Tag Archive for: home loans

Is Buying a Home for a College Student a Good Investment?

August 4, 2023
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Tuition, books, transportation, room and board…the cost of college adds up fast. At first glance, then, it may seem crazy to consider buying a home for a college student, but is it? 

The truth is that there can be many benefits when you buy any property, and this scenario is really no different. In fact, when you consider the high cost of both on-campus and off-campus living in an expensive college town, buying a house that your student can use during their college years begins to make a lot of sense. 

The High Cost of College Room and Board

According to Credible, on-campus room and board runs about $12,680 or more annually for private four-year colleges and $11,140 or more for public, in-state colleges. Of course, these numbers can be much higher in certain areas, or at certain schools.

The cost of off-campus housing in college towns varies widely depending on a number of factors. These can include location, the type of rental it is, the number of bedrooms, the number of roommates, and the community amenities. However, since food, utilities, cable/internet, and transportation to and from campus are not included, SharedEasy estimates that these costs come to an average of about $27,180 for the nine-month academic year. 

Then, don’t forget, you will have to multiply those costs times four—or more—to account for your college student’s full academic career. During that time, the cost of room and board on campus, not to mention the rents off campus, are almost certain to increase annually.

What if you put those five figures of expense to work for you instead? With some planning, you could buy a property that could initially house your college student and then later function as an investment property after they’ve graduated. It’s definitely worth weighing the pros and cons of this room and board option.

Considerations in Buying a Home for a College Student

Let’s think through a few of the pros and cons to see if buying a home for a college student may be the right option for your family. 

Lowering room and board costs

One big pro is the potential financial benefit. Buying a home or condo can significantly lower the financial burden of off-campus housing or room and board, which can result in massive student loan debt with high interest rates. This is especially true if the property has room for multiple roommates, which would garner rental income for you. 

Providing your child with stability

Another advantage of buying a home for a college student is their stability and convenience. Owning your child’s home can eliminate their need to find a new place and move every year. It also cuts down on storage costs over the summer, as well as security deposits every fall.

Turning a profit through appreciation

Home appreciation can be a potential benefit, especially if you buy in a high-growth area. There is the possibility of making a nice profit if you sell when your college student graduates, or you could make this home an investment property and collect rental income.

Buying a house in a college town can be very strategic, as there will always be a need for housing as more students enter the school every year. Real estate agents can tell you more about renting to students, but it’s great to have a built-in renter base as long as the college or university is there!

Risks of home depreciation

Speaking of college students, depreciation is something to consider carefully. Tenants are always plentiful in college towns, but students aren’t necessarily the best renters when it comes to taking care of a property. Your property could lose value if your student renters don’t maintain it well, or if they do something illegal while living in the home. 

It’s important to have a conversation with your child about the responsibilities of being a good tenant—especially for their parents! You should have the same discussion with any of your child’s roommates. It’s also a good idea to involve the roommates’ parents. After all, many parents co-sign leases for their students. As a result, they should also be informed about what you expect, as well as any house rules. 

You might also consider paying to have the home’s basic maintenance and landscaping needs taken care of by a professional on a regularly scheduled basis. Your student likely won’t have time for maintenance and repairs, and this step can help your investment retain its value.

Tax write-offs

Now for some more good news: Buying a home typically comes with tax benefits. These could pertain to the interest on the monthly mortgage payment, mortgage insurance, and any repairs or updates you make to the home.

Tax write-offs can vary by state and can also depend on how you use the property. For example, there are different tax implications if you buy a property and allow your college student to stay in it rent free, vs. renting it out to other roommates. That’s why it’s always a good idea to check with your tax advisor before buying a home for a college student.

Your student’s independence

Owning the home means your student will always have their own private space and can personalize it any way they would like. They will also be able to choose their own roommates, do their own cooking, and control the noise level of their space. 

Retirement potential for yourself

It’s also never a bad idea to take your retirement strategy into consideration if you’re thinking of buying a home for a college student. Buying a property in a college town can be a great long-term plan. Consider that your child can live in it when they are in school, you can use it as an investment property and accrue rental income when they graduate, and then you can move into the property yourself when you’re ready to retire.  

Are You Ready to Buy a Property?

Now let’s look at all the costs associated with buying a house—whether you’re buying a home for a college student or not. There is the sticker price of the home, of course, but there is also the down payment, the closing costs, the monthly mortgage payment, the possible mortgage insurance (if you put less than 20% down), and the cost of any work that may need to be done to the home.

You also need to think about interest rates at the time you’re looking to buy. And you’ll definitely want to schedule a home inspection. The house may have served as student housing previously, and as mentioned, students aren’t always the most conscientious tenants! 

To help make the final decision, look at the bottom line costs. Consider these three possible scenarios for housing during your child’s college years:

  • Your college student lives on campus and pays for room and board, likely through student loans.
  • Your child rents a property off campus. Consider that they will have to set up accounts for all ongoing living expenses, get themselves to and from campus, and remember to pay each individual bill on time.
  • You buy a home for your college student and house them yourself for four or more years. After they graduate, you will have the option to sell the home or convert it into an investment property that earns ongoing rental income.

All in all, purchasing a home in a college town is something to consider—but it’s far from a no-brainer. It can, however, be a great way to skirt some of the college debt for you and your child; ensure that they’re housed in a safe, clean environment; and possibly earn you some money in the process. 

Are you ready to discuss this idea further? Preferred Rate is here to go over all your options and create a plan that’s right for you. Contact us today to speak with a Mortgage Advisor. 

Six Ways to Beat Inflation by Buying a Home

February 2, 2023
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High inflation is no fun. Though everyone pays the same higher prices, periods of rising inflation don’t have the same impact on all Americans. A person’s investment strategy—including real estate, investments in the stock market and S&P 500, and their retirement plan—can be a good inflation hedge. 

