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Condo, House or Townhouse: Which Is Best for You?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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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.

What is a condominium?

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:

Maintenance

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.”

Monthly fees

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.

Interest rates also vary by state and by lender, so it’s important to research loan terms from several lenders before making a decision.

Condo vs. townhouse

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.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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5 Reasons You Should Make Biweekly Mortgage Payments

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Maybe you’ve heard whispers among friends and family that making biweekly mortgage payments—once every two weeks instead of once a month—can help you pay off your loan sooner. In most cases that’s true, but did you know there are a ton of other benefits as well?

If you’re intrigued, stay tuned. We’ll show you exactly how to make biweekly payments work for you and the benefits.

The secret extra payment

If you’re like most people paying your mortgage once per month, you’ll get 12 full mortgage payments in a year.

But what if you make biweekly payments? In that case, either you or your lender will split your payments in half and submit a payment twice each month. For example, if you normally make a $1,000 monthly mortgage payment, you’ll instead make a $500 mortgage payment every two weeks.

This leads to the quirk in the calendar that lets you get ahead. There aren’t a uniform number of days in each month, and so by making biweekly mortgage payments, you’ll make 26 “half-payments,” or 13 “full” payments per year instead of the normal 12 payments. In other words, you make one extra full payment per year, and you won’t even feel it because you’ve budgeted for it.

This extra payment might not seem like much, but over the course of the loan, it has huge effects.

Let’s look at an example. Say you just bought a house and have a $200,000 mortgage with a 30-year loan term, and your interest rate is 4.125% APR. Here’s what will happen if you stick to the plain-Jane monthly mortgage plan, versus opting for biweekly mortgage payments:

 

Monthly Payment

Biweekly Payment

Payment amount

$775.44

$387.72

Number of payments per year

12

26

Total Paid per Year

$9,305.28

$10,080.72

Number of Years

30

25 years and 10 months

Total Interest Paid

$119,158.25

$100,077.57

Total cost

$325,158.25

$306,077.57

In this example, making biweekly payments allows you to pay off your mortgage a full four years and two months earlier, and saves you $19,080.68 to boot.

One caveat: Rarely, some lenders will charge you to make biweekly payments, since it’s essentially twice as much work for them to process. If your lender does this, it may be better to stick with your normal monthly payment plan. If you want to make biweekly payments, you can still do so manually for free by setting aside a portion of your paycheck on your own, paying your normal monthly payment, and then submitting an extra payment yourself once per year.

The case for making biweekly mortgage payments

1. Build equity faster

Home equity is the amount of your home that you actually own versus how much you owe your mortgage lender. For example, if your home is worth $200,000 and you still owe $150,000 on your mortgage, you have $50,000 worth of home equity.

One of the biggest benefits of making biweekly mortgage payments is that you build home equity faster. You may not realize it, but when you are in the early years as a mortgage borrower, the vast majority of your mortgage payment goes toward interest — not the principal balance on your loan. And until you are significantly chipping away at that principal loan balance, you aren’t actually gaining equity (unless, of course, the value of the home increases enough to eclipse your mortgage loan balance).

When you make biweekly payments and manage to squeeze in that extra payment each year, you’ll be making extra payments toward reducing the balance of your loan. And that extra payment will give you a small push toward building equity.

There are a lot of advantages to having as much home equity as possible. If you have enough home equity, you can take out a home equity loan to finance things like home repairs or remodels, for example.

Another example where having more home equity can help you is when you sell your house. Many homeowners are surprised how expensive it can be when they go to sell their home, all thanks to closing costs, which can amount to tens of thousands of dollars on top of your original loan.

That’s a big problem if you don’t have enough equity built up in your home to cover the cost. You might end up actually having to pay to sell your home, and losing your down payment money for your next home to boot. One of the best ways to guard against this is to build up as much home equity as you can as fast as you can, and making biweekly mortgage payments is a good way to do that.

2. Pay less interest over time

When you make a mortgage payment, the bank actually splits up up the money and divvies it out to various things. During the first few years after you take out your mortgage, most of the money will be going toward interest and very little will be going to reducing the balance of your loan (sadly). This process is called amortization, and anyone who’s ever had a loan literally had to pay their dues, especially during those first few years.

But, again, here’s where making biweekly mortgage payments can really help you. Since you’ll be making an extra payment each year, you’ll pay down the principal even faster. This means that each interest payment thereafter will be smaller than if you hadn’t made that extra payment.

Over the course of your loan, this can save you a huge amount of money. For example, if you have a $400,000 mortgage, making biweekly mortgage payments can save you over $38,000 in interest.

3. Pay off your mortgage faster

If you make biweekly payments, you’ll be chipping away at your principal balance faster than normal. We won’t lie — it’ll still seem like you’re paying off the mortgage at a glacial pace, but you’ll have a slightly sharper pick than your neighbor making monthly payments.

If you have a $300,000 mortgage and you’re making biweekly mortgage payments, you can actually shave off four years and two months from your loan. Instead of being in debt for 30 years, you’ll only be in debt for 25 years and 10 months! What would you do with those extra years of being debt-free?

4. Drop your PMI payment sooner

In 2017, the average homebuyer bought their home with a 10% down payment. That’s not bad, but for most conventional loans (not including FHA, VA and USDA loans), you’ll need a down payment of at least 20% to avoid paying for private mortgage insurance each month. This fee, which is tacked onto your monthly mortgage payment, protects your lender in case you default on your loan. In other words, it doesn’t even protect you—it protects your lender in case you mess up.

Once you reach 20% equity in your home, you can ask your conventional lender to cancel your PMI payments. If you make biweekly payments, you can actually get there a lot faster because you’ll be paying down the balance of your loan quicker than normal.

Let’s look at an example. If you have a $350,000 mortgage and only put 10% down like most people, you’d owe an extra $164.06 each month to pay for PMI. If you make biweekly payments, you’ll hit 20% equity 13 months sooner than if you were making monthly mortgage payments. That’ll save you an extra $2,132.78 in PMI charges.

5. It’s easier to budget

You know that the beginning of the month sucks when you’re trying to scrounge up a massive housing payment. Even if you’re a super budgeter and on top of your finances, saying goodbye to so much cash at once hurts.

If nothing else, biweekly mortgage payments take the stress out of those big payments. If you’re paid biweekly, it’s even easier — just send in the check each time you get paid, if that’s the due date that you agree on with your lender.

That way, the money won’t be sitting in your account until next month, just begging to be spent on something else and leaving you short of the bill when your monthly mortgage payment does come due. Making biweekly payments in this way can save you a ton of stress in addition to all the financial benefits.

Closing

By default, almost everyone is put on a monthly repayment plan. It’s how we’re conditioned to think about debt: after all, just about every type of loan is paid back on a monthly basis, including credit cards, student loans, auto loans and personal loans. In some cases, like for student loans, you may be able to switch to a biweekly payment plan, but it’s not very common.

That doesn’t mean you need to stick with the mold, though. We’ve shown five great benefits to switching over to a biweekly mortgage payment plan. You’ll:

  • Build equity faster
  • Pay less interest over time
  • Pay off your mortgage faster
  • Drop your PMI payment sooner
  • Budget for housing more easily

If you’re interested in switching to a biweekly mortgage payment plan, the next step is to contact your lender to ask about it. Your future self will thank you.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Lindsay VanSomeren
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How to Use Your Mortgage Cash-Out Refinance

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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If you need money to pay for a big expense — such as college tuition, making home improvements or paying off credit card debt — and if you don’t have the savings to handle it, a cash-out refinance could help.

A cash-out refinance allows you to borrow from the equity you’ve built in your home, often at lower interest rate than other loans, and receive cash that can be used for just about any purpose. It can be a relatively cheap way to borrow money for important expenses.

But there are some risks involved with cash-out refinancing, and in certain situations, the cost will be higher than the alternatives.

This article explains what cash-out refinancing is, and dives into the pros and cons so that you can make the right decision for your needs.

What is cash-out refinancing?

A cash-out refinance involves taking out a new loan that is larger than your existing mortgage so that you can replace your old mortgage and walk away with extra cash that you can use for other financial goals.

For example, if you currently have a $150,000 mortgage on a home that’s worth $250,000, you could potentially refinance into a $180,000 loan that replaces your old mortgage and provides $30,000 that can be used for any purpose.

This is different than a traditional rate and term refinance in which your new loan balance is the same as your old loan balance.

With a traditional refinance, the primary goal is usually to reduce your interest rate and/or reduce your loan term in order to save money and potentially pay off your mortgage sooner.

With a cash-out refinance, the goal is generally both to improve the terms of your existing mortgage and tap into your home equity to help fund other financial goals.

Michael Dinich CRPS, a financial planner and the founder of Your Money Geek, says that a cash-out refinance can be an attractive way to pay for things like home improvements — in which case the interest would likely be tax deductible since the loan would be used to substantially improve the homes — or even pay off higher-interest debt like credit cards. The interest rate on cash-out refinances is usually lower than other forms of debt, such as personal loans or credit cards, because you are using collateral to back the loan (your home).

But there are some things to watch out for as well.

First, a cash-out refinance turns an asset — your home equity — into debt, which is always a decision that should be made carefully.

Second, the cash proceeds are typically first used to pay closing costs and other upfront expenses like property taxes and homeowners insurance, so you won’t always receive the full difference between your new loan amount and your old loan amount. You can apply for a no-cost refinance, but that just means that you’ll receive a higher interest rate or the closing costs will be added to the loan, so there’s really no escaping the cost.

Third, a larger loan could increase your monthly payment, and even if it doesn’t, you may end up paying more interest over the life of your loan if you are extending your loan term.

LendingTree, the parent company of MagnifyMoney, has a slew of tools to help you do the math. You can use this cash-out refinance calculator to estimate your monthly payment and this loan payment calculator to estimate your total interest cost.

So how do you decide whether a cash-out refinance is the right move for you? Let’s first look at how you can qualify and then look at situations in which it may or may not make sense.

How do you qualify for a cash-out refinance?

There are a few criteria you’ll have to meet in order to be eligible for a cash-out refinance.

Credit score

You must have a credit score of at least 620 in order to qualify for a cash-out refinance on your primary home. There are several ways to check your credit score for free, and you can use these six steps to improve your score if it isn’t yet where it needs to be.

Loan-to-value ratio

The maximum allowable loan-to-value ratio for a cash-out refinance is 80%, meaning that your total outstanding home loan balance after the refinance is complete can’t exceed 80% of the value of your home.

As an example, if your home is currently valued at $250,000, your new loan — combined with all other house related debt such as a home equity loan or HELOC — can’t exceed $200,000. If your outstanding debt is already greater than $200,000, you won’t be eligible for a cash-out refinance.

If you are looking to refinance a second home or an investment property, the maximum allowable loan-to-value ratio is lowered to 75%.

