The decision to buy a home can be complicated whether you are a first-time homebuyer or are looking for a second home, especially if you are shopping for property in an urban area. What kind of residence can you afford? Should you buy a house in a suburb or a historic downtown? What about a condo within walking distance of a train station? Or a townhouse in a new urban infill community?
Choosing between a townhouse, condominium or house involves questions of location, maintenance, lifestyle and price. These housing styles also have a lot of overlap, so choosing one over the others may involve less sacrifice than you might expect.
A condominium, called a “condo” for short, is actually a kind of ownership, while the terms “townhouse” and “house” (a standalone structure most people would think of as a traditional single-family home) refer to physical structure styles.
As such, condos can come in a variety of shapes in sizes, though they are often similar in size and appearance to an apartment. At the same time, some condos can be quite expansive. Condos typically are private residences that are part of a building or multiple-unit communities, although some detached condominiums are available. They are privately owned and occupied by an individual or a family.
Condos comes in many configurations beyond apartment-style buildings, said Mark Swets, executive director of the Association of Condominium, Townhouse, and Homeowners Associations. “Condos have less restrictions,” he said. “They can be converted from old office buildings or loft space.”
Regardless of their location or size, condo owners all share in the ownership of common areas and facilities that are maintained by a board that is comprised of members elected from the condo community. The board collects dues from the community’s condo owners and uses the money to maintain and operate common areas and amenities such a community pool, gym, and landscaping.
Condos often are found in urban areas where land for construction is scarce.
What is a townhouse?
A townhouse typically is a vertical, single-family structure that has at least two floors and shares at least one ground-to-roof wall with a residence next door.
Townhouses, which are individually owned, can be lined up on a row or arranged in a different configuration. Owners buy both the structure, including its interior and exterior, and the piece of land that the townhome is built on, which may include a small yard.
"A townhome is not a kind of ownership, but refers more to the physical structure,” Swets said, referring to the vertical design. “From an ownership perspective, some townhomes are classified as condos while others aren’t. It all depends upon what’s listed in the declaration and bylaws for each association."
Should I buy a house, townhouse or condo?
Here are some factors to consider when deciding what kind of residence to buy:
Are you good at home repairs, or do you prefer to have a handyman on speed dial? While a single-family house gives you freedom to fix up or renovate as you please, you also are responsible for all repairs and maintenance. The monthly fee you pay to a board or association if you own a condo may take care of maintenance such as mowing, exterior repairs and snow shoveling. Townhouse homeowners association fees may care of maintenance of the community’s common areas, such as a shared backyard or playground, but it’s not guaranteed.
“If I were to look at a condo, it would be because I didn’t want to worry about the maintenance outside,” said Lori Doerfler, the 2018 president of the Arizona Association of Realtors. “If I wanted to have a piece of land but not a lot of yard, a townhome would be a good choice.”
Location and lifestyle
Condos, townhomes and standalone houses can offer a wide range of lifestyles and locations. Homebuyers should think through whether they’re interested in an urban, walkable lifestyle, a suburban neighborhood, or something in between. Where you live also will determine your commute to work and proximity to family and friends.
Restrictions on ownership
While condos can offer convenience and amenities, they also come with monthly dues, occasional assessment fees for special community projects and property rules, which can be strict. Single-family homes, especially those in neighborhoods without a homeowners association, have few or no restrictions.
Buyers should always check the community’s bylaws to understand the rules.
“I always want to get the covenants, conditions and restrictions to the buyer,” Doerfler said. “They describe the requirements and limitations of what you can do with your home as well as the grounds.”
Any type of dwelling may come with a monthly fee to help pay for upkeep of the community’s amenities. Owners of a standalone single-family house in a neighborhood with a homeowners association will pay monthly or annual HOA fees, and condo and townhouse owners will pay fees every month to the community board or association.
When factoring your monthly mortgage payment, be sure to add in the HOA or condo association fees to determine how much you’ll pay to live in the dwelling. Fees could significantly increase your cost, putting a seemingly affordable dwelling out of reach.
Lending and price
Where you live will determine the price that you’ll pay for your home. Homes in desirable areas, such as downtowns and good school districts, can cost significantly more that homes with a long commute to a city.
Benefits: Again, condos and townhouses aren’t mutually exclusive, but their potentially different physical attributes and homeownership structures make them worth comparing in some ways. Both offer less maintenance than a house, the opportunity to get to know neighbors and build a strong community, and walkable amenities such as a pool or community gathering space. Condos may offer a variety of amenities, and with new developments providing over-the-top extras such as rooftop bars, doormen and catering kitchens.
Risks: Condo and HOA fees can be expensive, and you are trusting the HOA or condo association to provide satisfactory upkeep to the property. Condo fees tend to be higher than townhouse HOA fees because condo associations typically provide more maintenance and amenities, and condo associations can enact special assessments to pay for one-time facilities expenses.
House vs. condo
Benefits: While condos offer a range of amenities and maintenance for exterior property, owning a single-family home provides owners with freedom from the rules and restrictions of condominium ownership. Buyers looking for privacy, a rural or suburban lifestyle or a larger property also will have more options with a single-family house.
Risks: Owning a single-family home means that the homeowner must pay for damage and upkeep to the interior and exterior property that isn’t covered by insurance. Condo associations are liable for exterior property and, if stated in the bylaws, “common elements” such as the roof and windows.
Townhouse vs. house
Benefits: Single-family house and townhouse owners both own their entire units, giving them freedom to renovate and change them as they see fit within any guidelines for exterior changes set by HOAs.
Risks: Single-family homeowners assume responsibility for the entirety of their property, which townhome owners may not be liable for repairs, upkeep, or incidents that occur outside of their unit and the land it sits on, depending on their homeowner’s association.
Which is best for you?
Your decision in buying a home vs. a condo vs. a townhouse should depend on what you can afford, how much maintenance you want to do, where you want to live and the type of community you want to live in. Young families, for example, may want a yard and a house near a good school, while a single professional may be more interested in a downtown condo that is within walking distance to nightlife and the office.
As you consider what kind of dwelling to buy, be sure to include the costs of condo or HOA fees into your budget to be sure that your new home fits your lifestyle and your budget.
Nearly half of homeowners make a huge mistake during the homebuying process, according to the Consumer Financial Protection Bureau (CFPB) — they don’t compare lenders when shopping for a mortgage.
Not only do many consumers neglect to compare lenders in the process of purchasing a home, but a number of homebuyers express being unfamiliar with important factors that can greatly affect the cost of their mortgage as well, including:
The different types of mortgages
The money required at closing
The process of getting a mortgage
The income needed to qualify for a mortgage
The down payment requirements
Current mortgage rates
Personal credit history or credit score
This unfamiliarity increases even more for first-time home buyers. Without knowing what to expect, homeowners can go into the mortgage process unaware of what they are actually getting and paying for. From title searches to pest inspections, appraisals and more, the average homebuyer is purchasing much more than a home.
How much money do you bring to the closing table? Will you pay your taxes and insurance outright or have them escrowed (rolled into your mortgage payment)? What loan fees are set in stone versus ones you can shop around for? Will your loan interest rate remain the same or change at some point?
Depending on your choice for a home loan product, the outcome can have a big effect on your finances. A home is such a significant purchase — in fact, it’s probably the biggest purchase you’ll ever make — that just a few percentage points difference in interest can add up to tens of thousands of dollars saved (or lost) over the life of the loan.
Fortunately, it’s not all that difficult to compare mortgage loan offers between lenders these days. There’s been some standardization in the way banks present mortgage estimates to loan applicants. This is where the Good Faith Estimate (GFE) comes into play.
What is a Good Faith Estimate?
A Good Faith Estimate (GFE) is a standard template used by lenders to give you the rundown on your loan terms: interest rate, origination fees, monthly payments and more. However, you should know that as of October 2015, the Good Faith Estimate document was replaced by a document called the Loan Estimate for most types of loans.
The whole idea behind the GFE aka the Loan Estimate is to help consumers understand all the costs associated with their home loan, from the length of the loan to settlement fees you’ll have to pay at closing. It was also designed to inform consumers of which charges could change and when they could change for closing purposes.
With all of this information provided in a standardized format, the aim was to encourage borrowers to shop around for the best loan and loan terms for their home loan.
Before standardized estimate templates came on the scene, the average Joe consumer had a heck of a time deciphering all the loan “mumbo-jumbo” because there were many ways to state (and maybe even hide) fees associated with obtaining a home loan. Based on all the ways lending costs and fees could be itemized and stated, it became difficult to truly compare rates and get the very best rate for these home loan products.
Though the GFE was a great improvement over prior mortgage estimate methods, there were still more strides to be made in the usability and clarity. In other words, extensive testing showed that the average consumer still needed help with identifying key information pertinent to their loan terms. Enter the Loan Estimate.
GFE vs Loan Estimate: What are the differences?
GFEs were replaced with Loan Estimates after the CFPB initiated the Know Before You Owe mortgage disclosure rule. That effectively replaced Good Faith Estimates with the new Loan Estimate document. You’ll most likely see a loan estimate document when you apply for a traditional mortgage. Loan Estimates do not apply for reverse mortgages, HELOCs, and a handful of other real estate transactions.
According to the CFPB, the main objectives of the Loan Estimate form include helping consumers:
Understand their loan options
Shop for the mortgage that’s best for them
Avoid costly surprises at the closing table
There are some differences in design and usability that make the Loan Estimates different from the GFE in a few ways.
Easier to understand
The Loan Estimate form is designed to help you better identify loan risk factors, such as potential interest rate changes and negative amortization features. In addition, you should be able to see the overall cost of your home loan over both the short and long term. Finally, you should be able to understand, very clearly, what your monthly loan payments will be.
Better comparison shopping
A great thing about the Loan Estimate is that it’s easier to compare offers from competing lenders with a table that is clearly labeled for the sole purpose of comparison. Also, there’s a section on the Loan Estimate clearly labeled “Services You Can Shop For” and “Services You Cannot Shop For” in case there are other areas you can save money in the loan process.
Avoiding costly surprises at the closing table
Jonathan Dyer is a loan originator at Neighborhood Lending Services. He explains how the Loan Estimate further enforces provisions that started with the GFE and its similar predecessors. The Loan Estimate provides additional protections against last minute changes in loan terms and fees.
“Often, some fees [as stated in the disclosure] would be subject to change and would increase at the final hour [before closing],” he told MagnifyMoney. “Regulatory agencies have now prohibited any increase of disclosed fees without a significant change in the loan purpose or loan amount.”
