3 Ways to Pay Off Your Mortgage Early

Paying off a mortgage early is a dream of many homeowners. By making larger payments on your home loan, you can cut years off of your loan term and save thousands of dollars in interest payments that you can use toward savings or investments. But in an economy that has seen decades of wage stagnation and increasing costs of living, it can often seem like an unattainable goal.

With some planning and initiative, however, there are ways to pay off your home loan before your term limit.

In today’s post, we’re going to talk about three of the ways you can start paying off your mortgage early to avoid high interest payments and save yourself money along the way.

1. Refinance your mortgage

If you’re considering making larger payments on your mortgage, it might make sense to look at refinancing options. Most Americans take out 30-year, fixed-rate mortgages.

If you can afford to significantly increase your mortgage payments each month, you could refinance to a 15-year mortgage. This will save you on the number of interest payments you’ll have to make over the years. But, it will also help you secure a lower interest rate since shorter term mortgages typically come with lower interest rates.

This option isn’t for everyone. First, refinancing comes with fees you’ll have to pay for upfront. You’ll have to apply for refinancing, get an appraisal of your home, and wait for the decision to be made.

But, you’ll also have to ensure that you can keep up with your higher monthly payments. If your income is variable or undependable, it might not be the safest option to refinance to a shorter term mortgage.

2. Make extra payments

An option that entails less risk than refinancing is to simply increase your monthly payments. If you recently got a raise or are just reallocating funds to try and tackle your mortgage, this is an excellent option.

Depending on your mortgage lender, you may be able to simple increase your auto-pay amounts each month, streamlining the process. Otherwise, it’s possible to set up bill-pay with most banks to automatically transfer funds to your lender.

3. Bi-weekly payments or one extra payment per year

Making bi-weekly instead of monthly payments is an option that many homeowners use to pay off their mortgages early. Bi-weekly payments work by paying half of your monthly payment once every two weeks.

The vast majority of homeowners make 12 monthly payments per year. But by switching to 26 bi-weekly payments, you can effectively make 13 full monthly payments in a year without seeing too much of a difference in your daily budget.

This doesn’t seem like much savings in the short term, but let’s take a look at how much you could save over the term of a 30-year mortgage.

On a 30-year fixed mortgage of $200,000 with a 4.03 annual interest rate, you would make a monthly payment of $958.00 and a bi-weekly payment of $479.

Over 30 years of an extra monthly payment, you could save nearly $20,000 on the total interest amount and pay off your mortgage almost 5 years early.

Increase Your Credit Score to Decrease Your Mortgage Rate

Everyone knows that their credit score will affect the mortgage they qualify for and the interest rate they receive. The details of how exactly those numbers are arrived at, however, are a bit hazy for the average prospective homeowner.

This confusion is due to a number of reasons. Chief among them is the fact that your average person isn’t well-versed in credit terminology or the variables that go into determining their credit scores.

In this article, I’m going to break down credit scores and credit bureaus, then discuss how each of them affects the mortgage rate you could receive. Then, we’ll talk about some ways you can boost your score to qualify for a better rate.

Anatomy of a credit score

Credit scores are determined by five main variables. In order of importance, they are:

  • 35%: your payment history on loans, bills, credit cards, etc.

  • 30%: your total debt amount for all of your accounts

  • 15%: length of your credit history (how long you’ve had open accounts for loans, credit cards, etc.)

  • 10%: types of credit you have used (auto loan, student loan, credit card… diversity of loans matters)

  • 10%: recent credit inquiries (such as taking out new loans or opening new credit cards)

To have a “good” (over 700) or “excellent” (over 750) credit score, you’ll need to focus on each of these factors. For most people, paying their bills on time over a long enough timeline is enough to get them into the excellent range.

But things happen in life. People forget to pay an important bill, they have financial emergencies, or they have to take out a loan for an unforeseeable expense.

The credit bureaus

So, who are the people that determine your credit score?

There are three main credit bureaus: Experian, TransUnion, and Equifax. Lenders will look at reports from all three bureaus to determine your rate. Due to the Fair and Accurate Credit Transactions Act of 2003, consumers are able to receive a free copy of their credit report from each bureau once per year.

