Am I Really Ready to Buy a House?

Q: I’ve saved a down payment, narrowed my choices of neighborhoods and drawn up a wish list of what I’m looking for in a home, but I’m getting cold feet. How do I know if I’m really ready to buy a house?

A: It’s perfectly normal to feel hesitant about going through with what may be the biggest purchase of your life. To help put you at ease and to make sure you’re really prepared for this purchase, we’ve compiled a list of questions to ask yourself before buying a new home.

Man and woman looking at lady using laptop in office setting.

Can I afford to buy a house?

Before viewing properties, remember that purchasing a new home will cost more than just the down payment. Buyers also need to cover closing costs, which typically run at 2-4 percent of the total purchase, as well as moving costs, and possibly new furniture and renovations for their new home.

Can I afford the monthly mortgage payments?

Most lending companies will grant a loan to a home buyer if the monthly mortgage payments do not push the buyer’s debt-to-income (DTI) ratio above the recommended 43 percent. This means that the total monthly debt the buyer carries, including their mortgage, credit card, loan, and car payments, do not exceed 43 percent of their monthly income. You may want to work out the total for your pre-mortgage debt before applying for a loan so you have an idea of how much house you can afford.

When determining whether you can actually afford your monthly payments, though, remember that there’s more to home ownership than a monthly mortgage payment. Be sure to include calculations for taxes, insurance and a possible increase in utility bills. A mortgage lender should be able to provide some of these numbers for you.

Am I ready to settle down? 

The average length of time that homeowners in the U.S. live in a house is only seven years. Buyers who don’t plan on staying in their homes long-term may end up incurring a loss. Consider factors like your career, family planning, changing demographics of a neighborhood and more when trying to answer this question. Experts advise buyers to only purchase homes they plan on living in for a minimum of five years.

Does buying a house in my neighborhood make financial sense? 

Many Americans view home ownership as a rite of passage into adulthood, but that doesn’t mean purchasing a home always makes financial sense. In some neighborhoods, rentals are relatively cheap while houses sell for far more than they are actually worth. In these neighborhoods, buying a home may not be the logical choice, even if the buyer can easily afford the purchase.

Is my credit score high enough?

A fairly decent credit score is necessary to qualify for a home loan. Most lenders will only grant a home loan to borrowers with a credit score of 650 or higher. A score that doesn’t make the cut can be increased by being super-careful about paying all bills on time, not opening new credit cards in the months leading up to the home loan application, paying credit card bills in full each month and keeping credit utilization low.

Do I have a plan in place for repairs? 

When a renter has a leaky faucet, they call the landlord and the problem becomes theirs. When a homeowner has a leaky faucet, it’s their own problem. They can either fix it or hire someone to do the job, but it’s a good idea to have a plan in place before the first thing in a new home needs fixing. If you’re handy enough to handle repairs on your own, you’ll need to be ready and willing to give up some of your free time on weekends to tend to things around the house.  Otherwise, it’s best to have a tidy sum put away to pay for necessary repairs before purchasing a home.

Sometimes, an appliance or a system in the house will be broken beyond repair and will need replacing. Homeowners need to have enough money stashed away in their emergency fund or rainy-day account to cover these purchases, too.

Buying a first home is an exciting milestone that only happens once in a lifetime. If you think you’re ready to take this step, first make sure this purchase is the right choice for you at this time on a financial and practical level.

Your Turn: How did you know you were ready to buy a house? Share your thoughts with us in the comments.

Adjustable-Rate Mortgages (ARM)

