How Does a Reverse Mortgage Work? Pros and Cons

A reverse mortgage is a unique type of loan which flips the script on a typical mortgage, as the lender pays the homeowner. The way a reverse mortgage works is that a homeowner will borrow money backed by the value of their home. Below, we’ll go over the details of how a reverse mortgage works, along with the pros and cons.

What is a Reverse Mortgage?

A homeowner with most of their net worth tied up in the value of their home can use a reverse mortgage to gain access to a flow of cash. You can look at a reverse mortgage as trading some of the future value of a home to gain immediate access to the equity that has been built up.

Unlike other loans, there are no payments to be made on a reverse mortgage. Instead, homeowners can receive a lump sum or gain access to a line of credit. The loan does not have to be for the entire value of the home either. It can be for whatever amount you deem necessary. Reverse mortgages will only be practical options for those who own their home outright or have built up considerable equity.

The balance of the loan then becomes due upon the borrower’s death or the sale of the home. And the way these loans are structured, the balance of the loan can never exceed the value of the house. So even if the home drops in value, it will always remain the entire collateral for paying back the loan.

Loan Limits

You may not always be able to get a loan for the entire sum of your home’s value, even if you own the home outright. The amount you can borrow will depend on the age of the home’s youngest household member. There is also a current cap of $726,600 as of April 2020 on a Home Equity Conversion Mortgage or HECM.

Ultimately, the amount of money you can take out will depend on how low current interest rates are, how much your home is worth, and your age, as older borrowers can receive a higher principal amount.

What is Home Equity?

Home equity is the value of your home that has been paid off. The amount of equity you have accrued can be calculated by taking your home’s current value and subtracting the outstanding principal you owe.

Often, the equity in someone’s home is the most significant portion of their net worth. But there are only two ways of accessing this money: selling your home or by borrowing against it.

Types of Reverse Mortgages

There are three primary reverse mortgage options you can choose from:

  • Single-Purpose Reverse Mortgage
  • Federally Insured Reverse Mortgage
  • Proprietary Reverse Mortgage

Single-Purpose Reverse Mortgage

One of the fewer-used options, a single-purpose reverse mortgage will be issued through your state or local government. And true to the name, this loan can only be used for one specific purpose, such as to pay property taxes or make home repairs.

Federally Insured Reverse Mortgage

An example of a federally insured loan is the Home Equity Conversion Mortgage (HECM), which is the most popular type of reverse mortgage. Part of the reason for its popularity is that there are zero medical or income requirements to apply. But a Home Equity Conversion Mortgage will cost more on the front end than other types of loans.

With the HECM loan, you have the option of choosing a fixed interest rate or a variable interest rate. With a fixed rate, you gain access to one large payment. But if you go with a variable rate, you have many more options, including monthly payments, a line of credit, or a combination of both.

Proprietary Reverse Mortgage

An example of a proprietary loan is a jumbo reverse mortgage, which would be necessary if your home is worth more than the HECM maximum of $726,600. This type of loan is not federally backed, which also means that there are fewer upfront costs.

Pros and Cons of a Reverse Mortgage

A reverse mortgage can be an excellent option for some, but others should take caution before signing up for what can appear to be free money.

Pros of a Reverse Mortgage

The most significant advantage of a reverse mortgage is gaining immediate access to cash without a monthly payment tied to it. And for the homeowner who may not outlive the home, you never actually pay back the loan. For seniors with the majority of their net worth tied up in their home, a reverse mortgage is a great option to go live the life they want to live.

For the estate that inherits the home, the biggest pro is that the balance of the loan cannot exceed the value of the house. This practice gives peace of mind to both the homeowners and their families.

Cons of a Reverse Mortgage

For someone who has a longer life expectancy or lives long enough that they want to leave the house, a reverse mortgage could have damaging consequences. When you sign up for a reverse mortgage, the value of your home goes down, while the amount of your debt goes up.

Instead of a steadily increasing net worth that you can pass down to your heirs, a reverse mortgage lowers your net worth and leaves you with fewer assets to pass down. Signing up for a reverse mortgage is a decision that can affect many people beyond the homeowners and should ideally be discussed with the family.

Bottom Line on Reverse Mortgages

A reverse mortgage is not for everyone, but it can be an effective way of providing cash flow in your retirement years. While the prospect of receiving payments from the bank rather than the other way around may sound appealing, you should always avoid taking on new debt if you can afford to. A reverse mortgage is a helpful tool for some, but ultimately it will lower the amount of wealth that you can pass down to your heirs.

Should You Buy a Condo or Rent an Apartment?

A common question many young people ask is: “Should I buy a condo or rent an apartment?” The answer, of course, will be different for everyone. But after reading this article, you will hopefully know which camp you fall into. Below, we’ll go over the pros and cons of buying a condo versus renting an apartment and how these factors can affect your future.

Pros of Renting an Apartment

You Have More Freedom

When you rent an apartment, you are not locked into a monthly mortgage payment to a bank that won’t be paid off for 30 years. Most people who rent an apartment will have a one-year lease. When you’re young, your life is still in constant flux.

If you take a new job, it’s much easier to pick up and leave when you have a short-term lease. Or you may simply want to explore a new part of a big city. Or you may decide you want to see what it’s like to live in another state. Unless you can know exactly where you want to be for an extended period, you may be better off renting an apartment to keep your options open.

More Cash in Your Pocket

While buying a piece of property like a condo can be a reliable choice for building future wealth, renting an apartment can be much cheaper each month when compared to a mortgage payment. You avoid paying HOA fees, homeowner’s insurance, and property taxes when you rent.

Less Utility Costs

Often, apartment buildings will have at least a portion of your utilities covered by the monthly rent. An example is having cable and internet included in the rent, but you have to pay for electricity.

Cons of Renting an Apartment

Fewer Options for Decorating or Remodeling

When you buy a property, it’s yours to do with as you please. But when you rent an apartment, you have to abide by the landlord’s rules. This means that if you put a few dozen holes in the wall to hang pictures or artwork, you may not receive your full security deposit back when your lease is up.

Paying Someone Else’s Mortgage

When you buy a property, you are applying forced savings by paying your mortgage each month, lessening the amount of time until you own the home outright. While you have to pay interest on your loan, interest rates are at an all-time low.

When you rent an apartment, you are helping someone else to pay down their mortgage. What it boils down to is that buying a condo is an investment, while renting an apartment is a way to keep your options open until it’s time to settle down.

Pros of Buying a Condo

Mortgage Interest Deduction

A significant portion of your monthly mortgage payment is paying interest to the bank for your loan. While this can feel like you’re lighting your money on fire, it’s a necessary vehicle for owning the home outright and is 100% tax-deductible. This deduction is especially helpful at the beginning of the loan when the principal that you owe is the highest.

Option to Rent

If you decide you want to live in a new home or a new location, you may have the opportunity to rent the condo out to cover your carrying costs. Renting the space is also an excellent option down the line once the unit is paid off. Years from now, you’ll have an investment property generating a quality monthly cash flow.

Freedom to Decorate

When you buy your own home, you can do whatever you want with it. That might be tearing down a room for a remodel, putting crazy colors on the wall, or hanging a hundred pictures.

Cons of Buying a Condo

Property Taxes

Part of the reason your mortgage payment is likely to be higher than your comparable monthly rent is the property taxes you owe when you own a home.

Insurance

Another factor that increases your mortgage payments is insurance. Some renters may opt to pay for renter’s insurance, but it’s not a necessity like homeowner’s insurance is.

