Purchasing a condominium is a home purchase; however, condo financing differs from conventional single-family home mortgages. Buying a condominium comes with its own set of rules and fees.
From requiring you to follow extra steps in underwriting to boasting specific rules in particular programs, novices stepping into the world of purchasing a condo need to take time to learn more about mortgages. Buyers should consider the ins and outs of condo living before applying for the mortgage.
Here we take a closer look at what condo mortgages are and why they cost higher.
Scoring a mortgage to purchase a condo is a lot different than obtaining a loan to buy a single-family home. Typically, condominium loans boast stricter requirements alongside higher price tags on standalone single-family dwellings.
It is primarily because the value of a condo is subject to many additional risk factors that are not under the borrower's control. Fannie Mae and Freddie Mac ask borrowers to meet higher eligibility standards on condo loans to mitigate the risks.
If you're planning to buy a condo, it's a good idea to familiarize yourself with rates and down payments. Let's take a closer look at why mortgage rates and down payments are higher for condos.
Mortgage rates for purchasing a condo are typically higher than on single-family homes. Even if a borrower purchases them on similar terms, condominium mortgage rates exceed conventional mortgages due to condo mortgages being riskier.
Typically, on mortgages that Fannie Mae backs up, the rate on a condo may vary from 0.125-0.250% (one-eighth to one-quarter percent) higher than what you'd pay on single-family homes. Fannie Mae requires lenders to pay an upfront fee of 0.75% of the total loan amount. Here lenders may boost the mortgage rate to cover this fee.
Moreover, borrowers may avoid higher rates by paying the total upfront fee or making down payments totaling up to 25% of the home's purchase price. Unfortunately, condo buyers may find it challenging to score larger down payments, especially if they're novices.
However, if you choose an FHA loan, you may make a smaller down payment of around 3.5% while paying rates similar to when you would pay with larger down payments. The drawback here is that FHA also charges an upfront mortgage insurance fee comprising 1.75% of the total amount, which Fannie Mae loans don't charge.
In addition to this, you'll learn that specific lenders charge higher mortgage rates in different states. Generally, the difference isn't that noticeable. However, you'll find that some states charge half a percent more than other states.
Here's the thing: to enjoy the best rates on Fannie Mae loans, borrowers need to offer at least 25% down on condominiums. On the flip side, homebuyers can get their hands on fantastic rates if they put down less than 20 percent.
Apart from that, specific lenders require borrowers to put down a minimum of 20 percent. However, this may vary from state to state – Florida and Nevada are known for the highest requirements. Some states allow you to enjoy down payments as low as 5% alongside stellar credits.
Moreover, FHA loans ensure down payments as low as 3.5 percent. However, you may still have to put down 10% if you're purchasing a condominium in areas that are newer but lack warranties of 10 years.
Typically homeowners utilize 'conforming' mortgage financing, which means that they're acquiring their loan from government-sponsored entities, Fannie Mae and Freddie Mac. It also indicates that their loan meets both groups' minimum standards.
Fannie Mae and Freddie Mac use 'warrantable' to classify the different condo projects and properties against which they'll provide a mortgage. On the flip side, the term 'non-warrantable' refers to Condo projects and properties that fail to meet Fannie Mae and Freddie's Mac warrantable standards. Let's discuss what classifies as warrantable and non-warrantable.
Fannie Mae and Freddie Mac consider condos warrantable if:
Condos are considered non-warrantable if:
Condos are an excellent investment; however, you must understand the hidden costs of buying one:
While condos promise a maintenance-free life, Home Owner's Association (HOA) or Property Owner’s Association (POA) charge condo owners a monthly, quarterly, or annual fee to cover the property's maintenance. These fees can sometimes increase monthly mortgages up to $500 per month and more!
Condo owners may have to deal with special assessments on top of mortgage payments, HOA dues, property taxes, and insurance. Special reviews refer to extra privileges that HOA requires to cover any unplanned expenses that may occur.
Luxury condos present alongside the beachfront offer fantastic aesthetic appeal. However, these homes usually require homeowners to pay an additional cost.
Today, more and more people are purchasing condos, from retirees to investors. It's no surprise that condos are growing in popularity for their benefits; ensuring you can enjoy a maintenance-free life and offering you the opportunity to build a community. You can even benefit from excellent amenities like fitness facilities, pools, spas, and even cafes!
While condo mortgage rates are different from single-family home loans, there are ways you can score fantastic interest rates. Make sure you spend some time contemplating other condos in various states before making your final purchase.
When you’re in the process of buying a home, you’ll often work with a single real estate agent who will help you to find the perfect place for you and your family to call home. But did you know that there’s a way for real estate agents to share information with one another about available properties in order to better serve homebuyers and sellers?
This special arrangement is called a multiple listing service, also known as an MLS. With 64% of the National Association of Realtors claiming to use MLS listings regularly, the concept is very widespread.