While inflation slowly chips away at your dollar’s buying power, putting those dollars into investments can allow that money to grow faster than the rate of inflation. One of the best ways to beat inflation in 2023 is by buying a home—and we’ll show you how.

1. Lock in Your Interest Rate Now

The Federal Reserve combats high inflation by raising interest rates, thereby making it harder—and more expensive—to borrow money. So far this hasn’t done a lot to curb spending, and the Federal Reserve has made it clear that it intends to keep raising rates. This means borrowers who wait may face even higher rates. 

2. Buy Before Inflation Rises Again

As we mentioned, the actions of the Federal Reserve haven’t done enough to bring inflation down. Is there a threat that inflation will continue to rise? Absolutely. If and when that does happen, everything will get more expensive—including homes. Higher home prices mean larger loans, down payments, and closing costs, since all three of these are based on a percentage of the home’s price. It’s the ultimate example of a rising tide (aka rising inflation) lifting all boats. 

3. Stop Renting

Do you know what else is likely to go up during periods of high inflation? Rent. Because it’s a cost, right? So there’s a good chance it’ll head north as landlords use these rent increases to beat their inflation. Buying a home is a long-term investment that can save money—money that is currently only helping your landlord. Excellent inflation hedge for them; no help for you. 

Real estate is a part of any good, diversified investment strategy. Plus, it can lock in your expenses for the long term. No more worrying about rent increases or lease renewals. 

4. Utilize Preferred Rate’s Interest Rate Hack

Want to shave a few figures off the current advertised interest rates? You can with Preferred Rate’s interest rate hack. We have programs that will allow you to decrease your interest rate for either the life of the loan or the first two years. This can save money, prevent higher interest rates from crushing your dreams of homeownership, and allow you to make a long-term investment in your financial future, all while you beat inflation.

5. Appreciate Depreciating Debt

When you buy a home, that asset tends to appreciate in value over time (minus a few ebbs and flows inherent in the market). You know what does the opposite? Debt. Debt actually depreciates in value with the rate of inflation. 

Think about it this way: You know those folks who are always saying, “In my day, you could buy a home for $44,000”? Well, they’re not lying. Years and decades from now your debt will be worth far less. Your monthly mortgage payment won’t change, but with the rate of inflation, it will be worth less than it’s worth today. At the same time, your home is likely to go up in value. That’s a win-win, especially if you were renting before. 

6. Supplement Your Income with an Investment Property

Some Americans have extra cash lying around, becoming vulnerable to inflation because of the current economic uncertainties. If cash is sitting in a savings account earning next to nothing, then this much is certain: Inflation has won, and you’re no further ahead. 

Some people thinking about how to beat inflation have realized that an investment property may be the way to go, as that long-term investment can produce supplemental income. Extra income is extra appreciated with price increases, making this a smart inflation hedge. 

Every investment carries risks and rewards, and in a market like this, conditions can change in either direction—becoming more or less favorable. However, many individuals feel empowered when they take action. 

Though we can’t control periods of high inflation, we can respond to them by setting ourselves up for the best possible outcome. For some, that inflation hedge strategy will include locking in their investment costs, mortgage interest rate, and debt now to stave off any further price increases.

Preferred Rate has seen many market cycles, and we’re well-versed on the impacts of inflation. An experienced mortgage advisor is happy to talk anytime to determine if buying a home is the right move for you right now. 

Disclaimer: Preferred Rate – Partnered with American Pacific Mortgage is not a licensed CPA or financial planner. We advise you to consult your tax or legal professional as needed in order to make the right decision for you. Equal Housing Lender, NMLS #1850.

© 2023 Preferred Rate – Partnered with American Pacific Mortgage Corporation (NMLS 1850). All information contained herein is for informational purposes only and, while every effort has been made to ensure accuracy, no guarantee is expressed or implied. Any programs shown do not demonstrate all options or pricing structures. Rates, terms, programs, and underwriting policies are subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans are subject to underwriting approval. Some products may not be available in all states, and restrictions apply. Equal Housing Opportunity.

How to Declare a Primary Residence & Why it Matters

October 27, 2021
blog blue home evening, mortgage blog, primary residence, preferred rate

These past two years, homeowners across the country have considered buying a second home or relocating for several reasons. It could be a lifestyle change, moving closer to extended family, deciding to shift careers, seeking a lower cost of living, or even taking the big leap toward their dream house.

One question always comes up with every mortgage application: Will your new home be your primary residence? You might be wondering, why does it matter?

When it comes to your mortgage, primary residence, principal residence, and owner-occupied residence have the same meaning. But when you buy a property, it isn’t automatically considered your primary residence. In brief, a principal residence is the main property where you live more than six months out of the year. Your residence can be a single-family home, townhouse, condo, mobile home, or even a boat.

The broad rule is simple: where do you live most of the year? But it isn’t always clear-cut. So then, let’s talk about how to declare a primary residence and why it’s important.

Related: How to Finance a Fixer-Upper with the FHA 203(k) Home Loan

Top Mortgage Benefits of a Primary Residence

When you apply for a mortgage, you’ll need to declare the property type of your new home: principal residence, a second home, or investment property. In general, mortgage rates are the lowest for homebuyers purchasing a primary residence.

A low mortgage rate can save thousands of dollars over the length of your loan. What’s more, there are a number of discounts, loan programs, low down-payment options, and other benefits. When you’re buying or refinancing a principal residence, you’ll have the best options available to you.

Primary Residence Advantages:

  • lower interest rate and mortgage rates
  • flexible loan terms
  • greater home loan options
  • mortgage interest is tax-deductible
  • property taxes are tax-deductible
  • lower capital gains taxes *

* As the homeowner of a principal residence, you might qualify for reduced capital gains taxes when you decide to sell your home. Capital gains tax is due when you sell assets for a profit, such as selling a home. For 2021, the IRS permits homeowners to bypass capitals gains tax on the first $250k (filing single) or up to $500k (married, filing jointly).