A first mortgage typically has a set interest rate. The monthly payment stays the same regardless of the term. It doesn’t matter how much the economy, the Federal Reserve or your income change. Your interest rate is locked in over the life of the loan.
An Adjustable-Rate Mortgage (ARM), on the other hand, has an interest rate that can change periodically. These loans usually have a period of time in which the interest rate is fixed, commonly called the “initial rate,” which can last from as little as a month to as much as 5 years. After that period, the rate can change. How frequently it can change is determined by the adjustment period. In the most common type of ARM, a 5/1 ARM, the initial rate is set for 5 years and the adjustment period is 1 year. This means that after the first 5 years of the loan, the rate can change every year.
ARMs look very attractive at first glance because they’re usually listed with much lower interest rates. That rate is only the initial rate, although there are a few limitations on how high the interest rate can go after that period. If interest rates go up, that adjustment can have you paying more once the initial term completes. However, if interest rates go down, an ARM can actually become less expensive!
The Index and the Margin
The adjustable rate isn’t set arbitrarily. They’re set by the rate of return on some major investment vehicle. The most common one is the London Inter-Bank Offer Rate (LIBOR). This is the interest rate that the world’s largest banks charge each other for short-term loans. Investors feel confident that these loans will be repaid, so the LIBOR is a benchmark for safe investments, like mortgages. This rate serves as the index for the ARM rate at many financial institutions.
Because individual home buyers are less secure than the world’s largest banks, investors take on more risk by putting their money into an ARM. To reflect that increased risk, ARMs also include a margin. This is an additional interest rate the lender tacks on to the index rate. The margin is typically locked in for the duration of the loan. The two together are the fully indexed rate, and that’s the rate you’ll be charged once the adjustments begin.
Periods and Caps
Fortunately, there’s a limit to how often a lender can change the rate of the mortgage. This adjustment period provides some measure of stability. Typically, ARMs don’t have adjustment periods that are any longer than one year (after the initial period) or any shorter than one quarter.
There are also limits on how much the interest rate can increase in one period, called a periodic cap. No matter how high the index goes, your interest rate can’t be increased in one period by more than a set percentage. If your ARM includes a 2% periodic cap, and the underlying index rate increases by 3%, your rate will still only increase by 2%.
That extra 1% isn’t gone, though. Many ARMs include a carryover provision, which means rate increases that were prevented by a cap may be applied during the next period. Even if the underlying index decreases, your rate could still be increased by any amount that was capped out.
Another kind of cap that exists for ARMs is the lifetime cap. These caps provide a limit on how high the rate can go during the term of the loan. If your initial rate is 6% and your ARM has a lifetime cap of 6%, your interest rate can never go above 12% no matter how high the underlying index rates get.
When are ARMs a good idea?
The riskiness of ARMs makes them a tough option for many people, especially on a primary residence. Unless you’re in a financial position to survive a mortgage payment doubling over the course of 10 years, an ARM can be hard to swallow. However, there are situations where the initial lower interest rate can make sense.
If you’re planning on selling the property before the initial period is over, the ARM can save you significantly on loan costs. If you intend to “flip” the house, or if your career involves frequent relocation, an ARM could be ideal for you. In this case, the gamble you’re making is less about the performance of an index and more about the performance of your area’s housing market. If demand drops, you could wind up holding on to an expensive mortgage or selling the house at a loss.
Some people choose ARMs because they plan to refinance after the initial period. The lower initial interest rates let them make extra principal payments, and they can then get better terms on a 15- or 30-year fixed rate for the remainder of the loan. This can also be a risky move if the value drops. The refinance may not be enough to cover the initial mortgage amount, leaving borrowers in a difficult position.
In general, choosing an ARM means planning to pay the balance of the loan before the end of the initial period. Otherwise, the unpredictability of the mortgage payment can make financial plans too complicated. Be sure to read and understand the terms of any mortgage, fixed or adjustable, before you sign!

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 Credit Score: The (Other) Key To Your New Home

Each potential home buyer dreams of the day they’ll finally get the symbol of independence, security and prosperity: the key to the front door of their new home. Before you get that one, though, there’s another key you need to craft. Your credit score, a numerical representation of your credit history as an indicator of your ability to pay your bills, will determine a lot about your housing situation, from how much house you can afford to the interest rates you’ll receive.
Your credit score is determined by three different credit monitoring agencies: TransUnion, Equifax and Experian. Each has its own method for determining which events are most important to your score, so your number may vary depending upon the agency. Paying debts off, making payments on time and using only a small percentage of your available credit make your score go up. Missing payments, opening many credit accounts or carrying a significant balance of debt from month-to-month will decrease your score.
Less important than the actual score is your score grouping. Lenders tend to lump borrowers into four categories: sub-prime, near-prime, prime and super-prime. Different lenders break these categories down at different score points, but the terminology and treatment are fairly universal. Super-prime lenders get the lowest rates, because they represent the lowest level of risk for the lender. Sub-prime and near-prime borrowers will have a lower cap for the size of the loan they can take and will generally pay a higher interest rate. If you’re working on raising a low credit score, a good target number is 640. This will generally put you in the prime group and ensure you don’t have to pay extra on your mortgage because of credit. If you’re building good credit, 740 is generally the lowest super-prime score, which will give you access to some of the best rates and terms available.
If you’re going house-hunting in the next year, there are three steps you can take right now to improve the terms of your mortgage. Check your credit score, take steps to raise it and manage your loan in other ways. Taking these three steps will put you on the fast track to affordable home ownership! 
Check your credit score 
You can check your credit report for free once a year at annualcreditreport.com. Note, though, that there may be a nominal fee to receive your actual score along with the report. There are many similar websites, but many of them will charge you. Annualcreditreport.comis the site created by the three credit companies to provide consumers with transparent access to their financial information.
If your score isn’t at the level you think it should be, there may be errors or inaccuracies that are dragging down your good name. Look for accounts you don’t recognize or balances that are not up-to-date. You may even catch an identity thief red-handed! The report comes with instructions for challenging any item. In most cases, you can leave a note for lenders in the file explaining the item under dispute. 
Boost your credit score! 
There are no simple tricks to bump your credit score in advance of a mortgage. You need to develop a 6- to 12-month plan to boost your credit score before getting your mortgage by making sound financial decisions. Demonstrate to lenders that you can use credit responsibly, and your score will increase.
One of the biggest drags on a credit score is percentage of utilized debt. If you’re carrying a balance on credit cards, this tells lenders that you may be using credit to pay for your day-to-day expenses, and that lending you more money would not be a smart move for them. Getting balances to zero should be goal number one!
Also, take care that you don’t make any major purchases using credit right before you attempt to qualify for a mortgage. Even if you’re expecting a major windfall, such as an overtime check or a tax refund, creditors don’t see that on your report. Hold off until you have the cash in hand before you splurge on a new TV or car!
If it’s a lack of credit history that’s hurting your score, many lenders offer “credit builder” loans. These involve borrowing a small amount of money and making regular installment payments on it. Parents can frequently take out these loans on behalf of children to help them build a stronger credit history. 
What else? 
If your credit score is low, and there’s nothing you can do about it, you may need to take other steps to get a better position on a loan. You might try boosting your down payment or shopping for less expensive houses, so you’re borrowing a smaller sum of money. A co-signer, another responsible party willing to take on the risk of the loan, can also improve your terms. If your debt is a serious problem, perhaps moving into a new house isn’t a good short-term priority. Focus instead on paying off debt and saving up for a down payment. This can keep you from getting stuck with a house payment you can’t afford before you’re ready for it.
Destinations Credit Union offers its members free, unlimited financial counseling through our partnership with Accel Financial Services.  Take advantage of this great resource to help boost your credit score. 
SOURCES:

