules as well. The renovations must be made on the same home where you tapped the equity. For example, you can’t take out a home equity loan on your primary residence to renovate your vacation home and claim that as a deduction. You also can’t take out a home equity loan to create an emergency fund (or to use it for anything other than improving your home) and expect to claim it as a deduction.

Enjoy All the Tax Breaks for Homeowners

Taxes, like loan applications, require diligent recordkeeping and often a heap of paperwork. Thankfully, owning your own home can provide some major relief on the tax front, though you want to review the most recent rules surrounding tax deductions before you file.

As the Tax Cuts and Jobs Act proves, certain laws and deductions change over time. Be sure you know about all the tax deductions you have coming your way while steering clear of old rules that could get you in trouble with the Internal Revenue Service.*

Owning a home means more than just a place to call your own. It can come with great benefits like appreciation, the ability to customize your living space, and a break come tax season. From deducting mortgage interest to leveraging home improvement expenses, homeownership can have a big impact on your tax situation, which means it can have a big impact on your financial health.

Maximize your savings and make the most out of your homeownership investment by taking advantage of these tax benefits and staying informed about relevant tax laws/regulations that apply to your situation.

Preferred Rate Mortgage Advisors are not tax professionals, but they have access to information about what is typically considered an allowable tax deduction related to homeownership. Consulting with a tax professional or financial advisor can provide personalized advice that maximizes your tax strategy.

* The information provided has been prepared for informational purposes only and is not intended to provide—and should not be relied on for—tax, legal, or accounting advice. You should consult your tax, legal, and accounting professionals for information specific to you.

8 Questions Homebuyers Should Ask About Mortgages

March 11, 2024

Finally a home of our own. Shot of a young couple celebrating the move into their new house.

We know you know that buying a house is a major investment—one that can pay off in more ways than one, but still a major investment. This can weigh on a first-time homebuyer who has never made such a large financial commitment.

First, congrats on even considering taking this step! Buying a home requires confidence, perseverance, and knowledge. Second, if you’re freaking out because you’re not sure you know everything you should about getting a home loan, fear not.

A real estate agent is there to help you house-hunt and submit an offer on the home of your dreams. A loan officer is there to walk you through the mortgage process. They will help you figure out what your monthly payments might be, the terms of your home loan, and any other financing questions you have when buying a home.

If you’re a first-time homebuyer, you may not know exactly which questions you should ask. Or you may just be too embarrassed to voice them. Understand that there are no stupid questions when it comes to buying a home, especially as a first-time homebuyer. A trusted loan officer not only recognizes that you don’t know what you don’t know, but they are also a pro at walking you through every step of the process.

So let’s answer some of the most common questions homebuyers should ask. That will make it easier to move on to the fun stuff (like imagining the man cave or she-shed you plan to erect in the backyard).

1. How Much Home Can I Afford?

Fact check: Calculating a budget is the first step in the homebuying journey. You’ll want to figure in things like your income, debts, and expenses to come up with a realistic number. Remember, too, that just because you can qualify for a larger, more expensive house doesn’t mean you need to max out your budget.

Reducing that number by thousands of dollars (or tens of thousands of dollars) can make a noticeable difference in your monthly payments. Plus, you will want to save some cushion for all the expenses that come with buying a home. These include a home inspection, homeowners insurance, a home warranty, and some money set aside for repairs or upgrades to major systems.

2. What Will My Monthly Payments Be?

Fact check: Naturally, the monthly payments on a home loan vary for everyone. That’s because there are many factors that go into this calculation. You have to think about the cost of your home, the closing costs associated with the loan (and whether you choose to roll those costs into the mortgage or not), the size of your down payment, your interest rate (and whether it’s fixed or variable), and the term of your loan.

You should remember to add in any homeowners association (HOA) dues. Also consider the cost of private mortgage insurance (PMI) if you’re putting less than 20% down with most loans. Preferred Rate’s Home Affordability Calculator can help you get an accurate sense of what your monthly payments may be, based on a few variables. A Loan Advisor can help you get a good estimate as well.

3. How Much of a Down Payment Do I Need?

Fact check: You will often hear recommendations for a 20% down payment, but many home loan programs offer flexibility by including much lower down payment options.

The amount of the down payment can vary based on several factors, including the type of loan, the requirements, and the buyer’s financial situation. Here are some general guidelines for common mortgage types:

Conventional loans: Typically require down payments ranging from 5% to 20%. Some lenders may offer conventional loans with a down payment as low as 3%, especially for first-time homebuyers.
FHA loans: These loans require a minimum down payment of as little as 3.5% of the purchase price. FHA loans are popular among first-time homebuyers due to their lower down payment requirements.
VA loans: Eligible veterans and active-duty military personnel may qualify for VA loans, which often require no down payment.
USDA loans: These loans, designed for homebuyers in more rural areas, may also offer 0% down payment options.

