Why Do I Need To Get Preapproved For A Loan?

Q: I’m in the market for a new home, and everyone I talk to, from friends to financial Home with Sold Sign in frontadvisors, suggests I get preapproved for a mortgage before I start house hunting. Why is this so important?

A: You’re actually on the receiving end of great advice. When looking to take out a large loan, whether it’s for purchasing a home or buying a car, having that preapproval in hand before you start your search is crucial.

Depending upon the type of loan, the process of getting preapproved for a loan can take time. The lender will begin by asking for your financial history and other personal information. If you have a co-borrower, the lender will need this information about them as well.

You’ll be asked to provide your Social Security Number (SSN) and for permission to allow the lender to access your credit report. If the information you provide is satisfactory, as is your credit report, the lender will begin constructing the details of your loan. When they have determined how large of a loan you will be eligible for, they will grant you a preapproval letter. The letter will also detail your estimated interest rate on the loan, though that will sometimes also depend upon the specifics of your purchase, such as the year and condition of a car or appraisal on a home.

Having your preapproval letter will shorten the loan process significantly when you’re actually ready to take out the loan. However, that is only a small benefit of getting preapproved before you start “shopping.”

Here are some other advantages of getting preapproved for a loan:

1.) You’ll know what you can afford

Your preapproval will tell you exactly what you can afford. This way, you’ll avoid being disappointed later when you have your heart set on a certain home only to be told you can’t swing it financially. Knowing how large a loan you’ll qualify for will simplify your search and get you into your new home or car sooner.

Be sure to calculate other monthly costs, such as property taxes, home insurance and increased auto insurance rates when determining the actual amount of money you’ll need to shell out each month.

2.) Don’t get taken for a ride

Picture this scene at a car dealership:

Salesperson: So, you’re here to buy a new car! What are you looking for?

You: Well, I want something with a smooth ride and –

Salesperson: Got it. And how much of a monthly payment can you afford?

You: Weeelll, I think I can swing up to $200 a month, but I’d rather something closer to $150 if you —

Salesperson: Step right this way please! Let me show our new line of Camrys at just $205 a month! They have the most luxurious feel and the ride is smooth as butter!

What happened here is, quite simply, a salesperson looking to make the most money out of a customer. When you’re unsure about how much you can spend, the dealer will capitalize on your uncertainty and try to sell you a car that just barely skims the maximum amount you’ve decided you can afford.

Also, when you name a monthly payment you can manage, the dealer will work with that number instead of talking about the price of the car. They may try to inflate the payment with charges and fees just because they fit within your named payment amount.

In contrast, when you show up at the dealer with a preapproval in hand, the salesman will have to show you cars with price tags that fit within your loan amount.

Don’t get taken for a ride; get your preapproval before you set foot in the dealer shop!

3.) Be taken seriously

A car dealer will take you a lot more seriously when you wave that preapproval in their face, since having that information in hand shows you’re ready to buy.

When purchasing a home, the same rule holds true. A realtor will be able to assist you more efficiently when you know exactly how much house you can afford. They may also give you better service since you’re showing that you’re serious about buying a home. In fact, many realtors refuse to show homes to buyers who don’t have a preapproval in hand.

4.) Know you have financing you can trust

When you show up at the car dealership with a preapproval from your credit union, you know the deal is in your best interest. Many auto shops have access to several financing options and they’re almost always going to put customers into financing options that are in their own wallet’s best interests.

5.) Purchase your dream home

A preapproval makes you a valuable customer. It also helps you stand out from the pack. If you’re looking to buy a home in a competitive market, you may be competing with several other buyers for the same house. Having your preapproval will give you a leg up on bidding wars. A seller will be more eager to work with someone who’s already started the mortgage process. You can end your search sooner with a preapproval!

In the market for a new home or car? Don’t forget to call, click, or stop by Destinations Credit Union to hear about our fantastic rates on mortgage and auto loans!

Your Turn: Based on your own experience, why do you think it’s important to get preapproved for a loan? Share your thoughts with us in the comments!

