What is a 5/1 ARM loan? When it comes to different financing types, you can score for buying or refinancing homes. Mortgage lenders can choose between a plethora of other options. On top of that, you may choose between a fixed-rate loan, an adjustable mortgage loan, or a variable-rate mortgage. However, keep in mind that nowadays, ‘adjustable’ and ‘variable’ are used interchangeably.
One type of adjustable-rate mortgage boasting a fixed initial rate is 5/1 ARM. During the initial loan period of the first five years, the interest is typically fixed at a rate lower than other fixed-rate mortgages, making them a popular option. Let’s delve into the details of 5/1 ARM loans.
Adjustable rates typically change over time but always begin with an introductory rate that remains constant over five years. These may go up as much as 2 percent points per year depending on different factors. Let’s discuss what these rates are:
An adjustable-rate mortgage, also known as ARM, refers to a type of mortgage in which the interest rate applied on balance may vary across the loan life.
Typically in adjustable-rate mortgages, the initial interest is fixed for a specific period. After this time period, the interest rate may go up or down annually or monthly.
Adjustable-rate mortgages may also be referred to as floating mortgages or variable-rate mortgages. The interest rate for ARMs generally rests based on an index, benchmark, or ARM margin.
A 5/1 adjustable-rate mortgage, otherwise known as 5/1 ARM, refers to an adjustable-rate mortgage. Typically, these boast a fixed interest rate lasting the initial five years that adjusts over the year.
The ‘5’ here expresses the number of years featuring a fixed rate, whereas the ‘1’ refers to how often the mortgage rate will adjust after the initial term.
In 5/1 ARM loans, the initial fixed interest rates boast a low introductory level. As the initial period ends, the adjustable interest rate will change yearly based on various financial and economic market factors.
It means that your interest rate will reset to the indexed rate after the introductory period if the index spikes up. In case it falls, so will your interest rate.
ARMs are the ideal option to select when rates are skyrocketing. These first became available to homeowners across the U.S. in 1981 and have continued to grow in popularity ever since.
These are perfect for people planning to refinance their mortgage or sell their home before the introductory rate expires. A 5/1 ARM may also make sense if you think the value of your home will go up suddenly. Moreover, selecting an ARM provides you with the opportunity of qualifying for a larger loan.
The pros of a 5/1 ARM start from the flexibility and go up to low introductory rates. At the same time, the cons include the potential for substantially bigger payments and complexity:
Let’s discuss the top pros of 5/1 ARM loans:
Since interest rates change in 5/1 ARM loans, these are structured to provide you with a lower interest rate for the initial years of the loan. The lower payment provides you with the financial flexibility necessary for buying things essential for your home.
One incredible way to save money during the 5/1 ARM loan term is to start putting the money you save from the lower interest rate towards the principal.
As a result, even if the interest goes up during the adjustment period, you’ll be paying less due to a low balance.
5/1 ARM is perfect for those living in a starter home; especially if you plan to move out before the interest rate can adjust.
For this, you may have to plan early, but if all goes smoothly, you can enjoy avoiding increasing rates.
These are as follows:
If interest rates start skyrocketing, there’s a chance you may have to deal with increased mortgage payments once the adjustable period begins.
It may be challenging for borrowers that have trouble making larger payments.
While you have the option of refinancing a fixed-rate mortgage, keep in mind that you’ll also have to pay a closing cost when refinancing.
The closing cost may be paid in the form of upfront fees or paid overtime by taking a higher interest rate. Moreover, the closing price may be between 3% and 6% of the loan amount.
With falling interest rates comes the narrowing of the yield curve, which represents the difference between the fixed and adjustable-rate mortgages.
Therefore, if you’re saving a substantial amount through an ARM, your 5/1 ARM loan is worth it. However, if the difference is simply ten basis points, it may not be worth it.
You should consider getting a 5/1 ARM loan if you’re planning to refinance your mortgage or sell your house. If you select an ARM, you can easily qualify for a larger loan due to low introductory rates.
However, remember that interest rates and monthly payments will spike up after the introductory period, i.e., after three, five, seven, or ten years. Besides, they may increase by a considerable amount depending on the terms defined by your loan.
REO, or real estate owned, properties can be a great investment. The value of REO foreclosures makes these properties attractive opportunities. However, there are some risks you should know about before purchasing an REO property.
Don’t let the risks of bank-owned properties dissuade you from considering the REO process. The word foreclosure can intimidate potential buyers, but it doesn’t need to. REO properties just require a different negotiation process, and if you take the time to learn about these properties, you’ll find yourself a great deal.
Real estate owned (REO) refers to property that is owned by a bank or a lender, like Fannie Mae and Freddie Mac. The property has also not been sold at a foreclosure auction. The bank or lender becomes the foreclosure owner if the property does not sell for enough money to cover the remaining balance of the loan.
For a foreclosure property to become an REO, one of three things must happen.
Sometimes, banks will sell REO properties. Check out your bank's website and look for their portfolio of REO properties to see the extent of their experience. Additionally, clients who are in the market for a home and are working with a bank can seek out information from the bank's loan department regarding that specific bank's REO inventory.
If a bank or a lender has an extensive or complicated REO portfolio, they will likely have an REO specialist. A bank's REO specialist manages the REO properties by fulfilling the following needs:
An REO specialist will keep the properties in great condition and ready to sell. The bank benefits from having a supply of properties to match with customers after they’ve secured a loan.
To find an REO property, check with your bank's REO specialist. Their main job is to make the property accessible and well known to homebuyers like you. As a result, the REO specialist will negotiate with local real estate agents and have the bank's REO inventory listed in multiple listing services (MLS).
Being in the MLS makes it easy for real estate websites to find and list REO properties, especially for the following sites:
Real estate agents work with REO specialists to sell the property. The agents work on moving the properties, and they also receive a commission for selling REO properties on behalf of banks or lenders.
