Tag Archive for: mortgage advisor

Eight Ways to Pay Off Debt

September 5, 2023
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Having a significant amount of debt looming over you isn’t enjoyable at all. It’s even more disheartening when this burden is substantial enough to hinder your ability to pursue your desires and achieve long-held aspirations.

Imagine wanting to attend your best friend’s destination wedding in Bali, aiming to purchase your first home, or desiring to support your children’s college education. Achieving such goals becomes challenging when you’re saddled with hefty monthly credit card payments.

What’s worse, extricating yourself from a debt avalanche can seem like an insurmountable task, particularly when compounded interest is at play (which is often the case with credit card debt).

Thankfully, a plethora of approaches exist for paying off your debt. Not only does this relieve you of the burden of debt, but it also opens up a realm of possibilities, allowing you to make the most of your surplus funds and improved credit score.

Here are eight effective strategies to help you navigate and eliminate your debt.

Debt Strategy #1: Trim Your Financial Belt.

Begin by assessing your financial situation and meticulously outlining a budget. Detail all sources of income, including your regular salary, earnings from side gigs, bonuses, and more. Also, catalog your monthly expenditures, pinpointing those that are discretionary.

Identify areas where you can curtail spending and allocate the extra funds toward reducing the principal balance of your debt.

Debt Strategy #2: Embrace the Debt Avalanche Approach.

Before your debt becomes overwhelming, employ the debt avalanche method to systematically obliterate your bills. This method concentrates on eradicating your most costly debt first.

Here’s the game plan: Compile a list of all your debts, ranking them from the highest interest rate to the lowest. Maintain minimum payments on all debts while directing any additional funds toward the debt with the highest interest rate.

Once that high-interest debt is paid off, shift your focus to the debt with the second-highest interest rate. Apply the surplus payment you were making to that debt while continuing minimum payments on others.

Persist until you’re debt-free. This approach significantly reduces interest costs over time.

Debt Strategy #3: Implement the Debt Snowball Method.

For some, the debt snowball strategy resonates. This tactic involves settling your debt with the smallest balance initially and then proceeding to the next smallest principal balance.

Unlike other methods, the snowball approach doesn’t account for debt interest rates. Nevertheless, it delivers a swift psychological boost as you cross debts off your list one by one. The sense of accomplishment from conquering some of your obligations can serve as potent motivation to persevere. Eventually, you’ll tackle larger and larger debts until they’re all paid off.

While the snowball method doesn’t lead to substantial interest savings, it proves effective for those who prefer starting with the “easier” tasks, making it a suitable strategy for prompt debt settlement.

Debt Strategy #4: Refinance High-Interest Debt.

In certain cases, leveraging interest rates through the refinancing of high-interest loans into a single loan with a lower rate is advantageous.

Imagine holding multiple credit cards with elevated interest rates. You could consider applying for a personal loan with a reduced interest rate and utilizing the proceeds to settle all the high-interest cards.

If you opt for this route, be mindful of origination fees linked to obtaining a personal loan. Furthermore, invest time in exploring various options to secure the most favorable loan terms.

Debt Strategy #5: Master the Art of Balance Transfers.

Should you possess good credit and a manageable number of active credit accounts, transferring your debt to a new credit card featuring a low or 0% introductory rate might be strategic. Nonetheless, it’s vital to grasp the terms, including the duration, of the promotional rate.

Devise a plan to eliminate your debt before the standard interest rate on the new card takes effect.

Debt Strategy #6: Leverage Your Negotiation Skills.

Contrary to the belief that paying off debt or watching interest accumulate are your sole options, negotiating with your creditors is a viable alternative. Endeavor to secure a lower interest rate or a repayment plan that aligns better with your circumstances.

Be forthright with your creditors about the factors contributing to your debt and your strategy for overcoming it. Numerous creditors are open to adjusting terms, particularly when your sincere commitment to debt repayment is evident.

Debt Strategy #7: Harness Your Home Equity via Cash-Out Refinancing.

If you’re a homeowner, your substantial home equity can be an asset. A cash-out refinance offers one method to address significant debt.

This entails replacing your existing mortgage with a new, larger loan that surpasses your mortgage balance. The difference is disbursed as cash, which can be allocated to debt settlement.

By amalgamating high-interest debts into your mortgage payments, you can capitalize on the typically lower fixed mortgage interest rate compared to astronomical credit card rates.

Despite concerns about potentially undermining a super-low mortgage rate, it’s pivotal to analyze the “blended” or average rate of all your debts to determine if this approach suits your situation. Many homeowners have succeeded in clearing substantial debt while maintaining a new loan payment lower than the combined total of their current mortgage and minimum debt payments. Additionally, a mortgage loan provides a structured payoff plan and timeline.

This option holds the potential for substantial interest savings over the long term, and it might even offer tax advantages. It can also streamline payment management, as a single monthly payment is simpler to handle than multiple payments with diverse due dates. For those struggling to manage numerous payments, this strategy could potentially enhance their credit score.

