Tag Archive for: mortgage

6 Things to Know Before Building a Custom Home

February 20, 2024

roofer builder working on roog structure of building on construc

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

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

1. Your Budget

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

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

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

2. How to Get a Construction Loan

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

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

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

3. How to Find the Perfect Build Site

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

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

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

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

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

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

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

5. How to Choose Home Builders or Subcontractors

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

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

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

6. How to Prepare for Surprises and Delays

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

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

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

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

A Bit More on Custom Home Expenses

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

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

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

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

Is Building a Home Right for You?

February 15, 2024

New residential construction home framing against a blue sky.

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

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

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

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

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

Pros of Building a Custom Home

Build your dream home

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

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

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

The latest and greatest

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

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

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

Cons of Building a Custom Home

Cost considerations

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

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

Time considerations

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

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

Expect the unexpected

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

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

The Custom Home Building Process

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

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

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

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

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

Understanding a 3-2-1 Interest Rate Buydown

February 9, 2024

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

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

What Is a 3-2-1 Buydown?

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

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

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

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

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

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

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

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

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

Who Pays for a 3-2-1 Buydown?

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

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

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

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

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

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

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

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

How to Set Achievable Financial Goals

January 2, 2024

Happy couple, tablet and planning for finance, budget or application for loan on fintech app in home. Black man, woman or reading on touchscreen ux with smile, financial goals and investment profit

New year, new goals, right? When it comes to personal goal-setting, creating financial goals can be one of the most meaningful things you can do for yourself and your family.

Why? Because money may not be everything, but it can buy us choices. Where we live, what we do for work (and how much we work), what hobbies we’re able to pursue, and whether we’re able to help others in our lives often have strong ties to our financial picture. So, do yourself a favor in 2024 and set some financial goals you can crush.

No matter what your financial goals, remember that a goal without a plan is just a dream. Cheesy? Yes. True? Yes.

That’s why we’re here to show you not just the value of personal goal-setting, but a road map for killing those financial goals.

All Big Dreams Start Small

Whether your goal is to travel the world or pay off student loans, chances are this goal is more complicated than simply snapping your fingers and making it so. If that were the case, it wouldn’t be part of your list of goals. It would be on a to-do list.

So let’s acknowledge upfront that some of these financial goals can seem quite lofty. After all, it takes a lot of financial planning to, say, buy a home or live debt-free. But here’s the thing: Once you set a goal, you can work backward to see how you can achieve it.

For example, let’s say you need $18,000 to pay off your debt this year. That’s $1,500 per month, or about $750 every two weeks. If you know that you can afford to set aside $650 of every paycheck toward paying back debt, that leaves $100 per month you still need to find—perhaps through scrimping, selling, or a side hustle.

Breaking your goal into a smaller time frame helps you see how you can get there, and whether it’s really achievable.

Using SMART Goals

Using the SMART system to achieve your goals is extremely powerful. It’s all about breaking these larger financial goals into bite-sized, achievable pieces.

SMART stands for specific, measurable, achievable, relevant, and time-bound. Sounds fancy, but it’s really just a practical way to turn dreams into reality. Here’s what each component means.

Specific: Define your goal as precisely as you can. Instead of saying, “I need to get out of debt,” perhaps make it, “I want to pay off my credit card debt in a year.”
Measurable: Make sure you can track your progress toward your goal. For example, “On the first of every month, I’ll send $200 to the credit card company.”
Achievable: Make sure your goal is realistic for you. And then outline exactly how you plan to save the money. For example, to save that $200, maybe you commit to stopping buying coffee outside the house and making dinner at home six days a week.
Relevant: Ensure that your financial goals align with your personal life. If you’re ultimately dreaming of homeownership, maybe your priorities are to pay down debt and work on your credit score, rather than saving up for a vacation.
Time-bound: Give yourself a deadline. Saying, “I’ll have $5,000 saved for a down payment in 12 months,” helps you think about what that means on a weekly and monthly basis. It also creates a sense of urgency.

Financial Goals That Are Worth Setting

Let’s get one thing straight: Any goal that’s worth it to you is worth setting. Want to save money so you can buy a piece of artwork? Great. Need extra cash because your living expenses are increasing? Fabulous. Just really love to see a fat number in your savings account? We totally get it.