If you have a VA loan, you may be able to secure a cash-out refinance even if you don’t meet those loan-to-value requirements, but your maximum loan amount is capped depending on where you live and the type of property you are refinancing.

Debt-to-income ratio

Your debt-to-income ratio is the sum of all your monthly debt payments — including student loans, credit cards, and auto loans, in addition to your mortgage payments — divided by your gross monthly income. It must be 50% or less in order to qualify for a cash-out refinance.

Financial documentation

You will have to provide documentation that verifies your income and assets and proves that you are able to afford the loan. This documentation will vary by lender but often includes at least the following:

  • Your two most recent tax returns
  • Your two most recent W-2s
  • Bank statements for the past two months
  • Investment statements for the past quarter
  • Pay stubs from the most recent month

How those factors affect the cost of a cash-out refinance

While meeting the minimum requirements should allow you to qualify for a cash-out refinance, you can save money by improving these variables.

Specifically, lenders may collect a surcharge that varies based on your credit score and loan-to-value ratio.

If your credit score is 680 or above and your loan-to-value ratio is 60% or less, you can avoid the surcharge. But if your credit score dips below that threshold or your loan-to-value rises above it, your fee will range from 0.25%-3% the value of your loan.

For example, let’s say that your home is worth $250,000, your current mortgage balance is $150,000, and you’d like a cash-out refinance for $200,000 — an 80% loan-to-value ratio — so that you have $50,000 available for other goals.

If your credit score is between 700 and 739, you’ll face a 0.750% surcharge that equates to $1,500.

But if your credit score is just a little bit lower at 680-699, you’ll face a 1.375% surcharge that equates to $2,750. That’s an extra $1,250 for potentially just a few points difference in credit score.

All of which is to say that getting yourself in peak financial condition will help you qualify for a cash-out refinance and make it less costly.

Good ways to use your cash-out refinancing

There are many different ways you can use your cash-out refinance, some of which could help you improve your financial situation, save you money and even increase the value of your home.

Here are a few good ways to use your cash-out refinance.

Home improvements

Certain home improvements, such as replacing your entry door or upgrading your kitchen, can increase the value of your home in addition to making it a more enjoyable living space. And if you don’t have the savings to pay for it outright, using a cash-out refinance to fund those improvements can be a smart move.

“It may make sense to tap home equity for home improvements because the interest rate is lower than other forms of borrowing”, said Dinich.

Another benefit of using a cash-out refinance to improve your home is that the interest should be deductible. Under the Tax Cuts and Jobs Act, only interest on home loans used to buy, build or substantially improve your deductible, and home improvements should fit the definition.

It’s worth noting though that not all home improvements will increase the value of your home. Pools often don’t represent a good return on investment, and you also need to be careful about upgrading your home too far above the rest of your neighborhood.

This is one area where it pays to do your research. A good decision can pay off, but an uninformed decision may cost you money.

Paying off high-interest debt

Because the loan is secured by your home, and because it’s considered a first mortgage, a cash-out refinance typically has lower interest rates than other forms of debt.

This not only makes cash-out refinancing an attractive option compared with other loans, but it can make it a good way to pay off other loans and save some money in the long-term.

If you have credit card debt or private student loan debt with high interest rates, for example, you may be able to reduce your rate by executing a cash-out refinance, pay off those other loans and reduce your interest charges going forward.

Proceed carefully when it comes to federal student loans though. Those loans have a number of protections — such as income-driven repayment, forgiveness and deferment and forbearance — that would be lost by refinancing. Those protections are often worth more than a lower interest rate.

It’s also worth noting that the interest charged on the portion of the new loan used to pay off debt would not be deductible since that part of the loan wouldn’t be used to buy, build or substantially improve your home.

Paying for college

With college costs on the rise, parents are forced to get creative when the tuition bills come due.

A cash-out refinance may offer a lower interest rate than other types of loans, including parent PLUS federal student loans that are currently issued with a 7% interest rate.

The big downside is that you are using your house as collateral and that you will still be responsible for the loan even if your child drops out or otherwise doesn’t finish his or her education. You are also adding to your personal debt load at a time when you may need to be ramping up retirement savings.

In many cases it will make more sense for your child to take out federal student loans. They offer more protections, and he or she will have decades to pay it off.

Still, this can be an effective strategy in the right situations.

Purchasing an investment property

Using your cash-out refinance to purchase a rental property could serve as an effective long-term investment. The cash flow produced by the rental income could both offset the costs of the refinance and serve as a helpful source of income, and purchasing the property with the proceeds from a cash-out refinance may be cheaper than other forms of borrowing.

“It’s generally less expensive for homeowners to borrow against their primary residence than to borrow for an investment property,” said Dan Green, the founder of Growella and branch manager for Waterstone Mortgage in Cincinnati. “A cash-out refinance on the primary residence can reduce the total interest costs against both properties.”

Risks associated with a cash-out refinance

While a cash-out refinance can be a smart move in the right circumstances, there are some risks as well and in some situations there could be severe financial consequences.

Here are some of the riskier ways to use a cash-out refinance.

Debt consolidation

While using a cash-out refinance to pay off high interest can look like a no-brainer on the surface, there are some significant risks to be aware of.

“Accessing home equity to pay off high-interest credit card debt can be a good strategy, but only when it is in conjunction with the creation of a sustainable spending plan”, said Justin Harvey, a fee-only financial planner and the founder of Quantifi Planning, LLC in Philadelphia.

That is, taking out new debt to pay off old debt is generally only effective if you have a strong budget in place and a sustainable plan to both repay and stay out of debt. If replacing your credit card debt simply frees up space to reload those same credit cards, you could be doing more harm than good.

“Some of the consumers who were most harmed by the 2008 economic collapse were homeowners who treated their primary residence like an ATM during the housing price run-up,’ said Harvey. “When the price correction followed, many were stuck with a high-dollar mortgage on a low-value asset, and some homeowners were even underwater.”

Investing in the stock market

Taking out a loan to invest in the stock market is rarely a good idea. Stock market returns are not guaranteed, especially in the short term, and it’s possible to lose a lot of money in a short period of time.

If your investments do lose value, you may not have the money needed to make your mortgage payments, in which case you could be at risk of foreclosure.

Buying a car

“Taking out money to buy a car might not be a good way to use your equity,” said Jeremy Schachter, branch manager at Pinnacle Capital Mortgage in Phoenix. “You take out that equity and roll the interest over a 30-year period or take maybe a higher interest rate auto loan at a shorter term.”

Interest rates on auto loans are often low, especially if you are buying a new car and/or have excellent credit. And the loan term is typically one to eight years, which is shorter than most home loans and therefore often leads to lower interest costs over the life of the loan even if your interest rate is higher.

Starting a business

Only about half of all new businesses survive five years or longer, and only a third make it to 10 years or more. That’s less than the length of a typical mortgage, which means that you could run into trouble making your loan payments and put your house at risk in the process.

“Not all business loans are secured loans and all mortgage loans are,” said Green. “When your business succeeds, the distinction is less relevant. But when your business fails, having an unsecured loan is an advantage.”

If you do need a loan for your business, here are some alternatives to consider: 17 Options for Small Business Loans.

Lending money to friends and family

Lending money to friends and family is always risky because if the deal goes south, your personal relationship could be in jeopardy.

Financing that loan by taking on new debt yourself adds to the cost and risk of the transaction. And by tying that debt to your house through a cash-out refinance, you’re putting yourself in a position where if your friend or family member can’t pay you back, you could end up losing your home.

Put simply, this is rarely a good idea. If you’re determined to do it though, Green says that you should approach it like you would any other business decision.

“If you’re lending to friends or family members,” Green said, “you should use the same due diligence as with any investment and charge an appropriate interest rate for the risk.”

Should you use a cash-out refinance?

A cash-out refinance often has a lower interest rate than other types of loans because it’s secured by your home and because it’s considered a first mortgage. That can make it an attractive way to pay for big expenses, especially if you can reduce the interest rate on your existing mortgage in the process.

But that debt comes at a cost and it’s always worth evaluating all of your options, from saving the money you need yourself to exploring other types of loans.

In the end, a cash-out refinance is just one tool of many. When it’s used thoughtfully, it can provide a good return on investment. When it’s not, it can be just another costly debt.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Matt Becker
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Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Best Ways to Add Value to Your Home

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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If you’re tired of the way your home looks and feels but don’t necessarily want to move, you don’t have to settle. Whether you crave more square footage, an upgraded interior or better curb appeal, you’ll find an endless supply of ideas that can improve your home’s functionality and style.

But, that doesn’t mean that all remodeling projects are created equal — not by a long shot. While plenty of home upgrades can be “worth it” in a financial sense, there are ways you can improve your home that may cause its value to drop as well.

Before you remodel, it pays to research the best ways to add value to your home and which projects might offer the most “bang for your buck.” With the right strategy and a professional remodeling team by your side, it’s possible to create your dream home while building equity in the process.

Benefits of making home improvements

There are plenty of ways homeowners can benefit from a home remodel, but one of the biggest perks is an increase in their home’s value. With a home addition, a new kitchen, upgraded bathrooms or big project completed, it’s very likely your home will appraise at a higher value than it did before you remodeled. That means you’ll have a larger share of equity in the property, which is any homeowner’s ultimate goal.

And in when your home is worth more, there are several benefits you’ll get to enjoy.

  • The potential to remove private mortgage insurance (PMI) from your home loan: Private mortgage insurance is typically charged as an added fee when you buy a home with less than a 20% down payment. This fee can vary, but it’s usually equal to 0.15% to 1.95% of the loan amount. If your home’s value increases after you remodel, it may be possible to have your home appraised and the PMI charges removed from your monthly mortgage payment.
  • Increased net worth: An increase in your home’s value could boost your net worth — the measure of all your assets minus your liabilities.
  • Sell your home at a profit: The more your home is worth, the more likely you will be able to sell it for a profit if you need to move.
  • Easier qualification for home equity loans: By remodeling to improve your home’s value, your ability to qualify for a home equity loan or HELOC will improve. The amount you can borrow may also be higher.

In addition to the financial benefits of remodeling, there are other personal benefits you can acquire as well. Realtor Guillermo Salmon of Pearson Smith Realty says one of those benefits is the fact that you get to enjoy the fruits of your labor yourself if you stay in the home.

“It’s your home, and you want to be comfortable,” said Salmon, who sells real estate in the Washington, D.C., area. “I always tell my clients to make updates early so they can enjoy them instead of waiting to remodel until right before you sell.”

Salmon’s thoughts seem to line up with national statistics regarding home remodeling projects. According to the 2017 Remodeling Impact Report from the National Association of Realtors, 75% of homeowners who responded to the survey had a greater desire to be in their homes after their remodeling project was completed. And 65% of those polled also reported increased enjoyment in their homes.