HOA Fee

Almost every condo will have a homeowner’s association that you must pay a fee to each month. Some utilities may be covered in this payment, but more than likely, you are paying for access and maintenance to the common areas of the building. HOA fees are also used for the building to build up a reserve for future significant maintenance costs.

Lack of Mobility

Selling a property is a massive undertaking that generally involves months of preparation and weeks of waiting for the right buyer to walk through the door. This means that you are essentially stuck where you are. One of the ways around this, though, is renting your condo, which will allow you to move out.

Be careful to make sure that renting your condo is an option before buying. Many homeowner’s associations have a limit to how many units in the building can be rented out at one time.

Final Word on Condo vs. Apartment

When it comes to what is better for you, buying a condo or renting an apartment, the answer is nuanced and as far from concrete as possible. If you were looking to buy a condo for under $100,000, which you could fully pay off in six years for $1,000 a month, then it may be best to buy the condo rather than having to pay close to that much money in rent. By the time your condo is paid off, you can now rent it and look to buy a bigger place.

But if you were comparing that same condo to an apartment that cost you $500 per month and had utilities included, you may prefer the freedom of mobility and the lack of stress that comes with buying, managing, and maintaining a home that you own.

If the monthly cost of owning a condo is similar to that of renting, you are better off financially buying an asset that will appreciate, rather than paying for someone else’s mortgage. However, even if you find the best deal possible on a condo, you may be at a point in your life that the freedom of living somewhere else a year from now overrides the future financial benefit.

There is no right or wrong answer when it comes to buying a condo vs. renting an apartment. You will have to evaluate the monthly costs, the location, the condition of the units, and your own personal preferences to arrive at the right answer.

How Much Does It Cost to Build a House?

How much does it cost to build a house? Firstly, land, in itself, is valuable. Property owners may build a home and grow agricultural products on vacant land. Similarly, it could be utilized as an investment. However, creating this value is time consuming and, equally as important, expensive. For instance, hiring construction workers and purchasing supplies can costs hundreds of thousands of dollars.

Yet homebuyers who are willing to put in the work themselves reap these benefits. That is to say, they could purchase vacant property and construct a house. This is much cheaper than a traditional mortgage. Moreover, they may sell the property for more and make a sizable profit after building the home.

How much does it cost to build a house on developed land?

An empty piece of land is much cheaper than property with a house on top of it. In fact, this may be the main financial advantage of building a home. The average residential property, nationwide, costs about $282,000. That is the equivalent of $153.00 per square foot. Meanwhile, several years ago, the University of Illinois and the University of Michigan published a joint study on the valuation of vacant property.

The researchers found that, on average, developed land cost $11.73 per square foot. To clarify, this price variation is just shy of 1,500% in difference. Even though the economists looked at values from 2010, vacant properties were still much cheaper than house prices during that year. In short, the average mortgage ten years ago was $170,000 or $104.04 per square foot, almost ten times as much as empty urban land.

To illustrate, here is an example: A family bought a 2,000 square foot property in 2010. If the house was prebuilt, it would have a price-tag of $208,000 (at $104.04 per square foot). Yet the land in itself would’ve only cost less than $25,000 (assuming that it’s priced at the $11.73 per square foot average). Their profit, after constructing the home, is over $180,000. While this difference seems unbelievably large, it is justified.

Investment Value: How much does it cost to build a house and resell it?

Firstly, home construction companies must obtain permits, hire workers, purchase large machines, and assemble supplies. Secondly, flooring, walls, and materials are just as expensive. All together, the cost of constructing a house (commercially) was almost $240,000 in 2017. A private individual, meanwhile, doesn’t incur any employee expenses when they build a home. Moreover, companies deploy large trucks and machines in order to save time. Families and nonprofessional builders are more flexible in that regard.

Many people build houses for the sole purpose of selling them. To go back to our example, the family’s $180,000 in earnings is four times the average household income (in 2010). They could make a living out of building homes on vacant land. Even after we factor in the equipment and supplies, the profits are still enough to sustain real estate investors for a prolonged period.

Prefab Homes

A prefab house is prebuilt. Landowners may order one, and the supplier ships it directly to their location. Typically, prefab homes cost $200 per square foot, which is more pricy than a traditional house, let alone vacant land. Having said that, buyers could find much more affordable options. Moreover, adding a prefab house to an empty piece of land adds to its value.

That is to say, you may end up selling the property for much more than what it (and the home) cost you. This is especially important because prefab houses are new. Therefore, many buyers are willing to pay a higher price for them than previously-occupied homes.

How much does it cost to build a house? The interest and downpayment matter

Unlike traditional mortgages, vacant land loans have their own set of rules. Firstly, many lenders will require a down payment that’s 50% or more. In contrast, that of a typical mortgage is between 3% and 7%. Secondly, if you’re looking to build a house, the interest rate might be relatively high. Thirdly, most of the loans are limited to a ten-year term. Therefore, your monthly payments are costlier. 

Yet there are plenty of resources that investors can rely on to overcome these hurdles.

Alternative Lenders

The United States Department of Agriculture (USDA) has a program that particularly serves aspiring home builders. USDA loans have a three percent interest rate and property buyers don’t need to make a downpayment. Just as importantly, the Small Business Association (SBA) may offer assistance. For example, they can lend you money that covers half of the downpayment.

The SBA issues 20-year loan terms. As a result, the monthly installments are more manageable. The lender will still have to take care of the other half of the downpayment. However, keep in mind that vacant land is very cheap. At an average value of about $25,000, 50% or 25% of that amount is within many home builders’ grasp. Meanwhile, since the typical house’s cost was $170,000 in 2010, 3% to 7% would equal to $5,100 to $12,000.

In the same vein, financing vacant developed land with a traditional home equity loan is always an option, specifically if you plan to live in the house that you’re building. Either way, whether your construction goals are residential or commercial, there are many advantages to taking this route. That is to say, you can save money on the mortgage, secure a reduced interest rate, and, in comparison to home building companies, dramatically cut expenses.

How much does it cost to build a house? In short, plenty of time and planning. This will maximize your profits, regardless of what your objectives are.

How to Get a Land Loan

While most people purchase homes that are already built, some people want to get a bit more creative. Therefore, they purchase land to get things going, so that they can build their own dream homes.

While you get creative control when you decide to build, you still can’t avoid the fact that there is a large amount of capital required to get through the process.

Not only does the land need to be prepared to accommodate your new home, but you also need to buy all the materials needed, plus you need to pay the contractors who are working to make your home a reality.

Moreover, you never know what kind of random expenses can come up in the middle of the building process that you may need to attend to. When you add it all up, you likely just don’t have the kind of capital that is required. However, it is possible to acquire this capital.

Land Loans

Acquiring a land loan is one of the steps you can take to get started on your dream home. While these loans don’t cover the total cost of building the home, they cover the amount that you need to buy the land that you start building on.

Now, you may think that such a loan is useless, since it just results in you ending up with a plot of land. When you acquire that land, you still need to build stuff on it, right? Well, you also need to remember that the cost of the land is miniscule compared to the figure that is needed to start building.

This means that you can always secure the land in the meantime, while you work on assembling the funds you need to start building. It is also very possible to complete payment of the land loan before you start the construction process, so you can always free yourself up to start another loan payment.

Image by Kenneth Allen on Wikipedia

How Lenders Feel About Providing Land Loans

Most lenders view the provision of land loans as riskier than the provision of home loans. There isn’t a home to use as collateral, and the repossession of the land may not yield the required value if the person should default on payment.

Additionally, it is proven that people are more likely to walk away from land in the event of hardship than they are to walk away from a house. That is understandable when you think about it.

