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Three Tips to Help Sell Your Home Quickly

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Sell Your Home QuicklyThere are several reasons why you might want to sell your home quickly. Perhaps house prices are falling, and you want yours to be sold before prices fall too much in your area. Maybe housing demand is falling and you want yours to be more attractive than most in your neighborhood.  Perhaps you are desperate to sell, because you have a new house in mind, but have to sell yours first.  You could even be moving abroad shortly.

There are other potential reasons, but there are certain things you can do to help you make a quick sale. Each comes under one of three broad categories:

•    Curb Appeal
•    Improve apparent room size
•    Cleanliness and good repair

We shall discuss each, and what is needed to maximize the impression potential buyers get when they arrive for a viewing.

1.  Curb Appeal

The first thing a potential buyer will see is the exterior of your home. How does it compare with the other houses in your neighborhood? Does it impress at first sight? Is anything wrong, such as flaking paint, an unkempt garden with long grass and weeds, and does the gate close properly?

Spend some time improving the exterior appearance of your home.  Repaint anything that can be painted: window frames, doors, fences, the gate and so on. If you have the cash, replace old wooden windows with modern double-glazed uPVC windows. Manicure your lawn and the hedge, and pull out all the weeds!

When you are finished, stand back and look at your house subjectively.  How does it look to you – would you buy it if you were starting all over again? Get a friend or neighbor to look it over and give their comments – and then act on them.

2.  Remove the Clutter

Declutter!  Make sure you remove the clutter in every room. A room filled with your belongings looks smaller than it really is. Allow you prospective buyers to imaging themselves in each room with their own belongings – they can’t do that if most of the floor space is being used!

Include closets, because your viewer will almost certainly want to see inside them. Remove all that old stuff, clean them out and brighten them up. Go through your entire home and remove everything that is not needed to show it off to its best advantage. Maybe you can hire space in a repository, or perhaps a friend or relative will give you attic space meantime. One thing is sure – if your home is full of clutter you will be unlikely to get a sale, let alone sell your home quickly!

3.  Clean and Repair

Make sure your house is spotlessly clean. If it is not, your prospective buyers might believe that they will have to clean it if they purchase it. Either do it yourself, or employ a professional cleaning firm to do it for you – that is the best option.

Everything must be in good working order. Check your whole house, including the backyard and front garden. Make sure there are no dripping taps or broken light bulbs, and if you have a pond or fountain, everything should work as intended.  Every window should open if designed to do so, and locks must all be in order, including gate locks.

Sell Your Home Quickly – Summary

If you want to sell your home quickly, it is essential that it looks good, both externally and internally. Redecorating and cleaning will pay in the price you get.  However, it might also be worth your while employing a specialist staging company to stage your home for the sale.

Do all you can to sell your home before the viewers even arrive, and then be prepared to act positively on any negative comments the first viewers make. If they comment on your grubby brown garden fence, paint it white for the next viewers. As a final option to help sell your home quickly, have a concession you are willing to make at closing and you should successfully sell your home in the time frame you have set yourself.

What is an HOA: Homeowners Association Basics

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HOA BasicsWhat is an HOA or homeowners association? Fundamentally, an HOA is a body that sets rules and restrictions for people that belong to neighborhood communities for the benefit of the community as a whole.

These communities can take several forms, and it is generally a condition of purchasing a home in such communities that you join the HOA. An obvious example is a condominium, where you would own the inside of the condo, but neither the fabric making up the structure nor the common services and amenities provided.

Another example is a gated community, where residents are responsible for the maintenance of everything within the gate: sidewalks, lighting and security being just three obvious examples. Others may be landscaping, communal facilities such as fitness rooms and pools, and also rules such as pets and noise.

There are several other types of community that can form such an association, including leased land property and new housing developments with common shared areas such as tennis courts that are the residents’ responsibilities. Here are some basics to explain how they work and how they can be set up.

Setting Up an HOA

To set up an Association you must first establish your state’s property code, and are advised to use a real estate attorney or even contact your mortgage advisor. The developer, if appropriate, must agree and will likely also help you with the process.  The HOA must be set up as a company, and you will first have to form a board of at least 4 members with the usual officers: chair, secretary and treasurer.