Since then, companies like Credit Karma have made credit reports even more accessible. Users are able to check in on their credit as often as they want free of charge.

Since much of your credit score is out of your hands, at least in the short-term, what can you do to help boost your score over the next few months to increase your chances of getting a good interest rate on your loan? Two things.

Credit and mortgages

So, just how much of an impact does your credit score have on your mortgage rate? Having an excellent score can give you a full percentage point lower on your monthly interest rate.

One percent doesn’t seem like much, but over the period of a 30-year loan that can amount to tens of thousands of dollars that you could have saved if you had a better credit score. As you can imagine, having an extra $2,000 per year can be quite helpful to a new homeowner.

So, what can you do to boost your score?

Make corrections

Since you have access to free credit reports be sure to go through your detailed report a few months before you plan to apply for a mortgage. Report any harmful errors to help you increase your score.

Don’t apply for new credit

The period from now until you apply for a mortgage is an important one. If you make new credit inquiries (i.e., open up new credit cards, take out new loans, etc.), your score will temporarily decrease. Wait until after you sign on your mortgage to take out other loans.

How To Keep Your Finances In Check To Prepare For Buying A Home

There’s so much to consider when to comes to buying a new home. The first issue is that of your finances. You need to make sure that you’re preparing financially for the home search, and not just making your list of “wants” for a new home. It’s an exciting time when you’re purchasing your first home, but don’t let the excitement overtake your responsibility. Here’s some tips to keep you on the financial straight and narrow path when preparing to buy a home:

Be Mindful Of Your Credit Score

There’s many factors that can affect your credit score. Applying for new credit cards is one of those factors. Your credit score will drop a few points every time you have a new credit inquiry or open a new account. If you do get approved for new credit, lenders may have concerns that you’ll spend up maxing out your new approved credit limit on that account and possibly default on your loan.

Closing credit accounts is another factor that greatly affects your credit score. You may think that closing unused accounts is a good idea to help get yourself financially ready for becoming a homeowner. This isn’t true. Closing accounts lowers your amount of overall available credit. This means that your debt-to-credit ratio is larger. This lowers your overall credit score. You can certainly make these smart financial changes after you close on your new home.

Keep Records

When you move your money around, make sure you have records of it. Your lender will want to know about any unusual deposits and withdrawals. You’ll need to prove where your money comes from. All of the cash that you’ll be using for your home purchase should be in one account before you apply for a mortgage.

Keep Up With Your Bills

Don’t increase your debt. This will have an affect on the very important debt-to-income ratio which is one of the most vital aspects of loan approval. Also, be sure that you don’t skip your payments on bills. Your history of payments is incredibly important as well. Be sure that you continue to make full, on-time payments on all of your bills.

Keep Your Job

Even though a new job could mean a raise, or a better situation for you and your family, it could delay you in getting a mortgage. You’ll need to have your employment verified along with pay stubs to prove your source of income. Lenders like to see a longer employment history.

Keep Saving

The biggest up front costs in buying a home is that of closing costs and the down payment. Those must be paid at the time of closing. Lenders may even verify that your savings is on hand. Keep saving steadily and be sure to keep your savings in place.

3 Key Benefits of an Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) offers a home loan with an interest rate that may move up or down. Therefore, with an ARM, your mortgage payments may rise or fall depending on a variety of market factors.

For many homebuyers, an ARM remains a viable home financing option for a number of reasons, including:

1. Lower Interest Rate at the Beginning of Your Mortgage

An ARM enables you to purchase a home that may exceed your price range. As such, it frequently represents an ideal option for a young professional who expects his or her income to rise over the next few years.

With an ARM, you are able to lock in an interest rate for the first few years of your mortgage. For instance, with a 5/1 ARM, your interest rate will remain in place for the initial five years of your home loan. This means that your mortgage payments will remain the same for five years, then rise or fall based on market conditions.

Ultimately, an ARM may help you secure your dream home. In fact, an ARM often allows homebuyers to pay a lower interest rate at the beginning of a mortgage than the interest rate associated with many traditional fixed-rate mortgage (FRM) options.

