Mortgage Tips

Whether you are planning to purchase your first home, or you have purchased before and it’s time to move to a new home, it’s important to understand the different types of mortgage loans available. One of the most important things about your new loan (that will play a key role in your total monthly payments) is the interest rate. You may have heard about “fixed rate” or “adjustable rate” mortgages, which both offer advantages and disadvantages, but if you’re not sure what the difference is between the two, read on to find out.

Fixed Rate Mortgage

When you have a fixed rate mortgage, the interest rate on your loan will never change as long as you have the loan. It is set from the time that you sign the papers to close on your new home, and doesn’t fluctuate regardless of what happens with market interest rates. This type of loan is advantageous because you know your rates and payments will remain constant, and having this kind of stable payment helps you budget and plan better. They are also straightforward and easy to understand so you don’t get any surprises.

The disadvantage is that if interest rates do go down and you want to take advantage of it with a lower payment you will need to refinance, which can mean additional closing costs and paperwork. The initial interest will also be higher (and thus your monthly payments higher) than an adjustable rate would be, so it can be expensive for some homebuyers who might be able to afford higher payments later but cannot do it from the outset of the loan.

Adjustable Rate Mortgages (ARM)

Adjustable rate loans, also called ARMs, generally start at a lower interest rate for a set period of time, then can fluctuate up or down depending on the market. The interest rate of your loan is tied to a broad measure of interest rates (called an “index”), and when that index goes up, so does your payment amount. In some cases your payment might also go down with the index, but not in all cases so it’s important to understand the terms of your loan in advance.

The advantage of this type of loan is that the interest rate often begins very low, which can make it an affordable option for many homeowners. These lower payments can also help you qualify for a better home when you initially take out the loan. If your loan is structured to allow for the interest rates to go down with the index, you can take advantage of falling rates without the added closing costs. Plus they offer a lower-cost option for homeowners who are not planning to stay in a specific home for long.

The opportunity to see your payments go down with interest rates also means that they could go up with rising rates. Some ARMs have limits on how high your rate can go, and how often it can be adjusted, but there are cases where you might see the interest rate double or more over the life of the loan. Higher interest rates mean higher house payments, so it’s important to figure out how high the rates could go and still allow you to make your monthly mortgage payments. Finally, since there are many intricacies to these loans, a novice homebuyer could get confused or even trapped by an unscrupulous mortgage company.

It’s important for homeowners to understand all the parts of these two types of loans so you can choose the one that makes the most financial sense for you. Talk to a mortgage loan office today to find out more.

When you’re thinking about purchasing a home, it’s a very exciting time with a lot of things happening all at once—you are searching with a real estate agent or on your own through local listings, touring homes to find out which one you might want, and putting in offers on the home of your dreams.

Sometimes in all the excitement of preparing to buy that home, though, people can forget to do one of the most important things: get pre-qualified and figure out exactly how much you can afford to pay for a home. The amount you pay for your home should go beyond just the amount you can get qualified to borrow, as there are several factors that influence whether or not you can actually pay for the home you purchase. Here are some tips to help you figure out exactly what home price range you should be looking for.

1: Calculating Your Borrowing Power

There are several factors that go into the calculation of how much money a lender will provide you to purchase a home, including:

  • Income
  • Credit history
  • Down payment
  • Employment history
  • Residence and mortgage history

Before you even start looking for a home, it is a good idea to figure out exactly how much the lender would be able to give you—this prevents you from looking at homes that are two or three times what you can afford, then being disappointed by the homes available in your price range when you have to go down in price. The good news is that virtually all lenders will “pre-qualify” you for a loan to give you an idea of where you are at.

2: Outline Your Budget

When a lender tells you how much they would be willing to lend for a mortgage, they are basing it on a general calculation that takes into account your gross monthly income, your total debt payments each month, and the estimated costs of owning your home. What it does not (and cannot) account for are your personal spending habits. If you know that you want to spend extra each month shopping for clothes or going to the movies, you need to take that into account by calculating your own personal budget and knowing how much you want to spend on a home. If you have a target payment amount (including principle, interest, taxes, and insurance), you can talk to your lender and have them help you figure out the price range of homes that will fit that budget.

