Tag: house mortgage

How to End Your Mortgage PMI Payments Immediately?

Posted on | by Jackie Strauss | Leave a Comment on How to End Your Mortgage PMI Payments Immediately?
Female hands holding small house, natural background

When you get a house mortgage with a down payment that is less than 20%, the lender will require you to buy private mortgage insurance. The same would be true if you refinanced with less than 20% equity. However, mortgage PMI payments can be expensive so it’s best to remove them as soon as you can.

Ways to Get Rid of Your Mortgage PMI Payments

There are different ways to get rid of your mortgage PMI payments, depending on your situation.

Pay Down Mortgage for Automatic Termination of PMI

This is not going to be the fastest way to get your mortgage PMI payments over with, but under the rules, mortgage lenders are required to drop PMI when your balance reaches 78% of the original purchase price, and you haven’t missed any payments and are in good standing.

The lender also requires you to stop the PMI at the halfway point of your amortization schedule. For example, if you have a 30-year loan this midpoint is 15 years. The lender needs to cancel the PMI then, even if your balance hasn’t reached the percentage point. This is called final termination. Removing PMI in this manner works for those with traditional mortgages who have paid according to the payment schedule. Remember, you need to be up to date on payments.

Request PMI Cancelation When Your Balances Reaches 80%

Instead of just waiting for an automatic cancellation, a faster option is to ask the servicer to cancel PMI once the loan balance is at 80% of the home’s original value. If you are going to be making your payments as scheduled, you will be able to find this date on your PMI disclosure form. You can also request this from the servicer. If you have some cash on hand, you can get to this point faster by making some extra payments.

You can also prepay the principal on the loan and reduce the balance. This will help you build some equity faster to get to this point and help you save on interest payments. Even something as small as an extra $50 a month can mean a big drop in your balance and interest over the term of the loan.

Some people decide to do a lump sum toward the principal or make just an extra mortgage payment every year. In order to estimate the amount, your balance needs to be eligible for cancellation, just multiply the original home price by 0.8. To cancel your PMI, you need to send a request to your lender in writing, be current on payments and have a good payment history. You may also need to meet other requirements for the lender, such as making sure there aren’t any liens on the home. You may also need to get a home appraisal. If, by chance, your home value has lowered, it’s possible you won’t be able to cancel PMI.

What Does Mortgage Insurance Do?

Mortgage insurance is designed to reimburse the lender if you default on your home loan. You, as the borrower, are responsible for paying the mortgage PMI payments. When a company sells the insurance it’s known as private mortgage insurance. However, the government does sell mortgage insurance as well. This means PMI doesn’t apply to all mortgages with down payments below 20%. 

Refinance to Get Rid of Your Mortgage PMI Payments

If mortgage rates are low then you may want to consider a refinance for a number of benefits. Mortgage refinancing can save on interest costs or reduce your monthly payments. In addition to helping you save money, refinancing may enable you to get rid of your PMI. If your new mortgage balance is below 80% of the home value then you can get even more savings. In order for this refinancing strategy to work, your home needs to have gained value since the last time you got a mortgage. With refinancing, you want to weigh the closing costs against the potential savings from the new loan terms to see if it is worth it.

Refinancing is a strategy that works well in neighborhoods where home values are rising. If your home value has declined then refinancing may have the opposite effect. It’s possible that, if you want to refinance your mortgage, you may need to add PMI if your home equity has dropped.

Refinancing to get rid of your mortgage PMI payments usually doesn’t work well for a new homeowner. Some loans have a requirement that makes you wait at least two years before you are able to refinance to get rid of these payments. If your loan is less than two years old then you can ask about this but it’s not possible that you will be guaranteed approval.

Get a Reappraisal if Your Home Has Gained Value

In an area where homes are increasing in value, your home equity could reach 20% ahead of the schedule.

If this is the case, you may find that it’s worth it to pay for a new appraisal. Let’s suppose you have owned your home for at least five years and the loan balance isn’t more than 80% of the new valuation then you can ask for PMI to be canceled. If you have owned the home for at least two years then the remaining mortgage balance can’t be any greater than 75%.

Appraisals can range between $450 and $600, depending on your area. Some lenders might be willing to accept a broker’s price opinion instead and this can be a much cheaper option for you. If this is the case for you, it’s best to speak with your lender about the potential to cancel your PMI requirement. If you have added some extra amenities or even renovated parts of your home then the home could have also increased in value, which also means more equity. Whether it’s a pool, common upgrades, or an extra room, check to see if it increases your value.

What to Know About Getting Rid of Mortgage PMI Payments

Whether you are paying PMI every month or as part of a lump sum, it’s not fun. However, you should be aware not to make your financial situation worse by trying too hard to get rid of PMI. Many financial experts will agree that it’s important to have some liquidity in case of an emergency. You don’t want to tap into your retirement funds or savings to reach that 20% equity mark. Speak with a financial advisor to make sure you are on the right track to reach it instead of tapping into savings.