No two goals are exactly alike because the people setting them are all different. Nevertheless, when it comes to personal goal-setting, there are some financial goals that come up more than others. Here are some ideas for you.

Creating a budget

Perhaps you’re not sure what kind of financial goals to set because you’re not really sure where your money is going. If that’s the case, getting a handle on that is a valid goal for 2024!

Here’s a simple way to get started:

List all your monthly income. List all your sources of income, including your salary, freelance work, rental income, and any other sources of money.
List all your fixed monthly expenses. Fixed expenses are regular and consistent, like rent, utilities, loan payments, and other monthly obligations. For annual fixed expenses like property insurance, divide the total number by 12.
List all your variable monthly expenses. Estimate the expenses that can vary from month to month, such as groceries, gas, clothing, entertainment, and dining out.
Start tracking your spending. Make a spreadsheet to keep track of your actual spending in all the categories you’ve listed. This will give you a clear picture of where your money is going right now.

Once you have some basic information, you can start thinking about areas where you might be able to cut back or set realistic spending limits for yourself.

If you struggle to create a budget—or to stick to one—there are also many apps you can use to keep yourself on track.

Becoming debt-free

Ah, the “D” word. Credit cards, student loans, medical bills, mortgages, car payments, you know the drill. Being debt-free is like shedding a financial weight.

If this is one of your personal goals, then a good plan can be to tackle high-interest debts first. That’s because those interest rates are costing you the most money. You may also want to look into consolidating debt or opening a credit card that offers a 0% APR on balance transfers.

Only consider the credit card option, however, if you’re positive you can control your future spending. Part of the goal of being debt-free is improving your credit score. Getting into even more credit card debt is the opposite of what you want and can prevent you from reaching your financial goals.

For more help on paying off debt, see our blog post with eight practical ideas here.

Saving money

When it comes to saving money, the old set-it-and-forget-it method can be great. An easy way to do this is to auto-allocate a specific amount of money to be transferred to your savings account once your paycheck is deposited.

This is honestly the best kind of New Year’s resolution. You can take some time in January to set things up when your motivation is high, and then you’re done for the year. Goal achieved!

The other great thing about this strategy is it can help you work toward a long-term goal like buying a house, but it’s also great for short-term financial goals like, say, Taylor Swift concert tickets.

And you don’t have to have a spending goal in mind at all! If you want to save money simply to watch your savings account grow, that’s not only an achievable goal, it’s a brilliant one!

Improving your credit score

The credit score: also known as your financial goals’ gatekeeper. We don’t have to tell you that a great credit score opens doors—namely, to the ability to make big purchases by taking on more debt. This privilege can be yours if you work on your credit score.

Remember the SMART goals here. Before you can set a specific goal, you need to know what your starting score is. (You can request a free credit report here.)

Say you have a credit score of 650, and you want to get it up to 700 by the end of the year. Here are some achievable ways to do that:

Be sure to pay your bills on time. This is crucial, so set up reminders or automatic payments if necessary.
Keep your credit card balances low. Aim to keep your credit card balances at no more than 30% of your credit limit.
Keep old accounts open, and avoid opening too many new accounts. The length of your credit history is important. So having long-standing accounts helps you, while opening a lot of new accounts is viewed as risky behavior.
Seek professional help. If you want to improve your credit score before buying a home, a Preferred Rate Mortgage Advisor may be a great resource for getting personalized help on this goal.

Saving for a down payment

One of the most common financial goals involves real estate. This might take the form of buying your first house, a vacation property or adding an investment property to your portfolio. In any case, a down payment will be needed, making this one of the great personal goals for 2024.

Start by setting a specific savings goal for your down payment, then see where you can save—and where you can earn more money—to hit this target. It’s always great to put 20% down if you want to snag better mortgage rates and avoid private mortgage insurance (PMI), but it’s not required. Consult with a Preferred Rate Mortgage Advisor to see if you qualify for down payment assistance and what a good down payment savings goal might be for you.

Saving for retirement

It’s time to play the long game. Long-term financial goals keep your eye on the prize. If your dream is to work less or retire on a beach somewhere, then now is the time to start saving for it. If you haven’t done it already, set up a retirement account, such as a 401(k) or an IRA.