There are pros and cons of buying both REO properties and foreclosed properties. But in general, REO properties are the safer investment. Let’s take a closer look at the benefits and drawbacks of each!
PROS
REO
FORECLOSURE
REO properties cost less because banks don't want to maintain ownership over dead assets. When an REO property becomes part of the bank's portfolio, the bank becomes a motivated seller. As a homebuyer, you will benefit from the bank's eagerness to get rid of the asset.
Out of convenience, banks will sell REO properties for a major discount. You may find properties that are selling for far below market value. Consequently, intelligent homebuyers, or investors, who are limited by capital can get a great deal on discounted REO properties.
One of the challenges of investing in real estate is the question of ownership. From time to time, questions about the legal owner of a property can plague the entire buying process. Unpaid taxes and title liens could prevent you from legally owning the property.
REO properties do not come with tax or title liens. As soon as property becomes real estate owned, the bank will cover any and all liens against the real estate. In most cases, the bank will pay the property’s outstanding taxes. The bank that seizes the property will answer the question of ownership, and from there, the bank will work on selling the property.
Investors benefit greatly from investing in REO properties. For example, an investor can buy the property and convert it into a rental property. The new rental will generate rents and cash flow for the investor. When it comes time to divest ownership, your property will have appreciated, meaning you can sell it for a generous lump sum.
In the event that you are a house flipper, REO properties are a great opportunity for you to make quick money. The cost of buying, remodeling, and relisting the home for sale means you can purchase the property for a cheap price and sell it later on for market price.
Foreclosed properties sell below market value.
Instead of spending weeks or months on end negotiating with the property owner, the process is much faster with foreclosed properties. You can make an offer and close on a foreclosed property very quickly.
The cash-only aspect of foreclosed properties can be a barrier for some buyers. Auctions require cash bids, and this restriction lowers the pool of potential buyers, making competition a lot lower.
CONS
REO
FORECLOSURE
REO properties sound like a good deal, which are attractive to a lot of people! Many investors and other homebuyers understand that REO properties are good investment opportunities because they are a solid way to make money from real estate.
As such, real estate investors and homebuyers should expect to go against several other offers and competitors. It’s best to work with an experienced REO real estate agent to create an offer that stands out from the competition.
Banks sell REO properties as is, meaning the property is a risk because the bank will not pay for any repairs. The repair risk does not affect investors who plan to flip the REO property, but an investor seeking to turn the REO property into a rental might need to pay for substantial repairs before moving in tenants.
Property investors or homebuyers can have REO properties inspected before signing any contracts. If the home does not meet an investor’s requirements, then the investor can walk away from the deal. But paying for repairs is not as bad as it seems because those costs should be viewed as investments into a property that will eventually appreciate.
Auctions accept cash-only offers.
Home inspections are not allowed. The bank won’t offer any property history or assessment of conditions either. As the owner, you’ll be responsible for researching the title and paying back any existing taxes or liens.
Banks dislike having REO properties in their inventory and cash is a much better payment option in their eyes. The bank's enthusiasm to unload the property results in REO listings that are at or below market value. The attractive price will attract more buyers, too.
Inexperienced buyers may find it stressful and time-consuming to purchase an REO property. As such, it might be worthwhile to hire a buyer's agent who can negotiate with the bank on your behalf.
Remember these tips when searching for a buyer’s agent:
An appraisal is an objective, independent assessment of the property's worth. When buying a home, a review is critical because banks will refuse to lend money if the appraisal value is less than the selling price.
REO properties are sold as is, meaning that you’ll oversee and pay for repairs. Unlike foreclosures, REO properties allow for a home inspection. An inspection is a vital step in the REO process.
A professional inspector will locate any issues and provide a general idea of how much you will need to spend on repairs. An inspection can reveal a lot of information, like whether or not the anticipated maintenance or repairs are out of your budget.
When buying an REO property, you will probably obtain a quitclaim deed instead of a warranty deed. A quitclaim deed does not guarantee that a title is free from liens. Fortunately, liens are public records, meaning you can discover them on your own accord.
That's why it’s important to conduct a title search when buying an REO property. The title search will scan the property's public records and let you know who the legal owner is. The title search will also reveal any claims or liens on the property.
You should conduct a title search because you’ll be able to locate any unpaid debts that will come with the property. These debts may include unpaid taxes, HOA fees, or outstanding home improvement bills. If you overlook the importance of a title search and purchase the property without checking for existing debt, you’ll inherit the debt along with the property.
If your title search overlooked outstanding liens or unpaid taxes, it might be prudent to get an owner's title policy, which is also known as title insurance. The policy will protect you from ownership problems that happened before you bought the property or were unknown when you purchased the property. Consult with your buyer's agent to see if an owner's title policy is best for you.
You've found the right real estate. Now, you need to make a solid offer to the lender. Your agent will advise you on an offer that is competitive and likely to get accepted. From there, your agent will submit the offer on your behalf.
It’s important that you don’t lowball the bank. There will likely be several buyers, so the bank will reject your offer and move on to the next buyer. If your offer is successful, the bank will sign a contract, issue a quitclaim deed, and transfer ownership of the property to you.
The bank may require earnest money, which is usually anywhere from 1% to 2% of the purchase price. The funds will be held in escrow until the sale is finalized.
REO properties can be a valuable option for real estate investors and homebuyers, especially those who are willing to invest in repairs. It's critical for interested buyers to research the property and discuss it with experts before agreeing to deals or making any purchases.
Are you looking to buy an REO property? Get pre-approval for a loan through your bank to make the process easier!
When looking to refinance or buy a house, the pre-qualified vs pre-approved mortgage debate can be confusing. Pre-qualification is usually performed by an independent mortgage lender, and it allows you to make offers on homes, though it might not guarantee that the lender will accept your offer.