As long as you aren’t taking on an FHA loan, you won’t be married to PMI. You are able to drop it once you get that 20% in equity. This means you may only be paying for a few years, depending on how fast your home appreciates. Don’t feel the need to use every last bit of your cash to make a bigger down payment that avoids PMI. You don’t want to be left in a situation that doesn’t provide you with financial flexibility, especially as you move into a new home.

Requirements to Cancel PMI

No matter how you are canceling your PMI, there will be different requirements. Any PMI cancellation must be done in writing. You need to have a good payment history and be current on your payments. You will need to make sure that you don’t have any liens on the home and have to prove this. For example, you can’t have a home equity line of credit. An appraisal can be helpful to demonstrate that the loan balance isn’t too high compared to the home’s current value.

    Important Criteria for PMI cancellation
  • ✓Additional payments that reduce the principal balance of your mortgage to 80% of the original value of your home
  • ✓Your request must be in writing
  • ✓Good payment history
  • ✓No junior liens (such as a second mortgage) on your home
  • ✓The value of your property can't declined below the original value of the home
Source: consumerfinance.gov

Different Types of Mortgage Insurance

While you may be paying mortgage insurance, it only covers the lender. There are different types of mortgage insurance and each will work a little differently, depending on your type of home buying options.

PMI for a Conventional Mortgage

Many lenders will still offer conventional mortgages with low down payment requirements and some are as low as 3%. A lender will require that you pay for this private mortgage insurance, also known as PMI if you have a down payment that is less than 20%. Before you buy a home, it’s best to use a PMI calculator in order to estimate the cost of your PMI. This will vary according to the size of the loan, your credit score, and some other factors. Typically, this will be added to your monthly mortgage payment.

FHA Mortgage Insurance Premiums

FHA loans are insured by the Federal Housing Administration. And these loans have down payments as low as 3.5% and there are easier credit qualifications when compared to conventional loans. This loan requires you to pay mortgage insurance upfront and an annual payment, regardless of what you have for a down payment. The upfront premium will be 1.75% of the loan amount. The annual premiums can range from 0.45% to 1.05% of the outstanding balance. You will pay this for the life of the FHA loan.

USDA Mortgage Insurance

USDA loans, backed by the U.S. Department of Agriculture, usually are 0% down loans for suburban and rural homebuyers. There can be two different charges for mortgage insurance, including an upfront guarantee fee paid in the beginning and an annual fee you need to pay for the life of the loan. The federal government will evaluate the fee each fiscal year and can change it. However, your fee doesn’t fluctuate and they are fixed when the loan closes.

VA Mortgage Insurance

VA loans, similar to other government-backed loans, don’t have any down payments and feature low-interest rates for retired, disabled, and active military members. While these loans don’t require mortgage insurance, many borrowers will pay a funding fee that is between 1.25% and 3.3% of the loan amount. This fee will depend on a variety of different factors, including whether or not you have applied for a loan before and how big your down payment is.

Can You Avoid Mortgage Insurance?

The main way to avoid mortgage PMI payments is to make a down payment that equals 20%, or one-fifth, of the purchase price of the home. For example, if the home costs $180,000 then you would need to pay at least $36,000 to avoid paying PMI. While it’s the easiest way to avoid mortgage insurance, a down payment of this size may not be a feasible option.

Another option to avoid paying this is for qualified borrowers to get a piggyback mortgage. A home equity loan or second mortgage is taken out at the same time as the first mortgage. This means that 80% of the purchase price is then covered by the first mortgage, 10% is covered by the second loan, and then the final 10% is covered by the down payment. This will eliminate the need for PMI. With a home valued at $180,000, the first mortgage would be $144,000, the second mortgage would be about $18,000, and your down payment would be $18,000. This may be a more feasible option when saving.

A final option is the option of lender paid mortgage insurance where the cost of PMI is included in your interest rate for the life of the loan. While you are technically avoiding PMI payments, this means you are paying more in interest over the life of the loan.

Know Your Rights About Mortgage PMI Payments

Those who are making mortgage PMI payments should be aware of their rights under the Homeowners Protection Act. This is a federal law that will protect you from excessive PMI charges. This means you have the right to get rid of your payments once you have built up a certain amount of equity in the home. Lenders will all have different rules for canceling PMI but they have to let you do so.

Before you get a mortgage with PMI, ask for an explanation of PMI rules and the schedule and make sure you understand it. This will help you actually track progress toward ending the payment. If you feel like your lender isn’t following the rules for getting rid of PMI, you can report the situation to the Consumer Financial Protection Bureau.

In Conclusion

There are some ways to avoid PMI but in many instances, it isn’t feasible for a borrower. This is why a borrower may be looking for a way to end mortgage PMI payments immediately. There are four different ways to do this, depending on your financial situation and the type of loan you have. There are reasons to avoid PMI so it’s best to get to the point where you can cancel it as soon as possible, as long as you aren’t getting into worse financial shape by doing so.

