10 Rookie Mistakes That Hurt First-Time Homebuyers
If you’re a first-time homebuyer, buying a house can definitely be overwhelming. With an Agent by your side to guide you through the process, you’ll make it through just fine – but you might want to be aware of these rookie mistakes.
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If you’re searching for homes for sale on the Jersey Shore or Eastern Monmouth County where the market is ultracompetitive, making one of these mistakes could end up costing you big time.
Here are the Top 10 mistakes often made by first-time homebuyers:
1. Getting too emotionally attached
You’re about to purchase what’s probably the most expensive item you’ve ever bought. So try – as difficult as it is – not to get too attached. There will always be another house if you lose one.
A good tip would be to work with your Buyer’s Agent to find several homes you love so that you’re not too emotionally invested in one.
RELATED: How To Find The Right Buyer’s Agent
2. Finding the home yourself
We know you’re going to browse www.patrickparkerrealty.com and other real estate websites to find homes for sale in your desired location. But don’t rely on just your research skills. Finding your own home can be like diagnosing yourself of an illness.
Let your Agent vet homes for you. A good Real Estate Agent might find you properties that aren’t yet on the market. And of the homes that are on the market, your agent should be able to tell you what the home looks like, where it’s situated, the price per square foot in the neighborhood, and every other detail.
3. Going directly to the listing agent
If you’ve ever played Monopoly, there’s a card you might pick (a bad one) that says, “Do not pass go. Do not collect $200.” It means you did something wrong and now must pay the penalty.
The same applies if you go directly to a Listing Agent who is hired by and represents the seller, not you. Unless the Listing Agent is someone you have worked with or know personally and know they are an amazing agent, this is a big no-no. You need someone representing your best interests and your best interests only.
4. Assuming you have no rules to follow as a homeowner
One of the draws of homeownership is freedom: getting out from under someone else’s rules, whether those of your parents or your landlord. But some homes have deed restrictions that come with conditions.
Deed restrictions vary, depending on the community you’re buying in. Their purpose is typically to ensure the property holds its value, which is a good thing. But if you have plans that conflict with the restrictions, you won’t be a happy camper.
Get copies of the restrictions, read them, and ‘look under the hood’ at the internal health of a condo or homeowners’ association. Look for things like whether reserves are kept, the neighbors are paying their assessments, if there are pet restrictions, and whether you can run a business from the home.
5. Not saving enough money
If you saved up enough money for a down payment, kudos. That’s a huge accomplishment. Unfortunately, it’s only the tip of the iceberg. Transitioning from a renter or your parents’ home to your own home has incidental costs that may be overlooked.
Aim to have two to three months’ worth of mortgage payments in reserve. You should also count on paying closing costs (between 2% and 5% of the home’s price) and property taxes. After moving day, you’ll also need to buy household essentials you’ve never owned before, such as appliances, tools, and garden supplies.
Three to six months of expenses saved up in an emergency fund is even better. It’s not money to buy new furniture or remodel a room. It’s for the unexpected expenses, such as a leaky roof.
6. Not getting pre-approved for a loan
You’ve run the numbers several times now and know just what you can afford. That’s great. But if you want your offer to be taken seriously by the seller, get proof of income and assets in the form of a pre-approval letter from a lender.
This process can take just a few days and simply means that the lender has looked through your financial situation and is comfortable with the idea of lending you a certain amount of money.
7. Paying private mortgage insurance (PMI)
If you don’t put down at least 20%, you’ll have to pay PMI. Many first-time buyers pay this, she says. If you do, make sure you notify your lender when you pay down your mortgage and owe just 80% of the home’s value. Your lender will automatically cancel your PMI when you owe 78%, but you don’t want to pay a month more of PMI than you have to.
8. Not checking the price of homeowners’ insurance
Buying a home on the water is a dream come true for many people. But make sure you can afford to insure that home because it could be pricey. Being on the water means higher wind insurance and, of course, higher risk of flood. Other factors may increase your insurance, such as if your new home has a pool and more. Do your research ahead of time. Your Buyer’s Agent will have a network of experts you can ask about these things.
9. Not checking your credit score
Here’s a weird trivia fact: About 42 million credit reports contain errors. True, the error might be just a misspelling of your street address, which wouldn’t affect you. But some errors could hurt your score badly, such as showing you have late payments when you don’t.
Check your credit at least three months prior to house hunting. If there’s an error, ask the credit bureau to kindly fix it. Your interest rate depends on it.