It’s important to note that a higher down payment typically results in lower monthly mortgage payments. It may also affect the interest rate on the loan. You should carefully consider your financial situation, your goals, and the specific loan programs available to determine the most suitable down payment amount for your circumstances.

Your loan officer can also help with this by reviewing all the pros and cons of each option available.

Down payment assistance (DPA) programs and gift funds can also help you close the gap. Down payment assistance programs often come in the form of grants or low-interest loans, providing a valuable resource for individuals looking to make their homeownership dreams a reality.

Additionally, gift funds from family members or friends can contribute to the down payment, easing the financial burden on the buyer and facilitating a smoother transition into homeownership.

4. How Much Are the Closing Costs?

Fact check: Closing costs typically range from 2% to 5% of the home’s purchase price. They include various fees, including lender fees, the home inspection, the title, and escrow services.

Lender fees are charged by the lender for processing and facilitating the loan. These fees can include a loan origination fee, application fee, processing fee, and underwriting fee. These fees do not necessarily apply to all loans, but your loan officer can go over which fees apply to the options you’re considering. Additionally, your loan officer will provide a full loan estimate at the time of application (or very shortly thereafter) so you can get a clear look at the overall costs.

Getting a home inspection is totally up to you, but it can be a super smart move. It’s like giving your future home a thorough check-up before you seal the deal. This way, you can spot any sneaky issues hiding behind the walls or under the floors before you make it official.

Additionally, there are government-related fees, such as recording fees and transfer taxes, which vary by location and are essential for legally documenting the property transfer. There are also third-party fees, such as title insurance, credit report, appraisal, and escrow fees.

There’s also homeowners insurance to consider. Lenders will ask for it to be in place in time for closing. Also, when you’re sorting out the nitty-gritty at closing, you might bump into some other expenses, like property taxes and HOA fees, which are often prorated and paid in advance at closing.

Your Loan Advisor will provide a detailed breakdown at the start of the process so you can take a look at all the closing costs. They’ll explain the different ways you can cover these fees—including rolling them into your home loan.

5. What Documents Will I Need?

Fact check: When applying for a mortgage, you’ll want to provide financial documentation like W-2s, pay stubs, bank statements, and tax returns. And in a perfect world, you will get pre-approved before you start the house-hunting process.

Each loan program has specific requirements that your Loan Advisor can discuss with you in detail.

6. What Is the Interest Rate, and Should I Lock It In Now?

Fact check: Interest rates play a major role in your monthly payments and overall affordability when buying a house. They also change on a daily basis. This means that the rate you see when you first begin to think about buying a home may not be the rate you’re able to lock in once you complete your home loan application.

Since rates change so frequently, there is no one right answer about whether it’s best to lock in your rate or let it float. What you can do is discuss it with your Loan Advisor, which is why this is one of the best questions to ask when buying a home. Programs like SecureLock™ also offer peace of mind by locking in today’s rates for an extended period.

7. Are There Any Pre-Payment Penalties with This Home Loan?

Fact check: Paying off your loan early can save you thousands of dollars in interest over the long run. However, some loans may have pre-payment penalties where you’re actually penalized for paying your home loan off early.

That’s why this is one of the important questions homebuyers should ask before settling on a loan. It’s perfectly fine if you opt for a loan with a pre-payment penalty if your game plan is to keep the loan through the pre-payment period. But it’s something you’ll want to discuss before you sign on the dotted line. If pre-payment penalties are a deal-breaker for you, then your loan officer should know that.

8. Are There Any Other Things I Should Consider?

Fact check: In addition to the mortgage-centric questions above, there are other factors to think about when buying a home.

As mentioned, you’ll want to conduct a thorough home inspection to identify any problems with the house. Also verify the condition of major systems, including plumbing, electrical, and HVAC. This can help you avoid any surprises that can cost thousands of dollars.

You have to keep in mind that once the sale closes, the house is yours for better or for worse. You can always negotiate on points like which items the seller is including in the sale of the house. And you can certainly request repairs or upgrades in your offer.

But only the items signed off in the final sale will make the cut. Any problems with the house after the fact are now yours to handle. With that in mind, there are a few more questions homebuyers should ask before they get too far into the home search. They include:

How long has the house been on the market?
When was the last time the seller repaired or replaced any major systems?
What items are included in the sale of the house?
Has the homeowner had any problems with the house recently?

Your real estate agent can work to get you these answers. You can also consider buying homeowners insurance and a home warranty. These protections can provide peace of mind if problems with the house do materialize.

Help with Home-Buying

We know that starting the mortgage process is a major step for a first-time homebuyer who’s thinking about buying a home—and we’re here with you and for you. Contact us anytime to get some basic information, have your specific questions answered, or start the home loan process.

Interest Rate Buydowns: Permanent vs. Temporary Buydowns

March 4, 2024

Many would-be homebuyers are feeling the pinch from rising interest rates, but you don’t have to! Preferred Rate has buydown options to help you reduce your mortgage interest rate and get you the lowest monthly payments possible.