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Cash Out Refinance to Use Your Home Like A Bank

Posted on | by Carlie Lawson
Cash out refinance to use your home like a bank cover photo

You may love your home and want to remain there. You may also need remodeling or renovation to make it livable or to meet a change of life. Maybe you need to widen doors to accommodate a wheelchair. Perhaps you need to add a mother-in-law apartment. Perhaps you need to replace your furnishings. One of the simplest ways to pay for these needs is a cash-out refinance mortgage to replace your existing mortgage. You can obtain a new home loan that provides funds for more than you owe for the home with the difference going to you in cash. A traditional refinancing mortgage simply gives you a mortgage loan in the same amount that owe, but a cash-out refinance lets you access home equity.

Everything You Should Know About Cash-out Refinance

Cash-Out refinancing loan differs from a home equity loan though. You can join the 8.2 million homeowners already benefitting from a cash-out refinance mortgage as of June 2019.

You will pay a slightly higher interest rate and the cash-out limit will range between 80 to 90 percent of your home’s equity. While you may wish you could get all the home’s equity, this does mean you can borrow against it without depleting it. That also means you still have a bit of equity for a rainy day. Do not laugh. You will have at least 10 percent left meaning that if you need to access a few thousand dollars quickly, you will still have that money to access via a home equity line of credit. It is like keeping a few thousand dollars in your back pocket. Still, if you really want the full 100 percent of your equity right away, if you obtain a cash-out refinance loan guaranteed by the US Department of Veterans Affairs.

You can add the costs of a new mortgage to the amount refinanced so you do not have to pay anything out of pocket at closing. You can end up with a higher interest rate or longer loan term though. Also, you could end up paying more in interest through the life of the loan.

Now, do not get too excited. You won’t get cash right away. You still have to go through an underwriting process, the appraisal and your lender has to approve refinancing. Once you close, you get three days to cancel the loan in case you decide you have changed your mind – guaranteed by the Truth in Lending Act. Three to five days after your closing, you get your cash.

Reasons You Might Need a Cash-Out Refinance Mortgage

While the most common expense for these cash-out refinance loans is home renovations or improvements, you can also use the money for many other reasons.

Debt Consolidation

You can use the equity in your home for a very low-interest rate debt consolidation loan. This will also raise your credit score by letting you completely pay off your credit cards. This instantly reduces your credit utilization ratio.

Medical Bills

Skip the medical credit card and its high-interest rates. You can use the equity in your home to pay medical expenses.

School Expenses

Perhaps you want to attend a school or vocational program that does not offer financial aid packages. Leverage the home equity you have to pay for it.

Vacation

Take that trip around the world with your spouse or family. You can see Paris and enjoy it using your home equity.

Tax Deductions

Use a cash-out refinance mortgage to leverage the interest deduction available if you use the money to buy, build, or renovate your home.

Two Kinds of Refinance

Rate-and-term refinance: You will get a lower interest rate and new loan terms, but only the same amount of money as you currently owe.

Cash-out refinance: You may get a lower interest rate, but you will also get at least 80 percent of your equity in the loan on top of your new mortgage. You must get your home appraised to determine the home’s value for the loan-to-value ratio which determines one variable in the formula to decide for what amount of loan you qualify.

Reasons to Avoid Using a Cash-out Refinance Mortgage

To be honest, there are just as many reasons not to take out a cash-out refinance mortgage. You should only use this option for financing if you absolutely must.

Foreclosure Risk

You open yourself to the risk of foreclosure because your home becomes the collateral. If you fail to make the payments, you lose your house. While it is possible to use the cash-out refinance loan to pay off your credit card debts, this is frowned upon in the financial world because you repay an unsecured debt with a secured one.

New Terms

You completely reset your mortgage. It will have different terms than the original. You could end up with a higher interest rate and you will pay new loan fees. Read all documentation carefully before you sign anything.

Closing Costs

Yep, it is just like when you bought your home initially. You pay closing costs again. This ranges from two to five percent of the mortgage.

Private Mortgage Insurance

Remember the private mortgage insurance (PMI) you had to purchase when you first bought your home? If you tap into more than 80 percent of your home’s value, you have to obtain PMI again. This costs between 0.55 to 2.25 percent of the loan amount annually.

Bad Habits

Start a good habit by working and silently earning money to pay your bills, rather than continuing a bad habit of using a loan pay off your debts while you continue to charge to your credit cards.

An Example of How a Cash-Out Refinance Mortgage Works

In this example scenario, your home has a value of $300,000, but you still owe $100,000. Your lender requires you to leave 20 percent equity, so you can only get a loan for $160,000 or 80 percent of $200,000 of your equity. You can typically obtain a lower interest rate on your mortgage.

Difference Between a Reverse Mortgage and Cash-Out Refinancing

A reverse mortgage lets you borrow against your home’s equity without mortgage payments. You accumulate the interest on a reverse mortgage and pay the full balance when you sell your home or move out. Your heirs must pay it when you die if you die before you have paid it off. That may sound morbid, but you must be aged 62 or older to qualify for a reverse mortgage and the home must be your primary residence. You also must have substantial equity in it or own it outright.

