What's in a Mortgage Payment?

A monthly mortgage payment includes at least two parts: an amount that goes toward the principal of the loan (the money you've borrowed) and a second amount that goes toward interest (the cost of borrowing the money).

For most homeowners, however, there is also a third part of the mortgage payment: an amount that is paid into an escrow account that the lender maintains for you to pay for things like homeowners hazard insurance, property taxes, condominium and association fees and mortgage insurance (if applicable). This is the element of the monthly payment that can go up or down even in a fixed-rate mortgage.

Together, these elements are called PITI:

• P — Principal
• I — Interest
• T — Taxes
• I — Insurance

Your tax and insurance costs
Homeowners must pay property taxes and they must have some type of homeowners insurance. Depending on state laws and other variables, most lenders require homeowners to pay into what is called an "escrow account." In this account, the lender or mortgage servicer keeps enough money to cover your property taxes and homeowners insurance. You pay into this account each month as part of your mortgage payment. When your taxes are due, the lender/servicer pays them for you. The same is true for your insurance.

The lender/servicer sends you a periodic statement showing how much is in this account. You can compare the statement with your property tax bill and your homeowners policy to ensure that the right amount is being held to cover the payments. The Real Estate Settlement Procedures Act (RESPA), which is enforced by the U.S. Department of Housing and Urban Development (HUD), is the major law covering escrow accounts.

It is important to maintain the required property insurance on your home. If you don't, your lender/servicer can buy insurance on your behalf. This type of policy is known as "force placed insurance"; it usually is more expensive than typical insurance, and it provides less coverage.

If you're buying a house, most sellers disclose the amount of the annual property taxes on the house when it is listed for sale. If they don't, you can easily get this information from your local property tax assessor. A local insurance agent can give you an idea of the annual insurance cost. Divide each of these numbers by 12 and add them to the principal and interest to get the estimated total monthly payment.

What is private mortgage insurance?
If a buyer puts down less than 20 percent of the selling price on the mortgage, lenders may require the buyer to buy another type of insurance called private mortgage insurance (PMI). This provides insurance to the lender in case the buyer is not able to repay the loan and the lender is not able to recover costs after foreclosing the loan and selling the property.

The annual cost of PMI can vary but usually is between .19 percent and 1 percent of the total loan value, depending on the loan terms and loan type. PMI can be paid up front but most buyers prefer that it be included in their mortgage payment. The cost can vary based on several factors that include: loan amount, loan-to-value ratio, occupancy (primary home, second home, investment property), documentation provided at loan origination, and probably most of all credit score.

Once the principal of the loan reaches 80 percent (the owner has 20 percent equity in the home), the PMI is usually no longer required and can be canceled, although you may have to prove your equity by having a new appraisal done to show that the house is worth at least 20 percent more than you owe on it. (Note: Some lenders may require that PMI be paid for a fixed period even if the principal reaches 80 percent.) The cancellation request must come from the servicer (the company you send your mortgage payment to) of the mortgage to the PMI company that issued the insurance.

Note: PMI may be waived or avoided through some types of government or other loans. Check with your lender to determine your situation.

A PITI Payment with PMI
Maria and George have found a home that costs $150,000. They are able to make a downpayment of 5 percent, or $7,500. The annual property taxes are $1,650 and the annual homeowners insurance is $780. These payments are made in monthly installments in their mortgage and are held in an escrow account. When their taxes and insurance are due, the lender (or mortgage servicer) makes the payments for them.

Because their downpayment is less than 20 percent, Maria and George will pay PMI as part of the mortgage payment. With a 30-year fixed mortgage and an interest rate of 6 percent, the PITI with PMI is as follows:

• Principal and Interest (P and I): $854.36
  
• Monthly Property Taxes (T): $137.50
  
• Monthly Property Insurance (I): $65.00
  
• Private Mortgage Insurance (PMI): $85.50
  
• Total payment: $1,142.36

Making bi-weekly payments
Paying half your mortgage every two weeks instead of a full payment once a month can be done with most any type of loan but is most common with a 30-year fixed-rate loan. Doing so pays your mortgage more quickly because you pay the equivalent of 13 months of payments each year. For people who can budget to make a half-payment every two weeks, this offers more rapid building of equity. You can choose to do this on your own. Many people have it automatically deducted from their checking accounts.