As you begin to save for retirement, you’ll see what compound interest can do to the money you’re stashing away. As you watch this money grow, you can feel confident knowing you’re working toward being financially secure for the rest of your life.

Making career goals a reality

Part of being financially secure is the ability to pursue what’s important to you. When you’re not tied to the punch clock, you can achieve the career goals of your dreams.

For example, maybe you’d like to save enough money to return to school part-time to learn a new skill. Or maybe you have an idea for an entrepreneurial adventure and need startup funding. Or perhaps your goal is to be able to quit your day job entirely to turn your passion project into a career.

The first step, as always, is to write out your plan, including how much it is likely to cost and how long it will take to save for it. But whatever your goals, the ability to invest in yourself will never go out of style.

Celebrate Wins of All Sizes

A large part of personal goal-setting can involve sacrifice. You have to devote the time, money, and energy to creating specific goals. But you also need realistic, actionable plans to help get you there.

Keep in mind that the payoff doesn’t have to be years down the road when you achieve long-term financial goals. Celebrate the short-term goals as well. Did you create a plan and exceed your savings goal in the first month? That deserves some acknowledgment. Plus, recognizing your victories can keep you motivated for the long haul.

Setting achievable financial goals doesn’t have to be a buzzkill. Instead, it’s a positive step toward realizing your dreams.

And always remember, we’re here to help. Whether you’re having trouble establishing goals, aren’t sure of the best ways to save money, or want to understand the SMART goals system better, we’re happy to assist however we can.

What Is a Good Credit Score to Get a Mortgage Loan?

January 23, 2024

credit score concept on the screen of smartphone

Before you go too far down the house-hunting rabbit hole, you’ll want to ensure that you meet the credit score requirements to secure a mortgage loan. After all, this mortgage loan will allow you to purchase your dream home. And while many factors go into qualifying a good credit score is definitely one of them.

We know that getting “rated” can make you feel like you’re back in school. Like in school, however, with a little hard work, discipline, and dedication, you can improve your credit scores quickly!

So let’s jump right in, starting with the obvious.

What Is a Credit Score?

Credit scores range from 300 to 850. The Fair Isaac Corporation, also known as FICO, originally created this scale to help lenders and investors determine the creditworthiness of consumers.

A higher credit score indicates that you’re a lower-risk borrower, which could lead to a lower mortgage rate over the life of the loan. That’s because a good credit score and a strong credit report imply that you can manage your credit wisely and make timely payments. Lenders are more likely to offer you a lower interest rate mortgage loan if you are a high-credit-score (low-risk) borrower.

Other agencies have adopted a similar scale and are expected to start playing a bigger role in credit scoring in the coming years. At the end of the day, your credit score is a tool that provides a snapshot of your credit history to lenders, essentially summarizing the risk of lending to you.

What Determines Your Credit Score?

Five factors help calculate your credit score. Here’s an overview of these elements of the credit scoring model.

1. Payment history (35% of your overall score)

Paying your credit accounts on time—including credit cards, auto loans, student loans, medical bills, and any personal loans—can increase your credit score. In the same vein, late payments can negatively impact your credit score.

The credit scoring model considers the frequency and severity of these late payments. A 90-day late payment, for example, will have a larger negative impact on your credit score than a payment that’s 30 days late. Ultimately, you want to do what you can to pay your bills on time to ensure that you don’t make bad credit worse or reverse all the work you’ve done to improve your credit score.

2. Utilization rate (30% of your score)

The ratio of your credit account balances to your available credit limit is known as the utilization rate. The credit bureaus consider the utilization rate of your individual cards, as well as your overall cumulative credit limits, in this factor. A balance-to-credit-limit ratio below 30% may improve your credit scores, while a ratio above 30% may lead to bad credit.

3. Length of history (15% of your score)

The age of your credit accounts matters. What we mean is that it pays to establish a long history of credit usage and on-time payments. Credit accounts that have been open and utilized for years can improve your credit score.

Many people use their credit cards for their monthly expenses, which earns them perks and helps establish their reputation as responsible borrowers. This is a good idea only if you know you can pay your balance off every month.

With this in mind, you might think that it makes sense to open a bunch of new credit accounts, just as long as you pay off the balance at the end of the month. However, opening new credit accounts lowers the length of your credit history.