Difference Between a Home Equity Line of Credit and Cash-Out Refinancing

A Home Equity Line of Credit (HELOC) looks like a second mortgage on paper but works like a credit card. You can draw from your HELOC funds when you want to take money out instead of a mortgage that requires you to take funds out in a lump sum. For example, you can purchase the items for your wedding and use it again six months later to purchase a car. Unlike a credit card, you do not pay it back and re-obtain the credit. Once you use your credit limit, your HELOC closes. Until you pay it all back, your house is your collateral.

Remember Your Credit Score Still Matters

While your equity helps you qualify, you still need to know your credit score and it still needs to be about a 620. You can do a few things to raise your score if it is not quite up to par.

Pay your bills early or on time six months in a row. This increases your score by about 20 points.

Check your credit report for errors. Correct the errors by filing a correction request or requesting an investigation of any piece of data that looks questionable. If you do not recognize a credit line or show that the debt was paid, then you need to file a request with the credit bureau through which you obtained the credit report. Each credit bureau provides its own copy of your credit report. Different creditors report to different bureaus so they do not all have the same information.

Pay off your largest credit card debt, if possible. Make a lump-sum payment. This instantly reduces your debt-to-income ratio.

Your credit score is one of the biggest influencing factors that determine the interest rate you obtain. The higher you can get your credit score, the more easily you can obtain a lower interest rate. So, you need a high credit score to save money in the long run.

Specific Requirements for a Cash-out Refinance Loan

Each and every financial lender sets its requirements for refinancing qualifications. Most banks do have some typical requirements though. These include credit scores, debt-to-income ratio minimums, and required equity level.

A Credit Score Of At Least 620

If you just want a new interest rate and loan terms, you only need a credit score of about 580. If you want to get a cash-out loan though, you need a credit score of at least 620.

A Very Healthy Debt-To-Income (DTI) Ratio

You will need a DTI of less than 50 percent. The term DTI ratio refers to the amount of monthly debts and payments divided by the total monthly income.

Here is an example. Let’s say you pay $1,500 in housing and other bills each month. Your monthly household income is $4,000. To calculate your DTI ratio, divide $1,500 by $4,000.

1500/4000 = 37.5 percent

That means you would have the required DTI ratio of less than 50 percent.

Equity in Your Home

Your lender will require you to have a sizeable amount of equity to qualify for a cash-out refinance. Keep in mind that you cannot cash out 100 percent of the equity without a VA refinance. Plan accordingly since you will need to calculate ahead of time that 80 percent of your equity will cover the amount you need.

If it is so you can renovate your home, make sure you would have enough money to do the work by obtaining a few estimates from area contractors first. You may need a different type of loan to cover all of the work.

Getting Your Loan Approval

By now, you have probably prepped yourself rather fully. You complete your application for a cash-out refinance. It could take a few days before your lender decides whether to approve the refinance loan. It could take a few weeks. You may have to provide additional paperwork including bank statements, pay stubs and/or W-2s to prove your DTI ratio.

Once you are approved, you head toward your closing. A few days after it, you get the loan monies. Remember, you will still have closing costs, just as if you were purchasing a house again. Your loan check goes directly to the bank first since you have to pay off your original mortgage amount first. That includes the closing costs, real estate taxes, homeowner’s insurance and other items you may have bundled into the loan request. After that, the remaining funds belong to you.

Interest Rates

You can get a cash-out refinance with a fixed-rate mortgage or an adjustable-rate mortgage. Which one you choose depends on your financial situation. With respect to HELOCs, you will get a variable interest rate that changes in tandem with the U.S. Prime Rate. You can learn this rate before applying by checking The Wall Street Journal. As the index decreases or increases, so will your interest rate.

If that option does not sound attractive, you can also obtain a fixed-rate loan so that throughout the life of the loan, you will have one interest rate that will never vary.

In Conclusion

You have a number of options when it comes to refinancing your house mortgage. You might just adjust your interest rate and terms, or obtain a cash-out refinancing mortgage or take out a HELOC.  And you have a number of ways to fund household renovations, a new car or numerous other large financial needs. Start researching today at Loanry.

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No Closing Cost Mortgage: We All Like No Cost

Posted on | by Kevin Strauss

A no closing cost mortgage can be a bit confusing but it’s one of the residential mortgage types that are available to you. With this term, you may think that the fees are being paid by someone else or being waived completely. With a no closing cost mortgage, you are instead paying the closing cost with your loan balance instead of out of pocket. Not every bit of your closing costs will be able to get folded into your loan. But the closing costs you pay at the signing will be less than with a traditional mortgage.

How Does a No Closing Cost Mortgage Work?

There are two different ways that lenders structure no closing costs mortgages. The differences are subtle but the result is the same.

1. A lender can have you finance the closing costs. With this loan, the lender just adds your closing costs to the total loan balance. The monthly payments will be higher because you are now paying the closing costs with interest for the full length of the term.

2. The second option is that the lender absorbs the closing costs but you have a higher interest rate. This also means you will be paying more each month since your total interest costs will be higher over the life of the loan.

No matter how the lender does it, your monthly payment will increase slightly. You will pay less at closing time but pay more over the life of the loan.