Even if the bank were to try to sell the land to reclaim the value of the loan, this might prove to be a difficult process. If you were to look at the market share for land, you would see that it’s not very impressive. The truth is that the demand for land is not even close to the demand for homes. This is because not everyone has the drive or even the desire to purchase land to build something on.

All these factors are considered by lenders when they are required to provide land loans, so the terms that usually come with them can be a bit crazy.

The down payment is an example of this. As you know, when you buy a home, you must make a down payment and the loan covers the rest. The payment percentage is way more with a land loan than it is with a home loan. Additionally, there are usually higher interest rates coupled with shorter repayment terms for these kinds of loans. You may not even be able to get a ten year repayment term when you opt for a land loan.

How to Go About Getting a Land Loan

There are several different types of land loans, and these are all covered below. It is important to note that each type has its own inner workings and required qualifications. However, there are some general rules that apply where the acquisition of one of these land loans is concerned.

You first need to prove that you earn an income. Bank statements, pay stubs, job letters, etc. are great ways for you to display this. The point is that the income needs to allow for coverage of the loan repayment figure without being a strain on you. A lender needs to see this, or the belief is that you cannot adequately handle the repayment.

Your debt-to-income ratio also factors into the equation above, and you need to show that you have a good one. If debt is already eating away at most of your income, then it simply means that you cannot handle another source of credit.

Finally, excellent credit is required to access these types of loans. After all, this is the indicator that shows what your behavior is when you get to access credit facilities. A credit score check is typically done in this regard, and it forms a part of the processing fee for your loan.

The Types of Land Loans That You Can Access

There are five major types of land loans that you can get from lending institutions. Each one has different requirements and a different purpose that it serves.

Seller Financing

This loan doesn’t come from a financial institution, and it is not always available, depending on the land that you are looking to buy. This is because it is offered by the party selling the property to you. Note that this financing is usually offered with a short-term repayment condition.

While you may be able to access such an option, you should note that the terms here can be a bit extreme. Apart from the term for repayment, the down payment can be very high and so can the interest rates.

After all, this is just a random individual or company that is selling the land to you, so there are no resources or portfolios like that of a bank.

Home Equity Loan

This is an option that you’d need to have an existing home to cover. That home needs to have a significant amount of equity. If it does, you can use it to your advantage to get a home equity loan.

Unlike the situation you encounter with other loans, there is no down payment required, since you already own the asset. Additionally, the interest rate that you are given is typically not too high. Since your home is being used as security, there is no concern for what you plan to do with your land.

Should you decide to opt for this option, you should note that the interest you pay does not fall under the realm of being tax-deductible. This is because the loan’s purpose is not for the benefit of the house it was taken out against. Additionally, if you default on your payment, the possibility exists that you may end up losing your home.

Lender Land Loans

It is heavily recommended that you weigh your options before you make a loan application here. This is something you should do, regardless of the loan type, but especially for lender land loans.

The first point to note is that the interest rates can be very high when you opt for such land loans. If you are not looking to develop the land that the loan is for, this interest rate could skyrocket even higher.

Additionally, the down payment required could be heftier than you’re ready to accommodate. There are some cases where it’s required that you have 50% of the value of the land upfront before your loan can even be processed.

Of course, much of this depends on your plans for the land. So if the idea is for you to start development in the short term, then the conditions are likely to become more favorable.

Larger banks are not famous for offering lender land loans, so you may need to go to a credit union or a community bank.

SBA 504 Loans

This loan only applies to you if you’re a business owner. Additionally, you must be using the land for the benefit of your business. If you meet these two conditions, then you may qualify for an SBA 504 loan.

These loans are typically accessible via the United States Small Business Association, which is affectionately called the SBA. When you opt for this kind of loan, there are three contributors to the loan.

The first is the SBA, which provides a loan that covers 40% of the purchase price. The second is lender, which covers 50% of the purchase price with a loan. You are required to cover the additional 10% that is required by making your down payment.

The interest rate tends to be based on market rates when you get the loan, and the repayment period is either 10 or 20 years.

Rural Housing Site Loans

These land loans apply to you if the plan is to construct your home on land purchased in a rural area. Note that this must be a place of primary residence. If these conditions are met, then the United States Department of Agriculture can assist you with one of two loan types.

The first is the Section 523 loan. These are exclusively offered to those who plan to complete the labor process themselves. The interest rate on these loans is usually no more than 3% per annum.

The second loan type is the Section 524 loan. These loans are offered to those who plan to hire a contractor to complete the building of the home. The interest rate provided here depends on the current market rate.

Regardless of which one applies to your situation, they are designed for families that have a low or moderate amount of income.  The repayment term is two years, and you may even be able to access the loan with no down payment depending on your situation.

Do You Need Mortgage Protection Insurance?

This is one of those kinds of insurance that doesn’t get the amount of attention that it should. Here’s a question for you. If someone were to pass away before completing mortgage payments, what would happen to the house? The chances are that you gathered that foreclosure would be on the way unless someone else picked up the slack with the payments.

That assumption isn’t wrong, but now for a few more questions. What if no one else picked up the slack? What if no one else needed to pick up the slack? What if there was a way to take care of the mortgage payments without the need for another family member or loved one to get involved? It’s not as impossible as it sounds.

A home is one of the most expensive assets that someone can purchase. This is the reason that almost all home buyers go the route of getting a mortgage. It stands to reason then that there would be a safety net that could help if the mortgage payer suddenly became unable to honor the payment commitment any further. This is where mortgage protection insurance comes into the mix. By the time you’re done reading, this concept that was probably unknown to you should be a lot clearer.

What Is Mortgage Protection Insurance?

Mortgage protection works like a special-purpose life insurance. However, instead of providing a payout to your family with no dedicated purpose, such a policy revolves around your mortgage payment.

Under normal circumstances, if you become unable to honor your mortgage payments due to disability or death, your loved ones would need to take up the mantle, or the house would be repossessed.

In terms of its workflow, there’s not much difference from a life insurance policy. In such a policy, after you purchase it, you pay your premiums, then it ends when the tenure has passed. Should you die during that tenure, there is a death benefit that is paid to the beneficiaries you indicated when you were buying the policy.

Mortgage protection is similar, but there are differences. The first is the beneficiary listing. With a standard life insurance policy, you’d choose loved ones that get a portion of the death benefit. The beneficiary in a mortgage protection insurance policy is the lender of the mortgage. This is because the idea of such a policy is to pay off the remaining balance on your mortgage when you are no longer able to do so.

There is also the matter of the term. You could choose a 15-year term, a 45-year term, or any multiple of five in between. Since the idea is to insure your mortgage, the lifetime of the policy tends to match the term of your mortgage. Why would you insure a 30-year mortgage for 45 years? Note that there are other factors, such as the state of your health and your age, that also affect the maximum length that you are allowed.

Finally, the death benefit attached to the policy is not constant, as it is with a traditional life insurance policy. Instead, it starts high, and then it falls after about five years. The reason for this is that it exists for coverage of your mortgage payment. Remember that as you continue to pay your mortgage, the balance that remains consistently falls, so the insurance amount doesn’t need to stay constant.

Most mortgage lenders offer you the option of purchasing mortgage protection insurance during the process of your getting approved for a mortgage. Note that such a decision does not need to be made right off the bat. Mortgage protection insurance is offered as an independent policy by many institutions. The best part is that you don’t need to have a mortgage with a provider to access the facility.

This means that you can take the time to shop around as you see fit until you find a policy with the kind of terms that suit you best.

