Buying a home today can be a daunting task. There are so many choices to consider: condo, townhome, single family home, HOA, school districts, commute, the list goes on and on. Add to that the type of mortgage you should get and you may feel like quitting before you even get started. While I can’t help you decide on the type of home you should consider in a blog (I’m better at that in person), with the help of payoff.com I can help you learn the differences between the different types of mortgages to help you make an informed decision.
The Basic Types of Loans
1. CONVENTIONAL / FIXED RATE MORTGAGE
Conventional fixed rate loans are a safe bet because of their consistency — the monthly payments won’t change over the life of your loan. This is your standard, plain-vanilla mortgage.
They’re available in 10, 15, 20, 30, and 40-year terms but 15 and 30 are the most common.
2. INTEREST-ONLY MORTGAGE
Interest-only mortgages give you the option, during the first five or 10 years, to pay only the interest portion of your monthly payment instead of the full payment. You aren’t required do this. This slows down your repayment time but can be useful in a pinch. Afterward, the rest of the mortgage is paid off in full like a conventional mortgage.
3. ADJUSTABLE RATE MORTGAGE (ARM)
There are many different ARMs. The basic idea is that their interest rate changes over time throughout the life of the loan. The rate changes reflect changes in the economy and the cost of borrowing money. A common ARM is called the 5/1 loan — the interest rate stays the same for the first five years and then is free to change for the remaining 25 years.
Special Assistance for Certain Groups
4. FHA LOANS
These are mortgages guaranteed by the Federal Housing Administration. They come with built-in mortgage insurance to protect against the possibility of not being able to repay the loan. The required down payments are smaller with these loans.
5. VA LOANS
These loans make it easier for veterans of the U.S. armed forces, and sometimes their spouses, to buy homes. They don’t require a down payment and are guaranteed by the Department of Veteran Affairs.
More Exotic Types of Loans
6. COMBO / PIGGYBACK
The combo occurs when you put a down payment of less than 20% and take two loans of any type in combination to avoid paying Private Mortgage Insurance.
On a balloon mortgage, you pay interest only for a certain period of time — five years for example — and then the total principal amount is due after this initial period.
Jumbo refers to a mortgage that’s too big for the Federal Government to purchase or guarantee. Currently, the limit is about $700,000. This means that the borrower wouldn’t get the lowest interest rates available on smaller loans.
Now that you have a basic idea of what kind of mortgages are available, you are in a better place to work with your mortgage broker in finding the best type of loan for you. Once you are pre-approved you can begin shopping for your new home with confidence and excitement.
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If you are planning to purchase a home you know you must have homeowner’s insurance in order to apply for a mortgage. But what about a home warranty? A home warranty is not required when you purchase a home. Homeowner’s insurance and a home warranty are two very different things. Homeowner’s insurance covers the structure of your home in the event of a fire, flooding, storms, or other unforeseen tragedies. A home warranty covers certain appliances in the home when they breakdown due to normal wear and tear.
What is covered under a home warranty?
Each home warranty company offers different plans to suit your needs and budget. Much like insurance, you can choose a higher premium in order to have a lower service call amount or deductible and vice versa. Many companies also offer a variation of what the plan covers. One plan may cover only one appliance, another could cover all appliances, and another could cover only plumbing and electric. Sometimes multiple warranties are necessary if you want to cover something extra like a swimming pool.
What if I have a new build?
Most home builders will warranty the structure for a year after purchase, and the appliances generally come with a manufacturer’s warranty. However with any large purchase, always check the fine print and make note of when the warranties are due to expire so you can add or update a home warranty just before expiration.
Can I get a warranty even if my home is older or I have lived in it without a previous warranty?
Absolutely! A home warranty can be purchased at any time no matter the age of the home or the appliances within.
Should I purchase a home warranty when I sell my home?
Yes! Having a home warranty in place when you put your home on the market can give the buyer peace of mind and save you the expense of a post-sale conflict.
What if the home I’m buying does not offer a home warranty?