This can result in a lower credit score in the first 12 months. Once an account reaches 24 months or longer, however, it becomes a more established account. That’s when you can expect to see a positive impact.

This is also why a mortgage lender may tell potential homebuyers not to open new lines of credit when they’re preparing to buy a house. It can lower your credit score and potentially affect your debt-to-income (DTI) ratio.

4. Type of credit (10% of your score)

Also known as credit mix, credit scoring models consider what type of credit you have. Generally speaking, a mix of different credit types is more favorable than only one type of credit. Various types of credit may include a revolving credit card, an auto loan, and an installment loan, for example. This mix of credit types can produce a higher score than using revolving credit cards.

5. Inquiries (10% of your score)

When a lender pulls your credit, it is considered a “hard” inquiry. That can have a negative impact on your credit score. That means you could be dinging your score every time you apply for a new credit card or loan.

Not all inquiries negatively impact your credit, though. Pre-approval and employer inquiries that check your credit aren’t detrimental and don’t trigger calls and letters from other parties trying to sell you their latest and greatest credit card. Multiple inquiries from mortgage companies made within a 45-day window will ding your credit score only once, allowing consumers to do their research without lowering their credit score.

Of course, not all inquiries negatively impact your credit. “Soft” inquiries, such as a potential employer checking your credit, aren’t detrimental. Multiple inquiries on a single new account, such as multiple credit checks for your mortgage, ding your credit score only once, as long as these checks are all made within 45 days of one another.

What if you want to check your credit scores yourself? Any request regarding your personal credit is considered a soft inquiry and won’t count against you.

What Are the Credit Score Requirements to Buy a House?

Every mortgage lender is different. No magical number will suddenly unlock a home loan, but there are credit score ranges that lenders generally view more favorably than others.

Credit scores are typically viewed this way:

800–850: Excellent
700–799: Very good
680–699: Good
620–679: Fair
580–619: Poor
500–579: Bad
499 and lower: Very bad

A higher credit score can lead to a more favorable home loan interest rate. However, it’s important to note that credit score is just one part of the equation, and other factors such as income and DTI ratio also play a role in home loan qualification.

Each mortgage lender has its own strategy, including the level of risk they finds acceptable for a given credit product. So remember that there’s no standard “cut-off score” used by all lenders. Instead, these general ranges can tell them whether a potential borrower has a good or bad credit score or is somewhere in the middle.

Don’t forget: When it comes to qualifying for a loan, your credit score is only one part of the equation. A borrower can have a perfect 850 score, but if their income and DTI ratio don’t support the loan amount they’re requesting—say they make $30,000 a year and are looking at homes in the $800,000 range with no other liquid assets—their desired amount can still be denied.

How Do You Check Your Credit Score?

You can request a free copy of your credit report once a year from each of the three credit bureaus: TransWestern, Experian, and Equifax. You can contact these bureaus directly or go to Annual Credit Report to get all three.

This is a solid strategy if you’re looking to get a mortgage loan in the next three months. If you have some time and want to improve your credit, you can always request one report from each credit bureau every four months to track your progress.

Once your credit report is in hand, review it for accuracy. Call the credit bureaus if you find any errors or if you have questions about anything in the report.

How Do You Improve Your Credit Score?

If you find that your credit needs some work, remember the five factors determining your score and then set about optimizing your credit.

The most effective ways to do this:

Make payments on time every time.
Pay credit cards down to 30% or less of their credit limits.
Limit the number of accounts you apply for at one time.
Leave established, older accounts open even if they’re paid off.

Keep in mind, too, that you might be able to qualify for a mortgage loan even if your credit score is in the “poor” to “fair” range. That’s because credit is not the only factor considered.

Preferred Rate’s specialty pr ograms can help individuals who have previously had a short sale, pre-foreclosure, or foreclosure reenter the housing market. There is no need to count yourself out of the market just because your credit score is less than perfect. your credit score is less than perfect.

If you have questions about your credit or want to learn more about the homebuying process, click here to connect with an Preferred Rate Mortgage Advisor in your area.

Buy a Home Now, Refinance Later at Reduced Fees

January 16, 2024

Laptop, living room and couple search website information for home investment, loan or real estate property discussion on sofa. Young people on couch with pc internet, planning future together

The real estate waiting game is no fun. But with today’s high-interest rate, some would-be buyers think it’s prudent to play if they want to secure the best homeownership deal. The problem with that is you miss out on homeownership opportunities today, including less competition and falling prices in many markets.