In the event of your death or disability, the payment is made using a simple one time process. The insurance provider simply writes a check for the remainder of your mortgage amount, which is then sent to the lender to close out the mortgage. You should note that not every insurance provider is willing to cover the entire bill if you become disabled.

In this instance, the figure that is covered depends on a figure that was agreed upon in your contract. There is another kind of insurance, known as private mortgage insurance, that does something similar. For this reason, people who are aware of these insurance types tend to confuse them. However, they are not the same.

Private mortgage insurance has no benefit to you. It is built to pay off a mortgage lender if you should default on the mortgage.

Advantages of Mortgage Protection Insurance

Now it’s time to review some of the amazing benefits of Mortgage Protection Insurance:

Peace of Mind

Life is very unpredictable. Sometimes some of the healthiest and able-bodied people pass on or become completely disabled literally overnight. When you have a house that you pay for over decades, you don’t want that house to be taken one day because you could no longer make the payments. That would render all your payments up to that point useless.

Though you don’t want to be thinking along those lines, it is a reality that you deal with. Just the possibility is enough to seriously worry people. With mortgage protection insurance, you don’t need to be scared, once you’re paying your premiums. You can rest assured that, even if you’re no longer around, the mortgage payments don’t stop until the mortgage is paid in full.

Acceptance Rates

It is very unlikely for you to be turned down for mortgage protection insurance. This is the reason that it’s basically offered to you on a silver platter while you’re getting your mortgage approved.

Though life insurance policies are a good alternative, the acceptance rates for them are much lower. Therefore, you can always look to a mortgage insurance policy, since it’s easier to get.

Disadvantages of Mortgage Protection Insurance

There are several downsides to note where this kind of insurance is concerned.

Value Decline

As state before, the value that these insurance policies have is not fixed. They are closely linked to the balance of your mortgage, so the potential payout continues to decline as your mortgage balance declines.

What makes this frustrating is that there is the likelihood that your premium doesn’t change. This means that you find yourself in a position where you’re progressively paying the same for less.

Single Mortgage Coverage

There are many reasons that you’d be interested in taking out a second mortgage on your home in the form of a home equity loan or a line of credit. Unfortunately, mortgage protection insurance is only concerned with your first mortgage. Therefore, if the policy should ever need to be used to clear the mortgage, there’s still another source of credit that could still be the reason that the house is lost.

Nothing for Loved Ones

The check that is prepared to clear your mortgage when you are no longer able to do so is sent directly to the mortgage lender. Your family doesn’t get it. Even if they did, it wouldn’t have any benefit to them, as the amount is exactly what is needed to close out the mortgage.

Pinning Down the Price

Mortgage protection insurance costs can be very ambiguous and hard to pin down. For some reason, the cost of this insurance type doesn’t ever seem to settle. There are constant revisions, which make it hard for potential customers to get a quote for a price that is current.

Choosing Your Agent

As stated before, you should shop around when looking for a mortgage protection insurance provider. In fact, you should do so regardless of what kind of insurance you are looking for.

It’s all about finding the terms and conditions that best suit your needs. You may find some amazing benefits with some providers that don’t make an appearance elsewhere. For example, some insurance providers are willing to throw in a stable death benefit. Therefore, though the amount allocated to mortgage clearance decreases as you pay off your mortgage, what your family could stand to gain if you pass away stays consistent.

Make sure that you have a comprehensive understanding of what the policy covers and what it doesn’t. Remember that there are many reasons that could result in your inability to cover the mortgage. While many of these may be covered in the normal course of becoming disabled, some others are not.

Mortgage Protection Insurance Alternatives

There are alternatives that you can consider if you don’t like the terms attached to mortgage protection insurance.

A term life insurance policy is one of the most popular. That’s because the terms are lest restrictive, and the benefit can be much better. For example, you have a much broader base available in the area of the beneficiary selection. You can select a charity or even a school if you so desire. Of course, you can select your loved ones and family members too. The payout from such a policy is large and tax-free.

Additionally, there isn’t a drop in the value of the benefit. A standard term life insurance policy was never designed around mortgages, so the value of your policy isn’t dependent on your mortgage balance. This allows your family to be able to clear your mortgage and other things, such as any other loans or responsibilities. Note that there is also an annuities option, which means that the payment can be collected like a salary.

There are also permanent life insurance options, which are great because they last for the duration of the policy holder’s life. Note, however, that these policies tend to be way more complex and expensive than the other alternatives.

Should You Take out a Second Mortgage to Pay off Student Loans?

Did you know that there has been a significant increase in home values throughout the nation? This means that homeowners could choose to replace their student debt using a second mortgage. However, is it a wise decision to swap out your student debt to have real estate financing? Also, could you pay off your debts using real estate financing immediately or within a few years?

Home Equity and Student Loans: It’s Not Just About Rates

Federal student loans often have interest rates of about 4.45 – 7%, depending on a variety of factors. Still, these loans have lower rates because they are backed by the government and Congress sets the interest amount at the beginning of the school year each year. Often, second mortgages are cheaper and have similar interest rates, so does it make sense to get a home equity loan to dump your school debt?

If the question was just about rates, then it could be a simple answer. However, there are many differences between school debt and real estate equity. For example, student debt features several options that aren’t often available through a home equity loan. These include:

Deferment

Student loan deferments allow you to postpone the repayment of the loan under specific conditions. For example, it is possible to temporarily put off repaying the loan if you join the military or enroll in a graduate school.

Those who have a Perkins, Subsidized Stafford, or Direct Subsidized loan are going to find that the loan doesn’t accrue interest at this time. However, any other federal student loan does accrue interest, even during the deferral. If you don’t pay the interest during the deferment period (and you don’t have to do so), it is then added to the principal and balance.

Forgiveness

Sometimes, lenders can outright forgive the loan in its entirety based on your employment status. For example, doctors, teachers, and other similar careers can help you get your student loan balance forgiven for many reasons. Most often, it is if you agree to work in an under-served area or take a pay cut.

Likewise, if you work for the state, federal, tribal, or local government, a nonprofit organization, or the Peace Corps/AmeriCorps, the lender might cancel your remaining student debt after you’ve worked there for ten years.

Forbearance

Forbearance works similarly to deferment because you can still temporarily suspend the loan repayment process. Lenders often do this if you fall into a financial hardship that qualifies. During this time, the principal payments are postponed, though interest still accrues. You can pay the interest on the loan when it comes due, or you can choose to have it added to the balance.

Why Would You Take Out a Second Mortgage to Repay Student Loans?

With so many advantages available through student loans, you may wonder if it makes sense to replace your education debt using a second mortgage. It can because:

  • You might not qualify for forbearance, deferment, or forgiveness.
  • Your payment could be much lower, which improves cash flow when you need it most at the start of your new career.
  • You might be able to save more money using real estate financing. The size of that saving depends on many factors, such as the cost of a new financing scheme, current interest rates on your loan, and how long the loan has been outstanding.

Ways to Refinance Student Debt

You can find many ways to refinance your student loan debt. We look into all the options below:

A Second Mortgage

Let’s say that you have a student loan debt of $65,000 with a home that’s valued at $300,000. Your existing mortgage is right at $150,000. Of course, you have good credit scores and can qualify for a second mortgage.

If you take one out for $65,000, that raises your mortgage debt to $215,000. Now, your loan-to-value (LTV) ratio is at 72%, which is extremely low. Therefore, you are seen as a lesser risk to lenders. This, in turn, can help you get lower interest rates on the new mortgage financing.

Often, second mortgages have terms up to 30 years long. This means that your monthly payments might be more affordable. Using the example above, you finance $65,000 at a five-percent interest rate for 30 years and only pay about $349 each month for interest and principal.