However, the bank can facilitate the pre-approval process on your behalf, meaning that the bank will hold your mortgage and guarantee that the lender will accept your offer as long as certain conditions are met. This article discusses how these two different types of mortgages work and what each type means for people in different situations.
Read our beginners' guide to buying a home here.
Mortgage pre-qualification is the process of determining how much you can afford to spend on a home. When you are shopping for homes, it can be helpful to know what your monthly payments will look like before going into contract, making an offer, or signing official paperwork.
Mortgage pre-qualification is a service that lenders provide to potential homebuyers who are looking for the perfect house but don’t have enough money to put towards a down payment. It’s also helpful for people whose credit scores are not good enough to qualify for any of the loans available through mainstream lenders.
Mortgage brokers will first ask you for a variety of personal information and financial details to determine how much they can offer you as far as loans go. They may also need proof that you have a steady income, which they will then share with the banks to show that you are able to repay the loan.
Some mortgage brokers will offer pre-qualification based on your income alone, while others may require information about assets and liabilities as well. The broker will then prepare an estimate for what type of monthly payment they can provide you before submission to the bank or lender.
Mortgage brokers offer this service because they want to ensure that you can get a loan. They will do everything in their power to make sure that you qualify for financing so as not to lose the sale. The process can be a bit frustrating for some people, but it is worth the time if you want to get into your dream home.
Mortgage pre-approval is the process of determining how much money can be borrowed before you take out a mortgage. This process usually requires an application, credit check, appraisal, property valuation, and loan terms to be agreed upon before any funds are advanced.
The mortgage pre-approval process also establishes a benchmark for determining how much the interest rate will be when the time comes to purchase your home or investment property. Pre-approved mortgages typically have more competitive rates than standard mortgage rates, and they can lead to a savings of hundreds or thousands of dollars on your loan over time.
Read our blog explaining the full home appraisal process here.
Not everyone can qualify for a mortgage. Income levels, credit scores, and a lot of other factors can all play into whether people are approved or not. Some people may be pre-qualified before they apply for a home loan, while others will go through the process of being pre-approved first.
The two terms sound very similar, but there are important distinctions between them that you need to know about before you can make an educated decision about which one is best for your situation. Plus, it’ll help you understand the benefits that each option can provide you with when it comes time to buy a house.
Pre-approval means that someone has been evaluated by their lender and given the green light on how much money they can borrow from lenders. This value is based on various criteria like income levels, payment histories, and credit scores.
Some lenders will even provide a specific interest rate for the borrower to consider when looking at homes that are for sale or constructing them and other specifics about mortgage payments like monthly principal and interest, closing costs, taxes, and insurance premiums.
Pre-qualification is an evaluation process during which you input your financial information. This process allows the lender to screen you and inform you of the products that you qualify for. Income levels, credit scores, debt loads, and required down payment amounts are major determinants during the screening process.
For example, let's say someone is pre-approved for $250,000 and they qualify for a loan of only $110,000. The individual doesn't have to go through the process of being pre-qualified again once this discrepancy is discovered because they already know that there is no way they can be approved in their current situation. Thus, the process of buying a home will be sped up.
The difference between pre-approval and being pre-qualified is that the former gives you an idea of your best options when it comes to interest rates, closing costs, and other details. At the same time, the latter only tells you if the lender will consider you for these products based on your financial information, which could change at any time.
Moreover, when you're pre-approved, the lender has done some of the work for you by providing you with information about what your mortgage payments might look like and how much money will be needed to close on a home when it's time to make an offer.
Conversely, when you're pre-qualified, the lender will tell you whether or not they think your current financial situation is suitable for consideration of a loan. The lender will also notify you of what can happen if anything changes
We wrote a whole blog about mortgage fees and closing costs, read it here.
A pre-approved mortgage is an application that a lender has already approved. The applicant qualifies for the loan by either meeting or exceeding all of the requirements necessary to be approved for said loan through the given lending institution.
Although this type of financing can be used as collateral, it cannot be used in the future if the person looking to buy a home turns down the loan yet requests loans again later on. Lenders will typically need at least two years' worth of bank statements before they will approve individuals with high debt balances.
This additional request takes place when lenders want to see how much money is coming into the potential homebuyer’s account on a regular basis. Once approved, these mortgages may not have any conditions or restrictions placed upon them outside of what was agreed upon when originally applying, unless other changes are requested.
Pre-qualified mortgage applications require less stringent credit checks than pre-approved ones, so the applicant won't be approved until after an appraisal has been completed. In this case, a mortgage lender will have to consider how much money they can lend out and at what interest rate, which will depend on each person’s individual credit score.
They also need to make sure that lending laws in their state or jurisdiction allow them to offer loans with these conditions to potential applicants before making any decisions on the loan request's approval.
Pre-qualified mortgages are based on the information you provide. They take only a few minutes to fill out, and no one will ask for any documentation. Pre-qualified mortgages provide an estimate of how much you can afford to buy a house.
Pre-qualified mortgages are typically easier to obtain than pre-approved mortgages. If you're looking at a house and the seller will only accept one type of mortgage, it is usually much more likely that they'll require an applicant to be pre-approved rather than approved.
That being said, a lender may not have any problem with approvals. However, it might not be worth the time or effort to go through all of the paperwork associated with an approval when they could go with someone who has already been pre-approved.
Pre-approval mortgages are a much better choice for people with poor credit scores. This is because lenders will often require applicants to have an excellent score before they can qualify for or receive a pre-qualified mortgage.
A major difference between these two types of mortgages is that people who are approved for the loan are obligated to take the loan from their lender, while pre-approved people can choose to go with whichever company offers them the best deal. For this reason, lenders and other companies will often offer incentives to pre-approved people, like a lower interest rate or better loan terms.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
If you're looking to buy a house, understanding the difference between pre-qualified and pre-approved mortgages can save you a lot of time and money. Lenders use pre-qualification as an initial step in determining your eligibility for a loan, but it's not binding for either party.
