Understanding When Mortgage Points Are Worth Paying (Part 2)

In part one of this blog post we covered the basics on mortgage points (or discount points), including the costs to purchase them. We recommend reading that post if you have questions or need more information about mortgage points.

Part two of our blog post on deciding whether you should pay for mortgage points.

When Mortgage Points Could Be Worthwhile

If you are not planning to stay in your home for at least as long as the break-even point (and preferably longer to get some financial benefit from the points), then paying mortgage points is definitely not worth it. However, if you are planning to stay in your home for much longer than the break-even point, having a lower rate can save you a lot in interest. In the same example above, if you stayed in your home for the full 30 years of your loan, you would save more than $15,000 in interest with the lower rate.

Other Considerations

In addition to whether you plan to stay in your home long enough to realize the financial benefits of paying for a lower interest rate, there are some other things to consider.

  • Tax benefits: for people who meet the criteria, mortgage points are tax deductible, which provides an added incentive to pay for points if the other reasons (including the time you plan to stay in your home) are also aligned.
  • Investment opportunities: not paying points keeps more cash in your pocket at the time of closing. If you have an opportunity to invest that somewhere that it could earn interest, that may offer more financial benefit that the lower monthly mortgage. For example, if you have an opportunity to put the same $3,000 into your 401K and you can earn a decent return on that, it may be a better financial choice.
  • Cash needs: beyond your mortgage, there may be other costs after buying a home for which you would want to have cash on hand; for example, adding window coverings or landscaping your yard. If that’s the case, keeping the money might be a better choice.

Even without any immediate costs, having that money in a savings account can help if an emergency comes up—for example, if your water heater breaks or you need to make some roof repairs on the new home in the next five years. If you are going to use most or all of your savings for a down payment and closing costs, consider keeping the money and putting it into a high-yield savings account instead.

The decision of whether mortgage points are a good option should be determine on a case-by-case basis depending on your circumstances. Talk to Integrity First Lending to answer questions about mortgage points and whether they’re a good choice for you.

Understanding When Mortgage Points Are Worth Paying (Part 1)

Anyone who has ever applied for a mortgage has probably heard the term “mortgage points” or “discount points.”Perhaps you wondered exactly what these points were, and whether they are worth the cost to purchase them. We’ll review the basics on mortgage points, and when it makes sense to consider them in this two-part blog post.

Part one of our blog post to help you understand how mortgage points work in home loans.

The Basics: What is a Mortgage Point?

Mortgage points, which are sometimes called discount points, are essentially a fee that most lenders offer at the time of closing to lower your interest rate. When you purchase discount points or mortgage points, you get a lower interest rate for the entire life of your home loan. While the costs can vary, it usually costs about $1,000 per $100,000 of your loan, which will lower your interest rate by 0.25%.

For example, if you are trying to get a loan on a home that is $300,000 and your initial interest rate would be 4.5%, you could pay $3,000 for a rate of 4.25% instead. Having a lower interest rate will mean lower monthly mortgage payments, and less interest that you pay over the life of the loan, which are both great benefits. However, it’s important to weigh that against the up-front costs of purchasing the points to determine if it’s the right choice for you.

Calculating the Break-Even Point

To determine the “break-even point” of purchasing mortgage points, calculate the total savings per month as a result of your lower interest rate, then divide what you are paying for the points by that amount to see how long it takes to recoup the costs.

Example: You are purchasing a $300,000 house with a 5% down payment ($15,000).

  • At your current rate of 4.5% your monthly principal and interest payments are $1,444
  • If you purchase points to lower your interest rate to 4.25% your paymentsare $1,402
  • It will cost you $3,000 to purchase the points
  • With a $42 lower monthly payment, it will take about 72 months, or 6 years, to recoup that up-front cost

You can use a mortgage calculator to determine how much you will save each month with the lower interest rate. The break-even point calculation here is also simply dividing the total cost by monthly savings, which doesn’t take into account any opportunity costs of not investing that money elsewhere.

In part two of this post we’ll discuss when it might not be worthwhile to purchase mortgage points, and what other options you have for the cash you would have paid toward these points. Talk to Integrity First Lending today to determine which is the best choice for you.

How Much Down Payment Do I Need for a Home?

One of the most common questions that comes up as people start looking to purchase a new home is, “How much down payment do I need?” The actual amount that is required will depend on the type of loan you are planning to get, and your own personal financial situation.