Because of this, there are strict rules around what loan terms can and cannot change at closing. Another plus is that there are provisions that give you the chance to compare your Loan Estimate against your final Closing Disclosure at least three days before you come to the closing table.
Another improvement with the Loan Estimate came with reducing the number pages consumers receive during the loan application process.The Loan Estimate effectively replaces both the GFE along with the Initial Truth In Lending (TIL) Disclosure and consolidates this into one, shorter form.
You can see example templates of each form before and after to get an idea of the differences (click images below to access to the PDFs). From the thumbnail view, we can see pretty easily that the form is shorter and potentially less confusing for loan applicants.
When do I get a loan estimate?
Now that you know about how the estimate process and documentation have improved for loan applicants, you should know about what starts the clock on when you should have your Loan Estimate in hand.
Loan Estimates must be provided to consumers within three business days of submitting a loan application providing six pieces of information to a lender:
Social security number (for credit reporting)
Market value of the property (normally the sale price)
According to federal regulations, this is not an optional step. Lenders must provide this document to loan applicants and it has to be within three business days, or they could be in violation of the law.
Key terms to understand
Once you receive your Loan Estimates, pay attention to key terms and make sure you are comfortable with the impact these obligations will have on your overall finances.
Loan amount. The amount you are borrowing from the bank. Your loan should be reduced by the amount of your down payment.
Interest rate. How much interest you will pay the bank as a percentage of your loan. You should also pay attention to if this rate is fixed or variable (Note: Also pay close attention to the APR, which is discussed in the ‘Comparisons’ section below).
Monthly principal and interest. This how much you will pay on your home loan each month that will cover the principal loan amount and bank interest.
Estimated total monthly payments. This is how much you’ll pay each month for your loan. At minimum, your payment will Include loan principal and interest, but can also include property taxes, insurance, and possibly other fees like HOA dues.
Estimated taxes, insurance and assessments. It’s possible that these items will not be in escrow and therefore, not included in your payment. In this case, you will have to pay these fees yourself, aside from your monthly loan payment.
Estimated cash to close. This is the amount of money you’ll need to bring at the time of closing.
These are just a few key terms you should understand to start. If you want to understand all sections and terms on your Loan Estimate use the CFPB’s interactive tool called the Loan Estimate Explainer. This tool allows you to hover over sections of the document to get clear explanations of any sections or terms you don’t understand.
How to compare estimates from multiple lenders
Perhaps one of the best things about the Loan Estimate is the ability to compare estimates from multiple lenders. The template’s language is clear and uniform so you can quickly and easily identify areas where you should be comparing rates and terms.
Before you compare your Loan Estimates, make sure you are getting estimates for the same kind of loan from each lender. For example, if you ask one lender for rates and terms on a 15-year mortgage and another for a 30-year mortgage, you won’t be comparing apples to apples.
Next, there are certain sections you should examine to make sure you are getting the best deal from your lender:
On page 3 of your Loan Estimate, you’ll find a section labeled “Comparisons.” It contains a simple table with figures that you’ll want to use for comparing estimates. Once you get Loan Estimates from all the lenders you’re considering, put each lender’s comparison table side by side.
First up, you’ll see a section labeled “In 5 years,” showing how much you’ll pay for your home in the first five years. The first number in this box tells you the total you would have paid in principal, interest, mortgage insurance, and loan costs over the first five years of your home loan. Right below this number, you’ll see the amount of principal you would have paid off as well.
Next in the table, you’ll see the annual percentage rate (APR.) This figure is key because it takes into account all the fees you’ll pay for to purchase your home. Think of it as the bank’s interest rate plus any points, mortgage broker fees, and other charges that you might pay for your loan.
Finally, at the bottom of the table, you’ll see total interest percentage (TIP) will be right under the APR section. It represents the total amount of interest you’ll pay over the lifetime of your loan.
Under the “Costs at Closing” table on page 2, you’ll see a section labeled “Estimated Cash to Close.” For more details on how these numbers were calculated, look at “Calculating Cash to Close” at the bottom of page 3.
This section goes over the cash needed to settle up at the closing table i.e. what you need to bring to closing. Remember, this figure should be not changed drastically from the Loan Estimate once you get the final closing disclosure.
Fees that cannot change at closing include lender fees, other service fees, transfer taxes, and commission fees due to mortgage brokers or affiliates. Fees that can change 10 percent in either direction are recorder fees or service fees related to third-party providers.
If closing costs changed substantially, you may be eligible for a refund of costs that go beyond the allowable limits.
The smartest way to buying a home comes down to understanding your options and choosing the best one. You may feel tempted to go with the nicest lender, or the one with the most brand recognition, or where you already bank.
However, if you don’t compare actual loan terms, you could be forgoing the best possible outcome for your home purchase. Use the Loan Estimate for what it was designed for: comparison shopping to get the best deal on a home loan.
When you buy a home, in addition to your down payment, you need to budget for closing costs. Closing costs are the fees paid to third parties that help facilitate the sale of a home. The amount you’ll pay depends on several factors including the price of your home, your lender’s requirements, and the location of the property. We’ve put together this guide to help you get a sense of what to expect.
The type and amount of fees you’ll pay vary widely based on the lender you work with, the loan you choose, and your location. Here are some common fees to expect when closing on a home loan:
Paid to a professional who gives the lender an estimate of the home's market value.
In some states, an attorney may be required to represent the interest of the buyer and/or lender. This fee is paid to the attorney to prepare and review all closing documents.
Some lenders charge a fee for accessing your credit information.
Paid to a third party to determine whether the property is located in a flood zone. If your property is in a flood zone, your lender may require you to purchase flood insurance in addition to homeowners insurance.
Home warranty fees
If you choose to purchase a home warranty on the property, the annual premium may be included in your closing costs.
Homeowners association (HOA) fees
If your home is located within a homeowners association, the association may charge a fee to help pay for services and capital improvements. You may also need to prepay a portion of your annual dues at closing.
The first year's premium for your homeowner's insurance is typically paid in full at closing.
Paid to a home inspector to evaluate the home and tell you whether the property you want to buy is in good condition. You may also have a separate pest inspection to check for termites and other pest infestations.
Your lender may require that a surveyor conduct a property survey.
Upfront charges from your lender for making the loan. This may include an application fee and underwriting fees.
The cost of having a licensed notary public certify that the persons named in the documents did, in fact, sign them.
An upfront fee paid to the lender in exchange for a lower interest rate.
If you close on your loan in the middle of the month, your lender will collect interest on your loan from the closing date until the end of the month.
Private mortgage insurance premium
Depending on the type of loan you choose and how much money you put down, you may have to pay mortgage insurance – a policy that protects the lender against losses from loan defaults. Some lenders require an upfront premium, some collect it in monthly installments, and some do both.
Six months of property taxes are typically paid at closing.
State and local governments typically charge a fee to record your deed and other mortgage documents.
Real estate broker or agent fee
Fees paid to seller's real estate broker for listing the property and to the buyer's broker for bringing the buyer to the sale. The seller of the property typically pays these fees.
Provides protection if someone later sues and says they have a claim against your home, either from a previous owner's delinquent property taxes or contractors were not paid for work done on the home before you purchased it.
A fee paid to the title company to search the public records of the property you are purchasing.
Taxes imposed by the state, county, or municipality on the transfer of property. They may also be called conveyance taxes, stamp taxes, or property transfer taxes.
The amount you’ll pay depends largely on your location. A 2017 survey from ClosingCorp, a provider of residential real estate closing cost data, found that the national average closing costs totaled $4,876. That figure is based on closing cost data reported to more than 20,000 real estate service providers across the country. ClosingCorp compiled the average closing costs in each state, and based on the average purchase price in each state, average closing costs ranged from about 1% to about 4% of the purchase price. (The actual closing costs you pay could be higher or lower — a general rule of thumb says to expect paying about 2 to 7% of your home’s purchase price in closing costs.)
States with the highest average closing costs were:
District of Columbia: $12,573 (2.01% of average purchase price)
New York: $9,341 (2.60%)
Delaware: $8,663 (3.36%)
Maryland: $7,211 (2.28%)
But based on percentage of average purchase price, these states had the highest average closing costs:
Pennsylvania: $6,633 (3.50%)
Delaware: $8,663 (3.36%)
Vermont: $6,839 (2.99%)
New York: $9,341 (2.60%)
States with the lowest average closing costs were:
Missouri: $2,905 (1.63%)
Indiana: $2,934 (1.89%)
South Dakota: $2,996 (1.48%)
Iowa: $3,138 (1.70%)
And by percentage:
Hawaii: $5,528 (0.84%)
Colorado: $3,994 (1.09%)
Massachusetts $4,273 (1.14%)
California: $6,288 (1.20%)
In areas where home prices are high, closing costs will typically be high as well because many closing costs are calculated as a percentage of the home’s purchase price. In other areas, the ClosingCorp report pointed to high county transfer taxes as the principal reason certain areas have such closing costs.
Fortunately, there are steps to you can take to save on closing costs.
How to save on closing costs
Step 1: Choose your location
The location has a lot to do with the total closing costs you’ll pay. Factors that affect closing costs include:
Home price. Since many costs are calculated as a percentage of the home’s purchase price, buying a less expensive home can lower your closing costs.
Property taxes. You may have to prepay six months of property (or real estate) taxes at closing, so buying a home in a state with high-property tax rates can significantly impact your closing costs. The Tax Foundation publishes a list of the property tax rates by state. New Jersey is the highest with an effective tax rate of 2.11%, and Hawaii is the lowest at 0.28%.
Laws and customs governing the closing process. Some states require an attorney to handle closings, resulting in higher legal fees at closing. In other states, closing costs are lower because closings are handled by a title or escrow company.
Real estate transfer taxes. Transfer taxes are imposed by state and local government entities and can vary widely by locale. The National Conference of State Legislatures publishes a list of real estate transfer taxes by state. Some states, such as Alaska and Louisiana, have none as of 2017. In some localities in Colorado, the rates can be as high as 4%.
Ask your lender or real estate agent about closing costs in your area. If you’re not determined to live in a particular area, you could save thousands in closing costs by buying in a neighboring state or county.
Step 2: Shop around
A crucial step to saving on closing costs is to shop around. Home loans are available from many different types of lenders, and different lenders may quote you different rates and fees, even of the same type of loan. You should contact several lenders for quotes.