SOURCES:
http://www.investopedia.com/mortgage/pre-approval/ 

https://www.nerdwallet.com/blog/loans/advantages-of-getting-pre-approved-for-a-car-loan/
https://www.google.com/amp/s/www.zillow.com/mortgage-learning/pre-approval/amp/

The Pros And Cons Of Bridge Loans

Buying your second home is nothing like buying your first. This time around, you’re bridge loancoming to the table with the experience of being a homeowner. You know what to expect throughout the buying process, you know what to look for in a home and you know what you can afford. After all, experience is truly the best teacher.

Another major difference this time around is that you’re likely counting on proceeds from the sale of your first home to help cover the down payment and the closing costs of your new home.

But what happens if selling that home is taking a bit longer than you’d anticipated? What if you need to move immediately because of a job opportunity, or because there’s a great home on the market that will be snatched up if you don’t grab it quickly? How are you going to come up with the funds if your own home isn’t selling quickly?

This is where bridge loans come in. A bridge loan provides temporary financing until more permanent financing can be obtained. When taking out a bridge loan, it’s understood that once permanent financing is in place, some of those funds will be used to pay back the bridge loan. Bridge loans are most commonly used to help the borrower span the gap between the sale of one home and the purchase of another.

Terms vary tremendously, so take the time to talk with your loan officer. Some will completely pay up the outstanding mortgage on the old home, while others will only pay off a portion of it, leaving the borrower with two mortgages, or simply lumping the loans together.

Bridge loans understandably have shorter terms than other loans, and are typically more expensive as well. Also, a lender will usually only extend a bridge loan if the borrower agrees to finance their new home’s mortgage through the same institution.

Bridge loans seem to provide the ideal solution to a less-than-ideal situation: You can now house-hunt freely and without waiting for your current home to sell. However, bridge loans are not as simple as they may seem.

Let’s take a look at some of the pros and cons of taking out a bridge loan.

Pros

1.) Freedom to house-hunt

The most obvious benefit of taking out a bridge loan is also the most significant. With this financing in place, you’ll be free to buy the home of your choice, without being bound by the sale of your previous home.

2.) Short lending term

Another big benefit of bridge loans is their short lifespan. Bridge loans usually run for six-month terms, though they can span anywhere from several weeks to several years. In contrast, most conventional loans are structured around a long payback term that can last for decades. The longer the payback term, the more likely it is that the borrower will suffer from a financial setback, which makes repayment challenging or impossible.

This, in turn, can give rise to further financial challenges as the borrower is hit with various penalties and fees, or is forced to take out another loan. The short payback term of bridge loans assures that this loan will not be a source of financial stress for years to come.

Cons

1.) Total debt increases

Any loan a buyer takes out will cause their total debt to climb. Sometimes, a bridge loan will split the purchase of the second home into two mortgages, leaving a buyer with three monthly mortgage payments; one from their previous home, and two from their new one. Other times, the buyer will be left with two mortgages to pay, which can also be a strain on their budget. In either case, an increase in debt means an increase in monthly financial obligations.

2.) High interest rates and fees

To compensate for their short lifespans and the amount of work the lender has to do for them, bridge loans generally have high interest rates, generally reaching between 8.5 – 10.5% of the total loan. There are also various fees involved, such as closing costs, origination fees and more.

3.) Risky contingency

Bridge loans are usually taken out with the understanding that the sale of your existing home will allow you to repay the loan. But what if your house doesn’t sell before the loan is due? This can happen even if you have an interested buyer – they may not get the financing they need or they may back out. This will leave you with a huge debt on your hands that you can’t afford to repay.

It’s important to speak to a Realtor about market conditions before taking out a bridge loan, even if you think you have a buyer. Make sure the odds are in your favor and that it is likely your home will be sold on time before committing to a loan that is contingent on its sale.

If you really need the funds from the sale of your home before the transaction is finalized, but the thought of taking out a bridge loan makes you uneasy, you may want to consider other options. You can take out a HELOC, borrow against a 401(k) plan or take out a loan secured by stocks, bonds or other assets.

And of course, don’t forget to call, click, or stop by Destinations Credit Union for guidance throughout the process of buying and selling a home.