Related: How to Buy a Home With Friends or Family

How to Meet the Criteria for a Primary Residence

In short, your primary residence is where you live more than six months of the year. This rule seems pretty straightforward for homeowners who live and work in the same area or are raising a family and sending their kids to a local school.

But it’s not always that clear-cut. For example, what if you travel for work regularly and split your time between two locations? Does your family spend half the year in a winter location travel somewhere new during the warmer months? Some couples own multiple homes and don’t live in any particular home for more than six months out of the year.

When you declare your property as your principal residence, you’ll be asked to verify the following:

  • Tax Returns: What address will be listed on your federal tax returns?
  • Postal Mail: Is your primary residence listed with the U.S. Postal Service?
  • Personal ID: Which address will you use on your Driver’s License?
  • Voting: Where are you registered to vote?

The IRS, in particular, defines a primary residence as an address that is close to your bank, your place of work, where your family resides, or where you are officially part of an organization or local club. Find more info here on tax rules.

Summary

When you apply for a mortgage, most homebuyers want to get the best rate and the loan terms. In most cases, this means being able to declare the property as your primary residence. Primary residence, principal residence, and owner-occupied residence all mean the same thing.

So if you’re looking for a second home or investment property, be aware that it may not meet the criteria needed to qualify as a primary residence. The benefits of declaring a primary residence include getting a lower interest rate, better loan options, tax breaks, and a break on capital gains taxes when you sell your home. 

Next Steps

If you’re not sure whether or not your next property will qualify as your primary residence, we can help guide you through the process. Knowing your loan options is always a smart move, whether you’re considering a principal residence, investment property, or vacation home. Connect with a local mortgage advisor to discuss your goals and set yourself up for financial freedom. We’d love to help.

Can a Co-Signer Help Me Get a Better Mortgage?

August 31, 2022
mortgage blog, cosigner, preferred rate

Mortgage rate increases have begun slowing down but there’s no getting around the fact that 3% mortgage rates are well in the rearview mirror. Higher mortgage rates turn into higher mortgage payments and for a lot of homebuyers, this means they can no longer afford houses with a higher price tag. Especially for first-time homebuyers who have been saving diligently over the past few years, watching mortgage rates rise can be discouraging. Asking a family member or friend to be a co-signer on a mortgage application could help you qualify for a better home loan.

If you’re ready to buy a home but the mortgage rates are pushing up faster than your savings account, a co-signer might be worth considering. A co-signer can help you meet some of the requirements for a home loan and may help you qualify faster. That said, having a co-signer on your mortgage isn’t always the best choice and there are a few restrictions to keep in mind.

This article can help.

When is a co-signer a good idea for a mortgage?

In general, most homebuyers benefit from a co-signer when they need a boost with their income, employment history, or credit score.

A good fit for a co-signer will be a person with a high credit score, steady income, stable employment history, and solid credit history. If you’re falling short in any of these four areas, then adding a co-signer to your mortgage application could help you get approved faster and secure better terms on your home loan.

In many cases, adding a co-signer to a mortgage application can help push your mortgage approval across the finish line, but it’s not a guarantee.

For example, if a mortgage applicant doesn’t have the means to pay back the mortgage or if the lender considers the homebuyer a high risk, adding a cosigner typically won’t sway the lender’s decision.

Connect with a local mortgage advisor to talk through your specific situation. You might be closer than you think to a great mortgage and the keys to your dream home.

Related: How to boost your credit score in 60 days

TOP 3 BENEFITS TO HAVING A CO-SIGNER ON A MORTGAGE

1. A co-signer can help you meet the credit score requirements.

In general, a cosigner will not be able to override negative marks in your credit history, such as bankruptcy or loan defaults. But a cosigner with a strong credit history can give your credit profile a bit of a bump if you land in the medium range. The typical mortgage lender will look at your mortgage application in its entirety to determine risk and decide if you’ll be able to pay back the loan as agreed.

If your credit score is in the midrange and you have a cosigner with a strong credit history, this reduces risk in the eyes of the mortgage lender. More importantly, it increases your chance to secure a great mortgage.

2. A co-signer can provide support to help you meet employment criteria.

If you have good employment but a short employment history, a cosigner with stable long-term employment can help you qualify for a preferred mortgage. In many cases, borrowers just beginning their career or starting a new career path might have a good employment profile, but it isn’t steady enough for the best mortgage. A co-signer can help boost your profile in this area.

Related: How to Qualify for a Mortgage if You’re Self-Employed

3. A co-signer may help you qualify for a larger home loan.

To qualify for a mortgage with a co-signer, the mortgage lender considers both incomes. For this reason, you might be able to qualify for a bigger home (and a better loan) by having a co-signer on your mortgage application. The co-signer will be responsible if the borrower defaults, so verifiable income for both parties is an important factor. That said, an individual borrower will only qualify if they have the independent resources to pay back the loan as agreed. Ultimately, the mortgage lender will decide the level of risk and whether or not they approve the mortgage application.

Who can qualify as a co-signer on a mortgage application?

To be eligible as a co-signer, the individual must be a family member close to the borrower. Family members such as parents, siblings, grandparents, aunts and uncles all qualify by definition. Family-type relationships are also eligible for a cosigner on a mortgage. For example, friends in this category would be someone you’ve had a close, long-term relationship with for most of your life, or someone you’ve lived with for an extended period of time.  

This requirement is in place to protect the borrower from having a cosigner who has divided interests. For instance, a real estate agent or a builder might want to be a cosigner since they would directly benefit if your mortgage application is approved. For this reason, non-family members are not eligible to cosign a mortgage.

Related: Buying a House With a Friend or Relative–Everything You Need to Know

3 THINGS A CO-SIGNER ON A MORTGAGE APPLICATION CAN’T DO 

A co-signer cannot make the minimum down payment on your behalf.