What Are the Closing Costs?

Every house mortgage will come with some closing costs. Closing costs can be pretty high and typically range from about 2% to 5% of the loan amount. It may be helpful for you to calculate the closing costs for your particular situation so you can get an idea. If you are purchasing a $250,000 home then you may be paying anywhere from $5,000 to $12,500 at the settlement table for closing costs. The closing costs vary with your specific situation and location. Common closing costs include the appraisal cost, title insurance, tax service provider fees, taxes, and prepaid costs, such as homeowners insurance and property tax. Lenders can also add loan origination fees and application fees that can increase the closing costs.

There really isn’t a way to get a home without closing costs. You have the decision whether or not you pay them with cash when you are signing the loan or add them into the monthly mortgage payment. However, there are ways to reduce the closing costs by negotiating third-party charges and lender fees. It’s also possible to qualify for housing grants or closing cost assistance in some areas. Many of the grants can be free money and you don’t need to prepay them unless you move or refinance. If you have a military connection, VA loans have a limit on the closing costs that are allowed.

Pros and Cons of a No Closing Cost Mortgage

One of the main advantages of using this type of loan is the upfront savings. With this loan, it helps a borrower who is short on funds to close. This is helpful if you have made a large down payment and already paid out of pocket for your inspection and appraisal. You may still want to have some cash on hand to make upgrades and renovations once you move into the home. You may not need the cash on hand for home improvements but may need it for other expenses, such as medical expenses. Maybe you would rather have the peace of mind that having a large emergency fund brings.

Assigning a dollar amount to the savings will depend on the purchase price and closing costs. If paying for closing costs out of pocket would drain your cash then a no closing cost mortgage can be the obvious choice. However, you should weigh the original savings against what you may pay in interest over the loan when you have a higher rate. Even just a small fraction of a point can cost you thousands of dollars over the loan term.

An Example

Buyer A has a 4% rate, while Buyer B has a 4.25% rate. Both are purchasing a $250,000 home. Buyer A pays $179,674 in interest while Buyer B pays $192,746. This is a difference of $13,072. You then have to add this interest to the additional interest Buyer B is paying for the closing costs in the loan. Financing the closing costs can make it harder to qualify for a loan and the higher interest rates can mean a bigger monthly payment, which could push your budget. If your borrower qualifications are already tight then the higher interest rate could be an issue.

Debt to Income Ratio

Your debt-to-income ratio is the percentage of your income that is going toward paying your debt each month. Many lenders like to see a number of 43% or less. This figure will include what you are spending on your mortgage, as well as student loans, credit cards, and any other debts you have. If you are accepting a higher rate to pay for the closing costs then this will increase your monthly payment. When you are increasing your monthly payment, you have a higher debt obligation.

Even if you are okay with the extra interest and are getting a no closing cost mortgage, it doesn’t mean that you don’t have any money due at the table. Your lender may allow you to have a loan that covers customary closing fees, such as tax recording or escrow. However, you may still have to pay for things typically charged as closing costs, such as private mortgage insurance, transfer fees, or real estate taxes.

Is a No Closing Cost Mortgage Right for You?

If you are considering a no closing cost mortgage then you should think through the decision carefully. You should weigh the pros and cons and keep some things in mind. What is your motivation for getting the no closing cost loan? How much are you saving by not paying any closing costs upfront? What is the new loan rate and how much does it affect your monthly payments? How long do you plan to stay in the home?

The decision on whether or not a no closing cost mortgage is right for you is going to depend on how long you plan on staying in the home. If you are going to stay in the home for the full mortgage term then you will end up paying more for the closing costs, in the long run, thanks to the interest rate. However, if you plan on moving within a few years of buying then the financial impact of the higher interest rate may not matter as much. If you have short-term plans with the financing then not paying closing costs may be a good strategy. However, if you think of this home as your forever home, it’s probably best to pay closing costs upfront, instead of throughout the life of the loan.

Things to Consider With a No Closing Cost Mortgage

You can use different mortgage calculators to determine if a no closing cost mortgage is right for you but there are also some other things to consider.

Do You Have Enough for Closing Costs?

Many people are only eligible for a loan if they can agree to have a certain amount for a down payment. This can be the bulk of savings for many people and there just isn’t enough to pay for closing costs. Instead of having to dip into an emergency fund or savings, a no closing cost mortgage may be the only way that you can go through with the purchase. If this is the case, you have to decide if the price of this type of mortgage is right for you or if you should save more before you purchase a home.

How Long Will You Be in the Home?

This can help you determine the break-even point of how long you will be in the home with the added monthly payments. If closing costs are $10,000 then it may take you about 8.3 years to break even. After this, you are paying more than if you would have just paid the closing costs upfront.

Is There an Early Repayment Penalty Clause?

If you decide to go the higher interest rate route while thinking that you can pay off the loan ahead of the break-even point, you need to check if this is an option. Many mortgage contracts have a penalty for the early repayment of a loan. If your lender does have this, it could make it harder to avoid paying closing costs upfront and avoid paying even more over the course of the loan.