Your Turn: Have you bought a second home recently? How was the purchase different than your first time around? Share your experience with us in the comments!

SOURCES:
http://www.bankrate.com/finance/mortgages/bridge-loans-ease-the-transition-from-one-home-to-another-at-a-cost.aspx 
https://en.m.wikipedia.org/wiki/Bridge_loan 
https://www.thebalance.com/what-are-bridge-loans-1798410 
http://m.finweb.com/real-estate/the-pros-and-cons-of-bridge-loan-financing.html  

Adjustable Or Fixed-Rate Mortgage – Which Is Right For Me


If you’re mortgage shopping, you may be overwhelmed by the number of options. Dozens of lenders, each with their own rates, terms, conditions and costs, can make the decision feel that way. But it doesn’t have to be that difficult! The choice of which mortgage to go with starts with a simple question: fixed-rate or adjustable? There are many different terms, points and rates associated with each, but narrowing your search to a category can really simplify the process.

As an overview, fixed-rate mortgages are the more traditional choice. You and a lender agree to a length of time (or term) and an interest rate. That interest rate stays the same throughout the term of the mortgage.

Adjustable Rate Mortgages (ARMs) are a slightly newer offering. These loans have a segment of time during which the interest rate is fixed. After that, the rate is determined by an economic indicator. If you’ve seen the notation “ARM 5/1,” that means an it is an adjustable rate mortgage with a set rate for the first five years of the loan, and then a new rate every year after that. There’s more to it than that, but this basic explanation will get us started.

So, which is the right one for you? The answer really depends on several factors.

How long do you plan to own your home?

One thing you’ll notice right away when shopping for mortgages is that ARMs have lower interest rates, sometimes by as much as 0.50%. On a $200,000 mortgage, that saves you as much as $70 a month! The initial rates are lower because the lender is taking on less risk. With a traditional mortgage, if rates go up, the lender is stuck with a lower return. With the ARM, you’re agreeing to pay more as the lending market offers more.

That doesn’t matter as much if you’re not planning on owning your home five years from now. If you’re in a line of work that moves you from place to place every few years, taking the monthly savings on an ARM and sticking it in your 401(k) is a good move. If you intend to buy the house, make some improvements and resell it for a profit, the ARM will lower your costs while you’re living there.

There’s still risk involved in the ARM even if you plan to sell the house. If demand drops in your neighborhood, you may have trouble finding a buyer. In that case, you’re stuck with the loan and a likely increasing interest rate. If you can find a buyer, but not for the price you paid for the house, the difference between the sales price and what you owe will follow you around, draining your monthly income until you finally get it paid off.

On the other hand, if you’re in your house for the long haul, the savings are likely to get wiped out once the adjustment period starts.  Interest rates are at historic lows right now, and will likely increase in the next five years. The half-point savings in interest rates will seem trivial compared to the several-point increase you’ll face after the initial period.

How much can you afford to put down?

An ARM can be easier to qualify for and provides you with an interest rate that you might not get without a 20% down payment. If you don’t have enough cash on hand to make a large down payment, an ARM might give you some time to build equity. Refinancing your mortgage after the initial period is over can put you in a better position. You can use the equity you have in your home, plus whatever you’ve saved during that time, to put more money down and get a better fixed-rate mortgage.

Of course, this strategy is not without risk either. If the value of your home decreases, you may have a difficult time refinancing for the balance of the loan after the initial term. This would leave you stuck paying the higher interest rates of the ARM. If you can’t make the payments, you still lose your house, regardless of the equity you’ve established.

If you’ve got the cash to make a 20% down payment or are buying in an up-and-down housing market, a fixed-rate mortgage provides you with a good rate that you won’t need to worry about. Your mortgage payment stays the same from month-to-month and there’s no uncertainty about what global economies do in the interim.

What’s your risk tolerance?

At the core of the choice between fixed-rate and adjustable-rate mortgages, is a quick and dirty shortcut. Fixed-rate mortgages are the safer, more conservative choice. Adjustable-rate mortgages are the riskier alternative, but offer the possibility of savings.