Interest rate buydowns are the key to lower interest rates, a smaller monthly mortgage payment, and saving you money.

The current housing market has kept many buyers on the sidelines. When interest rates were low, competition was fierce, and prices were high. With higher interest rates today, it’s harder for buyers to qualify. And even if they can qualify, the idea of a higher mortgage payment can be cause for pause.

That’s why Preferred Rate provides solutions for borrowers with permanent or temporary interest rate reduction options. Both temporary and permanent rate buydowns provide opportunities to reduce your monthly payments.

Temporary Buydowns

Preferred Rate offers borrowers two temporary buydown programs. The first is a 3-2-1 buydown, where the interest rate is reduced by 3 percentage points the first year, 2 percentage points the second year, and 1 percentage point the third year. You can read more about this program by clicking here.

Preferred Rate also offers a 2-1 buydown. This program reduces the interest rate by 2 percentage points during the first year and 1 percentage point in the second year of the loan.

At the end of your buydown term, the interest rate will adjust to the original rate (the full interest rate that you locked in when you bought your home). It will stay at this rate for the duration of the home loan or until the loan is refinanced or paid off.

These programs are great options, because temporarily lowering your interest rate allows you to gradually work up to making the full payment. This can take massive pressure off you as a new homeowner.

As we know, interest rates don’t stay stagnant; they rise and fall and change direction. If interest rates ever fall to a level that makes sense for you, you can consider refinancing.

And here is even better news: The money for the temporary buydown goes into an escrow account and is applied to your loan every month during the buydown period. If you refinance or sell during that period, the unused portion gets applied to your home loan, reducing the balance of your loan.

This type of strategy allows you to take advantage of today’s buyer’s market—one in which sellers are much more open to concessions and negotiations than they were even six months ago. You will also face less competition, which means you have a better chance of making a successful bid on your dream home.

Having your mortgage lender provide a pre-approval that incorporates buydown scenarios to include with your offer can also help secure those seller concessions to pay for the buydown!

Permanent Buydowns

Our second interest rate buydown option is a permanent buydown. This type of buydown lasts for the entire loan term. With a permanent mortgage rate buydown, you pay a fee known as discount points to lower your interest rate for the life of your loan. You can purchase as little as 0.125 of a point or as much as 4 points, depending on the loan program.

Each point is equal to 1% of your loan amount, and this fee is due at closing. For example, if your loan amount is $500,000, then 1 point will cost $5,000. It’s best to determine how long you want to remain in your home before investing in a permanent buydown. This is to ensure that you can recoup the upfront costs through a lower payment amount over time.

The breakeven point on permanent buydowns will depend on how much you have contributed and the overall monthly savings. Your Preferred Rate Mortgage Advisor can give you a breakdown of your specific scenario to ensure that you make the right decision.

If you’re planning to stay in your home for 10-plus years, a permanent buydown can save you a lot of money. However, if this home is more of a stepping stone for you, it may be wiser to choose a temporary buydown that can yield some good savings for 12 months or 24 months.

With a lower monthly payment amount, you can put the money you save toward your home, credit card debt, student loans, or an emergency fund. A lower interest rate also means you can qualify for more house, which can be a big deal in many markets.

Benefits of Interest Rate Buydowns

Whether you choose a temporary or permanent rate buydown, there are benefits to you:

Lower payments: By paying a lump sum upfront, buyers can secure a lower interest rate for the initial years of the mortgage—or permanently. This relief makes homeownership more affordable initially and over the long term.
Improved affordability: Lower monthly payments can enhance a buyer’s ability to qualify for a mortgage and to afford a more expensive home. This can be particularly beneficial for first-time homebuyers or those with tight budgets.
Financial relief: Interest rate buydowns provide relief by reducing the financial strain in the early years of homeownership. This can be helpful for buyers who anticipate an increase in income down the road or will have other financial priorities during the initial years of the mortgage.
Easier budgeting: Predictable and lower monthly payments make it easier for buyers to budget and manage their finances. This stability can be especially valuable for those who prefer to make consistent payments while adjusting to the responsibilities of homeownership.
Potential long-term savings: Depending on the buyer’s financial situation and how long they plan to stay in the home, the savings from lower interest rates can outweigh the upfront cost of the buydown. This can result in long-term financial benefits.

And here’s another piece of good news: When sellers are motivated, they may be willing to pick up the fees involved with your permanent or temporary buydown. Seller concessions toward closing costs have been popular in creating one more reason why this could be the ideal time to buy a home.

Is an Interest Rate Buydown Right for You?

It’s important to weigh the pros and cons of an interest rate buydown with a mortgage professional who can consider your current financial situation and short- and long-term goals. To connect with a Preferred Rate Mortgage Advisor, click here.

Disclaimer: Subject to change without notice, terms and conditions apply. Equal Housing Lender.

How Much One Extra Mortgage Payment Can Save You

January 9, 2024

happy family mother father and child daughter dancing at home

You finally own that home you always wanted. You’re benefiting from the financial perks, but with a new home comes a new monthly mortgage payment … and perhaps a new interest rate to consider.

