When it comes to buying a home everything revolves around your mortgage payment. Whether you’re buying a new home or refinancing an existing loan, mortgage lenders are going to calculate the monthly payment for your new loan and try to understand if you can afford it based on your debt-to-income ratio. When going through the underwriting process mortgage lenders look at the PITI payment for your loan. This is the total monthly payment which includes the principal and interest payment for the loan, the monthly cost of property taxes and homeowners insurance, as well any mortgage insurance premiums and HOA fees.
The payment for your mortgage debt is called your principal and interest payment, or “P & I payment.” This is the bulk of your monthly payment, but it’s not all that’s required.
Mortgage companies take a lot of things into account when you apply for a home loan. A major factor in qualifying is your credit score. But what credit score is needed to buy a house?
This question actually breaks down into two parts:
Reverse mortgages, also called Home Equity Conversion Mortgages (HECM), solve a large problem for seniors. They convert a portion of their home’s equity to cash – allowing the home owner to access their equity without creating a new monthly payment or forcing the sale of the home. That all sounds great – but how does a reverse mortgage work? And more importantly what are the risks of taking out a reverse mortgage?
Let’s cover the basics of a reverse mortgage. We’ll dive into how they work using a fictitious couple as an example and explore a few scenarios that may occur after the close of the loan.
If you haven’t had a chance to read up on what a reverse mortgage is or why it’s useful, you can read our article here. Otherwise, let’s jump into the nuts and bolts of how these loans work.
A reverse mortgage, also called a home equity conversion mortgage (HECM), is a tool that helps retired seniors borrower money against the value of their home. Reverse mortgages are designed to secure a comfortable living situation for retirees, help cover major expenses (like health care costs) and potentially generate monthly cash for the borrower.
People aren’t great at seeing into the future. It’s actually a skill – its called affective forecasting. For whatever reason, we have a hard time considering our future self.
Daniel Gilbert studies this for a living. When it comes to estimating how much we’ll change in the future, or how happy something would make us, we are usually way off. He set up a really basic experiment with Prudential that shows how this inability to see into the future can affect retirement.
A reverse mortgage can be a great tool for retirees – they can also cause a number of issues. There are a number of pros and cons with reverse mortgages, also called home equity conversion mortgages (HECM loans), all of which you should consider before applying for the loan. It’s important to know exactly what you are signing up for – educating yourself now can help you avoid the pitfalls of a reverse mortgage.
This is part of our series on reverse mortgages. If you are interested in learning more, we’ve written a few great articles that can help
Baby Boomers are not prepared for retirement. Business Insider does a good job of describing the problem: few seniors have enough savings for retirement, and that’s consistent across generational groups, race, and political affiliation.
However, when looking at data from the 2013 American Housing Survey, one thing is clear – America’s seniors own homes. According to the survey, over 65% of senior homeowners own their house outright. On average, they carry a significant amount of home equity – nearly $130,000.
Considering these two facts together, I foresee a boom in reverse mortgages on the horizon. A home equity conversion mortgage (HECM), often called a reverse mortgage, allows retirees to cover large expense using home equity, increase their monthly income, or both. Some seniors may not have a choice in the matter.
If the use of reverse mortgages becomes widespread, it’s important to learn a little bit about how they work. This isn’t just the work of seniors. I fall into the millennial demographic and I consider this everyone’s problem.
If you’ve ever taken a loan or applied for a credit card, you’ve probably seen the term annual percentage rate or APR. When it comes to mortgages the APR is a percentage, it’s usually right next to the interest rate and looks awfully similar. You might find yourself thinking “what’s the difference between the mortgage interest rate and APR?” You’ve come to the right place, we’re here to help!
Let’s get this out of the way at the start – annual percentage rate (also known as APR) and interest rate are not the same things. This can be confusing because they’re very related, and they’re often presented together. They are very different numbers, however, and they serve different purposes.
When underwriting a mortgage, lenders try to understand whether or not you’ll be able to afford your new mortgage payment. They care more about your monthly debt payments than they do your total amount of debt. To understand your ability to repay your debt, lenders will check your debt-to-income ratio.
Also known as a DTI ratio, this is a monthly analysis of how much of your income goes towards paying your debts. For a mortgage to be affordable, there needs to be enough room in your monthly budget to cover your living expenses and still satisfy the debt payments for your credit cards, mortgages, and any other debts you might have. Read More
When it comes to saving for a home most people focus on saving for a down payment. While your down payment is a big part of determining your home affordability, it’s not the only component. Between closing costs, fees & taxes you can expect to pay an additional 2-5% of your home price at the closing table. In many cases, some or all of these closing costs must be paid at the time of closing your loan. Your cash to close your loan includes BOTH your down payment and any closing costs.
So what’s included in the closing costs? And how do you calculate your cash to close? Read More
The type of property you choose can affect your home affordability, the interest rate you qualify for, and what loan products are available to you as a borrower. Underwriting the property is just as important and underwriting the borrower applying for a home loan. When trying to understand if a property is the right fit for a particular mortgage there are three major considerations: occupancy, property type, and homeowners association dues.