10. Not getting a home inspection
All homes need inspections, even brand-new ones. But some homebuyers skip this step because they get emotionally attached to the home and want it no matter what. If the home does have issues, you’ll want the seller to fix them or to lower the price.
If you’re first-time homebuyers, you might be a bit shy about asking the seller to fix that stuck window or leaky faucet. But the reality is that the buyers who ask for more often get more. So don’t be afraid to speak up and get outstanding issues fixed before you sign those settlement papers.
Did you make any rookie mistakes and have tips to share? Sound of on our Facebook Page, or on our Twitter, LinkedIn or Instagram feeds. And don’t forget to subscribe to our monthly HOME ADVICE email newsletter for articles like this delivered straight to your inbox. You may unsubscribe at any time.
27 New Year’s Resolutions for Homeowners
Heading into a new year, we feel an obligation to make resolutions.
Personal resolutions can be motivating, exciting or just plain silly. This year I will… eat healthier, save money, run the Long Branch 5K, learn to surf in Monmouth Beach, do the Asbury Park Polar Bear Plunge.
As a homeowner, resolutions can also be empowering. Some are mission-critical for a solid financial year, others maybe fall in the wish list.
Need ideas? This list should get you started:
1. “Lose weight.”
Losing the weight of excess possessions save time (you know, like looking everywhere for your shoes in a cluttered bedroom), money (where did I put that bill?) and your mind (psychologists agree that clutter and stress go hand-in-hand).
2. Get organized.
The logical next step to decluttering is to find a logical place for what’s left.
Need inspiration? Walk through a home storage store or get yourself on Pinterest for some seriously clever organizational ideas.
3. Save energy.
Saving energy is good for the planet and it’s also great for your pocketbook. EnergyStar appliances are just the start.
• LED bulbs are much more efficient and now come in warmer tones and dimmable options for a more homey feel. Use a lighting calculator to measure energy and cost savings.
• Water heaters expend energy storing hot water. The Department of Energy says tankless water heaters are 8 percent to 34 percent more energy efficient than standard water heaters, depending on usage.
• Going solar no longer has to be ugly roof additions. Have you seen the new Tesla solar tiles?
Saving on energy can even have some great tax implications! Check out our article on the best energy enhancements for optimal tax write-offs.
4. Build green.
Going green is more than energy usage. It’s also about sustainability and healthful choices in finishes.
• Change out laminates and carpets for natural hard surfaces.
• Remove asbestos (with a professional).
• Use sustainable and recycled materials like bamboo, cork and Vetrazzo.
• Need to paint? Go with a low- or no-VOC non-toxic paint.
• If you’re texturizing a wall, try Earth plaster instead of gypsum.
5. Get healthy.
Create a workout space, so there’s no excuse when the weather turns. If you’re looking to move, check out neighborhoods with nearby trails, fitness centers and amenities.
6. Just fix it.
You’ve walked by that broken switch plate how many times?
Go through the house like a home inspector and create a checklist of repairs that need to be done. When it comes time to sell and appraise your house, you’ll be glad these were done.
7. Set yourself (debt) free.
Those who carry debt and struggle to pay it off are twice as likely to develop mental health problems, according to a study by John Gathergood of the University of Nottingham.
Paying off debt sets you free in so many ways, plus it’s great for your credit score. Think of all the things you could do in the future with the money you save on payments and interest (maybe even pay off your home early — see #20).
8. Remodel right.
Is it time to update a dated bathroom? Replace the garage door?
If you’re wondering what improvements will lead to a better return on investment when you sell, check out our article on which home renovations offer the greatest return on investment. Our Agent’s can also tell you what improvements are best for your neighborhood and house type.
9. Maximize your mortgage.
A recent Zillow study showed that Americans spent more time researching a car purchase than their home loan. Since the Fed announced that it’s planning three rate hikes in 2017, it’s wise to refi sooner than later.
Have you reached the loan-to-value needed to remove your mortgage insurance? Make an appointment to talk to a lender for a mortgage checkup.
10. Learn to DIY.
The more minor fixes (and if you’re really skilled, major fixes) you can do yourself, the more money you save.
11. Plan to maintain.
Create a maintenance calendar to remember those routine maintenance tasks, such as replacing furnace air filters, changing smoke detector batteries and winterizing sprinklers.