Today, we’ll explore what an MLS entails and how it benefits real estate agents, buyers, and sellers alike.
Essentially, an MLS is a privatized database that can be accessed and edited by active real estate agents and brokers. The goal of a multiple listing service is to help real estate professionals connect their clients with high-quality listings that might fit their needs, even if they’re outside of the agent’s brokerage.
Though the concept of an MLS was originally created solely for real estate pros to share information with each other, the databases have developed over time to become an important resource that agents can use to share properties directly with their clients.
MLS listings will include vital information such as:
Depending on the MLS listing, other information will often be included as well, such as the age of the property or disclosures regarding the property’s condition. Information like this can give buyers a better understanding of what’s available in their desired area so that they can make more informed choices.
The databases include family homes and open properties as well as condos, foreclosures, and international properties. Rentals will occasionally be included as well.
If sellers do not list their properties through a real estate agent, their home will not be included on an MLS. Likewise, any property that is listed through an agent will be included on an MLS.
If you’re in the process of buying a home, know that the vast majority of properties for sale will be available for you and your agent to peruse together on a multiple listing service. Even so, MLS online listings aren’t the same as home-buying websites.
Real estate organizations across the country have been allocating millions of dollars toward the development of comprehensive, helpful multiple listing services. Some of this information gets forwarded to sites that list houses for sale, but the most complete and accurate information is often in the MLS.
Therefore, it benefits sellers, buyers, and real estate professionals to utilize an MLS for their buying and selling needs.
MLS databases allow the property seller’s real estate broker to achieve a wider reach for the property, increasing their chances of finding the right buyer and selling the property for the right price. Similarly, using an MLS can help a buyer’s broker widen the variety of options that they can show to their clients.
In a sale created from exposure via the MLS, both the buyer’s agent and the listing agent will share a piece of the commission. An MLS acts as a kind of neutralizer that allows both small and large real estate companies to interact with one another on an even playing field.
At the same time, sellers and buyers who don’t have real estate training will come away with a positive experience. It results in both parties getting to receive what they wanted at a price that’s fair for everyone involved.
Multiple listing services are reserved for sellers and serious buyers who are represented by an agent. A realtor license number is required for access. Real estate professionals pay dues regularly in order to keep up the legitimacy and accuracy of MLS databases.
However, many real estate companies will display current MLS listings right on their website for potential buyers to peruse. Should a potential client hire a real estate agent or broker for assistance in buying a property, they will gain access to the MLS that the company belongs to by way of their agent.
If you’re interested in buying a home, perusing an MLS is not your only option. There are several other popular real estate websites and apps available, including Zillow, Trulia, and Redfin. All of these alternatives allow potential buyers to find out what’s available in their area without requiring the services of a real estate agent.
Available homes can also be listed on sites dedicated to listings that are for sale by owner (FSBO). However, since these homes are sold without real estate representation, they won’t be available on an MLS. Instead, they may only be available on a limited number of third-party real estate sites.
Additionally, large real estate firms in busy markets will often have their own websites that are dedicated to their listings, which potential buyers are free to check at any point in time.
Pocket listings are properties that real estate agents keep “in their pocket” by only sharing them with specific potential buyers and a select few agents. In a sense, these listings are kept secret by not being included in any MLS listings or third-party real estate websites. Most pocket listing homes don’t even display a “For Sale” sign publicly.
Navigating the housing market can be difficult without the help of a real estate agent or a broker. Once you’ve hired a professional to aid you in the process, an MLS can be a crucial part of finding your family’s perfect home or securing the right buyer for your property!
In times of economic hardship, like the present economic events caused by the COVID-19 pandemic, many homeowners struggle to meet their mortgage payments. Employers end up cutting back work hours, causing financial circumstances to become very unpredictable.
Whether you are facing financial instability because of the pandemic or unrelated life events, there are ways to work with your lender and save your home from foreclosure. One of the most accessible short-term solutions is forbearance.
Mortgage forbearance is an agreement between a homeowner and their lender that allows the homeowner to suspend or lower their monthly payment amounts for a set period of time. If you are in the process of finding new work or you are temporarily making less money per month than before, forbearance can give you a temporary break from your regular monthly mortgage payments while you get back on your feet.
Each lender treats mortgage forbearance a little differently. It’s important to note that forbearance doesn’t permanently lower your mortgage payments and you will still owe amount of money that you don’t pay during the forbearance period to your lender.
Whether or not you qualify for forbearance depends on your lender and your loan type. For example, government-backed loans are treated differently than private loans. No matter your situation, clarity and initiative are key.
Set up a meeting with your lender as soon as you can so that you can settle on a plan before you miss any payments and subsequently damage your credit. Providing proof of the events that led to financial hardship, like your bills or proof of your loss of income, will give them information they need to understand and reasses your situation.