Because your payments are applied to the loan every 14 days, the principal amount decreases faster, saving you more in interest costs. Your loan term shortens to 22 or 23 years, providing a substantial decrease in total interest costs. For example:

Monthly mortgage payment (12 months/12 payments): $997
Interest paid over the life of the loan: $209,263
Paid off in 30 years

Half payment (13 months/26 payments): $498 ($997 / 2)
Interest paid over the life of the loan: $155,938
Paid off in 22-23 years

Interest savings over the life of the loan are $53,325 – paid off in 22-23 years instead of 30 years!

Paying additional principal
Another option — if you can afford a slightly higher monthly payment — is to achieve the same savings with monthly payments. To do this, you would need to pay an extra amount of principal to your total mortgage each month. Using the above example, with a mortgage payment of $997, you would add $83 a month ($997 divided by 12) toward the principal (You will need to specify the extra amount for "principal only" on your payment.), making your payment $1,080. The interest savings would be the same and the loan would be paid off about seven years early, but you wouldn’t have to commit to making payments every two weeks.

Qualifying for a Mortgage

To some potential buyers, particularly first-time buyers, the prospect of meeting a mortgage lender may seem a little scary. Lenders ask a lot of questions because they want to help you get a mortgage. If you work with a lender before you decide on a home, you will know whether you’ll qualify for a mortgage large enough to finance the home you want.
It may seem that your lender needs to know everything about you for the application, but actually all the lender needs to know about is employment, finances and information about the home you’re buying (but you can be pre-approved before you choose a home). You will, however, need to provide quite a few details about these topics. The goal is to arrive at a monthly payment you can afford without creating financial hardships. Here's an idea of what lenders consider when they are qualifying you for a loan:

Your household income and expenses

Lenders look at your income in ways other than the total amount; how you earn it is also important. For example, income from bonuses, commissions and overtime can vary from year to year. If these sources make up a large percentage of your income, your lender will want to know how reliable they are.

Your lender will also consider the relationship between your income and expenses. Generally, your fixed housing expenses (mortgage payment, insurance and property taxes, but not repairs or maintenance) should not be more than 28 percent of your gross monthly income, although this is not an absolute rule. Your lender will also consider other long-term debts, such as car loans or college loans. It is a good idea to bring the following when you meet with your lender:

Income

• Employment, salary and bonuses, and any other source of income for the past two years (bring your most recent pay stub, previous year’s W-2 forms and tax returns if possible)
• The most recent account statement showing the amount of any dividend and interest income you received during the past two years
• Official documentation to support the amount of any other regular income you may receive (alimony, child support, etc.)

Employment history
Job stability is a factor that a mortgage lender will look for, and two years at your current job helps, but this also is not an absolute requirement. If you change jobs but stay in the same line of work, you should not have a problem — especially if the job change is an advancement or increase in income.

Credit scoreYour credit score also helps to predict how likely you are to repay the mortgage debt.

Personal assets

• Current balances and recent statements for any bank accounts, including checking and savings
• Most recent account statement showing current market value of any investments you may have, such as stocks, bonds or certificates of deposit
• Documentation showing interest in retirement funds
• Face amount and cash value of life insurance policies
• Value of significant pieces of personal property, including automobiles
• Debt Information
• The balances and account numbers of your current loans and debts, including car loans, credit card balances and any other loans you may have

UnderwritingThe lender does the best possible job of ensuring that a borrower qualifies for a loan. The final decision, however, rests with the lender's underwriter, who measures the total risk that the specific investor, who backs up the loan, is taking. Each investor (or investment company) has its own underwriting guidelines (often using statistical models), so while the underwriters evaluate many of the same factors as the lenders, they may look more closely at some areas than others, depending on the guidelines. For example, while the lender may have pre-approved you before you chose a home, by the time you get to underwriting, you will have chosen the property you want to buy, and the underwriter will review the property details closely.