You may not know this, but at the beginning of your mortgage, a lot of that monthly mortgage payment goes toward interest. That’s because your loan balance is still at or near the original amount you borrowed since you’ve just started paying it off.

When you’re calculating your annual budget with your new mortgage payment, it can be wise to consider paying extra toward your mortgage in the form of an additional payment.

There are three reasons why this could be a smart move for you. You might be surprised at how much money one extra mortgage payment can save you.

Reason #1: Saves Money on Interest

When you pay extra money toward your mortgage payment, you can specify that you want that money going toward your principal.

This will gradually—but noticeably—reduce your loan balance.

And what does a reduced loan balance mean? It means you’ll pay less interest over time. It means you can pay off your mortgage early. It means you’re saving money.

The lower your loan balance, the less interest is added to the mortgage payment each month. These savings won’t affect your monthly payment during the loan. But by the time you pay it off you will have saved thousands of dollars in interest—and reduced the time you’re making those pesky monthly payments.

Reason #2: Build Equity Faster

As you reduce your principal and interest, your equity increases (assuming home values are maintained). Having equity built up in your home increases the value of your investment, which translates to increased profits if and when you decide to sell.

Equity also provides an option for future home improvement loans, if needed.

And if you have less than 20% equity and are paying PMI (private mortgage insurance), those extra payments will help get you to the 20% threshold faster so you can eliminate the PMI payment.

Reason #3: Pay Off Your Mortgage Early

What can one extra payment a year really do to the term of your loan?

That one additional payment may help you pay off your mortgage as much as three to four years early—and if you make more than one additional payment per year, it’s even faster!

Not only do you save money on interest, but you’ll be clear of having a mortgage payment at all much more quickly.

Just think about what those dollars could be used for. College tuition, vacations, a second home, or even an investment property. That one extra payment allows you to build long-term wealth.

In the end, it doesn’t matter what you do with the extra money—the point is that it’s your decision to make. Even if your goal is simply to become debt-free, those extra mortgage payments will get you there faster.

How to Make an Extra Mortgage Payment

There are multiple ways you can make extra mortgage payments. Here are three strategies that might work for you:

1. A Lump Sum Payment

Save any extra money throughout the year until it equals one extra mortgage payment. Then send it in at any point during the year, but be sure to specify that this is a principal-only payment.

If you’re not sure how to do this, contact your loan servicer for instructions.

2. Extra Dollars in Each Monthly Payment

Divide your monthly mortgage payment by 12, and then add that amount to each monthly payment.

For example, if your monthly mortgage payment is $1,200, that would be 1,200 divided by 12 months, which equals $100. That’s the extra money you would add to each monthly payment to chip away at your mortgage balance.

In this scenario, you would then increase the amount you send in for your mortgage payment to $1,300 a month ($1,200 + $100). Be sure to confirm that the extra funds will be applied to your principal loan balance.

3. Biweekly Payments

Just like you might be unaware of what a dent an extra mortgage payment can make in the life of the loan, you may not realize what a biweekly payment can do.

By simply dividing your monthly payment in half and paying that amount every other week, you’ll create an additional payment every year. That’s because the length of each month varies, but the number of weeks in a year does not.

Relying on a biweekly schedule allows you to capitalize on this discrepancy, resulting in an extra payment. After all, 26 half-payments per year is equal to 13 whole payments … giving you an extra payment and hardly noticing it!

Before You Dive In

Now, a few disclaimers. Before you decide to start making extra mortgage payments each year, you want to make sure you’re financially healthy.

If you have high-interest debt or a 401(k) that needs to be funded, any extra money may be better spent on these items.

You should also keep an emergency fund that can cover at least three months—but ideally six months—of living expenses. This will protect you in case something happens to your employment or income.

Lastly, you want to check with your loan officer to ensure that your mortgage doesn’t carry prepayment penalties. Most of these penalties apply to much larger paydowns, but you’ll want to be sure before you start sending in money.

One thing to note is that these penalties expire after a specified amount of time (usually no longer than five years), so if you have such a penalty, just sock the extra money away and make one larger payment after the penalty period expires.

Though one additional mortgage payment per year may seem like a drop in the bucket, especially early in the life of the loan, this extra money will soon add up.

Before you know it, your diligence will help you reach your goals sooner.

Ready to put that extra money toward your mortgage payment and understand the savings you could unlock? Our Preferred Rate Mortgage Advisors are here to help. Give us a call today!

The Pros and Cons of Buying New Construction

February 12, 2024

Couple make their dreams of building their own home come true visiting house under construction

Are you having a rough time finding the exact home that meets your vision? Then building your dream home may be the right strategy for you. A custom home can take a few forms.

This label encompasses everything from buying a newly built home that allows for a few customized home plans to hiring a custom home builder who can tailor every plank, light switch, and master bedroom angle to your exact specifications.