Whether it’s a paper calendar or your iCal on your phone, plan out scheduled maintenance so you won’t hear that relentless beeping of the smoke detector in the middle of the night — or run out of propane before the steaks are done (tragedy!).
Is this the year to buy a rental property? Or a vacation home?
This will really require you to understand your financial situation, so talk to your financial advisor and an Agent who understands investment properties.
13. Take an inventory.
That new flat screen television and 360 viewer you got for Christmas are going to need coverage. If disaster happens, do you really know what’s in your house?
14. Do the double check.
The Insurance Information Institute says a standard policy covers the structure and possessions against fire, hurricanes, wind, hail, lightning, theft and vandalism.
Most other disasters are add-ons. Talk to your insurance agent and make sure you have not only enough property coverage but also enough liability coverage.
15. Get a “CLUE”.
Your homeowners’ insurance premiums are dependent on a number of factors, such as credit score and the Comprehensive Loss Underwriting Exchange (CLUE) report of claim history.
You can request a free report from LexisNexis.
16. Make your neighborhood better.
Get involved with your local HOA, neighborhood watch or community events. The first step to a better neighborhood is your personal involvement.
For news, information about issues that effect your community and to keep in touch with your neighbors; you can also join the Community Facebook Pages and Group we maintain. Like the Bradley Beach, New Jersey Facebook Page or join the Groups for Bradley Beach, NJ Residents, Ocean Township, NJ Residents or our Jersey Shore and Monmouth County Lifestyle Group.
17. Save water.
Dry climate areas struggle for water in dense population centers. Watering restrictions can turn your grass brown and overuse can cost you with tiered billing. Even the New Jersey climates experience seasonal droughts or below average reservoir levels.
Xeriscape what you can outside and look for indoor appliances that use less water. If you live in a state with conservation legislation, get those regulators on your shower heads and hoses.
18. Get dirty.
Landscaping is essential to curb appeal. So this year, really plan to keep up with it or think about going to a more easy-care style.
Out back, consider a garden to save money on better produce. Get a composter for garden and food waste.
19. Plan for emergencies.
Natural disasters and social disruptions are unwanted, but they happen. To be ready, you actually need to prepare!
Do you have a family evacuation plan? Emergency supplies? Go to ready.gov for a ton of ideas on prevention and disaster preparedness.
20. Get smart.
Smart home features make your home more efficient and easy to use, even remotely. Look for these to be the “wow” factor that could make your house stand out. Who doesn’t love Alexa-enabled appliances?
21. Make extra mortgage payments.
You can take thousands of dollars and years off your mortgage by putting an extra amount towards the principal each month. For a $400,000 at 4.25 percent interest with 25 of its 30 years left, you could save $21,107 and take two years off by paying an extra $100 per month.
RELATED: How To Pay Your Mortgage Off Early
What could you save? Try Bankrate’s handy extra payment calculator.
22. Pay off your second mortgage.
Whether it’s a one- or multiple-year plan, it won’t happen if you don’t budget for it.
23. Scrutinize your property tax.
If you live in an area where your home value has dropped since the last assessment, you need to really look at that bill.
Is the assessment correct? Is it going up faster than the sale prices of comparable homes? You can appeal via your local appraisal review board.
24. Optimize your withholding.
If you’re a first-time homeowner, you’re going to enjoy those new deductions. Be sure to talk to your tax advisor about adjusting your paycheck withholding accordingly (unless you like Uncle Sam making money off your income instead of you!).
25. Pay bills, especially your mortgage, on time.
It goes a long way to improving your credit. “The longer bills are paid on time, the higher the FICO Score should rise,” says myFICO. “That’s because as recent “good payment” patterns appear on a credit report, the impact of past credit problems on a FICO Score fade.”
26. Cook dinner.
You know that fabulous kitchen you had to have when you bought your home? Use it!
The USDA’s 2016-17 Food Price Outlook shows the price of groceries decreased in 2016, with a less than 1.5 percent increase in 2017, but restaurants will continue to climb beyond 2016’s 2.4 percent increase.
You’ll also eat healthier at home by controlling what goes into your body. If you own a home with a less-than-stellar kitchen, cooking will probably motivate you to make some appliance and feature upgrades that will pay off when you sell.
27. Get hip.
Dated cabinets and 1980s fixtures don’t help your resale value. Evaluate your style and start looking at upcoming (not past) trends.
Although we’re still in a “sellers’ market” that will likely change in the next few years. A modern home (unless it’s a historic property) is simply more appealing and makes the buyer feel like it’s move-in ready.