HELOC

Alternatively, you may consider a HELOC (Home Equity Line of Credit), which lets you swap out your student debt instantly for real estate debt.

For example, if your property has that fair market value of about $300,000 and a lender is going to allow you a 75% CLTV (Combined Loan-to-Value ratio), you get financing of about $225,000. That equals the amount of the first mortgage ($150,000) plus $75,000 in credit.

You can easily settle your student loans and have another $10,000 to use for other purposes. It’s also possible to put that money in a savings account to draw interest and use it in an emergency.

Still, you have to understand how HELOCs work. Generally, they can last up to 15 years and work similarly to a credit card.

For example, you could have a five-year drawing period where you can withdraw money from your HELOC account. This means you can tap it out completely, pay down the balance, and then reuse it up to the credit limit again, almost all without any restrictions.

During that draw period, interest rates are variable, so it can be hard to budget for repayment.

There is also a ten year repayment period. During that time, you must pay off the full debt and cannot make any more withdrawals on the account. Again, interest rates are likely to be variable, but sometimes, you can find a HELOC that allows you to lock on a fixed rate when you stop withdrawing any money.

The issue here is that repayment periods are only ten years, so they can be pretty high. For example, if you owed $65,000, have to pay it off in ten years, and have 5% interest rate, you are going to pay $689 a month.

Tenure Along with Second Mortgages

When looking at the basic mechanism of HELOCs and second mortgages, you may also want to think about tenure. This is the length of time you plan to own your home. About four years ago, typical ownership periods were about ten years, according to the NAR (National Association of Realtors). However, young homeowners and first-time buyers often spend less time in their homes.

Generally, young homeowners kept the property for about four to five years. One in five people sold their homes in as little as two or three years.

This is an important consideration because, when you borrow against the property and then choose to sell it, you can’t extend the loan repayment. Your HELOC or second mortgage has to be repaid once you sell the house.

That could be a good thing if you want to eliminate debt for good. However, it could also cause many problems if you desire to continue financing at a lower rate over an extended period of time with the home sale proceeds going to other things.

Tenure is also essential to think about when you’re trying to choose between HELOCs and fixed second mortgages. HELOCs can start out with lower interest rates, but the second option is safer because it might be a higher rate, just fixed.

HELOCs can be less risky the less time you plan to keep your house because the rate isn’t likely to increase with a shorter time frame.

Your Home Might Be at Risk

Another thing you have to consider is that your house is on the line here. While you’re shrinking the interest from the student loan, you are growing the mortgage bill. If you can’t make the monthly payments, you may default. Should that happen, the lender has the right to foreclose on the house and take it away from you. This leaves you without a home, and you might still be required to repay the loan.

Of course, if you choose a HELOC instead of a second mortgage, the home isn’t at risk quite as much. Still, you have to remember that whatever money you borrow over those five years has to be paid back in ten years. If you only take out enough to pay off your debts and leave the rest untouched, paying it off bit by bit, you have 15 years’ time to pay it off. This can be beneficial and it can work, but emergencies are bound to pop up during those five years.

Getting a Second Mortgage

If you have decided that you want to refinance, it is similar to the steps you took to get the first one. These include:

  • Qualifying: The lender is going to look at your credit report and score, equity in the home, income, and property values to see if you qualify. If those numbers are higher, you have a better chance of getting approved.
  • Get Everything Together: Regardless of whether it’s your second or first, you have to get all of the information together. This includes debt-to-income ratio information, credit scores and reports, and the documents from the first mortgage. Often, if you apply for a second one with the same lender, this information is going to be on file.
  • Gather the Documents: You are going to have to show proof, so you’re going to need housing papers and financial statements. These can include tax documents and paystubs. Your lender could have different document requirements and can let you know what to bring.
  • Shop: It’s important to understand that you don’t have to take out that second mortgage with the original lender. Make sure you shop around to get the best rates possible on whichever loan you choose. Compare fees, loan terms, and interest rates.

A second mortgage might be harder to get than your first one because there is a bit more risk for the lender. Plus, there is a higher chance of foreclosure issues. Regardless, if you have student loans that are hard to pay off, it might be a good idea to consider second mortgages. You can borrow a lot of money, often more than you could get from a personal loan. Plus, you may get more favorable interest rates. Just make sure you can pay off the mortgage before making the final decision.

Best States to Retire

Retirement is all about living life on your own terms. And one of the decisions that will make a lasting impact on both your quality of life and your bank account is the state you choose to retire in.

There are three main areas to pay attention to when trying to decide which state to retire in: your perceived quality of life, the cost of living, and the health care available to you.

Many different elements come into play in the quality of life criteria. Are you looking for a location with the best entertainment, restaurants, or museums? Or the best view of nature when you look out your window? The expected crime rate in an area is another factor to consider. And, of course, the weather you can expect to encounter daily may be a heavily weighted element.

When considering the best state to retire in, your personal preferences will trump any list or writer’s recommendation. But one thing that no one can argue with when it comes to retirement is placing a high value on how far your dollar will go in a particular state.

Taxes, of course, play a significant role in determining the best states to retire in. While people often look at income tax, property tax, and state sales tax, taxes on social security benefits are often overlooked. For many, social security benefits will become a large percentage of your income in retirement.

Before we get into the best states to retire, here are states with no income tax that do not appear on this list:

  • Tennessee
  • South Dakota
  • Nevada
  • Texas
  • Alaska

As the most tax-friendly state in the country, Alaska just missed the cut from making this list due to its higher than average cost of living, and its proximity to the rest of the country.

Wyoming

While it may take you a second to find Wyoming on a map, it should be among the first states you consider retiring in. That’s because it is the second-most tax-friendly state in the country, with zero income tax, no tax on social security, and the ninth-lowest property tax at 0.52%.

Wyoming is also home to the stunning Grand Teton National Park, Yellowstone National Park (shown above), and Jackson Hole. If you enjoy the outdoors and prefer mountains to the ocean, Wyoming should be a state to consider.

Delaware

Delaware probably doesn’t make the initial cut when you first start writing down a list of potential states to retire in. But if you have spent most of your life in the northeast, Delaware may be the perfect location to set up camp for retirement.

If you’re a history buff, you may appreciate Delaware more than most. As the first of the 13 colonies to ratify the constitution, Delaware is known as “The First State.” There is a wide variety of museums worth visiting throughout the small state of Delaware. If you have called Washington D.C., Baltimore, Philadelphia, or New York City home for most of your life, Delaware is a quick escape that keeps friends and family close.

Delaware has average property and income tax rates, but does not tax social security benefits and has no state sales tax.

New Hampshire

Like Delaware, New Hampshire might not jump straight to the top of your mind when contemplating states to retire in. But when you consider that it has no income tax, no sales tax, and no tax on social security, you may start to rethink New Hampshire as a strong possibility. The only thing holding back New Hampshire from being the most tax-friendly state in the U.S. is the third-highest property tax rate in the country at 1.94%.

In addition to being incredibly tax-friendly, there are many sites to see, state parks to visit, and mountains to climb if that’s your thing. Those who enjoy outdoor sports such as skiing and snowboarding may find that New Hampshire is the perfect choice for retirement.

Oregon

One of the few states that can boast having beaches and mountains in close vicinity, Oregon is an excellent option to consider for retirement. While Oregon has a 9% income tax, the highest in the United States, it has zero state sales tax, a low 0.95% property tax, and does not tax your social security benefits.

Arizona

A popular state to retire in, Arizona has many positive factors going for it. One of the most significant factors for those who have lived in a northern state for most of their life is the year-round warm temperatures. Arizona is home to thousands of golf courses, hiking trails, and a long list of national parks. It also features stunning red rock mountain ranges in the Sedona area.