Another important benefit of remodeling is the fact that it may improve your home’s utility, says Salmon. The NAR survey also revealed that 36% of homeowners reported better functionality and livability as the most important result from their project.

When you think about it, that makes a lot of sense. A kitchen with a better layout or a bathroom with a new garden tub could make living in your home a more positive experience, for example.

Last but not least, remodeling your home may help you avoid moving and all moving-related costs. Remember that moving to a new home may require hiring movers, some remodeling of your new home, realtor fees to sell your home, and of course closing costs on your new home loan.

“If the space is there and you are able to remodel, the price of a big project or full-home remodel could be well worth it,” said Salmon. “There are a lot of moving costs that people don’t think about, and it is often a lot more expensive than people realize.”

Home improvements that can add value to your home

While remodeling your home can make it more appealing to the eye and more functional, the right remodeling project can also boost the value of your home. The key to increasing your home’s value through remodeling is making sure you’re choosing projects that will actually pay off.

Kitchens and bedrooms and bathrooms, oh my

According to Salmon, kitchens, master bedrooms and master bathrooms are the areas buyers pay the most attention to — as well as the areas that could add the most value to your home if you remodel. Other bathrooms in the home are also important, he says, because “buyers don’t want to have to remodel rooms they need, and bathrooms are some of the most used rooms in a home.”

Salmon also says that paint may be more important than people think.

“Paint the interior of your home so it looks clean and fresh, but make sure to choose a neutral color,” he said. Salmon notes that many buyers lack imagination, so if they walk into your home and see lots of bright colors or a lack of cohesion in the color palette, they may be scared off.

“Some people hate bright wall colors or bold wallpaper,” he said.

Open concept conversion

Residential designer Paul DeFeis of Trade Mark Design & Build in the New Jersey area says another project that typically pays off is opening up walls to create an open living space.

If you have an older home with a boxy and broken-up interior, opening up the walls to create a larger living space is often one of the best “bang for your buck” remodeling projects. “Opening up a wall that connects an adjacent room to your kitchen is huge,” said DeFeis.

Curb appeal

Last but not least, both DeFeis and Salmon agree that curb appeal is important, and that improving the exterior look of your home can go a long way toward fetching a higher sales price or just upping your home’s value.

Salmon says that planting nice bushes, adding mulch or painting your exterior door can make your home pop. You should also make sure your grass is mowed and debris is removed. “Even basic yard cleanup can go a long way,” he said.

The National Association of Realtors also offers their own list of home upgrades that can pay off the most over time. According to their study, the home upgrades they believe will increase your home’s value the most in 2017 included:

  • Complete kitchen renovation
  • Kitchen upgrade
  • Bathroom renovation
  • Add new bathroom
  • New master suite
  • New wood flooring
  • HVAC replacement
  • Hardwood flooring refinish
  • Basement conversion to living area
  • Attic conversion to living area
  • Closet renovation
  • Insulation upgrade

In terms of exterior home remodel projects, they list new roofing, new vinyl windows, a new garage door and new vinyl siding as the top four upgrades that will appeal to buyers and increase the value of your home.

Home improvements that can negatively impact your property values

While there are plenty of improvements that can be a net positive for your finances, there are just as many that can make no impact in your home’s value — or worse, decrease your home’s value.

This list isn’t all-inclusive and the type of projects that can hurt your home’s value also vary depending on your neighborhood and where you live. If you want to avoid completing updates that won’t be worth it, think long and hard before you tackle any of the projects below:

  • Garage conversions
    • Cost: $5,000 – $30,000 and potentially more depending on job site conditions and square footage. While it might be tempting to convert your garage into a room to increase your square footage, DeFeis says this is often a bad idea. Not only can a converted garage look awful from the road, but it could be a zoning issue as well. Further, many buyers will want a garage over more square footage and may not consider your home without one.
  • Swimming pools
    • Cost: $30,000 – $100,000 depending on construction materials, landscaping and upgrades. Swimming pools may be standard or popular in warmer climates, but you could limit your potential pool of buyers by adding one no matter where you live. “It depends on the buyer,” he said. “Some buyers want a pool and some people absolutely refuse to have one.”
  • Nonconforming additions
    • Cost: $30,000 – $60,000 and potentially more for a home addition depending on size. Adding onto your home can increase your square footage and make your home more livable, but that doesn’t mean all additions look great from the outside of your home. “If you’re driving down the street and your house looks out of place, then it’s not going to help your home’s value,” said DeFeis.
  • Luxury upgrades
    • Cost: $1,000 – $2,500 per linear square foot for custom kitchen cabinets, $22 – $32 and up per square foot for marble flooring including installation. While luxury upgrades like custom cabinets or Italian marble flooring may have been all the rage a few decades ago, these products seem to be taking a back seat to more mainstream products, says DeFeis. “People want the look but they do not want the luxury product anymore.”
  • Overdone landscaping.
    • Cost: pricing varies. Too much landscaping can make buyers feel overwhelmed, but it depends on the neighborhood. Ideally, you’ll want your landscaping to look similar to your neighbors.
  • Overbuilding
    • Cost: pricing varies. Last but not least, don’t forget it’s possible to improve your home too much. Making your home a lot bigger than the rest of the homes in your neighborhood may not be a good investment, for example. “If the average price point in your neighborhood is $400,000 and your home is worth that amount but you add a $100,000 addition to your home, that doesn’t mean your home will be worth $500,000,” said Salmon.

Final thoughts

Whether you want to remodel to sell or to make your home into what you want it to be, it’s smart to research different remodeling projects to gauge your potential return on investment. While some projects can absolutely pay off, there are just as many home “upgrades” that can hurt your home’s value or make no impact at all.

 

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Janet Berry-Johnson
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Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Mortgage

What to Know About Getting a Mortgage on a Second Home

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Although 36 percent of investors and 29 percent of vacation home buyers pay cash for their properties, many finance their homes, according to a survey by the National Association of Realtors Research Department. But even buyers who finance their second homes have a lot of cash on hand: 47 percent of investors and 45 percent of vacation home buyers finance less than 70 percent of the home’s purchase price.

That’s not to say you can’t get a second home with a smaller down payment, but it’s one of many important things to think about when looking to get a mortgage on a second home.

Is buying a second home right for you?

Before making a huge financial commitment like this, make sure you ask yourself these crucial questions:

Can I afford a second home?

Many families love the idea of buying a second home, but think about all the costs you incurred when buying your primary residence:

  • Down payment
  • Closing costs
  • Monthly mortgage payment
  • Property taxes
  • Property insurance
  • Private mortgage insurance (PMI)
  • Utilities
  • Landscaping and upkeep

You’ll incur many of these same costs with a second home, too. For example, Doug Crouse, a senior loan officer with nearly 20 years of experience in the mortgage industry, says PMI can be especially costly: “When it comes to second homes, PMI rates are about 50% higher than what they would be for a primary residence.”

However, a second mortgage isn’t inherently more expensive than a first mortgage. Dan Green, founder of Growella and a former top producing loan officer with 15 years of mortgage lending experience, says, “There is no closing cost difference on a second home [or] vacation home mortgage as compared to a primary residence.”

Keep in mind that if your second home is in a faraway location, you have to consider the long-distance costs of upkeep.

Will this be a vacation rental or an investment property?

There are typically two reasons people want to purchase a second home: buying it as a vacation home or buying it as an investment property. How you use it will have implications for your taxes.

According to the IRS, your home is a vacation home if you spend the greater of 14 days a year or 10% of the time you rent it to others.

Keep in mind that if you use your home solely for your family to vacation there, you can’t deduct items on your tax returns like utilities and real estate taxes like you would if it was an investment property. While you can deduct mortgage interest on a vacation home like you do for your first home, the new tax law for 2018 only allows you to deduct mortgage interest on your total properties up to $750,000. So if you already own a $750,000 home, you would not be able to deduct your mortgage interest on a second home.

If you use your second home to generate income from rent, you may be able to deduct items on your tax returns like utilities, real estate taxes, the fees you pay your property manager and more, according to the IRS. (Think of it like being a business owner who gets to deduct business expenses versus a vacation home owner.)

If you don’t want to choose between your second home being a vacation home or being an investment property, you don’t have to. It can be used as both, but you have to keep impeccable records that show when it’s being used and how, so you can properly itemize your deductions. For example, if you use it for half the year as a vacation home and rent it out the other half of the year, the IRS says you can only deduct your utilities, etc., on your taxes for the portion of the year you’re treating your home as a business and renting it out. It’s a good idea to consult a tax professional about how such an investment will affect you before you commit to buying a second home.

Is a second home a good investment?

Whether or not a second home is a good investment depends on the individual. Roger Wohlner, a fee-only financial planner, says, “One should be buying a second home for a specific reason such as a family gathering spot, an affinity to a location (a lake, etc.) or some other reason. Because of that, it can’t really compare to another investment.”

In other words, you can’t quantify relaxation, memories or family time as part of a return-on-investment calculation. That’s why it’s crucial you make sure you can afford the second home from the get-go.

If you’re considering a second home strictly as an investment property, whether or not it’s a good decision depends on many other decisions you make along the way, like how much you choose to charge in rent, which improvements you make to the property and how you plan to manage the property, to name a few. Before you decide to rent out an income property, make sure you’ve considered these seven major cost areas.

How to get a mortgage on a second home

What’s the difference between your primary mortgage and your second home mortgage?

There are a few differences between these two mortgages. Depending on your credit score and other qualifications, you may be able to get a conventional mortgage for a primary residence with as little as 3 percent down (but you will have to pay private mortgage insurance, or PMI.) You might also qualify for an FHA loan with 3.5 percent down. Generally, the higher your credit score, the better interest rate you will qualify for, but lenders may consider your application with a 620 or lower credit score. (You can read more here about the most important factors in getting approved for a mortgage.)

For a second home, you could be required to put 10 percent to 30 percent down, depending on your credit or debt to income ratio. Lenders like to see cash reserves, as well, to show that you can cover one to 12 months of payments. Additionally, lenders like to see a 640-700 credit score for second homes, and your interest rates might be a quarter of a point to a half a point higher than your primary mortgage, although Green says, “Mortgage rates on second homes may be slightly higher, or may not be higher at all.”

When it comes to credit qualifications for a second home, Crouse says, “Second home credit requirements are typically the same as primary residence for conventional lending.” Additionally, he says there’s no difference in the approval process. Green corroborates this. He says, “Minimum credit score thresholds aren’t usually different for vacation homes as compared to primary residences. However, lenders often ask for additional monies down.”

If you want to find a mortgage for a second home, Crouse says, “Typically lenders who offer primary home loans would also offer second home financing.” Green advises, “The mortgage-comparison process is the same. Do your research, talk to two or more lenders, and choose the lender that works best for you.”

You’ll also want to ask yourself these questions in order to avoid common mistakes:

Can I really afford this place? Wohlner says, “If you don’t have the cash for the down payment on a second home you shouldn’t be buying one.”