http://hubpages.com/money/Tips-To-Increase-Your-Credit-Score

The Hows, Whys, And Whens Of Rate Locks


Q: Everyone I talk with about my house search tells me I need to shop mortgages and lock in a rate. What do they mean? 
If you’re on the market for a house now, congratulations. This is an historically good time to buy. Interest rates are low and prices are rising in most markets. Even if it seems like a disorienting and confusing process, home buying is worthwhile in the long run.
A rate lock is an agreement by a lender to ensure a rate on a loan for a set period of time. Regardless of what the mortgage market does before the closing date, the “points,” duration, and interest rate will remain the same. The lock agreement is valid until a few days after your expected closing date to account for any potential complications and can be rejected only if some serious error emerges during the qualification process. 
When should I get a rate lock? 
Rate lock agreements are usually offered for 30, 60 or 90 days. The longer term locks may seem like a good deal, but they usually come with higher origination fees. A 30-day rate lock might establish a 4.00% interest rate with a quarter point (or 0.25% of the value of the loan). A 60-day lock on that same loan might include a half point instead (0.50% of the loan).
It might be tempting to get your mortgage rate set in stone before you’ve started looking at homes so you have a good idea of your price range. As convenient as it sounds, doing so could cost you in the long run. Interest rates don’t change that fast. Over the past year, interest rates have gone from a low of 3.55% to a high of 4.20%. The worst month ever for mortgage rates saw an increase of about half a percent. That raises your monthly payment $35 on a $250,000 loan. To save that $35 per month, your lender may charge you $6,250 (a quarter point) up front! You won’t make up for that higher upfront cost for nearly 15 years. If, instead, you paid the higher interest rate and put that money in a savings account, you’d make about $2,000 over the life of your mortgage.
That said, ignoring your mortgage rate until the day before closing is also unwise. Your lender needs time to put together the paperwork for your loan. Ideally, you should get a rate lock sometime between a week and a month before you close. A pre-approval process should give you a good idea of your budget and can help your offer stand out in a sellers’ market. An easy closing transaction, instead of trying to time the market, should be your priority here. 
How do I lock my rate? 
One of the wisest things you can do in the home-buying process is to talk with your credit union representatives to let them know you are starting the process of buying a home. With many years of experience in home lending, they can help you identify some good strategies for determining the right home for you and streamline the process you’ll be following. They will also help you get started on pre-approval if appropriate at that time. Then, once you’ve found the right house and you’re ready to make it yours, let them know you are ready to lock your rate. After signing an agreement with your lender for the rate, points and duration, you’re all set. 
Why should I lock my interest rate? 
Locking your interest rate has two big benefits. It helps you prepare your new monthly budget and it helps your credit union get all the necessary paperwork in order for closing. Don’t think of your rate lock as a chance to score a deal. You won’t save much money. In fact, you could stand to lose quite a bit by trying. Think of it as a T-crossing and I-dotting exercise. Having a rate lock on a mortgage means one less piece of paperwork that stands between you and your new home.
If you’d like more information about current mortgage rates, saving for a down payment, or anything else about the home-buying process, reach out to your neighbors at Destinations Credit Union. Our supportive staff is there to help you every step of the way, from setting a budget to protecting your biggest investment. Call, email, or click your way to Destinations Credit Union today! 
 SOURCES: 

https://ycharts.com/indicators/30_year_mortgage_rate