Debt Strategy #8: Leverage Home Equity through a Home Equity Line of Credit (HELOC).

Home equity presents numerous opportunities. Some utilize it for home enhancements or to clear student loans. Others tap into it through a home equity line of credit (HELOC) to eliminate high-interest debt.

A HELOC functions as a revolving credit line secured by your home. You can access funds as needed, employing your home equity to settle debts. Generally, a HELOC carries a lower interest rate than credit cards, rendering it an astute debt repayment avenue.

Nevertheless, prudent usage of a HELOC is essential. Guard against accumulating additional debt by drawing on this credit line only when necessary.

Seeking Further Debt Repayment Options?

Whichever strategy you opt for, committing to responsible credit usage in the future is paramount. Construct a budget within your means and adhere to it to sidestep financial difficulties down the road.

Debt can be a formidable adversary but don’t allow it to dominate your life or curtail your prospects. Effective methods exist to wipe the slate clean, free up funds, and embark on a new financial chapter.

If you’re interested in additional debt repayment avenues, don’t hesitate to contact Preferred Rate. Our trusted Mortgage Advisors are eager to hear about your financial situation and provide tailored strategies that suit your needs.

Seven Red Flags to Look for When Buying a Home

August 29, 2023
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It’s easy to get caught up in the fun of house hunting, but you also need to keep your eyes open for warning signs that the home you’re considering might not be a safe, sound, dependable dwelling. 

Thankfully, you can easily spot major red flags. You just have to know what to look for, have the right people on your side (hello, structural engineer, home inspector, real estate agents, and your trusted licensed pest inspector!), and go into your purchase with your eyes wide open.

So let’s peel back the curtain—and possibly some paint to see what’s behind it—and start identifying the biggest homebuyer red flags.

1. Foundation Problems

It goes without saying that the home’s foundation is one of the most important structures—and structural issues can be expensive. The biggest sign to watch for, experts say, is cracking. While smaller hairline cracks in the basement are indicative of cement settling, larger cracks are a red flag. They may signal structural problems that compromise the integrity of the home.

One way to spot cracks: Unfinished basements are a starting point. Here you’ll get a clearer picture of the home’s foundation.If the home doesn’t have a basement, door frames can also provide some clues. If the door doesn’t close and open squarely with its frame, take a closer look. Unfit doors can point to larger structural issues.

If you’re still in doubt, consider investing in a structural engineer to inspect the foundation.

2. Pest Problems

No one wants to deal with a pest problem. But some pests can do more than send shivers down your spine. Wood-destroying insects like termites can cause serious damage to the home—and the bill for fixing it could be four figures.

One way to spot pests: A termite inspection from a licensed pest inspector is the best way to ensure that there are no creepy crawlies. Some states don’t require a professional inspection before buying a home, but your lender might. Either way, it’s a good idea to get one.

If the initial report raises any suspicions about possible pests, think about doing a more thorough pest inspection. If anything comes up, you have the discretion to ask the seller to cover the costs.

3. Freshly Painted Walls

It’s not uncommon for a home seller to make sure their home looks its best. This may include fresh paint. But a patch of paint—inside or outside the home—is one of the notorious homebuyer red flags. This patch of paint can signal an attempt to cover up damage, potentially costing you big bucks to fix.

How to spot patches of paint: Do your own inspection during the walk-through or open house before buying a home. Take a step back and look at walls from a distance. If you notice some inconsistency to the paint, there might be something hiding behind it.

Next, take a flashlight and get closer to see if there is damage to the wall underneath, obvious patches, or water staining. Be sure to alert your real estate agent if you see anything. They will pass the information to the seller’s agent or note it for the home inspector. Be sure to take a look at both interior and exterior paint in all areas of the home.

4. Questionable Repairs

DIY projects can be fun, but sometimes an owner’s attempt to repair something can go wrong. The savvy shopper will look at an amateur project and see a red flag. Remember that property flippers sometimes put a premium on speed but may lack the experience needed to make certain repairs.

One way to spot bad workmanship: If something looks rushed or incomplete, chances are it is. Some of the more common “quick fixes” can be found in the home’s plumbing, carpentry, and electrical work. Keep an eye out for leaky faucets, toilets (listen for sounds as well), missing trim work, and uneven flooring. Looking at outlet covers, corners of countertops, and air vent covers can give you a clue as to other workmanship issues.

5. What’s That Smell?

When looking at a home, it’s not just a foul smell that’s a warning sign. Pleasant smells can be warning signs, too. It goes without saying that a bad odor can indicate an issue with the home, but a pleasant smell can be an attempt to cover up unfavorable odors—and bigger issues.

How to sniff out an issue: Look for clues of compensation. Did the seller put a deodorizer in every room? Are all the windows open despite the cold weather?

Although these don’t always point to an issue, they could be homebuyer red flags. So be sure to inquire about all smells, both good and bad.