When you receive a quote, don’t just get the interest rate, APR, or monthly payment amount. The lender should provide you with a Loan Estimate that discloses the loan terms, amounts, interest rate, total monthly principal and interest, and whether the item can increase after closing. It also communicates which closing costs you can shop around for and which are fixed no matter which lender you choose.
Also, take a look at the homeowners insurance premium listed on Page 2 of the Loan Estimate. The lender will estimate an amount for the Loan Estimate, but your homeowner’s insurance premium is set by the insurance company, not the lender, and insurance rates can vary drastically by company. Comparison shopping for insurance can have a significant impact on your closing costs, as you’ll typically pay the first year’s premium at closing.
Step 3: Negotiate
Jeffrey Miller, co-founder of AE Home Group in Baltimore, Md., says knowing whether closing costs are negotiable or non-negotiable depends on whether or not they’re being charged for the mortgage company’s labor or to an outside service. “Line items like origination fee can be negotiated lower, whereas line items like the county recording fee are set by an outside third party and are non-negotiable,” Miller said.
Page 2 of your Loan Estimate will list the services you cannot shop for and the services you can shop for. The services you cannot shop for may be set by a government program or a third party rather than the lender. Your lender may provide you with a list of approved vendors for the services you can shop for.
Miller says in his experience, the line item with the most potential savings is the survey. “As a buyer, you have the right to select the survey company that is used,” Miller said. “We’ve seen this price range anywhere from $120 to $600. If this amount is on the high side, then it may be advisable to select a new survey company.”
Step 4: Ask the seller to pay closing costs
Many loans, including FHA loans, allow sellers to contribute a percentage of the sales price to the buyer as a closing costs credit. This is especially useful for buyers who are short on cash for the down payment and closing costs but can handle a slightly higher loan balance.
For instance, say the seller is asking $200,000 for the home. The buyer can offer $204,000 but asks the seller to cover up to two percent of the original asking price in closing costs ($200,000 x 2% = $4,000). The seller is able to get the same net profit on the sale, and the buyer reduces his closing costs by $4,000.
Keep in mind that lenders may have restrictions on how much the seller can credit to the buyer at closing. For instance, FHA loans limit the seller concession to 6% of the home’s sales price. There may also be restrictions on the types of closing costs that can be covered by the seller credit. For instance, they may restrict the seller credit to covering non-recurring items like the title insurance and loan origination fees.
Step 5: Time your closing
Part of your closing costs consists of prepaid interest charges for the time between your closing date and the end of the month. The earlier in the month you close, the more you’ll pay in prepaid interest. To reduce the amount you’ll need out of pocket, you can consider closing at the end of the month. The difference may be small, but if you’re really strapped for cash to close, this could help. However, timing your closing at the end of the month doesn’t actually save you any money in the long term. It just impacts the amount you’ll need to come up with at closing.
Step 6: Sign in person
Kevin Miller, Director of Growth with Open Listings, an online house-hunting service based in Los Angeles, says you may be able to reduce the costs you’ll pay at closing simply by asking your escrow company. “You should contact them at the beginning of the process to discuss the fees they charge you,” he said. “If you agree to use electronic documents and sign in-person, you may be able to avoid fees for a mobile notary, printing, and mailing.”
Should I get a no-closing cost mortgage?
While shopping around for a mortgage, you may have come across a “no-closing cost mortgage” and wondered if it’s the right deal for you.
A no-closing-cost mortgage is worth looking into, but “no closing costs” doesn’t actually mean you won’t have to come up with any cash for closing. Instead, it means that the lender doesn’t charge any lender fees. However, they may charge a higher interest rate to cover the costs of making the loan or add the closing costs to your loan amount.
Either way, you won’t need to come up with as much cash to close, but you’ll typically have a higher monthly payment.
Also, keep in mind that you may still have to pay costs at closing, such as title insurance and appraisal fees. Before you get locked into a no-closing-cost mortgage, ask the lender for a Loan Estimate and take a look at the interest rate, APR, monthly payment and the amount you’ll need at closing. Consider whether reducing the cash you need to close is worth paying more in the long run with a higher interest rate or larger loan amount.
The bottom line
When you’re in the market for a mortgage, it pays to shop around. Review your paperwork carefully. Ask your lender about any costs and fees you aren’t familiar with, or anything that changes from your Loan Estimate to the closing documents. Negotiating can be intimidating for many people, but your home is a big investment. The more you can save on closing costs, the more cash you’ll keep in your pocket for moving, buying furniture, and making your new place feel like home.
You don't have to be an expert negotiator to leverage the power of persuasion — and ultimately save big. Alison Fragale, negotiation expert and professor of organizational behavior at the University of North Carolina, tells MagnifyMoney that a little preparation can go a long way.
"Any time you have goals you need to achieve, and you need someone else's cooperation to make those goals happen, that's a negotiation," she said, adding that coming to the conversation prepared is often a game changer.
We caught up with a handful of folks who did just that. From talking down debt, to negotiating salary increases, these everyday people successfully haggled their way to some big financial wins — to the tune of $40,000 worth of savings.
Here's how they did it.
I shaved $7,400+ off my student loan balance.
As of 2014, the average college graduate wrapped up their studies with nearly $29,000 in student loan debt, according to The Institute for College Access & Success. But your balances aren't always set in stone.
Danielle Scott, a 30-year-old public relations professional in New York City, used some persuasive bargaining skills to save thousands on her private loans. The inspiration? After several years of just paying the minimum monthly payment and calling it a day, she was discouraged to see that her principal balance was relatively unchanged, thanks to super high interest rates.
"One was as high as 15 percent, and my total loan balance was about $80,000,” Scott told MagnifyMoney.
She called her loan provider, Navient, and cut a deal — if they agreed to lower the interest rate on her loans, she'd up her monthly payments from $400 to $1,500. They agreed, lowering her rate to 1% on one of her two loans, and Scott put everything she had into paying down the debt over the next five years. She paid much more in the short term, but she saved big over the long haul since she was shortening the life of the debt and putting way more toward the principal balance.
Earlier this year, when her balance had gone down to $15,000, her loan servicer reached out to her with a deal of their own. They were willing to reduce her balance to $9,000 if she could pay it off in two lump payments. Scott countered.
"I asked them how low they could go if I agreed to pay it all off in one payment," she recalls. "At first, they said no, but after pushing back a little, and being put on hold for 20 minutes, they came back with $7,600 as their final offer, but I had to make the payment that day."
Scott dipped into her savings to pay it and, just like that, was debt-free.
While you might have some wiggle room negotiating private student loan debt, federal student loans are a different story. If you've defaulted on federal loans and they've been sent to collections, you can use one of the following standard settlements to make good with the U.S. Department of Education, according to student loan expert Mark Kantrowitz:
Pay off the current principal balance plus any unpaid interest; collection fees are waived.
Pay off the current principal balance plus 50 percent of any unpaid interest.
Pay off a minimum of 90 percent of the current principal balance and interest.
Just keep in mind that settlements are generally due in full within 90 days. (FYI: There's also a chance you'll have to pay taxes on whatever is forgiven.)
I talked my way out of $20,000 of medical debt.
In 2010, Robin, a Tampa, Fla., lawyer, was involved in a major car accident that almost cost her her life. The road to recovery was a long one and included multiple surgeries and hospital stays. Despite having health insurance, her bills eventually reached a whopping $197,000. But it wasn't until she really pored over the statements that she noticed some major errors.
"A mix of in-network and out-of-network medical providers were billing me for whatever my insurance company wasn't paying, even after I'd met my deductible," Robin, 57, told MagnifyMoney. She requested that we not use her full name because she’s still negotiating down her debts.
"I called each and every medical provider, in some cases threatening to report them to the attorney general," she recalled. "Some bills were forgiven more easily than others; some took years to resolve, but nothing was ever sent to collections."
All in all, Robin has wiped out about $20,000 of her medical debt by directly challenging providers — a wise move considering that the Consumer Financial Protection Bureau reported that medical bills make up over half of all debt on credit reports.
I negotiated a $15,000 raise and promotion.
When it comes to nailing down a raise, getting a pay bump of 2 percent per year is the average, according to the U.S. Department of Labor. But you might be able to get more if you're willing to negotiate.
Ariel Gonzalez, a 33-year-old front end development engineer in Orlando, Fla., has successfully negotiated multiple pay raises over the years. The latest got him a $15,000 pay bump and promotion after a year of working in a junior position.
"My demeanor is typically calm and confident, but firm," he told MagnifyMoney. "I hate talking about money, but I know what I bring to the table as an employee."
Gonzalez is a big believer in coming to salary negotiations as prepared as possible, researching comparable salaries on sites like Salary.com and Glassdoor. Referencing positive client testimonials in past negotiations has also proved fruitful. He landed his last raise in 2016 by showing up to the meeting with an air of respect and transparency.
"I came to my boss with my number, hat in hand, and said that it was what I needed to be comfortable and that I didn't want to do the whole back-and-forth thing," Gonzalez said, adding that the promotion and raise he was asking for were in line with his performance and proven results as an employee.
The preparation and confidence paid off; his boss had no problem granting his request. The takeaway? Do your homework ahead of time and ask for what you deserve.
Some expert negotiation tips to follow
Whether you're looking to score a raise or buy a new car, Fragale suggests pinpointing the following three terms before beginning any negotiation:
1) What are you trying to achieve? This should be a clear aspiration that's grounded in reality, given your circumstances.
2) What's your walk-away point? Before going in, clarify the point at which you'll abandon the deal. Fragale said knowing this beforehand is empowering because it discourages an "I'll take what I can get" mentality.
3) What's the alternative? In other words, if you don't get what you want out of this deal, what's going to happen? If the stakes are high and your alternative is terrible, you'll be more inclined to settle for less than what you want. (Case in point: You're more likely to settle for a low salary if your alternative is unemployment.)
"If you have the luxury, try and make your alternative as good as possible before negotiating," says Fragale. "That tends to lift the whole boat."
While the average costs to build a house can give you a general idea of how much you’ll pay for a new build, it’s important to note that the costs of building any home can vary dramatically. Where you live, for example, can play a huge role in not only the costs of land but the price of the permits and fees you’ll need to cover.
Of course, there are other factors that will dictate how much you pay, from the type of home you select to what you choose to do inside. Other factors that can dictate the costs of your home include:
Your lot: The NAHB reports that the average price for a lot of land worked out to $4.20 per square foot in 2015 (the most recent data available), bringing the total for an average size lot (20,129 square feet) to $84,541.80. However, this cost can vary depending on the lot you buy, the size of the lot and the local real estate market where you buy.