However, pre-approval is more formal than pre-qualification. With pre-approval, once you are approved for a home, there will be specific guidelines set up around your financial situation. This makes everything easier when the time comes to make offers on properties or prepare for closing day!
Research indicates that 58% of homeowners in HOA communities and single-family homes pay an average monthly fee of $250. Despite this substantial number, homeowners lack adequate information about HOA fees and why they have to pay for them in the first place.
Typically, properties in homeowners' association communities come with the requirement that the homeowners will pay a certain amount of money per month. These costs are generally used to provide additional amenities like gym equipment, swimming pools, and security.
All in all, HOA fees are a way of ensuring that both current and future homeowners can enjoy all of the features and components of the neighborhood for years. Let's take a deeper dive into what HOA fees are and how they affect your finances.
Do you know what the differences between a COA, HOA, and POA are? Read all about them here.
An HOA fee is the amount of money homeowners are required to pay their association. These funds go directly to a management company that schedules maintenance and improvement within the community.
HOA fees are usually levied on condominium owners. However, they may also be applicable to homeowners of single-family homes. Let's take a closer look at what HOA fees are.
HOA fees are used to pay expenses related to the upkeep of a condominium community’s common areas. Communities often include lobbies, swimming pools, patios, and elevators, among other features. Plus, there are usually services offered as amenities, like landscaping or standard utilities such as water, sewage, and garbage disposal.
The homeowner’s association may even impose specific assessments intended to take care of major repairs like roofing or elevator replacement. At the same time, HOA fees that apply to single-family homes in various neighborhoods are put towards neighborhood amenities such as clubhouses, tennis courts, or parks
Depending on the association, HOA fees may vary drastically. However, some experts believe that an accurate range of HOA fees is anywhere from $100 to $700 per month. Keep in mind that the exact costs of your homeowner’s association fees will be dependent on what your HOA provides you.
Oftentimes the more services and amenities in your community, the higher your HOA fees will be. Moreover, you may have to deal with even higher costs if the reserve funds are not managed adequately.
HOA dues are not deductible for your personal residence. But keep in mind that if you rent out your property and pay on-time HOA fees, you can reap the benefits of a tax break.
Moreover, a home office deduction may also be possible if you work from your place of residence. Reach out to a tax accountant to learn more about your tax break options.
These dues cover many amenities and services, including but not limited to the following:
Before purchasing a home that requires HOA fees, you should first thoroughly understand these payment processes. Let's discuss the different ways HOA dues can affect your monthly finances.
Before you purchase a home that is part of an HOA, you and your lender need to spend some time evaluating the property's monthly HOA costs. This way, you can determine whether you can afford the dues in addition to your mortgage.
One major caveat of HOA fees is that they can change over time. The fees can spike up when home projects require additional financing or as the result of automatic inflation adjustments. In some cases, housing payments can become unaffordable for homeowners strictly because of the HOA fees, so make sure you ask your lender about the HOA's history of increasing fees.
HOA fees cover routine costs as well as occasional expenses. However, in some cases, critical projects and emergency repairs will require unexpected out-of-pocket fees for homeowners. In these cases, homeowners will have to pay an additional assessment which can cost several hundreds or thousands of dollars.
If you live in a multi-unit property, HOA fees go towards a premium insurance policy that doesn't cover your personal property, your unit's interior, the home you reside in, damage originating from your unit, or your personal liability.
Discuss the risks associated with an HOA with your insurance provider to find out which policy will match your needs the best. Make sure you fully understand the prices of the policy before you purchase an HOA property to ensure that you are aware of its future costs.
Purchasing a home in an HOA community means you've agreed to pay these monthly fees. If you fail to pay the costs, you'll owe money to your HOA. Plus, your HOA has the power to send past-due accounts to collections.
They may even put a lien on your home or initiate a foreclosure. From there, collection accounts and public records will start appearing on your credit reports. These negative marks on your credit reports will make it harder for you to secure other loans or find affordable housing in the future.
HOA fees cover the costs of various repairs and renovations in your neighborhood. But the fact of the matter is that you may not need everything that you pay fees for.
That is the major downside of living in a shared space. For instance, you may not ever use the pool or the rooftop patio but you'll still have to help pay for them anyway.
When you purchase a property that boasts as an HOA community, you'll have to pay dues for every day you live there. On the brighter side, you only have to pay a prorated amount once you’ve sold your home
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
If homeowners fail to pay the requisitory assessments, the homeowner’s association can collect the dues with the help of various conventional collection processes. From sending demand letters and making collection calls, to initiating foreclosures and filing a civil suit, homeowner’s associations will pursue legal action against homeowners who don’t pay their HOA fees.
Homeowner’s association fees refer to monthly dues that homeowner’s associations collect. Typically, HOA fees are used to pay for costs of repairs, maintenance, and other amenities in the community.
Overall, it is important to understand HOA fees and what these fees entail prior to purchasing a property. To make sure this property’s community is in your best interest, further investigate what the community’s amenities are and how these payments contribute to your neighborhood.
Private mortgage insurance is something millions of homeowners pay for each year. However, this type of insurance does not protect the homeowner.
Mortgage insurance is designed to protect the lender. If the homeowner were to default on the loan, the mortgage insurance would pay off the loan to the lender, but the homeowner would still lose their home.
So, is mortgage insurance a requirement? Believe it or not, mortgage insurance is only required for specific types of mortgages.
If you don’t have a lot of money saved up to put towards a home, you can still secure a mortgage. In fact, with an FHA mortgage, you can qualify by putting down 3.5% of the home's value in the form of a down payment, so long as you meet the current requirements.