Your house is your biggest asset. While not all of these resolutions are essential, aim to start out by focusing on your mortgage and personal finances. What do you have to add? Where might you start? Sound off on the Patrick Parker Realty Facebook Page, on our Twitter or LinkedIn feeds. And don’t forget to sign up for our monthly HOME ADVICE eNewsletter for articles like this one delivered straight to your inbox.
Here’s to a healthier, happier and successful New Year!
5 Things You Need To Be Pre-Approved For A Mortgage
While idly shopping for a home may be pleasant, serious homebuyers need to start the process in a lender’s office, not an open house. Potential buyers benefit in several ways by consulting with a lender and obtaining a pre-approval letter. First, they have an opportunity to discuss loan options and budgeting with the lender. Second, the lender will check on their credit and alert the would-be buyers to any problems.
Third, the buyers learn the maximum they can borrow and therefore have an idea of their price range. However, all buyers should be careful to estimate their own comfort level with a housing payment rather than immediately aiming for the top of their spending ability. Lastly, home sellers expect all buyers to have a pre-approval letter and are more willing to negotiate with people who have proof that they can obtain financing.
Pre-qualification Vs. Pre-approval
A mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on your home, but a pre-approval is much more valuable because this means the lender has actually checked your credit and verified your documentation to approve a specific loan amount (usually for a particular time period such as 90 days). Final loan approval occurs when you have an appraisal done and the loan is applied to a particular property. (Learn more by reading Pre-Qualified vs. Pre-Approved – What’s The Difference?)
1. Proof of Income
“No verification” or “no documentation” loans are a thing of the past, so all borrowers need to be prepared with W-2 statements from the past two years, recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses and your two most recent years of tax returns.
2. Proof of Assets
You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs, as well as cash reserves. An FHA loan requires a down payment of as low as 3.5% of the cost of the home, while conventional home loans require 10 to 20%, depending on the loan program. If you receive money from a friend or relative to assist with the down payment, you will need a gift letter to prove that this is not a loan.
TUTORIAL: Mortgage Glossary
3. Good Credit
Most lenders today reserve the lowest interest rates for customers with a credit score of 740 or above. Below that, borrowers may have to pay a little more in interest or pay additional discount points to lower the rate. FHA loan guidelines have tightened in recent months, too, so that borrowers with a credit score below 580 are required to make a larger down payment. Most lenders require a credit score of 620 or above in order to approve an FHA loan. Lenders will often work with borrowers with a low or moderately low credit score and suggest ways they can improve their score. (For more on credit scores, see Can You Hit A Perfect Credit Score?)
4. Employment Verification
Your lender will not only want to see your pay stubs, but is also likely to call your employer to verify that you are still employed and to check on your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Lenders today want to make sure they are loaning only to borrowers with a stable employment. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
Your lender will need to copy your driver’s license and will need your Social Security number and your signature allowing the lender to pull a credit report. Be prepared at the pre-approval session and later to provide (as quickly as possible) any additional paperwork requested by the lender. The more cooperative you are, the smoother the mortgage process will be.
The Bottom Line
Consulting with a lender before you start the home buying process can save a lot of heartache later, so gather your paperwork or print some recent statements off your online bank accounts before your pre-approval appointment and before you begin house hunting.
Did you recently buy a home after being pre-approved? How did this make the homebuying process easier? Did you buy only to be approved later? What challenges did you meet? Sound off on the Patrick Parker Realty Facebook Page, Twitter or LinkedIn feeds and don’t forget to subscribe to Patrick Parker Realty’s Jersey Shore HOME ADVICE™ monthly email newsletter for articles like this delivered straight to your inbox.
Jersey Shore Home Buyers:
Beat the Competition with a Pre-Approved Loan
The Monmouth and Ocean County New Jersey housing market is red hot. This can mean you’ll need to compete with other buyers for a home.
But with a pre-approved loan from a lender, you’ll give yourself a head-start in the race for a home you love.
Pre-approval also comes in handy when you’re dipping your toe into the market. Even in a soft market, you’ll have to compete with other buyers if you find a home in excellent condition with an attractive price tag.
What is a pre-approved loan?
Every potential homebuyer should start the process of looking for a home with a visit to a reputable mortgage lender. While a lender can give you a pre-qualification for a home loan based on your credit score and your stated income and assets, a home seller wants to see you’re completely pre-approved for a loan.