Home size: The larger the home, the more construction costs you’ll encounter, says Frank Nieuwkoop, sales and marketing director of new-home builder Valecraft Homes Ltd. Larger homes also require more materials (more flooring, more lighting, more fixtures, etc.), he says, which can lead to higher costs in a hurry.
Upgrades: If you opt for fancy upgrades, you’ll pay more for a new home, says Nieuwkoop. Granite or marble, upgraded fixtures, and custom woodwork can make any home considerably more expensive. This is one area where you can also save on the costs of building, however. Where laminate countertops may cost just $10 per square foot installed, you’ll pay more like $60 to $120 per square foot for concrete or recycled glass, according to Consumer Reports. If you multiply those savings across all the rooms that need counters in your home (kitchen and baths), it’s easy to see how you could pay more or less depending on what you choose.
Home design: The design of the home can also play a factor in cost, says Nieuwkoop. If you build a home that is standard in design, you may pay less than if you build a custom home with unique design or special features. If you design a truly custom home, you may also need to hire an architect to draft a design. Hiring an architect can add another 15 or even 20 percent of costs to your total project.
Siding: What you choose to cover the exterior of your home can play a big role in your total price. If you choose a custom stone exterior, you may pay more than you would if you choose vinyl siding instead.
Landscaping: Will you opt for an elaborate outdoor landscaping scheme or some simple greenery? Your landscaping choices will play a role in the costs of your home as well as ongoing outdoor maintenance. You’ll also pay more for a fenced yard.
Building vs. buying
Building a home comes with pros and cons that are entirely different from the factors that lead people to purchase an existing home. Before you choose to build or shop among homes already in your area, make sure to consider the advantages and disadvantages of both scenarios.
Pros of building your own home
Less competition: According to the National Association of Realtors, existing homes stayed on the market for an average of 34 days nationwide before being sold in October 2017. In “hot areas” of the country such as San Francisco, San Diego, Boston, and San Jose, however, houses — especially those in an affordable price range — tend to go under contract in less than a week, it notes. By selecting your own lot and building a home, you can avoid stiff competition for existing properties and still get the home you want.
Everything is new: “Many people love the idea that everything in their house will be brand new when they build,” says Nieuwkoop. Having new fixtures, a new roof, new appliances and a new HVAC system may also mean you’ll have fewer repair bills during the first few years of homeownership.
Choose the location of your home: Building a new home on a lot you choose puts you in the unique position of selecting exactly where you’ll live. This can be advantageous if you hope to live near work or near public transportation, or if you want a lot with a certain type of view. “Do you want to back up to a lake or woods?” asks Nieuwkoop. “When you build, you get to decide.”
Select your own floor plan and finishes: Whether you build a custom home or select a floor plan through a builder, you get to choose how your new home is set up — including your floor plan. You may even be able to select your own finishes including your paint color, countertops, flooring and cabinets.
Cons of building your own house
Moving delays: Building a home often means longer delays when it comes to moving, says Nieuwkoop. “Building a home can take as little as two months all the way up to a year,” he says. If you want to move quickly, this can be a deal-breaker.
Building surprises: Especially if you design a custom home, you may not know exactly how the floor plan flows until your home is already built, notes the expert. “With a custom home especially, you may end up with something different than you envisioned.” Fortunately, this isn’t typically a problem with larger builders and developers since they often have model homes you can walk through, he says.
Pricing surprises: With custom homes especially, pricing can easily surge — especially if you make changes as the plan moves along, says Nieuwkoop. Plus, there are added costs that come with building that many people forget. Adding window blinds and treatments can add up, as can new décor, shelving and other interior fixtures that don’t come in the home price. Builders rarely put a fence in the yard, so that’s another expense to consider if you want one.
Less negotiation power: You may be able to negotiate the price on an existing home if a buyer is motivated to sell, but there may be less wiggle room on the price of a new home.
Construction traffic: If you’re building in a new neighborhood, you may deal with ongoing construction traffic for months or even years.
Pros of buying an existing home
Save money with existing features: Existing homes tend to have a lot of additions and upgrades made already, says Nieuwkoop. You may already have mini blinds, a privacy fence and appliances, for example, which can help you save money.
Move in quicker: “Although it can take a few months to close on an existing home and be able to move in, the timeline until move day is still faster with an existing home,” says Nieuwkoop. If you need to move quickly, you can typically do so faster if you buy instead of build.
Property maturity: Existing homes tend to have more mature trees and landscaping, which could be advantageous if you don’t like the idea of growing new grass on your own.
No construction zone: If you’re buying a home in a mature neighborhood, you may not have to deal with ongoing construction issues like you would with a new build in a new neighborhood.
Cons of buying an existing home
Lack of customization: You don’t get to pick out the floor plan or fixtures when you buy an existing home. You get exactly what is there already, which may or may not be what you want.
Costs to upgrade: If you buy an existing home that is out-of-date, you may need to spend considerable sums of money to make important updates or replace out-of-date fixtures.
Hidden problems: Existing homes may have problems you don’t see, says Nieuwkoop, adding that home inspectors don’t always find every issue. “If there was a water leak in the home and the seller replaced the drywall without actually fixing the issue, you may not find out you need costly repairs until after you move in.”
Who it’s best for
According to Nieuwkoop, building is best for individuals and couples who are very detailed and know exactly what they want. Building is also ideal for people who don’t care as much about cost as long as they get a brand-new home and the ability to pick and choose every finish and feature.
“Building is also best for buyers who are patient and willing to endure some bumps along the road,” says the builder. “If you’re high stress and don’t want to deal with any issues, you may be better off buying a newer existing home.”
5 steps to building a house
While the process of building a house can vary slightly depending on whether you design your own custom home or work with a developer, the main steps to completing the process are the same. Fortunately, Nieuwkoop helped us outline the five steps to building a house from beginning to end.
Step 1: Create a budget.
Before you decide to build or buy a home, it’s crucial to know how much you can afford to spend. The best way to come up with a housing budget is to see a mortgage broker or apply for a mortgage online, to see how much you can afford to borrow. You should also get pre-approved for a mortgage, says Nieuwkoop. That way, you’ll be ready to work with a builder when you decide what you want. You can compare mortgage offers online with LendingTree, MagnifyMoney’s parent company.
Step 2: Purchase land or select a lot.
Once you know what you can afford (house and land included), it’s time to find a lot in an existing community or buy land you plan to build on. Keep in mind that the price of the land you buy will need to be included in your mortgage amount unless you plan to buy the land in cash separately. If you’re choosing a piece of land that hasn’t been developed, you should also ask your builder about the costs of adding utilities to the property, cutting down trees, or leveling the land.
If you’re buying from a developer or builder who is overseeing the construction of a new neighborhood, it’s possible the price of your chosen lot will be built into the price of the floor plan and home you select, says Nieuwkoop. Either way, now is the time to talk through land costs with a builder and decide where you want your new home to be.
Step 3: Develop floor plans and designs.
If you’re working with a builder, chances are good they’ll offer a range of floor plans and new home designs you can choose from. If you’re building a custom home, on the other hand, you’ll likely need to hire an architect to create a realistic housing design that encompasses all the features you want.
Either way, you need to nail down your ideal floor plan and design at this stage. Decide how many bedrooms and bathrooms you want, along with the general layout of your home. From there, you can select or design a housing plan that fits your budget and style.
Step 4: Select finishes, features, and appliances.
Once you’ve chosen the layout of your home, you still need to choose what goes inside. Work with your builder to decide on the interior finishes in your home, from the cabinets in your kitchen to your light fixtures, plumbing fixtures, flooring, and paint colors.
Step 5: Watch your home being built.
Once your home is commissioned and ready to be built, you can watch as the process takes place over the weeks and months. Nieuwkoop says that, ideally, your builder will let you walk through the home during various stages of the process. By walking through, you may be able to discover and point out issues that need to be fixed, such as incorrect fixtures or design problems.
How to finance the build
According to mortgage advisor Jeremy Schachter of Pinnacle Capital Mortgage, the process for financing a new build is similar to the process of buying an existing home.
When you build a home, it’s crucial to get pre-qualified with a bank or lender. During this process, the lender will take a look at your credit score, income, assets and debts, then use those factors to determine how much you can borrow.
The biggest difference with a new build, says Schachter, is that you’ll likely need to get pre-approved for a mortgage once and then start a portion of the process over again. “You’ll need to submit financial statements, a credit report, and pay stubs to get approved to build a house, but you’ll likely need to resubmit all this information again if the process takes several months,” he says. Schachter was clear that the final home closing doesn’t take place until the house is completed, and that this is when you’ll start making mortgage payments.
Fortunately, Schachter says, many lenders will let you lock in the interest rate on your home loan for up to a year when you’re building a home. But you should always check and ask about your APR to make sure you’re not stuck with a higher interest rate if your new build takes several months and rates surge during that time, he says.
What type of home loans can you use?
Schachter notes that consumers can use any type of home loan to build a property that they could use to buy a traditional home. For example:
VA loans: To qualify for a VA loan, you must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) based on your level of service. You must also plan to live in the home full-time.
FHA loans: You can apply for an FHA construction loan to finance a new build. To qualify for an FHA loan, you’ll need at least 3.5 percent as a down payment, a credit score of 580 or higher, and proof of income. You may qualify for an FHA loan with a credit score lower than 580, but you’ll need to make a larger down payment. Lenders will also look at your debt-to-income ratio — a figure determined by taking all your debt payments and dividing them by your gross monthly income. If you have $3,000 in bills each month and your gross monthly income is $5,000, your debt-to-income ratio is 60 percent. Generally speaking, lenders want you to keep your debt-to-income ratio under 43 percent, including all housing payments.
Conventional home loan: Requirements for a conventional mortgage can vary, although you typically need a good credit score (FICO score of about 740 or higher) to qualify for a loan with the best APR. Lenders also look at your employment history, income and debt-to-income ratio.
Construction loans: Schachter notes that individuals building a custom home may need to get a special “construction loan from a lender or bank.” These loans cover the initial costs of building a house, including the lot, building materials and architect fees. Schachter notes that construction loans are typically short-term loans with variable interest rates that are good for less than a year. Ultimately, construction loans are converted to permanent home loans once the construction process is complete.
Drew and April Olanoff had great jobs in Silicon Valley, but even they were discouraged by the house hunting process in the San Francisco Bay Area: all-cash offers, bidding wars, two-bedroom condos listed for $1.5 million. They quickly decided to move their search to Drew’s hometown of Philadelphia — and they conducted the whole process online, from settling on a home to nailing down a mortgage.