However, the less money you put down on a home, the riskier lenders tend to consider you to be. To make a lender comfortable with lending you money, they may require you to purchase mortgage insurance. This insurance is often referred to as private mortgage insurance, or PMI.
Even though you’ll be paying for mortgage insurance on a monthly basis, you are not the beneficiary. You’ll be paying this expense on behalf of the bank, making the bank the beneficiary.
If you default on your loan, you will still lose your house. However, the bank will receive the money they are due thanks to the mortgage insurance.
Unfortunately, there is not a one-size-fits-all approach to mortgage insurance. Your monthly mortgage insurance payment will depend on how much money you put down on your home and what type of mortgage you originally used to finance your home.
For example, FHA loans have a different PMI rate compared to conventional mortgages. On average, mortgage insurance will cost you anywhere from 0.35% to 2.25% of your loan amount.
Let’s review the pros and cons of mortgage insurance.
By paying mortgage insurance, a homeowner can likely purchase a home with a less substantial down payment. For example, saving up for a 20% down payment on a $300,000 home is difficult, whereas saving up for a 3.5% down payment on the same home is probably easier.
If there wasn’t mortgage insurance, banks would not likely be comfortable lending money to a homebuyer who just puts down a 3.5% down payment. In this way, mortgage insurance has helped people secure loans that they previously would not qualify for.
Mortgage insurance does not protect the homeowner, it protects the lender. Depending on the type of loan you purchased, mortgage insurance can be with you for the life of the loan.
This can add up to a great deal of money, and again, the homeowner does not get the protection. Mortgage insurance takes money out of your pocket each month, increasing the cost of owning a home.
Needless to say, most people would prefer to save $100-$200 per month, instead of paying for insurance that does not protect them.
Conventional mortgages do not always require mortgage insurance. In fact, you’ll just pay PMI on a conventional mortgage if your down payment isn’t at least 20%. If your down payment is less than 20%, you will be paying mortgage insurance on a conventional loan.
If you are financing via a conventional mortgage and do in fact need PMI, you can request the lender drops the PMI once you reach 20% equity in your home.
FHA loans require mortgage insurance. Generally speaking, an FHA loan is used in the following situations:
FHA loans are guaranteed by the United States Government, and require mortgage insurance in case the homeowner defaults on their loan
If you are in an FHA loan, you can always refinance to a conventional loan once you build equity in your home. By refinancing your mortgage you may be able to save quite a bit of money on mortgage insurance.
VA loans do not require PMI. This is one of the greatest benefits of a VA loan. The government still backs VA loans, but as a thank you to our veterans, the government and lenders do not require the individual or family to carry mortgage insurance.
There are several ways to avoid paying for mortgage insurance. The most common options include:
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
Without question, mortgage insurance has helped millions of people qualify for homes they otherwise would not be able to. However, beyond the initial qualification, mortgage insurance feels more like a financial drain than a benefit.
Remember, PMI does not protect the homeowner, but rather protects the bank if the homeowner defaults on their mortgage. PMI is a requirement for specific loans, but not all of them. Be sure to review all the various loan options available to you before deciding which loan is right for you.
When you first set out to buy a home, it can feel like you’re taking an exam you forgot to study for. You have to make quick decisions that can have ramifications on your finances for years and years to come, and while you'll probably get no shortage of advice from friends and family, it can be a headache to make sense of all the information.
The type of mortgage you pick is one example of a crucial decision you’ll need to make.
In this article, we’ll talk about what it means to get a 30-year mortgage, how it differs from a 15-year mortgage, why you might want to consider paying off your mortgage early, and more.
Read our complete beginner's guide to buying a house here.
30-year mortgage, 15-year mortgage, fixed-rate, adjustable-rate—as you’re in the process of buying a house or researching the home buying process, you’ll hear a lot of terms being used to describe home mortgages. A 30-year mortgage is one example of a common term and mortgage type.
A 30-year mortgage is a loan that will be paid off completely in 30 years if you make every payment as scheduled over a 30-year payback timeline. Each month you’ll pay a mortgage payment that comprises a mix of principal (the amount of money you borrowgoasdfasdfsadfed), interest, and if you escrow, insurance, and taxes. If you opt for a fixed-rate home loan, your total payment amount and interest rate will remain constant throughout the loan. Keep in mind, however, that if escrow for taxes and insurance are taken as part of the payment, it can vary especially considering property taxes tend to increase every year.
Generally, if you put 30- and 15-year mortgages side-by-side, the 30-year mortgage will look like a better deal upfront since your monthly payment will likely be lower. However, smaller payments in the short term can also mean a hefty amount of additional interest paid in the long term.
Let's unpack what a 30-year mortgage means and how it works.
First, the monthly payments will likely be lower than a mortgage with a shorter term, like a 15-year. Second, longer loan terms mean you’ll pay more interest - often much more. Third, when you pay your mortgage payment on a 30-year loan each month, not all of your money will actually go toward paying off the principle of the loan; at first, very little of it is. We’ll discuss each one of those in a little more depth:
For some of the reasons we discussed above, namely, less interest over the length of the loan, 15-year mortgages are growing in popularity—but are they right for you? We’ll compare and contrast the two loan types below.
You’ve probably realized this by now, but there’s not always a clear-cut answer as to what type of mortgage you should choose. A 30-year mortgage might be right for you, but it comes with its own set of pros and cons.
First, let’s discuss the reasons a 30-year mortgage can make smart financial sense:
So what about the downsides of a 30-year mortgage? We’ve already alluded to several, but we’ll summarize them here:
More interest, but lower monthly payments. Slow equity accumulation, but you could get the house you really want. A 30-year mortgage has downsides, but it also has real benefits because it frees up your money in the short term. Also, a 30-year mortgage could end much quicker than planned if you make extra mortgage payments, which we’ll discuss next.