3: Understand All the Costs of Buying a Home

Your mortgage payment will include several things, including the principle and interest payments for the home that you are purchasing, homeowners insurance, and property taxes—the latter two are often added to your monthly payments. If you’re not putting 20 percent down on the home, you will also have to get mortgage insurance, which will add to your monthly payments.

After all these expenses, you should also take note of other potential costs of owning a home that won’t be in your mortgage payment, but are also required every month, such as utility costs, home repairs, and homeowners association fees in some cases. By adding up all these anticipated costs (and being realistic) you can make sure you will be able to afford the home you get. You should also account for the costs of getting the loan, including mortgage application fees and closing costs. Talk to your lender to learn more about these costs.

Knowing the costs and making appropriate calculations can help you get a home you will love, and one that you can afford.

If you got a home loan at a time when interest rates were higher, then watched as interest rates have dropped to record lows over the past few years, you might be thinking about refinancing into a lower interest rate. While the refinance process is not right for every homeowner, there are some advantages that you might want to consider. If you’re interested, here are some insider tips to help you get the most from your refinance process.

Don’t Focus on the Monthly Payment

If you have been paying on your 30-year mortgage for the past 10 years, and you refinance into a new 30-year loan, your payment will automatically go down. Chances are you will be financing a lower amount of money (unless you borrowed against your home with equity loans and have a higher principal balance today), and you just extended your total payment period from the original 30 years to 40 (the 10 you already paid, plus 30 more) and you may end up paying more in interest over the long run even with a better rate. Instead, focus on the interest rate you will be getting to determine if it’s worthwhile to refinance.

Consider Shorter Maturity Loans

If you can afford it, talk to your lender about the benefits of a shorter loan, such as a 15-year loan instead of a 30-year loan when you refinance. Your monthly payments might be a little higher, but these loans offer a lower interest rate and allow you to put more money toward the principal balance of the house and pay less in interest over time. It’s important to make sure you can afford the higher payments before you do this, though, as you don’t want to get in over your head and end up missing payments.

Follow Your Loan Officer’s Instructions

Just like when you applied for your initial loan, the refinance process requires a lot of paperwork and information. Lenders want to make sure that you are qualified for the new loan, that you can afford to pay it, and all your paperwork is in order. It might seem frustrating to have to fill out forms and provide documentation for things like your income when you were already approved for a home loan on the same house before, but if you fail to provide the right information in a timely manner, the result could be denial of your refinance loan request.

Keep in mind that just because you filled out the application to apply for a refinance, that doesn’t mean you are officially approved yet, so don’t go out and spend the money you think you will save until the loan goes through. Find out more about refinancing with City Creek Mortgage today.

When you are ready to go and purchase a home, there are plenty of decisions that you will need to make. It is likely the largest asset you will ever own, and probably the most expensive thing you will ever purchase. Traditionally homeowners will finance their home with a 30-year mortgage, but you may have been hearing advertisements and buzz lately about how low a 15-year mortgage rate can be (the average is around 3 percent right now) compared with a 30-year loan (average around 4.5 percent).

While 30 years is generally the standard, there are no hard and fast rules that say you must get a loan for that long, and there are definite financial advantages to getting a shorter-term loan of 15 years.

Advantages of 15 Years

Perhaps the main reason someone might consider getting a loan for 15 years is that you can pay off the mortgage faster. If you are worried about saddling yourself with that big a debt for a long period of time, a 15-year mortgage cuts that commitment in half.

Another benefit is the potentially huge interest savings over the life of the loan. If you get a $250,000 loan at today’s interest rate of 4.5 percent, you will pay over $206,000 in interest during that time period, almost doubling the actual cost of your home. With a 15-year loan at today’s rates, you will pay only about $63,000 in interest—a savings of $145,000.