If you have the room in your budget to accommodate a potentially fluctuating mortgage payment and enough security in your work, savings, and other financial priorities, an ARM does offer the potential to lower your monthly payment. If you’re confident that the value of your home will increase faster than interest rates, an ARM might be a wise investment.

If you’d rather have the security of a fixed-rate mortgage, there’s quite a bit to be said for that. If you’ve found the house you want to raise a family in, the stability of a fixed-rate mortgage may be desirable. If you’re trying to find the simplest path to homeownership, you may find the simplicity of the fixed-rate mortgage very appealing. It might be easier to be financially aggressive in other aspects of your life, and not put the place where you live at risk.

Brextastrophy Or Brexportunity? What The Brexit Vote Means For Homebuyers And Homeowners



The recent decision by the United Kingdom to leave the European Union has led to serious turmoil in stock markets around the world. Many investors are panicking and selling off stocks in a hurry. Smart investors, though, can be prepared to ride out the storm by making a few savvy moves.

In times of trouble, people tend to look for the safest possible investment. These generally fall into three groups: stock in big companies, bonds of financially stable governments and real property. That last category should be of interest to homeowners and house hunters alike, as the recent Brexit vote is likely to be a boon to real estate markets everywhere outside the United Kingdom.
It’s not that people are flocking out of the UK and looking for houses to buy. Rather, many people are looking to invest in real estate, but the British pound sterling is experiencing a loss of value. On the other hand, for people looking for real estate either as living space or as an investment, the time has never been better.
Let’s take a look at how this could affect each group individually.

Real Estate Investors

Owning rental property is a big wealth-building strategy component for many people. Whether you serve as landlord yourself or turn the property over to a management company to handle the day-to-day operations, rental income is as close to passive as it gets. You get the rent minus expenses, plus the appreciation of the property.

One of the biggest costs associated with buying rental property is the mortgage. Very few landlords own rental property outright. More often, they mortgage the property and use the rent to cover the mortgage payment.

Interest rates have been historically low as a means of economic stimulus for quite some time, so costs have already been modest. With the uncertainty created by the Brexit vote, most experts expect the Fed to avoid raising those rates. Mortgages will stay cheap into the foreseeable future.

Moreover, investors seeking to invest in a more diverse real estate portfolio are buying mortgages at an accelerated rate. They’re doing so because they’re seeking a safe investment, and prime mortgages (loans made to people with good to very good credit) represent a pretty safe place to park money. Since there are more dollars available to lend, the cost of those dollars (the interest rate) will drop further.

If you’ve been on the fence about buying an investment property, the time could be right. Low rates and rising property values could make it a valuable part of your retirement strategy.

Homebuyers

Most of the reasons why home ownership makes sense for investors also make sense for people looking to buy a home for themselves. There’s one more factor, though, that could tip the scales in favor of buying a home.

One of the other effects of increased mortgage availability is an easing of mortgage requirements. The door is open for borrowers with less-than-optimal credit scores. Many of these people have been scared away from the mortgage market because they fear they won’t be approved. The increased availability of credit, though, may make mortgages easier to get. Working through a community lender like Destinations Credit Union can offer borrowers the personal guidance they seek along with access to loan options that are not always widely available on the open market.

Homebuyers with good or very good credit may be able to up their price range a bit. If you’ve been on the market for a while and had little success, it may be time to take another look at payment projections and re-evaluate how much house you can afford. With interest rates approaching 3-year lows, you may be able to find an affordable house payment on a more expensive house.

Homeowners

If you’re a current homeowner, these rates should be attractive to you, as well. If you’re thinking about selling your home, now’s a great time. Cheap loans and rising rents will continue to push more people into the housing market, and more demand means prices are sure to continue to increase. Now might be a good time to get an estimate or test the waters to see how much you might get for your home.

If you’re happy with your home but want to make some upgrades, getting a home equity line of credit to do those remodels is another way to take advantage of low rates. Remodeling a bathroom or kitchen using a home equity loan could help you take advantage of the surging real estate market, and it could make your house a happier home in the meanwhile.