As far as taxes go, Arizona has a low income tax rate of 2.88% and an even lower property tax of 0.66%. There is also no tax on social security. Arizona does have an 8.25% sales tax, but those living in Tucson, Arizona have been found to retire on their social security check alone.

Hawaii

Hawaii may not seem like a practical option, either due to the travel or the high cost of living in the state. But if the journey to and from Hawaii doesn’t concern you and you have a nice nest egg built up, Hawaii should be under consideration for retirement. In addition to the gorgeous beauty you will never get sick of waking up to, Hawaii is one of the top states in the nation when it comes to health care.

Hawaii has an income tax rate of 7.2%, but it has the lowest property tax rate in the U.S. at 0.29%. Like every other state on this list, Hawaii does not tax your social security benefits.

Washington

Similar to Oregon, Washington can also brag about both oceans and gorgeous mountain ranges among its many benefits for retirees. There is also no state income tax and no tax on social security. Those seeking an active lifestyle can retire with endless activities to do each day and not have to worry about their bank account as much as retirees in many other states in the U.S.

Florida

Florida consistently appears near the top of most detailed studies that attempt to answer the question, “what is the best state to retire?” It’s one of the most tax-friendly states in the country, as it does not tax social security or income. The property tax is also just 0.9%, and the sales tax isn’t outrageous at 6.8%.

Florida, of course, features a warm climate and has more beaches and cities along the coastline than any other state in the country.

How to Lower Insurance Premiums with the Help of a Home Improvement Loan

Most people want to make their homes more comfortable and safer, and the best way to do that is through home improvement loans. Still, you may wonder about your homeowner’s insurance and how the premium could be affected by what you do or change in the house. Many people have cut their insurance premiums by adding security systems and making renovations. However, it’s also possible to raise your premiums by changing certain things.

Install a Security System

Many insurers are going to offer you a discount on your premiums for homeowners insurance if you install a security system or burglar alarm. Of course, the amount you save is based on how good the security system is and what it can do. For example, you might save more money on your insurance premium if you use a third-party monitoring system for the cameras.

Often, you are going to need proof that the system was installed by a professional. The insurer might ask for an alarm certificate to show that it communicates with a private security company or the local police.

The amount of money you can save is going to vary, but discounts for stand-alone systems can be upwards of five percent. Add up to three percent if you have a full security system with cameras and third-party monitoring.

Improve Things Around the Home

Home improvement loans can often be used for anything in or pertaining to the house. These can include the heating, plumbing, and electrical systems. Plus, if you upgrade these things with money from the loan, you are sure to get a discount from your homeowners insurance company. This is because your house is less vulnerable to flooding from a burst pipe, fire from bad wiring, and frozen pipes caused by a loss of heat during winter.

Your discount may vary, but you can expect to cut up to six percent off your premium if you replace the plumbing during a remodeling session. You can also get two percent off if you upgrade the electrical system completely. Of course, you should talk to your insurer before taking out a loan and making such improvements to find out if these discounts are available and what your premiums might be if you do make the changes.

Replace Your Roof

Many states are in areas prone to hail, hurricanes, and other damage. Therefore, you may want to consider a home improvement loan to replace the roof with one that is sturdier and can withstand such conditions.

This can help you get a reduction on your homeowner’s insurance. However, it is imperative that you talk to your insurer first to find out which type of roof is going to get you a discount or the best discount. Often, the insurer is going to trim the premium for you if you have a fortified roof that is made of a stronger material. That way, if you live in an area prone to wildfires, tornadoes, and hurricanes, you can protect your assets.

The insurer is likely to offer a discount because you are doing your part to protect your stuff. There is less of a chance that the company is going to have to pay on a claim because you lost everything when it was caused by Mother Nature.

Discounts can range but might be as high as 35 percent when you install an impact-resistant roof. This may only apply if you live in a state prone to natural disasters. Likewise, your insurer may only give you a discount for specific products and from particular manufacturers. Therefore, it is best to talk to your insurance carrier before making the replacement. Some insurers may list this information on their websites, making it easier to find out which roofing materials you can use.

For example, State Farm offers discounts on roofs made of slate shingles, metal, clay tiles, composition shingles, and concrete tiles for policyholders in Canada and 26 different US states.

Another way to get a discount if you live somewhere prone to windstorms is to add a roof clip or a similar device.

Add Detection and Sensing Equipment

While it depends on where you live, installing sensor alarms and smoke detectors that can detect temperature change and gas leaks might reduce your insurance bill each month.

You could also add a freeze alarm to your home. If the temperature drops significantly (past a preset number) when you aren’t home, it can contact you or another designated person by text, email, or phone. Then, the heat settings can be adjusted appropriately.

Smoke detectors are often required in most states, so they aren’t going to provide you much of a discount if any. Still, some detection systems are more high-tech and do more than detect smoke. Some of them can tell if a fire is present and seal off the area or use an integrated sprinkler system to contain it, thereby reducing the damage done to the property and your possessions.

Another option is to install a water-leak detection system. You are instantly notified of a potential plumbing leak, which can save money on your water bill and ensure that you don’t have significant water or mold damage with which to deal.

It is possible to save up to six percent with the right alarm system. Plus, with small home improvement loans, you can easily pay for the unit and installation. That way, you get the money you need for a better system and might save money on your home insurance, too.

Buy and Install a Generator

Did you know that you could buy a generator and have it professionally installed on a home improvement loan? These loans are designed to be used for anything that can be installed on the home or used for the house to make life easier and more comfortable.

Having a working generator is also highly beneficial to you because anything in the house that runs on electricity can still operate during a power outage. These can include dehumidifiers, sump pumps, refrigerators, and air conditioning/furnaces.

When you maintain those systems, it reduces the likelihood of costly repairs and insurance claims. For example, if your pipes burst or the sump pump goes out and floods your basement, it is going to cost a lot to repair. Just remember that homeowners insurance only covers flooding from a home’s system. If mud or water comes in from outside, it isn’t covered unless you have flood insurance.

Plus, you are going to find that the insurance company is going to be happy that there is less of a chance it is going to have to pay out a claim. Therefore, you could get a hefty discount of up to ten percent on the property part of your policy. Of course, it does depend on where you live. Those people who live in areas prone to blackouts or severe storms may see larger discounts than those who do not.

Remove Your Wood-Burning Stove

You may be surprised to know that many homes are still heated primarily by a wood-burning stove. In fact, you may use one to heat your house. This is considered more dangerous than a traditional furnace, and you’re likely to pay more in insurance premiums because of it.

The risk of fire goes up with such a heating source, so many insurance companies charge you more or may not insure you at all. Removing it can help you save up to $150 on your premium, though this depends on your provider.

You could call on a professional who can remove the wood-burning stove and install a new furnace system. Home improvement loans can be used on both accounts.

Renovations That Could Raise Premiums

While your goal is probably to pay less for homeowner’s insurance, it is important to know that not all renovations are created equal. Your premiums might not raise if you want to add new fixtures or a coat of paint. Still, it is a good idea to talk to your insurance carrier before making any changes.

Sometimes, that house improvement you make is going to boost your home’s value by a lot. However, that also means your insurance coverage is now inadequate. If something happened and there was extensive damage, you might be vulnerable to a loss where the insurer can’t give you the full amount to cover the damage and lost property/items. These can include:

A New Pool

Installing a pool is likely every homeowner’s dream, and it could also make you highly popular with everyone on the block. However, from an insurance standpoint, your home is now riskier to insure.