2. Extra Savings for Home Improvements

If you choose an ARM with a below-average interest rate, you may be able to save extra money that you can use to improve your home.

For example, if you want to overhaul your residence’s attic or basement or add an outdoor swimming pool, an ARM may help you do just that. Because you’ll know exactly what you’re paying for the first few years of your home loan, you can budget accordingly and invest in home improvements that may help you boost the value of your home.

3. Affordable Short-Term Financing

If you intend to live in a home for only a few years, an ARM may be preferable compared to an FRM.

In many instances, an ARM will feature a lower interest rate than an FRM. As a result, if you take advantage of an ARM, you may be able to secure a great house at an affordable price. Plus, if you sell your home before your initial interest rate expires, you can avoid the risk that your interest rate – and monthly mortgage costs – may rise.

Homebuyers should evaluate both ARM and FRM options. By doing so, a homebuyer can assess his or her home loan options and make an informed decision.

If you ever have ARM or FRM questions, banks and credit unions are happy to respond to your queries. These lenders will enable you to evaluate your financing needs so you can acquire your dream house.

Furthermore, consulting with your real estate agent may deliver immediate and long-lasting benefits. Your real estate agent can offer home loan recommendations and put you in touch with local lenders.

Dedicate the necessary time and resources to assess your home financing options, and you can move one step closer to securing your ideal house.

Mortgage Terminology 101

Whether you’re a first time homebuyer or a seasoned homeowner, the terminology of mortgages can be confusing. Since buying a home is such a huge financial decision, you’re also going to want to make sure you understand every step of the process and all of the conditions and fees along the way.

In this article, we’re going to explain some of the common terms you might come across when applying for a home loan, be it online or over the phone. By learning the basic meaning of these terms you’ll feel more confident and prepared going into the application process.

We’ll cover the acronyms, like APRs and ARMs, and the scary sounding terms like “amortization” so that you know everything you need to about the terminology of home loans.

  • ARM and FRM, or adjustable rate vs fixed rate mortgages. Lenders make their money by charging you interest on your home loan that you pay back over the length of your loan period. Adjustable rate mortgages or ARMs are loans that have interest rates which change over the lifespan of your loan. You may start off at a low, “introductory rate” and later start paying higher amounts depending on the predetermined rate index. Fixed rate mortgages, on the other hand, remain at the same rate throughout the life of the loan. However, refinancing on your loan allows you to receive a different interest rate later down the road.

  • Amortization. It sounds like a medieval torture technique, but in reality amortization is the process of making your life easier by setting up a fixed repayment schedule. This schedule includes both the interest and the principal loan balance, allowing you to understand how long and how much money will go toward repaying your mortgage.

  • Equity. Simply state, your equity is the the amount of the home you have paid off. In a sense, it’s the amount of the home that you really own. Your equity increases as you make payments, and having equity can help you buy a new home, or see a return on investment with your current home if the home increases in value.

  • Assumption and assumability. It isn’t the title of a Jane Austen novel. It’s all about the process of a mortgage changing hands. An assumable mortgage can be transferred to a new buyer, and assumption is the actual transfer of the loan. Assuming a loan can be financially beneficial if the home as increased in value since the mortgage was created.

  • Escrow. There are a lot of legal implications that come along with buying a home. An escrow is designed to make sure the loan process runs smoothly. It acts as a holding tank for your documents, payments, as well as property taxes and insurance. An escrow performs an important function in the home buying process, and, as a result, charges you a percentage of the home for its services.

  • Origination fee. Basically a fancy way of saying “processing fee,” the origination covers the cost of processing your mortgage application. It’s one of the many “closing costs” you’ll encounter when buying a home and accounts for all of the legwork your loan officer does to make your mortgage a reality–running credit reports, reviewing income history, and so on.  

A Guide to VA Loans for Veterans and Servicemembers

Securing a mortgage can take years of planning and saving. Depending on credit score and financial history, it can be difficult for some people to secure a mortgage with a reasonable interest rate and down payment.

As a result, the U.S. government–at both the federal and state level–has created several programs to make the goal of homeownership more achievable for more Americans. 

These programs are designed to help a number of people, including first-time homebuyers, low-income families, people living in rural areas, Native Americans, and veterans and servicemembers of the United States military.