The Olanoffs are just two of a growing number of homeowners who obtain a mortgage completely online, uploading documents and e-signing forms with no in-person meetings required. Online direct lenders — that means companies like SoFi, Better Mortgage and Rocket Mortgage by Quicken Loans — typically eschew costs like origination and applications fees. And they focus on speedier processes, which can lead to quicker closing times compared with more traditional mortgages. (Disclosure: MagnifyMoney’s parent company, LendingTree, offers homebuyers an online tool they can use to compare quotes from mortgage lenders.)
These upstart players are pushing the mortgage industry to innovate and become more transparent, experts say. But, they add, a fully online experience isn’t for everyone — and online lenders may not necessarily offer a homeowner a better rate than a traditional lender would.
“I can’t even imagine going into an office, dropping off paperwork, seeing people, and not getting the house at the end of the day,”
In the Olanoffs’ case, they even selected their home unconventionally, at a distance. From the West Coast, they directed a ReMax real estate agent to visit about 10 homes, shoot video and upload the footage to YouTube. They chose their 1916-built South Philadelphia home based on these videos.
Then their agent directed them to GuaranteedRate, one of the largest mortgage lenders in the U.S., which offered them a fully online experience, with the ability to upload and digitally sign documents. The Olanoffs were approved for an Federal Housing Administration (FHA) loan for about $260,000 in July 2016, and closed on the home that September.
“It was way less stressful doing it online,” says Drew, 38, vice president of communications at venture equity firm Scaleworks.
“I can't even imagine going into an office, dropping off paperwork, seeing people, and not getting the house at the end of the day,” he adds. “The process leading up to and bidding on a home is so stressful, it's almost like we were automatically removed from the intensity of it by doing it online. And we knew if we got outbid, all of our paperwork would still be there ready to go, which is genius.”
That ease and transparency is attractive not only to smartphone-loving millennials, but to homebuyers of all ages who are tired of complex and confusing mortgage-application processes, says Keith Gumbinger, vice president of the independent consumer-loan site HSH.com.
“The push to online has been underway for years, and it’s finally coming to the forefront with consumers’ widespread adoption of technology,” Gumbinger says.
“The market has now grown into it, too. You don’t think about it as a homebuyer, but there are lots of backend processes and entities involved in a mortgage. The industry has worked to come up with standards and it’s finally gotten there.”
Here’s a look at three of the major online mortgage players, all of which are direct lenders and can complete 100 percent of the process online.
SoFi’s mission and advantages: “SoFi’s target market is high-earner, not-rich-yet,” says Helen Huang, its senior director of product marketing. That reflects SoFi’s unique applicant-assessment philosophy: The company looks beyond the traditional factors like credit report and savings, taking into account the borrower’s earning potential.
SoFi gives a lot of weight to job history and career prospects. So a high-demand software engineer who has restricted stock units at Facebook and her choice of Silicon Valley jobs might be more attractive to SoFi, compared with the person with good money saved for a down payment. (It’s no surprise, then, that Huang says a “significant” portion of SoFi customers work in the technology industry.)
SoFi has another edge over traditional lenders: The company requires only a 10 percent down payment with no private mortgage insurance requirement. Most lenders require 20 percent down to skip over PMI. SoFi issues mortgages up to $3 million, and the company has originated $2.2 billion in mortgages since 2014.
SoFi is short for Social Finance — the company offers lots of other services, like student loan refinancing and wealth management — and it lives up to its name with its SoFi Members Facebook page. The group is extremely active, with SoFi customers frequently posting to solicit advice and tips from fellow borrowers or SoFi’s customer service team.
Potential cons: SoFi won’t originate loans below $100,000, so it’s not a good choice for customers in areas where real estate is relatively inexpensive. Borrowers must put down a minimum of 10 percent for new loans. And it takes 72 hours to receive a decision from SoFi, which — while quick — isn’t as speedy as some competitors.
SoFi mortgages also aren’t available nationwide. The company only originates mortgages in 29 states: Alabama, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Maryland, Minnesota, Montana, Nevada, New Jersey, New York, North Carolina, North Dakota, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, Washington, Wisconsin, Wyoming and Washington, D.C.
SoFi’s mortgage application, step by step
Get started: First, you’ll set up a SoFi account by entering your name, state of residence, email and a password. Next comes the “Basic Info” screen: your mailing address, phone number, date of birth, citizenship and current living situation.
Next is School Info, where you’ll fill out information about post-high-school degrees. (SoFi notes on the screen that a “college degree is not required to qualify for a mortgage. While education is not used in mortgage underwriting, this info helps SoFi better understand our members.”) Then it’s time to add Employment Info: your employer name, job title, start date and annual income. For now, you’ll do this just for your current employer, and at the bottom of the page, select your total years of professional work experience.
Mortgage eligibility: Here you’ll complete several questions about what you’re looking for: Do you need a mortgage for a new property, a refinance, a student loan cash-out refinance or a cash-out refinance? You’ll also enter information about where you are in the buying process, and information about your desired area or specific property. You can also add information on this screen about your marital status and whether you have a co-applicant. Check the box to grant SoFi the right to do a soft credit pull to preapprove you for a mortgage. Remember: A soft pull won’t harm your credit score.
Get your rate: Hopefully, the next screen will announce: “Congratulations! You’ve pre-qualified for a SoFi mortgage.” If so, you can calculate your loan amount by entering the home’s price and your down payment. Then you can choose loan terms: 30-year fixed, 15-year fixed, or adjustable rate. To move forward, click “continue with pre-approval.”
Next you’ll fill out employment information for any previous jobs you may have held in the past two years, and if you currently hold two or more jobs you’ll add that information too. Then itemize any non job-related income, like Social Security or rental properties, and finally add any assets you want SoFi to consider in your application (checking, savings, brokerage or retirement accounts; second homes; etc.) and click “continue.”
Get approved: Finish up by answering a series of yes-or-no “declarations,” like whether or not you’re involved in a lawsuit. Finally, add your Social Security number and consent to SoFi’s credit disclosure. The final screen will confirm that SoFi is reviewing your application, and it will ask you to upload income validation documents (two most recent years’ W-2s or the last two years’ year-end paystubs), as well as your two most recent paystubs. You’re done; SoFi says applicants can expect to receive their application decision within 72 hours.
Rocket Mortgage by Quicken Loans
Rocket’s mission and advantages: As the online lender arm of Quicken Loans, Rocket is like a startup backed by a long-established, well-known parent. The company is named for its speed (its 2016 Super Bowl ad used the now-defunct, controversial tagline “Push button, get mortgage”).
One of the reasons for that speed is a unique, refreshing lack of paperwork. Rocket pulls from private and public sources to automatically fill in information like employment history and income, as well as financial statements (from the “vast majority” of institutions) — drastically cutting down on the need for uploaded documents or line-by-line typing of information. It’s somewhat similar to how budgeting apps like Mint pull your financial data from several institutions at once.
“Whether it’s car rides or takeout, these days we expect everything to happen immediately with the push of a button,” says Regis Hadiaris, Rocket’s product lead. “The mortgage industry has to catch up to that.”
On average, 60 percent of people using Rocket are doing so on a mobile device, Hadiaris says. Rocket originated $7 billion in loans in its first year, and the company now has nearly two million user accounts. Unlike many of its competitors, Rocket originates loans in all 50 states.
Potential cons: While mortgage consultants are available to help, including via phone or online chat, Rocket is clearly designed more for customers who want a fully digitized experience.
Rocket’s application process isn’t quite as streamlined as some of its competitors. Once you move past the preapproval process, you’ll be directed to Quicken Loans’ MyQL site to complete any needed tasks to purchase the loan, and to download your approval letter. On the plus side, Rocket says that starting in mid to late December 2017, users will be able to complete all possible digital steps within the same application.
Rocket Mortgage application, step by step
Start by creating an account with your name, username and password. Then you’ll answer questions about your current situation: where you live now, when you started living there, and how much you pay in rent or mortgage. Next, provide information about the home you want to buy, or your desired location. Add information for anyone else who will be a co-signer on the loan, if applicable.
The next section is where Rocket’s automatic filling of information comes in. The system asks for assets and income, which you can choose to type in manually – or you can click “Find My Account” to add the data automatically. Quicken/Rocket connects with the majority of financial institutions, but double check to make sure everything is complete and accurate.
Below that, it’s a similar process for employment data and income: Either add it manually, or let Rocket fill it automatically. The company’s primary source for this employment information is third-party verifier The Work Number, and Hadiaris says it covers just over half of Americans – so again, this is one you’ll want to double check.
Finish up by answering government questions like whether you’re a U.S. citizen, and authorize a soft credit check by entering your birth date, Social Security number and phone number. A countdown clock pops up (“T-Minus 00:06 Seconds”) and then you’ll be sent to a screen with your mortgage options.
Mess around with loan terms and down payment percentages to get different choices, and Rocket will categorize them by lowers monthly payment, lowest upfront costs and balanced costs and payments. You’ll be directed to MyQL.com to complete any needed tasks to purchase the loan, and to download your approval letter.
Better’s mission and advantages:Better’s tagline is “The status quo is broken.” The mortgage industry operates as if the Internet doesn’t exist, the company argues, with opaque and overly lengthy practices. So Better’s goal is to provide transparency during every step of the loan process — from crystal-clear FAQs and online resources to a streamlined application and speedy approval.
“We don't want to just disintermediate for the sake of it,” says Taylor Salditch, Better’s vice president of marketing. “We really are trying to tackle the whole process and rebuild it in a holistic way.”
Better offers a single application platform that borrowers can access anytime to e-sign documents, link bank accounts and securely upload files from any device.
Borrowers can work on the application for a bit, then save their progress and come back later to finish up. It takes three minutes to receive a basic preapproval confirmation, and 24 hours for a “cash-competitive” verified preapproval letter. The entire process is personalized to each user, with different questions popping up based on responses. The company has funded nearly $1 billion in mortgages.
Customers can chat with a loan consultant as early in the process as they would like, to ask questions or get more information even before they begin. Once borrowers are approved for a loan, they are assigned to a “Loan Ranger” who serves as their point of contact.
Better offers home purchase loans for as little as 3% down, as well as a variety of loan types. Borrowers can play around with different fees and discount points to see how it affects their rate. Better also guarantees its loan estimate will be at least $1,000 less in closing costs compared with a competitor offering the same rate and loan terms — or they’ll pay you $1,000.