The payment plan for your loan after forbearance is up to the entity that actually owns your loan, which in almost every case is different from your lender. For example, Fannie Mae and Freddie Mac both offer standardized repayment plans. Currently, they each allow up to twelve months of forbearance under the CARES Act, which we’ll cover momentarily.
The payment plan and repayment options for privately-backed mortgage loans will vary depending on which entity owns your loan. Contacting your lender to find out who owns your mortgage loan will help you better understand your repayment options.
Since so many homeowners have faced financial hardship due to COVID-19, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act applies to any loan owned by the government entities like Fannie Mae and Freddie Mac.
The CARES Act has made it possible for homeowners to use forbearance plans to pause or reduce their mortgage payments if they are struggling to meet their mortgage due to the economic impact of COVID-19. Home loans backed or insured by Fannie Mae, Freddie Mac, HUD, the VA, or the USDA are covered under the CARES Act during the COVID-19 pandemic.
Homeowners with federally-backed loans covered by the CARES Act can repay their mortgage after forbearance in one of many ways. One option is to submit a lump sum payment that covers the missed amount in full at the end of forbearance.
However, this often isn’t always feasible option for those struggling financially. That’s why options like a short-term repayment plan, where you pay an additional payment each month along with your mortgage, or an extended loan modification, which extends your loan term and adds the missed payments to the end of your loan, exist.
Borrowers who can’t afford their mortgage at its current interest rate and monthly payment value may be eligible for a flex modification option. This is available on a case-by-case basis and it will change your loan terms in a way that works for both you and the lender.
Private lenders offer similar options to the ones listed above, but their repayment plans vary depending on the bank or institution. Contact your lender to get more information about who owns the loan and the available forbearance options.
Mortgage forbearances or deferments will not hurt your credit. However, it’s crucial to arrange an agreement with your lender as soon as possible. Mortgage payments that go unpaid for more than 30 days without an explanation are typically reported to credit bureaus.
At that point, your missed payments will hurt your score. The sooner you talk to your lender, the better your chances are of finding a viable solution before you start missing your payments.
To understand whether or not you should look into mortgage forbearance, it’s important to compare it with a loan modification. Forbearance is a temporary fix that only suspends your payments for a set amount of time. Plus, the missed payments are still due to the lender after the forbearance period is over.
A loan modification is often an option for those who are already in default on their loans because they have missed payments. Homeowners are eligible for loan modifications on a case-by-case basis. With a loan modification, the terms of their loans will be changed in a way that works better for their financial situations. Typically, this extends the length of the loan but even so, it gives them more time to pay off their loan in smaller doses.
Mortgage forbearance can help a homeowner during times of financial stress or instability by suspending or reducing monthly payments in a way that won’t negatively affect credit score or lead to foreclosure. Homeowners will still have to repay the missed amount eventually, but with forbearance, they have more time to find a job or save up the money they need in order to make regular payments again.
If you think forbearance might be a good option for you, don’t hesitate to reach out to your lender. Provide them with details of your financial situation so that they can find a solution that suits your needs when it comes to making payments on your mortgage loan.
Considering the complexities of today’s real estate market, many potential buyers are asking themselves, “Should I buy a house now?” In many places, the current market is a seller’s market, which means that it’s easier than ever for people who are selling their properties to make a lot of money.
However, buyers may need additional financial support to meet a seller’s expectations. Enter the private mortgage. Real estate purchases financed by friends, family, and private institutions come attached to fewer strings than traditional bank mortgages. Private mortgages also allow for greater flexibility in today’s challenging market.
You do not apply for a private mortgage through a bank or a mortgage lender. Instead, private mortgages are just that — private. When you reach out to family, friends, and business acquaintances for support with purchasing your new home, you can benefit from a non-institutionalized private mortgage.
The informal nature of these loans can benefit the borrower immensely but it can also put additional stress on personal relationships. To successfully establish a private mortgage, it’s in the best interest of the borrower to create an interest-forward contract, like a mortgage note or comparable contract, which will ensure that no one ends up getting shorted.
Private mortgages aren’t single-use loans. Borrowers can use these mortgages to purchase a new property or refinance an existing property!
The housing market is in a tricky place as of 2022. It is a seller’s market, which means that buyers need to step up their game if they want to purchase the property of their dreams.
Parties that are interested in securing a private loan should express their interest early on so that they are prepared to make an offer when the right multi-family or residential property comes along.
People who are interested in commercial investments can lean into the potential financial gain of those properties to more effectively secure the financing they need from private sources, too.
Feeling confined by a traditional mortgage? Private mortgage lenders can help borrowers rather than the lenders or banks that the borrowers have worked with in the past.
Private mortgages are popular with lenders and borrowers alike for a myriad of reasons, including the following!
Private mortgages come with higher-than-average interest rates. As such, private lenders can more easily make money off of their investments.
Borrowers may have specific benefits, too, which include shorter approval times and the ability to buy a house with the intention of flipping it.