It is important to contact every member of the community and get them involved, because if membership was not a condition of purchase you could have a problem if any disagree. This is why using a lawyer experienced in this type of work is important.

Homeowners associations are set up with non-profit articles of incorporation, conditions and restrictions and bylaws that apply to the area or communities involved. There will be a board of directors, and each homeowner will make monthly payments to the HOA treasurer.  If you intend purchasing a home in a neighborhood with an HOA, make sure you fully understand its bylaws and what you can and cannot do with your home before purchasing.

Purchasing a Home in a Homeowners Association Area

If you are purchasing a home, and the property you like is situated in an existing HOA area, there are certain things you must establish before signing any contracts.

Restrictions may apply on the color of your exterior decoration (doors, windows, fences, walls, etc), and even whether or not you are permitted to dry your washing outdoors, have a real log or coal fire, the size of your satellite dish (or even if you are permitted one), whether you are allowed pets, and if so what species and size.  Many do not allow cats, while yappy dogs may also be frowned upon.

There are many other potential restrictions, such as the design and size of fences and hedges, the type of blinds, shutters or drapes permitted on windows overlooking the street and whether or not you can park your car in the street or even in your driveway.

These are just simple examples, and most communities have reasons for applying them. They generally tend to enhance the look and peacefulness of a neighborhood, and most are not overly restrictive. Make sure you know what the HOA rules are in your neighborhood before making a decision to purchase a home.

Homeowners Associations Rules

Among the Homeowners Association rules you should establish are:

  • Restrictions on external décor and dimensions of fences and hedges.
  • Must you keep your garden or backyard tidy?
  • Are you allowed a barbecue in your backyard?
  • Are you permitted pets?
  • I street parking permitted?
  • Can you park in your driveway – many do not allow certain types of vehicle.
  • Can you install solar panels – some HOA agreements o not permit these.
  • Does your HOA have the power to approve or reject projected home improvements, such as adding a conservatory or extra garage?
  • What is an HOA in a neighboring community doing with regard to the above – is yours average, lenient or strict?
  • What happens if you break a rule?
  • Can the HOA foreclose if you miss payments?

There are many more aspects of your HOA that you should establish before deciding to purchase a property. One of these is how the HOA is managed – is it strict or lenient? Another is whether there are personality clashes within the board, and how that might affect decisions made that could affect you.

A homeowners association can benefit a community if run efficiently. An HOA can benefit you in many ways, particularly in maintaining the look of the district and the amenities available to your family.  The vast majority believes them to enhance their community and help to develop a genuine community spirit.

How Much Home Can I Afford: Mortgage Affordability Factors

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How Much Home Can I Afford?The question “How much home can I afford?” is a common one with new buyers, and there is no easy answer to mortgage affordability without having a lot more information.  There are several ways to work out how much of a home you can afford to purchase, although the two fundamental questions to be answered first are:

a) How much of a deposit are you able to pay?

b) How much can you afford to pay each month?

The way your potential lender will work out how much to lend you is different to the way you will calculate how much you can afford to pay. Sometimes the lender will offer you more than you expected, and at other times will offer less and leave you unhappy. So what’s the difference?  Let’s first look at how you might work out how much you can afford.

Mortgage Affordability: What Can You Afford to Pay?

Don’t look at your dream home, get the price, and then figure how you are going to afford it. People are very good at making themselves promises to economize, stop going out and eat frugally to afford this fabulous home – but they are also very good at failing to do these things and ending up in serious financial trouble, terminating in repossession and eviction notices.

Work out what you can afford to pay each month without making promises to yourself that you know you will ultimately fail to keep. Take the gross (pretax) income for your household, and you should be able to afford a monthly mortgage repayment of around one third of that. So if you and your partner, say, earn $4,800 between you, then you should be able to afford a monthly mortgage repayment of $1,600.

However, if you have other debts such as credit cards and student loans to pay, you should take these into consideration. If you work to about 40% of your gross income as debt, then that should work fine for you. Keep in mind that you can claim tax relief on your mortgage interest payments so once you agree a mortgage make sure you know how much you are paying each month in interest and how much is coming off the principal.