Potential cons: Better originates mortgages in only Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, North Carolina, New Jersey, Oregon, Pennsylvania and Washington, plus Washington, D.C. The company says it’s working to expand into more states soon. Better won’t offer loans for manufactured mobile homes, cooperatives or multifamily units.
Also, Better doesn’t service mortgages. As a direct lender the company processes the application and underwrites, closes and funds your loan. Once the loan is funded, however, Better’s servicing partner LoanCare services the loan for a temporary period of about 30 days. Then it’s transferred to a “reputable, quality investor that provides the right type of loan and servicing for your situation.”
Better’s application, step by step
Better’s super-simple preapproval questionnaire is designed to help even customers who might be interested in buying a home sometime soon but don’t know where to start. First, Better asks if you already have an accepted purchase offer. If you do, you’ll enter the address and then Better will prompt you to create an account.
If you don’t have an accepted offer, then you’ll share the zip code where you’re looking and when you plan to make an offer (there’s an option to say “not sure”). Next, select which type of home you’re interested in — primary residence, second home or investment — and the property type (single family or condo/townhouse). At this point Better will ask you to create an account.
Then you’ll give Better permission to do a soft credit check that won’t affect your score, providing your name, current address, phone number and Social Security number. After a moment, Better will present your credit score from TransUnion and ask for a few more details: how you earn money, whether anyone else will be on the home’s title, if you’re working with a real estate agent, whether you currently pay rent or own properties, other assets available and the estimated purchase price of your home plus your maximum down payment percentage.
You’ll find out in a few moments whether you’re preapproved. If you are, you can look at rate options — terms include 30-, 20- and 15-year fixed, as well as a variety of adjustable rates — and select the one you like. Better says that basic preapproval takes about three minutes, and you can receive a verified preapproval letter within 24 hours.
Better wasn’t able to provide a demo after this point, because the rest of the process to loan purchase is a “personalized Q&A” that changes depending on the answers you provide. But Better says you can expect to need two years’ worth of the following documents: personal tax returns, business tax returns (if you own more than a quarter of the business) and W-2s or 1099s; plus two months of bank statements and proof of any alimony or child support payments.
Should you get an online mortgage?
A fully online mortgage process is great for buyers like the Olanoffs, and people who don’t want the hassle of meetings and phone calls. But other homebuyers might be unsettled by a “low-touch experience,” says Gumbinger, the HSH.com vice president.
A recent survey of about 2,000 U.S. adults conducted on behalf of the American Bankers Association showed that 60 percent use the Internet to research their home loans but would rather apply for a mortgage in person.
It’s important to ask yourself which of those groups you fall into. Are you a high- or low-touch shopper? Can you get your financial paperwork in order, or is it much more attractive to you to choose a lender who can automatically fill in that information? Is the ease and speed of the online process more valuable to you than the ability to have in-person meetings with a loan officer?
Whatever you do, shop around first
Even if your comfort level with a fully online experience is high, it’s paramount to do your homework when it comes to a decision as major as a mortgage. Compare experiences between both traditional and online lenders, be honest with yourself about your personal needs — and, though it goes without saying, we’ll say it anyway: Always shop around for rates. You can ask individual lenders for quotes (so long as you do them over a short period of time they should only count as one hard inquiry on your credit account) one at a time, or you can compare mortgage rates online from many lenders at once on sites like LendingTree.
“Just because someone has an electronic platform that’s easy and nice-looking, it doesn't mean you’ll get the best possible price,” Gumbinger says. “On the flip side, the mortgage lender your aunt recommended may not have the best price, either. The fact of the matter is, you always need take a cross-cut of the marketplace to find where you can get the best deal for you.”
When you’re shopping for a loan, don’t let your research end with a comparison of lenders’ interest rates. While a low interest rate is appealing, it’s important to also look at each loan’s annual percentage rate (APR), which will provide a clearer picture of how much the loan will cost you when fees and other costs are factored in.
APR vs Interest Rate: Understanding the differences
The difference between APR and interest rate is that APR will give borrowers a truer picture of how much the loan will cost them. While APR is expressed as an interest rate, it is not related to the monthly payment, which is calculated using only the interest rate. Instead, APR reflects the interest rate along with fees and other one-time costs a borrower will pay for a loan.
“You can find a mortgage that has a 4-percent interest rate, but with a bunch of fees, that APR may be 4.6 or 4.7 percent,” said Todd Nelson, senior vice president-business development officer with online lender Lightstream. “With all of those fees baked in, they are going to swing the interest rate.”
For example, one lender may charge no fees, so the loan’s APR and interest rate are the same. The second lender may charge a 5 percent origination fee, which will increase the APR on that loan.
How the APR is calculated
Lenders calculate APR by adding fees and costs to the loan’s interest rate and creating a new price for the loan. Here’s an example that shows how APR is calculated using LendingTree’s loan calculator.
A lender approves a $100,000 at a 4.5 percent interest rate. The borrower decides to buy one point, a fee paid to the lender in exchange for a reduced rate, for $1,000. The loan also includes $900 in fees.
With these fees and costs added to the loan, the adjusted balance being borrowed is $101,900. The monthly payment is then $516.31 with the 4.5 percent interest rate, compared with $506.69 if the balance had remained at $100,000.
To find the APR, the lender returns to the original loan amount of $100,000 and calculates the interest rate that would create a monthly payment of $516.31. In this example, that APR would be 4.661 percent.
APRs will vary from lender to lender because different lenders charge different fees. Some may offer competitive interest rates but then tack on expensive fees and costs. Lenders with the same interest rate and APR are not charging any fees on that loan, and lenders that offer APR and interest rates that are the closest will charge the least-substantial amount of fees and extra costs.
What can impact my APR?
While APR will change as interest rates fluctuate, lenders’ fees and costs will have the greatest impact on APR. Here are some of the fees that will affect the APR.
Discount points: Buying points to lower a loan’s interest rate can have a significant impact on APR. Lenders allow buyers to purchase “points” in return for a lower interest rate. A point is equal to one percent of the mortgage loan amount. For example, a buyer approved for a $100,000 loan could buy three points, at $1,000 each, to lower the interest rate from 4.5 to 4.15.
Loan origination fees: Loan origination fees typically range between 1 and 6 percent, according to Nelson. This can be especially significant for larger loans.
Loan processing: This fee, which some lenders will negotiate, pays for the cost of processing a mortgage application.
Underwriting: These fees cover an underwriter’s review of a loan application, including the borrower’s income, credit history, assets and liabilities, and property appraisal, to determine whether the lender should approve the loan application and what terms should be applied to the loan.
Appraisal review: Some lenders pay an outside reviewer to make sure an appraisal meets underwriting standards and that the appraiser has submitted an accurate report of the home’s value.
Document drawing: Lenders often charge a fee for creating mortgage documents for a loan.
Commonly not included in APR are notary fees, credit report costs, title insurance and escrow services, the appraisal, home inspection, attorney fees, document preparation and recording fees.
Because APR includes a loan’s interest rate, rising interest rates will increase APR for mortgages, auto loans and other types of loans and credit.
Interest rate vs APR: What should I focus on when shopping for a mortgage?
While lenders often push their low interest rates when they advertise loans, Nelson said it’s vital that consumers check loans’ APR when shopping around and pay attention to how loan advertisements are worded.
“Look for a lender that’s transparent about disclosing all of those fees,” he said. Lenders may advertise “no hidden fees,” he said, but that might mean there are other fees that simply aren’t hidden.
Here’s how two loans for the same amount can have different APRs.
Fees and costs
Fixed interest rate
The Truth in Lending Act requires lenders to disclose APR in advertising so that consumers can make an equivalent comparison between loans. If two loan offers have similar APRs, request a Good Faith Estimate (GFE) or Loan Estimate from each lender.
Lenders are required to provide this document, which shows all expenses associated with the mortgage, within three business days of the loan application date. Some lenders may be willing to supply a loan estimate for consumers who are shopping for a loan.
APRs on Adjustable Rate Mortgages (ARMs): What to know
It’s important to remember that the APR on ARMs will not apply for the life of the loan, as the payment on the loan will change as the economy fluctuates. APR on ARMs is calculated for the interest rate during the loan’s introductory period, and no one can predict how much the rate will increase in years to come.
A loan with a 7/1 ARM, for example, will have a fixed rate for the first seven years that is determined by the current economic conditions on the day the loan was approved. After seven years, the lender will begin to adjust the rate based on movement of the economic index, which likely will not be the same as it was when the loan was approved. Rates fluctuate daily, and no economic forecaster can predict where the index will be in 20 or 25 years.
Understanding mortgage interest rates
A mortgage rate is another term for interest rate, which is the rate that a lender uses to determine how much to charge a customer for borrowing money. Mortgage rates can be either fixed or adjustable.
Fixed mortgage rates do not change over the life of a loan. For example, if you take out a 30-year loan at a 4.25 percent interest rate, that rate will stay the same regardless of changes in the economy and market index, through the entire lifetime of the loan.
Adjustable rate mortgages (ARM), on the other hand, will change as the market changes after an introductory period, often set at five or seven years. That means your interest rate could go up or down depending on economic conditions, which will in turn raise or lower your payments.
ARMs, which are a common type of mortgage loan with an adjustable rate, often start with a lower interest rate than a fixed mortgage — but only for that introductory period. After that, the rate could go up as it adjusts to market conditions, which could raise your payment accordingly.
If you are considering an ARM, it’s important to talk to your lender first about what the adjustable rate could mean for your loan payment after the introductory period. The federal government’s Consumer Financial Protection Bureau (CFPB) recommends researching:
Whether your ARM has a cap on how high or low your interest rate can go.
How often your rate will be adjusted.
How much your monthly payment and interest rate can increase with each adjustment.
Whether you can still afford the loan if the interest rate and monthly payment reach their maximum under your loan contract.
How is your mortgage rate calculated?
Don’t be surprised if a lender offers you a mortgage interest rate that is higher than what is advertised. Each loan’s interest rate is primarily determined by market conditions and by the borrower’s financial health. Lenders take into account:
Your credit score: Borrowers with higher credit scores generally receive better interest rates.
The terms of the loan: The number of months you agree to pay back the loan can make a difference. Generally, a shorter term loan will have a lower rate than a longer term loan but higher monthly payments.
The location of the property you are purchasing: Interest rates are different in rural and urban areas, and sometimes they can vary by county.
The amount of the loan: Interest rates can be different for loan amounts that are unusually large or small.
Down payment: Lenders may offer a lower rate to borrowers who can make a larger down payment, which often is an indicator that the borrower is financially secure and more likely to pay back the loan.