Examples of Closing Costs

  • Loan Origination FeeThe origination fee is so that the lender can prepare your loan. The average fee is about 1% of the loan.
  • Appraisal FeeDuring the appraisal process, a professional comes to the property to assess the value. Many appraisers charge $300 to $500 for their services.
  • Title FeesThe document you receive when you buy your home is the deed. The title shows that the seller legally transferred ownership of the property to you. Title insurance saves you from any errors in the records of your property or home.
  • Credit Report FeeLenders need to check your credit score and some lenders will pass the fee of checking the score back to you during closing. These fees can range from $25 to $50 depending on your state and your lender.
  • Prepaid InterestThe lender can ask that you pay the first month’s interest upfront during the closing. This will depend on the interest rate and that depends on the type of loan you have and your credit.
  • Discount PointsThese are optional and this is the fee you would pay the lender in exchange for a lower interest rate. Each point costs 1% of the total loan amount and you are able to buy multiple points.

Are There Other Ways to Get Rid of Closing Costs?

If you are hoping to avoid closing costs then a no closing cost mortgage may not be the only thing that will work for you. You can also take other routes to help manage some of the costs. One of the first things you want to do is ask the lender to waive some of the closing fees. It doesn’t hurt to ask but don’t expect too much. A more realistic solution can be to ask the seller to cover some of the closing costs by using a concession. A seller concession works by determining the closing costs you want the seller to pay.

If the seller agrees then that amount is added to the purchase price. You get a mortgage for the new purchase price and then the original purchase price is paid to the seller and the differences go to the closing cost. This is a legal way to roll the closing cost expenses into your loan, which wouldn’t normally be allowed unless you are refinancing. However, it’s still important to note that if you are rolling the closing costs into the loan, you are paying interest on them. When you increase the total loan amount, you are increasing the monthly payment as well.

Even with a seller concession, you still need to bring money to closing. The number of seller concessions you can have will depend on the loan type. If you want to ask the seller to pick up some of the closing costs, be sure to get help from your real estate agent. Agents are able to help with negotiations for seller concessions once your offer has been accepted.

Reducing Closing Costs

Besides a seller concession, there are ways to reduce the closing costs you are paying.

Compare Costs

Lenders have different fees. So it’s even more of a reason to go mortgage loan shopping. And see which lender offers the lowest closing costs. You can ask a lender to match lower closing costs you see offered elsewhere. There are some services in the closing costs that you are allowed to shop around for before committing. You don’t have to go with the provider the lender suggests if you can find a lower price.

Evaluate the Loan Estimate

Don’t just go through the loan estimate right away. Take the time to evaluate each item with the lender and question what each fee covers. This can be a good way to identify any unnecessary or padded fees. Keep an eye out for fees that have a similar name. This could mean the lender is likely charging twice for the same thing.

Negotiate Fees with the Lender

Once you have a handle on the fees you are paying then you are able to start negotiating. Ask for more vague fees to be knocked off the final total. Ask the lender to give you a closing disclosure form when it’s available. This details the final closing costs. Compare it to what was on the loan estimate and then ask the lender to justify the discrepancies.

Delay the Closing

You can minimize the prepaid daily insurance charges by closing toward the end of the month. Plan ahead and try to schedule your closing when you will have to pay less money upfront.

Save on Points

If you are buying in a low-interest rate environment then you likely don’t need extra points. Paying for points can add up fast so save that money and pay it toward the closing costs.

Alternative Lower Cost Loans

A no closing cost mortgage isn’t the only way to save money. And you may find that there are alternative loans out there to decrease the amount of cash you need upfront.

FHA Loans: These loans are offered by private lenders but are insured by the Federal Housing Administration. Under this program, you can have as little as 3.5% down on a home, saving you money on upfront costs.

VA Loans: These loans are offered to veterans and service members but may be loans that don’t require any down payment.

USDA Loans: These loans are backed by the U.S. Department of Agriculture and are designed for borrowers in rural areas defined by the agency. Under this program, borrowers may be able to take out a loan without making a down payment.

Final Thoughts

A no closing cost mortgage allows you to bundle many of the closing costs into your loan. This way, you end up paying more over the life of the loan in interest. But you don’t have to have a large amount of cash upfront. This may make sense for you depending on if you have the funds for closing, how long you are going to be in the home, and how the structure of your mortgage. There are ways to lower closing costs so you aren’t stuck paying a huge fee upfront. Or having to bundle it into the loan. There may also be alternative lower-cost loans that don’t require large down payments. So you don’t have to bring as much cash to the signing table. Always shop around for your mortgage options so you are picking the right one for your situation.

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Mortgage Broker Fees Explained: Home Loans 101

Posted on | by Kevin Strauss | Leave a Comment on Mortgage Broker Fees Explained: Home Loans 101

Shopping around for a house mortgage is an important step of the process. However, many people don’t have time to contact different lenders and look at all the little details so they choose to go with a mortgage broker instead. Before you decide to go with a mortgage broker, you should understand how mortgage broker fees work so you can make sure it’s the right decision for you.