What Does the Lender Think?

Lenders evaluate your DTI or debt to income ratio. This is the ratio of your total debts to your income, so if you make $4,800 monthly and have debts of $1,730 your DTI is 100×1730/4800 = 36%.

Your lender splits this into two components:  the total DTI and the proportion of that which is connected with your housing.  That can include your interest and principal payments, any property taxes, any homeowner’s insurance payments and anything else connecting with buying your home such as any payments to a housing association. If you are renting, it includes your rent and any regular maintenance payments.

No more than 28% of the household’s monthly income should involve the housing component. Also, lenders like to see no more than 36% DTI. So if your household earns $4,800 monthly, you should be given a mortgage if your total debts are no more than $1,730.

Since no more than 28% should be used for housing, you can get a mortgage where your total housing costs, including repayments, insurance, etc, are no more than 28% of your $4,800 = $1,344 ( a bit less than the $1,600 estimate above).  That also means that your other debts should be no more than 8% (so all debts = a maximum of 36%) or $384 monthly.

Using that example, you should be able to work out how your mortgage affordability, or much you can spend on your mortgage. Obviously, the lower your other debts, the more you can afford for your home to a maximum of 28% of your total monthly pre-tax income.

That’s the way your lender calculates it, which is not the same as you would have done. It is important to understand how your mortgage lender thinks in order to make sure that you meet their requirements.

To answer the question, ‘How much home can I afford,’ you can work out you mortgage afordability using that $1,344. If the current mortgage interest rate is 4%, and you pay around 2% annually for taxes and insurance, you can afford to pay in the region of $200,000 for your home. You would have to check with your choice of mortgage lender or building society for exact amounts.

How Much Can YOU Afford?

We can help you understand how much home you can afford with a FREE consultation. We can also get you up to date on where mortgage rates are and which loan programs fit your needs the best.

Meeting Your Home’s Former Owners Before and After the Sale

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Meeting Your Home's Former OwnersBuying and selling a home can be a strange combination of very personal feelings and very impersonal relations. Both the buyer and the seller usually have strong emotional connections to the house, but in the course of making the sale, the two parties don’t always meet in person.

If you don’t get an opportunity to met the current owners before you buy, there are important questions you need answers to that you should ask the selling agent. That being said, an unexpected visit from a former owner can give you the chance to ask lingering questions and learn more about the house from before it was yours.

What to Ask the Home Owner or Realtor Before You Buy

  • How recently were the plumbing and other systems updated?
  • Were there any problems during the updates?
  • Are there other issues with the neighborhood, area, or the home?
Sometimes you don’t get an opportunity to met the sellers before the transaction is complete, but come face to face with their seller some time later when the seller chooses to return to their old home.

What To Ask a Former Owner After the Sale

Undoubtedly, when a stranger comes to your door, it can be a little disconcerting. When it’s the former owner of your home, however, you can take advantage of the fact by asking them questions your home inspector might not have elaborated on, or about things that weren’t disclosed during the actual sale. Some of these questions can include:

  • How receptive were the neighbors to renovations and updates to the home?
  • Do they have any favorite contractors they can suggest?
  • Do they have any thoughts for upgrades that they were considering before they sold. They may have ideas and thoughts about improving the home that hadn’t occurred to you? 
  • Do they have any stories about the home’s history? 

Of course, the former owner may wish to ask you questions too. Many sellers often still feel a personal connection to the house and want to share that with you.

What Former Owners Might Say

It isn’t uncommon  for former owners return for sentimental reasons. They may have had children grow up in the home, or it might have been their first major purchase. Ultimately, they often just want to make sure you’re caring for their former residence. They even may ask you questions about your family, or how you plan to change the house to fit your tastes. In any case, meeting your home’s former owners is a chance to learn more about your home and learn about your home’s history.