Most insurance companies label a pool as an attractive nuisance. Though everyone wants to use it, it also increases your loss exposure. There are many factors at play here, too.

For example, what happens if the pool is damaged and leakage occurs? It could cause significant water damage or a flood in your yard. You also have to worry about someone getting injured while playing in the pool. This means covering legal expenses and medical costs.

Standard policies come with personal liability protection of about $100,000, but your insurance company might require you to have $500,000, at least.

Of course, you may also be required to have fencing installed, a lock, and so much more. Plus, that isn’t even including pools with a slide or diving board. Then, it could be a bigger hazard.

Home Business Office

While this renovation isn’t likely to cost as much in insurance premiums as a pool, it can raise your bill. Many policies do cover equipment for a home business of up to $2,500, but that might not be enough if you store inventory and supplies there or have specialty machinery.

In some cases, you may need to add a business policy to the home, which can raise your rates significantly. It might be wise to talk to your insurance provider before making the decision to have a home office.

Save Money While Improving Your Home

Renovating your home with home improvement loans can help you be more comfortable and enjoy your surroundings more thoroughly. Still, you do need to focus on how your homeowner’s insurance rates may rise or go down. Also, it is helpful to know that discounts are sometimes available. That way, you make sure you’re getting what you’re entitled to and don’t overpay.

How to Know if You’re Ready to Buy a House

One significant life experience everyone goes through is buying a home. Some individuals experience this life event sooner than others; however, no matter when it happens, you need to make sure your bank account is ready for it. There are many steps you need to take to ensure you are financially prepared to make such a substantial investment. Home buying should be seen as an investment because you are taking your hard-earned money and hoping your purchase pays off in the long run.  

For example, some people may buy a home like a fixer-upper and find that it has more problems than they initially thought. If this is the situation, then your investment may be considered as a setback. As you can see, home buying is just like any other investment, only this one is more important because it is an investment for you and your family.

The question is, how can you financially prepare for this event now to be able to invest later? There are at least three major financial factors that you need to keep in order. These factors consist of credit, savings funds, and financial documentation. Each of these components holds its own significance in the home buying process. Let’s arm you with everything you need to know to be a home buying expert.

Pregame: Timing

Before you go researching loans and talking to your bank about your options, you need to make sure your everyday life is in order. As harsh as that may sound, the home buying process is a long adventure that requires extra attention.

You should be at a point in your life where events have calmed down. For example, if you just had a baby, now would most definitely not be the right time. You and your partner are going to be very occupied and have very little time to do something as simple as keeping your home clean. At times like this, you need to prioritize your duties and try not to have any added stress.

Another example of a hectic time in one’s life would be if you just received a promotion at work. A promotion comes with a ton of advantages (hopefully) and some disadvantages. For instance, some benefits may be a pay raise, new office, or you may just be one step closer to your desired position. While these are all fantastic, you may need to put in some extra time and effort to prove your worth at work. A promotion comes with significant responsibilities and can be very time-consuming.

Therefore, before you go jumping into the process, make sure you have minimal added stress and that you are ready to apply some effort. Some individuals believe that a real estate agent or a loan officer might do all the work for you. However, this is not the case. You need to have everything to not only help them, but to help yourself by shortening the duration of the home buying process.

Credit Score

First, you need to get your credit in check if it is not already. By the time you are 21 years old, you should have already built some type of loan. If not, you are behind. There are many ways to build your credit score. However, it is a timely process that requires an adequate amount of effort. You cannot make your credit score overnight; it requires attention and personal discipline. Your credit score says a lot about your personality and demonstrates that you’re responsible and trustworthy.

Are you wondering how to check your credit score? There are plenty of ways to check your score. One option may be requesting your credit score through your bank. Some commercial banks offer this luxury to customers; however, other banks may not. It never hurts to ask questions when it comes to essential aspects of your life. If your bank is unable to do this for you, then you can always download software applications like Credit Karma. No matter how you do it, it’s still good to know where you stand, especially before embarking on a journey like buying property.

Nonetheless, if you already know your credit score but it is sitting at an undesirable number, consider any of these options: personal loans, credit cards, or making payments on time. Often, the reason for a low credit score is because a person has not been applying enough effort to the situation. As stated above, building a credit score takes a few years.

The minimum amount of credit that is required for a property loan is a score of 620 for most lenders. Sometimes banks make exceptions if your credit score falls just short of the baseline. However, it is better just to meet the requirements already. Before you take a meeting with a loan officer, you need to acquire documents that state your current credit score and any credit history. Your bank or some software applications allow you to create PDF files of your information that can be printed off. It is best to have as much history about your credit as possible. The more information you can give, the better your chances are at gaining a loan.

When you are upfront and honest about your financial history, loan officers feel more comfortable and may give you a raise on your loans face value. Do your best to connect with your loan officer, ask about their personal life, and create conversation topics that are more than finance talk. Likewise, if you have ever had a fall through in your credit history, loan officers may give you the chance to explain yourself. Remember never to lie. Be honest and own up to any past actions.

 Savings Funds

It can seem almost impossible to save money sometimes. Everyone experiences periods in their lives where bills seem to rack up and they struggle just to get by. If you are at a time in your life where you can’t save much, then you may consider holding off on the home buying process. First, you need to take a good long look at your personal accounts and investigate if you have any extra upcoming bills. You need to get all your own affairs in order so you can ensure that you can focus entirely on your new journey.

How much should you have in your savings account? This is a tough question. There is no baseline number for how much you should have saved. The amount depends on what you need your home to have. In most cases, it’s best to put 20% down, but if you can’t, many lenders will have the option of putting as low as 5% or 6%.  

Just like everything else that pertains to finance, you are taking time to build your savings. You can’t just save every dime you make because you have other obligations, especially when it comes to monthly bills.

Tips and Tricks to Save Money

As stated before, sometimes it can seem impossible to save money. Here are some tips and tricks to help you achieve your goals.

First, create a spreadsheet of all your monthly bills and subtract them from your income. Next, consider how much you spend on things like groceries, food, and any other extra expenses and subtract them from the sum of your bills. By now, you should have a good starting point for a monthly budget.

The goal is to take away any unnecessary expenses like eating out or getting your nails done. This means you must be more considerate of your choices. The hardest aspect to overcome is an advertisement. If you can blind yourself to those new shoes you want but think you need, you are in good shape. You must overcome that inner person that tells you to spend your money frivolously. Be more mindful of your choices.

Another way to save money is by taking a small amount from each pay period and placing it in your savings account. Some people prefer to take cash out and store it in a safe at home. Real estate agents enjoy customers who can pay their down payment with cash.

Financial Documents

Lastly, this is the most crucial step of all. You need to ensure that all your financial statements are up to date and try to include some new history. The more you have to offer about yourself, the better. For some people, this can be a scary step because they may have a rocky past. However, loan officers tend to look at your current situation and may only go back at least two years on your financial history.

Before taking a meeting with a loan officer, you need to be sure that your files and records are all organized. If you organize ahead of time, it is easier for them to thumb through and find what they need.  Some loan agents might require you to bring information about your partner as well if you got married within the last five years. For instance, when you both apply for the loan, the officer may need to investigate both of your previous records.

After a few days, the loan officer should be able to figure up a loan that best suits your situation. If you have any stipulations to add to your mortgage, be sure to mention it at the first meeting.

Eventually, you and your partner can dig into some house searching. Make sure you are mindful of your financial choices at the beginning of your journey. Even after you have placed a down payment and moved in, the extra bill can cause some damage if you are not careful. It is okay to be very restrictive on your social life for a while. At least until everything starts to fall into place, it is common to experience some feelings of shock at first because everything happens so fast. Be sure to communicate any worries or concerns with your partner, loan officer, and real estate agent.