You’ve probably seen bloggers, social media influencers, and financial consultants bringing up the idea of paying off your mortgage ahead of schedule. If you’re in the right financial situation, an early payoff can make sense. A mortgage payment is one of the largest and most regular financial burdens a person will ever commit to in their life. Paying off a mortgage and getting rid of a monthly payment can free you up to use your money in different ways or even become less reliant on a regular paycheck altogether.
That said, if you’re considering trying to pay down your mortgage faster, you should first attend to your savings and other debts. If you don’t already have around 3 to 6 months of income saved up in an emergency fund, you should divert any extra money toward building that up first before putting more money toward your house. Also, if you have any outstanding debts, such as student loans or credit card balances, it’s probably smart to tackle those first, as they may have even heftier interest rates than your home loan.
When you’ve covered those bases and ensured you’re able to contribute enough money to other important buckets such as your children’s education fund and your own retirement, you can consider diverting any extra money toward your mortgage. While you may see a lot of examples of extreme mortgage payoffs, you can add whatever amount of money works for you. Even an extra $100 per month will make a difference in the length of your loan.
One final caveat is that you should always ensure with your lender that there is no penalty for early payoff. The last thing you want to find out is that you have to pay a large fee just when you're about to eliminate your mortgage.
Paying off your mortgage early may sound amazing, but as we mentioned above, it’s not always the best choice. One of the most notable reasons experts cite is that you could, in theory, make better financial decisions with the extra money you'd be putting into your mortgage.
Many financial pros cite investing or contributing to retirement accounts as better uses of extra money due to the potential returns you could get. However, investing goes hand-in-hand with risk, and depending on the health of the market, you could end up losing money with this approach.
Another risky market is real estate. If you pay off the cost of your home before you need to but its value dips below what you paid for it, you could even lose money on your house if you tried to sell it.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
By now, the whole issue of 30-year vs. 15-year mortgages should be much clearer. Both methods have their pros and cons, and you should consider all the facts before you pick the one that’s right for you.
If you value lower payments so you can allocate your money to retirement, debt payoff, or an emergency fund and can handle potentially higher 30-year mortgage rates, a 30-year mortgage may be better for you. If you’re fine with higher monthly payments so you can pay off your mortgage faster and pay less interest overall, a 15-year mortgage may be the right choice.
Speak with a financial professional about both options to decide which method is better in light of your own personal financial situation.
The vast majority of mortgage loans require you to put down a certain percentage of the selling price upfront. However, not everyone can afford to put down that much cash at once. Thankfully, there are many options for home loans that don’t require a down payment.
These loans usually come with strict specifications depending on your eligibility and the property’s location. These loans also often have additional fees or higher rates attached to them. In this article, we’ll cover some of the options available to you as well as the requirements you must meet and whether or not any of them are a good fit for you.
First, let’s be clear about what a down payment is. Let’s say the home you’re looking to buy has a sale price of $250,000 and you’ve qualified for an FHA loan at 3.5% down. This is one of the most accessible and popular loans for first-time homebuyers.
In this instance, your down payment would be 3.5% of the total sale price, which would amount to a down payment of $8,750. This down payment would also come along with additional closing costs that often have to be paid right away as well, further increasing your costs upfront.
If you meet certain qualifications, you could potentially qualify for a mortgage loan with either a low down payment amount or no down payment at all. These no-down-payment options come from government organizations, like the Veterans’ Association or from credit unions that offer limited mortgage loans without a down payment.
If you can’t come up with the thousands of dollars that are needed to finance a home, a zero-down-payment mortgage sounds like a great idea. However, it’s not for everyone.
While financing without a down payment will help you find a home faster without needing to come up with cash right away, you’ll most likely end up paying additional fees or have a higher interest rate on the loan. However, the circumstances will be different if you can qualify for a VA or USDA loan, both of which we’ll cover below.
This means that most, if not all, of the money you would save by not making a down payment will eventually be charged to you over time as part of your mortgage payments. In fact, the total sum of fees and added interest rate over time may end up being greater than the amount you would have paid for a down payment in the first place.
If you need to get into a home quickly and know that you’ll be able to afford slightly higher monthly payments over the term of your loan each month, a zero-down-payment mortgage may be a good option. On the other hand, if you think you might struggle to make larger monthly mortgage payments, it might be a good idea to agree to a down payment instead. You can either save up for an FHA loan or consider other options for low-income mortgage loans.
Here are the most widely-accessible options for mortgage loans that don’t have a down payment. While having no down payment does save you money as a buyer, it’s important to note that each option will come with additional fees and eligibility requirements.
The VA home loan is offered by the U.S. Department of Veterans Affairs. It is accessible to any and all retired or active military members. This home loan offers low interest rates and low to no down payment options.
It also comes with more lenient credit score requirements and mortgage insurance options than other loans. Because the VA loan is government-sponsored just like the FHA loan, it also comes with property livability requirements, and it must be put towards the borrower's primary residence.
While a VA loan can be secured without a down payment, there is a funding fee required at closing, and that fee can cost up to several percentage points of the total cost of the home. The funding fee is typically less than the amount a down payment would be on a house through an FHA loan, but it still requires the buyer to present a few thousand dollars in cash at closing.
The USDA loan is made available by the United States Department of Agriculture. It offers low-interest, zero-down-payment loans for borrowers who are open to living in more rural or undeveloped areas. These areas are pre-determined in every state, and they include both rural land and suburban neighborhoods.
For residents willing to live in predetermined “rural” areas across the United States., USDA home loans are some of the most accessible options, but there are a few specific requirements. The home must be a primary residence. As such, it can’t be a working farm, vacation home, or rental. Also, most lenders offering a USDA loan require that the borrower pay for several months of expenses upfront, including insurance and property tax.