To find a lender who will help land your dream home, try a pre-approved loan service like the one featured on the realtor.com® individual listings page. By checking the box that says, “I want to get pre-approved by a lender” you’ll be connected with up to three lenders right away.
How a pre-approved loan can help you compete
If you’re competing with other buyers, a mortgage pre-approval makes your offer stronger. While many buyers today have a pre-approval handy, you can use yours to win the bidding war by providing a financial statement along with a pre-approval letter from your lender with your offer.
If your pre-approval letter is for an amount above the asking price for the home, this will give the sellers confidence in your ability to easily finalize the loan. You also can ask your lender to call the listing agent directly to emphasize your ability to close the deal and to discuss how quickly the contract can go to settlement.
Most real estate contracts include a contingency: the offer depends on the buyer obtaining financing. If you have a strong pre-approval letter and feel your lender is dependable, you can remove the financing contingency or shorten the contingency term.
Sellers are happy to see an offer without a financing contingency, because it proves the buyer has confidence the loan will close on time. However, waiving this contingency can be risky because if your financing doesn’t come through you could lose your earnest money deposit and even run the risk of being sued by the sellers.
A shorter contingency might be safer and still garner you the attention and confidence of the sellers in a competitive situation.
What benefits did you see from getting pre-approved? Post your stories on the Patrick Parker Realty Facebook Page, Twitter Feed or on LinkedIn. Plus don’t forget to subscribe to the monthly Patrick Parker Realty email newsletter for articles like this one delivered straight to your inbox.
#Brexit: The Immediate Impact on U.S. Mortgage and Housing Finance
After much speculation on the U.K.’s decision — British voters decided to leave the European Union — now many speculate about how this will affect the U.S. economy.
Here is a summary of the opinions that impact the housing and mortgage finance industry:
First, Standard & Poor’s reports it may downgrade UK sovereign ratings: now at “competitive disadvantage compared with other global financial centers.”
Stateside, financial institutions sought to downplay fears in the early hours Friday.
“We affirm our assessment that the U.K. economy and financial sector remain resilient and are confident that the UK authorities are well-positioned to address the consequences of the referendum outcome,” the G-7 finance ministers and central bank governors stated.
“We recognize that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability,” their statement continued.
So how do experts think the market will react to this decision?
“The market action in Treasuries and Gilts continues to evolve in line with the playbook from the 2011 U.S. sovereign downgrade,” said Mike Schumacher, head of rate strategy Wells Fargo.
“There is one key distinction: this time Gilts are leading the way,” Schumacher said. “Should Gilts lead Treasuries? We think not. We still expect capital to flow out of the U.K., with the U.S. being a very likely destination.”
“In the June 17 edition of the Rates Explorer, we called for two-year and 10-year Treasury yields to reach 0.5% and 1.3%, respectively, in the week or two after a leave victory,” Schumacher continued. “We stand by these projections. In the Asia trading session, the two-year reached 0.5%, while the 10-year bottomed at 1.4%.”
Then he adds this important point:
“We still expect capital to flow out of the U.K., with the U.S. being a very likely destination. In the June 17 edition of the Rates Explorer, we called for 2yr and 10yr Treasury yields to reach 0.5% and 1.3%, respectively, in the week or two after a “Leave” victory.”
In fact, the Brexit vote may not cause as dramatic of an effect as some people think, and will even take years before going into effect, said Andrew Kenningham Capital Economics senior global economist. The economy may even see benefits such as loosening monetary conditions.
“Goldman Sachs has a long history of adapting to change, and we will work with the relevant authorities as the terms of the exit become clear,” said CEO Lloyd Blankfein in an internal memo following the Brexit vote, according to an article by Stephen Alpher for Seeking Alpha.
On the other hand, some experts point out the downfalls that could come from the vote.
“Isolationist move will cause many wealthy foreigners to consider selling their properties in UK, especially in London as it becomes less attractive place to set up offices to conduct global business,” said Lawrence Yun, the National Association of Realtors chief economist. “Therefore, demand for U.S. real estate could rise if global investors view America as open to global business.”
“But overall, global economy and job creations could modestly slow down with more frictions in place to do commerce,” Yun said. “The British economy will be disrupted and hence we should expect fewer Brits able to buy in the U.S”
Previously, after the recent shockingly low jobs report, some experts pointed to the Brexit vote as a deciding factor on the Fed raising rates.