What loan terms make the most sense for this property? Just because you have a 30-year fixed-rate mortgage on your primary residence doesn’t mean that’s the right choice for a second home. Crouse says, “A common mistake is not looking at adjustable rate loans as an option,” because second homes are often “a luxury item and therefore something people liquidate when there is a change financial situation.”

Have I explored all my options? Green says, “When you’re shopping for a mortgage on a second home, make sure to actually shop.” He adds, “You’re looking for the best combination of price and service on your loan. It’s good to shop around.”

What are some ways to pay the down payment on a second home?

The best way to pay for a down payment on a second home is to pay for it with cash. Crouse says, in his experience, most people use cash as their down payment on second homes. The reason, he says, is, “Most buyers don’t want to tie up personal residence equity into their second home.”

If you don’t have the cash on hand and you’re committed to buying a second home, you can consider taking out a HELOC on your primary residence and using that money for the downpayment for your second home.

Taking out a HELOC comes with risks, though. You are leveraging your primary residence to purchase a second residence, which could cause you to lose your home if you fail to make your HELOC payments. In fact, Wohlner completely advises his financial planning clients against getting a HELOC to pay for a down payment on a second home. He says you should pay for it in cash.

Alternatives to mortgages for a second home

Getting a mortgage for a second home isn’t the only way to get the vacation property or investment property you want. Here are some other options:

Pay cash

Paying cash for your second home is a great way to ensure you don’t pay interest to a bank. It also means you’ll have no monthly mortgage payments on your second home, and that’s a great feeling. Of course, you’ll no longer have easy access to that money in case of an emergency. You might also prefer to get a mortgage at a low-interest rate and instead invest your cash in the stock market. Again, this is up to you, your risk tolerance and your cash reserves.

Get a joint mortgage with family

Sharing a second home and getting a mortgage with a family member could be a great way to split the costs and responsibilities of having a second home. Of course, involving multiple applicants in the mortgage process may make it a bit more logistically challenging.

You should also know that there are tax implications. When claiming the mortgage interest deduction, you may have to include an attachment in your tax return showing how much of the mortgage interest you paid. If you’re the person who receives the Form 1098 (the mortgage interest statement), you will deduct only the portion you paid and have to let the other borrowers know what their shares are.

Timeshare

Timeshares are an $8.6 billion industry, and the average price of a timeshare interval is $20,040, according to the American Resort Development Association. (A timeshare interval is the set number of days and nights per year an owner uses the property, usually a week, according to the ARDA.)

Now, you can go to large, well-known companies like Disney to find your own timeshare. With a timeshare, you typically get to visit a specific place every year for a set amount of time, like one week. So, you don’t have the flexibility of getting to visit your second home any time you want, but it can be more cost-efficient. Another con is that timeshares come with hefty dues that can increase each year.

Bottom line

Ultimately, buying a second home is an exciting prospect. If you vacation often to the same place, it can be a great way to become an official part of that community. However, buying a second home is a serious financial commitment that requires a large down payment and other maintenance costs. Luckily, if you decide you aren’t ready to buy a second home yet, you can still use vacation rental websites and continue to try new locations until you’re finally ready to take the plunge.

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Cat Alford is a writer at MagnifyMoney. You can email Catherine at cat@magnifymoney.com

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Mortgage

Can I Refinance a Mortgage When My Home Is for Sale?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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If you’re having trouble paying your bills, or if you’d simply like to reduce your monthly expenses, refinancing your mortgage could be a good option. By reducing your interest rate, extending your loan term, or both, you could stand to significantly reduce your monthly payment.

But refinancing isn’t easy if you’re also in the process of selling your home. Many mortgage lenders may be hesitant to work with you, and there are some rules you’ll have to follow before you can even consider it.

This article explains why you might want to refinance your mortgage while your home is for sale, why lenders might be hesitant to allow it, and how you can maximize your odds of success.

Why You Might Consider Refinancing When Selling Your Home — and Why You Should Think Twice

There are a few situations in which refinancing a home you are trying to sell might seem like a good idea. But there are also some downsides to this approach, and in some situations, those downsides will outweigh any potential benefit.

Here are some of the reasons to consider it, as well as some reasons to think twice.

1. Relieve the burden of two mortgage payments

If you have already moved into a new home and you are now dealing with two mortgage payments, refinancing your older mortgage could be a way to reduce your monthly expenses and make this temporary situation a little more manageable.

One issue with this approach is that the upfront closing costs could outweigh the savings you receive on the monthly payment. This is especially likely if you end up selling your home quickly, as there may not be enough time for you to recoup those upfront expenses.

Dan Green, the founder of Growella and the branch manager for Waterstone Mortgage in Pewaukee, Wis., also warns that refinancing is not a cure-all if you’ve gotten yourself into a difficult financial situation. While it may offer temporary relief, the long-term issue of having to afford two mortgages will remain and you might end up spending a lot of money on something that still leaves you in a tough spot.

2. You can do a no-cost refinance

If you plan on selling your home within the next few months, the typical upfront closing costs associated with refinancing are a big obstacle.

But you may be offered a no-cost refinance in which you’re able to refinance your mortgage without closing costs. And that could be helpful in the right circumstances, as long as you understand the pros and cons.

The term “no-cost” is slightly deceptive because the lender isn’t actually giving you a free pass. They are simply rolling the closing costs into the loan, which increases the amount you’re borrowing and therefore increases the long-term cost of the loan.

The upside is that without the upfront costs, you can start saving money immediately as long as you’re able to lower your monthly payment. If you sell your home relatively quickly, you could end up spending less than if you had kept your original mortgage.

The downside is that since you’re taking out a larger mortgage, you’ll have to pay more the longer you hold it. If you have trouble selling the house or if your plans change and you decide to keep it, you could end up spending more than you would have either with your original mortgage or with a traditional refinance.

3. You’re not planning to sell the home anymore

If your house has been on the market for some time without any success, you might be having some doubts. That may be especially true if you’re in a buyer’s market, leaving you with little leverage for getting the price that you want.

In that case, you might simply decide that you no longer want to sell the house. You may even decide to turn the home into an investment property instead and rent it out to tenants.

According to Green, this is the most suitable reason to refinance while your home is for sale. If your plans have changed, a refinance might be the best way to save money over the long term.

Why lenders are wary of refinancing a home that’s for sale

Even if you decide that refinancing is the right move, you may have trouble finding a lender that’s willing to do it.

Lenders always take on risk when originating a mortgage loan, and some of these risks are even bigger when they’re considering short-term financing.

Default risk

Default risk is the risk that you might not be able to pay the loan back, in which case the lender stands to lose money.

On the one hand, if you are refinancing a mortgage on a home that you are trying to sell, it should theoretically be a short-term loan and that may decrease the odds of default.

If, as Green mentions, you are refinancing in an attempt to relieve some of the stress of a difficult financial situation, you might quickly find yourself in even more financial trouble if you aren’t able to sell your home quickly. And that type of situation could make it harder for you to pay back the loan, which increases the lender’s risk of losing money to default.

Early-repayment risk

According to Casey Fleming, mortgage adviser and author of “The Loan Guide”, lenders make most of their profit when they sell their loans to investors. So in a situation where you’re trying to take out a loan on a property that you’re trying to sell, the lender faces the risk that you’ll pay the loan off early and eliminate their ability to sell it for a profit.

“A lender doesn’t want to book a loan that’s going to be paid off after only a month or two,” said Fleming. “The lender stands to lose quite a bit of money if someone takes out a loan and then sells the property.”

Even if the lender does manage to sell the loan to an investor, part of the sale includes representation and warranties that could cause problems in the case of early repayment.

Fleming said, “The lender represents to the investor that the information in the file is true and correct and affirms that the loan will pay off as planned.”

So if you sell the home and repay the loan within just a few months, the lender may be forced to buy the loan back from the investor, resulting in more losses.

How to improve your odds of refinancing

If you’re still convinced that refinancing is the right move, how can you find a lender who is willing to go through with it while your home is still for sale?

The first step is to be honest. If your home is listed, it will show up on a multiple listings service (MLS) that the lender can easily cross-reference, so you shouldn’t try to hide it.

Beyond that, here are three steps you can take to improve your chances of getting approved for a mortgage refinance.

1. Take your home off the market

Most lenders will require that you remove your listing before they consider refinancing.

For cash-out refinance transactions, Fannie Mae, a government-sponsored enterprise that buys mortgages from lenders, requires that your property must be taken off the market before the loan is disbursed. And for limited cash-out refinance transactions, they require that the borrower confirm their intent to occupy the home.

In other words, for the most part you will not be allowed to refinance your mortgage if you are still planning to sell the home. You must have changed your mind, decided to hold onto it, and taken it off the market.

2. Write a letter of intent

Even if you do take your home off the market, lenders may still be wary of proceeding. In that case, a letter explaining your new intentions may help you secure the refinance you’re looking for.

According to Green, Fannie Mae requires borrowers to sign a letter indicating their intention to occupy the home as a primary residence. In other situations, you might write a letter explaining that you’ve decided to turn the home into a rental property rather than sell it.

Whatever the case, explaining your intention to hold onto the property, and providing evidence of that intention if possible, could help your case. For example, a copy of a lease agreement with a tenant could bolster your case that you are truly planning on using the property as a rental.

Again, it’s important to be honest. If you declare your intention to keep the home and then turn around and sell it right away, you could end up in a lot of trouble.

“If you misrepresent your intentions, you’ve committed mortgage fraud,” said Fleming. “The lender could sue you for damages and the federal government could prosecute you.”

3. Shop around

While most lenders will require that you take your home off the market and leave it off the market in order to refinance, some don’t have those restrictions.

“Banks or credit unions that retain some of their loans rather than sell them might be more willing,” said Fleming. “But only on higher-risk, higher-rate loans.”

If you shop around, you may be able to find a lender who’s willing to refinance even if you keep your home for sale. But there’s no guarantee, and you’ll likely end up with a more expensive loan that could hurt you in both the short and long term.

A good place to start shopping refi offers is through MagnifyMoney’s parent company, LendingTree’s mortgage marketplace.

The Bottom Line

If your home is already listed for sale, or if you plan on selling in the near future, refinancing is a difficult proposition. Many lenders won’t even offer a refinance unless you take your home off the market and those that will refinance often charge you higher interest rates.

In the end, it may be better to simply avoid refinancing if a sale is imminent.

But if you’ve had trouble selling your home and you’re having second thoughts, you can improve your chances of getting approved by taking your home off the market and refinancing in good faith.

Doing so could help you secure a lower monthly payment, a lower interest rate, or both, and free up a little extra cash flow for your other needs.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Matt Becker
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Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Mortgage

Is Now the Best Time to Buy a Home?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Mortgage applications increased by 7.8% in December 2017 from the previous year, according to the Mortgage Bankers Association. But the fact that more people are buying homes doesn’t necessarily mean it’s the best time for you.