6. Mold Problems

I’m sure we don’t have to tell you that mold is one of the bigger homebuyer red flags. Not only can it indicate issues with the home, such as a leak, but mold can pose a health risk to you and your family. As you might imagine, fixing mold-related issues is also expensive.

One way to spot mold: Mold can be tricky to find, though water stains can provide a lead. The most common areas for mold are basements, attics, windows, and ceilings—as well as obvious wet areas, such as a bathroom or under a sink. There are also mold tests that can make a definitive determination on the presence of molds. In the end, a professional inspection is your best defense against mold.

7. There Goes the Neighborhood

The first six red flags dealt with the home itself, but you also want to put the neighborhood under a magnifying glass. Survey the area’s condition and look for an excess of for-sale signs, foreclosures, or abandoned lots. These can be indicators of stagnant growth and under-performance—things you definitely don’t want. 

Other things to look for: Visit your prospective neighborhood at different times of the day (and night) to get a full snapshot of what it’s like. During these visits, take note of vehicle and foot traffic and other potential issues like noise. You can also search online databases for crime frequency and sex offenders, as well as learn about schools and amenities.

While some of these factors may not be an immediate hit to your wallet, they can have long-term effects on the equity on your home. And they will certainly weigh on your peace of mind. 

What to Do with What You Find

If you find problems while house hunting, it’s up to you whether you proceed with the sale, try to negotiate with the seller, or walk away. 

As you weigh those options, here are a few things to keep in mind:

As-is sales

Buying a home “as-is” is exactly how it sounds: You’re taking it as it stands, warts and all. The seller isn’t offering any warranties or guarantees regarding the home’s current condition, which puts the responsibility on you to get the home inspected and find any defects.

Even if you do find defects, the seller will not be covering their costs—you’ll simply have the knowledge that the defects exist. Buying a home as-is carries a higher level of risk, but these homes typically come with a lower price tag, so weigh the pros and cons. 

Visible issues

No home is perfect, even a newly constructed one. But there’s a difference between your everyday problems and, say, encountering a horrible smell or seeing visible water stains during the open house.

You’ll want to document the issues with photos or a video, and then contact a professional who can help assess them. You can also request permission from the seller to conduct mold or water damage tests for a more accurate understanding of the situation. It’s important to fully understand the scope of a problem before making any decision.

Problems on the inspection report

Your home inspector will find things. However, you need to understand the problem, how it can be solved, how much that might cost, and how long it may take. Be sure to ask your inspector follow-up questions, as well as their personal opinion on whether this is one of the major homebuyer red flags or something minor that can be addressed later. 

The Importance of Due Diligence

It’s no fun to think about inspecting paint or worrying about hairline cracks. But these little tasks—whether done by you or delegated to a professional—can save you time, money and, perhaps most importantly, your peace of mind! You want to know that, at the end of the day, your family lives in the best home you can provide.

Remember that some of these homebuyer red flags are bigger than others. Water stains may be inconvenient and expensive, but structural or electrical issues could pose a real danger. Knowing what warning signs to spot, when to call in the experts, and when to move on in the house-hunting process can not only save your wallet, but it might even save lives. 

Want more information about homebuying and financing? We’re here to help!

What You Need to Know About Cosigning for a Mortgage

August 17, 2023
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Sometimes, we get by with a little help from our friends…or family. 

There are many reasons someone may need help to qualify for a mortgage. They may just be starting out and haven’t established a good credit history yet. Or perhaps they’re just getting out of a tough financial situation that they’re turning around. 

When it comes to cosigning for a mortgage, the cosigner is essentially boosting the financial profile of the mortgage application, while signing up to share responsibility for the loan should the primary borrower stop making their monthly mortgage payments. 

Questions About Cosigning

Cosigning can be an amazing thing to do for someone, especially your children or other loved ones, but it comes with a lot of financial responsibility on your part. Before cosigning for a mortgage, you need to understand all the implications, risks, and potential consequences. 

Does cosigning for a mortgage affect my credit?

Cosigning for a mortgage loan impacts your credit. The loan will show up on your credit report, meaning that it will impact your debt-to-income (DTI) ratio and overall credit utilization. Additionally, any missed or late payments by the primary borrower will impact everyone’s credit score—the primary borrower’s and the cosigner’s. 

Now for the good news: If the primary borrower consistently makes their monthly mortgage payments on time, it can improve everyone’s credit score. It’ll all come down to the primary borrower and their ability and willingness to pay on time.

With this in mind, it is always a good idea to maintain an open and honest line of communication with the primary borrower. This ensures that mortgage payments are made on time and creates good credit for everyone.

Does a mortgage count as debt? 

A home loan is a form of debt. Cosigning for a mortgage means you’re assuming responsibility for the debt alongside the primary borrower.

As mentioned, the mortgage debt will factor into your debt-to-income ratio, which lenders analyze to determine your ability to manage additional credit. It’s important to consider the impact of this debt when applying for other loans or credit lines in the future.