The homebuyer must meet the minimum requirements for making the down payment, typically 5% for most home loans. Fannie Mae sets this guideline, which requires that the home must be the borrower’s primary residence, and the loan-to-value ratio cannot exceed 95%. The cosigner can increase the down payment, but the resident borrower must provide the minimum down payment required.

A co-signer cannot improve your debt-to-income (DTI) ratio.

The homebuyer must meet the minimum requirements set by the lender for the DTI ratio. In most cases, mortgage lenders allow borrower’s a maximum DTI of 43%. This is your debt-to-income ratio. DTI is calculated by combining all recurring debt payments such as credit cards, car loans, and student loans and measuring the total debt against your income.

Therefore, even if your cosigner has ample assets and minimal debt, the main borrower must meet the loan requirement with a DTI ratio of less than 43%.

A co-signer cannot override or erase your credit history.

While a co-signer’s credit history can help boost your mortgage application, it cannot override substantial credit implications such as bankruptcy, foreclosure, or a credit score below 580. If you have a credit score in the mid-range, check out our recent post on how to boost your credit score in 60 days.

Are there risks to having a co-signer on a mortgage?

Deciding to ask a family member to cosign on a mortgage is a serious decision. For the most part, the co-signer takes on more risk than the designated borrower. This is because the cosigner will be legally responsible for the mortgage, along with the borrower, until the mortgage is paid off.

For this reason, the borrower should make every attempt to remove the cosigner from the mortgage as soon as reasonably possible. The best option is to refinance the mortgage as soon as the homeowner can qualify for their own mortgage.

In addition, the mortgage will be reflected on the cosigner’s credit report. As such, it will affect their buying power for future opportunities. Finally, late payments will be reflected on the credit reports for both the borrower and the cosigner as well. Download a free copy of your credit report here.

An important note–if the borrower defaults on the mortgage, the cosigner will be legally responsible for paying the loan obligations in full. If the cosigner isn’t on the title of the property (which is often the case), they will have to meet the financial obligation with their own assets.

Taking Action

One of the best first steps you can take is to start your mortgage application. Once you’ve started the process, talk with your mortgage advisor about adding a co-signer. Adding a co-signer to a mortgage application can be a difficult decision but it may help you qualify for a better mortgage. We can guide you through the process and help you determine if a co-signer on your mortgage will help you qualify for a preferred home loan. Either way, discussing your options can give you a jump start on your mortgage goals. Connect with a local mortgage advisor to get started. We’d love to help.

Should You Have a Co-Signer on a Mortgage?

October 12, 2021
blog signature, mortgage blog, preferred rate

Adding a co-signer on a mortgage application could help you qualify for a better home loan. Mortgage rates are still low and no one knows how long it will last. If you’re ready to buy a home but in a tough financial position, you may have considered applying for a mortgage with a co-signer. A co-signer can help you meet some of the requirements for a home loan, but not all of them.

When is a co-signer a good idea for a mortgage?

In general, most homebuyers benefit from a co-signer when they need a boost with their income, employment history, or credit score. A good fit for a co-signer will be a person with a high credit score, steady income, stable employment history, and solid credit history. If you’re falling short in any of these four areas, then adding a co-signer to a mortgage application could help you get approved and secure better loan terms.

In many cases, adding a co-signer to a mortgage can help push your mortgage application across the finish line, but it won’t make up for everything. For example, if a mortgage applicant doesn’t have the means to pay back the mortgage or is considered too high risk by the lender, adding a cosigner typically won’t sway the lender’s decision.

Related: How to boost your credit score in 60 days

TOP BENEFITS TO HAVING A CO-SIGNER ON A MORTGAGE

1. Provide flexibility with credit score requirements

In general, a cosigner will not be able to override negative marks in your credit history, such as bankruptcy or loan defaults. But a cosigner with a strong credit history can give your credit profile a bit of a bump if you land in the medium range. The mortgage lender is looking at the mortgage application in its entirety to determine risk and decide if you’ll be able to pay back the loan as agreed. If your credit score is in the midrange and you have a cosigner with a strong credit history, this reduces risk in the eyes of the mortgage lender.

2. Provide backup with employment requirements

If you have good employment but a short employment history, a cosigner with stable long-term employment can help you qualify for a preferred mortgage. In many cases, borrowers just beginning their career or starting a new career path might have a good employment profile, but it isn’t steady enough for the best mortgage. A co-signer can help boost your profile in this area.

Related: How to Qualify for a Mortgage if You’re Self-Employed

3. Opportunity for a larger home loan

To qualify for a mortgage with a co-signer, the mortgage lender considers both incomes. For this reason, you might be able to qualify for a bigger home (and a better loan) by having a co-signer on your mortgage application. The co-signer will be responsible if the borrower defaults, so verifiable income for both parties is an important factor. That said, a borrower will only qualify if they have the resources to pay back the loan as agreed. Ultimately, the mortgage lender will decide the level of risk and whether or not they approve the mortgage application.

Who can qualify as a co-signer on a mortgage application?

To be eligible as a co-signer, the individual must be a family member close to the borrower. Family members such as parents, siblings, grandparents, aunts and uncles all qualify by definition. Family-type relationships are also eligible for a cosigner on a mortgage. For example, friends in this category would be someone you’ve had a close, long-term relationship with for most of your life, or someone you’ve lived with for an extended time.  

This requirement is in place to protect the borrower from having a cosigner who has divided interests. For instance, a real estate agent or a builder might want to be a cosigner since they would directly benefit if your mortgage application is approved. For this reason, non-family members are not eligible to cosign a mortgage.

Related: Buying a House With a Friend or Relative–Everything You Need to Know

3 THINGS A CO-SIGNER ON A MORTGAGE CAN’T DO 

A co-signer cannot make the required down payment.