If remodels aren’t in the cards right now, it may be a wise opportunity to refinance. If you got a loan when you had less than perfect credit but have been making payments consistently, you could qualify for a significant savings in your monthly payments. The same is true if your mortgage is more than 10 years old. Refinancing now could lock in some serious savings and take some pressure off the budget each month.

You can probably save money on your homeowner’s insurance too.  If you haven’t shopped around for a while, you might want to see what switching can save you.  Our partnership with TruStage and Liberty Mutual offers great discounts to our members.  Liberty Mutual was one of the companies cited in The Simple Dollar’s Blog for the cheapest home insurance.  Get a quote and put some extra money in your pocket.

Don’t buy into the hype. The Brexit vote is not a time for panic. It’s not a time to stuff your money in a mattress. It’s a time to make smart moves to protect your investments, when disciplined investors can significantly improve their position. You can do it, and Destinations Credit Union can help!

SOURCES:

Your Down Payment On A House

Q: I’m hoping to buy a house in the next few months. How much of a down payment should I have saved up?
A: When you think about your down payment, balance is key. If you think you might sell the house within just a few years of ownership, having a large down payment exposes you to greater risk if real estate prices fall. However, a larger down payment can also mean lower monthly payments.
The value of $1,000 is pretty hard to quantify, especially in a real estate market that might have $30,000 homes and $300,000 homes. Instead of thinking about the amount of money, think about a percentage of the value of the house. When making these decisions, here are three questions to ask yourself.
Can I put 20% down?
A down payment of 20% is something of a magic number. With 20% down, borrowers are no longer responsible for carrying Private Mortgage Insurance (PMI). PMI is a protection most lenders require to cover their investment in you should you not repay your loan. The premiums for this insurance are paid by you, either as a lump sum at closing or included with the mortgage payment, and thus make your monthly payment higher. PMI usually costs between 0.5% and 1.0% of the value of the loan, though prices vary based upon several factors. Using this model, on a $100,000 loan, expect to pay around $83 more per month.
20% is also a magic number for interest rates. Lenders see a 20% down payment as a sign of a responsible borrower. Meeting that down payment amount means the borrower typically has a lifestyle of spending responsibly and saving money, both of which are signs of a solid credit risk. Regardless of your credit score, a 20% down payment can help save on the costs of the loan.
Can I get help to get there?
There are a wide variety of home buyer assistance programs designed to help people reach that 20% threshold. These come in two forms: grants and delayed repayment loans. They’re offered by housing departments at all levels of government and frequently go unused because home buyers don’t think they qualify.
Grants are no-strings-attached checks that you have to use for a specific purpose, in this case, the down payment on a home. Many are limited by income level or region of purchase, but they are definitely worth exploring. Even more options are open to first-time home buyers, former or current members of the armed forces and people in public service-oriented professions.
Delayed repayment loans are similar. These are second mortgages held by an organization for a portion of the total cost of the house. They do not begin accruing interest until after you’ve paid off your primary mortgage, and some of them are forgiven after you’ve owned the home for a certain amount of time. These are available from housing authorities and private organizations all over the country.
One important note: While you can get a lot of help, you cannot use another loan, even one from your parents or relatives, as part of your down payment. Doing so is a federal crime and can get you in serious trouble! In the best case, lenders will be suspicious of large deposits you can’t explain, and may even refuse to issue the mortgage loan.
If you can’t get to a 20% down payment, there are several options. You could make the smaller down payment, understanding that you’ll have to pay higher interest rates and PMI. You could also look at houses in lower price ranges. You might also decide to postpone home ownership and focus on saving so you can get there the next time around.
Should I go over 20%?
Making a very large down payment is an investment. Think of your mortgage like a savings account. You make an initial “deposit” when you make a down payment. A portion of your payment goes into your account each month while the rest goes to cover interest, which is the price you pay for living in your savings account. The return on your investment in the large initial down payment is the lower total interest you’ll have to pay.
When deciding if you want to put more than 20% down, think of your mortgage rate like the rate of return. If you can put another $1,000 down, that’s $1,000 less you’ll need to borrow. If your interest rate is 4%, then the return on that investment is $40 in interest you don’t have to pay. On the other hand, you don’t have that $1,000 to invest somewhere else now. If your retirement account earns 5%, then that same $1,000 will earn $50 if invested there. Making the larger down payment will end up “costing” you $10 in the long run.
As with any other investment decision, weigh the pros and cons. It may have a comparatively low rate of return, but the risk is negligible. Unless the value of your house drops dramatically, you won’t lose your down payment. It can be a smart move to put down as much as you can, but make sure to leave your retirement fund and emergency fund intact.