“The sudden stop in employment growth rules out any chance of a rate hike from the Fed at next week’s FOMC meeting, particularly now that the UK vote on whether to leave the European Union appears to be going down to the wire,” said Capital Economics Chief Economist Paul Ashworth.
“The people of the United Kingdom have spoken and we respect their decision,” said Jacob Lew, U.S. Secretary of the Treasury. “We will work closely with both London and Brussels and our international partners to ensure continued economic stability, security, and prosperity in Europe and beyond.”
“We continue to monitor developments in financial markets,” Lew said. “I have been in regular contact in recent weeks with my counterparts and financial market participants in the UK, EU and globally and we are continuing to consult closely. The UK and other policymakers have the tools necessary to support financial stability, which is key to economic growth.”
Sources: The New York Times, The Wall Street Journal, Housing Wire
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6 Mortgage Terms to Know
Buying a house is an exciting and busy time. Once you’re pre-approved for a mortgage, you can start looking at homes in your price range. Whether you’re a first-time homebuyer or have been there before, it’s easy to feel overwhelmed. Not only will you have to find a home inspector and a real estate lawyer, you’ll also need to choose a mortgage lender. A mortgage represents a serious amount of money, so it’s important to fully understand it.
Before diving into these key mortgage terms we think it is important to briefly describe the difference between a Mortgage Broker and a Mortgage Lender. A Mortgage Broker is an intermediary who brings mortgage borrowers and mortgage lenders together, but does not use its own funds to originate mortgages. A mortgage broker gathers paperwork from a borrower, and passes that paperwork along to a mortgage lender for underwriting and approval.
Here are 6 mortgage terms to know as a homebuyer:
1. Amortization Period
Do you aspire to be mortgage-free? Well, you’ll want to know your amortization period. Your amortization period is the period of time over which your mortgage will be fully paid off. Generally, a standard amortization period on high-ratio mortgages (a down payment between 5% and 19.99%) is 25 years. On conventional mortgages (a down payment 20% or greater), 30 year amortization periods are still available. By shortening your amortization period you’ll pay less interest over the life of your mortgage, but your mortgage payments will be higher. A few years ago homeowners could choose an amortization period as long as 40 years, but that has recently been reduced by the federal government in an effort to avoid a housing bubble.
Even though you may of have purchased your home for $550,000, it doesn’t necessarily mean your lender agrees with its value. Most mortgage lenders will require an appraisal to determine your property’s value. You shouldn’t confuse market value and appraised value, as they aren’t always the same. It’s important to not get caught up in a bidding war and pay a lot more than the appraisal value, as you’ll have to come up with the extra money if the appraisal comes in a lot less. Homebuyers cover the cost of appraisals, although some lenders may be willing to foot the bill.
RELATED: Market Value vs. Appraised Value
3. Home Insurance
Protects your home in most cases from fire and other named perils. Insurance is paid by monthly premiums. Most lenders require you’re fully insured before they’ll approve your mortgage.
Lenders don’t simply offer you a mortgage out of the goodness of their heart. The interest on a loan like a mortgage covers the cost of borrowing. When you start paying your mortgage, you’ll notice your interest payments are quite high, but as you get closer to paying it off your interest payments will get smaller. That’s because as you pay down your principal, your interest payments become less and less.
Nobody wants to pay only the interest on their mortgage. A portion of each mortgage payments goes towards principal and interest. Most closed mortgages come with prepayments privileges. When you make lump sum payments, it’s applied against principal. This can help you shave years off your mortgage and save thousands in interest.
RELATED: Will I Qualify For A Mortgage?
Not to be confused with the amortization period, a mortgage term is the length of your current mortgage agreement. Although a mortgage term can be as short as six months or as long as 10 years, most homebuyers choose the stability of a five-year fixed rate mortgage term. Once your mortgage term expires, you can repay your balance in full or renew your mortgage with the same or another mortgage lender.
Best Practices for Paying Off Your Mortgage
It’s simple to pay off a mortgage earlier. But should you? It’s a complicated question.
Let’s discuss why…
For many people, their mortgage carries an interest rate that’s lower than they could average in retirement or investment accounts. And that means the “extra” money you could throw at a mortgage might actually earn you a lot more elsewhere.
With a low mortgage interest rate, homeowners are “so much better off putting that money in a Roth IRA,” says Jill Gianola, CFP professional, author of “The Young Couple’s Guide to Growing Rich Together.”