Down payments are required for many home loans, and we’ll discuss how much you need.

Understanding Down Payments

A down payment is cash you give to the lender when you get your home loan. It reduces the total amount you will borrow, and provides immediate equity in your new home. The down payment is calculated as a percent of the total purchase price, so a 20% down payment on a $300,000 loan would be $60,000, and you would borrow the remaining $240,000. For lenders, the down payment represents an initial ownership stake in the home, and can protect against future housing market fluctuations, making it a safer investment for them.

Minimum Down Payment Requirements

The minimum amount a lender requires you to put down depends on the type of loan. Some mortgage loans are available without any down payment if you meet certain qualifications:

  • Conventional 15- or 30-year fixed-rate mortgage: 10-20%
  • Fannie Mae or Freddie Mac Conventional mortgage: 3-20%
  • FHA loans backed by the Federal Housing Administration: 3.5%
  • VA loans through the Department of Veterans Affairs: None
  • USDA loans through the Rural Development Program: None

Most minimum down payment amounts are only available to borrowers with a high enough credit score. A lower credit score (below 580) usually requires a larger down payment.

Should You Put More Down?

Just because you have more cash to put down than the minimum requirement to qualify for your loan doesn’t necessarily mean that you should put a bigger down payment, but in some cases that might make sense.

A higher down payment can get you:

  • Lower interest rate
  • Lower up-front fees for the mortgage
  • Lower monthly payment by avoiding mortgage insurance (PMI)
  • More equity in your home immediately

While these are all great benefits, there are other factors to consider before you put down more than is required by your loan.

  • Savings: it’s always a good idea to have some money set aside in savings for emergencies, so if putting more money down will eliminate your savings, it may be a better idea to put the required down payment and keep the rest in savings.
  • Cash on hand: there can be many costs after buying a new home, such as landscaping, appliances like a refrigerator or washer/dryer, or purchasing window coverings. If you use all your cash for a bigger down payment, you may not have enough for these costs after your move.

Create a budget of savings and costs after you move in to make sure you have enough before deciding on your down payment.

Call Integrity First Lending today to discuss your home loan options and down payment requirements.

4 Money Mistakes People Make Before Buying a Home

Everyone knows that buying a home is a significant commitment and investment, and preparing to purchase a home requires some financial discipline and smart decisions to get approved for a loan at the lowest possible interest rate. Some money decisions that you may be tempted to make right before you close on your home could seriously hinder your ability to get qualified. Here are four of the most common mistakes people make that you should avoid.

Don’t make these four mistakes if you are thinking about trying to buy a home soon

1: Using Emergency Savings for a Down Payment

After the financial crisis of 2008 many lenders put in more stringent requirements to purchase a home, including at least a 20% down payment. It is still possible to get a loan without a full 20% down, but you will probably have topay private mortgage insurance (PMI) or get a higher interest rate. You may be tempted to use your emergency savingsfor a bigger down payment to avoid PMI, butkeeping that money in savings in case of a sudden job loss or other financial emergency is usually a better option. Talk to your lender about the best way to structure your loan with the down payment you have, and avoid dipping into those savings.

2: Making Other Large Purchases

Right before you buy a home is definitely not the time to make big purchases, such asbuying a new car, getting a new credit card, charging a big balance on an existing card, or taking out a student loan. These financial moves will affect your credit score, and could also impact your debt-to-income ratio, which your lender uses to calculate whether you can afford that home. You may be surprised to get to your loan closing and find out you can no longer qualify for the home you were planning to buy.

3: Quitting or Changing Jobs

Sometimes changes in your work life are inevitable, and while it’s not necessarily going to derail your entire loan process if you quit one job and start a new one, it can make lenders nervous. If your new job is at a lower pay rate or you quit a job without having anything else lined up, you may even be disqualified from the loan. You should also avoid job-hopping prior to trying to buy a home; lenders will ask you to prove 9 to 12 months of steady employment.

4: Not Getting Pre-Approved

Before you put in an offer for a home, you need to get pre-approved by your lender. They will conduct a thorough review of your financial situation and tell you how much you can get qualified to borrow. Going through the process of negotiating a price for your dream home only to find out you can’t get approved for a loan for that amount is frustrating for everyone. Pre-approval can help you avoid it.

When you are ready to turn your dreams of homeownership into a reality, come to Integrity First Lending. Our helpful mortgage loan officers can give you advice on qualifying for a loan and help you through the entire process.