If you’re trying to decide whether now is the right time to buy a home, it’s important to understand how the housing market works and whether you’re financially and emotionally ready to take on such a large commitment.

Here are some of the most important factors to consider.

A snapshot of the current housing market

There are several market forces that influence the overall affordability of housing, and can therefore affect your personal decision.

In this section, we’ll look at the current state of three main factors: mortgage rates, home prices, and inventory levels.

Mortgage rates are rising

As with the stock market, you can’t know for sure how mortgage interest rates will change over time. You can, however, make predictions based on some underlying factors.

According to Tendayi Kapfidze, chief economist at LendingTree, mortgage rates are significantly higher than they were six months ago. Indeed, the following chart from Freddie Mac shows a steady climb starting in September, followed by a sharp climb in rates more recently:

Kapfidze points to two factors that have helped push rates higher.

“The first thing is that the Federal Reserve, since September, has been reducing its holdings of Treasury securities and mortgage-backed securities,” he said.

The Federal Reserve began the program of buying up these holdings in response to the financial crisis that began a decade ago. The idea was to lower interest rates to encourage businesses to invest and help the economy grow.

Kapfidze says that this reduction in the Federal Reserve’s holdings lowers demand for Treasury bonds and mortgage-backed securities, “If you reduce the demand, the price falls,” he added, “which in this case means that interest rates go up.”

The second factor, according to Kapfidze, is the recent behavior of Congress, which passed both the Tax Cuts and Jobs Act and a sweeping budget bill recently.

“Both of those things are projected to increase the U.S. budget deficit pretty significantly,” said Kapfidze. “They’re going to be issuing a lot more Treasury bonds, and because they’re adding a lot of supply and we have a reduction in demand, that’s also pushing up the interest rates.”

Home prices are on the rise

If you thought home prices were high when the housing market bubble burst in 2007, take a look at how they’ve grown since the market recovered.

If you’re concerned that the market will see another correction soon, you might not want to risk getting caught up in it. It’s difficult to predict if and when a correction will happen, so it’s often not advisable to try to time the market.

One thing to keep in mind, though, is the correlation between interest rates and home prices.

“As mortgage rates go up, that does put some downward pressure on home prices, but it does it with a lag,” said Kapfidze. “If you were to run a correlation between mortgage rates going up this year and home prices three years from now, you’ll probably see a little slower appreciation in home prices.”

There are fewer homes available

While mortgage rates may not have an immediate impact on home prices, inventory levels can. Total housing inventory fell 11.4% in December 2017, according to the National Association of Realtors, and was 10.3% lower than the previous year.

With fewer homes on the market and growing demand, sellers have less competition and therefore more opportunity to increase prices. But Kapfidze doesn’t see that acting as a deterrent for homebuyers.

“Given the strength of demand in the housing market today, I think you’ll probably still see pretty strong growth in home sales this year,” he said.

The benefits of buying a home

Buying a home is a major financial commitment and should not be taken lightly. But it also comes with some significant benefits, both financial and otherwise, that may factor into your decision.

Tax breaks

The U.S. tax code allows homeowners to deduct the amount of mortgage interest and property taxes they pay each year from their taxable income. The catch is that you have to be able to itemize your deductions instead of taking the standard deduction.

With the new tax law in effect, the standard deduction has increased from $6,500 to $12,000 for single taxpayers and from $13,000 to $24,000 for married couples filing jointly. As a result, fewer homeowners find it worthwhile to itemize their deductions and therefore take advantage of the mortgage interest and property tax deductions.

You may also receive a tax break when you selling your home down the road. The IRS allows you to up to $250,000 in tax-free gains on your sale if you are single, and up to $500,000 if you are married filing jointly, assuming certain conditions are met.

So if, for example, you buy a house for $200,000 and sell it years later for $300,000, that $100,000 gain would be completely tax-free as long as you meet the eligibility requirements.

Equity

So long as home sales remain strong, a home is an appreciable asset, which means that its value typically grows over time. And every monthly payment you make increases the amount of the home that you actually own — your equity — which means that you are building wealth along the way.

Of course, growth isn’t guaranteed. As the U.S. real estate bubble burst a decade ago, the Case-Shiller 20-City Composite Home Price NSA Index fell for almost three years straight.

That said, the long-term upward trend is clear. According to the U.S. Census Bureau, the median home value grew from $30,600 in 1940 to $119,600 in 2000, adjusted for inflation.

All of which is to say that owning a home functions as a sort of forced savings program. By continually contributing money to an appreciable asset, you can build long-term wealth.

Predictable monthly costs

If you opt for a fixed-rate mortgage, your monthly payment is locked in for the length of your loan term. This is in contrast to renting, where your monthly payment can change every time you renew your lease.

That fixed cost can make budgeting and planning a lot easier. With that said, owning your house means that you’re on the hook for maintenance and repairs. These costs can be unpredictable, and sometimes quite high, which is one of the reasons why building an emergency fund can be so helpful.

More control

While homeownership can provide financial benefits, many people simply want the freedom to create a home that makes them happy.

As a homeowner, you don’t have to ask permission to paint the walls, replace the floor, add a room or get a pet. For the most part, you have complete control to do what you like.

Of course, this may mean spending more money on home improvements. But if it’s in pursuit of turning your house into a home, it may be worth the costs.

Running the numbers on buying vs. renting

The choice to buy or rent isn’t always an easy one, even if you’ve done your homework. But it’s always helpful to run the numbers to see which route is more likely to come out ahead.

You can play around with The New York Times’s Buy vs. Rent calculator to crunch the numbers.

It generally makes more sense to buy if you plan on living in the home for an extended period of time.

The less time you plan on staying in the home, and the greater the associated costs of your home are — such as interest rate, property taxes, insurance, and maintenance — the less likely it is that buying will be the better financial decision.

While there is no golden rule, there are certain variables that generally argue one way or the other in the buy vs. rent debate.

Here are some of the major considerations:

Even if you’re ready to take the next step toward buying a house, the process can be daunting, especially if you’re a first-time homebuyer.

As you begin the house-hunting process, here are some tips to help you stay on the right track.

1. Figure out how much you can afford

A mortgage is a long-term investment, so make sure your budget can handle both the monthly payment and all the other expenses that come with owning a home.

“You want to make sure to have a conservative budget, so if any curveballs are thrown at you like a lost job or big unexpected repair, you have the means to tackle them,” said Mike Schupak, CFP®, a fee-only financial planner and the founder of Schupak Financial Advisors in Jersey City, N.J.

You can use MagnifyMoney’s home affordability calculator to get a quick idea of your price range, then focus on homes within that range.

2. Research recent home sales in your area

Given that the housing market crashed not too long ago, and that average home prices have now risen above what they were before the crash, you might be worried about buying at the top of the market and suffering through another downturn.

Luckily, there are plenty of tools that allow you to research the value of recently sold homes in your area, which can help you gauge whether the home prices you see are fair.

Websites like Zillow.com and Realtor.com can be helpful places to start. Zillow allows you to search as many as three years back, and both sites allow you to filter based on a number of variables so that you can get as fair a comparison as possible.

But this is where a good realtor will really shine. Realtors have access to databases that go back even further, and a good realtor will understand how to evaluate that data, find the right comparisons and explain it all in a way that makes sense.

3. Determine how much you’ll put down

A larger down payment will reduce your monthly payment and potentially allow you to avoid PMI, but you have to weigh that against the savings you have available and your other financial needs.

Lucas Casarez, CFP®, a fee-only financial planner and the owner of Level Up Financial Planning in Fort Collins, Colo., says that a 20% down payment is preferred, but not a deal breaker. It typically allows you to avoid PMI and may allow you to secure a lower interest rate.

But putting 20% down isn’t always realistic, and there are plenty of mortgage programs that allow you to buy a home with less. You just need to weigh the pros and cons in light of your personal situation.

4. Get preapproved

You can get a pre-approval letter from a lender before even making an offer on a house. This letter says that the lender will likely loan you up to a certain amount of money, based on a set of assumptions.

And while this isn’t a loan offer or a guarantee, it both allows you to make an offer with more confidence and gives the seller more confidence that you will actually be able to follow through on your offer, increasing your odds of having it accepted.

5. Avoid applying for credit

Every time you apply for a credit card, loan or any other type of credit, the lender does a hard credit check that can temporarily knock a few points off your credit score.

It’s therefore wise to delay new credit activity until after you close on your mortgage in order to keep your credit score from dropping.

6. Get the right loan

There are many different types of mortgages, from conventional loans to non-conforming loans, to programs that allow you to put less than 20% down. You can get a fixed interest rate or an adjustable rate, and you can choose mortgage term that’s typically either 15 or 30 years.

There are many different factors to consider, and a good mortgage adviser can help you understand your options and make the right choice based on your personal needs.

7. Compare mortgage rates

Every mortgage lender has different criteria when underwriting their mortgages, so you have the opportunity to shop around to find the lowest interest rate available to you. You can use this tool from the Consumer Financial Protection Bureau to get a sense of the rates available in your area, and you can apply with several lenders to see what offers you qualify for.

MagnifyMoney’s parent company LendingTree also makes it easy to get quotes from lenders online, using this short online form.

And you don’t have to worry about hurting your credit score by making several applications. As long as they are all within a 45-day window, the credit bureaus will count multiple credit checks from multiple mortgage lenders as a single inquiry.

8. Make a strong but reasonable offer

Once you find the right house, you can work with your real estate agent to make a strong offer that’s within your budget.

At this point in the process, you may be confronted with competing bids, and it’s important not to get caught up in a bidding war that could put you in a difficult situation. You can potentially work with your realtor to make certainly reasonable concessions, but be prepared to walk away if the price gets too high.

The bottom line: Is it time for me to buy a house?

With so many market and financial factors to consider, it can be hard to figure out whether it truly is the right time to buy. Schupak’s advice is to focus on what you can control.

“Don’t try to time interest rates,” Schupak said. “Instead, focus on items like purchase price, expected maintenance cost, insurance, HOA fees and real estate taxes. A forecast miss on those items often turns out to be much more costly than a higher interest rate.”

Casarez encourages people to be conservative and wait until you have a solid foundation in place that can help you navigate the ups and downs of this big transition.

“Sometimes the monthly cost of owning a house can be a big jump, and it can cause a lot of stress,” said Casarez. “The best time to buy a home is when you’re financially and mentally ready to do so.”

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Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Mortgage

Most Important Factors to Getting Approved for a Mortgage

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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When David Inglis and his wife decided to move to San Diego last year, they were expecting a relatively smooth process. They’d keep the house they owned in Los Angeles and rent it out as a source of passive income, then they’d buy a new house in San Diego. They even had a 20% down payment ready to go.