In today’s article, we’re going to be talking about “VA loans,” or loans guaranteed by the United States Department f Veterans Affairs.

What is a VA Loan?

When a bank chooses to approve someone for a mortgage, they have weighed the risks of that person’s ability to pay back the loan. The less certain a bank is that they will see a return on their investment with a borrower, the higher the down payment and interest rate they will require.

One incentive that the U.S. Department of Veteran Affairs offers its service members and veterans is the ability to receive a loan that is, in part, guaranteed by U.S. Government. That means that lenders can safely approve you for lower interest rates and down payments knowing that the money they are lending you is insured.

Who is eligible for a loan?

Loans guaranteed by Veterans Affairs aren’t strictly for veterans. Active duty service members, including National Guard and Reserve Members may also be eligible. In addition to service members, people who are or were spouses of veterans or service members might also be eligible for a VA loan.

Specific eligibility requirements can be somewhat complicated, so it’s a good idea to visit the eligibility page or contact your local Veterans Affairs office.

What are the perks of a VA Loan?

If you’ve spent a significant portion of your time serving in the military, there’s a good chance that saving for a home has been placed on the back burner. Shopping around for a loan with an affordable down payment can be daunting or impossible for many.

Fortunately, with a VA loan eligible recipients are able to receive a loan with a low down payment or even no down payment.

In a time when down payments can average 20% of the mortgage, that can mean a lot of money you won’t have to spend up from. For example, a home that costs $275,000 would have a 20% down payment of $55,000.

What are the fees?

This great deal does come with one catch. As with many loan assistance programs, there is a fee charged for the services. On top of the funding fee charged by the VA, there are other costs associated with buying a home.

These may include appraisals, inspections, credit reports, and more. Additionally, lenders may charge a 1% flat fee for those using a VA loan.

How to Secure the Best Possible Mortgage Rate

Securing the best mortgage for your home may seem challenging, particularly for those who are first-time homebuyers. Fortunately, we’re here to help you get the best possible mortgage rate, regardless of the real estate market.

Here are three tips that you can use to get the best mortgage rate at any time:

1. Find Ways to Improve Your Credit Score.

Your credit score likely will influence your mortgage rate. However, those who track their credit score closely can improve this score over an extended period of time. That way, when the time comes to secure a mortgage for a new home, you’ll be in great position to get the best mortgage rate possible.

Try to check your credit score regularly. You can do so quickly and easily, as you’re entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies (Equifax, Experian and Trans Union).

To improve your credit score, focus on paying off any outstanding debt. This will help you enhance your credit score without delay.

2. Take Advantage of a Shorter-Term Mortgage.

Although you may consider a variety of mortgage options, a shorter-term mortgage may allow you to pay a lower mortgage rate for a shorter period of time.

Remember, just because you choose a 15-year mortgage over a 30-year mortgage does not mean you will wind up paying twice as much for your mortgage payment each month.

For example, selecting a 15-year fixed-rate mortgage over a 30-year fixed-rate mortgage may prove to be a viable option for many homebuyers.

A 15-year fixed-rate mortgage will have higher principal and interest totals than a 30-year counterpart, while the insurance and tax fees associated with both types of mortgages will remain the same.

3. Look at All of the Lending Options That Are Available.

It sometimes can be overwhelming to look at all of the banks, credit unions and other lending options that provide mortgage assistance. Diligent homebuyers, however, will dedicate the time and resources necessary to explore all of the lending options at their disposal to make an informed decision.

Ideally, you should try to get multiple quotes from a variety of lenders. This will enable you to see exactly what each lender has to offer and improve your chances of making the best decision possible.

Lastly, don’t forget to lock in your mortgage rate in writing. By doing so, you’ll be able to verify you have the mortgage rate you like and the loan you need to secure your dream home.

Understanding the ins and outs of landing the ideal mortgage rate can be difficult. And if you ever have concerns or questions along the way, your real estate agent may be able to point you in the right direction as well. Because this agent boasts comprehensive real estate sector experience, he or she may be able to provide guidance and tips to ensure that you can find a reliable lender and land a great mortgage rate.