While private mortgage lenders will still want to consider a borrower’s credit score and pay-back history, the loan approval rates between family and friends tend to be a lot faster than when you apply for loans through banks.
Banks and public lenders require a significant amount of documentation before they will approve a mortgage. With a borrower’s loved ones, their relationship with the borrower will be enough of a character reference for them to base their decision off of.
Buying a house with the intention of flipping it is easier with a private mortgage than with a bank. If borrowers can sell the homes that they finance and flip them for more than the cost of their private mortgage, then they can make a profit on their work without worrying about the limitations and regulations set by a traditional bank.
Banks and public mortgage lenders have risen in popularity for a reason. These institutions have established, federally-directed policies that protect both themselves and their borrowers.
Parties that pursue a private mortgage, both as lenders and borrowers, may subsequently face challenges that the world of public financing doesn’t experience.
There are several drawbacks to choosing a private mortgage as a lender. These downsides include a short payback period and the potential to default on the loan.
One of the greatest private mortgage lender benefits is the chance to arrange for a substantial interest rate. However, the mortgage’s short payback period means that lenders won’t have the chance to benefit from the additional income for too long.
Lenders need to plan out their future finances with care if they want to make the most of a borrower’s interest.
There is always a chance that, despite the financial support that a lender offers, the borrower may default on their mortgage. While the borrower has the opportunity to declare bankruptcy, lenders who are interested in regaining the investments they lost may have to undergo a complicated and costly legal process.
Likewise, there are several drawbacks of a private mortgage for borrowers. These include an even shorter payback period and higher interest rates.
Traditional mortgages often allow the borrower to pay back the loan and the interest over a term of thirty years or more. But this isn’t the case with private mortgages which have a notably shorter payback period.
As such, borrowers will need to manage their finances carefully to prevent bankruptcy as the result of taking out a substantial loan.
Even though they are established in an informal environment, private mortgages still require paperwork in order to protect a private mortgage lender’s interest. As such, these loans will also likely include interest.
While borrowers can avoid the complexity of working with a bank or other institution, they’ll face interest rates that are substantially higher if they choose to go the route of a private mortgage. This cost can transform a borrower’s financial plans both for the immediate future and for life down the road.
Borrowers and lenders alike can use private mortgages to their advantage. To ensure a mutually beneficial arrangement, both parties may want to establish an interest rate in writing and plan for things to go awry.
All lenders establishing private loans must require their borrowers to pay interest equal to the IRS Applicable Federal Rate. Many lenders are encouraged to charge more, both for the borrower’s tax benefits and for their own financial gain. With that being said, the exact amount of interest that a private mortgage lender charges is up to the individual.
Both the borrower and the lender will then want to establish their fixed tax rate in writing to ensure that it’s easier to report on legal financial documents. It will also prevent either party from attempting to change the fixed rate later on down the road.
Lenders and borrowers alike face a distinct risk of financial disaster if they improperly handle a private mortgage. That’s why both parties will want to establish contingency plans during their initial conversations.
Writing in provisions for borrower defaults and missed payments can keep the relationship between a borrower and lender civil without compromising either party’s financial standing.
Private mortgages benefit lenders and borrowers alike. As long as all parties involved in the process make financially-sound decisions, you won’t need to ask yourself, “Should I buy a house now?” for long. Sit down with your friends, family, or a private institution to determine whether a private mortgage lender agreement can help you purchase the property of your dreams.
If you’re looking to buy a house, and do not have a mountain of cash saved up, you’ll need to consider getting a mortgage to help you finance this large expense.
But what exactly is a mortgage? Simply put, a mortgage is a debt instrument used to purchase real estate. A lender will loan a borrower money, and the borrower is obligated to pay the lender back.
An agreed upon repayment plan is established between both parties, and various terms and conditions must be met.
If you're wondering, how does a mortgage work - we’ll start at a high level and break it down step by step. A borrower borrows money from a mortgage lender and agrees to pay the mortgage lender back the full amount of the loan, plus any interest expense. The lender conducts their own research on the borrower before agreeing to lend them money.
There’s a lot of parties and terminology involved in the process.
The first step in getting a mortgage is to work with a licensed loan officer. Be sure whoever you are working with is licensed and registered to sell mortgages.
Loan officers help answer how to get a mortgage, and they’ll assist you with a variety of tasks. They’ll help you determine which mortgage works best for you, will shop for the best interest rate, and will even assist you with all the paperwork you need to complete. We’ll get into more of these details below.
You can select from a variety of mortgage options, each of them serves a purpose. A common option is a fixed-rate 30-year mortgage. This means for the duration of the loan, 30 years, the borrower will pay a fixed interest rate and payment each month. This fixed rate concept can also be applied to other mortgage options, such as a 15-year mortgage.
The following are some common words associated with mortgages and mortgage transactions.
A down payment is simply the amount of money you put down on your home. If the price of the home is $300,000 and you put down $30,000 as your down payment, you put down 10%. Various mortgage types will require a specific percentage for a down payment.