No problem! Ask your Realtor® for information on a home warranty provider or turn to the internet or friends and family for recommendations. Many companies will offer free quotes so feel free to check with a few to find the one that works best for you. Always read the agreement carefully and make sure everything you want covered is at the agreed upon price.
A home warranty is not a requirement for any homeowner it is simply an added layer of peace knowing you are covered when the hot water heater needs replacing or the A/C has to be serviced. With the stress of everyday life, a little peace of mind can go a long way.
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Buying your first home is an exciting milestone. Buying a home is a multi-step process. The most important step is to insure that your credit score is as high as possible. Your FICO credit score is a three digit number ranging from 300-850. The higher the score, the better interest rate which equates to a lower payment. For a small fee, your credit score is available through myfico.com If your credit is less than stellar there are things you can do to improve it before meeting with a mortgage lender.
- The first step in managing your credit is to familiarize yourself with the credit reports. There are three credit bureaus: Equifax, TransUnion, and Experian. Each bureau will allow you to review your credit report for free once a year. When you are planning on purchasing a home, it is in your best interest to download or print your report from each bureau. If you want to make sure everything is accurate with no intention of buying for a few months or a year, then you should pull your report from a different bureau every few months.
- Once you have reviewed your credit report(s), dispute any incorrect information. Most people find a few discrepancies. It may be as simple as a misspelled name or an account number that has been transposed by mistake. Other discrepancies could be more damaging such as an account or purchase that you never authorized. This could indicate identity theft and should be addressed immediately. Any error could cause your credit score to be many points lower. Using a service like Credit Karma will allow you to review your credit reports, learn your FICO score, and allow you to dispute any discrepancies electronically.
- After you have reviewed your credit reports and reported any inaccuracies, you can begin to build your credit up and improve your score. First and foremost try to pay down or pay off new or high interest credit cards. It can be hard to pay extra on accounts especially when you are short on cash. My best advice is to follow a strict budget, cancel any memberships that aren’t being used or you can go without for a while, and sell items to bring in extra income. The ratio of the balance on your credit cards compared to the credit limit is called your credit utilization ratio. If you have a $1000 limit on a card with a $600 balance, your credit utilization ratio is 60%, which is considered very high. You want to pay down the balances on all of your cards as low as possible. The lower the balances, the higher your credit score will be.
- From this point on make sure you pay every bill on time every month. Even one late/missed payment one month can hinder your credit score.
- Now that you have increased your credit score and cleaned up your credit reports, it is time to meet with a mortgage lender to get pre-approved and start house shopping. The mortgage lender will pull credit reports, verify your income, bank documents and tax filings. We can recommend local lenders that are knowledgeable and can work with individuals with lower credit scores, as well as offer special programs for teachers, police officers, and veterans.
- One last and extremely important tip: Once you have your pre-approval and until you have closed on your new house, do not open any new accounts or make any large purchases. This can hinder the mortgage process and cause you to lose your dream home.
When you are ready to purchase your home, or if you have any questions regarding the home buying process, please give me a call at 970.393.3424 or sign in to my website.
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So many good people experience times in their lives where they face financial adversity. The 2008 recession in particular impacted millions of people. Throughout the course of my career I’ve had to set many people straight on the topic of old debt that I thought I would blog on the topic in hopes to help more people understand their rights and how to make educated decisions.
Step 1: Obtain your credit report. You can do this for free once per year simply by going to www.annualcreditreport.com
Here you will have what is on the three big credit bureau’s: Equifax, Transunion and Experian.
Go thru your entire report with a highlighter and highlight anything derogatory and all “old debt” items you see. Now, you may be surprised on some of the dates you see. For example, let’s say you had a credit card debt of $10,000 dating back to 2008 and the credit card company turned your account off in 2009 and began their collection process. Now you see that same “old debt” but the date says it’s a debt where they stared collections in 2013. How can that be right? Read on.