The homebuyer must meet the minimum requirements for making the down payment, typically 5% for most home loans. Fannie Mae sets this guideline, which requires that the home must be the borrower’s primary residence, and the loan-to-value ratio cannot exceed 95%. The cosigner can increase the down payment, but the resident borrower must provide the minimum down payment required.

A co-signer cannot change your DTI (debt-to-income) ratio.

The homebuyer must meet the minimum requirements set by the lender for the DTI ratio. In most cases, mortgage lenders allow borrower’s a maximum DTI of 43%. This is your debt-to-income ratio. DTI is calculated by combining all recurring debt payments such as credit cards, car loans, student loans and measuring against your income. Therefore, even if your cosigner has ample assets and low debt, the residential borrower must meet the loan requirement with a DTI ratio less than 43%.

A co-signer cannot override your credit history.

While a co-signer’s credit history can help boost your mortgage application, it cannot override substantial credit implications such as bankruptcy, foreclosure, or a credit score below 580. If you have a credit score in the mid-range, check out our recent post on how to boost your credit score in 60 days.

What are the risks to having a co-signer on a mortgage?

Deciding to ask a family member to cosign on a mortgage is a serious decision. The cosigner will be legally responsible for the mortgage, along with the borrower, until the mortgage is paid off. For this reason, the borrower should make every attempt to remove the cosigner from the mortgage as soon as reasonable. The best option is to refinance the mortgage as soon as they can qualify.

In addition, the mortgage will be reflected on the cosigner’s credit report. As such, it will affect their buying power for future opportunities. Finally, late payments will be reflected on the credit reports for both the borrower and the cosigner as well. Download a free copy of your credit report here.

An important note–if the borrower defaults on the mortgage, the cosigner will be legally responsible for paying the loan obligations in full. If the cosigner isn’t on the title of the property (which is often the case), they will have to meet the financial obligation with their own assets.

Next Steps

Adding a co-signer to a mortgage application can be a difficult decision. We can guide you through the process and help you determine if a co-signer on your mortgage will help you qualify for home loan. Either way, discussing your options can give you a jump start on your mortgage goals. Connect with a local mortgage advisor to get started. We’d love to help.

Top 5 Strategies to Stay on Budget for Your Next Home Remodel

June 22, 2022
mortgage blog, home remodel, renovation, preferred rate

These top 5 strategies can help you stay on budget, plan ahead, get the best financing and save money on your next home remodel. Home remodels and renovations come in all shapes and sizes. Blowout kitchens, bonus rooms, a new home office, or giving your bathroom a luxury upgrade. Thousands of homeowners across the country are refinancing their mortgages to take advantage of their home equity before mortgage rates push higher. So if you’re thinking about refinancing to start a home remodeling project or renovation, you’re in good company.

The costs of a home remodel vary by location and higher interest rates translate to higher mortgage rates. It’s smart to connect with a local mortgage advisor early on! You’ll be able to access your home equity at the lowest rate available, and stay on budget for your next home remodel project.

Keep these strategies in mind to stay on budget and tackle that renovation you’ve been dreaming about.

Related: 7 Ways to Increase the Value of Your Home on Your Next Remodel

TOP 5 HOME REMODEL STRATEGIES TO STAY ON BUDGET

1. Keep the scope of the project in check.

The number one reason most home remodels run over budget might be surprising. It happens when homeowners change their minds. Turns out that changing the scope of the project is the number one reason most home remodels slide beyond the budget.

Changing your mind on kitchen cabinets or tile flooring, for instance, after supplies have been ordered. Or deciding on structural changes once new framing has begun.

In almost every case, the work has started, materials have been ordered, or supplies have been delivered, and the cost is already measured. As much as possible, take your time and picture your home renovation from start to finish. Ask your builders and designers as many questions as you can before the work begins.

Often there’s a lot of work on the back end that the homeowner may not see, which becomes a surprise when they change their mind.

Related: How to Finance a Renovation with the Fannie Mae Homestyle Loan

2. Expect new fees for building permits and current building codes.

Many home remodels look straightforward and clear-cut at the start. However, once the work begins it’s very common for new obstacles to show up and new work will be required to bring the home up to code. Why? Building codes often change over time, so there are typically new codes and permits that have been put in place after the home was first built.

Each state has its own rules to follow, but most states and counties require contractors to meet current building codes if they discover a conflict. Across most states in the country, if a contractor discovers something that isn’t up to code, they are required to do the work to bring it up to code.

Any and all costs associated with bringing the house up to code will be passed along to the homeowner. So, make room for these unexpected changes, especially if you have an older home or if you are doing a major home remodel.

3. Plan for structural repairs and hidden damage.

Floorboards, roofing, foundations and framing are all home to pests and critters. Often the damage is hidden until construction begins and then the damage is exposed. Many older homes have structural damage caused by termites, wood rot, mold, or water damage. 

It might seem impossible to prepare for unexpected costs like replacing the subfloor or foundation. However, it’s worth taking the extra step to have a professional home inspection done before you begin the work. Talk with your contractor about the age of your home. Also, find out if they’ve done work on other homes in your neighborhood. This can reduce a lot of stress and keep the home remodel project moving forward.

4. Increase your budget for weekend getaways and eating out.

A home remodeling project that includes the kitchen usually means there will be days when you won’t have power, gas, water, or working appliances. What’s more, kitchen remodels often run much longer than expected, and homeowners often find themselves eating out more than they first planned. Camping in the backyard or eating on hotplates can sound novel, but the reality wears off quickly.

Even home remodels outside the kitchen often get homeowners wanting some peace and quiet. People get tired of the dust, construction, noise, and general chaos. What might be one night out turns into back-to-back restaurants and doordash. With larger projects, some families find themselves moving out temporarily to take a break from it all. Plan ahead so you can reduce stress and budget for the cost.

Also, don’t forget your pets! You may need temporary boarding or plan to take them with you on a short getaway.

 

Compare: Should I use a Home Equity Loan or HELOC for a home remodel?

