Aaron Wluka's Blog
Most homeowners would love to be able to pay off their mortgage early. However, few see it as a possibility when they take into account their earnings and other bills.
There are, however, a few ways to pay down your mortgage earlier than planned. But first, let’s talk about when it makes sense to try and pay off your mortgage.
When to consider paying off your mortgage early
If you recently got a promotion, have someone move in with you who contributes to paying the bills, or recently got a secondary form of income, you might want to consider making extra payments on your mortgage.
However, having extra money doesn’t always mean you should spend it immediately on your home loan.
First, consider if you have a large enough emergency savings fund. It might be tempting to try and throw any extra money at your mortgage as soon as possible, but there are other financial commitments you should plan for as well.
If you have kids who will be applying to college soon, remember that student aid takes into account their parents’ finances. If your children plan on applying to institutions with high tuition, then your equity will be counted against you.
Refinancing to pay your mortgage early
Refinancing your home loan is one option if you’re considering increasing the payments on your mortgage. If you can refinance a 30-year loan to a 15-year loan with a lower interest rate, you’ll save money in two ways--your lower interest rate and the fact that you’ll be accruing interest for less time.
There is a downside to refinancing. Once you refinance, you’re locked into your new payment amount. So, if your higher income isn’t dependable, it might not make sense to commit to a higher monthly payment that you aren’t sure you’re going to be able to keep paying.
There’s also the matter of refinancing costs. Just like the costs associated with signing on your mortgage, you’ll have to pay closing costs on refinancing. You’ll need to weigh the cost of refinancing against the amount you’ll save on interest over the term of your mortgage to see if it truly makes sense to go through the refinancing process.
Paying more on your current loan
Even if you aren’t sure that refinancing is the best option, there are other ways you can make payments on your mortgage to pay it off years sooner than your term length.
One of the common methods is to simply make thirteen payments each year instead of twelve. To do this, homeowners often use their tax returns or savings to make the thirteenth payment. Over a thirty year mortgage, this could save you over full two years of added interest.
A second option is to make two bi-weekly payments rather than one monthly payment. By making biweekly payments you have the ability to make 26 payments in a year. If you were to just make two payments per month then you would make 24 total payments. Over time, those two extra payments per year add up.
If you bought a house that was over $484,350 prior to 2020, you had to get a jumbo loan, which is a non-conforming loan. The Federal Housing Finance Agency (FHFA) increased the limit on conforming loans to $510,400 in most areas. The FHFA also increased the loan limit to $765,600 in some high-cost areas, which include Alaska, Guam, Hawaii and the U.S. Virgin Islands. FHFA increased the loan limit for conforming loans because home prices increased by an average of 5.38 percent from the third quarter of 2018 to the third quarter of 2019.
What is a Conforming Loan?
A conforming loan follows standardized rules set by the Federal National Mortgage Association (FNMA / Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC / Freddie Mac). The two companies are government-sponsored, and they drive the home loan market. The most common standardized rule is the loan limit. Still, the two organizations dictate how much a loan-to-value ratio can be, your debt-to-income ratio, higher interest rates based on your credit score and what documentation you might need for a home loan. A conforming loan must also have private mortgage insurance (PMI) if the down payment is less than 20 percent.
Jumbo and Other Non-Conforming Loans
Banks do not like to write non-conforming loans because they cannot sell those loans to Fannie Mae and Freddie Mac, or most of the other smaller organizations that buy loans. The most common non-conforming loan is a jumbo loan – a loan that is outside the loan limit, which is increasing for 2020. Other types of non-conforming loans might include loans for people who do not meet the debt-to-income ratio or the loan-to-value ratio. Because those loans are riskier, they often come with higher interest rates. Generally, you must also have a very good credit score to qualify for most non-conforming loans, especially jumbo loans.
While some states and territories were mentioned as high-cost areas above, some places in the continental United States are also considered to be high-cost areas. Washington, D.C. and some parts of California have the higher limit of $765,600 for 2020 because the prices of single-family homes are higher than average.
Qualifying for a Jumbo Loan
To qualify for a jumbo loan, you’ll have to jump through more hoops. Some factors a lender look for include:
A credit score of at least 700. Some lenders require a score of at least 720.
Your debt-to-income ratio (DTI). While non-conforming loans may go outside the typical DTI, some lenders might refuse to go over 45 percent.
The lender might require you to have cash reserves of several months to a year in the bank.
The lender might require extensive documentation. You might have to supply your complete tax returns and several months of bank statements for a jumbo loan.
Lenders might require a second appraisal of the home.
A larger down payment.
You might get a higher interest rate, depending on the lender, your financial situation and market conditions.
Closing costs are often higher because of the extra steps you must go through to qualify for the loan.
As with any loan, shop around for a jumbo loan instead of jumping at the first loan offered.
When financing a home purchase, one of the most basic decisions to make is where to get your mortgage from. The basic options are whether you should go to a mortgage lender or not. Financing with a mortgage lender has both pros and cons.
Pro: Many Loan Options
If you go to a mortgage lender, you’ll find that they offer a great amount of choices. These are essentially brokers for various underwriting companies, and they offer many loan options. You’ll also have a wide variety of mortgage setups to choose from. Whether you want a 15-, 30- or 40-year fixed or some sort of variable loan, you can likely find it through a lender.
Pro: Might Be Able to Negotiate
The choices that mortgage lenders provide sometimes make it possible to negotiate with potential lenders. If you can pit multiple lenders against each other, you might be able to get a lower interest rate or complimentary points on your loan. A lender might even try to negotiate on your behalf.