However, before you start building your dream home, you want to be sure you’re comfortable with the level (and cost and time) of personalization in this custom home.

So let’s dive into the things to know before building a home.

The Builder Floor Plan

One of the most attractive features of new construction homes is the carefully crafted builder’s floor plan. Professional home builders are, well, pros at what they do. The engineers, architects, and contractors know how to maximize space and provide layouts that appeal to the masses. You shouldn’t overlook this expertise, especially when it comes to the eventual resale value of your home.

On the other hand, some people want what they want. New construction home builders aren’t the same as custom home builders. That means there are limitations to custom home plans. That’s why the thought of building a house with a custom home builder can be appealing.

For instance, if you run an in-home daycare, you may want a larger living room or expansive loft space. If a family member uses a wheelchair, you may want to create a certain bed-bath parity or modify entire rooms. If you’re training to be a contestant on America Ninja Warrior, you may need a backyard large enough to accommodate an obstacle course. You get the drift…

Buying an existing home or new home construction can be convenient, but you also want to ensure that it meets your specific needs. Consider whether new construction home plans will work for you and your family. If they don’t, then it might be a good idea to think about a custom home builder.

Neighborhood Considerations

This may sound obvious, but among the things to know before building a home is the fact that new construction is located, well, where it’s being built.

What do we mean by that? We mean the neighborhood or subdivision is naturally chosen for you. The houses are where they are. You either like their location, community amenities, schools, surrounding retail, and so on—or you don’t.

If you’re building a house, however, you can choose your location. (Well, choose your location within reason, that is.) You’ll still need to find a vacant lot that allows you to build your custom home.

If you’re going out on your own with a custom home builder, you do want to consider the fact that you won’t have any shared community amenities, such as a pool, pocket park, or clubhouse that come with many new construction neighborhoods, especially the ones that have homeowners associations (HOAs).

Minimal Modifications

The promise of a new and fresh home equipped with the latest in technology is a major perk of new construction. The building process incorporates state-of-the-art features, ensuring your home is aesthetically pleasing and super-advanced. Features like modern lighting fixtures, smart home technologies, energy efficiency, and extra storage space can create a dream custom home design.

Yet this advantage comes with a downside—the limitations on modifications. While you can work with the builder to achieve some customization, making major changes can be complex and costly. This is where the services of a custom home builder become invaluable. Opting to build a custom home from the ground up provides the flexibility needed to align the home with your unique preferences and lifestyle.

New construction typically has room for some personal touches but won’t allow for major modifications to the original plans. That’s because these can be both time-consuming and expensive.

If you have a really specific vision in mind for, say, the way your master bedroom is configured, then it may be a good idea to hire a custom home builder who can bring that vision to life. On the other hand, if you’re just looking to have a little say in the smaller items—think paint, lighting fixtures, appliances, types of light switches, and so on—then new home construction may be the best option for you.

Outdoor Elements

New construction homes often come with a landscaped front yard, which creates a fabulous curb appeal. But the backyard is typically left untouched. This can be a good thing or a bad thing, depending on you and your needs (and your wallet).

You can view this blank slate as your opportunity to carry out a few custom home aspirations, or you may see it as a time-consuming, added expense. In either case, you don’t want this outdoor amenity to turn into storage space (or do you?), so you’ll have to give it a little thought.

The pros and cons of buying new home construction versus building a custom home are a wash on this backyard space, but still one of the important things to know before building a home.

Building Your Dream Home

While the process of building a house can be time-consuming, and the restrictions on modifications may pose challenges, investing in a new construction home is often considered a long-term commitment. The meticulous planning, quality construction, and integration of modern technologies ensure that your home remains relevant and functional for years to come.

Still, if you’re thinking long-term—as in you’re going to live in this house for a very long time—then a truly custom home design may make sense.

You also have to consider the type of financing when weighing the pros and cons of building a house. Unless you have cash, you’ll need a construction loan as you build a custom home. After that, you’ll need a long-term loan—think fixed-rate or adjustable 15- or 30-year loan—to cover the mortgage.

The decision to buy a new construction home is a delicate balance between the desire for the latest and greatest and the need for personalization. Whether you opt for the convenience of a new construction or the flexibility of working with a custom home builder, the journey toward building your dream home deserves thoughtful consideration, which includes the pros and cons of each.

Remember, these four walls are much more than a structure. The floor plan, neighborhood, and indoor and outdoor home features will be with you for a very long time, so you want to make sure your long-term aspirations align with your short-term goals and sacrifices.

It’s a lot to think about, we know. We’re here for you anytime. Drop us a line today to discuss a custom home, new home construction and other options.

6 Things to Know Before Building a Custom Home

February 20, 2024

roofer builder working on roog structure of building on construc

Building your dream home is the most amazing thing ever (next to your kids), but like your kids, it requires careful planning and consideration. Some upfront tasks and considerations may not come to mind, especially if you’ve purchased an existing home before and feel like this isn’t your first rodeo.