Type of loan: While many borrowers apply for conventional mortgages, the federal government offers loan programs through the FHA, USDA, and VA that often offer lower interest rates.
How often do mortgage rates change?
Mortgage rates fluctuate on a daily basis. Because the market changes so often, lenders typically give borrowers the opportunity to lock in or float your interest rate for 30, 45, or 60 days from the day your lender approves your loan. That way you won’t get burned if rates rise soon after you secure a loan.
If you choose to lock in your rate, lenders will honor that rate within the agreed-upon time period before closing regardless of market fluctuations. Floating your rate will allow you to secure a lower interest rate before closing, should rates drop during that period.
How do mortgage rate changes impact the cost of borrowing?
When shopping for loans, you can best compare loans by getting mortgage quotes from lenders at the same day on the same time. Online marketplaces such as LendingTree also can provide real-time loan offers from multiple lenders, which makes it easier to compare mortgage APR vs. interest rates.
Don’t be dazzled by low interest rates. If the loan’s APR matches its low interest rate, you likely have a good deal. Otherwise, investigate the costs and fees behind a loan’s APR to best determine which loan offer is the best deal.
Learn more about how you can compare quotes from lenders at LendingTree.com.
Finding the right mortgage can be a confusing process, especially for first-time homebuyers. There are so many options that it can be hard for a consumer to know how to get the optimal rate and terms.
One way to get a better initial interest rate is by taking out a 5/1 ARM mortgage. Small wonder that many potential borrowers want to know what makes a 5/1 ARM mortgage so unique and whether it might be the right loan for them.
Below is a guide to how 5/1 ARM mortgages work, how they are different from traditional 15- and 30-year mortgages, and what pros and cons consumers need to understand.
A 5/1 ARM mortgage, as explained by MagnifyMoney’s parent company, LendingTree, is a type of adjustable-rate mortgage (hence, the ARM part) that begins with a fixed interest rate for the first five years. Then, once that time has elapsed, the interest rate becomes variable. A variable rate means your interest rate can change. Consequently, so can your payment.
The number “5” in “5/1 ARM” means that your interest rate is fixed for five years. The number “1” in “5/1 ARM” means your interest rate could change each year after the first five years have passed.
Interest rates are based on an index, which is a benchmark rate used by lenders to set their rates. An index is based on broad market conditions and investment returns in the U.S.. Thus, your bank can adjust its interest rates at any point that the benchmark rate changes or if there are major fluctuations in the U.S. stock market.
What’s fixed? What’s adjustable?
Fixed-rate mortgages have the same interest rate for the duration of the mortgage loan. The most common loan periods for these are 15- and 30-year.
Adjustable-rate mortgages like the 5/1 ARM loan mentioned above have a fixed interest rate for the beginning of the loan and then a variable rate after the initial fixed-rate period.
The chart below shows an example of the same house with three different types of mortgages.
As you can see below, the 15-year fixed rate mortgage has a lower interest rate, but a much higher payment. The 5/1 ARM has the lowest interest rate of all, but once that interest rate becomes variable, the lower rate is not guaranteed. This is one of the cons of a 5/1 ARM mortgage, which will be outlined in the next section.
Here is an example of three different types of mortgage payments for someone taking out a $200,000 mortgage. The chart below makes the assumption that the fictional person this is for has a high credit score and qualifies for good interest rates.
After 5 Years
Total Interest Cost
After 5 Years
The pros and cons of 5/1 ARM mortgages
The biggest advantage of a 5/1 ARM mortgage is that interest rates are typically lower for the first five years of the loan than they would be with a typical 15- or 30-year fixed-rate deal. This allows the homeowner to put more of the monthly payment toward the principal balance on the home, which is a good way to gain equity in the property.
The 5/1 ARM mortgage commonly has a lifetime adjustment cap, which means that even though the rate is variable, it can never go higher than that cap. That way, your lender can tell you what your highest monthly payment will be in the future should your interest rate ever reach that point.
As mentioned above, the con of a 5/1 ARM mortgage is the whole “adjustable” component. Once you get past the five-year term, there will be uncertainty. Every year after the fifth year of your mortgage, the rate can adjust and keep adjusting.
There is a way around this. You can refinance your mortgage after the five years and secure a new mortgage with a fixed rate. But be warned: Refinancing comes with fees. You will have to calculate on your own whether or not the savings you derive from a lower payment for five years is worthwhile as you measure it against the cost of refinancing to a fixed-rate loan.
That’s why it’s important to know how long you want to live in your home and whether or not you’ll want to sell your home when you move (as opposed to, say, renting it out).
A 5/1 mortgage is right for ...
“For certain people, like first-time homebuyers, 5/1 ARM mortgages are very useful,” Doug Crouse, a senior loan officer with nearly 20 years of experience in the mortgage industry, tells MagnifyMoney.
Here are the types of people who could benefit from a 5/1 ARM mortgage:
First-time homebuyers who are planning to move within five years.
Borrowers who will pay off their mortgages very quickly.
Borrowers who take out a jumbo mortgage.
Crouse explains that with some first-time homebuyers, the plan is to move after a few years. This group can benefit from lower interest rates and lower monthly payments during those early years, before the fixed rate changes to a variable rate.
Mindy Jensen, who is the community manager for BiggerPockets, an 800,000-person online community of real estate investors, agrees. “You can actually use a 5/1 ARM to your advantage in certain situations,” Jensen tells MagnifyMoney.
For example, Jensen mentions a 5/1 ARM could work well for someone who wants to pay down a mortgage very, very quickly. After all, if you know you’re going to pay off your loan early, why pay more interest to your lender than you have to?
“Homeowners who are looking to make very aggressive payments in order to be mortgage-free can use the 5/1 ARM” to their advantage, she explains. “The lower initial interest rate frees up more money to make higher principal payments.”
Another group that can benefit from 5/1 ARM mortgages, Crouse says, is those who take out or refinance jumbo mortgages.
For these loans, a 5/1 ARM makes the first few years of mortgage payments lower because of the lower interest rate. This, in turn, means that the initial payments will be much more affordable for these higher-end properties.
Plus, if buyers purchased these more expensive homes in desirable areas where home prices are projected to rise quickly, it’s possible the value of their home could soar in the first few years while they make lower payments. Then, they can sell after five years and hopefully make a profit. Keep in mind that real estate is a risky investment and nothing is guaranteed.
The 5/1 isn’t right for ...
Long-term home buyers who plan to stay put for the long haul probably won’t benefit from a 5/1 ARM loan, experts say. “An adjustable-rate mortgage loan is a bad idea for anyone who sees their home as a long-term choice,” Jensen says.
Crouse echoes the sentiment: “If someone plans to stay in their home for longer than five years, this might not be the best option for them.”
Jensen adds that homeowners should consider whether or not they want to be landlords in the future. If you decide to move out of your home but keep the mortgage and rent a property, it won’t be so beneficial to sign up for a 5/1 ARM loan.
Questions to ask yourself
If, after reading this guide, you think a 5/1 ARM mortgage might be right to you, go through this list of questions to be sure. Remember, you can also consult with your lender.
How long do I want to live in this home?
Will this home suit my family if my family grows?
Is there a chance I could get transferred with my job?
How often does the rate adjust after five years?
When is the adjusted rate applied to the mortgage?
If I want to refinance after five years, what is the typical cost of a refinance?
How comfortable am I with the uncertainty of a variable rate?
Do I want to rent my house if I decide to move?
Hopefully these questions and this guide can aid you in reaching a sensible decision.
Mortgages with the Federal Housing Administration (FHA) can be especially attractive to credit-challenged first-time homebuyers. Not only can your down payment be as little as 3.5 percent, but FHA loans also have more lenient credit requirements. Indeed, you can qualify for maximum funding and that low percentage rate with a minimum credit score of 580.
On the negative side, the generous qualifying requirements increase the risk to a lender. That’s where mortgage insurance comes into play.
FHA mortgage insurance (MIP) backs up lenders if you default. It’s the price you pay for getting a mortgage with easier underwriting standards. If you put down 10 percent or more, you’ll pay MIP for 11 years. If you put down less than 10 percent, you’ll pay for MIP for the life of the loan. But there are ways you can get MIP removed or canceled, which we’ll also explain in a bit.
MIP can be bit confusing, so we’ll break down exactly how it works and how much it can add to the cost of a mortgage loan in this post.
All FHA borrowers have to pay for mortgage insurance.
MIP is paid upfront, when you close your mortgage loan, as well as through an annual payment that is divided into monthly installments. Not all homebuyers have to pay MIP forever, and we’ll get into those specifics, so hang tight.
When you make your upfront MIP payment, the lender will put those funds into an escrow account and keep them there. If you default, those funds will be used to pay off the lender. As for your ongoing MIP payments, they get tacked onto your monthly mortgage loan payment.
How long you have to pay MIP as part of your mortgage payments can vary based on when the loan was closed, your loan-to-value (LTV) ratio, and the size of your down payment. Your LTV is simply how much your loan balance is, versus the value of your home, which our parent company LendingTree explains in this post.
Upfront Mortgage Insurance Premium (UFMIP)
UFMIP is required to be paid upon closing. It can be paid entirely with cash or rolled into the total amount of the loan. The lender will send the fee to the FHA. The current upfront premium is 1.75 percent of the base loan amount. So, if you borrow a FHA loan valued at $200,000, your upfront mortgage insurance payment would be $3,500 due at closing.
With ongoing premiums, your lender will collect your MIP and send it to HUD. The lender, not you, be penalized for any late MIP payments.
Annual MIP payments are calculated by loan amount, LTV, and term. To help estimate your cost, the FHA has a great What’s My Payment tool.
Here’s an example of monthly charges based on a $300,000, 30-year loan at 4 percent interest, with a 3.5 percent down payment and an FHA MIP of 0.85 percent. (This does not include any money escrowed for taxes and insurance):
Principal and interest: $1,406.30
Down payment: $10,500
Upfront MIP at 1.75 percent: $5,066
Monthly FHA MIP at 0.85 percent: $203.42
Total monthly payment = $1,609.72
Penalties and interest charges for late monthly payments are similar to those levied on the UFMIP.
The length on MIP requirements also depends on when you closed the loan and the size of your down payment. The rules changed dramatically in July 3, 2013. Until then, you could cancel your MIP after your LTV ratio dropped to 78 percent. Under the new rules, the MIP on loans closed after June 3, 2013, will last either the life of the loan or for 11 years, based on the amount of the down payment.