Other financial pros agree. And if you have extra money and an employer that offers matching retirement contributions, that option might give you a higher return for your money than paying off a low-rate mortgage, says Eric Tyson, author of “Personal Finance for Dummies.”
Then there’s the college aid factor. If you’re applying for need-based aid for your kids, that home equity could count against you with some colleges, he says, because some institutions view equity as money in the bank.
If, after those caveats, you want to pay off your mortgage early, here are 4 ways to make it happen:
1. Pay an extra 1/12th every month
Divide your monthly principal and interest by 12 and add that amount to your monthly payment. End result: 13 payments a year.
IMPORTANT NOTE: Before you make anything beyond the regular payment, phone your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan.
Let them know you want to pay “more aggressively,” and ask the best ways to do that.
Some servicers may require a note with the extra money or directions on the notation line of the check.
And to confirm, if you’re putting extra money toward your loan, always check the next statement to make sure it’s been properly applied.
2. Refinance with a shorter-term mortgage
Want to make sure your mortgage is paid in 15 years? Refinance to a 15-year mortgage.
15-year mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts.
But this option is not quick or free. You must qualify for a new mortgage – which means paperwork, a credit check, and, likely, a home appraisal. Plus closing costs.
So do your research about refinance costs before jumping in… even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible. If you decide that you don’t have the extra money one month to put toward the mortgage, you’re locked in anyway.
Ultimately, unless the new interest rate is lower than the old rate, there’s no point in refinancing. Without a lower rate, you’ll get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount.
3. Make an extra mortgage payment every year
12 months, 13 payments. There are a couple of ways to pull off this tactic. You can save up throughout the year and make an extra payment. Or, for those who get paid biweekly, harness part or all of those “extra” or “third” checks.
Get a bonus? A tax refund? An unexpected windfall? However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.
The upside: You’re paying extra only when you’re flush. And those additional payments toward the principal will cut the total interest on your loan.
The downside: It’s irregular, so it’s hard to predict the mortgage payoff date. If you throw too much at the mortgage, you won’t have money for other needs.
So yes, whether you should pay off your mortgage early it’s a complicated question. But it does not mean without the proper research you can’t come to an answer.
Have you used any of the above methods to start paying your mortgage off early? What is working for you?
And don’t forget to subscribe to the monthly Patrick Parker Realty email newsletter for articles like these delivered straight to your inbox!
How Does The Closing Process Work?
Real estate transactions are complex and involve as many as twenty different players including real estate brokers, buyers, sellers, attorneys, inspectors, appraisers, lenders, and often contractors. Because of this, even the simplest transaction today typically takes between 30 and 45 days to close.
The closing process begins with the acceptance of an offer which is prepared by the parties themselves, a real estate broker, or often an attorney. This process often involves an initial offer or letter of intent from the buyer followed by a series of discussions and or negotiations with the seller. Once an agreement is hammered out the details are typically memorialized in a written form that all parties sign.
Once accepted the offer is typically placed with an escrow company. An escrow company is a depository for legal documents and often acts as a notary and closing agent to process signatures and monies for the parties involved in a transaction. It’s important to note that they do not represent either party in the sale, and because of this they are often referred to as a neutral third party in the transaction. In some states an attorney may act as the closing agent and prepare the closing documents.
Prior to closing, all of the conditions of sale must be met. These conditions are often referred to as contingencies. The most common contingency is the buyer’s ability to secure a new mortgage. Often this is the most time consuming aspect of closing a real estate transaction as the lender must conduct employment verifications, credit report reviews, financial statement reviews, and order an appraisal for the home itself. In addition many buyers and their lenders require an inspection of the home. These inspections can vary by state and local custom but often include pest and dry rot inspections, whole home inspections, or specialized inspections that are area specific like a radon gas inspection. We can help you define exactly what is included in the state of New Jersey.
While the escrow is opened, a title company may be hired to conduct a preliminary title report. This report will provide a comprehensive review of all of the recorded documents which affect the deed to the property. Examples include easements, liens, tax assessments, covenants, conditions and restrictions, and homeowner association bylaws. The buyer and lender must approve of the preliminary title report prior to closing.
Once the conditions of sale have been met and the preliminary title report has been approved, all parties will agree to sign closing documents. In some states this will mean that all parties will meet together and sign documents at the same time, while in other areas it is customary to sign independently; again, we walk you through the process in the state of New Jersey. Once the documents have been signed, notarized copies will be forwarded to the lender, funds will be released, and the sale will be recorded at the local recorder’s office.