The thing is, once the high-interest rates of today’s market moderate, everyone who’s been sitting on the sidelines may very well flood into the market at once. Yes, that’s right: A lot of other potential homebuyers are taking the wait-and-see approach, just like you are. The likely outcome is that competition will return, and real estate prices may start heading north once again.

Thankfully, Preferred Rate has a solution to get you on the path to homeownership NOW while allowing you to take advantage of lower rates if they materialize in the near future. The Buy-Fi Program lets you buy a home now and then refinance later with reduced lender fees.

Let’s dig into the details of this program.

The Advantages of Preferred Rate’s Buy-Fi Program

Buy-Fi is a game-changing opportunity for potential homebuyers seeking confidence and flexibility in their purchasing decisions. It’s truly the best of both worlds.

Buy now with confidence

Preferred Rate’s Buy-Fi program lets potential homebuyers buy with confidence between November 1, 2023, and March 31, 2024, regardless of current high-interest rates, with the knowledge that they can refinance into a lower rate later for lower fees.

Flexible refinancing options

Participants in the Buy-Fi program can refinance their homes anytime before December 31, 2024. This allows them to capitalize on lower interest rates at any time before that date.

Reduced fees make it a no-brainer

Preferred Rate is committed to reducing the financial burden of refinancing by offering reduced closing costs. These include administrative, application, commitment, technology, processing, and underwriting fees. When you add all those up, that’s a lot of savings compared with another mortgage lender or financial institution!

How to Buy a Home Now, Refinance Later

A few simple steps can help you get into a home now with the Buy-Fi program while taking advantage of lower interest rates that may be forthcoming.

To secure your home purchase loan, you just have to do the following:

Start your homeownership journey by applying with Preferred Rate for the purchase of your new home.
Successfully close on your home loan, securing your foothold in the real estate market.
At that point, Preferred Rate will watch the interest rates for you. When they drop, we’ve got you covered!
You can refinance anytime before December 31, 2024, and we’ll reduce your lender fees.

The Buy-Fi program creates a stress-free homeownership experience without the hassle of waiting for higher interest rates to come down. The strategy to buy a home now and refinance later is a financially responsible way to invest in real estate. These reduced lender fees provide real-world benefits to you in the long run and allow you to start building equity sooner.

Plus, this flexible approach of refinancing when it’s right for you (up until December 31, 2024) allows you to dictate the timing while securing a more favorable interest rate.

Some people think sitting on the sidelines puts them in the driver’s seat in this market. But really, doing your homework, getting creative, and pulling the trigger when the factors are right for you are what really put you in control of your financial future.

Other Things to Consider

Here are a few other things to consider when considering this program.

The federal funds rate and its influence on real estate

Preferred Rate’s Buy-Fi program strategically aligns with market dynamics influenced by the federal funds rate. That’s the rate at which banks, credit unions, and other financial institutions lend one another money. This gives participants in the Buy-Fi program a competitive edge in the real estate market.

In other words, when these high-interest rates finally start moving down, we move to save you money!

A new way to save

An online savings account—not to mention a high-yield savings account—is great, but Preferred Rate’s Buy-Fi program positions itself as a modern alternative to the traditional savings account.

With Buy-Fi, you save money on reduced closing costs on the refinance (via reduced mortgage lender fees). You also save on the lower interest rate after you refinance. And, of course, you can start building equity right away.

Get into the market while the competition is lower

Those high-interest rates do make the housing market more attractive in a few respects. They mean that competition is lower, meaning you’re less likely to get into a bidding war over the home of your dreams. Lower competition usually leads to lower prices as well.

Waiting to Buy a Home Could Cost You

Getting a mortgage from other financial institutions or a mortgage lender comes with fees, including closing costs. The extra money required can strain the homebuying process, and waiting for rates to drop may not necessarily mitigate all these costs.

At the same time, putting the money that would go toward your home purchase into one of these high-yield savings accounts that compounds interest can be attractive. However, the opportunity cost of waiting for lower mortgage rates could lead to missed opportunities for homeownership, impacting your long-term financial goals.