Well, if it’s your first building-a-house rodeo, buckle up. We’re about to embark on a wild (but fun) ride!

1. Your Budget

No-brainer, right? Before you embark on home design, sketch out an office nook inside a master bedroom, or find the coolest hands-free light switch, you have to determine how much you can spend. Remember, too, that since we’re dealing with a custom home, those funds—whether out of pocket or through a construction loan (typically both)—will need to cover the entire building process.

You also have to think about the long-term mortgage and your monthly budget for that once the home is completed. To be clear, this has to be considered before construction kicks off…not after the custom home is built and you’re ready to move in.

Not sure where to begin? Preferred Rate is happy to explore convenient loan options that work with your budget and financial situation.

2. How to Get a Construction Loan

Speaking of financing…a construction loan typically plays a starring role in your custom home story. That’s because, unless you have a lot of cash on hand, you’ll want to prioritize securing the construction loan. We know, we know, buzzkill city. It may not be the most glamorous part of building your dream home, but it’s undoubtedly one of the biggest things to know before building a home.

Preferred Rate offers a two-time close construction loan that includes both the construction loan you’ll need during the building process and the permanent financing required upon completion of your custom home. This can be a great solution and a good idea for custom home buyers.

Keep in mind that whether you choose to “bundle” these loans or not, you’ll need to qualify twice—once before the construction process kicks off and once when the custom home is complete and the actual long-term mortgage begins. This can affect the associated costs, including closing costs and appraisals.

3. How to Find the Perfect Build Site

This may seem obvious, but one of the first things to know before building a home is that you have to find a site. Consider the location, neighborhood, and proximity to amenities. Delve into homeowners association (HOA) rules and costs. This initial decision sets the stage for the entire building process.

Remember that not every empty lot is zoned for residential. This is where a real estate agent can come in handy. You don’t want to get your hopes up only to find out that beachfront space along Main Street isn’t an option for you. First-world problems, right?

You’ll also want to consider whether the chosen lot can accommodate your design plans, which we will get to next.

4. How Involved You Want to Be in the Plans and Specs

Whether you opt for a true custom home or home builders with pre-designed options, you’ll need detailed plans and specifications. Decisions on floor plans like where the master bedroom is located, custom home features like how much storage space is included, and design elements like which lighting fixtures to go with (and where the light switches are located) will all be up for discussion.

How involved you want to be in this process—and how committed you are to building your dream home versus weighing in slightly less on a semi-custom home from one of the expert home builders—will help you determine which route to take.

Consider the time, energy, and cost commitments that come with custom, semi-custom, and pre-planned homes. When building a house, these three considerations will dictate how you proceed.

5. How to Choose Home Builders or Subcontractors

Selecting the right home builders or subcontractors is a crazy important decision. For home builders, you want to research their previous developments, possibly tour their model homes, and get recommendations and references. For a custom home, you’ll need to find a reliable general contractor to manage the building process and all the workers who will construct the home to your plans and specs.

Oh, and no matter how fabulous a custom home builder seems, you’ll want to verify their standing with the Better Business Bureau (BBB) and the National Association of Home Builders before signing a contract. If you think building your dream home is expensive, then you can’t imagine how those costs multiply exponentially if you build a custom home and then find that it’s not to code. Or that the roof is leaking. Or that the retaining wall has already cracked.

Okay, enough. You get the point. We can feel our blood pressure rising at the mere thought, but it leads us to the last thing you should know…

6. How to Prepare for Surprises and Delays

Anyone who’s ever put a shovel to dirt can tell you that building a house can often come with unexpected expenses, including construction delays that are also time-consuming. Expect the unexpected by acknowledging that there are costs, delays, and other factors that can affect your timeline and closing.

When building your dream home, you kind of become a general contractor yourself as you oversee the building process. (Note: This does not mean you don’t need an actual general contractor; let’s be real.) With this in mind, you should be prepared for surprise bumps and the required approvals and funds that often accompany them.

Now that you’re up to date on the things to know before building a home, you may want to ask yourself a few questions. Questions like:

What is my budget?
What type of construction am I interested in (custom home, semi-custom home, or pre-planned home)?
Which home builders or general contractors will I use?
What location or home style am I looking for?
What custom home features do I want?
How much do I want to weigh in on this home design?
What’s my timeline?

A Bit More on Custom Home Expenses

Custom home construction costs vary by square footage, location, features, and materials. According to Forbes, as of early 2024, the average cost to build a home in the U.S. is about $150 per square foot (minus the land), but this can go much, much higher. In California, for example, custom home costs start around $400 per square foot.

You’ll want to break down costs into categories like pre-construction, land and site work, foundation, framing, exterior work, major systems, and interior finishes to prevent these numbers from becoming too confusing or obscure.

Embarking on the journey to build a custom home is an amazing undertaking. Our Preferred Rate Mortgage Advisors are pros in the custom home construction space and are ready to help regardless of where you are in your journey and how custom you want the home.