With a shorter loan, you will pay more toward the principal balance up front, which allows you to build equity in the home faster. Equity is the difference between your home’s total value and what you owe, which represents your profits if you sell the house.

Since a mortgage loan is likely to be your largest single expense every month, paying it off more quickly can also help you free up your finances so you can cut back on work hours, travel more, and enjoy the freedom of not paying on a mortgage.

Advantages of 30 Years

A shorter loan is not for everyone, and there are advantages to getting the more traditional 30-year mortgage loan. First and foremost, financing over a longer period of time means your total monthly payments will be lower. If you will have trouble affording the payments for a 15-year loan, a 30-year loan can allow you to get the home you want.

There is also an opportunity cost associated with the shorter loan—that money you are paying toward a house payment now could be used to bolster your personal savings, reduce your revolving credit card debt, make home improvements, or put into a retirement account.

The great thing about a 30-year loan is that there is often no penalty for early payment, so you can get approved for the lower payment now, then when you have extra money you can pay that toward your principal balance, thus achieving the benefits of paying off your loan sooner and paying less interest, but without saddling yourself with a high 15-year payment.

No loan is right for everyone, so you should review your personal financial situation and your goals before you decide on which loan to go with, then make the decision that is best for you.

Today is a Fed Meeting Minutes release day.  The minutes will be released at 12:00 p.m. MST, and will likely create volatility in the market today.  Of the last 20 Fed Meeting releases, 18 of those times were damaging to the bond market, pressuring interest rates higher.  We will have to see if the contents of the minutes are helpful or hurtful to the bond market.  Hopefully there will be bond-friendly news.

After taking a beating yesterday, the stock market is back to its old tricks today, with the S&P 500 currently up 12 points and the DOW up 126 points.  This, of course, is pushing bond prices lower, while moving interest rates higher.  However, mortgage bonds are still in an upward channel.  The danger is that they are now at the bottom of the channel and are at risk of breaking beneath support.  The Fed Meeting Minute release could be the catalyst to cause a break below or to get bonds heading higher.

Mortgage purchase applications were reported to be down another 3%.  Given that we are in the buying season, this is negative indication of the current state of housing and our economy in general.  The markets anticipated an increase in the number of people applying to purchase homes, so this is just additional proof that our economy was not yet prepared for the increase in mortgage rates that we saw happen last year.

With mortgage bonds struggling so far today, and given the potential volatility from the Fed Meeting Minute release, the safe play is to lock.  However, until we break beneath support we are still in an upward channel.  If we break below, a short term locking bias is certainly prudent.

When I suggest no-fee loans to my clients, I’m often asked how it is possible to Refinance a loan without paying the closing costs. A loan without closing costs seems too good to be true, so many become skeptical. Below is a detailed explanation of how a no-cost loan works and the benefits it offers. (NOTE: City Creek mortgage does not charge you any closing costs. We are 100% compensated on a fixed income basis by our investors, not by our clients.)

A No-Fee Loan Explained:

There are always fees associated with doing a mortgage. Appraisers, title companies and underwriters all require payment for their services. On a typical $225,000 mortgage, the total for these is approximately $2,462. Then, there is either a cost or a credit associated with each interest rate. For example, a 3.75% interest rate may have a cost of 1%. Therefore, with a $225,000 loan, you will pay the following:

  • Basic Closing Costs: $2,462
  • Cost for Interest Rate of 3.75%: $2,250
    TOTAL CLOSING COSTS: $4,712

Alternatively, there are also interest rates that offer a credit. The credit is then used to cover the basic closing costs incurred. If the credit is equal to or greater than the basic closing costs, then all of the fees are covered, making the loan no-cost. For example, an interest rate of 4.125% may offer a credit of 1.125% of the loan amount. This is demonstrated as follows:

  • Basic Closing Costs: $2,462
  • Credit for Interest Rate of 4.125%: ($2,531.25)
    TOTAL CLOSING COSTS: ($69.25)
  • Difference in close costs: $4,712 – ($69.25) = $4,781.25