 

5. Set aside extra funds to update your Homeowner’s Insurance.

Home remodels often increase the value of your home, so it’s a good idea to revisit your homeowner’s insurance coverage. For one, you want to make sure the renovations are covered under your policy and that your coverage meets your home’s new value. Certain home remodels and renovation projects such as adding square footage, a new office, or a full-scale kitchen remodel will increase the value of your home. It just takes a quick call to your service provider to make sure you have the coverage you need.

 

What’s the best way to pay for a home remodeling project?

Many homeowners consider a home equity loan or a home equity line of credit for a home remodeling project. Others refinance a mortgage or turn to personal loans and credit cards.

The truth is, there are several custom home loan options that can save you money even as mortgage rates continue to rise. A preferred home loan that gives you access to your equity can help you stay on budget and finance your home remodel without added financial stress.

It’s always worth it to connect with a local mortgage advisor to discuss your options–especially when it comes to a home remodel or renovation project.

 

Taking Action

Connect with a mortgage advisor to determine the best path to refinance for a home remodel or renovation project. Remember, you can access your home equity in several different ways — cash-out refinancing, a home equity loan, a home equity line of credit, or custom home renovation loans. We can help you decide the best option that will save you money and fit your home remodeling budget. Connect with a local mortgage advisor to get started. We’d love to help.

Top 5 Hidden Costs of a Home Remodeling Project

September 28, 2021
blog man home improvement

So you’ve spent the better part of the past two years at home, and you’re finally ready to give your home a makeover. Maybe it’s a quick facelift or a backyard garden. But for a lot of homeowners, now is the final push before the holidays to take on bigger home remodeling projects like kitchen and bathroom upgrades, new flooring, or even a full-scale home renovation.

The costs of a home remodel vary dramatically by location, but mortgage rates are still low. This means you can access your home equity at a low rate and stay on budget for your dream home remodeling project.

First, beware of these hidden costs so you can plan ahead.

Related: 7 Ways to Increase the Value of Your Home on Your Next Remodel

TOP 5 HIDDEN COSTS OF A HOME REMODELING PROJECT

1. Changing the Scope of the Project

Believe it or not, the biggest hidden cost to a home remodel is when the homeowner changes their mind. More than half of all remodeling projects face a “change in scope” which dramatically increases the cost. Changing your mind on kitchen cabinets or tile flooring, for instance, after supplies have been ordered. Or deciding on structural changes once new framing has begun.

In almost every case, the work has started, materials have been ordered, or supplies have been delivered, and the cost is already measured. As much as possible, try to envision a home remodeling project from start to finish and ask questions before the work begins. Often there’s a lot of work on the back end that the homeowner may not see, which becomes a surprise when they change their mind.

Related: How to Finance a Renovation with the Fannie Mae Homestyle Loan

2. Building Codes and Permits

Many home remodels look clear-cut on the front end. But once the work begins, it turns out that new work has to be completed to bring the home up to code. Why? Building codes often change over time, so there are typically new codes and permits since the home was first built. Across most states in the country, if a contractor discovers something that isn’t up to code, they are required to do the work to bring it up to code.

Even if the new work wasn’t quoted in the home remodeling project, the contractor is required to meet current building codes, and that cost will be passed on to the homeowner. Allow a larger budget to meet these unsuspected changes, especially if your home was built several years ago.

3. Eating Out and Moving Out

During a kitchen remodel, eating out can become a growing expense and one that is rarely planned for. A home remodeling project in the kitchen usually means you won’t have power, gas lines, or working appliances. Some homeowners set up a temporary kitchen in the basement or garage, but the novelty can wear off quickly.

Even home remodels outside the kitchen often push homeowners out. People get tired of the dust, construction, noise, and general chaos. What might be one night out turns into ongoing restaurants and takeout. With larger projects, some families find themselves moving out temporarily to take a break from it all. Plan ahead so you can reduce stress and budget for the cost.

Also, don’t forget your pets! You may need temporary boarding or plan to take them with you.

Compare: Should I use a Home Equity Loan or HELOC for a home remodel?

4. Surprises and Structural Changes

Many hidden costs are hiding in the floorboards. Literally. Pests, termites, wood rot, mold, water damage. Many homes have hidden structural damage that is only discovered once a home remodeling project is underway. While there’s isn’t a tried and true way to plan ahead for these changes, it’s smart to prepare for the possibility. Have finances prepared so that you can face the problem head-on if any structural damage or surprises come up. This will reduce stress and keep the home remodeling project moving forward.

5. Homeowner’s Insurance

Home remodels often increase the value of your home, so it’s a good idea to revisit your homeowner’s insurance coverage. For one, you want to make sure the renovations are covered under your policy and that your coverage meets your home’s new value. Certain remodeling projects such as adding square footage, a new office, or a full-scale kitchen remodel will increase the value of your home. It just takes a quick call to your service provider to make sure you have the coverage you need.

Why is home remodeling so expensive right now?

Millions of people are spending more time at home than ever before: online school, remote work, DIY projects, home gardens, you name it. As a result, home remodeling and renovations have skyrocketed and the demand for contractors has jumped up in tandem. But even though construction costs are inching upwards, it’s still smart to tap into your home equity and get the job done while mortgage rates are low.

What’s the best way to pay for a home remodeling project?

Many homeowners consider a home equity loan or a home equity line of credit for a home remodeling project. Others refinance a mortgage or turn to personal loans and credit cards.

The truth is, mortgage rates are still low and there are several custom home loan options that can save you money. A preferred home loan that gives you access to your equity can help you stay on budget and finance your home remodel without financial stress.

It’s always worth it to connect with a local mortgage advisor to discuss your options–especially when it comes to a home remodeling project or renovation.

