This question comes up so often. With mortgage rates at a record low, more and more people who couldn’t afford homes before are thinking about buying. But if you’re a first time buyer, you might not know much about how mortgage rates work. Just because rates are at an all-time low doesn’t mean you’ll get a record-low rate. Many factors go into a mortgage rate, including the type of mortgage, the term of the mortgage, and the borrower’s credit. What do you need to know about mortgage rates to help you get the possible rate on your new home?
Type of Mortgage
The type of mortgage plays a role in the mortgage rate. Lenders want to be compensated for lending, so a riskier or more unusual type of mortgage comes hand-in-hand with a higher rate. Many lenders have multiple “products” – that is, types of mortgage or mortgage program – so you’ll need to talk with a lender about your specific situation and needs to determine what type of mortgage you qualify for, and what your rate will ultimately be.
Term of Mortgage
The term of your mortgage also plays a role in your rate. Typically, longer-term mortgages come with higher rates; you may be able to get a lower rate with a shorter mortgage. Currently, 15-year mortgage rates are at an all-time low. 30-year mortgage rates are about three-quarters of a percent higher. When mortgage rates are higher, you may see more than a percentage point of spread from a long-term to a low-term mortgage. If you can afford the higher payments on a shorter term, like a 15-year mortgage, you can save money on interest because you’ll have a lower rate.
Of course, the borrower’s credit is one of the most important factors in mortgage rate. Depending on your credit score, you may not be able to qualify for the lowest-rate product a lender has; you may only qualify for a high-risk product that comes along with a higher interest rate. Generally speaking, the better your credit score, the lower your mortgage interest rate – and vice versa.
These are just a sample of the most common items that determine your mortgage rate. Be sure to ask your lender what factors determine your rate specifically, so you are in the know as to what goes into your mortgage rate.
With the start of another year, real estate sites are making predictions about the number of transactions expected in 2012, whether they think prices will go up or down, whether the market will be good or bad; in short, whether 2012 is going to be a good year for real estate sales. When you’re reading these predictions, it’s vital to remember to adjust for your region. Nationwide trends may not be reflected in your regional real estate market, and trends reported in another region may directly counter your local real estate patterns. Whether you’re thinking about buying or selling in 2012, make sure you consult the trends for your area.
Beware of Nationwide, Sweeping Generalizations
Nationwide, statisticians can draw conclusions about the number of home sales versus previous years, the trending of home prices and other data that professionals use to say whether the real estate market is “good” or “improving.” But those nationwide trends may have nothing to do with your local real estate market. Industry professionals predict 4.5 million real estate transactions in 2012, but those transactions are not distributed evenly around the United States. The real estate market in some areas continues to suffer, while real estate in other areas is picking up. Nationwide trends don’t reflect conditions in your region.
Regional Trends may Directly Contradict One Another
Beware of making assumptions based on regional trends. A Central Minnesota news outlet reported recently that the Central Minnesota real estate market showed a dramatic jump in 2011, demonstrating a direct reversal of 2010 data. But a news source in Connecticut reported that the state’s real estate market in 2011 was the worst in two decades, with the biggest drop on record for home sales. Don’t read a regional update and assume the same thing is happening in your area; consult local news sources, or a real estate agent experienced in your area, to find out what’s really going on with the real estate market in your region.
When the housing market is having problems and foreclosures are rising, there’s an unintended side effect that many people don’t know about: an increase in demand for rental properties. When home prices are too high, or when the housing market is in turmoil, potential buyers are more inclined to keep renting to avoid any unintended consequences of buying at a bad time. When foreclosures increase, the displaced families need places to live, and typically aren’t buying new homes – so they rent too. This leads to an increase in demand for rental properties – which makes things tougher for renters.
The Consequences of Increased Rental Demand
An increase in demand for rental units has a couple of negative consequences for renters. Most noteworthy is price. When the demand for rental properties outstrips the supply, the price of renting skyrockets. People in some parts of the country may see their rent rising hundreds of dollars the next time they renewer their leases. The other negative side effect of high demand for rentals is difficulty finding a good rental. When the demand for rentals is high, renters are often forced to settle for whatever they can find and sign a lease quickly – or risk not finding a place at all.
Stop Renting and Buy Your Home
This confluence of negative effects for renters, combined with the all-time low mortgage rates, means that now is the perfect time to buy. With rents increasing around the country, you could save hundreds of dollars a month by buying instead of renting. Likewise, the housing market in much of the country still has a fair amount of inventory; which means you still have a lot more choices in properties if you decide to buy instead of rent.
Stop paying money into the bottomless hole that is rent, and buy your dream home! What are you waiting for? Things are only getting tougher for renters going forward.
If you already own a home and want to make some improvements, or if you’re thinking of buying a home and know you’ll want to make improvements down the road, one of the most difficult aspects of making those improvements is deciding how to finance them. Homeowners have a lot of options to pay for home improvements. The best option for you varies depending on your situation and individual needs, but these are the most common ways of paying for home improvements. You will want to double check with your lender as to current limits on each of these. With the current housing market situation, many of these accounts will have limits as to how much you can borrow in relation to what the home is currently worth.
Line of Credit
Many lenders will issue a line of credit with your home as collateral. This is a way to get a bigger line of credit than a normal credit card, and sometimes the rates can be quite low. But the specifics vary depending on your income and debt.