Step 2: Find your state’s Statute of Limitations. In short, what this means is how long your creditors have to collect on your debt. So go back to the $10,000 credit card debt from 2009. If your state has a statute of limitations of 6 years, they can only go after you until 2015. But now it’s 2017 and you’re still getting collection calls and/or threatening letters in the mail. So many people ask me, “how can they just adjust the date beyond the statute of limitations”? The answer is they can’t, but in the next point I’ll explain what happens.
Step 3: Find out if a law office or attorney bought your debt! It doesn’t have to be a law firm; in fact, many of these companies are nothing more than sales organizations/credit collection companies that simply try to scare people into paying on a debt the original company sold off to them! These are companies that use in many cases, very aggressive, somewhat shady business practices to scare the lights out of you in an effort to collect. They purchased your debt for pennies on the dollar and set up very aggressive campaigns to frighten you into one of a few things: 1. Admitting you owe the debt. When you do this, they “re-age” or what’s called “park” your debt. This is a big reason people see old debt “within the statute of limitations….again…and again…and again”. An illegal practice, especially when the creditor did not notify you in writing that they intend on re-aging your old debt. 2. Say or may any notion that you intend on paying. This can take you backwards and resurface even the oldest of debts. The easiest way to handle these people is to “hang up” on them.
Should you find yourself fighting an old debt, here is my recommendation:
- Do research on the company coming after you. Are they really a legit law firm or posturing themselves as such?
- Write back to them within 35 days of their initial contact. Request verification of the debt. They legally must show proof that you owe them, proof of the actual sum and proof that they are entitled to collect.
- If they are harassing your cell phone, home phone or mailbox, write them a letter to cease all communications with you. They must comply with the Fair Debt Collection Practices Act.
- Dispute any “re-aged” actions you see on your credit report directly with them; and not acknowledging in your letter that you owe the money.
- If you don’t see the date removed on your credit report, you can write directly to the three main credit bureaus directly. They legally must remove it if they do not written confirmation.
Over the years, so many people in these situations simply are not educated on their rights as a consumer. As a result, “old debt” prevents many people from moving forward with their plans to get a mortgage and own the home they wish to live in.
If you need help or advice on this matter, I would be happy to help. Thanks for taking the time to read my blog.
The information on this website is designed to inform and educate only. The views and opinions expressed herein are simply those of the author and do not reflect the policy of my company.
In the fourth quarter of 2016 we witnessed a great number of mortgage lenders loosen their approval standards. We also saw a spike in interest rates, but if history is an indicator of where interest rates are going for the remainder of 2017, rates should flatten or even perhaps show a slow decrease.
Recently sworn in Treasure Secretary Steven Mnuchin stated out of the gate that mortgage rates are likely to stay low for some time. Statements from high ranking officials such as Mr. Mnuchin often keep rates in check. Add historical data to that, when interest rates spike up quickly (they went up 80 basis points from November 2016 to January 2017…which by the way, is one of the largest spikes we’ve seen in such a short amount of time) history shows a long, slow decline in rates. Most people are assuming a continual increase in interest rates, but that very well may not be the case.
The housing market rise and surging stock market has created optimism among lenders. Minimum credit scores have been reduced; documentation for the self-employed has reduced; and maximum loan-to-values have been increased. Banks have also made concessions with individuals with less than perfect credit and have low and no down payment mortgages (VA, USDA, FHA). Today, very few banking institutions create their own lending models. Most will follow the lending guidelines set forth by Fannie Mae and Freddy Mac, in addition to FHA, VA and USDA. What’s loosening are the investor overlays; meaning, if FHA says a minimum FICO score is 525, a banking institution may insert an overlay, bringing the credit guideline to 580.
To support this trend, mortgage processing software firm Ellie Mae has approved 77% of the almost 4 million mortgages they processed last year. The end result is cautious optimism in the US Housing Market.
So what does this mean to you? It means if you’ve been turned down getting a mortgage, you should consider trying again. If you are self-employed and went through a few struggling years after the mortgage melt down, time has passed and banks seem to be prepared to start lending to you again. Whether you’re in the market for a new home or an investment property, 2017 could be a very optimal time for you to act.