How Do Mortgage Broker Fees Work?

Unlike a loan offer, a mortgage broker doesn’t work for a bank. Brokers are independent and must have a license. They will charge a fee for their service, which can be paid by you as the borrower or the lender. The fee will usually be a small percentage of the loan, which varies between 1% and 2%. If you are paying these fees, the dollar amount can be paid upfront or added into the loan. Mortgage brokers will need to disclose fees/ upfront and only charge what is disclosed. Every fee should be itemized and the mortgage broker will need to tell you exactly why each fee is being charged. Fee costs will vary depending on the number and size of the loans.

The Dodd-Frank Act put in new regulations on how mortgage brokers get paid and how the fees work. Prior to this, lenders could compensate brokers if the brokers could get their clients to agree to high interest rate loans and then sign off on the fees. There were few laws in place in order to protect clients. As a result of this, there is more protection for clients.

Now mortgage brokers can’t charge hidden fees, can’t tie the pay to your loans’ interest rate, can’t get paid for steering you in the direction of an affiliated business, and can’t be paid by both you and the lender. Unless you pay the cost upfront, mortgage brokers will generally not receive payment unless there is a closed deal.

What Does a Mortgage Broker Do?

When you go to the bank to get a loan, the bank offers you only the loans they carry. Since it’s only one institution, the loan options can be limited and may not suit your needs.

If you go to a mortgage broker, he or she can have a variety of loan options from various lenders. It’s the mortgage broker’s job to find the best mortgage rate tailored to you and this is why they charge mortgage broker fees. For example, if you need to get a house but can’t afford more than 5% down payment then your mortgage broker should approach lenders that have those terms.

Lender Paid Compensation

With a lender paid fee, a broker will connect a homebuyer to a mortgage lender and then the lender will pay the broker. Brokers can receive different compensation from different lenders. For a homebuyer, this structure can work out because they don’t have to pay for the broker when the deal is closed. However, you will still cover the commission indirectly, usually by paying a higher interest rate.

A drawback to this payment structure is that brokers can be biased by the compensation given by different lenders. A responsible broker should be offering the most affordable option, regardless of the commission they are getting paid. Unfortunately, not all brokers can be so honest and if the broker is going to prioritize their own profit then the homebuyer can end up paying a lot more than what is needed.

Borrower Paid Compensation

When a mortgage broker users a borrower paid fee schedule, the homebuyer pays for the broker’s services when they close on the loan. This payment will come in the form of an origination fee. The fee will vary based on your state of residence, your broker, the complexity and size of the loan, the housing market, fee caps, and more.

Borrower compensation also isn’t always in the form of origination fees and can just be another miscellaneous fee. Even if the borrower is paying this fee, it’s still advantageous to borrowers since it will remove the broker’s temptation to choose a more expensive lender who gives them higher compensation. The broker is more motivated to choose an affordable lender since they will be paid the same.

Which Mortgage Broker Fee Structure Is Right for You?

Regardless of the compensation structure, you will end up paying the broker’s fees in one way or another. The right fee structure for you will depend on whether you want to make the payment over the course of the loan or upfront. If you are able to have the money upfront then a borrower paid compensation option can be your best bet. This way you can avoid inflating your loan payments. You also won’t have to worry about whether or not the recommendations were just influenced by the broker’s desire for higher compensation.

Fee schedules can vary by different brokers. If you want to get a good deal, you will have to comparison shop. Be sure to look at the whole picture, including other lender fees and the interest rate for the best overall value. Brokers will not usually have a salary or any base pay. Brokers get paid by commission. If you see a broker advertising a no-cost loan, this should make you suspicious. Ask how a broker is being compensated if they aren’t disclosing that information to you.

Do You Need a Mortgage Broker?

Since there are mortgage broker fees, you may be wondering if you actually need the services of a mortgage broker. There are pros and cons to using their services but it’s helpful to know that mortgages can be complicated and it can be difficult to actually crunch all the numbers yourself.

Pros of Working with a Mortgage Broker

Brokers will give you all of your options. Many homebuyers just choose a loan from the bank where they already have a checking account but it helps to know all your loan options from a variety of lenders. Shopping around is the key to finding the best deal and a broker can deliver a more ideal loan than one bank ever could. Brokers are able to save you time. While it’s possible to compare all your options on your own, it can be time-consuming.

Brokers can handle all the negotiations with the lenders and many have relationships with certain banks that allow you to speed up the process. If you are in a rush then using a broker can help. Brokers will give you specialized attention and factor in your specific characteristics to match your application to the best lender for your circumstances. This can be helpful if you are an abnormal candidate but it can also help even if you do have good credit.

Cons of Working with a Mortgage Broker

No matter where you get the loan from, there will be fees. These can be in the form of appraisal fees, origination fees, and application fees. Some mortgage brokers can get some of the fees waived. However, brokers still charge their own mortgage broker fees. Mortgage broker fees are usually paid by you but in some cases can be paid by the lender. Whether it is added to the loan or paid upfront, it can still be a chunk of change. You need to know what your mortgage broker is charging you and weigh it against the benefits.