Cash Out Refinance
If you’ve owned your home for a while and have established some equity, you may be able to refinance your home and take some cash out. With mortgage rates currently at an all-time low, now is a great time to refinance at a lower rate and take some cash out to make your home improvements. You can actually save yourself money this way, but the repayment is typically over a longer term, which means you’ll be paying more than if you took it as a line of credit.
Home Equity Loan
If you don’t want to refinance your existing home loan, you may be able to get a second mortgage or a home equity loan. This is different than a line of credit; a second mortgage or home equity loan pays out in a lump sum, while a line of credit enables you to draw as needed. A line of credit may be more flexible, but can also represent risk as lenders change your interest rate or call for repayment, while a home equity loan or second mortgage is typically fixed and you know what your payments are, for how long.
It doesn’t matter what the seller tells you when you’re shopping for a home; the property description that goes into the contract is the one that is enforceable. You may think that the shed or other outbuilding on the property is included in the home purchase, but you could be in for a surprise when you show up after closing to find that the seller removed the extra buildings to take to the new home. Make sure your purchase and sale agreement includes an accurate description of all buildings that will be included in the transaction, and include this item on your pre-closing checklist.
Assertions about the Building
Some sellers will say a lot to attract a buyer; particularly in a competitive housing market. Your seller may tell you that the building was designed by a famous architect. You may believe the building to be made from certain materials or constructed in a specific manner and building technique. The seller may claim the house is a certain square footage, or is energy efficient.
Ask to have any and all property assertions about the building included in the property description. It may be difficult to prosecute a seller for fraud for verbal representations, but if the seller misrepresents the property in the contract, you may have grounds for legal action later. Listing all of these facts in the contract is an easy way to get peace-of-mind, and may reveal something you didn’t know about the property.
Outbuildings, Sheds and Other Considerations
Don’t assume that outbuildings, garden sheds, tool sheds, barns, greenhouses and other separate buildings on the property are included in the home purchase. In some cases, the sellers may write the contract in such a way that they retain ownership of some of these buildings. Even by virtue of leaving outbuildings out of a contract, the seller may be justified in taking or demolishing these features. By including these outbuildings in the legal description, you have a reliable account of what you’re purchasing, and can take legal action if you don’t get what you think you’re getting when you buy your new home.
When most people are thinking of buying a home, they consider their employment status. Here are a few of the most common questions that people ask themselves when buying a home:
- Am I making enough money?
- Will home-ownership expenses cause serious issues?
- What happens if I lose my job?
If you wonder about these things, you’re not alone. Most people worry about their employment status and income when making a big decision like purchasing a house. It’s human nature.
Think about it from a different angle, though. Even if you’re renting, you still have housing expenses. What happens if you’re renting an apartment and you lose your job? You’d still be in a position of trying to come up with the money to make your housing payments, but you’d actually be in worse shape. Why?
Mortgage companies want you to keep your home. They want you to make your house payments for the duration of your mortgage. That’s how they make money. When your house is foreclosed, mortgage companies bleed money like a seive.
They must pay for the legal proceedings to pursue the foreclosure. They must often sell the home at a loss to recoup a portion of their investment. To avoid this, most lenders are willing to work with homeowners to help them keep their homes, by altering payment plans, offering forbearance or making other arrangements.
When you’re renting an apartment, the landlord doesn’t have the same impetus to make sure you keep your home. If you can’t make your rent, the landlord is going to evict you to get someone else in the unit that will pay in a timely manner. He doesn’t have the long-term considerations to make it in his best interest to keep you; it’s in his best interest to show you the door.
In this way, buying a home is actually safer from a housing perspective. Budget so that you can save money, which will help you get through tight spots if you should lose your job, but don’t let job worries keep you from making an investment that actually serves your best interests.
Income is a big factor in determining whether or not to issue you a loan. Loan calculations take into consideration your total debt, housing debt and the ratio of these numbers to your gross income. If your numbers look too high, you can always look for ways to lift your income in order to qualify for the mortgage for your dream home.
Qualifying income varies
Many people don’t have a single, steady source of income. In many households, people have multiple sources of income, and these sources may fluctuate. For example, waiters and waitresses may have trouble proving a steady income, because tips vary so much. People who hold down a part-time job may find that their income fluctuates depending on how many hours they’ve worked. Even regular, full-time employees may have fluctuating income due to overtime, bonuses or commissions.
Showing a history goes a long way toward establishing that income is steady
One of the first things that lenders look at when evaluating your income is your income history especially if you are self-employed or on a commission pay structure. Lenders will look at your last two years of tax returns if you fall into either of the last two categories. They’ll normally average out the last two years unless your most recent year is much worse than the prior year. If that’s the case, they will most likely use the most recent year only.
If you’re salaried, they like to see a history of employment for at least the last two years. So if you’ve been unemployed or chosen not to work for an extended period of time, plan on being at your current job for at least 30 days and then be prepared to provide a written explanation for the previous unemployed time. The exception to this rule would be if you’ve just graduated from school. Any bonuses, overtime or commission you receive at your job would usually be counted as long as you have a track record going back 2 years minimum.
Explain your income, in writing, if in doubt
If you’ve got special circumstances, explain it to your lender, in writing. If you can provide evidence to back a less conservative income estimate, your lender may be willing to consider it if it is on paper. Make sure you explain thoroughly, and enlist the help of your accountant if you have special income circumstances that require a more detailed explanation.