How to Budget to Cover Your Mortgage Payment

With the recent housing market recession looming and no way out of it just yet, many people wonder about their mortgage payments. Of course, most people look at the house and ask themselves if they can afford it. Instead, a better question is if you can afford to borrow the money you need for it.

What Is a Mortgage?

Before you start worrying about your budget, you need to know what a mortgage is. Many people think they know. A mortgage is a loan that is used by someone to purchase real property to raise the funds necessary to buy real estate.

In a sense, your lender gives you the money you need to buy the house you want. You promise to pay back the money you borrowed plus interest. This happens over a period of time, usually 20 to 30 years.

This type of loan is a secured loan because the house is the collateral. If you default on the mortgage loan, the lender can sell the home from you to recoup its losses. Generally, mortgage payments are made monthly and have four components, including taxes, interest, insurance, and principal.

A Deeper Definition

Before you get a mortgage, you have to agree to the lender’s conditions and terms. They specify how long you have to pay back the loan, which is often decades. You also find out how much money you pay each year and how much money down you pay at signing. The down payment is usually a percentage of your home’s cost.

The terms and conditions also show you how fast interest accrues. You may have an interest rate that is fixed, which means that the amount stays the same for the life of the loan. An adjustable-rate interest is also available, where it can lower or raise depending on the market. You can also find hybrid versions, such as the 7/1 ARM (adjustable-rate mortgage), which accrues interest at the fixed rate for the first seven years of its life. After that, the lender can choose to adjust the interest rate.

Often, you are expected to make payments each month on your mortgage, though you can find other terms, such as paying every other month or quarterly (every three months). Generally, your payment goes toward the full amount you borrowed, which is the principal and interest; the interest is tax-deductible. When you fully pay off the mortgage, it’s called amortization.

A mortgage is a secured loan, so it’s backed by the house as the asset. If you default, the lender can take back the house, called a foreclosure. Generally, lenders want borrowers to take insurance out on the home, such as homeowner’s insurance. This covers any damages to the property. Another option is mortgage insurance, which is going to protect the lender if you default.

There are a variety of mortgage options available. These include:

  • Balloon Mortgage: With the balloon mortgage, your monthly payments don’t amortize the loan toward the end of its period. The payments start off lower, but they balloon to a larger amount by the end of the terms. This works well for people who plan to have a higher income toward the end of their borrowing period. It also works for people who plan to sell the home before the loan ends, though you may have to sell the property or refinance your mortgage.
  • Second Mortgage: Sometimes called a home equity loan, this allows you to take another loan out on the house to get to the home’s collateral or equity.
  • Government-Backed Mortgage: Some citizens qualify for a U.S. government-issued mortgage. This can include the USDA (U.S. Department of Agriculture) loan. It is given to a rural property owner who doesn’t have appropriate housing. There’s also the Housing Administration Loan from the Federal government, which offers help to low-income citizens. People who served in the armed forces may also qualify for special options.

How to Budget for Your Mortgage

Now that you have a basic understanding of a mortgage, you might be trying to find the right one. With so many options, it can be tough. Plus, you may not know if you can afford the house that you want to buy.

For the most part, you can probably afford a loan on a property that costs between two and two-and-a-half times your gross income. With this formula, if you earn $100,000 a year, you can afford mortgages between $200,000 and $250,000. However, this is just a guideline to follow. It might be better to use a mortgage calculator or talk to your lender to estimate your monthly mortgage payment.

Before you start looking at houses, it is a good idea to know how much of a mortgage you can afford. This can help you decide on the right property. Talk to potential lenders and find out what they think you can afford and how the lender came to that estimation. Also, you have to evaluate your current finances, as well as your priorities and goals.

How a Lender Decides

Many factors go into the lender’s decision for affordability. Generally, it comes down to income, assets, liabilities, and debt. You may believe that your mortgage application is judged by someone who goes by their gut instead of objectivity, but the process is primarily based on a formula. Even if the person who approves or denies your loan has a bad day, they still go by these four criteria: gross income, front-end ratio, back-end ratio, and credit score.

Lenders need to know how much money you earn, what demands are already placed on that income, and the potential for those numbers to change in the future. In short, they look at what could jeopardize their ability to get their money back. Your credit score and history determine interest rates on the financing, which is decided on down payments, monthly expenses, and income.

Every mortgage lender has its own criteria to determine affordability, but it depends primarily on these factors:

Gross Income

This is the amount of money you make before your income taxes. It includes your salary, any bonuses, Social Security benefits, alimony, disability, child support, and more. It can help determine your front-end ratio.

Front-End Ratio

The front-end ratio is the percentage of your gross income (each year) that is dedicated to paying the mortgage each month. Mortgage payments consist of four components, including interest, principal, insurance, and taxes. In general, all of these components shouldn’t exceed 28 percent of the gross income. Still, many lenders let their borrowers go over 30 percent and might even go above 40 percent.

Back-End Ratio

Sometimes called the DTI (Debt-to-Income) ratio, this calculates how much of your gross income is needed to cover debts. This can include child support, credit card payments, and other loans (student, auto, etc.) For example, if you pay about $2,000 a month in expenses but only make $4,000 a month, this ratio is at 50 percent because half of the monthly income has to go toward debt.

The bad news is that such a high debt-to-income ratio isn’t going to allow you to get your dream home. Most lenders don’t want your DTI to exceed 36 percent of the gross income. You can calculate your maximum debt based on the DTI ratio by multiplying your income by 0.36 and then dividing that number by 12. Therefore, if you make $100,000 a year, you shouldn’t have monthly debt expenses exceeding $3,000. Of course, a lower DTI ratio is always better.

Credit Scores

Affordability is just one part of the mortgage payment and budget. The lender is also going to look at how much of a risk you are. Lenders have developed a way to tell how risky you are to them. It can vary, but it often focuses on your credit score. If you have a lower score, you’re probably going to pay higher interest rates, also called an APR (annual percentage rate).

The good news is that, if you’re planning to buy a house in the future, you can start improving your credit score now. Pay close attention to your credit reports and make sure to get them once a year from all three credit bureaus. If you notice anything incorrect, make sure you try to resolve and remove them from the report. Otherwise, you could miss out on your dream home because of a mistake on someone else’s part.

Calculating Your Down Payment

A down payment is the amount you can afford to pay out of your pocket using liquid assets or cash. Most lenders require you to have 20 percent of the purchase price of the home. If you want to avoid having to buy private mortgage insurance, you have to have 20 percent of the purchase price. Still, some lenders might loan you the money if you don’t have the full down payment. Of course, the more money you can put down, the less you are going to need in financing, and you are also going to look better to the lender.

For example, if you want a home that costs $100,000 and can afford 10 percent down, you have to pay a down payment of $10,000. Therefore, you need a loan for $90,000.

Lenders need to know how much they have to cover, but they also need to know how long the mortgage is necessary. Short-term mortgages have higher monthly payments but are often less expensive for the duration.

Personal Budget Restrictions

There is one more factor to consider here. Most lenders focus on your gross pay when determining your down payment and all the rest. You may factor that in too, but you’re not thinking about other expenses, such as health insurance, FICA deductions, taxes, and all the rest. Therefore, you might want to go by your net income (what you bring home) instead of the gross income.

When it comes to deciding how much you can afford, it comes down to your gross pay and your budget. It is important to understand how lenders determine mortgage amounts and why you may want to consider going by net instead of gross pay.