Tag Archive for: mortgage

Pros and Cons of Putting Less Than 20% Down

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When it comes to buying a home, one of the most significant decisions you’ll need to make is how much to put down. While the traditional advice suggests a down payment of 20%, many buyers opt for less. Here are some pros and cons of putting less than 20% down on a mortgage.

Pros

1. Lower Initial Investment

The most apparent benefit of a smaller down payment is that it requires less money upfront. This can make homeownership more accessible, especially for first-time buyers or those with limited savings.

2. More Liquidity

By putting less money down, you can maintain more of your savings for emergencies, home repairs, or other expenses. This can provide a safety net and financial flexibility. While it is possible to borrower money against your house, it requires additional processing time and costs.

3. Opportunity Cost

Investing a large sum of money into a house means those funds are not being used elsewhere. By putting less down, you may have more money to invest in retirement accounts, the stock market, or other ventures that could potentially yield a higher return, even when accounting for the cons below.

Cons

1. Higher Monthly Payments

A smaller down payment means a larger loan amount, which can result in higher monthly mortgage payments. This can strain your monthly budget and leave less room for other expenses.

2. Private Mortgage Insurance (PMI)

If you put down less than 20%, you’ll likely be required to pay for Private Mortgage Insurance. PMI is an extra fee added to your monthly mortgage payment until you’ve paid off 20% of your home’s value.

3. More Interest Over Time

The smaller your down payment, the more you’ll borrow, and the more interest you’ll pay over the life of the loan. This can significantly increase the total cost of your home.

The Bottom Line

Putting less than 20% down makes the most sense when you simply do not have 20% down. This will allow you to access your liquid assets more quickly and you could possibly break even every month if you invest the extra funds. Consult with your mortgage professional to see if putting less than 20% down makes sense for you.

Mortgage Closing Costs and How to Save

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Understand and save on mortgage closing costs. Yurii Kibalnik – stock.adobe.com.

If you are planning to buy a home, you might be wondering what are mortgage closing costs and how much they will affect your budget. Mortgage closing costs are the fees and expenses that you pay when you finalize your home loan. They can include things like appraisal fees, title insurance, origination fees, recording fees, and are charged by third party service providers, government, and the lender. The typical costs range from 1.5% to 2% (or more) of the loan amount and are paid at closing time.

The stage of the loan will determine which closing costs document is available for you. If you are not yet in contract with the seller, you may receive an Approximate Loan Cost Illustration (ALCI) or similar document that gives you an idea of what the costs could be. After you get into contract, you will receive a Loan Estimate document as part of the Initial Disclosures. This is where you can see a sectionalized break down of the mortgage closing costs.

Some of the most common closing costs include:

  • Appraisal: This is a fee that’s paid to an appraiser to determine the value of your home.
  • Title and escrow service: This is a fee that’s paid to a title company to research the title of your home and to insure you and the lender against any title defects.
  • Lender origination: This is a fee that’s charged by the lender for processing and underwriting your loan.
  • Government fees: These are fees that are paid to the government for the transfer of real estate and to record the mortgage documents.
  • Escrow or impound account: These are fees that are paid to an escrow account to hold money for property taxes and insurance.
  • Homeowners insurance: This is insurance that protects your home from damage or loss.
  • Prepaids: These are expenses you pay in advance of mortgage payments and cover a specific period of time. Prepaids typically include mortgage interest, property taxes, homeowner’s insurance, homeowner’s association dues, and mortgage insurance.

Ways to save on closing costs:

  • Lender credits: Your lender may offer you credits as part of your loan. The amount of credits is dependent on the specifics of your loan scenario such as loan to value ratio, credit score, loan product and interest rate.
  • Seller credits: The seller may offer credits as a sales incentive.
  • Agent credits: Your buyer agent may offer you credits from part of the commission received from the sale.
  • Rolling the closing costs: If you are refinancing, you can roll the costs into the loan amount. This does not reduce the costs but spreads it out over the life of the loan so you do not need to pay the entire amount at closing time.
  • Keep in mind that any credits you receive for your home purchase cannot exceed the total closing costs.

Mortgage closing costs are an inevitable part of buying a home. It’s important to factor them into your budget when you’re buying a home. By understanding what goes into closing costs and possible ways to save, you can make your home buying process smoother.

ARM or Fixed Rate Mortgage: How to Choose

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Fixed rate vs adjustable rate mortgage pros and cons. Vitalii Vodolazskyi – stock.adobe.com.

One of the biggest decisions you will need to make as a home buyer is whether to choose an Adjustable Rate Mortgage (ARM) or a fixed-rate mortgage. Both types of mortgages have their pros and cons, and the choice largely depends on your individual financial circumstances and goals.

Fixed rate mortgages have an interest rate that does not change for the life of the loan, typically 10, 15, 20 or 30 years. This means that your monthly payments will be the same each month through the entire loan term, regardless of market fluctuations. However, fixed-rate mortgages typically have higher interest rates than ARMs. If you plan to own your home for a long time, a fixed rate mortgage may be a good option for you as you can lock in a predictable payment for the life of the loan. A fixed rate mortgage is amortized over the same number of years.

On the other hand, an ARM offers an initial interest rate that is lower and fixed for the first 5, 7, or 10 years, making the initial monthly payment lower. After the initial fixed years, the rate will adjust every 6 months or 1 year. The rate adjustments will stop after you refinance into a new loan or sell your home. If you plan to own your home for a short period of time or anticipate lower refinance rates before the rate adjusts, an ARM may be a good option for you. There are caps and limits in place to protect you from large increases in the interest rate, including the frequency of rate adjustments, the maximum interest rate increase per adjustment period, and the lifetime interest rate cap.

An example of an adjustable rate mortgage is a A 7/1 ARM, or a 7-year adjustable rate mortgage, is a type of mortgage where the interest rate is fixed for the first 7 years and then adjusts annually for the remaining 23 years of the loan term. The amount of adjustment is based on an index such as the weekly average of the 1-year US Treasury securities adjusted to constant maturity of one year, as made available by the Federal Reserve. Another example is a 10/6-month ARM, or a 10-year adjustable rate mortgage, is a type of mortgage where the interest rate is fixed for the first 10 years and then adjusts every 6 months for the remaining 20 years of the loan term. The amount of adjustment is indexed to the 30-day Average Secured Overnight Financing Rate (SOFR), as published in the Federal Reserve Bank of New York. The initial fixed-rate period of 7 or 10 years means that your interest rate will not change during this period, regardless of any fluctuations in the market.

Here are some factors to consider when choosing between an ARM and fixed-rate mortgage:

  • Your financial situation. If you plan to move within within the next few years or anticipate refinancing into a lower rate, an ARM may be a good choice. You can save hundreds of dollars each month by choosing an ARM term that matches your ownership timeframe. If you plan to own your home for a long time, a fixed-rate mortgage may be a better option.
  • Your risk tolerance. If you are on a tight budget and comfortable with the risk of your monthly payments going up, an ARM may be a good option. However, if you are not comfortable with this risk and want to know exactly how much your monthly payments will be for the life of the loan, a fixed-rate mortgage may be a better choice.
  • The current interest rate environment. If interest rates are expected to rise or have peaked, you may be able to get a good deal on an ARM mortgage. However, if interest rates are currently low, a fixed rate mortgage may be a better option.

If you are unsure which mortgage option to choose, it is advisable to seek guidance from a mortgage professional. They can help you evaluate your goals and circumstances, assess your risk tolerance, and provide valuable insights into the pros and cons of each mortgage option. Additionally, a mortgage professional can help you navigate the complex process of mortgage application and ensure that you get the best help possible.