“The problem was that we found renters and had to get out of our current house and close on the new house within 21 days,” Inglis, 40, a yacht broker, tells MagnifyMoney. That gave them just 21 days to get a mortgage — easier said than done. As Inglis put it: “Getting approved for a mortgage is a process, to say the least.”

With what felt like a moment’s notice, the couple had to gather up and submit everything from tax returns to current income statements, and do mountains of paperwork in between to get pre-qualified for a loan. From there, their lender picked through their credit scores, debt-to-income ratio, employment history — you name it. They closed on their new house in the nick of time at the end of 2017, and it was anything but a stress-free experience.

If you’re new to the whole buying-a-house thing, locking down a mortgage loan isn’t something that happens overnight. That’s not to say it isn’t worth it though. One recent Value Insured survey found that the vast majority of younger folks—a whopping 83%, in fact—still associate buying a home with the American dream.

At the starting line? There are a number of important factors that go into determining if a lender will approve you for a home loan. Here’s everything you need to know.

Getting approved for a mortgage — 5 things lenders are looking for

Credit score

Remember: A mortgage is a type of loan. When you’re applying for any type of financing, your credit score is perhaps the most important piece of the puzzle. This three-digit number essentially provides lenders with a general idea of your creditworthiness.

If you have accounts in collections or a history of making late payments, for example, you’ll have a lower-than-average score, which directly affects your loan options. That means you could get hit with higher interest rates or bigger mortgage insurance premiums, or both.

“Your credit score is really important on conventional loans,” John Moran, founder of TheHomeMortgagePro.com, tells MagnifyMoney. “Some other loan programs are less credit-sensitive.”

For conventional home loans, Moran says your credit score has to be at least 620, but for FHA or VA loans, you may be able to get away with a score in the 500s. But it’s not just about getting approved. The lower your score, the higher your mortgage rate will likely be — and that can add tens of thousands of dollars to the cost of your loan over time.

FICO, America’s leading credit reporting agency, looks at several important factors when determining your score. Your payment history, amounts owed, and length of credit history are chief among them. If you’re aiming for a home in the next year or two, you’ve got time to improve your credit if you start now.

Trust us — it’ll be worth the effort. You can see below what estimated mortgage rate folks would get based on their credit score and how much it could cost them over time. For our purposes, we’ll assume they’re all getting a $250,000 30-year fixed rate loan.

Score Range

APR

Monthly Payment

Total interest paid

760-850

3.914%

$1,181

$175,224

700-759

4.136%

$1,213

$186,760

680-699

4.313%

$1,239

$196,072

660-679

4.527%

$1,271

$207,462

640-659

4.957%

$1,335

$230,777

620-639

5.503%

$1,420

$261,180

Source: Calculated using the MyFico Loan Savings Calculator
Rates current as of Feb. 2, 2018.

You can find a detailed breakdown of your credit score by pulling up your credit report for free. Your report unpacks your credit history for lenders, so it’s vital to know what’s on it. This is crucial because you could end up spotting an error that’s weighing your score down.

If your credit score could use some work, don’t fret—there are plenty of ways to give it a good boost before buying a home. Establishing credit history, keeping your credit utilization ratio below 30%, and making consistent on-time payments are all on the list.

Debt vs. income

Your credit score goes hand in hand with your current debt load. Lenders specifically zero in on how your debt relates to your income. Together, this determines what’s known as your debt-to-income ratio (DTI)..

To calculate out your DTI, it’s fairly simple: Add up all your monthly debt obligations (not including your current housing payment unless you own the home and plan on keeping it), then divide that number by your gross monthly income. So if you pay, for example, $2,000 a month toward debt and you’re grossing $4,500, your DTI comes in at about 44%.

What’s a good DTI? Strive for 36% or less.

Fannie Mae, which sets the lending standards for the vast majority of mortgage loans, generally requires a maximum total DTI of no more than 36%. However, if the borrower meets certain credit and reserve requirements, they can generally get away with 45%.

Why? A high DTI is a red flag to lenders that you may not be able to afford a new monthly loan payment. In a lot of ways, it’s more telling than your credit score.

“The only thing that really matters to lenders is how this new monthly payment and your other debts relate to your income,” said Moran. “One of the quickest ways people can turn things around is by paying down revolving debts like credit cards and lines of credit, which increases your available credit and decreases your credit utilization ratio.”

He adds that making a smaller down payment in order to pay down revolving debt might improve your chances of qualifying since doing so will boost your credit score relatively quickly. Knocking those balances down also lowers your monthly minimum payment, so you may be able to qualify for a larger loan. In other words, your DTI isn’t the end-all-be-all when applying for a mortgage loan, but it’s pretty important.

Down payment

Lenders also look at how much of a down payment you can make, which ties directly back into your debt-to-income ratio. According to Bob McLaughlin, director of residential mortgage at financial services company Bryn Mawr Trust, putting down a higher down payment makes you more likely to get approved since it essentially decreases the risk for the lender. As a result, better loan terms and interest rates will likely be on the table.

“If you have the ability to put 20% down, you also avoid having to pay private mortgage insurance, which makes it easier to qualify,” he said.

Another perk is that you’ll have more equity in your home as well as a lower monthly mortgage payment. But for many, saving for a 20% down payment is a serious barrier to homeownership. Not surprisingly, a 2016 report put out by the National Association of Realtors found that the average down payment for first-time homebuyers has fallen in the 6% range for the last few years. The good news is that according to Moran, you can still get approved with a lower down payment.

“You can put 0% down for VA loans, 3.5% for FHA loans and even as little as 3% for conventional loans,” he said.

“There are people all the time buying homes with these minimum down payments, but it really all boils down to what you’re comfortable with and the kind of monthly payment you can handle.”

FHA and VA loans are usually the first low down-payment loans that come to mind, but options like personal loans and USDA loans may also be worth considering. Just keep in mind that taking this shortcut could potentially translate to a financial burden — low down payments typically necessitate higher insurance rates and extra fees to protect the lender.

That said, lenders are really looking at your big financial picture, not just your down payment size. If you’re putting down less, but have a good score and a steady source of income, you’re much more likely to get approved for a mortgage loan than someone with a lower score and/or spotty employment status.

Employment history

Our insiders say that your income and employment history are just as important as your credit score, DTI and down payment size. Again, it all comes down to lenders feeling confident that you can indeed repay your loan.

“You have to fit the underwriting guidelines per your profession, and there is little flexibility there,” said McLaughlin.

Piggybacking on this insight, Moran says that the ideal situation is if you’ve worked for the same employer for two years and you’re salaried. The second ideal way to get the green light is if you’re an hourly worker who’s been with the same company for at least two years.

But all this begs one obvious question: What about self-employed folks? The freelance economy is growing rapidly. According to the latest Freelancing in America survey conducted by Upwork and the Freelancers Union, these folks are predicted to make up the majority of the U.S. workforce within the next decade. Moran says that for these workers to qualify for a mortgage, they’ll need to have a two-year work history.

Check out our guide on getting approved for a mortgage when you’re self-employed.

“It’s a little bit of a kiss of death to start self-employment right before applying for a home loan,” he said.

“Most lenders won’t approve you because they want to be sure you’ll be able to afford your new loan payment. The only way to really prove you have a steady income is with two years’ worth of tax returns.”

In rare cases, Moran adds, you may be able to get away with one year, but it’s not the norm. Things are different of course, for self-employed newbies who are applying with a spouse who works a steady 9-to-5, which could tip the scales in their favor. Again, it’s all about the big picture. That said, a new salaried position will typically erase doubts stemming from a spotty employment history, as long as you have about two months’ worth of pay stubs, according to McLaughlin.

Loan size

All the factors we’re highlighting here are interwoven. The size of the loan you’re applying for fits right in. The higher your loan amount, the higher your monthly payment, which impacts that all-important DTI.

This is why you may be more likely to get approved if you’re seeking a lower amount. But whether you’re looking for $100,000 or $400,000, it really boils down to how big of a monthly payment your budget can absorb. (Lending Tree, which is the parent company of MagnifyMoney, has a Home Affordability Calculator that can help you figure this out.)

The general rule of thumb here is to keep your mortgage loan (including principal, interest, taxes, and insurance) at or below 28% of your total income. Moran has worked with ultra-conservative folks who like to keep that number at 25%, but he says it really varies from person to person.

“Some people like to travel and don’t want to be house poor; others are homebodies and just really want a nice house because that’s where they’re going to spend their time,” he said.

“It’s all a trade-off, but either way, lenders will only pre-qualify you for what they think you can actually afford.”

How to get preapproved for a mortgage

Pre-approval is a term you’re likely to hear in the home-buying process. This is when the lender takes into account everything from your credit score and debts to employment history and down payment size to offer you a maximum loan amount.

When you come to the table with a pre-approved offer of lending from a bank, you’re already way ahead of the competition. And this can really give you an edge. When you’re living in a metro where most people are coming with double-digit down payments and pre-approvals to boot, you’re competing with very attractive borrowers.

Pre-approvals will ding your credit score, but the hit won’t be too bad if you complete several mortgage applications over a short time period, like 30 to 45 days. Multiple inquiries should only count as one hard inquiry on your credit report.

A good rule of thumb is to get mortgage quotes before you apply for pre-approval. You can get quotes quickly from different lenders at LendingTree by filling out a short online form.

Included in a pre-approval letter will be the estimated loan amount you might qualify for and your estimated mortgage rate.

The pre-approval process is also meant to prevent you from making offers on homes you can’t afford. But this doesn’t mean you have to actually take out a loan for the full amount. Many choose to get preapproved for their top number, then dial back during negotiations.

Final word

When it comes to mortgage approval factors, there are a lot of moving parts. Far and away, your credit score and debt-to-income ratio carry the most weight for potential lenders. From there, your ability to prove that you’re steadily and reliably employed is equally important.

At the end of the day, all that really matters is that you’re applying for a loan that you’ll actually be able to repay hiccup-free. The larger your down payment, the better your odds—especially if it eliminates the need for PMI. Either way, it’s probably in your best interest to meet with lenders before you start house hunting.

“You don’t want to put the cart before the horse by going with a realtor to look at houses, only to fall in love with something you can’t afford,” added McLaughlin. “Your emotions can definitely make the mortgage application process more stressful, which is why it’s best to go through the prequalification process first.”

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
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Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Mortgage

3% Down? Why Small Down Payment Mortgages Could Be a Bad Idea

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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For prospective homeowners, the idea of saving up for a 20% down payment — usually tens of thousands of dollars — can often be paralyzing. As a result, small or no down payment mortgages are extremely attractive.

But as usual, taking a shortcut financially can come back to bite you. Mortgage loans that have a low-minimum down payment usually require extra fees or insurance to make it worth the lender’s while.

To determine whether a small down payment mortgage is right for you, it’s important that you know what you’re getting yourself into and how much it can cost you in the end.