That’s why Preferred Rate’s Buy-Fi program is here to help. By encouraging proactive decision-making, offering flexible refinancing options, and reducing closing costs, Preferred Rate hopes to pave the way for a smart and seamless homeownership experience.

Don’t let the uncertainty of market conditions dictate your homeownership journey. Seize the opportunity with Buy-Fi, and start your journey today!

The Importance of an Annual Mortgage Review for Homeowners

December 18, 2023

Boyfriend and girlfriend sitting at home with laptop

Just as we prioritize our physical well-being with annual checkups with our doctors, it’s important to take a moment each year to assess our financial health. One of the essential financial checkups is the annual mortgage review.

This proactive approach can have a major impact on your financial well-being and can save you big money in the long run. Whether you have a fixed-rate loan, adjustable-rate mortgage (ARM), VA loan, FHA loan, or any other type of home loan, this review can be a game-changer.

Assess Your Financial Situation

An annual mortgage review provides you with an opportunity to assess your current financial situation. If you’re planning on making any major financial decisions in the upcoming year, such as paying for college, remodeling your home, or buying an investment property, your mortgage loan could play a big role.

Knowing where you stand with your mortgage can help you make informed choices about accessing funds for any additional ventures.

Leverage Home Equity

Home equity is a valuable asset that many homeowners underestimate. During your annual mortgage review, you’ll get a look at how much your home has appreciated, as well as the amount of equity in your home. This information is vital because it can be a resource to tap into for future financial endeavors.

Let’s say you want to remodel your home. You might be able to use a home equity line of credit (HELOC) or refinance your mortgage to access the funds you need. By using your home equity wisely, you can finance your projects at a lower interest rate than other forms of borrowing. This can save you money in the long term.

Plan for Future Investments

Your annual mortgage review is an excellent time to discuss your upcoming investments or major financial decisions with a professional. Whether it’s turning your primary residence into an investment property, expanding your real estate portfolio, or venturing into other investment opportunities, your home can play a big part in bankrolling these endeavors.

Your Preferred Rate Mortgage Advisor can help you explore how your current mortgage loan and the equity in your home can be used to facilitate any of these investments and potentially save you money in the process.

Manage Your Debt

We all face financial challenges now and again. Mounting credit card debt, medical bills, and other unexpected expenses have been known to derail even the best-intentioned people. Your mortgage review is the perfect time to discuss any speed bumps with a financial professional who can help you explore all your options and potential solutions.

One option to consider is consolidating your debt under your mortgage using your home equity. By rolling your high-interest debts into your mortgage, you can benefit from a lower interest rate and a single monthly payment. This can make managing your finances more efficient while saving you money in interest payments over the long term.

Another option might be to consolidate your debt using a home equity loan or personal line of credit. Your Preferred Rate Mortgage Advisor can connect you with the right financing for your specific scenario.

Eliminate Private Mortgage Insurance

If your mortgage loan required you to pay for private mortgage insurance (PMI) when you initially purchased your home, an annual mortgage review can be the right time to assess whether you’re eligible to eliminate this additional cost from your mortgage payments.

Often, once you’ve built up 20% equity in your home, you can request to remove PMI. This typically has some requirements to be eligible but can reduce your monthly mortgage payment amount and save you money on your mortgage over the long term. Your advisor can guide you through the process and determine whether you qualify to remove PMI. It’s important to note that mortgage insurance for FHA loans is treated differently by the Federal Housing Authority, and cannot be removed.

Explore Loan Term Options

Your annual mortgage review is an opportunity to re-evaluate the terms of your mortgage loan. If you currently have a long-term loan, such as a 30-year fixed-rate loan, you might consider shortening your loan term. If you shorten your loan term to a 15-year fixed-rate mortgage, it can help you pay off your home loan faster and save tons on interest over the life of the loan.

An annual mortgage review can be even more important if you have an adjustable-rate mortgage (ARM). That’s because the review is the ideal time to assess your current rate and the potential risk of rate fluctuations. You can also talk about refinancing into a fixed-rate loan if you’re looking to obtain a stable interest rate, ensuring that your monthly payment remains consistent and predictable.

Explore Payment Options

Did you know that if you make one extra principal and interest payment per year, you could shave years off your mortgage?