The interest rate is what the lender charges you for borrowing their money, in addition to the principal balance. This rate is referenced as a percentage. For example, a borrower with a fixed interest rate of 3.5% will pay that flat borrowing fee for the life of their loan.
Your loan can have a fixed interest rate, meaning it doesn’t change for the duration of the loan. Or, your loan may have an adjustable interest rate, meaning it can change over time. The lower the rate, the more favorable borrowing money is.
What's the difference between an interest rate and an annual percentage rate (APR)? Find out here!
This is a trickier concept, but amortization is the process of gradually writing off the initial cost of an asset. Remember, someone gets a mortgage for a given period of time. In the early years of the mortgage, the borrower’s payments fund mostly interest expenses.
As the years progress, the borrowers interest expense lessens, and more of their monthly mortgage payment is allocated to the principal balance. Visually seeing this may help paint a clearer picture.
Escrow is another common term used in the mortgage or real estate industry. Escrow is a contractual arrangement where a legal third party receives, holds, and distributes property or money for two parties. Escrow is essentially an unbiased middleman between the buyer and seller, or the buyer and an insurance company.
A buyer gives the escrow agent money to hold, and the homeowner selling their home gives the escrow agent the home. When the sale is finalized, the escrow agent gives the new homebuyer the home and the former owner the money. If the deal doesn't go through, the escrow agent is obligated to give the buyer back their money and the home goes back to the seller.
If you’re curious how to calculate a mortgage payment, there are a few components that give you the final monthly number.
The principal balance is the initial balance of the loan. Using the same example as above, if the home was $300,000 and your down payment was $30,000, or 10 percent, you borrowed a total of $270,000 from the lender - which is the principal balance. Each mortgage payment reduces the outstanding principal balance. The more principal balance you reduce, the more equity you have in your home.
Interest is the fee a lender charges you for borrowing the principal balance. The lower the fee is, the less money you pay. If you have a great credit score, a low debt to income ratio, and put down a sizable down payment, you’ll likely have a more favorable, or lower, interest rate. If your credit score is less than average, and you’re not putting down a large down payment, you may have a higher interest rate.
The interest rate changes with various government involvement and economic conditions. But if you have a fixed rate interest rate, you’re locked into that rate for the life of the loan. Only when your mortgage is an adjustable rate mortgage do you have to worry about your payments being volatile.
Taxes vary by state, county or even on a town level. The tax rate is also referred to as a mill rate. Some mortgage companies allow you to roll your tax expense into the monthly mortgage payment, utilizing the escrow system we discussed above. If your taxes aren’t rolled into the monthly payment, you’ll be responsible for paying your town directly.
Similar to car insurance, you must carry insurance on your home. How much you pay in insurance will vary, just as it does on a car. Variables that impact the insurance expense include; crime rate in the area, if the house has a pool, if the house is in a flood zone, and the value of the property.
Mortgages are not one size fits all. There are various types of mortgages you can choose from. Each one has a purpose; your goals, financial situation and comfort level will dictate which loan is right for you.
A conventional mortgage is a loan that is not secured by a government agency. Conventional mortgages are common, but they typically come with a higher interest rate as they are not insured by the federal government. A private lender, or Fannie and Freddie Mac issue conventional mortgages.
There are three government agencies that can issue a mortgage.
A jumbo loan is used to purchase homes that cost more than what a conforming loan allows. This amount is variable depending on where you live, and can change year over year.
A fixed rate mortgage is when the interest rate on the loan remains the same throughout the duration of the loan. This can be a fixed rate 15 year mortgage, 20 year mortgage, or even 30 years. The interest rate will not change, which makes budgeting easier.
An adjustable rate mortgage is the opposite of fixed rate. When you have an adjustable rate mortgage, your interest expense can go up or down throughout the life of the mortgage. Considering the rate can fluctuate, it makes budgeting a bit more difficult.
Now with a better understanding of the various types of mortgages, how much mortgage can I afford may be the next question on your mind! Remember, the mortgage payment consists of; principal, interest, taxes and insurance. Let’s visit the qualification process.
A lender (or bank) takes a lot of financial variables into consideration when determining your maximum monthly mortgage payment including: your debt to income ratio; credit score; annual household income; and your income potential. Two people with the exact same income can qualify for different mortgage amounts.
Person A makes $80,000/year, has no debt and a high credit score. Person B makes $80,000/year, has a high debt-to-income ratio, and a lower credit score. The lender is likely more inclined to lend person A more money, as they have more confidence person A has the ability to pay them back.
Your lender, and various financial calculators, can figure out what your monthly mortgage payment is. But, it’s important to fully understand what that number is made up of.
Remember, your mortgage payment consists of; principal, interest, taxes, homeowners insurance, and potentially mortgage insurance. You’ll have to understand what the annual amount of each of those expenses are and divide by 12 to get your monthly rate.