 

Strategies for Paying Off Your Mortgage Faster

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When taking out a mortgage, buyers often consider how they will get a rate that will enable them to pay off their mortgage as quickly as possible. In other words, they want the lowest rate possible, as we all do. Many times it is often only those that are approaching retirement that actually start to think about how they will pay off their mortgage. With careful planning, paying off your mortgage faster can be a realistic goal regardless of what your rate is.

Paying Down Your Mortgage

  1. Pay your Mortgage More Than Once Per Month – Setting up a bi-weekly or weekly payment schedule can help you pay of your mortgage many times faster than by making a standard monthly payment. If you pay bi-weekly, you end up paying one or two extra mortgage payments per year which automatically reduces your amortization period.
  2. Increase Your payments When You Have More Money Coming In – Instead of using additional funds from a raise or bonus at work for something else, put it towards your mortgage every time you make a payment.
  3. Get a Reasonable Interest Rate – It goes without saying that it is important that you do your due diligence when shopping for a mortgage. While rate is only one of the factors to consider when choosing a mortgage professional, it is important that you choose your mortgage professional and rate carefully.
  4. Consider an Adjustable Rate Mortgage – While an adjustable rate mortgage may not offer the security of an unchanging mortgage payment, it can provide for a smaller rate and payment due than a fixed rate mortgage. This lower rate / payment will enable you to make larger payments towards the principal, which can help you pay off your mortgage significantly faster. Keep in mind that an adjustable rate mortgage may or not make the most sense for your needs, we can help you understand the options and which ones fit your needs the best.

If you abide by some of the above strategies, it may be possible to pay off your mortgage up to a decade earlier. Not having to pay substantial housing costs later in life can help ease a major financial burden and can free up money for retirement, college education for the kids, investments or other financial needs.

 

Debt to Income Ratio Basics: The Importance of Your DTI

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Mortgage Debt to Income BasicsFundamentally, your debt to income ratio (DTI) is the percentage of your income that is used to pay your debts, and is often abbreviated to the ‘debt ratio.’ Your ‘income‘ is your total gross income from all sources before tax, and the ‘debts‘ cover everything that you are currently repaying.

For example, let’s say you earn $4,200 each month and also have an investment income averaging $300 each month. Your income is then $4,500 monthly. Let’s also say that your mortgage is $870/month, your home insurance and property taxes come to $200, your credit card payments average $300 and you have an auto loan of $250 each month. Your total monthly debt is $1,620, so your income to debt ratio would be calculated as:

100 x 1620/4500 = 36%

This means that 36% of your total gross income is used to repay your debts.

Presentation of Debt Ratios

In the USA and some other countries it is common, but not essential,  to present debt to income ratios using two figures, known as the ‘front-end’ and back-end’ ratios.  While the above 36% is useful to lenders, it is even more useful to separate the payments made to the individual’s current home costs from their other debts. To make this clearer, let’s consider another set of figures.

The front-end ratio relates to the income spent on housing costs, including the mortgage repayments, rental payments, housing taxes, home insurance, mortgage insurance and so on. In the simplified example provided, this sum totals $1,070 each month. The rest of the 36% involve costs not associate with your home ownership or rental.

Taking this figure and calculating the debt to income ratio for that, it comes to 100×1070/4500 = 24% (to nearest whole figure). The DTI here would then be expressed as 24/36. The lender now knows that 24% of the 36% DTI is related to your home, and only 12% to other debts. This is important because it gives the lender an idea of your debts unconnected to your home ownership or rental.

Speaking generally as diffferent lenders vary, one lender might insist on a figure of at least 28/36, so that the above person would not qualify. With a DTI lower on the front end, it means that there are more debts other than for housing. This would have a negative effect on your likelihood of being offered a loan or another mortgage.

How to Improve your Debt to Income Ratio

It is important that you start by getting an accurate indication of your current DTI. Then you should work on paying less each month on your non-housing related debts.  Reduce your credit card payments, pay off your auto loan(s) and try to clear as many other debts as you can, or at least negotiate reduced monthly payments.

It is not your total debts that lenders are concerned about, but with how much income you have available after paying the monthly repayments for your non-housing related debts. They want to get a feel for whether or not you can afford the added burden of a monthly mortgage payment. They know the rough cost of living in your area, and will apply a debt to income ratio appropriate to what they believe you will have left after paying your other debts plus your living expenses.