What are the risks of cosigning a loan? 

It’s a cold, hard reality that if the primary borrower fails to make timely monthly mortgage payments or defaults on the loan, the responsibility for this debt will fall on the cosigner. This could lead to financial strain, credit score damage, and even potential legal action as the lender attempts to collect the outstanding debt.

Remember, too, that since your debt-to-income ratio will be affected by cosigning for a mortgage, your ability to obtain credit in the future may be impacted. This is why you should think long and hard not just about whether you feel that the primary borrower can consistently pay their home loan, but also about any large purchases or credit lines you may need in the future. 

Reduced borrowing capacity could really hurt you if, say, you’re looking to finance a new car, help out a child with a student loan, refinance your own home, or invest in a second property. 

Can a cosigner be removed from a mortgage? 

The option to remove a cosigner from a mortgage loan depends on several factors. In some cases, mortgage lenders may consider removing a cosigner if the primary borrower has made consistent monthly mortgage payments.

It’s not as easy as just removing the cosigner’s name from the loan, however. The primary borrower typically has to refinance the home loan, putting it in their name alone. This means the primary borrower will have to take interest rates, credit score requirements, debt to income ratio, and their current financial circumstances into account. In essence, they would have to be sure they’ve cleared up the reason they needed a cosigner in the first place.

Trusted mortgage lenders can help you understand the specific requirements and conditions for removing a cosigner from a home loan.

What happens if a cosigner doesn’t pay?

We know what happens if the primary borrower doesn’t pay: The mortgage lender will come looking for the cosigner. But what happens if the cosigner also doesn’t pay? 

When a cosigner fails to make the mortgage payments, the lender will typically pursue both the primary borrower and the cosigner for payment. If neither party fulfills the financial obligation, they can both be subject to legal action and collection efforts.

What’s the difference between a co-borrower and a cosigner? 

A cosigner is someone who agrees to assume responsibility for the loan if the primary borrower cannot meet their obligations. On the other hand, a co-borrower (or co-applicant) is equally responsible for repaying the loan and shares ownership of the property.

While a cosigner’s name may appear on the loan documents, a co-borrower has equal rights and responsibilities, along with a stake in the house. 

What else do I need to know before cosigning?

You need to give cosigning for a mortgage loan a lot of thought. Assess the primary borrower’s financial stability, including their income, employment history, and credit history.

If you’re willing to consider cosigning a mortgage loan for them, you probably know the potential primary borrower pretty well. Use this relationship to your advantage as you think about how responsible they are in general. Do they always do what they say they’re going to do? Are they quick to shirk blame? Do they go out of their way to rectify problems, or do they avoid them like the plague? 

You want to be confident that your credit score, borrowing ability, and—most of all—good name will not be ruined by cosigning for a mortgage.

Next, ensure that you can comfortably handle the financial responsibility of the mortgage payment in case the primary borrower is unable to fulfill their obligations.

Finally, consult with a knowledgeable mortgage advisor like Preferred Rate to gain a comprehensive understanding of the specific loan terms, interest rates and any mortgage insurance requirements associated with the home loan. 

Pros and Cons of Cosigning for a Mortgage

You’ve now got a lot of information about what it takes to cosign for a mortgage. But let’s weigh out the benefits and risks so you can really hone in on whether this is the right move for you. 

Pros

  • Cosigning can help a loved one achieve their dream of homeownership.
  • It allows the primary borrower to qualify for a mortgage they might not otherwise have been eligible for.
  • On-time payments can, over time, help improve both the primary borrower’s and the cosigner’s credit scores and credit history.

Cons

  • Cosigning for a mortgage comes with financial risks, including knocks to your credit score and being held responsible for the other party’s missed payments or default.
  • It can limit your borrowing capacity, as the cosigned mortgage becomes part of your debt-to-income ratio.
  • The relationship between the cosigner and the primary borrower may become strained if payment issues arise.

Taking the First Steps

Cosigning for a mortgage is a big decision and a long-term commitment. So you have to weigh the risks and benefits carefully, considering both your financial situation and the primary borrower’s ability to fulfill their obligations. Sit down and have an honest conversation with the primary borrower. Make sure you lay the foundation for a healthy, open, and communicative relationship going forward.

Once you’re ready, bring a professional like a Preferred Rate mortgage advisor into your corner to make sure cosigning for a mortgage aligns with your financial goals and responsibilities.

If you’re at that point now and want to get started, give us a call today. We’re always here to help.

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. 

How to Qualify for a Second Home Loan

July 25, 2023
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The American dream is not one size fits all. Some borrowers want to purchase a second home where their family can vacation for part of the year. Buying property as a second home could mean a cabin in the mountains, a beachside bungalow, or anything in between.

The vision is up to you. But what’s important is that you understand that buying a second home is completely attainable for many people. That’s right: Buying property as a second home can be within your reach, but it starts with understanding the second home mortgage requirements.

