Mortgage Newsletter Summer 2024
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- Economy & Mortgages: Why Rates are Holding Steady?
-Converting Equity Into Renovations: Sizing Up the Possibilities
-Tackling Affordability Challenges: The Non-Occupant, Co-Borrower Strategy
-Down Payments for VA Loans
-APR Explained
Economy & Mortgages: Why Rates are Holding Steady?
Converting Equity Into Renovations: Sizing Up the Possibilities
Homeowners today are enjoying a record level of home equity, built up by faster appreciation, low-cost loans from a few years back, and staying-put-longer trends. Naturally, we get a lot of inquiries about tapping this equity for renovations, and upgrades.
We like to help clients break it down into not just “needs” and “wants” but when it makes sense to do each. Mandatory projects that should happen right away: This includes addressing deferred maintenance like dry rot, foundation problems, mold remediation, roofing problems, wiring or plumbing issues, sagging floors, and more. It is usually more cost-effective to get it done than let the problems worsen. This keeps your home livable and healthy, and protects its value. If you plan to sell, these are projects you generally cannot ignore.
Life-stage projects: These may include renovations or upgrades that are part of life stage change - - adding a work-from-home office, adding a bedroom or bathroom as your family expands, or adding an ADU for an aging relative to live in. They’re elective in that you can choose not to do these, but life gets challenging if you don’t.
Elective projects: These include entertainment rooms, landscaping, kitchen upgrades, upgraded fixtures or windows, and cosmetic upgrades to a home. These things improve the enjoyment you derive from living in your home, and they can be done on your timetable.
Someday-sell-it projects: Time your upgrade to match your time horizon. Tastes change constantly among homebuyers, and renovations done years beforehand may not age well.
Some projects may make sense closer to the time you sell. On the other hand, if you have a long time horizon, why wait? Renovate now and enjoy your upgraded digs for years to come! We can help you finance any of these. There are ample programs available. We can consider home equity loans, home equity lines of credit, renovation loans, cash out refinances, loans for energy efficiency upgrades, and more.
The important thing to remember is that timetables always run longer than you might like, and good contractors are always busy. So let’s get a conversation started sooner than later, so that you can enjoy the benefits faster!
Tackling Affordability Challenges: The Non-Occupant, Co-Borrower Strategy
Today’s tight market, higher prices, and higher interest rates can seriously challenge many prospective homebuyers. One option buyers can use to improve their purchasing power is to team up with a family member or close friend who will be a co-borrower, but who will not live with the homeowner – a non-occupant co-borrower. Non-occupant coborrowers are allowed with conventional mortgages, FHA loans, and select other programs.
The non-occupant co-borrower is more than just a co-signer. The lender considers their income, debts, and credit history along with the homebuyer's. This can help the homebuyer qualify for the loan, but it also means the non-occupant co-borrower is jointly responsible for making those monthly payments.
Unlike a co-signer, the non-occupant co-borrower usually goes on the title of the property with the primary homebuyers. This gives them a stake in the ownership of the property, including any upside if it appreciates (and the opposite as well). There can also be tax benefits if they help with payments (please involve your tax advisor!) Generally, there are no restrictions preventing a non-occupant co-borrower from moving into the home later. A non-occupant co-borrower can exit the loan in a refinance, where the homebuyer gets a new loan on their own.
What it takes.
► An honest assessment beforehand. Whether you play the role of the homebuyer or the non-occupant co-borrower, it’s critical to assess risks from both sides. This isn’t something that you can do on your own, at least objectively. Talk to us, and we can help all parties make an honest assessment of incomes, creditworthiness, assets, and more. The co-borrower’s other debts affect the loan decisioning, so you want to know if the addition of the co-borrower’s financials are strong enough to lift the homebuyer’s chances.
► A close relationship is key. The non-occupant co-borrower and the homeowners must be great communicators and work in concert to fulfill their obligations. In some cases, the non-occupant co-borrower is contributing a portion of the payment. It’s important that there is good communication about whether, how much, and when any actual support is required, because they’re jointly on the hook if payments are late or missed altogether.
Credit scores for both parties are affected, and in the case of a foreclosure, both parties are of course affected.
► A commitment to homeownership. Beyond making payments on time, it’s important to share a commitment to taking care of the property. Deferred maintenance can lower the value of the property, which affects both parties in the long run, when it comes time to sell.
Co-borrowing can be a great tool to help a family member or close friend achieve their dream of homeownership. We can help borrowers fully understand all the risks and responsibilities involved. When done right, this can be a win-win for everyone involved! Contact us to get started.
Down Payments for VA Loans
VA loans do not require a down payment or mortgage insurance, but making a down payment is allowed. In doing so, you can offset the VA funding fee to some degree. The VA funding fee is a one-time fee that is charged in most cases, which lowers the cost of the loan for taxpayers.
For a $300,000 loan, a down payment of 0%-4.99% triggers a funding fee of 2.15%, or $6,450 (3.3% if this is not your first VA loan). Raise your down payment to between 5% - 9.99%, and that fee shrinks to 1.5%, or $4,500. Make a down payment of 10% or more, and the fee drops to 1.25% or $3,750.
Consider making a down payment for these reasons:
• Savings! A 5% or 10% down payment cuts your fee funding fee by 0.65% or 0.90%, respectively. On a $300,000 loan, that equates to up to $2,700 in savings! And you're achieving that by putting up equity, which is ultimately yours to keep.
• You’re borrowing less. That means a lower monthly payment, and potentially a better rate.
• It’s equity. You can tap it in the future, and it offers some protection if home values decline.
On the other hand, it requires cash – not always easy for first-time home buyers. Many veterans would rather get into the market without waiting to save up the down payment, and it’s possible to finance the funding fees into the loan amount. We can come up with a plan that works for you or a veteran you know. Contact us to discuss the options.
APR Explained
Interest rates drive your monthly payment, but they’re not the full measure of how much a loan will actually cost. There are other costs involved: lender fees, discount points, most closing costs, private mortgage insurance, etc. So, we compute an “Annual Percentage Rate,” or APR, which adds these other costs to the interest you will owe, and arrives at a rate that better represents the annual cost of financing. The more “other costs,” the greater the APR is, compared to the basic interest rate. APR allows consumers to more easily compare loans with different combinations of interest rates, points, and fees.
By law, lenders must always disclose the APR, and as prominently as the rate. This prevents shady lenders from “hiding” loans with lots of extra costs. APR assumes you hold your loan the full term. If you exit earlier, the true APR would be higher, since those extra costs would be applied to fewer years! To get the best perspective, you’ll want to compare loans based on how long you intend to hold them. Give us a call and we can re-run any APR calculation based on your plans!
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