 

The Benefits of a No-Cost Loan

When comparing a loan that has closing costs with a no-cost loan, the loan amounts must be adjusted to reflect equal cash needed at closing. In other words, if there is a difference in loan costs between the two options of $4,781, the no-fee option will have a loan amount that is $4,781 lower. That will most effectively show the true cost of paying closing costs to obtain a lower interest rate. Therefore, we would compare a balance of $229,781 at a rate of 3.75% vs. a loan amount of $225,000 at a rate of 4.125%. The results are as follows:

  • Full-Fee Option: $229,781 @ 3.75% has a P&I payment of $1,064.15
  • No-Fee Option: $225,000 @ 4.125% has a P&I payment of $1,090.46

You will see that by paying $4,781 in closing costs, the monthly payment will be $26.31 lower than the no-fee option. Therefore, the breakeven point is 181 months ($4,781 / $26.31 = 181.71 months). If the loan will be in place for at least 15.1 years, then paying the fees for the lower rate may be the best option. However, that is very rare and does not account for the option to move the rate lower again should interest rates continue to fall without losing the amount paid for the loan. Nor does it take into consideration the additional tax benefits the higher interest rate of a no-cost loan offers.

With interest rates now on a slow grind higher, the spread in rate between a 30 year and 15 year mortgage has grown to just shy of 1%. This spread in rates has many opting for the more aggressive pay down plan to take advantage of the interest savings.

There are several key points to think through when considering shortening the term of your home loan. The following non-inclusive list will help you profile your situation to decide what is best:

 Payment affordability: This is the most crucial determining factor and should never be ignored. Since shortening the term of your loan will most often times result in a higher monthly payment, if your budget is currently stretched, you may be better off keeping the longer term loan in place.

 Age: We typically see our clients become more aggressive with their mortgage reduction plan as they get older. Generally, people in their 40s and 50’s realize the desire to own their homes when they retire. A shorter-term loan with a lower interest rate is one way to achieve that goal.

 Future plan for the home: This step is listed to point out that it is not as big of a consideration as many people think it is. Some say they will never keep their home long enough to pay it off, so why would they pay the loan down more quickly? The reality is that increasing equity in your home is one way to store net worth. If someone plans to downsize in the future, the equity they have in their home can transfer to their next home or be used to supplement retirement income.

 Consider better use of the money: Paying down a home essentially transfers net worth from cash into equity. If the cash can be used to increase net worth in other ways, that should be considered. In many cases, it can be better served by reducing other consumer debts.

 Forced savings: Shortening the term of your loan is essentially forcing you to pay down your home more quickly, which in turn will more rapidly increase your equity. This a great way for those who have a hard time making additional principal reduction payments to be required to pay down their home loan more quickly.

A case study / example of converting a 30 year term to a 15 year mortgage:

Current Loan Balance: $247,000

Current Interest Rate: 4.375%

Term Remaining: 25 years 3 months

Current principal & interest payment: $1,348.04

Remaining Interest Due on Loan: $161,456

 

No-Cost Rate for 15 Year Loan: 3.5%

Proposed Principal & Interest Payment: $1,765.76

Proposed Payment Increase: $417.72

Years Saved on New Loan: 10 Years 3 Months

Total Interest on Proposed 15-Year Loan: $70,836

Total Interest Saved: $90,620

Generally speaking, people strive to pay their homes off to save interests costs and to increase cash flow at some point in the future. However, there is more than one way to accomplish these goals. If you are questioning whether a 15-year mortgage is right for you, call us for a free mortgage review. We will answer your questions and help you to analyze the differences to determine what is best for your situation.

People often ask if it is really possible to get a mortgage without paying closing costs. The answer is YES! We’ve been closing NO-COST loans for over 15 years and we will explain how.

A NO-COST Loan explained:

There are always fees associated with doing a mortgage. Appraisers, title companies and underwriters all require payment for their services. However, how fees are paid is your decision. For example, a typical loan will have:

· Basic closing costs (appraisal, title, underwriting)

· Either a cost or a credit for the interest rate you choose

Yes, you get to choose your rate. If you want a lower rate you will pay a fee. If you don’t want to pay any closing costs, you will get a slightly higher interest rate.