Taking Action

Connect with a mortgage advisor to determine the best path to finance a home remodeling project. Remember, you can access your home equity in several different ways — cash-out refinancing, a home equity loan, a home equity line of credit, or custom home renovation loans. We can help you decide the best option that will save you money and fit your home remodeling budget. Connect with a local mortgage advisor to get started. We’d love to help.

When is it a Good Idea to Buy Mortgage Points?

November 2, 2021
blog young businessman, mortgage blog, mortgage points, preferred rate

Buying mortgage points can lower your mortgage rate. When you buy a home or refinance, you might have the option to buy mortgage points. Buying mortgage points will generally reduce your interest rate by 0.25% (depending on the lender) for each point you purchase. But buying mortgage points isn’t always the best move.

If your top priority as a homebuyer is to lower your interest rate, then buying mortgage points or “discount points” will help you hit your goal. However, paying mortgage points isn’t the best decision for every homebuyer. What’s more, it won’t always help you save money on your mortgage.

The truth is, after discussing the final terms of a mortgage, along with closing costs and down payment options, many clients change their minds about buying mortgage points. Several factors impact a mortgage application, including your credit score, income, employment history, and debt-to-income ratio. Connecting with a local mortgage advisor can help you get the best mortgage based on your homeownership goals.

So then, how does it work when you decide to buy mortgage points?

Related: Mortgage Escrow Accounts–Everything You Need to Know

TOP 5 QUESTIONS ABOUT BUYING MORTGAGE POINTS

1. How does it work if I decide to buy mortgage points?

There are two kinds of mortgage points: rebate points and discount points. When homebuyers refer to paying mortgage points, they’re talking about “discount points.” Whether you “pay discount points” or “buy mortgage points,” both phrases mean the same thing.

Discount points allow the homebuyer to pre-pay interest when the loan closes in exchange for a lower interest rate. By pre-paying mortgage interest, you’ll receive a discount on your loan in the form of a lowered interest rate.

Each mortgage point typically costs 1% of the total loan amount. For example, buying 1 point on a $500k mortgage would be $5,000 (2 points would cost $10,000). The interest rate on your home loan would then be reduced by 0.25% for each discount point you purchase.

Related: Pros and Cons of a Conventional Mortgage

2. A sample scenario for a fixed-rate 30-year mortgage.

Here’s a sample home loan example for a $450,000, 30-year fixed-rate mortgage.

Loan amount: $450,000
Loan term: 30 year fixed-rate
Interest rate: 4.5%
Monthly payment: $2,280

If you decide to buy 2 mortgage points, it would cost $9,000 (2%), and your rate would be reduced 0.50% (0.25% x 2) to 4.0%. Your new payment would be $2,148.

In this scenario, you’d have a monthly payment that is $132 lower. It will take 69 months to recover the cost of your mortgage points (the original $9,000). After 6 years, you’d break even and begin saving money on your mortgage. Over 30 years, this would amount to a savings of $47,520.

3. Is it always a smart move to buy mortgage points?

In our example above, paying mortgage points at closing can save you a lot of money over the life of the loan. However, if you decide to sell or refinance before you break even, it could end up costing you money.

There are a few additional questions worth considering. How how long do you expect to stay in your new home? Do you have enough cash reserves for unexpected repairs? Are there other investment opportunities that might yield a better return?

Remember, you’ll need cash reserves for home repairs, maintenance, homeowner’s insurance, and other unexpected homeowner costs. If paying mortgage points exhausts your savings, it might be smarter to hold your funds.

Compare: How to Qualify for a Home Loan When You’re Self-Employed

4. Should I make a bigger down payment instead of buying points?

In the example above, if you were to put that $9,000 toward your down payment instead of paying mortgage points, you’d have a smaller loan and a lower monthly payment of $2,234.

Loan amount: $441,000
Loan term: 30 year fixed rate
Interest rate: 4.5%
Monthly payment: 2,234

One important detail: If you can put 20% as a down payment, you’ll have access to better loan terms, lower rates, and you won’t have to pay private mortgage insurance. For this reason, using your extra cash to increase your down payment might be a smart move.

By increasing your down payment, you’ll have a stronger loan-to-value (LTV) ratio, yielding better loan terms.

Understanding the trade-offs and using a mortgage calculator can help you determine what’s best for you financially. Connect with a local mortgage advisor to discuss your best options.

5. If I buy mortgage points, will the amount be tax deductible?

Yes, mortgage points are tax-deductible in most scenarios. When you buy mortgage points, you are technically pre-paying interest on your mortgage. For this reason, any amount you pay to buy mortgage points is treated the same as mortgage interest on your tax forms.

The Tax Cuts and Jobs Act of 2017 has put limits on the amount of mortgage interest that can be claimed as a deduction. For this reason, it’s a good idea to check with your accountant or tax advisor to verify the current limits and tax laws in your state.

Summary

Paying mortgage points at closing is a straight path to securing a lower interest rate on your mortgage. If you plan to stay in your home long-term, buying discount points will save you money on mortgage interest. However, paying down mortgage points along with your down payment, title fees, property taxes, and other closing costs can be tough.

Before you decide to exhaust your savings, discuss your options with a local mortgage advisor. An experienced mortgage advisor can help figure out exactly how much you’ll save each month on your mortgage and how long it would take to break even.

Finally, consider making a large down payment if you have plenty of cash resources to put toward a new home. A bigger down payment could generate more favorable loan terms that could end up saving you more money than deciding to buy mortgage points.

Taking Action

If you’re not sure whether buying mortgage points is the best financial decision, we can help guide you through the process. It’s important to understand the final terms of your loan, closing costs, and down payment options before you decide to buy discount points. Connect with a local mortgage advisor to discuss your goals and set yourself up for financial freedom. We’d love to help.