Mortgages that require a small down payment

Small down payment mortgages are attractive primarily because they allow people to buy a home sooner than if they had to put a full 20% down.

This can be appealing for personal reasons since owning a house often makes it feel more like home. And it can occasionally be attractive for financial reasons, potentially saving you money compared with renting, particularly if you stay in the house for an extended period of time.

Additionally, there are several home loan programs that offer small or no down payment mortgages to those who qualify:

Veterans Affairs (VA) loans

These loans are insured by the U.S. Department of Veterans Affairs for certain veterans, service members, spouses and other eligible beneficiaries.

They don’t require a down payment or mortgage insurance but do charge a one-time funding fee of 0.5% to 3.3%, depending on the type of loan, the size of the down payment and the nature of your military service.

U.S. Department of Agriculture (USDA) loans

The U.S. Department of Agriculture insures home loans for low- to moderate-income homebuyers in eligible rural areas.

Like VA loans, there is no down payment for a USDA loan. But there is an upfront fee of 1% and an ongoing annual fee of 0.35%, both of which apply to purchases and refinances.

Federal Housing Administration (FHA) loans

Insured by the U.S. Department of Housing and Urban Development (HUD), borrowers can get an FHA loan with a down payment as low as 3.5%.

Additional fees include an upfront mortgage insurance premium of 1.75% and an annual mortgage insurance premium of 0.45% to 1.05%, depending on the type, size and length of the loan and the size of the down payment.

Conventional loans

Some mortgage lenders offer small down payment mortgages — as little as 3% down payment — to borrowers who qualify.

These loans, however, aren’t insured by a government agency, so the lender will require private mortgage insurance (PMI). The cost of PMI varies but is often between 0.5% and 1% of the loan amount. You can typically request to have your PMI dropped once you have at least 20% equity in the home.

Learn more: Planning your down payment

The benefits of small down payment mortgages

These small and no-down payment mortgage options are designed for those with low- to moderate-incomes who either don’t have enough cash on hand for a large down payment or find it difficult to qualify for a conventional mortgage for credit reasons.

For example, you can get an FHA loan with a 3.5% down payment with a credit score as low as 580. VA loans technically don’t have any minimum credit score requirement, although you may still get denied if you don’t meet the lender’s financial criteria.

As a result, these small down payment mortgages are attractive because they make homeownership more accessible. You can save enough for a down payment much sooner than if you had to put the full 20% down, and you can secure a mortgage even if your credit isn’t perfect.

Why a small down payment could end up costing you more

Home loans with a small down payment are often billed as affordable options for homebuyers because of the fact that you don’t have to bring as much money to the table upfront. But the flipside is that you’ll likely spend more money over the life of your loan than if you waited until you had saved enough to make a larger down payment.

For example, let’s say you’re buying a $200,000 home, putting 3% down, and not rolling your closing costs into the loan. On a 30-year mortgage with a 4% interest rate, your monthly payment will consist of the following elements:

  • Principal: The amount of each payment that goes toward reducing your loan balance.
  • Interest: The amount of each payment that goes toward paying the interest on the loan.
  • PMI: Private mortgage insurance paid to a third party to protect the lender in case you default on your loan. For our example, we’ll assume a 0.75% rate.
  • Homeowners insurance: This covers certain damages to your home, the loss of personal belongings and covers your liability in the case that you accidentally injure someone or damage his or her property. Lenders typically require homeowners insurance and collect your payments in an escrow account, making payments to the insurance company for you. We’ll assume a $70 monthly insurance payment for our example.
  • Property tax: Your property tax rate will depend on your state and county. For the sake of simplicity, we’ll use a 1% tax rate for our example.

Using MagnifyMoney’s parent company, LendingTree’s online mortgage calculator, here’s how your monthly payment will break down:

  • Principal and interest: $926.19
  • PMI: $121.25
  • Homeowners insurance: $70
  • Property tax: $166.67

If you total these up, your monthly payment will be $1,284.11.

Now, let’s compare that with your monthly payment if you make a 20% down payment instead.

 

3% Down Payment

20% Down Payment

Principal and interest

$926.19

$763.86

PMI

$121.25

$0

Homeowners insurance

$70

$70

Property tax

$166.67

$166.67

Total Monthly Payment

$1,284.11

$1,000.53

That’s a savings of $283.58 per month, for a total of $102,088.80 over the life of the loan.

What you could do with the money you saved by making a bigger down payment

Even if you don’t plan on staying in the home for the full 30 years, having an extra few hundred dollars per month can make a big difference for your budget. Here are just a few things you can do with that additional cash.

  • Invest: Whether for retirement or some other long-term goal, investing is the best way to get your money to work for you.
  • Pay down debt: Student loans, credit cards, and other debts are easier to pay off when you have extra room in your budget.
  • Save: Saving ahead for home repairs and routine maintenance, as well as building an emergency fund to handle big, unexpected expenses.
  • Travel: More disposable income makes it easier to travel, whether you want to explore somewhere new or simply visit friends and family.
  • Home improvement: If your new house isn’t your dream home, you can use the monthly savings to work on renovations.

If you do plan on staying in your house for the life of the loan, that extra $102,088.80 can go a long way toward securing every part of your financial future.

How to decide if a low down payment mortgage is for you

While it’s generally better to make a bigger down payment, there are some situations in which a small down payment mortgage may be the better option.

You don’t plan on staying in the home very long

Over a 30-year period, you can save tens of thousands of dollars by opting for a higher down payment. But if you’re only planning on staying in the home for a few years, the savings won’t be nearly as high.

That said, it’s important to also consider the transaction costs.

“The cost of buying and then selling a home runs about 8% to 10% of the purchase price, depending on where you live,” said Casey Fleming, mortgage advisor and author of “The Loan Guide.” “Buying with a low down payment only makes sense if you plan on being in the home long enough to make back at least your acquisition and sale costs.”

You need the liquidity

Even if you have enough money to make a large down payment, you may not want to part with all of it. For example, you might prefer to keep your emergency fund intact rather than deplete it. Or you might want to keep some cash available for repairs. Or you might want to invest some of that money with the hope of getting a better rate of return.

“With a larger down payment, you’re taking money that’s liquid and making it illiquid,” said Dan Green, founder of Growella and the branch manager for Waterstone Mortgage in Pewaukee, Wis. “The only way to get to your money is to refinance, sell your home or take a line of credit. It’s very important that before making a large down payment that you have a sufficient emergency fund, a budget set aside for home repairs.”

Ways to build up to a larger down payment

If you’ve set a goal of making a 10% to 20% down payment on your next home purchase, now is the time to start getting your strategy in place. While it can sometimes take years to save that kind of money, there are a few things you can do to speed up the process.

Find extra cash to save

Sometimes the best way to reach a financial goal is a good mix of offense and defense.

On offense, consider finding ways to earn more money either by negotiating a raise, starting a side hustle, getting a second job or booking the occasional side gig.

On defense, create and maintain a budget to find areas where you can cut back. Set a monthly goal for how much you want to save, automate that savings and funnel any extra cash toward your down payment fund. Tools like You Need a Budget and Mint.com can help you create and execute this plan.

Pros

  • The opportunities to earn extra money are virtually endless.
  • You have control over how and where you spend your money.
  • Negotiating a raise at your current job can provide extra money without requiring extra work.
  • Starting a side hustle could bring in extra income long after you’ve reached your down payment goal.

Cons

  • These strategies can require more time than other options.
  • If you have a lot of debt and other essential expenses, cutting back can be hard.
  • Creating new habits and sticking to them can be difficult. You have to be committed for the long run.

Borrowing from family or friends

If a friend or family member is willing to loan you money, you might not have to spend time finding extra cash. You may even be lucky enough to receive the money as a gift — subject to federal gift tax rules — which would provide the money at essentially no cost to you.

However, if you are structuring it as a loan, Neal Frankle, a certified financial planner and the founder of Credit Pilgrim, recommends adhering to the current guidelines for Applicable Federal Rate (AFR), which specify minimum interest rates for various types of loans.

Pros

  • You’ll get into your new house sooner.
  • You can often get a lower interest rate from family or friends than you’d get from a lender.
  • You may have more flexibility with the repayment terms.

Cons

  • It can damage your relationship if something goes wrong.
  • Your family members or friends may not consider you trustworthy enough to loan money.
  • Not all mortgage lenders allow you to borrow your down payment.

Borrow from your 401(k)

Qualified retirement accounts like a 401(k) typically penalize you for taking withdrawals before you’ve reached retirement age.

But many 401(k) plans offer loan programs that allow you to borrow from your account balance, often with relatively low-interest rates even if you have poor credit. And if you are using the money in order to purchase a primary residence, you may be able to pay the loan back over a period of 25 years, as opposed to the standard 5-year term for most 401(k) loans.

Pros

  • You can get into your new house sooner.
  • 401(k) loans often have lower interest rates than a personal loan.
  • The interest you pay goes back into your 401(k) account rather than to a lender.

Cons

  • You’re forfeiting potential investment gains on the borrowed money.
  • If you leave your employer for any reason, your loan may be due within 90 days, putting you in a difficult financial position.
  • Not all 401(k) plans offer loan programs.

The bottom line

There are certain situations where a small down payment mortgage might be a good idea. It can get you into a home sooner, and many federally-insured mortgage programs can minimize the costs and allow you to buy a home with less-than-perfect credit.

But in many cases, it’s better to go above and beyond the minimum down payment required. A larger down payment can save you money both in the short term and the long term, helping you invest more in your future financial security.

Making the right choice for your personal situation involves both running the numbers and taking your personal goals into account. If you do your due diligence, you’ll be in a better position to make a good decision.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Mortgage

Taking out a Mortgage for a Manufactured Home

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Looking to buy a place to call home without taking on massive debt? A manufactured home may be the least expensive way to buy a house that meets your family’s needs. The average sales price of a new manufactured home was just under $75,000 in August 2017, according to the Manufactured Housing Survey. That’s less than a quarter of the median price for a new single-family home, which was $314,200 in August.

“More people are turning to manufactured housing to deliver homes that fit their needs and wants, at prices they can afford,” according to Patti Boerger, VP of Communications for the Manufactured Housing Institute. On average, manufactured homes cost about $51 per square foot — that’s nearly half the price of a traditional site-built home, according to 2015 Census data.

However, the inexpensive house often comes with an expensive loan. According to research from the CFPB, between 2001 to 2010, two-thirds (65%) of all manufactured home owners used the expensive chattel loan option to pay for their mortgage. While chattel loans provide a viable solution for buying a manufactured home, many homeowners have lower cost financing options. This is especially true for the two-thirds of manufactured homeowners who own their lot.

Manufactured, modular or mobile? What’s the difference?