To Lock In or Not? How to Decide if a Mortgage Rate Lock is a Good Idea

If you are thinking about buying a home in the near future, you’re probably paying really close attention to what happens with mortgage interest rates. In recent months they have gone down, which is great for homebuyers who are able to get a lower rate, since even a small difference in your interest rate can dramatically reduce the amount of interest you will pay over the life of a 30-year mortgage loan. One of the most common questions that comes up is whether you should lock in a mortgage rate, and if you should, then when?

With rates hovering historically low, is now the right time to lock in your mortgage rate?

What is a Mortgage Rate Lock?

Locking in a mortgage rate with your lender means that you are guaranteed to get a certain rate—it freezes the interest rate for your loan so it cannot go up. Since mortgage rates are always changing, the ability to lock in a rate that you feel comfortable with can be great to avoid the surprise of a higher monthly payment if rates do spike right before you close.

Some lenders require that you pay a fee to lock in a rate, while others will let you do it without a fee provided you close within a certain period of time—usually between 30 and 60 days. This should give you plenty of time to get through loan processing and underwriting.

When is the Right Time to Lock In?

You don’t want to lock your rate too soon, since you need to close on the loan before your lock expires. Generally the best time will be when:

  • You put in an offer on a home that was accepted
  • Your loan application was approved
  • You feel comfortable with the current mortgage rate
  • You can close on the loan within the lock period

Are There Times When You Shouldn’t Lock Your Rate?

Locking in a mortgage interest rate can be beneficial for you as the buyer, but only if you think that rates might go up in the near future. If rates are going down over time or staying relatively steady, it may not benefit you to lock in a rate. Some mortgage rate locks do allow you to have a one-time “float-down”, which means that if rates continue to drop you can adjust your locked rate downward once, but not all of them include this provision. Without this provision, if you lock in and rates go down, you will still have the higher rate.

There are factors that could void or cause your rate lock to expire, such as:

  • Underwriting or loan processing issues
  • Credit score changes that disqualify you for that rate
  • Income or employment changes
  • Loan revisions (such as changing the length or type of mortgage)
  • Low property appraisals

Talk to Integrity First Lending today about options for mortgage rate locks. With rates at historic lows now is a great time to lock in yours.

Understanding How Underwriters Calculate What You Can Borrow for a Home Loan

Before you can get a loan for your mortgage, your request for the loan has to go through underwriting. The underwriting process is fairly straightforward—your lender takes the information you provide about your income, assets, property, and debts to determine whether they should give you a loan. You won’t be involved in the process except to provide any necessary information to your lender.

Underwriters play a crucial role in determining how much risk you present as a borrower.

What Underwriters Look for in Home Loan Applications

During the process, an underwriter is looking for two main things: how much risk they believe you present as a borrower, and whether you will be able to afford the loan. In the underwriting process they review:

  • Your credit history, including your credit score from a credit report
  • On-time payment history for other loans, including mortgages, auto loans, student loans, rent, and revolving credit lines
  • Bankruptcies or other negative financial events in your past
  • Credit balances on your revolving credit lines (overuse of credit could be a red flag that you are not in a good financial position)

Once they review this information, the next step is to order an appraisal of the property you are planning to purchase. This is done by a third-party appraiser who looks at the home you’re planning to buy and compares it to home values in the area to ensure that it is worth the amount of the loan you’re requesting.

Next they look at your current income and employment status. You will need to provide proof (usually in the form of pay stubs) of your total monthly income and how long you have been employed in your current position. If it’s a new job, they may request information about your previous employment and require proof of income from a past employer in addition to your current pay stubs.

An underwriter will also check your debt-to-income ratio, which is a term for how much money you are paying each monthly on debt payments as a percentage of your income. If you have a lot of debt and are paying a lot of your income toward debt each month, the underwriter may decide that you can’t borrow as much because their job is to make sure you will have enough cash flow to pay your mortgage.

Finally, the underwriter will look at your current bank accounts, including checking and savings, to make sure you have enough cash for things like a down payment. They are also looking for any irregularities in your accounts, so if you recently made a large deposit, be prepared to explain and provide documentation about where it came from in case the underwriter asks. For example, if you made a deposit of $30,000 into your savings account after selling your last home, you may be asked to provide documents from the closing.