For loans that were closed before June 3, 2013, you can still request that MIP be dropped after your LTV ratio drops to 78 percent — after five years of payments without delinquencies.
Here’s the breakdown:
Original Down Payment
20, 25, 30 years
Less than 10%
Life of loan
20, 25, 30 years
More than 10%
15 years or less
Less than 10%
Life of loan
15 years or less
More than 10%
Original Down Payment
20, 25, 30 years
Less than 10%
78% LTV based on original purchase price
(5 years minimum)
20, 25, 30 years
78% LTV based on original purchase price
(5 years minimum)
20, 25, 30 years
More than 22%
Less than 10%
More than 22%
How to Eliminate MIP
NOTE: About endorsements
According to the MIP Refund Center, the HUD endorsement on FHA loan is the date your MIP is approved. When you pay your upfront MIP with the lender, the loan is closed.The clock starts ticking on your MIP on the endorsement date.
More on MIP cancellation:
Most of today’s FHA borrowers will have but a few options to end their insurance payments. If you’re hoping to get out of paying FHA mortgage insurance, you’re going to either have to pay off the loan or do some refinancing. The FHA policy allowing borrowers to cancel annual MIP after paying for five years and reaching 78 percent LTV was rescinded with the new regulations in 2013 requiring payments for the life of the loan.
The good news about the FHA policy is that you can retire your loan earlier by making additional payments. If you closed your loan after June 2013, you can cancel MIP by refinancing into a conventional loan once you have an LTV of at least 80 percent.
Here are two strategies to get your MIP canceled:
Replace/refinance with a Streamline FHA Mortgage
If you have a current FHA mortgage and have no late payments, you may qualify for a Streamline FHA mortgage to refinance your existing loan with a better rate. You’ll still need to pay MIP but the savings generated by the lower interest rate can offset your insurance costs.
PMI is similar to MIP in that both protect the lender's investment. The MIP is determined by the LTV and term. The PMI is calculated on the size of your down payment.
A minimum of 5 percent down is required and the PMI can be paid in a lump sum or monthly installments — not both. If you put down 20 percent or more, the requirement for PMI on conventional financing can be waived. In conventional refinancing, you may be required to have an appraisal to determine property value. This is essential since the PMI insurance requirement on conventional loans ends once the borrower’s LTV drops to 78 percent. The Consumer Financial Protection Bureau says that the lender is required to cancel PMI once your payments reach the “midpoint of your loan’s amortization schedule” — no matter the LTV. That’s if you’re current on your payments.
Consumers should check with lenders or with HUD to stay up to speed on changes that could affect their mortgage.
Am I eligible for a HUD refund?
If you acquired your loan prior to Sept. 1, 1983, you may be eligible for a refund on a portion of your UFMIP. Or, if you refinance your home with another FHA loan, the insurance refund is applied to your new loan.
HUD rules specify how long you have to refinance before you lose your refund:
For any FHA-insured loans with a closing date prior to Jan. 1, 2001, and endorsed before Dec. 8, 2004, no refund is due the homeowner after the end of the seventh year of insurance.
For any FHA-insured loans closed on or after Jan. 1, 2001 and endorsed before Dec. 8, 2004, no refund is due the homeowner after the fifth year of insurance.
For FHA-insured loans endorsed on or after Dec. 8, 2004, no refund is due the homeowner unless he or she refinanced to a new FHA-insured loan, and no refund is due these homeowners after the third year of insurance.
The refund process goes into motion when the mortgage company reports the termination of your insurance on the loan to HUD. You may receive additional paperwork from HUD or receive a refund directly in the mail. You can find out if you’re owed a refund by entering your information at the HUD refund site. If you’re on the list, call HUD to get the ball rolling at: 1-800-697-6967.
If you’re trying to get into a home with less-than-optimal credit, an FHA-backed loan could be your best option. You’ll pay for the benefit of landing the mortgage through MIP over much of the loan’s lifetime, if not all of it. You may save money after you’ve built some equity (or improved your credit) by refinancing to a conventional mortgage that drops the mortgage insurance requirement after you reach the 78 percent LTV milestone.
Unlike people of her father’s generation, Lauren Beale, 60, said she never expected to own a house outright at retirement.
Beale, a former journalist who retired in 2015, pays $2,063 a month for a mortgage for her home in Palos Verdes Estates, Calif., in Los Angeles County, where she lives with her husband. The couple bought the house for $800,000 in 2002.
They now owe $268,000 on the mortgage. And Beale said she had no plans to double up on her payment and pay it off faster. “What if you need that money for some kind of emergency down the road?” she asked. “We are comfortable with some mortgage payment. It doesn’t make sense to draw from the nest egg, the retirement accounts, to pay it down soon.”
Beale, now a freelancer and novelist, said she would rather keep her savings as a safety net: “I think boomers are feeling less secure about our medical futures.”
Retired with a mortgage
The Federal National Mortgage Association, known as Fannie Mae, recently released an analysis concluding that baby boomers — those born between 1946 and 1965 — were 10 percentage points less likely to own their homes outright than pre-boomer people who were the same age in 2000.
The report says the rise in housing debt among older homeowners is increasingly worrisome. There are concerns that having mortgage obligations could weaken seniors’ financial security in retirement and put them at greater risk for foreclosure, among other potential problems.
Still, Beale is not concerned. Her family’s monthly mortgage bill is just roughly 20 percent of the total household income. They have no other debts, nor do they have major monetary needs. Her financial goal at this stage is to have enough money to live comfortably in retirement, pay all the bills and be able to travel.
To be sure, not every boomer is as financially confident as Beale. Nationwide, boomers carried an average housing debt of about $68,400 in 2016, according to Federal Reserve data analyzed by MagnifyMoney. National statistics also revealed that a hefty 2.5 million people ages 55 and older became renters between 2009 and 2015, up 28 percent from 2009, the biggest jump among all age groups. RENTCafe.com, a nationwide apartment search website, said the notable change in renter profile could be that empty-nesters changed lifestyles, got hit hard by the housing slump or can’t afford to own homes.
How to pay off your mortgage faster
For those who do care about paying mortgages off before retirement, here are some ways to handle those debts faster and stay motivated to reach your goals:
Paying off debt? It’s like earning more money
Leon LaBrecque, a Michigan-based certified financial planner, said roughly half of his clients — mostly middle-class Americans — are able to pay off mortgages approaching retirement. A boomer himself, he is all for paying off mortgages as soon as possible to achieve better cash flow.
“Debts are an anti-asset,” said LaBrecque. “Removing an anti-asset is the same as having an asset. So If I got a 4 percent mortgage, I pay it off, I made 4 percent.”
He added: “It’s very hard to make 4 percent now. The fixed-income market is so constrained that there are not a lot of good alternatives to debt reduction.”
Pay off other debts. High-interest debt, in particular.
Before paying down a mortgage or paying it off, get rid of other high-interest-rate debts first. Think student loans and credit card balances.
LaBrecque offered this example: Say you have a 4 percent rate on your mortgage and an auto loan with a $350 payment and a 5 percent interest rate — you should pay the car note off first. Then you can put an extra $350 toward your mortgage each month.
Find money from other sources
If you have cash idling somewhere, with no particular purpose, pay off your mortgage. Remember: If you go and pay off a loan, there is an immediate return for what you’ve repaid.
“You got $125,000 sitting in the bank, making nothing, and you owe $80,000 on the mortgage; pay the mortgage off,” LaBrecque has been telling his elderly clients lately.
Also, if you have money in the market, consider getting rid of a sub-performing investment and put the resources into the mortgage, he said.
Improve the cash flow
Be conscious of how you spend your money. If paying off housing debts is your primary goal, prioritize it and allocate your money accordingly.
“We always talk about having a good cash-flow management system for our younger population, but we don’t get a lot of that on the older population,” said Juan Guevara, a Colorado-based certified financial planner. “We always think that, ‘Well, those guys have figured it out.’ Well, maybe not.”
Take a look at your cash flow holistically. When you track your spending, you can watch for opportunities to put more money toward your mortgage. For example, if you were helping your children pay student loans, see if they can take on the responsibility and redirect that budget toward your housing debt. As you approach retirement, consider using any bonuses or pay raises you receive to pay down debt.
Break down big goals. Baby steps.
It’s easier to make big goals and separate them into little pieces, experts say. Guevara advises that boomers divide their monthly house payment by 12 and add that amount to their payment each month.
If your monthly payment is $1,500, for instance, “now you’re looking at a goal of having to add another $125 to each payment every month, instead of having to come up with $1,500 at the end of the year,” Guevara said.
Refinance your mortgage
Once you’ve managed a good cash flow, it’s likely that you are able to apply extra funds to your mortgage every month. This is when you may to consider refinancing the mortgage to get a lower rate or a shorter term.
LaBrecque said he suggests that clients take out 30-year mortgages but pay them off sooner.
“You can always turn a 30-year mortgage into a 15 but you can’t turn a 15-year mortgage into a 30,” he said. “I’m a big fan of having the obligation as low as possible on a monthly but also have the flexibility to pay it off.”
Shorter home loans generally have lower interest rates, so you’ll not only pay off your mortgage faster, you’ll also pay less in interest.
Beale has refinanced her mortgage twice to lower the monthly payment. Her current 20-year mortgage now carries an interest rate of about of 3.88 percent, significantly lower than the original 30-year loan. (It came with a rate above 5 percent.)
Guevara said he has seen an increasing number of parents spending beyond their means for their children: They’re taking on student loans, supporting sons and daughters after they finish school or offering other assistance. Those expenses chew up a significant amount of the money they could be putting toward the mortgage.
“It’s not my place to tell them to stop,” he said. “It’s my place to show them, ‘Look, this is what happens if you don’t stop or if you continue on the path that you are on now.’”
If you want to own your house outright earlier, Guevara said it’s worth starting to teach your children about the value of money and helping them become more financially responsible in an early stage.
“Money is a taboo in our society, and it shouldn’t be,” Guevara said. “It should be something that we talk about at the dinner table.”
Look forward to financial freedom
Beale and her husband will be debt-free in 13 more years if they stay in the same house and continue making payments as they’ve been doing. But she doesn't seem to look forward to that day.
“I think as we age, things that might seem like a happy occasion might be more of a sense of finality,” she said.
But she also finds a silver lining — the financial freedom that comes when debt is paid off.
“Who knows at that point; what if I have grandkids?” she said. “Maybe I’ll say: ‘Hey, my bills are paid. Maybe I’ll start taking that $2,000 and putting it into a college fund or something.’”