How Boomers Can Retire The Way Millennials Work


You may have noticed a surge in the number of ponytails and slightly exposed tattoos around the workplace water cooler. Or perhaps you find you now need to get to the office earlier if you plan to land a space for locking up your bike. Maybe you’ve had to make peace with the fact that the kid in your meetings who doesn’t look old enough to ride solo on a roller coaster is not an intern, but an actual employee!  Face it, millennials are a force in the American labor force. In fact, by 2020, they’ll represent more than half of all workers in the country.  In spite of what you’ve read, those pesky youths can actually teach us experienced folks some important lessons about money, some of which might make you rethink part of your retirement planning.  Here are some of the things they’ve figured out that the rest of us might want to consider:

1.)  Don’t be afraid to move.  USA Today recently reported that one-third of all employees in America are freelance, by-the-job workers.  In many cases, these jobs are being handled by young people, many of whom commute over Wi-Fi from home or a coffee shop, instead of 45 minutes of bumper-to-bumper on I-695.  In fact, many of those young people would need an airplane ticket to come into the office.  An increasing number of young people live a “digital nomad” lifestyle, living in the cheapest cities and working wherever they feel most inclined.  It’s easier to make ends meet living in San Antonio, where the median home price is $150,000, than it is in San Francisco, with a median home price six times as high.
The same logic works for retirement.  There’s no reason to keep living in a pricey neighborhood just because it’s a convenient drive to the office you’re not visiting any longer.  In fact, many retirees are following the digital nomads abroad, retiring to Asia and Central America, where the cost of living is pennies on the dollar.  In Belize, for example, a couple can retire with a budget of around $13,000 per year. That’s below the poverty line in the United States! How many flights could you buy for the grand-kids with that kind of savings? Would they love to visit you on the beach?  You bet they would!
 2.) Know what to rent … know what to buy.   It used to be that every young person’s living room looked the same:  futon from the curb, coffee table from Ikea and an enormous corner bookshelf filled to the brim with DVDs. Before that, the DVDs were LPs, the coffee table was a spool table and that futon was probably the same futon from the same curb, just 20 years earlier. But if you ask millennials how many DVDs or albums they own, they’ll respond with a confused look.  Why would anyone own movies or music?  Paying $20 for one movie or album doesn’t make sense when you can get all of Netflix for $8 per month or Spotify for free. 
The same is true for a lot of the things you might want in retirement. Is it time to replace that car? Borrow at the lowest rates possible.  Do you want to own that house forever?  Why not create a leaseback arrangement? Do you own a timeshare?  Sell it and put the proceeds into a high-yield money market account.  It’ll go a long way toward paying for your vacations, wherever you choose to go. 
3.)  Get connected.  Young people can do just about everything through social media, even when they’re otherwise not technologically inclined.  I recently had a millennial ask me what use anyone could possibly have for Excel, which was stunning by itself, but then she proceeded to arrange a meeting over Instagram on her phone at the drop of a hat and on a Saturday afternoon, which was even more shocking.
Make your social media work for you.  Go through the social media apps on your phone, see what you use them for and why you have so many.  Then ask young people why they have apps you don’t. Do those apps sound useful?  If so, get them. If not, try them out anyway. While you’re at it, follow the businesses you use most often, so you can find news and deals.  It’s better than email, faster and easier to interact.  

Most importantly, if you’re not following us on Twitter and Facebook, now’s the time.  We put out a lot of great info to help you with your finances, and you can shoot us a question. With just a couple of clicks, you can see the questions other people have.  You might even learn the answer to a question you didn’t even know you needed to ask!  
Sources:

http://money.usnews.com/money/blogs/on-retirement/2014/04/16/the-worlds-9-most-affordable-places-to-retire