Second Home vs. Investment Property

Let’s clear one thing up before we discuss second home mortgage requirements. While an investment property may in fact be the “second home” you purchase—after your primary residence—that is viewed as a different product with a different purpose in the eyes of mortgage lenders.


A second home is an additional dwelling for you and your family. It can act as a personal vacation home, a place to stay when visiting family, or as your retirement home in a few years. While you may be able to rent out your second home on a short-term basis, the primary purpose of this property is for you and your family. With that in mind, you cannot rely on the rental income this home may generate when qualifying for a second home loan.

Down Payment

Most lenders require at least 10% down on a second home, though 20% down tends to be standard. Lenders need to see that you’re committed to buying a second home, as it’s easier to walk away from a home that isn’t your primary residence. A larger down payment may also help you avoid higher interest rates. 


As with a primary residence, you can obtain your down payment by tapping into savings, utilizing a monetary gift from a relative or domestic partner, or liquidating investments. You may even be able to use some of the equity in your primary residence when buying a second home by using a cash-out refinance or home equity loan. Your loan adviser can help you navigate this process.


You might be thinking, “But there are loan programs that don’t require any money down,” and you would be right. However, these are government-backed mortgages or down payment assistance, which cannot be used for second home purchases. Most second home loans are conventional loans, although FHA loans can be used as well.

Credit Score

Every lender is different, but credit standards tend to be a bit tighter when qualifying for a second home mortgage. That’s because a primary residence provides shelter, whereas a second home is a “nice-to-have,” not a necessity.


Lenders may consider applicants with a score of 620 or higher, though a score above 700 is preferable when qualifying for a second home mortgage. Naturally, lenders will also want to look at your credit history, taking into account any late mortgage payments, exorbitant credit card balances, and bankruptcies. The more you are extended with various debt payments, the higher risk you may be for the lender.

Debt-to-Income (DTI) Ratio

You’re not a stranger to this; you’ve been around the block before when you purchased your primary residence. Like last time, lenders will want to analyze your debt-to-income ratio—or the amount of money going out versus the money coming in.


You need to understand that this time your existing mortgage payment will be factored into your DTI, along with other monthly payment debts, including credit cards, student loans, and auto payments. Remember, too, that you cannot offset your DTI by factoring in any forward-looking rental income that you may be able to collect by renting out your second home. That would make this an investment property. Investment properties come with investment property mortgages, with a different set of mortgage requirements. 


When qualifying for a second home mortgage, lenders generally want to see that your debt, which would include your new mortgage, will represent 43% or less of your pre-tax monthly income. This number can sometimes vary depending on your credit score and down payment.

As with a primary mortgage, you can get pre-approved for a second home loan, so it’s always a good idea to talk to a loan officer before you enlist a real estate agent to search for properties.

Reserves

Things happen. Mortgage professionals know this more than anyone, which is why they like to see some liquidity from second home buyers. This comes in the form of reserve funds.

Well-qualified borrowers generally need to show at least two months of reserve funds that can cover both their primary and secondary mortgages, property taxes, and insurance should their income or employment change. Weaker borrowers and those who are self-employed may need to show six months of reserve funds.

Is a Second Home Right for You?

Though the process of qualifying for a second home mortgage isn’t that different from qualifying for a primary home, borrowers may face a little more scrutiny and tighter lending standards on these properties. You should also keep in mind that these homes may have tax implications, short-term rental restrictions, and additional condo or HOA fees. These are all things to consider when determining whether a second home is right for you.


Preferred Rate is always standing by to help with your housing-related needs. Give us a call today to go over your unique financial situation and the process of qualifying for a second home loan.

Financing and Buying an Investment Property

July 19, 2023
modern corner apartment complex with blue colored windows and light leaks

Investing in income property can be a crucial step toward achieving financial independence and building wealth for future generations. Whether your aim is to generate rental income, take advantage of tax benefits, or both, owning an investment property can expedite the accomplishment of your long-term goals.

However, financing and acquiring an investment property require careful planning and consideration. It’s important to understand the various types of investment properties available to you. But before delving into those details, let’s explore why purchasing an investment property can be a wise decision:

 

  1. Rental income: By renting out your property, you can earn a steady stream of cash flow and passive income.

  2. Appreciation: Real estate investments have the potential to increase in value over time, allowing you to build equity and enhance your overall investment. Making improvements to your property can further boost its value and enable you to command higher rental rates.

  3. Diversification: Adding an investment property to your portfolio helps spread out risk and reduces the overall volatility of your investments.

  4. Tax benefits: Real estate investments offer several tax advantages, such as deductions for mortgage loan interest, operating expenses, property taxes, insurance, and depreciation.

  5. Inflation hedge: Investment properties, including most residential homes, tend to hold their value and often appreciate over time, providing a hedge against inflation.