This is information you’ll learn in your annual mortgage review. Most mortgages offer flexible payment options, and if your financial situation allows for it, you might be able to increase your payment amount or make additional payments to pay your mortgage off faster.

Stay Informed About Interest Rates

Even if you have a fixed-rate mortgage, interest rates play a pivotal role in your mortgage and overall financial health. Your annual mortgage review is a way to stay informed about current interest rates and any trends in the mortgage market.

By keeping an eye on interest rate movements, you’ll know whether it’s the right time to refinance or lock in a more favorable rate. If you’re looking to buy another home, second home, or investment property, this is a great time to talk about the right time to buy, the type of mortgage you should be looking at, and strategies around higher interest rates.

Yearly Financial Checkup

An annual mortgage review is a prudent practice for current homeowners. It provides you with the opportunity to assess your financial situation, leverage your home equity, plan for future investments, manage debt, eliminate unnecessary costs, explore loan term options, stay informed about interest rates, and so much more. You didn’t think one little meeting could do so much, did you?

Owning a home isn’t a passive investment. So the annual mortgage review makes sure your investment stands the best chance of paying off for you. Pair that with an experienced Preferred Rate Mortgage Advisor, and you can make the most out of your home loan while potentially saving money in the process.

House Hunting: The Art of Timing and the Cost of Waiting

September 27, 2023

House for sale. A stunning real estate photograph of a suburban

When it comes to investments, a lot of folks say that timing is everything. Sounds good on paper, right? But let’s be real, when you’re thinking about making a big investment like buying a house, trying to time the market is like chasing a unicorn. Sure, we all wish for a world where both interest rates and house prices are in the basement, but that’s about as rare as a shooting star.

Remember the big housing price drop in 2007 during the Great Recession? Yeah, that was a rollercoaster. And then in 2020, the pandemic made home prices play hide and seek. But apart from those blips, it’s mostly been business as usual.

Of course, home prices have their ups and downs, driven by stuff like the overall economy, interest rates, and what’s happening in your neighborhood. Speaking of interest rates, those are like the secret sauce controlled by the Federal Reserve. They’re the only ones who really know what’s up with interest rates, and they sometimes have to do some last-minute tweaking.

But hey, no worries, right? You’re thinking of waiting it out until houses are raining from the sky, and interest rates are so low you’d think they’re on clearance.

But what if that never happens? What if mortgage rates decide to do a rocket launch to the moon instead? Housing inventory could become scarcer than Bigfoot sightings. And as for prices, well, they dance to the beat of their own drum.

Bottom line, market timing might sound good in theory, but while you’re waiting for the perfect alignment of stars, someone else might snatch your dream home.

The Waiting Game

Putting off a big money move like buying a home can make sense sometimes, like if you need to work on your credit, save up for a down payment, or build an emergency fund. But if you’re just twiddling your thumbs waiting for the stars to align in the housing market, it might be time to consider the cost of playing the waiting game.

In this world of rising inflation, the price tags on everything keep going up. Unfortunately, that can eat into your housing budget, leaving you with less cash to put down on your dream pad.

And remember, a home is like any other product on the shelf—it’s not immune to price hikes. While some markets have calmed down a bit in the past year, nobody can say for sure if that trend will stick around. The wild card here is interest rates. If they take a nosedive, demand could spike again, and the epic house bidding wars of 2021 might make a comeback. So, no guarantees of lower prices there.

On the flip side, if interest rates decide to climb, there might be less competition in the market, but those rates will gnaw away at your housing budget. They can even tack on extra bucks—sometimes hundreds—to your monthly mortgage payments.

Renting Costs

Now, let’s talk about your current housing situation. If you’re renting, you’re basically paying someone else’s mortgage (your landlord’s), and you’re probably dealing with annual rent hikes.

So far, this year has seen average rent increases of around 3.3%, according to NerdWallet. But in some places, like Hartford, Connecticut (7.3%), Buffalo, New York (6.3%), Chicago (6%), and Boston (5.8%), rent hikes are way steeper.

One of the perks of owning a home is that your monthly mortgage payment stays put if you’ve got a fixed-rate loan.

And here’s another nifty thing about mortgages: You can refinance them. It’s like giving yourself a safety net. You can buy a home now to cash in on lower prices and less competition, and then refinance whenever interest rates decide to play nice.