The formula can get a bit complex considering the math you’ll have to do on the interest rate. It’s best to know what variables make up your mortgage amount and leverage an online calculator to get the final amount.
Wondering what fees and costs you'll have to pay at closing? Find out here.
Getting a mortgage doesn’t need to be complicated. In fact, in today’s modern world, you can get a mortgage right from the comfort of your own home.
The first step is to get pre approved for a loan. To do this, find a trustworthy lender you’re comfortable working with. All lenders will require a bit of paperwork from you. This includes bank records, pay stubs, insight into your expenses, identification, etc. Supply the lender with accurate records, and within a few days you’ll be pre approved for a specific mortgage amount. You’re now ready to start shopping for a home!
Armed with the pre approval letter, real estate agents will be willing to take you on as a client. The pre approved letter helps you and the real estate agent determine what homes are in your price range.
You can look for homes in your desired price range and area from just about anywhere. Zillow and Trulia are popular real estate sites that will show you homes based on whatever criteria you give them.
Once you find the right place to call home, it's now time to finalize your loan. You’ll submit an offer to the seller, and if they accept, you’re ready to progress to the next step. Pending approval, you’ll go back to your lender and begin the loan finalization process. This includes getting the home appraised, inspected, and one final review of your financials.
The lender wants to be certain your debt to income, and credit score, remains aligned with what they saw when you were pre approved.
If everything aligns, you’ll be ready to close. Generally speaking, there is a bit of a waiting period between submitting your offer, getting it accepted, and officially closing on the loan. Both the buyer and the seller will agree to a closing date at some point in the near future. Once that day comes, you’ll do one final walk through of the home before officially closing.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
A mortgage is a debt instrument used to help finance real estate purchases. Everyone has a different financial history, and various financial goals, so there are many different mortgage options you can choose from. Some mortgages have an adjustable rate, whereas some mortgages have a fixed interest rate. The duration of the loan can vary as well.
Buying a house and obtaining a mortgage is a huge financial decision. It’s best to work with a professional throughout each process. They’ll help answer any questions that come up along the way, and will provide guidance where appropriate. Be sure to only work with licensed mortgage brokers when applying for a loan.
Have you decided this is the year to buy a new home? Good for you! When you begin your research for the right mortgage loan for you, you’re going to be focused on finding the lowest terms and interest rates for which you qualify. It’s no surprise, then, that for many soon to be homeowners, the lower payments available with a balloon mortgage are alluring. Balloon mortgages have some great benefits for the buyer, but they also come with significant risks as well. Before you become convinced that a balloon mortgage is the right option, it’s important to do your homework.
Balloon mortgages get their name from the fact they include a lump sum payment - or “balloon” payment - at the end of the loan. Balloon mortgages also differ from traditional mortgages in that they are a shorter loan; usually no more than 10 years, unlike a traditional loan of 15 to 30 years. The monthly payments are smaller for balloon mortgages than in traditional loans because they are either partially or entirely comprised of interest payments only, rather than the combination of interest and principal payments one makes on a traditional mortgage loan. While the interest-only payments alone can be very appealing, it’s important to look at all the angels on a balloon mortgage before determining if it is the right solution for you.
In a traditional mortgage, the loan is amortized over the length of the loan (typically a 15- or 30-year term), which is a fancy word for saying that the principal and the interest of the loan will be paid in full at the end of the loan’s term. With a balloon mortgage, there is no amortization.
The borrower makes a small monthly payment, based upon the fact they are only paying the interest due on the loan or a small amount of the principal and a majority of interest. While small payments may sound like a great benefit, they can amount to one big drawback; a large sum payment due at the end, typically tens or even hundreds of thousands of dollars. While there’s typically no penalty for making payments toward the balloon amount early, the large sum can make it challenging for home owners to meet the terms of the loan, and so they usually sell the home to pay back the amount due.
So how does a balloon mortgage work? Balloon payments can function in a couple of different ways. The two varieties include interest only balloon mortgages and interest with small principal payment balloon mortgages.
Let’s say you are interested in a 10-year fixed-rate, interest-only balloon mortgage for an amount of $150,000 at an interest rate of 5%, and you have a down payment of $5,000. In this scenario, you would be looking at a monthly mortgage payment of around $780.00. That’s a reasonable payment, right? It certainly is, but don’t forget, all you’re paying is interest; none of that amount goes to principal, and when the 10 years is over, you still have to pay all that untouched principal back to the tune of roughly $120,000.
Even with a balloon mortgage where you had the same terms as above but were paying an additional amount of $500 a month toward the principal, you’d still be looking at a balloon payment amount of approximately $40,000 at the end. That’s a significant amount of money to come up with for anyone. This is why most borrowers typically end up selling the property at the end of the loan.
When it’s time to pay the piper, the borrower is expected to pay the balloon payment amount to settle the mortgage, and as we’ve seen, that can be a hefty bill. However, there are a few other options available to settle the mortgage other than writing a large check.