Where Is Your Debt to Income Ratio?

For a FREE rate quote and an evaluation of your current debt to income ratio and ability to qualify for a new home purchase or refinance, please call us at the number above. We can also help you understand what loan programs are available and which ones makes the most sense for your needs.

Why Pay Points on a Mortgage: Are Points a Benefit or Not?

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Mortgage PointsWhy pay points on a mortgage, and how do they benefit you? Points are a typically American arrangement, and refer to payments made in order to receive a lower interest rate. They have certain advantages, although these are not universal. Here are some details on mortgage points, and how they can be used to your advantage.

Some people get confused between their deposit and the subsequent points payment. The fundamental difference between the two is that the deposit is typically mandatory, while points are not, and tend to rise in 1% increments. Once you have agreed the loan details and paid the deposit, you might then be offered the opportunity to reduce the agreed interest rate by paying points on the mortgage.

For example, once your loan has been complete: you have paid the deposit and have agreed to a specific interest rate, whether fixed or variable, you may then be offered points. For each 1% of your mortgage loan you pay in cash, you will be offered a corresponding reduction in your interest rate.

What Do Points Cost?

In many cases, mortgage rates are quoted including points, the base rate not being quoted unless you refuse points. For example, if you are offered a mortgage of $200,000 at 7.5% and 2 points, you may have to pay 8% interest if you refuse to buy the points. If you pay extra points over and above what is offered, your interest rate will reduce accordingly. For example, if you borrowed $200,000, two points would be 2% of that, or a cash payment of $4,000 to get the 7.5% rate.

You have no obligation to pay points, and there are certain circumstances in which it would be wrong to do so. Keep in mind that your points agreement only last as long as the mortgage does, so if you change homes fairly quickly, or decide to refinance, your points agreement is terminated.

Should I Buy Points or Not?

You should pay points on a mortgage if you have a relatively low income, but a good lump sum to use to pay for the points. If you can afford more than a 20% deposit, you should use the extra to purchase points rather than reduce you principal sum borrowed.

Using the example above, on a $200,000 loan you will pay simple interest of $16,000 in a year at an 8% interest rate. You would pay $15,000 at 7.5% interest, saving $1,000 each year. Yes, interest reduces as your principal reduces, but not by much over the first few years.

By paying for 2 points at a total of $4,000, you would make that sum up after approximately 4 years and benefit thereafter, this is known as your break even point. If you paid that $4,000 as payment off the principal, you would save around 8% of that each year, or $320 – losing $680 every year in relation to points.

If you intend selling your house or moving on within 4 years, it does not make sense to buy points because you would spend more than you gained. Otherwise it does – in this example.

So Why Pay Points on a Mortgage?

The simple answer is to save money over the longer term. The longer the term of your mortgage, the more you gain by buying points. If you are short of cash when you purchase your home, but expect to earn more later, then points don’t make sense. But if you are cash-rich for a short while (an inheritance or medium lottery win), points can help you pay less for your home, or purchase a better home for what you can afford with your current income.

Pay the minimum of a deposit and the maximum points you can afford or are offered if you are keeping your home for a long time.

Still Have Questions About Points?

We can help. For a FREE consultation about point or any mortgage questions you might have, feel free to call us directly. We can help educate you on what loan programs are available and get you an up to the minute mortgage rate quote.

Refinance Basics: Should You Refinance Your Home?

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Home Refinance BasicsShould you refinance your home? Since we can only speak in regards to refinancing on a general basis, before you make a decision to refinance your home you should be sure to speak with a mortgage professional. Everyone’s circumstances are different, and what applies to one person might not apply to you.

Before making a decision to refinance you home, or any other property you own, you must first be fully familiar with the three fundamental aspects of acquiring a new loan to replace your existing loan with your home as security, which is what refinancing is, by definition.

The three major factors that determine the feasibility of refinancing a mortgage are:

The Interest Rate

You should not refinance your home to save money if the interest rate offered is greater than that you are currently paying with your existing mortgage. If you simply want some cash to pay for home improvements, then shop around for the best interest rates you can get, because there is a fine line between refinancing and a secured loan.