And trust us, interest rates will eventually behave. The real estate market operates in cycles, and this interest rate party won’t last forever. When it’ll end, though, is anyone’s guess.

Don’t forget, that homes tend to appreciate over time, even if they take a few price dips here and there. Just look at the median price of homes sold in July—it hit $406,700, according to the National Association of Realtors, and that’s with interest rates at 7.3%!

Ready to Make the Move?

So, if you’ve got your financial ducks in a row but you’re waiting for the perfect moment to buy a home, consider that the right time might be right now. You can always refinance down the road, and you don’t want to miss out on your dream home if rates or prices decide to do a moonwalk.

Got more questions? Click here to chat with a Preferred Rate Mortgage Advisor in your area. They can fill you in on your unique financial situation and what’s cooking in the housing market.

Should I Refinance My Home to Pay Off High-Interest Debt?

September 11, 2023

Happy family using laptop for online shopping. They are excited

High-interest credit card debt can be financially draining for anyone. Paying off such debt with today’s high-interest rates can require significant sacrifices, but there’s a potential solution, especially if you’re a homeowner.

Your home equity can serve as a lifeline when facing the burden of high-interest credit card debt. Through options like a cash-out refinance, home equity line of credit (HELOC), or home equity loan (HELOAN), you can eliminate your debt or consolidate multiple high-interest credit card accounts into a more manageable single payment, typically lower than your previous combined monthly payments to various creditors.

How It Works:

Cash-Out Refinance: This involves replacing your existing mortgage with a new, larger one, with the difference between the new and old loan balances paid to you in cash. You can then use this money to pay off your high-interest credit card debt.
HELOC: A HELOC allows you to establish a line of credit against your home, typically with a 10-year draw period during which you can withdraw funds up to your maximum credit limit. You then have 20 years to repay the principal and interest on the amount withdrawn, and during the draw period, you pay interest only on the money you take out.
HELOAN (Home Equity Loan): This is a fixed-rate mortgage with a typical term of 15 years. Unlike HELOC, it offers a fixed home loan with a lump sum check at closing, enabling you to consolidate your debt.

However, it’s important to understand that utilizing these options will result in a new mortgage loan or, in the case of a second mortgage, a new interest rate.

Benefits of Using Home Equity to Pay off High-Interest Debt:

Faster Debt Repayment: Lower interest rates mean reduced borrowing costs, allowing you to pay off your debt more quickly, saving thousands of dollars in interest payments over time.
Improved Credit Score: Reducing your credit card debt load can lead to an improved credit score, offering better terms and opportunities for future loans and credit lines.
Building Savings: Freed-up funds from a HELOC, home equity loan, or cash-out refinance can accelerate debt consolidation efforts, allowing you to divert previous monthly payments into savings, retirement, emergencies, or other financial goals.
Financial Security: Debt consolidation provides a safety net, increases credit limits, and creates financial security, leading to better peace of mind.
Streamlined Payment Process: Simplify your financial management by consolidating multiple payments into one with a more favorable fixed interest rate, potentially improving your credit score.
Elimination of High Interest: While your new mortgage may have a different interest rate, it’s generally much lower than the high-interest rates on credit cards, potentially saving you substantial sums.

Considerations for Debt Consolidation Refinance:

Higher Monthly Payments: Expect increased monthly mortgage payments due to new terms and a higher mortgage balance. However, the savings from consolidating high-interest debt can outweigh this cost.
More Mortgage Interest: While you save on credit card interest, you may pay more interest on your mortgage over its life.
Loss of Deductibility: Unlike mortgage interest, interest on other debts, such as credit card debt, is not tax-deductible.
Long-Term Commitment: A cash-out refinance or HELOC commits you to a new loan and repayment structure for the next 20 to 30 years.
Closing Costs: Using home equity involves closing costs, typically ranging from 2% to 6% of the loan amount.

Using home equity to pay off high-interest credit card debt can be a wise move for homeowners who can manage the new monthly payments and plan to stay in their homes. While it may involve higher monthly mortgage payments and additional costs, the long-term benefits can outweigh these drawbacks, especially if your credit card debt is overwhelming your financial stability. Consider discussing your situation with a Preferred Rate Mortgage Advisor for personalized guidance.