The underwriting process is an essential part of a home loan. Understanding what’s involved and what you need to provide can help you move through the process quickly to get approved for your loan. Contact Integrity First Lending today for information about mortgage loans.

Should You Consider Postponing Your Mortgage Payments Using Forbearance?

Refinancing may be a better option than forbearance to save money.

You may have heard of the CARES Act that has been making headlines offering relief to those affected by COVID-19, and you may also be wondering how this applies to your mortgage. This law allows borrowers, with federally backed mortgages, to request a payment reprieve in the form of forbearance. The law has raised a lot of questions, and we want to support you and be as clear as possible to help you avoid landing in a more difficult situation down the road.

The main point we want to convey is that forbearance should not be considered unless you have lost your job. Refinancing may be a better option.

Above all, borrowers should know that forbearance is NOT forgiveness. If a mortgage loan is delayed, it has to be paid back once the forbearance ends. Delaying the loan could lead to significant financial hardship in the future, as this scenario illustrates:

You currently have a mortgage of $1,500 per month.
Your friend tells you that you should request forbearance because you won’t have to make a payment for the next six months.
You call the servicer and ask for forbearance.
In one phone call, you get six months “off” from paying.
Seven months later, forbearance is lifted and servicer says,

“That will be $9,000 + $1,500, which is due now”. ($10,500 total)

You almost pass out and say, “WHY??”
Servicer: “That’s the 6 months of forbearance plus the current month.”
You: “I can’t do that, can we work something out?”
Servicer: “Sure, we will spread out the $9,000 over 12 months.”
You: “Phew….ok, good. What will that look like?”

Servicer: That will be $2,250 a month for the next 12 months.”

You: “I can’t afford that.”
Servicer: “Sorry…..”
You: “Can I refinance?”
Servicer: “No because the loan went into forbearance.”

As you can see, requesting forbearance is a very big deal because of the potential haunting consequences. It should only be considered as an option in extreme, job loss, circumstances.

As an alternative to forbearance, you may want to consider refinancing. When refinancing, you can delay up to two mortgage payments and potentially reduce your rate. Please don’t hesitate to contact us with any questions, we care and we are here for you. Give us a call at 801.542.0961 or live chat with a loan officer below!

 

Does it Pay to Compare Mortgage Rates from Different Lenders?

When you are thinking about getting a home loan, one of the first things most borrowers do is look at the current mortgage interest rates. These rates play a significant role in what your payment will be, which can affect how much money you can borrow and what home you can buy.

It is a good idea to shop around, but with the caveat that it’s important to also understand that different lenders can have different requirements or different loan options that may not make sense for every borrower, so before you just jump on the lowest rate you find, make sure you understand the loan you’re getting.

It can pay to compare rates from different mortgage lenders when buying a home.

Rates are Tied to Borrower Risk

The mortgage rate you can get is tied to the level of risk a lender assigns to you as a borrower. A borrow with higher risk will have a higher interest rate than a low-risk one. Lenders use various measures, beginning with your credit score, to predict risk—if you have paid your bills on time in the past and have steady employment, you will be seen as less risky than someone with poor repayment history, bankruptcies, or other financial red flags.

Other things that the lender takes into account when determining your interest rate could include:

  • Analysis of your current financial position
  • Credit history
  • Employment history
  • Debt-to-income ratio (how much debt you owe as a percent of your monthly pay)
  • Down payment

Different Lenders Evaluate Risk Differently

While the general metrics for measuring a borrower’s risk are pretty standard from one lender to another, different lenders have different models and algorithms they use for predicting and measuring your risk as a borrower. For example, some lenders might put more weight on a high debt-to-income ratio (seeing you as a riskier borrower) while another might focus on your high credit score or see that you have a 20% down payment and view you as less risky.

Loan Products Can Affect Borrower Rates

In addition to risk algorithms, the specific types of loans available from a lender also have an impact on your rates. For example, one lender may have a 5-year ARM (adjustable rate mortgage) with a very low initial rate that seems much better than a 30-year fixed, but your rate could go up significantly after year 5 unless you refinance or pay off the loan in a lump sum. In another example, if you only have a 5% down payment the lenders may have specific loans available to get you into a home without 20% down.

Because risk models and loans vary by lender, it can benefit you to “shop around” for mortgage rates. Integrity First Lending is focused on helping borrowers get the best loan rates possible to purchase home, so make sure when you’re shopping around that you get a quote from us. Contact us today to learn more.