One of the more common solutions to dealing with a large payment is refinancing the remaining balloon payment into a new mortgage either with the original lender, or with a new one. If you were diligent about making your payments on time, have maintained a healthy credit score, and the home itself is of greater value than the amount owed, chances are good you would be able to utilize this option.
It’s also possible your balloon mortgage might include an option to delay the payment provided there is no additional mortgage on the property and you’ve been diligent about making all your previous payments on time.
You can, but you’ll want to check the terms of your mortgage and see if there is a penalty for doing so before you do. When you make the balloon payment early, the mortgage lender loses out on the interest they would have made on your monthly payments, so it’s possible they could have a penalty clause for early payment.
If your mortgage does have a penalty clause, however, it’s still worth getting out your calculator and doing some math. Depending on where you are in the mortgage schedule, it’s possible that the penalty charge might be a better savings for you than continuing to pay the remaining interest payments, so weigh the difference when determining your actions.
Prior to the mortgage crisis of 2008, balloon mortgages were much more prevalent, in part because of more lax qualifying processes that led to borrowers seeking homes that would normally be out of their price range. While balloon mortgages are still available and even make sense in some circumstances, there are drawbacks, and it’s important to take a look at these when deciding if a balloon mortgage is for you.
Balloon mortgages seem like an ideal scenario going in, but they can be very difficult to get out of. Many borrowers who decide to pursue a balloon mortgage go into the loan thinking they will have years of low monthly payments and then easily convert to a standard fixed-rate or adjustable rate mortgage prior to the lump sum payment coming due. Unfortunately, this isn’t always the case. If the value of your home has depleted since you purchased it or if your financial circumstances have changed, refinancing can be a difficult proposition.
These potential hiccups create real risks of foreclosure for both borrowers and lenders. While qualifying for a balloon mortgage is easy, extricating yourself from one can be troublesome.
If you go into a balloon mortgage thinking it will be a cinch to refinance your loan to a standard mortgage prior to the lump sum coming due, think again. Just like traditional mortgages, refinancing rules have become more rigid since the subprime mortgage crisis, and most expect the borrower to have at least 20% equity in their home in order to qualify. If you had a small down payment and have been paying an interest only balloon mortgage for years, you won’t be anywhere close to having 20% equity in your property. While programs like HARP (Home Affordable Refinance Program) might be able to offer some assistance, this program also has some specific qualifying standards.
While some groups warned about the impending subprime mortgage crisis, many borrowers were caught completely unprepared when the bottom fell out. Changes in the market and fluctuating property values can happen quickly, and if you have an interest only balloon mortgage, you can end up being upside down on your loan because of them. Refinancing a loan can prove exceptionally challenging in these circumstances.
Building equity is a valuable part of home ownership as is building your own investment in the property. One of the biggest drawbacks of an interest only mortgage is that if you’re not paying any principal on your loan, you’re not building any equity in your home. This makes refinancing or qualifying for a different mortgage difficult, and does little to boost your own financial position.
While there are many drawbacks to a balloon mortgage, they exist for a reason, and can be a very smart choice for someone in the right position to make the most of their benefits.
If you’ve grown tired of renting and don’t have a significant downpayment saved, a balloon mortgage can be a smart way to get into the home you’ve always wanted. It’s also a valid choice if you’re working on getting your finances in order, as balloon mortgages don’t have the same stringent credit requirements that more traditional loan programs have.
The feature that attracts most people to balloon mortgages is that they offer considerably lower monthly payments than traditional mortgages. If you’re working on getting other bills paid down or the house you purchased needs some significant renovations and upgrades, paying smaller mortgage payments for several years can free up the cash flow needed to achieve these goals while still providing the luxury of being a homeowner.
Another draw of a balloon mortgage? Their shorter loan terms. Most balloon mortgages are for five, seven, or ten years at most. If you know you’re only going to be in a home for a few years, having small monthly payments and selling the home before the balloon amount comes due could be a winning solution for you. If you’re confident you will be able to pay the balloon payment at the end of the loan, balloon mortgages also make sense, because you will own your home free and clear within a relatively short time.
While balloon mortgages are certainly not for everyone, they can be a great fit for people in specialized circumstances and for those who are confident the large balloon payment won’t be an issue.
For real estate investors, balloon mortgages can be a great solution. They allow for small monthly payments, a short-term loan, and the bandwidth to pay off the remainder of the mortgage once they’ve sold or “flipped” the house.
Buyers who plan to receive a large sum of money from an inheritance or an investment in the near future and are looking for a shorter term commitment to a house will also likely find that balloon mortgages could be the golden ticket to home ownership, as they can plan the terms of the large sum payment to coincide with their windfall.
Ultimately, balloon loans are like a pair of running shoes: wonderful when they fit perfectly, troublesome when the fit is just a little off. There is no doubt that they are a great deal riskier than traditional loans, but if you’re ideally looking to have the lowest payments possible and are comfortable with either paying the large balloon payment or finding a way to refinance it, it could be the ideal solution for you.