Cheers to bringing your dream home to life! Contact us anytime.

Is Building a Home Right for You?

February 15, 2024

New residential construction home framing against a blue sky.

Searching for a home can be an exciting process, but this journey can quickly get frustrating if you can’t find what you’re looking for. As we all know, buying a home involves more than just the actual real estate. You have to consider the neighborhood, surrounding amenities, outdoor space, and of course the actual home and its features.

Add in competition from other buyers and/or a lack of inventory, and this exciting journey is suddenly maddening. That is, until you consider building a home.

That’s right. You don’t have to compete with anyone—or settle for anything—if you don’t want to. You can build a custom home instead.

Naturally, building a home comes with its own set of advantages and challenges. After all, if it were that easy to erect a custom home, there would be no new construction home builders, and every general contractor would be booked from here till the end of time with custom home projects.

So let’s see if this route is the right real estate choice for you.

Pros of Building a Custom Home

Build your dream home

Does the opportunity to create your dream living space sound good to you? It does to many people, which is why the custom home trend remains alive and well.

While items like light fixtures can be easily swapped out on an existing home, making big-time changes like the location of interior walls or a bathroom (or plumbing fixtures) isn’t typically feasible.

Buying an existing home can also involve compromising on either the right features or the perfect location. On the other hand, a custom home, once completed, is tailored to your exact preferences. That means there’s no remodel in your future!

The latest and greatest

Custom homes come equipped with the latest energy-efficient technologies. Building a home allows you to incorporate cutting-edge, environmentally friendly features that not only contribute to an eco-friendly lifestyle but also can save money in the long run.

Speaking of technology, do you like smart home features? Enjoy monitoring your energy usage on your phone? When starting with a brand-new build site, you have the opportunity to incorporate all the latest and greatest technology into your home from the jump.

This can encompass everything from energy-efficient appliances to plumbing and electrical. Yes, that’s right. Your lighting fixtures and plumbing fixtures can save money. Is there anything technology can’t do?

Cons of Building a Custom Home

Cost considerations

You may save money with those lighting and plumbing fixtures, but remember, you must buy them first. And have them installed. And that’s after you’ve already obtained a building site, finalized floor plans, secured building permits, installed plumbing and electrical, erected interior walls, and undergone a litany of other tasks, both large and small.

It sounds like a lot—and it can be. However, this short-term pain can be worth it for the long-term payoff that comes with a dream home, especially if there’s an opportunity to save money down the line on remodels or appliance refreshes.

Time considerations

If you didn’t get the sense from above, we’ll reiterate it here. Building a home will take time, energy, and money, even if you’ve got excellent home builders and the best general contractor in the business. Since this is a custom home, you’ll be weighing in on a lot.

It sounds fun at first, but all this decision-making can quickly spiral. This is when professionals can come in handy. A real estate agent can help you find the perfect site. A general contractor can advise on building materials and popular configurations. An interior designer can help with those pesky lighting fixtures and plumbing fixtures.

Expect the unexpected

Let’s face it, unforeseen challenges tend to come with the territory of building a home. It’s not that custom home builders are lazy or shady by any means. It’s just that unpredictability reigns supreme when you’re dealing with weather, the supply chain, building permits, a building site, and plumbing and electrical. Try to keep this in mind when you’re determining budgets and timelines.

Construction delays could also impact your current living situation. This could be a particular pain point if you have to give your landlord notice—or if you’ve sold your current home and need to move out by a certain date.

The Custom Home Building Process

Understanding the ins and outs of building a home is pivotal before deciding whether it’s right for you. Key tasks you’ll need to consider include:

Consulting with a real estate agent. Even if you’re not buying an existing house, a real estate agent can help you find the perfect build site in the perfect location. They can also help you evaluate market trends, understand property values, and offer advice on potential resale value.
Choosing experienced and reputable home builders. Research and choose a builder with a proven track record of delivering high-quality custom homes on time and on budget.
Collaborating with a reputable general contractor to ensure a smooth and successful construction process. This person will oversee the coordination of various aspects of building a home, such as securing building permits, managing subcontractors, and adhering to local building codes.
Navigating the regulatory process. Understanding and obtaining the right building permits is an important step in the construction process. Local building codes and regulations must be adhered to, and a knowledgeable general contractor can be your best friend through this aspect of building a custom home.
Securing a construction loan. Financing the actual building process of a custom home often involves obtaining a construction loan. You want to explore various loan options and understand the associated interest rates, then choose the one that aligns with your financial goals. Preferred Rate is always here to help you with this step.
Designing your dream home. We finally got to the fun part! This is where you talk among yourselves and then engage with an architect and interior designer who can help you shape the aesthetics and functionality of your custom home. From floor plans to energy-efficient lighting fixtures, plumbing, electrical layouts, and everything in between, you have the freedom to personalize every detail.
Selling (or renting) your current home. You certainly have to consider the logistics of selling or renting out your existing property before you build a house. Plus, strategically timing the sale or rental agreement can prevent a boatload of stress during the construction phase.