So, which option is best for you? This is where we will help advise you based on your specific circumstances. The following will demonstrate how a NO-COST loan compares to a FULL-COST Loan:

Option 1: NO-COST Loan

(Pay your fees with a higher rate)

$300,000 New Home Price

– $75,000 Down Payment

+ 0 Fees

$ 225,000 New Loan Amount

@ 4.625% Interest Rate

$1,156.81 Monthly P/I Payment

Option 2: FULL-COST Loan

(Add your fees to your loan amount)

$300,000 New Home Price

– $75,000 Down Payment

+ $4.712 Fees

$ 229,712 New Loan Amount

@ 4.25% Interest Rate

$1,130.04 Monthly P/I Payment

By increasing your monthly payment by $26.77 per month you avoided paying $4,712 in upfront closing costs. You can see that it would take almost 14 years ($4712/$26.77=176 months) to break even paying your costs. Meaning, you would have to keep your home, and this exact loan (no refinancing), for over 14 years to benefit from paying closing costs. Most homeowners only keep their loan for an average of less than seven years. This is why for many people we suggest a NOCOST loan.

 

To determine which option would save you the most money, call us at 801-501-7950, or e-mail me at mike@dev.citycreekmortgage.com. You can also use the “Find Your Best Rate” tool on our web site atwww.dev.citycreekmortgage.com.

(NOTE: City Creek mortgage is paid a flat fee by our investors, which means that we do not benefit from your choice either way. Our advice will always be based on what is best for you.) To determine which option would save you the most money, call us at 801-501-7950, or e-mail me at mike@dev.citycreekmortgage.com. You can also use the “Find Your Best Rate” tool on our web site at www.dev.citycreekmortgage.com.

I am often asked when a homeowner should put the focus of paying off their mortgage. Although the answer to this question is specific to each homeowner, my general recommendation lies within a 4-step plan that I use to advise each of my clients.

Each step is numbered based upon the priority. In other words, step one should be on track before moving on to step two, and so on. The problem is that many homeowners jump ahead before the prior step are mastered. This typically leads to living paycheck to paycheck, getting stuck in the consumer debt rut, or reaching retirement to find that you are equity rich and cash poor. By following the steps below, you can help ensure you reach retirement having achieved the long-term goals you desire.

Step 1 – Develop a Cash Reserve

The most important step is to have a reserve fund to cover short-term unplanned expenses. Without having cash reserve, shortages typically result in having consumer debt. Once consumer debt is established, it can lead to destructive long-term habits that are difficult to break. If you have a cash reserve, you should never have a need for unsecured debt.

Step 2 – Pay off ALL Consumer Debts

This is the step where you become consumer debt free, with the exception of your mortgage. Revolving and unsecured debts should be paid off first, with car loans and other secured loans being paid off second. Remember that cars are depreciating assets, and you will always have car expenses. If you are able to pay off your car, you can begin to save money to pay cash for your next car.

Step 3 – Create Significant Liquidity

One of the greatest gifts we have is the gift of compounding interest. This is the quadrant that grows and compounds. Even if you are not secure in steps 1 & 2, if possible, you need to develop the habit of putting cash into long-term investment accounts. Once you are secure in steps 1 & 2, make this quadrant your primary focus and watch your net worth rise over time.

Step 4 – Focus on Home Equity – Paying off your Mortgage

Once you have developed a cash reserve, have paid off all consumer debts, and are on track to meet or exceed your retirement goals, then you can put a focus on paying off your home loan.

Personal finance is most often a reflection of habits. If you develop good financial habits, and exercise them over-time, long-term you will likely do well. Not only can you use the four step plan to help you allocate cash flow in the budget, but you should also use the plan to help you to allocate cash and home equity net worth.