 

How to Finance and Buy an Investment Property

 

Now let’s discuss how to finance and purchase an investment property. Financing is typically the most challenging aspect of any home purchase, often involving a considerable amount of paperwork and calculations to evaluate your income, debts, and potential impact on your monthly budget. However, mortgage lenders and experts like Preferred Rate are available to guide you through the process, taking into account your specific financial situation, goals, and available options.

 

If you are considering investing in real estate, here are some steps to get you started:

 

  1. Establish clear investment goals: Define the type of property, desired location, budget, expected returns, and timeline.

  2. Assess your finances: Evaluate your credit score, calculate your savings for a down payment, and organize the necessary documents for loan pre-approval. Most mortgage lenders require a minimum credit score of 620 for investment property purchases. Preferred Rate, for instance, accepts a down payment as low as 15% for single-family investment properties and 25% for multifamily properties. It’s important to note that many lenders may also require six months’ worth of cash reserves and private mortgage insurance (PMI) if your down payment is less than 20%.

  3. Consider interest rates: Interest rates for investment properties are generally higher than those for primary residences due to the perceived higher risk for lenders when the property is not owner-occupied.

  4. Understand loan-to-value (LTV) ratio: Investment properties often have stricter LTV requirements, meaning you may need more equity or a larger down payment to meet these requirements. Preferred Rate offers up to 80% LTV.

  5. Analyze your debt-to-income (DTI) ratio: Lenders will examine your DTI ratio, which compares your monthly debt obligations to your monthly income. For investment properties, there might be more stringent DTI requirements, although lenders usually consider rental income when calculating this ratio.

  6. Compare financing options: Many loan options available for primary residences can also be used for investment properties, including conventional loans, FHA loans, VA loans, and jumbo loans.

  7. Do the math: Calculate the potential return on investment (ROI) by factoring in rental income, expenses, mortgage payments, and vacancy rates. Additionally, consider the long-term mortgage payments, which can extend up to 40 years if financed through Preferred Rate. It’s essential to ensure you can handle tenant turnover, regular maintenance, updates, and both expected and unexpected repairs.

  8. Consider maintenance and property management: Determine whether you want to hire a property manager to handle tenant screening, rent collection, and property maintenance. While property managers can be beneficial, remember to account for their cost in your monthly budget.

 

Types of Investment Properties 

 

Next, let’s explore the different types of investment properties available:

 

  1. Single-family homes: These properties are ideal for securing long-term tenants and, depending on local laws and homeowners’ association (HOA) regulations, can also be used for short-term rentals.

  2. Multifamily properties: These properties consist of two to four units or even entire apartment buildings, allowing you to accommodate multiple renters and collect higher monthly rent payments.

  3. Condominiums: Purchasing a unit in a condominium complex provides the opportunity to rent out the property. However, it’s crucial to understand the building’s bylaws and restrictions.

 

A Little Info on Airbnb

 

Before investing in real estate with the intention of renting it out on platforms like Airbnb, it’s essential to familiarize yourself with local regulations governing short-term rentals. Cities often have specific rules, permits, or limitations for Airbnb rentals. Complying with legal requirements and understanding any potential restrictions in your desired location can help you avoid legal complications or unexpected issues.

 

Consider properties with features that appeal to travelers, such as proximity to attractions, adequate space, desirable amenities, and a welcoming atmosphere. Evaluate the property’s layout, number of bedrooms, parking availability, and outdoor spaces to offer a unique and comfortable experience for guests. While owning an Airbnb can be profitable, it’s crucial to consider the long-term sustainability of your property. Look for areas with economic stability, diverse tourism sources, and growth potential. Anticipate market changes or regulatory updates that could impact your business and evaluate your ability to adapt.

 

Second Home vs. Investment Property

 

It’s important to note the distinction between a second home and an investment property. While an investment property can be your second home, there are significant differences between the two. Financial requirements, financing options, cash flow potential, and tax benefits vary depending on whether the property is classified as a second home or an investment property. A second home is primarily intended for personal use, such as a vacation home, and typically needs to be located at least 50 miles away from your primary residence. Renting out a second home is generally limited to a maximum of two weeks per year.

 

Although investment property purchases involve financial requirements, obtaining a mortgage loan for an investment property can be made easier with the assistance of professionals like Preferred Rate. We can guide you through the guidelines, options, and strategies to position yourself for the best chance of success. Reach out to a mortgage advisor at Preferred Rate to learn more about your investment property financing options.

Second Home vs. Investment Property: What’s the Difference?

July 7, 2023
Two kids happily splashing on the edge of a pool

You own your primary residence, but you’re thinking about buying a second home. Congrats! Being in the financial position to make that kind of real estate investment is a major accomplishment, and you should be proud of that.


The first thing you’ll want to do after celebrating your awesomeness is to determine the function of this new home. There are second homes that are exactly that—additional dwellings regularly used by you and your family as a vacation home. And then there are investment properties that are purchased with the explicit intent of renting them out as a source of income.