Certain credit unions offer zero-down-payment options, but typically, they require interested borrowers to apply so that the credit unions can ensure that people meet the strict income, debt, and credit score requirements. Credit unions offering these low to no down payment options include Alliance Credit Union and Navy Federal Credit Union, to name a couple of examples.
Many lenders offer loans through the Doctor Loan Program, which applies to early career doctors, dentists, and med school students who are facing large student loan debt or don’t have the funds for a sizable down payment. These loan programs have their own sets of requirements which differ by state, but they are great mortgage options for eligible borrowers in the medical field. Plus, there are no private mortgage insurance fees!
If you want to try to save up for a smaller down payment or you aren’t eligible for some of the options above, there are still many accessible mortgage loans for you to consider! The following alternatives are offered nationwide and they come with low down payment options.
FHA loans typically require 3.5% down, but government regulations require lenders to allow, in certain circumstances, gift funds from friends or family members as part of that down payment.
Using a piggy-back mortgage strategy, a borrower can occasionally take out two separate loans: one for 80% of the mortgage, and the other for up to 15% of the mortgage, which leaves you responsible for a 5% down payment. While this might make it easier for you to come up with cash for a down payment, it can cause an equivalent amount of stress to your bank account over time.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
For those who can’t save up for a down payment on a home, there are certain options available that might lower or completely eliminate the down payment altogether. However, be aware of the additional fees involved, as these can offset the benefit of financing without putting any money down. If you’re able to pay slightly higher monthly payments or pay these fees at closing, a zero-down-payment mortgage may be the best option for you!
When you buy a house and start making mortgage payments, your payment consists of four different components, known by the acronym PITI, which refers to Principal, Interest, Taxes, and Insurance. The insurance component can include PMI (private mortgage insurance) and homeowners insurance. Each of these concepts would take an entire article to explain, but we’ll be focusing on homeowners insurance in this blog post. If you’ve bought a house or are preparing to buy one, this article will provide a thorough overview of what homeowners insurance is, why you have to have it, what it covers, and ways to bring the costs associated with it down.
What is homeowners insurance, and why is it necessary that you pay for it? Essentially, homeowners insurance protects you if your home or possessions in the house are put in jeopardy by a natural disaster, robbery, or some other unexpected event. In addition, homeowners insurance protects lenders by allowing you to continue to make mortgage payments in the event of a crisis and protecting the property for which they have a financial interest in until the mortgage is satisfied. In most cases, proof of homeowners insurance is a mandatory requirement from mortgage companies.
Homeowners insurance includes property insurance, which protects your actual home and property in the event of a fire, theft, or other unexpected events, but it also includes liability insurance. Liability insurance protects you legally if someone who’s not on your policy is affected by your property or while on your land. Examples of this could include someone falling and getting hurt on your property or a tree planted on your land falling on someone else’s house—though the liability in both of these examples would depend on the exact details of the event and is determined on a case by case analysis. Because home insurance includes two types of insurance bundled together, it’s known as multi-line.
Not all homeowners insurance policies look the same. Depending on your situation and needs, your policy could look completely different from someone else’s. Here, we’ll go over several different types you might encounter and what they cover.
Homeowners insurance is just as much a protection for you as it is for your lender, so it’s natural to want to know what exactly it covers. While the exact coverage will depend on your policy, there are some common things that you can expect to see home insurance guarding you against.
First, homeowners insurance, depending on the policy, may protect your house, inside and out, from disasters like fires and smoke damage, explosions, falling trees, aircraft damage, and even destruction from a burst pipe. If you neglect the upkeep of your home and experience damage due to that, homeowners insurance may find you at fault and this can affect your coverage. Homeowners insurance also generally covers not just you but the property in your house. This can be comforting if you worry about the possibility of a burglary. Depending on your policy, homeowners insurance may also cover damages for injury to people on your property in the event of an accident. Finally, if a disaster happens to displace you temporarily, your insurance might also cover day-to-day expenses, including lodging and food, within reason.
We’ve discussed what home insurance covers in brief, but let’s break it down even further so you can understand exactly what to expect.
The first section in your policy is all about you—your house, your possessions, and your well being when disaster strikes.
Dwelling refers to the actual physical makeup of your home. Insurance companies will want to consider how expensive it would be to repair or entirely rebuild your residence in the event of a disaster.
The items in your house can carry substantial value, which is why many homeowners insurance policies cover them as well. For people with especially high-value items, such as jewelry or rare collector items that they own and treasure, extra coverage might be a good idea.
As we discussed before, some disasters can drive you out of your home for an extended period. Luckily you won’t have to pay for lodging costs during this time if you have the right coverage.
Many potential accidents could happen on your property or as a result of something on your property: your pet could harm someone, a tree branch could break off and damage your neighbor’s car, and the list goes on. The liability section exists to safeguard you from the financial burden of any repairs or payments that arise because of such events.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
When you’re ready to buy homeowners insurance, do your research. Determine what type of insurance you need, your home-rebuilding price, the items in your home that need to be insured and how you want them to be covered, and more. Consult with an insurance agent or a realtor as needed. If you live in a place that’s likely to flood or have earthquakes, you may want to ask about buying additional insurance just for this eventuality.
Before binding yourself on a policy, be sure to compare prices from several different companies to ensure you’re getting the best homeowners insurance premiums and coverage.
Your situation isn’t the same as your neighbor’s, so you likely won’t pay the same as they do on their homeowners insurance. If you are wondering, “How much is homeowners insurance going to cost me?” know that insurance businesses consider several details when calculating how much to charge you. Some factors have to do with the home itself, while others take into account your lifestyle choices. Here are some of the main factors that may go into how much your homeowners insurance premium rates:
Most people want to cut costs wherever they can, especially when you’re dealing with the already pricy business of buying a house. Some ways that you can keep your premiums as low as possible without skimping on the quality of your insurance include:
Overall, while homeowners insurance may be a requirement, it’s also a smart thing to purchase to protect you and your property from unexpected events that can cause damage. If you’re looking for the right homeowners insurance company to safeguard your next real estate investment, an insurance agent can help you explore policies and customize them for your needs.