Another aspect of interest rates to consider is that if you have your mortgage for a long time, the bulk of your current payments will be used in reducing the capital. Initially, you are paying a lot more in interest than in capital, but as your capital sum reduces, so does the interest. If you refinance, you will likely be back to paying more on interest than repaying the actual loan.

Against that, of course, is the fact that your equity would reduce the sum borrowed, unless you want to include the ability for home improvements such as a new kitchen or a room addition.

The Term of the Loan

The term, or length of the loan period, will impact upon both your payments and how able you are to maintain them. You can refinance over whatever period your lender is willing to offer you up to 30 years, depending on your age, ability to pay and the equity on our home.

Fees

You will be informed of the fees in advance, but the cost of fees involved may play a role in  the decision making process and whether or not your new rate is low enough to justify refinancing.

Divide the fees by your monthly saving to find your break even point, and find out how long it will take before you are actually begin saving money. Let’s say you refinance your home and save $88/month over your existing payments. If the fees, including the closing costs of your existing mortgage, totaled $3,000 it would take 34 months before you are actually saving money. If the closing costs were $6,000 (which is not unreasonable), you would have to repay for 68 months before you would be saving money over your existing payments.

Refinancing: The Big Picture

Take the fees, including the closing costs of your existing mortgage, interest rate and repayment period into consideration, and figure out how much you will be repaying in terms of the finance provided. Perhaps an extended term would enable you to afford a sum you could not repay over a shorter period. Before you refinance your home, be sure to view your Good Faith Estimate  to insure your fees are in line.

There are a variety of factors (as mentioned above) that come into play when deciding if refinancing your existing home loan makes the most sense for you. Still have questions? We can help. For a FREE consultation, please call us at the number at the top of the page. We can help you understand if refinancing makes sense for you and help educate you on which programs makes the most sense for your needs if refinancing fits your current situation.

Mortgage Lock Basics: Should You Lock-In Your Mortgage Rate?

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A mortgage lock can work for you or against you depending upon the terms of the mortgage rate lock in period and upon the current behavior of the economy as seen in the equities and bond markets (stock markets). Because these are common variables, it is not always easy to provide a definitive answer as to whether or not a rate lock makes sense. However, the following discussion should give you a better understanding of the components involved in trying determine whether or not locking in your mortgage rate is the best move for your specific circumstances.

First, it is important that you understand what it means when discussing a mortgage lock, and what benefits you can expect by locking in to a certain mortgage interest rate.

What is a Mortgage Lock?

In simple terms, you lock in your mortgage agreement to a specific agreed interest rate for an agreed period of time while your mortgage application is being processed. It is fundamentally an assurance that once you have agreed an interest rate with your mortgage lender, that rate will neither increase nor decrease until your mortgage papers have been signed.

You can also include the points when you lock in your mortgage, although this is not mandatory. The ‘points’ refer to lump sum charges you can pay to reduce you interest rate, and one point is generally equivalent to 1% of the sum being loaned – i.e. 1% of your mortgage. So if you borrowed $200,000 to purchase your home, one point would equal $2,000.

Should You Lock Your Rate or Not?

Given that your mortgage can take a few weeks or more to complete once you have made your offer backed up by a mortgage from your bank or building society, you will usually not lose with a mortgage lock, although much depends on the financial situation at the time.

In a highly inflationary period, when interest rates are generally rising, it makes sense to lock-in your mortgage to an agreed rate. However, if you are buying your new home in a recession, and prices are generally stable, interest rates tend to drop, and it might be to your benefit to hold out for a lower interest offer.

You are not restricted to what you accept, and you can usually ask for a mortgage lock at any time during the process. In a recession it is likely best to keep your options open and not lock in your interest rate until you see a trend – either up or down regarding interest rates. However, your lender will be doing the same thing, and is unlikely to agree to lock into an interest rate that is liable to increase over the short term.