Many people use the terms manufactured, modular and mobile homes interchangeably, but there are some distinctions. For a home to be a manufactured home, it must meet Manufactured Home Construction and Safety Standards set up by the Housing and Urban Development department (HUD) in 1976. Homes that meet the standards receive a certification called a HUD tag. HUD tags make the home eligible for a variety of financing including Federal Housing Administration (FHA) insured loans. Fabricated homes built prior to 1976 cannot be HUD certified, so the HUD department calls them mobile homes.

Modern manufactured homes can either be attached to a permanent foundation (like a concrete slab or pier footings) or a temporary foundation (such as a ground and anchor foundation). Homes attached to a temporary foundation could accurately be called mobile homes since you could move them. However, even moving a mobile home is a massive task.

Modular homes are a type of manufactured home that is delivered to the site in multiple pieces. These homes must meet the local standards of site-built houses rather than the Manufactured Home Construction and Safety Standards.

Despite the differences, many companies manufacture and install both manufactured and modular homes.

How to finance a manufactured home

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While taking out any mortgage is a huge undertaking, manufactured home mortgages can be especially confusing. Borrowing options for manufactured homes aren’t only limited by your credit, down payment and income qualifications. The home you buy also influences which loans are available to you.

These are the steps you’ll need to take when buying a manufactured home, according to a loan officer who specializes in manufactured-home financing.

Buying a used manufactured home

Buying a used manufactured home is a bit like buying a used car from a private seller. You can get a great deal, but you need to complete due diligence before buying.

  1. Decide whether to buy the lot: Nearly two-thirds of manufactured homeowners own the lot where their home is located. Buying both the lot and the home means you may qualify for conventional mortgages. Homebuyers who plan to rent their lot will only qualify for chattel loans.
  2. Check for the HUD tag: The home needs to have a HUD tag indicating that it meets safety standards. The tag is a metal plate that you should be able to find on the outside of the manufactured home. If you can’t find the physical HUD tag, ask the owner to request a Letter of Label Certification from the Institute for Building Technology and Safety.
  3. Check title history: Every manufactured home has a unique serial number that can be used to look into past ownership information. As a buyer, you’ll want to look into statements of location to determine whether the home has moved in the past. The exact site for searching manufactured home history varies by state. However, the most likely candidates include your state’s department of transportation, department of housing, or register of deeds websites.If you find that a home has moved from its original location, the home won’t qualify for a traditional mortgage (like an FHA, conventional, or VA loan).
  4. Compare loans options: Use the information you gathered in the previous steps and the guide below to help you determine the best loan for your situation. Whether you choose a traditional loan or a chattel loan, you can compare rates from multiple lenders to get the best deal.
  5. Property appraisal: Once you qualify for a loan, your lender will appraise your manufactured home. The lender will also send inspectors to check on the home’s foundation and confirm that it meets current standards.
  6. Close on loan: If the property meets the required standards, you may proceed with the loan closing process.
  7. Transfer title: Following the loan closing, the title will be transferred to you. At this point, you may have to convert the home from personal property to real property (more on that later). Your closing attorney or lender can help you with the conversion.

Buying new

Buying a new manufactured home means you can buy the exact home you want. It also opens up more opportunities to qualify for traditional mortgages (if you also own your lot).

  1. Find lot: Whether you plan to rent a lot or buy one, you’ll need to find a location for a home. Some people will place a new home on land they already own.
  2. Start home design process: In some cases, you may pick a manufactured home right off of a vendor’s lot, but many people choose custom designs for their homes.
  3. Determine loan options: Home manufacturers may point you toward certain lenders, but don’t be afraid to shop around. Comparing multiple lenders often yields a better deal. If you plan to buy land, you can consider using a conventional mortgage.
  4. Property assessment: Before a bank will allow you to close on a conventional loan, they will require a property assessment. This assessment will determine whether the site can hold a proper foundation.
  5. Close on loan: Once the property passes inspection, you’ll close on your home loan. If you’re taking out a conventional mortgage, your initial loan may be a construction loan, but it will convert to a mortgage once the manufacturer completes the home.
  6. Home delivered to property: After the loan closes, the manufacturer will deliver and install the home on the property.
  7. Title property: Once the home has been delivered, you’ll need to title the property. If you’ve taken out a traditional mortgage, you’ll have to title the property as real property.

Choosing the best mortgage for your manufactured home

Traditional mortgages such as FHA loans, conventional mortgages and VA loans offer financing up to 30 years with (potentially) low fixed rates. However, they also have more stringent buying criteria. Chattel loans have higher interest rates and shorter payoff periods, but the criteria for borrowing is a bit looser.

You can use the information below to determine what loan may fit your situation best.

 

Chattel Loans

FHA Loans

Conventional Mortgage

VA Loans

VA Loans for Manufactured Homes

Overall

Best for borrowers who want to buy the home only, and place it in a rented lot.

Best for borrowers with a small down payment who want to buy a manufactured home and the lot.

Best for borrowers with a large down payment who want to buy a manufactured home and the lot.

Best for military members who want to buy a manufactured home and the lot.

Best for military members who want buy a manufactured home and rent a lot.

Credit score required

Ability to pay criteria

500, but banks have minimum underwriting standards

620

Credit score standards set by lender

Credit score standards set by lender

Down payment required

5% (10% for borrowers with credit scores 500 or below)

Credit score between 500-579: 10%



Credit score at or above 580: 3.5%

5% (10% for people with thin credit)

None

5%

Interest rates

Average 6.79% in 2014 (most recent data available)



Between 0.5-5.5% higher than traditional loans

Average 4.22%

Average 4.25%

3.97%

Varies by lender

Upfront financing fee

Up to 2.25% (can be financed)

1.75% (can be financed)

None

1.25-3.3% depending on your military status, homebuying experience and down payment (can be financed)

1%

Mortgage insurance

Up to 1%

0.45-1.05%

0.5% annually

None

None

Mortgage limits

Home only: $69,678


Lot only: $23,226


Home and lot: $92,904

Generally, $294,515 for single-family units, but it varies by location, and you should check the limits in your area

Generally, $453,100

Generally $453,100

Value of home and lot

Mortgage term limits

20 years for home only



20 years for single-section home and lot



15 years for lot only



25 years for a multi-section home and lot

Up to 30 years

Up to 30 years

Up to 30 years

15 years for lot only



20 years for single-wide home



20 years for single-wide home and lot



23 years for a double-wide home



25 for a double-wide manufactured home and lot

Titling requirements

Personal Property

The house must be titled as real property, and you must own the lot where the house is located.

Must own land (or be part of a co-op), and home must be titled as real property.

The house must be titled as real property, and you must own the lot where the house is located.

Personal or real property

Foundation requirements

Foundation anchors or permanent foundation

Permanent foundation (including pier and footing)

Permanent foundation (foundation anchors may be appropriate depending on the manufacturer’s requirements)

Continuous slab or load-bearing piers and footings.

Foundation anchors or permanent foundation

Minimum size

400 square feet

400 square feet

600 square feet

None

400 square feet (single wide), 700 square feet (double-wide)

Can home move?

Yes

Only from manufacturers to permanent foundation (even if purchasing used).

Only from manufacturers to permanent foundation (even if purchasing used).

Must be permanently affixed and titled as real property.

Yes

Where to compare lenders

Manufactured Housing Institute

HUD FHA Lender Search

LendingTree mortgage comparison*

LendingTree VA mortgage comparison*

Manufactured Housing Institute (Call to ask about VA loans)

*LendingTree is MagnifyMoney’s parent company.

Personal property versus real property titling

When it comes to financing a manufactured home, one of the most important considerations is how you plan to title the home. Buyers can choose to title a manufactured home as personal property which is how you title a boat, RV or vehicle, or real property which is how you title a traditional home.

In most parts of the country, you have had a permanent foundation to title your loan as real property. Some states require you to own your lot while others allow you to title your home as real property on leased land. You can find out the exact titling requirements in your state by working with the register of deeds in your county.

How you title your property will have a tremendous effect upon your total ownership experience. These are the seven ways titling may affect your experience:

Upfront taxes: When you purchase real property you pay transfer taxes, but when you purchase personal property you pay sales tax. The sales tax rate is generally higher than the transfer tax fee. Some states have sales tax exemptions for manufactured home buyers.

Property tax rate: Real property may be taxed at a higher rate than personal property in your state. If you title as real property, you may pay higher property taxes every year you own your home.

Default process: If you choose to title your home as personal property, your lender can repossess your home if you default. The default process will be governed by the Uniform Commercial Code, so you don’t have the full rights and protection of a property owner. People who title their home as real property have the right to a full foreclosure process which may give them time to get out of default before losing their home. Foreclosure laws vary by state.

Loan modifications: People who are in danger of losing their home often look for loan modifications to make their home affordable again. The largest home loan modification program is the Making Home Affordable Program, which outlines criteria for Home Affordable Mortgage Program (HAMP) loan modifications. HAMP modifications are only available to manufactured homeowners who own their lot and home and have both classified as real property.

Rights of joint owners: Titling your home as personal property also has disadvantages if your spouse defaults on a debt. In some states, manufactured homes that are classified as personal property may be seized for a default on debt, even if the home is owned by both spouses and the default was the responsibility of just one spouse. On the other hand, homes classified as real property do not face that problem.

Borrowing options: If you title your home as personal property, you have the option to take out an FHA chattel loan, a personal loan or owner-held financing solutions. When you opt to title your home as real property you gain the option to take out FHA loans, conventional mortgages, VA loans and other government-backed mortgages. These mortgages tend to be lower cost and have more protections.

Advantages of manufactured homes

Manufactured homes are no longer the boxy trailers of a few decades ago. Buyers can now select a range of new features that are attractive to new buyers including fully-functional kitchens, open layouts and attractive roofs. These features come at about half the price per square foot of site-built homes.

Much of the cost savings come from the manufacturing process itself, which ensures that home building isn’t subject to costly weather delays, and the standardized parts make it easier to build.

In addition to lower construction costs, manufactured homeowners often have lower utility bills than site-built homeowners due to the small size of manufactured homes. Older manufactured homes are notorious for having poor energy efficiency, but manufactured homes built after 1994 are subject to current HUD energy standards for manufactured homes. Some home manufacturers are taking energy efficiency a step further by manufacturing Energy Star-certified manufactured homes which are at least 15% more efficient than manufactured houses built to code.

Disadvantages of manufactured homes

Despite the cost and energy advantages, manufactured homes have drawbacks. Manufactured homeowners who do not (or cannot) choose to title their home as real property has decreased rights if they default on their loan. When titled as personal property, manufactured homes may be repossessed or taken as part of another debt settlement suit (depending on state laws). Manufactured homeowners who don’t own their land may miss out on a wealth-building opportunity since the land may appreciate while home structures tend to depreciate in value.

Finally, the mortgages available for manufactured homes may be more limited than those for site-built homes. In particular, many manufactured homeowners have to rely on high-priced chattel loans rather than mortgages for site-built homes.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

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