Pro: Knowledgeable Guidance
At a mortgage lender, you’ll work with a loan officer whose sole job is to help homeowners find mortgages. They’ll be knowledgeable and able to provide you with informed guidance throughout the loan application and selection process.
Con: Might Not Be Local
Should you shop loans with a mortgage lender, it might not be someone local to your area who’s providing assistance. Often mortgage lenders service people across a state and even maybe in multiple states. As a result, there’s a good chance you won’t ever meet them in person.
Con: Might Sell Your Loan
Ultimately, mortgage lenders are in the business of underwriting and managing mortgages -- and that’s not necessarily the customer service business. If a lender deems it financially prudent to, they’ll sell your loan to another lender. Not only will you not deal with the same person or office, but you might not even deal with the same company down the road. Since mortgages last many years, there’s a chance yours could be sold multiple times.
Finding a Mortgage is a Personal Choice
A mortgage lender may be a good option if you’re looking for a great deal on a home loan, but they don’t offer a personal touch. If you want someone in your area and prioritize personal service, a credit union or other more local institution might be a better alternative for you. The decision to go through a mortgage lender or another place ultimately depends on what type of experience you want.
If you’re a first-time homebuyer, odds are you’ve thrown the words “prequalified” and “preapproved” interchangeably. However, when it comes to home loans, there are some very important differences between the two.
For buyers hoping to purchase a home with a few missteps and misunderstandings as possible, it’s vital to understand the procedures involved in acquiring financing for a home.
Today, we’ll break down these two real estate jargon terms so that you can go into the mortgage approval process armed with the knowledge to help you succeed in securing a home loan.
Let’s start with the easy part--mortgage prequalification. Getting prequalified helps borrowers find out what kind and what size mortgage they can likely secure financing for. It also helps lenders establish a relationship with potential customers, which is why you will often see so many ads for mortgage prequalification around the web.
Prequalification is a relatively simple process. You’ll be asked to provide an overview of your finances, which your lender will plug into a formula and then report back to you whether or not you’re likely to get approved based on your current circumstances.
The lender will ask you for general information about your income, assets, debt, and credit. You won’t need to provide exact documents for these things at this phase in the process, since you have not yet technically applied for a mortgage.
Prequalification exists to give you a broad picture of what you can expect. You can use this information to plan for the future, or you can seek out other lenders for a second opinion. But, before you start shopping for homes, you’ll want to make sure you’re preapproved, not prequalified.
After you’ve prequalified, you can start thinking about preapproval. If you’re serious about buying a home in the near future, getting preapproved will simplify your buying process. It will also make sellers more likely to take you seriously, since you already have your financing partially secured.
Mortgage preapproval requires you to provide the lender with income documentation. They will also perform a credit inquiry to receive your FICO score.
Mortgage applications and credit scores
Before we talk about the rest of the preapproval process, we need to address one common issue that buyers face when applying for a mortgage. There are two types of credit inquiries that lenders can perform to view your credit history--hard inquiries and soft inquiries.
A soft inquiry won’t affect your credit score. But a hard inquiry can lower your score by a few points for a period of 1 to 2 months. So, when getting preapproved, you should expect your credit score to drop temporarily.
Once you’re preapproved for a mortgage, you can safely begin looking at homes. If you decide to make an offer on a home and your offer is accepted, your preapproval will make it easier to move forward in closing on the home.
Once the lender checks off on the house you’re making an offer on, they will send you a loan commitment letter, enabling you to move forward with closing on the home.
Over the years, mortgage options were likely limited to what a person's local bank was willing to offer him or her. But today's new marketplace provides several fresh opportunities. With the continuous influx of alternative lenders, many homebuyers are now fully ready to connect with lenders all over the nation. Online, they can check out several loan systems to the extent of choosing their preferred way of borrowing.
For the first-timer or homeowner looking to refinance a family homestead, alternative lenders are worth considering as you begin the loan-shopping process.
What is an alternative lender?
Succinctly, an alternative mortgage lender is a non-bank entity that provides you with home loans. These lenders offer homebuyers benefits they won't get if they go through their local banks.
Today's market is getting more intense and saturated with lenders from which to select and brokers who will utilize that extensive knowledge and experience to help homebuyers navigate the arena to get the best mortgage.
Also, you may notice that your bank mortgage options restrict applicants with low credit scores or poor employment history. If you may fall into any of these categories, then you will need to embrace alternative mortgage lenders since they offer you loan options you won't see anywhere else.
Types of alternative lenders
At the onset, when you start your mortgage search, you will come across two categories of lenders. The direct lender and the middlemen. The direct lender is the business that offers some loan products. Credit unions, banks, and a few online lenders belong to this category. The middle man, on the other hand, includes companies whose duty is to bring homebuyers to lenders. Good examples are the brokers and lending marketplaces.
Although alternative mortgage lenders bring people a step closer to homeownership by reducing the high cost of bank loans, they still have their merits and challenges.
- A quick and straightforward application process
- You may receive the funds within a day
- You can get a loan even if you have a poor credit history
- You can develop a good relationship with the lender to get a lower rate perhaps next time
- Most of their loans are usually a large amount
- Some alternative mortgage lenders may charge you hidden fees
Choosing to get your home through alternative mortgage lenders is a personal choice. However, it is exciting to know that there are more options when it comes to financing your home. Before choosing a lender, seek pre-approval from both a traditional lender and an alternative lender.