Whether you’re a first-time buyer or you’ve purchased a home before, you’ve likely heard of a homeowner’s association. In fact, an in-depth study has shown that 58% of all homeowners live in HOA communities.
A homeowner’s association refers to an organized group within certain neighborhoods and communities, like planned unit developments, subdivisions, or condominiums. HOAs are made up of a board of directors that local homeowners elect to maintain a framework of regulations and rules in a community. Let’s compare the pros and cons of a homeowner’s association!
An HOA comes with many benefits, as well as a few drawbacks. Let’s take a closer look at the pros and cons of an HOA. We hope this makes it easier for you to decide whether you want to purchase a property that is part of a homeowner’s association or not.
A well-run homeowner’s association will offer several perks. In fact, according to in-depth research, being a member of an HOA can boost the value of your property by 4.2%, which is incredible. This increase in property value is the direct result of the amenities and enhanced aesthetic of an HOA, both of which often create greater appeal when selling your home.
An HOA also creates excellent curb appeal by providing well-maintained community spaces. All of these features can help you market your property for sale because they enhance your home’s attractiveness. In addition, potential buyers can enjoy the financial benefits that an HOA can offer them if they purchased a home within an HOA.
Another great benefit of HOAs is that these organizations can set community rules and regulations. While these rules are often thought to be a con rather than a pro of an HOA, these regulations can actually benefit residents very well.
For instance, people living in popular tourist destinations can enjoy quiet hours as set forth by the HOA. In the same fashion, rules and regulations about speed limits and parking can make your neighborhood safer and easier to navigate. Rules aren’t always a bad thing, especially when it comes to rules formed by a homeowner’s association.
At the same time, HOAs present several downsides to property owners. For instance, some residents may find it inconvenient and costly to have to pay HOA dues every month or quarter.
In addition, an investor purchasing an HOA property that they plan to rent out for additional income may experience lower cash flow than if they purchased a non-HOA property because there aren’t any fees associated with non-HOA homes. In the event that people decide to shift the cost on to their potential tenants by charging their tenants more money to cover the HOA fees, they could end up risking their ability to market the property in the future.
All in all, first-time homebuyers seeking a property within an HOA community may find HOA fees cause their monthly costs to be higher than they are comfortable with. Sometimes, HOA fees can cause costs to exceed people’s budgets.
Some HOAs charge a lot of fees, but what are you paying for? Read our blog all about HOA fees here!
Once you purchase a home that’s part of a community association, you need to follow all its rules and regulations. These rules primarily focus on protecting your investment, as well as providing neighbors a common framework. Let’s explore some of the most common HOA rules!
The HOA is responsible for ensuring that a community is appealing and looks beautiful. As a result, most HOAs require that individuals maintain a certain level of curb appeal. HOA maintenance requirements typically include walkways, driveways, lawns, facade, and other visible or public areas.
A common homeowner’s association rule that you need to keep in mind is the policy on rentals. The fact is that not every HOA allows you to rent out your property. Thus, you must verify all the rules regarding rentals to avoid fines.
Additionally, individuals living in an HOA community are expected to pay a monthly or quarterly fee. These fees are put towards amenities and other items that improve the community as a whole.
Some HOAs also implement restrictions on noise pollution. Apart from limiting the time you’re allowed to use power tools and host parties, a lot of HOAs also have set hours where you can’t make a lot of noise. These are known as quiet hours.
Most HOAs have rules regarding pets, including the number of animals you can have, the type of breed, pet-related clean-up rules, whether you can walk your pet or not, noise levels, and leash laws.
HOAs mainly focus on ensuring a family-friendly and happy environment. This means that the focus of their rules and regulations are the overall safety and wellness of everyone who lives in the HOA.
HOA strives to improve the aesthetic and overall appeal of the neighborhood. So, apart from maintenance rules, they also limit the clutter you can put on display. Your HOA will also require you to abide by rules regarding what you can dispose of in the community's garbage and recycle bins.
Before you purchase a home with an HOA, you must learn about the different ways that HOA dues can affect your finances. So, let’s discuss the top 3 ways HOA dues impact your finances!
With time, it’s possible that your HOA dues will either decrease or increase. In the event that they increase rapidly, you may have trouble paying your home loan if you’re not prepared for this possibility.
HOA fees often increase if and when a certain HOA project requires funding. Fees may increase as a result of inflation as well. To avoid being subjected to sudden increases, read about the HOA’s history in your desired area and inquire about any upcoming projects.
Here’s the thing. Your HOA dues cover planned and routine costs only. So, if there are any large projects on the horizon or emergency repairs that require immediate funding, you may have to pay for the additional special assessment as part of your next round of HOA fees. The total cost of these assessments can vary from hundreds to thousands of dollars.
Purchasing a home in an HOA community means you’re agreeing to pay regular HOA dues. If you don’t pay them, you’ll start to fall behind on your financial responsibilities and jeopardize your ability to still be part of the HOA.
An HOA can take out a lien on your property if you don’t pay your HOA fees, which can lead to foreclosure in some instances. Worst of all, collection accounts and public records can appear on your credit reports, too. All of these possible scenarios can make it harder for you to qualify for other loans to purchase another house in the future.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
Depending on your interests and preferences, there are some regulations that you may find overly restrictive while other rules might not seem strict enough for you. So, taking a look at the rules and regulations of the HOA that the home you want to buy is part of will help you decide if that’s where you want to live after all.
*Does not apply to third party fees and closing costs.
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