Mortgage brokers are independent from banks but they can still have biases. Some brokers can have a long history of dealing with a certain lender and favor them. In some cases, the lender may pay the mortgage broker fee, which sounds great unless the loan has undesirable terms.

Different Mortgage Broker Fees

Mortgage brokers may have different ways of naming their fees. Here are some that you may find.

Loan Origination Fees

Some brokers will add their fees to the origination fees by the lender. If this is the case, you want to ask for a breakdown. Loan origination fees will be a percentage of the loan.

Yield Spread Premium

This is a fee that lenders pay brokers for getting the client to agree on an interest that is higher than the going market rate. If you are going to choose this deal with your broker then check to see if the interest rate is competitive. If the broker is not charging you this fee then someone is paying this fee.

Upfront Fees

This fee will usually be charged if a borrower is looking for a jumbo loan. They are typically charged as a flat fee for setting up the loan. If the broker isn’t charging this fee then check to make sure the broker isn’t getting a yield spread premium from the lender.

Administration Fees

In some cases, a mortgage broker will add administrative fees to the standard fee. If you see these fees on your agreement, ask to have them be waived. Unless you are at high risk due to your credit profile, you can usually negotiate your way out of these types of fees.

How Do You Find a Mortgage Broker?

Mortgage broker fees are important but it should only be one factor when you are shopping for a broker.

The best way to find a broker is by asking relatives and friends for referrals and make sure they have actually used the mortgage broker. Learn what you can about the services, communication style, and approach to clients to make sure it’s the right fit for you. You can also ask your real estate agent. Some real estate companies do have an in-house mortgage broker as part of their service but you don’t need to be obligated to go with that individual or company.

There are some different questions you can ask. Ask how the application process works. One of the main reasons for using a broker is to make the home buying process easier. The best mortgage brokers can provide information on the mortgage application process, such as a comprehensive list of documents you need to complete an application. The broker should take into account your personal circumstances and ask questions about your situation so they can find the best solution. Find out how long the entire process will take. You want to know what to expect and if the broker can guarantee on-time closings. Check the track record of the broker. Does he or she have a good reputation? How long has he or she been in business? Read reviews and ask for references.

Mistakes You Should Avoid When Buying a House

There are a lot of mortgage tips out there but there are some mistakes you should avoid when getting a mortgage, whether you are a first-time buyer or looking to refinance.

Not Getting Pre-approved

Not shopping for a mortgage until you have already found your dream home can be a big mistake since you can be too late. Many sellers require a pre-approval notice be given with an offer and the process can take days or even weeks. It’s best to apply for pre-approval before you look at any available properties. When you do this extra step to prepare your finances, you are ready to submit an offer quickly when you find the perfect home.

Borrowing Your Max Amount

The pre-approval can help you figure out how much you can afford to spend. Many buyers believe that the amount on their pre-approval letter means that is the amount they can spend. Instead, it’s better to think of the loan amounts as a range. You may have the ability to borrow that much but you don’t necessarily want to go that far. It’s best to do some budgeting on your own. Look at your income and expenses in order to figure out how much you would be comfortable putting toward a mortgage each month. Use that number and play around with a mortgage calculator until you land on the price of how much home you should really be buying.

Overestimating Abilities

Buyers may be willing to take on remodeling and repairs in order to get a lower sale price. The repairs may require more money, time, and skills than buyers have. If you are looking at a fixer-upper property that will need a lot of care, make sure that you are honest about your abilities. Do you have previous remodeling experiences? Can you afford professional help? What will happen if there are unforeseen expenses and problems?

Not Reading the Fine Print

You should be reading everything you are signing in full. This is easier said than done so it’s easy to skip a section. This mistake can cost you a lot. When you are negotiating an offer, you need to know exactly what you are agreeing to before you sign. The mortgage broker fees are just one of the things you need to understand when getting a mortgage.

Not Getting an Inspection

Inspections are there for the buyer’s benefit and skipping inspections may not give you more bargaining power. If you choose to waive any inspections then you agree to take financial responsibility for any repairs that can come up, even if the problems pre-date your ownership. Weigh your options carefully if you decide to not get an inspection.

Forgetting About the Closing Costs

Budgeting to get a home isn’t just about what you can afford as the monthly mortgage payment and down payment. You also need to consider closing costs. Closings costs are paid at settlement and include the fees needed for the transaction. The exact amount you will pay at closing will depend on your property but it usually between 2% and 5% of the purchase price.

Conclusion

A mortgage broker can help you when it comes to where to shop for a mortgage and finding the best deal for your situation. Brokers do have mortgage broker fees that you will need to understand when it comes to getting the deal. Some of the time the lender pays mortgage broker fees and other times borrower pays these fees.

There are advantages and disadvantages of working with a mortgage broker that you will want to weigh out. You also want to make sure you are getting a broker that will give you the best deal and really help you with your application process. Whether or not you work with a broker, be sure to avoid some home buying mistakes and know the mortgage process in order to make sure it all goes smoothly.

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