There are a few key differences between a second home and an investment property. They can impact your interest rate, down payment, ability to qualify, and even taxes. So make sure you’re clear on the goals for your new property from the start. You can also turn to Preferred Rate or a trusted real estate agent for additional information on these non-primary residences. 

Interest Rate Differences

There is a noticeable difference between a mortgage rate on second homes vs. investment properties. Second home loan rates are more like those of primary residences, while an investment property will typically have much higher interest rates. Rates on investment properties are usually 1 to 3 percentage points higher, depending on credit and loan-to-value ratio.


Why is there such a difference between the two types of homes? It’s because a rental property is not occupied by the borrower, and most borrowers will be relying on the income that the property generates to fund the home. Those two factors make these loans a much higher risk for mortgage lenders.


Remember that for both second homes and investment homes, your mortgage rate is also influenced by both your credit and your down payment. Of course, the better your credit score and the higher your down payment, the better your rate.

Down Payment Requirements

A typical down payment on a second home is 20%. However, you can find options to put as little as 10% down, depending on your credit rate and other qualifiers. Investments like rental properties, on the other hand, tend to require 20% to 25% down.


A larger down payment can sometimes lower your mortgage rate, regardless of whether you’re thinking about a second home vs. investment property. Keep in mind, too, that items like the interest rate and down payment will impact the size of your monthly mortgage payment. 

The Need for Reserves

Reserves are savings balances that will be there after you close on your home purchase. These are seen as emergency funds that assure lenders that you will be able to continue making payments should any unforeseen expenses or income loss come your way.


Some lenders require reserves on second homes, and they almost always require them on a real estate investment like a rental property. These reserve requirements can range from two months to more than six months of your total housing payments. You will want to consider this when determining the amount of your down payment so you don’t completely liquidate your savings.

Debt-to-Income Ratio Calculation

Since this new home will be in addition to your primary residence, you’ll have to include the mortgage on your primary home, plus this new mortgage, into your debt-to-income (DTI) qualifying ratio.


Though you may be able to rent out your second home on a short-term basis, you cannot count that anticipated income in your DTI calculation. If your home is an investment property, however, lenders will generally allow you to count up to 75% of your expected rental income toward your DTI. This can require additional paperwork and even a special appraisal to ensure that your rental figures are comparable to the ones in the rest of the neighborhood.

Proximity to Primary Residence

For your new home to qualify as a second home, lenders will generally require that it be located at least 50 miles from your primary residence. An investment borrower, on the other hand, can live as close or as far from their rental properties as they like.


Regardless of their proximity to their real estate investment, these landlords should have a property manager or property management plan in place to maintain the day-to-day operations and maintenance required for an investment property.

Credit Score Requirements

As you would expect, a high credit score is always favorable for any type of additional home purchase. A borrower buying a second home will typically need a score of at least 640. This can hold true for investment buyers as well, though a score above 680 is preferable. 

Tax Benefits and Considerations

Rental income is taxed differently depending on whether you have a second home vs. investment property.


If you own an investment property, the rental income must be declared as part of your taxable income. Those who own a vacation home don’t have to do this as long as their property is rented out for 14 days a year or less.


Investment homeowners do get a few tax benefits, though. They are able to deduct depreciation, in addition to property maintenance, advertising, insurance, and utility expenses. As you might guess, these deductions can go a long way toward offsetting the overall tax impact of the asset’s rental income.


However, if you’re using the property as a second home, you can deduct mortgage interest (up to $750,000 in mortgage debt), property taxes, and mortgage insurance payments.

Discuss Your Real Estate Investment with a Pro

The discussion over whether to purchase a second home vs. an investment property is a personal one. It really boils down to your goals. Are you looking to generate income? Will this be a long-term or short-term rental? When you picture this home, do you see yourself living in it for part of the year, or do you fantasize more about increased cash flow?


There are pros and cons to all types of real estate investments, so establishing what you hope to achieve through this purchase will help determine how you should invest in real estate. 

Here’s something else you need to know: You don’t have to make these decisions alone. Reach out to a mortgage advisor at Preferred Rate —we are here to assist you in this process.


Contact us today to learn more about these two home purchase options and which one may be best for you based on your situation

Six Ways to Beat Inflation by Buying a Home

February 2, 2023
AdobeStock 306637701 copy

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.

Can I Qualify for a Mortgage With Student Loan Debt?

May 11, 2022
mortgage blog, student loan debt, graduation

Graduation season is here! For many college graduates, student loan debt can turn into long-term financial stress. Even years after graduation, student loan debt can keep people from realizing dreams of homeownership. Add the recent economic shifts and inflation, and buying a house right now might feel downright impossible. This article can help bring some good news and help you make a plan.

If you’re getting ready to buy a house for the first time, but you’re worried about how your student loan debt will affect your mortgage, keep reading. A steady job and a good handle on your monthly expenses will take you farther than you think, especially if you’re a first-time homeowner. 