To take full advantage of a mortgage lock, you are best advised to work with a mortgage professional that has a day in and day out working knowledge of the markets and latest mortgage rate activity, and accept a lock in mortgage rate if you believe that existing conditions appear to indicate a future rate increase.

How Long Does a Mortgage Lock Last?

Mortgage rate locks can typically last around 1 to 2 months. This depends on the lender, and some might hold the interest rate for only 7 days after approval of the loan. Others might go longer – to 120 days or more. Establish the period when you arrange it and make sure that you understand and agree to the terms of the rate lock.

Your lender might charge a fee for a mortgage lock, in which case this sum will likely increase with an increasing amount time for which the rate is held. The period should last until settlement, so before agreeing on a time period find out how long it generally takes for purchases to be settled in your area.

Should You Include Points?

The term ‘points’ refers to a means of reducing your monthly payments by paying a lump sum. Each point has a capital cost, and reduces your interest rate by a certain amount. You can also lock-in the value of each point to a fixed sum so that your lender cannot make up for any loss in interest payments by increasing the points charge.

You can lock-in your points and interest rate or just take a mortgage lock with floating points. Before making this type of important decision, you should first seek the advice of an independent financial advisor who is on you side, and not working for your lender.

Private Mortgage Insurance Basics: The Fundamentals of PMI

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Private Mortgage Insurance BasicsPrivate mortgage insurance (PMI) is a form of protection for mortgage lenders in the event of borrowers defaulting on their payments. If a borrow takes a mortgage that is more than 80% of the purchase price of their home, then they must also purchase mortgage insurance to protect the lender. In other words, you need PMI if your down payment is less than 20% of the selling price.

In some cases, the value of your home may be appraised if the lender feels that the price you paid is not representative of its true value. Because its purpose is to protect the lender, the insurance premium is based upon the amount borrowed, and generally set at 0.5% of the total mortgage loan for year one, and then decreases each year as more of the principal is paid.

Benefits of Private Mortgage Insurance

Here are some of the benefits of PMI:

  • The lender is paid if the borrower defaults on the loan.
  • Those with lower income or less of a deposit available can become involved in home ownership.
  • People with little savings can purchase their dream home with a low deposit.
  • Once you owe less than 80% of the total purchase price you can elect to cancel the PMI assuming that you are paying the premiums and not the lender (more on this below).

PMI Payment Options

  • Your monthly private mortgage insurance payment can be integrated into your mortgage repayment, so you make the one monthly payment to your lender that includes an additional sum for the PMI.
  • You can make an annual lump sum payment, or even pay a single lump sum to purchase the insurance policy for the life of its term.
  • The lender can pay the PMI for you, and then claw the money back by means of an increased interest rate.

Whichever of these options suits you best will be determined by your personal financial circumstances. If you have the lump sum to spare, then the one-off payment might be worthwhile. However, you have to balance that with the benefits of using the lump sum as part of your deposit which might avoid you having to pay PMI at all.

If you have less spare cash, but can afford an annual payment, then that might be your best option. Many decide not to do that if they need the ready cash to furnish and decorate their new home. The lender-paid option might be attractive if you earn a good monthly income with prospects of advancement but have no spare cash.

As your salary increases, the extra interest you are paying becomes less significant to your overall income. In fact, the interest you pay on lender-paid private mortgage insurance is tax deductible, providing another reason for taking this option.

PMI Policy Cancellation

It is possible to cancel the policy once the amount you owe on the principal of your mortgage loan has reduced to below 80%. Even if the value of home has appreciated due to improvements this 80% refers only to the original loan. However, keep in mind that the vast majority of your initial mortgage repayments will be paying the interest charges, with very little being deducted from the sum you borrowed.

This is the case with any repayment mortgage, and it could be many years before your principal reduces to below 80%: 10-15 years is not unusual for a 30 year mortgage.

Summary

Private mortgage insurance is mandatory if your deposit is less than 20% of the purchase price. You may be offered options on how this is paid, and the most tax-friendly way is for the lender to include the PMI payment in your monthly repayment, when it will be tax deductible. Regulations can change during the lifetime of the average mortgage, and it makes sense to seek the advice of an independent financial advisor before signing any PMI agreement.

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