However, most of the information used is the same as that used by the lender, but it may be evaluated differently. The underwriter will evaluate the borrower's ability to pay (income), willingness to pay (credit history), and the collateral (property). As underwriters analyze each of these risks (although this is not a complete list), here are some possible guidelines they may use:

Income

• Is the income sufficient to repay the loan? Ratio guidelines of 28 percent payment-to-income and 36 percent total debt-to-income are standard, but some programs allow for higher ratios.
• Is the income stable from month to month and year to year?
• Has the borrower been on his/her current job and in the same industry for a sufficient amount of time? A minimum of two years is the standard guideline, but exceptions can be made.
• Can the income be verified?

Credit

• Does the borrower have a good credit score (typically, 680 or higher is considered good)?
• Does the borrower have late payments, collections, or a bankruptcy? If so, is there an explanation that can be provided for the late payments/collections/bankruptcy?
• Does the borrower have excessive monthly debts to repay?
• Is the borrower maxed out on credit cards?

Collateral
Is the property worth what the borrower is paying for it? If not, the lender will not loan an amount in excess of the value. If the appraisal comes back less than the offer on the house, sometimes you can renegotiate the terms of the purchase contract with the seller and his/her real estate agent.

Some borrowers agree to purchase the home at the price they originally offer and pay the difference between the loan and the sales price. You need to have disposable cash to do this, and you should assess whether the property is likely to hold its value. You also need to consider the type of loan for which you have qualified. If you need to move suddenly and have a large loan relative to the original value, and the property has not held its value, you could face a difficult cash shortfall when you go to pay off your loan.

Is the property an acceptable type of property, and does it meet coding requirements and zoning restrictions? Is the property comparable to other properties in the area? Surveys are common and are used to get an accurate measurement of the land that goes with the property you are purchasing. The person who prepares the survey should be a licensed land surveyor. The survey shows the location of the land, dimensions of the land and any improvements.

Encroachments are improvements to property that illegally violate another's property or their right to use the property, such as building a fence that is actually on your neighbor's property instead of yours, or constructing a building that crosses from your property to another’s property without their permission. Evidence of encroachments can slow the final approval process.

The downpaymentA downpayment is a percentage of your home's value. The type of mortgage you choose determines the downpayment you will need. It can range from zero to 20 percent, or more if you wish.

A number of loans are available that do not require high downpayments, particularly for first-time home buyers. FHA loans, for example, may require less than 5 percent down, and veterans or those on active duty in the military can obtain loans with no downpayment at all. In addition to downpayment assistance, these programs may have less strict guidelines for loan approval, such as allowing a higher ratio of payment to income or debt to income. They also may accept alternative forms of credit history if you have not established credit through traditional means — credit cards and car loans. For example, a lender could look at the history of utility payments and rent payments to determine credit worthiness.

Several state and federal programs provide downpayment assistance but may have income and other guidelines. To get qualified Click here!

Who Does A Realtor Represent? The Buyer Or The Seller?

 

Good question. Do you know the answer? 

So you have been thinking about buying a new home. You want more room, you have your stuff crammed into every nook and cranny you can find and you come to the realization that you just simply need more space. Or, your kids have flown the nest and the house is cavernous at this point with rooms you really don’t use anymore and it is just more than you want to maintain at this stage in your life.

You decide to drive around a neighborhood you really like and see a home that looks good with a sign in the yard. You call the number on the sign. What you need to understand is that the Realtor you have called represents the SELLER and their main responsibility is to look out for the sellers (their clients) best interest and they will negotiate on the sellers behalf to get as close as possible to the sellers asking price. So remember, the seller’s agent works for the seller, NOT the buyer.