If you have specific questions regarding your personal situation, please call or send me an e-mail. Also, if you have a friend or family member in need of advice, I would be honored to help them as well. Having professional advisors to help you manage your investments, mortgage, taxes, and estate is the best way to protect your long-term results.

It may seem difficult to decide where to place your trust with all the mounting changes we have seen in the mortgageindustry in recent years. However, many of the most beneficial changes have been instituted by independent mortgagebrokers and are designed to benefit the customer. mortgage brokers can provide many advantages to their clients, which borrowers do not receive when working with a traditional bank. A broker has access to lower interest rates and fees as well as many more products and services to meet the individual needs of their clients. Many high volume brokers also receive special pricing and service beyond what you would expect when working with a larger bank. Most importantly, brokers offer a heightened level of transparency when it comes to any costs associated with a loan. Combine all these benefits with an elevated standard of customer service and there is no doubt that a mortgageexperience with a broker is the best deal in town.

Cost Savings
One of the most important aspects of mortgage lending for borrowers is fees and costs associated with a home loan. When you work with a mortgage broker, you can rest assured that you are not being charged more than any other borrower with your same loan parameters. That’s because, with increased industry regulation, most mortgage brokers are now paid a flat fee based on the loan amount for originating mortgage loans. Banks, on the other hand, have the freedom to charge closing fees and offer interest rates that will generate additional income for them, and those amounts can vary between borrowers. Not only can this damage the trust in a relationship, it also creates fear that you are not being offered the best deal in exchange for the bank increasing their profits. Whereas, you can trust a broker when you receive a quote on interest rate and closing costs, because their services are held to a much higher regulatory standard in the mortgage industry. In addition, brokers are not limited by one bank’s products and fees, but rather they have access to multiple banks and lenders and are able to shop around for the lowest price and the lender that best suits your needs.

Transparency
At City Creek Mortgage, we firmly believe that transparency builds trust. The very foundation of our business model is the trusting and lasting relationship we have with our clients. As a broker, we strive for total and complete transparency. It is important to us that our clients fully understand their loan terms and that costs and benefit have been fully calculated and measured to produce the best option for them. While banks and larger mortgage companies have the ability to charge more for their services without disclosing the total income they are earning (often referred to as “Back End Fees”), brokers disclose every penny they earn and there are no hidden costs. Most importantly, brokers do not charge their borrowers anything directly; they are compensated solely by the lender that will service your loan. This is why you will not see “Origination Fees” or “Processing Fees” charged by a broker that you typically see when working with a bank.

Mortgage brokers are not permitted to earn any money beyond their flat fee paid by the lender on each loan. If there is any additional credit back associated with the interest rate chosen, that credit is automatically applied back to the borrower at closing. This is how City Creek is able to offer a no-cost loan to our clients, by applying an interest rate credit to cover any standard third party fees (title costs, appraisal, underwriting, etc.) charged on a loan.

For these and many other reasons, working with an independent broker can offer you many advantages over a loan with a traditional bank. As always, I only recommend you choose a trusted and experienced mortgage broker with a team of qualified professionals, thus ensuring that your loan is handled with efficiency and superior customer care. To make certain you have chosen one of these top organizations look for designations such as Certified mortgageAdvisor that indicate they have completed additional training and education. Also, look for brokerages that have withstood the market and industry volatility and have been in business a long time. Longevity and professional designations show they are committed to their profession and are providing sound and trusted advice in this ever-changing mortgage environment.

To experience the level of trust and experience we provide at City Creek, visit our website at www.dev.citycreekmortgage.com and price your own loan with our “Find Your Best Rate” option. After answering a few simple questions, you will get a complete list of interest rate possibilities and closing fees associated with those rates (if any) for all suggested available loan options. If you are considering a refinance, we suggest selecting an interest rate that reflects total closing fees as $0 or a negative number. These are our no-cost loan options. You can easily apply online or give us a call to take a personal application over the phone. We are always here to provide the best possible service to our clients. Give us the opportunity to show you how great working with a trusted mortgagebroker can be.