Find a mortgage rate that works for you, and you may be able to save money over the life of your mortgage.

Why You Should Get Preapproved For A Mortgage

When you’re shopping for a home, there’s so much to consider. Between the questions of what neighborhood you should live in and what style house you like, you need to think of the most important thing: finances.

When you think that you’re financially ready to buy a home, you often will get the notion that it’s a good time to just start shopping. There’s several steps that you must take first before you start shopping for a home. One of the first steps you should consider taking before you make the leap into home ownership is to get preapproved.

While buyers still tend to skip the preapproval process, doing this can help you immensely throughout the home buying process. While it may seem an insignificant and kind of boring step, getting preapproved is important for your finances. It may even help you to land in a home that you love faster.

It’s actually detrimental to make an offer without a preapproval, because some lenders won’t accept an offer without one. Many realtors verify and require that offers come along with the stamp of preapproval.

What Does Getting Preapproved Involve?

You may have heard of a prequalification. This is much different from being preapproved. Prequalification involves buyer provided information, just to get a sense of how much they can spend on a home. Preapproval involves credit scores, bank statements, tax returns and more. This process states exactly how much lenders will be willing to give to the borrower. All of the documents needed for preapproval are the same exact documents needed for a mortgage. This helps you as the borrower prepare ahead of time as well.

These are some of the kinds of documents that you’ll need for preapproval:

Pay stubs
W-2s from the previous year
Federal tax returns from the past two years
Two Months of Bank Statements from all of your accounts
A credit report

While a preapproval is only one step in the long process of buying a home, it speeds up the later steps of securing a mortgage. The process also helps buyers face their financial reality. Don’t put off the important process because you fear that you won’t be approved for the amount that you need. It’s also common for buyers to assume that because someone they know has been approved for a certain amount of money that they will be able to get that same loan amount as well. This isn’t always the case and another great reason to get preapproved.

Errors On Credit Reports

Often, there are errors on credit reports. That’s why you need to check them often. If you have some errors on your credit report, getting preapproved is a great way to check if there are any errors and give you time to fix them before you apply for a mortgage.

Mortgages Made Easy for the Self-Employed

Getting a mortgage these days can be tough and it is even tougher for small-business owners. Potential self-employed borrowers usually have variability in their income streams. Today, banks are requiring more financial documentation from all buyers, and self-employed borrowers tend to face more scrutiny.

Small-business owners may have a smaller income because they are typically knowledgeable about tax deductions and credits. This often reduces the amount of taxable income they have. Reducing the amount of taxable income on your tax returns means to the lender there is less income to qualify for a loan.

There are ways self-employed borrowers can increase their chances of getting a home loan, however. Here are a few tips:

What is the lenders history?

Find out if the lender has a history of working with self-employed borrowers. Self-employed borrowers should focus more on finding a lender that will understand their situation rather than shop the loan rate. There are individual loan officers who will be able to think out of the box or come up with solutions. The lender you choose is key.

Consider portfolio lenders.

Portfolio lenders have more flexibility in originating loans because they don’t have to sell the loan to Freddie Mac or Fannie Mae. Portfolio lenders hold their own loans. That makes a big difference in their ability to loan. Another option may to consider credit unions. Many credit unions also keep a good portion of loans on their books.

Boost your income.

Show you make as much money as possible on your tax return. You might need to amend your tax returns. Some lenders will look at a loan application again if they have sent in amended returns to the government. Sometimes by rethinking deductions and credits on income taxes, a borrower can increase his qualifying income. Of course, with this strategy, the borrower would also face a new tax bill.

What is a Jumbo Loan?

Are you looking to buy a bigger home? If you are looking to make the move a jumbo mortgage might be right for you.

A jumbo mortgage is a home loan with an amount that exceeds conforming loan limits set by the Office of Federal Housing Enterprise Oversight (OFHEO) or better known as Fannie Mae and Freddie Mac. Currently, the loan limit is $417,000 in most parts of the United States, but can increase to $625,500 in the higher cost areas. OFHEO sets the conforming loan limit size on an annual basis.

Jumbo loans have slightly higher interest rates because they carry more credit risk.