There are times when a seller’s agent can work with a buyer too. In this case, the selling agent becomes what is called a dual agent. Some states allow dual agency and some do not. Ohio IS a state that allows dual agency. However, in a dual agent situation the dual agency MUST be disclosed. There is a form called an Agency Disclosure Statement that, by law, must be completed in every real estate transaction. It is on this form that the agent’s role in the transaction is clearly defined and you are required to sign the form to acknowledge that you understand who the agent(s) represent in the transaction. You also need to know that in a dual agent situation, the agent CAN NOTnegotiate on behalf of either party nor can they divulge any information what so ever to either party without the permission of that party. They, in effect, become the conduit between the seller and the buyer. The buyer makes an offer and the dual agent presents that offer to the seller and then presents any counter offer the seller decides upon back to the buyer and so on until all aspects of the transaction are agreed upon.

When you are the buyer and you have found an agent you really like and want to work with, it is a good idea to sign a Buyer Agency Agreement with that agent and I say this for a couple of reasons. It lets the agent know that you are serious about buying a home. It lets them know that all the time and effort they are putting into looking for a home for you is wisely spent because they know it is information you really want and appreciate during your home search. It also gives you peace of mind knowing your agent works for YOU. When your agent is scouring listings with your must haves and needs in mind you know they are doing so on your behalf and no one else's. When your agent speaks with a selling agent about a home you are interested in, they are advocating for YOU. Lets get started and get Pre-Approved NOW! Click here!

Housing Hoedown

After rising by 28% in 2012 and 18% in 2013, the 923,000 housing starts in 2013 were the sixth lowest amount since record keeping began in 1959, with only the prior five years being worse. As for single-family starts, despite having risen by 24% in 2012 and 15% in 2013, they came in at 618,000, the fifth worst year on record, with only the prior four years being worse.

Don't get me wrong! Positive numbers are positive but what is the real truth? If the United States population grows exponential since 1959, one would think that the Housing market would too. Population in 1959 was 177m and 2013 was 315m. That is 177% growth! Was the opportunity today they same as 1959? Was the Mortgage Industry softer? I have taken numerous application over the last year and less and less have money to put down on a home. When I ask, "How much do you have to put down?", many times the answer is nothing! When I purchased my first home my wife and I put 20% down. We thought that was what you did. In today's world, people are strugling to put 3.5%, the FHA minimum which is less then the 5% for a Conventional loan.

Just wondering what the underlying truth really is. For assistance in purchasing a home, please call me at 937-550-6530.

Down to 600 Credit Score

3 Questions to Ask Before Buying a Home

 

If you are thinking about purchasing a home right now, you are surely getting a lot of advice. Though your friends and family have your best interests at heart, they may not be fully aware of your needs and what is currently happening in real estate. Let’s look at whether or not now is actually a good time for you to buy a home. 

 There are three questions you should ask before purchasing in today’s market:

1. Why am I buying a home in the first place?

This truly is the most important question to answer. Forget the finances for a minute. Why did you even begin to consider purchasing a home? For most, the reason has nothing to do with finances. A study by the Joint Center for Housing Studies at Harvard University reveals that the four major reasons people buy a home have nothing to do with money:

• A good place to raise children and for them to get a good education
• A place where you and your family feel safe
• More space for you and your family
• Control of the space

What non-financial benefits will you and your family derive from owning a home? The answer to that question should be the biggest reason you decide to purchase or not.

2. Where are home values headed?

When looking at future housing values, we like the Home Price Expectation Survey. Every quarter, Pulsenomics surveys a nationwide panel of over one hundred economists, real estate experts and investment & market strategists about where prices are headed over the next five years. They then average the projections of all 100+ experts into a single number.
Here is what the experts projected in the latest survey:

• Home values will appreciate by 4.3% in 2014.
• The cumulative appreciation will be 28% by 2018.
• Even the experts making up the most bearish quartile of the survey still are projecting a cumulative appreciation of over 16.8% by 2018.

3. Where are mortgage interest rates headed?

A buyer must be concerned about more than just prices. The ‘long term cost’ of a home can be dramatically impacted by an increase in mortgage rates.
The Mortgage Bankers Association (MBA), the National Association of Realtors, Fannie Mae and Freddie Mac have all projected that mortgage interest rates will increase by approximately one full percentage over the next twelve months.

Bottom Line

Only you and your family can know for certain the right time to purchase a home. Answering these questions will help you make that decision. Need to know where to start? Click here to get started!

Location, Location, Location..

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