Building a home allows you to create a space that reflects your personal preferences and lifestyle. While it comes with its challenges (cons), the potential benefits (pros), such as a tailored living space, energy efficiency, and a fresh start, can outweigh the bad for many people.

Still, you have to think about your budget, timeline, and commitment to the building process when determining if a custom home is right for you. Consulting with professionals, including a real estate agent, home builders, a general contractor, an interior designer, and, yes, a Mortgage Advisor, is the wisest, most responsible step you can take as you begin this process.

When you get there, we’re here to help every step of the way. Feel free to contact us anytime.

Understanding a 3-2-1 Interest Rate Buydown

February 9, 2024

Higher interest rate environments can make it difficult to buy a home, but there are silver linings and workarounds. The good news is that higher interest rates often mean less competition, lower prices, and eager sellers. These sellers can be more willing to consider concessions than they would have been in a hotter market. Today you may be able to negotiate who pays for many closing costs, including mortgage discount points.

There’s an alternative to buying points, however, that homebuyers should understand. It can significantly lower the interest rate on your mortgage payment for the first several years of the mortgage. It’s called a 3-2-1 buydown, and it can help combat these higher interest rates.

What Is a 3-2-1 Buydown?

A 3-2-1 buydown temporarily lowers the interest rate on your mortgage by 3 percentage points the first year, 2 percentage points the second year, and 1 percentage point the third year. After that time, your mortgage will revert to the original rate.

This is a huge deal with interest rates at their current levels. Suppose you lock in your mortgage with an annual percentage rate (APR) at 6%. If you purchased a 3-2-1 buydown mortgage, your rate would be 3% in year one, 4% in year two, and 5% in year three, wrapping up with the agreed-upon 6% note rate for the remainder of the loan term.

This program was created to give buyers a little breathing room when higher interest rates threaten to derail their dream of homeownership. A 3 percentage point difference in your mortgage loan can make a significant impact on your monthly payment.

This program can also free up cash at a critical time after you purchase a home. Remember that a down payment, closing costs, and moving expenses can be very expensive. The money you save with temporary buydowns such as a 3-2-1 buydown can replenish the savings or emergency fund that you might have exhausted to pay for these expenses.

Your savings can also be put toward furniture purchases or repairs and upgrades for your new home. You don’t want to max out your credit cards on these items, which negatively affects your credit score. Instead, put the money you’re saving to work for you.

How Can I Use the 3-2-1 Buydown to My Advantage?

Three years is a long time in the mortgage industry. You’ve seen how quickly the daily and weekly mortgage rates can change. The 3-2-1 buydown can get you through the current interest rate hike, but it can also position you to refinance after the program ends in three years. At that time—as long as your home equity is at least 20%—you can consider refinancing to a lower permanent rate.

This is assuming that 30-year fixed-rate mortgages will be lower at that time, although no one knows what the Federal Reserve will do three years from now. If rates do increase, you’re still ahead of the game with the mortgage rate you originally locked in.

This makes a 3-2-1 temporary buydown a win-win for homebuyers!

Who Pays for a 3-2-1 Buydown?

A 3-2-1 buydown can be paid for by the seller, homebuilder, or even the mortgage lender. This is a popular concession among sellers who are eager to sell for one reason or another. It often allows them to achieve the full asking price on their home, while also incentivizing buyers to invest in real estate.

What’s the Difference Between a 3-2-1 Buydown and Buying Discount Points?

The difference between 3-2-1 temporary buydowns and discount points all comes down to rate and timing. You know you’ll get to chop entire percentage points off your interest rate during the first three years of your loan term with the 3-2-1 buydown. Permanent buydowns such as discount points, on the other hand, lower your rate by a smaller amount—generally 0.125 to 0.5 percentage points—for the entire life of the loan.

Here’s where you need to weigh your options. Naturally, that 3 percentage point APR savings is an attractive benefit, but saving half a percentage point on a 30-year fixed-rate mortgage is valuable, too. That equates to a lot of savings over time.

Buying mortgage points can be the way to go if you plan to stay in your home a long time because you want to make sure you achieve your “breakeven.” This is the point at which the money you’ve saved on the permanent interest rate discount outweighs the upfront costs you (or the seller) paid for that discount. This breakeven is generally achieved around year five of your home loan.

An additional item to consider is how comfortable you are with the interest rate you’re locking in. You want to make sure this is an interest rate you can live with after the three-year period on a 3-2-1 buydown ends because it will be your permanent mortgage rate for the remaining years of the loan. The option to refinance as long as you’ve built up enough home equity is available, but there’s no guarantee that rates will be low enough to count on that.

Taking all this into account, the 3-2-1 buydown is still a very attractive option for buyers when interest rates are high.

We know these are important decisions, which is why Preferred Rate is always here to walk you through them. We can explore the various scenarios with you, outlining how much you’d save with each option. Locate a Preferred Rate Mortgage Advisor near you to get started.