Lost? Not to worry, Patrick Parker Realty experts are happy talk to you about what to expect when closing. We are there, by your side, through closing. We leave no stone unturned throughout the entire buying and selling process. Contact us today for more information.
10 Ways to Prepare for Homeownership
2. Develop your home wish list. Then, prioritize the features on your list.
3. Select where you want to live. Compile a list of three or four neighborhoods you’d like to live in, taking into account items such as schools, recreational facilities, area expansion plans, and safety.
4. Start saving. Do you have enough money saved to qualify for a mortgage and cover your down payment? Ideally, you should have 20 percent of the purchase price saved as a down payment. Also, don’t forget to factor in closing costs. Closing costs — including taxes, attorney’s fee, and transfer fees — average between 2 and 7 percent of the home price.
5. Get your credit in order. Obtain a copy of your credit report to make sure it is accurate and to correct any errors immediately. A credit report provides a history of your credit, bad debts, and any late payments.
6. Determine your mortgage qualifications. How large of mortgage do you qualify for? Also, explore different loan options — such as 30-year or 15-year fixed mortgages or ARMs — and decide what’s best for you.
7. Get preapproved. Organize all the documentation a lender will need to preapprove you for a loan. You might need W-2 forms, copies of at least one pay stub, account numbers, and copies of two to four months of bank or credit union statements.
8. Weigh other sources of help with a down payment. Do you qualify for any special mortgage or down payment assistance programs? Check with your state and local government on down payment assistance programs for first-time buyers. Or, if you have an IRA account, you can use the money you’ve saved to buy your fist home without paying a penalty for early withdrawal.
9. Calculate the costs of homeownership. This should include property taxes, insurance, maintenance and utilities, and association fees, if applicable.
10. Patrick Parker Realty experts can help guide you through the home buying process. Take our “Am I Ready to Buy A Home?” Checklist.
From the Patrick Parker Realty Tax Season Blog Series:
Tax Tips for Short Sales
If you are in a position where you have to sell your house for less than the amount you owe on it or have to restructure your mortgage with the lender in order to avoid foreclosure proceedings, you may face tax implications on the transaction. Understanding how a short sale or restructure will be viewed by the Internal Revenue Service can help you plan your tax situation ahead of time.
What is a short sale?
A short sale happens when you sell your property for less than what you owe on its mortgage(s). A short sale has to be approved by your lender because it will not receive the full amount of the outstanding loans.
After the sale, the loan will still have an unpaid balance, called the deficiency. Depending on the lender and the laws of your state, a short sale can result either in you owing the deficiency to the lender as unsecured debt, or in the lender forgiving the deficiency. A short sale is often negotiated as an alternative to foreclosure, as it often involves fewer costs and fees.
Tax implications of forgiven debt
If your lender forgives the balance of your mortgage after the short sale, you may not be out of the woods yet. You may have to include the forgiven debt as taxable income in the year of the short sale. The Mortgage Forgiveness Debt Relief Act of 2007 exempted that income through 2014 from taxation, up to $2 million, if it was your principal residence, or main home. However, the tax still applies to second or vacation houses as well as rental properties. Beginning in 2015, the exemption is no longer available unless it is reinstated.
Before seeking a short sale or being forced into a foreclosure, you may be able to negotiate a mortgage restructuring to allow you to stay in your home and to be more able to afford your mortgage’s terms and interest rate. These types of loan modifications can take many forms and may include:
• Reduced interest rates
• A reduction of the loan principal
• Stretching out the payments over a longer time frame to make payments smaller
Of these options, only a principal reduction may have income tax implications. The principal reduction may be considered taxable income to you in the year of the restructure. If the property is your main home, it will fall under the provisions of the Mortgage Forgiveness Debt Relief Act and will be excluded from taxable income.
Dealing with incorrect 1099-C forms
If your lender has reduced or eradicated your debt under a short sale or mortgage restructure, it will send you IRS Form 1099-C at the end of the year, showing the amount of the debt forgiven and the fair market value of the property. Review the document carefully and compare it to your own figures. If it contains misstatements, contact the lender and attempt to have it correct the form. If it is not able, or not willing, to do that in a timely manner, recalculate the correct figures and provide the IRS with documentation showing how you arrived at your figures when you file your income tax return.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.
Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.
For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.
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