4 Questions People are Asking About COVID-19 and Mortgages

As more and more of our lives are disrupted by local, state, and federal policies around mortgages, there are several questions that many people have about how these policies and the COVID-19 virus are affecting mortgages. Here are four questions that many people have around mortgage loan rates, new mortgage loans, refinancing, and home values.

The COVID-19 virus has caused significant disruption for homebuying and refinancing.

1: Are mortgage rates going to continue to go down?

The Federal Reserve (Fed) recently made a significant cut to interest rates in an effort to slow down the economic freefall on Wall Street in early March that saw stocks tumble to their lowest levels in more than a decade. That has left many potential homebuyers, and homeowners who are considering refinancing a mortgage, wondering whether you should move ahead with today’s rates or hope for rates to go down more in the near future. The interest rates set by the Fed are different from mortgage rates; mortgage rates can follow the direction of Fed rates, but they could also go up. If you’re thinking about locking in a mortgage rate or refinancing, rates are at or near all-time lows right now so talk to your lender about whether a rate lock is a good move.

2: Can I still get a new mortgage loan right now?

If you are in the process of buying a new home, stay-at-home or shelter-in-place orders and non-essential business closings could be affecting the homebuying process. Orders that limit the number of people who can gather could make it hard to do a traditional loan closing, and other concerns could makehomebuying a challenge, for example, if the appraisal gets delayed or county offices are closed or short-staffed. However, most businesses are working to find solutions, so talk to your real estate agent and Integrity First Lending today.

3: Should I refinance my mortgage right now?

Maybe. Right now rates are very low, so if you’re in a high-interest loan or your home has appreciated in value enough to eliminate private mortgage insurance with 20% equity or more, now could be a great time to refinance. Talk to Integrity First Lending to discuss your specific situation and learn more about refinancing options.

4: Are home values going to go down in the near future?

It’s impossible to predict exactly where home prices will go, especially since the reason for the current economic decline is unprecedented. While some economic indicators are being compared to those around the 2008 recession when home values declined, othersindicate that the effects could be very short-term. Most of the time home values remain pretty steady, even in difficult economic times.

For other questions about things like mortgage forbearance or other short-term relief if you lost your job, or questions about the CARES Act and how it could impact your mortgage, contact Integrity First Lending today for assistance.

Important First Steps Before Applying for a Mortgage

There is a lot of information out there about the mortgage loan process itself—what documents you need, how long each step takes, and more—but not as much information about the important steps you should be taking several months, and even years, before you go to apply for that mortgage. Here are some important things that should be on your radar long before the mortgage process.

Getting qualified for a mortgage loan means taking important financial steps well in advance.

Check Your Credit Score

You have probably heard this one before, but it’s such an important part of the mortgage loan process. While there is no exact credit score number that automatically qualifies you for a loan, there are some general guidelines depending on the type of loan you will apply for:

  • FHA loans with 10% down: 500
  • FHA loans with 3.5% down: 580
  • VA loans for veterans: 580-620
  • USDA loans in designated rural areas: 620
  • Conventional loans: 620-640

None of these numbers are set in stone, so for example, a lender may be willing to give you a VA loan if your credit score is below 620 but they may require a bigger down payment.

By checking your score you can identify whether you are in the right range for a home loan, how much you might need to save for a down payment, and whether you need to take steps to improve that score, which can take time.

Pay Off Debts

One important factor in your ability to purchase a home is how much debt you currently have compared to your income, called a debt-to-income ratio. Lenders want to know you will be able to make a mortgage payment, so they have guidelines on how much of your income should be paid toward debt. If you have lots of other debts, like student loans, car payments, credit card debt, or medical bills, those all go toward your total debt calculation and can reduce what a lender is willing to give you for a home mortgage. Paying down debt (even if you can’t pay it off entirely) gives you more financial flexibility to get a bigger loan for that home you really want. Eliminating debt can also improve your credit score.

Watch Your Spending

Putting things on your credit card right now if you don’t have the ability to pay it all off right away can harm your credit score. Likewise, taking out new loans right before you plan to buy a home can lower your credit score. Don’t sign up for that store credit line, buy a new car, or make any big purchases on a card until you’re done with the mortgage process.

If you take these financial steps well in advance of your mortgage loan application with Integrity First Lending, you can help the process go smoothly and get the best loan at the best interest rate for your new home.