One of the best moves you can make is to lock in your rate today by getting pre-approved, which we blogged about here.

How to Buy a House With Student Loan Debt

This article will explain how student loans affect your home loan eligibility and how to qualify for a mortgage. Specifically, how to apply for a mortgage and get a home loan while you’re still paying off your student debt. 

A great first step is to connect with a mortgage advisor. You’ll be able to get personalized advice about your situation and find out about custom mortgage options. Start here to find a local advisor.

Three Factors That Affect Your Eligibility When You Apply for a Mortgage

#1 Debt to Income Ratio (DTI)

Your debt-to-income ratio impacts your buying power the most. Lenders compare your gross monthly income against your monthly debt obligations to determine how much you can afford to borrow. A DTI ratio higher than 43% can make it difficult to qualify. But there are select options for borrowers with student loan debt.

#2 Credit Score

A good credit score will get you a better home loan and a lower mortgage rate. But there are also special programs available for first-time homebuyers who have a lower credit score.

It’s always a good idea to download a free copy of your credit report. This will allow you to fix any errors, dispute incorrect information, and know your credit score.

#3 Down Payment

A larger down payment can often lock in a better rate and a more affordable mortgage payment. Ask your mortgage advisor about using investment stocks, retirement funds, gift funds, or borrowing from other sources.

Related: How to FAST TRACK your mortgage pre-approval

Best Home Loan Options for Homebuyers With Student Loan Debt

Related: Does every mortgage need an escrow account?

How Debt-to-Income Ratios Affect a Mortgage Application

When you apply for a mortgage, your debt-to-income ratio directly impacts your eligibility, your rate, and your loan terms.

Why? Lenders compare your total monthly income with monthly debt repayments to determine how much you can afford. For this reason, it can be difficult to qualify if your monthly debt payments are higher than 40% of your pre-tax income.

This is where student loan payments make a significant impact.

Student loan payments are automatically included in your monthly debt balance, so they directly affect how much you can afford for a home loan. Since there are different student loan repayment programs, the structure of your specific student loan payment plan can make a big difference.

First, let’s look at how debt-to-income ratios are calculated. Then you can decide whether or not it’s a smart idea to restructure your student loan debt.

How to Calculate Your Debt-to-Income Ratio (DTI)

Figuring out your debt-to-income ratio (DTI) is easy.

First, write down your gross monthly income, then list all your recurring monthly payments.

Leave out expenses that vary each month, such as utility bills, entertainment, groceries, transportation, etc.

To calculate your DTI, combine your required monthly payments such as:

  •  Monthly rent or mortgage payment
  •  Student loan payment
  •  Minimum credit card payment
  •  Monthly car payment
  •  Any court-ordered payments (child support, back taxes, etc.)

Related: Boost your credit score in less than 60 days

Example: Calculating Your Debt-to-Income Ratio with Student Loans

For example, if your gross monthly income is $6,000, 43% would be $2,580. This is the maximum amount a lender would approve for a monthly mortgage payment for a conventional loan.

Next, it’s time to subtract your monthly debt repayments. For example:

  • Monthly car payment = $200
  • Credit card payment = $135
  • Student loan payment = $250

In this scenario, your monthly debt repayment would be $585. From the lender’s perspective, this means you have $1,995 available to make a monthly mortgage payment ($2,580 – $585 = $1,995.)

Note that your new monthly payment will need to cover your mortgage payment, homeowner’s insurance, property taxes, and mortgage insurance if required.

There are several loan options and custom mortgages available. Many home loans for first-time homebuyers offer home loans with 0-5% down. FHA loans only require a 3.5% down payment. Conventional 97 requires only a 3% down payment.

How Different Student Loan Repayment Programs Affect Your Mortgage Application

Finally, restructuring your student loans can help lower your debt-to-income ratio and be a better option than paying off your student loans.

Why? To apply for a mortgage, you’ll want to have a down payment ready as well as emergency funds. So you don’t want to deplete your savings to pay off your student loans.

If your monthly student loan payment is high, you might consider restructuring your student loan debt to lower your monthly payment. This will help lower your DTI.

Contact your student loan program and ask about the following options:

  •  standard repayment plan
  •  deferred student loan
  •  income-driven payment plan
  •  graduated payment plan

Don’t Let Student Loans Keep You From Buying a House

Buying your first home might be closer than you think, even while you’re paying off student loans. And several loan programs can work to your advantage, especially for first-time homebuyers.

Plan for your down payment, find out your credit score and calculate your debt-to-income ratio. Once you have a clear financial picture, you can consider restructuring your student debt to lower your DTI ratio.

Taking Action

Working with a local mortgage advisor can help you compare your best mortgage options, lock in the lowest mortgage rate, and secure the best home loan that fits your life goals. Even with student debt. Connect with a local mortgage advisor to discuss your options and save money on your mortgage. We’d love to help.