Benefits of a Reverse Mortgage When Costs are Rising

May 25, 2022
mortgage blog, reverse mortgage, happy couple, preferred rate

Mortgage rates appear to be increasing ever so slowly while inflation is hitting our cash flow and monthly budgets. The dollar is buying less when it comes to groceries, gas, clothing, and travel. Understandably, homeowners have been asking us about the benefits of a reverse mortgage. Economic uncertainty seems to be standard fare for homeowners across the country right now, and information about reverse mortgages can appear conflicting and confusing.

If you’ve got a substantial amount of equity in your home and you’re over the age of 62, can a reverse mortgage provide financial stability? When is a reverse mortgage a good idea? Are there hidden dangers of a reverse mortgage?

We hear you.

After all, one of the biggest benefits of homeownership is accessing your home equity when you need it most. Keep reading to learn the pros and cons of a reverse mortgage and decide if it’s a good fit.

Related: How to fast-track your loan application and refinance your mortgage while rates are still low

TOP 7 QUESTIONS ABOUT REVERSE MORTGAGES (answered)

1. What is a reverse mortgage and how does it work?

At its core, a reverse mortgage is one way to refinance your mortgage. A reverse mortgage allows homeowners to turn their home equity into cash while deferring mortgage payments. As with every mortgage, your home is the collateral for the new loan.

A reverse mortgage is similar to refinancing with cash-out. But with a reverse mortgage, you can defer your mortgage payments. In fact, with a reverse mortgage, you don’t need to pay back the loan until the homeowner moves out, sells the property, or passes away.

For example, let’s say you own a home and you’ve been making monthly mortgage payments on a 30-year mortgage for several years, and now your mortgage balance is $100k. Your home has also increased in value and is now worth $650k.

A reverse mortgage allows you to borrow against the equity in your home ($550k) and receive the funds in a lump sum or monthly payments over a set term. There are limits to how much a homeowner can borrow.

There are no restrictions on how you use the funds.

Once you’ve qualified for a reverse mortgage, you can defer your mortgage payments until you move or sell the house. Interest will accrue on your new mortgage, but rarely will your mortgage balance surpass the value of your home.

2. When is a reverse mortgage a good idea?

If you’re a homeowner over the age of 62 with substantial equity in your home, a reverse mortgage might be worth considering. You can access your home equity and use the cash any way you like, without restrictions. Funds are disbursed as a lump sum, regular monthly payments, or even a line of credit.

Highlights:

  •  Access to home equity as spendable cash
  •  Option to defer mortgage payments
  •  Option to receive in a lump sum or monthly payments
  •  Use funds to supplement retirement income
  •  No taxes due on the income since they are loan proceeds
  •  Protected if the mortgage surpasses your home’s value

3. Do I need to make monthly mortgage payments on a reverse mortgage?

No. One of the main benefits of a reverse mortgage is that you have options for paying your mortgage. The main benefit is that you can access your equity now and have it disbursed to you monthly, as a lump sum, or even as a line of credit.

You get to decide how you want to pay back your mortgage:

  •  Make monthly payments against your new mortgage balance
  •  Defer payments for a limited amount of time
  •  Defer payments until you decide to move or sell the home

With a reverse mortgage, if you decide to defer mortgage payments, the interest on the loan will continue to accrue. As interest accrues, the balance will increase, but the equity in your home will also increase. Rarely will a reverse mortgage balance surpass the value of the home.

Connect with a mortgage advisor to determine which option works best with your financial goals.

4. Who is eligible for a reverse mortgage?

Homeowners must be at least 62 years old and have substantial home equity. When you apply for a reverse mortgage, it’s similar to applying for a mortgage refinance. The application process will require a home appraisal, financial documentation, a credit report, and general mortgage application information.

Connecting with a local mortgage advisor to discuss your goals can be extremely helpful since there are a few restrictions and requirements.

Once you qualify for a reverse mortgage, you can decide how much you want to borrow, up to the approved loan amount.

RELATED: Lower your mortgage payment with the FHA Streamline Refinance

5. How do I access funds with a reverse mortgage?

With a reverse mortgage, you can receive a lump sum, monthly payments, or use a line of credit. Once you qualify, you can decide how much you want to borrow and how you want to receive the funds, up to the loan amount approved by your mortgage lender.

Often, homeowners choose a reverse mortgage to help with monthly expenses, health care needs or as a supplement to retirement income.

RELATED: Home Equity Loan vs. Home Equity Line of Credit

6. Who pays off a reverse mortgage if the property owner moves or passes away?

Reverse mortgages can be paid off at any time. In most cases, a reverse mortgage is paid off when the owner moves or passes away.

With an estate, heirs can pay off the mortgage directly, refinance if the property has sufficient value, or sell the property to pay off the mortgage.

In the few instances where the home’s value falls below the loan balance, heirs can settle the loan by returning the title to the lender. This is called a non-recourse loan, and the heirs will not be liable for the balance.

Most reverse mortgages are insured by the FHA, which guarantees final payment to the mortgage lender.

RELATED: 7 Ways to Increase the Value of Your Home

7. What happens when you sell a home with a reverse mortgage?

When you sell a home with a reverse mortgage, the mortgage balance is paid in full when the sale closes. If there is equity left after you pay off the mortgage balance, that money is disbursed to you (the property owners) or the heirs if part of an estate.

If your home’s current market value is lower than the current mortgage balance and you no longer want to live in the home, the mortgage is settled as a non-recourse loan. 

A non-recourse loan means that the loan can be settled by giving the title back to the lender. Neither the owner nor the heirs will be liable for the balance. Almost all reverse mortgages are insured by the FHA, which guarantees full payment to the mortgage lender.

  • Worth noting— foreclosures can still happen if property taxes or homeowner’s insurance are not paid on time.

Taking Action

Connect with a mortgage advisor to determine whether or not a reverse mortgage is a good fit. Remember, you can access your home equity in many different ways — with a reverse mortgage, cash-out refinancing, a line of credit, or a home equity loan. We can help you decide which path will save you money and provide financial stability. Connect with a local mortgage advisor to get started. We’d love to help.