A home doesn’t just fall into foreclosure status. There are stages and processes that take place behind the scenes before a home is sold via foreclosure. One of those steps is known as pre-foreclosure.
No one ever wants to experience foreclosure. Understanding the pre-foreclosure processes and which options are available to you as a homeowner is important. We’ll be covering everything you need to know below.
What does a pre-foreclosure mean? Before unpacking that question, let’s take a step back and review what a foreclosure is.
A foreclosure is when a lender enters the legal process of seizing property because the owner has not lived up to their contract by paying the mortgage. This is a legal right that the lender holds, and this right can be found within the original closing documents.
A pre-foreclosure is what occurs before the house actually goes into full legal foreclosure. If a homeowner were to ever fall behind on the mortgage, the mortgage company would likely make numerous efforts to collect their money.
This includes sending letters to the homeowner and contacting them by phone to discuss payment options. If their communication efforts are left unanswered, the lender will have little choice but to move forward with the pre-foreclosure and foreclosure processes.
If you are late on a single payment, generally speaking, your home will not move into the pre-foreclosure status. Depending on which state a home is in, lenders are unlikely to move forward with this process until the homeowner has fallen behind on their mortgage by about three to six months.
If or when that occurs, the lender executes the first steps of the pre-foreclosure process. The pre-foreclosure status is essentially a time clock between the homeowner and the lender. If the outstanding balance isn’t paid in full within a specific period of time, the lender moves forward with the foreclosure and reclaims the property.
If you own a home and it’s in pre-foreclosure, you still have options. There are measures you can take to avoid your home going into foreclosure. Let’s take a look at some of them.
One of the first options you can try is modifying your existing mortgage, especially if you purchased your home years ago when interest rates were higher. Refinancing your home with a lower interest rate can save you money each month.
A short sale is another option you may want to consider if your home is in pre-foreclosure. Many mortgage lenders do not like to hold onto or sell physical real estate themselves. Therefore, they may be inclined to do a short sale.
A short sale is when the homeowner sells their home at market value, typically for less than what they owe on it. For example, if the outstanding mortgage balance is $280,000, the lender and homeowner can join together to sell the property for $250,000.
The homeowner isn’t responsible for the $30,000 difference, but it is very likely to negatively impact the homeowner’s credit score as well as their ability to buy another home in the near future.
A deed in lieu of foreclosure is when the homeowner signs the deed over to a mortgage company. In exchange, the mortgage company will forgive the debt. Like a short sale, this will result in the loss of the home and subsequently require the homeowner to move.
Forbearance is when the mortgage company agrees to stop collecting monthly payments for a specific period of time. However, once the period of time has elapsed, the mortgage company can require the homeowner to pay the outstanding balance in full in the form of a one-time payment or in combination with another repayment plan such as a loan modification.
For example, if your mortgage is $2,000 per month and your forbearance period was 4 months, the mortgage company would expect $8,000 at the end of the 4 months
Lenders are also often open to talking about repayment plans. If you temporarily fall behind with your finances due to an unforeseen circumstance, a mortgage company may be willing to work with you in this way.
For example, if you were injured and your injury made it impossible for you to work, then that situation would prevent you from earning an income. A mortgage company may be willing to accept smaller payments or interest-only payments for a set period of time until you are able to return to work
Pre-foreclosure is not only on the homeowner’s mind. It can also be something a homebuyer is looking for. If you’ve ever shopped for homes online, you’ve likely seen homes in pre-foreclosure. But should you buy them?
Let’s explore what it means to purchase a pre-foreclosure home.
Pre-foreclosure homes, or homes soon to be in foreclosure, are generally priced below their market value. The reasoning is simple: the lender likely wants to get back at least what is owed on the home. Remember, lenders are typically in the business of buying and selling physical real estate properties.
If the home was initially purchased for $400,000, and the existing mortgage value is $250,000, the lender may just be interested in recovering $250,000, rather than trying to get the current market value of the home. In such cases, you may be able to get a great deal on a house you couldn’t otherwise afford.
Even though the house may be priced well below market, it might not be in your best interest to purchase the property. If the homeowner fell behind on their mortgage payment, they may not have had the money to maintain the home.
There could be mechanical issues with various appliances, the roof may be in terrible condition, and any repairs that were done to the home may have been done incorrectly or unsafely just to save money. This is not true for all homes with a pre-foreclosure or foreclosure status, but it can certainly apply to many of them
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
Whether you're a homeowner facing a pre-foreclosure situation or a homebuyer looking to purchase a home in foreclosure, you should be aware of your options. A real estate transaction on both the buying and selling side can have lingering side effects. Knowledge is power, and knowing your options can help you avoid making costly mistakes.
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.
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!
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.
*Does not apply to third party fees and closing costs.
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