MORTGAGES, NOW OR NEVER

For most of us, our personal residence may be our single biggest investment.  Have you done everything possible to take advantage of these historically low interest rates?

Please allow me to put it into perspective.

If you have a $250,000 mortgage, and your current rate is 4%, your monthly payment (only principal and interest, not taxes or insurance) is estimated to be $1,194.00 for a 30 year.  If you can refinance at 3% in today’s market, that is a monthly payment of $1,054.00, or a total savings (all interest) of $50,400.

Now let’s do one other thing.  Assume that you can afford to pay an additional $672.00 per month, and even if you don’t qualify with the bank for that larger payment, you have effectively converted your 30 mortgage into a 15 year mortgage.  Your total payments over the 15 years is $310,680.  If you maintained the 30 year at $1,054, your total payments are $379,440.  You would have saved almost $70,000. 

And go back to the 4% at 30 vs. the 3% at 15.  Now it is a total of $429,840 vs. $310,680.  You just saved almost $120,000.

You can do it on your own.  The traditional lender has to accept the additional principal payments.

Do I have your attention now?

I think it is worth your exploring a refinance, and if you do not own a home, it is time to consider it.

What is involved in the application procedure?  Some say it is worse than going to the dentist, but keep your eye on the prize.  Whether it is a refi or purchase, most of the standards are the same.

The ultimate lender (and we can discuss whom you should approach) is interested in the following –

1)      The value of the property you own or want to acquire.

2)      The cash or other liquid assets (such as stocks) you have to use at closing.  The lender typically wants 20% equity from you.  Yes, you can apply for PMI (private mortgage insurance) to do less than 20% down, but try to avoid it if at all possible.

3)      The income or cash flow that you have to pay the mortgage and all of your other financial obligations.  The old rule of thumb was 33% to 35% PITI.  That means 35% of your verifiable income must be enough to cover principal, interest, taxes and property insurance.

4)      Your personal credit history and score.

The lender can look to you alone, but if you have a partner or spouse, it does increase your “buying power.”

So let’s start with how much house you can afford. 

Drilling now into the details (just like the dentist).

(For a refinance, this paragraph may not apply to you.)The cash that you have has to be “aged.”  It cannot mysteriously appear two weeks before closing or even the date of your application.  For example, it is common for first time homebuyers to get financial assistance from parents.  The best way is to move the cash now so it appears that it is yours.  Your parents can protect themselves with a promissory note if need be, but the mortgage lender will want to know that it is a gift.  Otherwise they will add it to your debt obligations.

Regarding income, try not to disclose if you are an owner of a business.  If you get a salary, you will disclose it.  But if they realize that you are a small business owner, they will also want to evaluate the financial status and future of the business.  Just not worth the hassle.  You will have to be able to verify your salary/income.  Tax return, W-2, etc.  The lender will look for two years of results.  Not likely that you have other income, but if you do, a bonus as long as you can have it verified.

So now the lender knows your gross income.  Remember the 33% to 35%.  If your verifiable income is $5,000 per month, then your PITI should not be more than $1,750.  (Your partner may also be in the calculation, which can help.)  Then the lender looks at your other debt obligations, such as credit cards, car loans, student loans, etc.  The total of all of those monthly obligations along with the PITI should not exceed 45% of your gross monthly income.

Gathering the documentation to support these numbers can be daunting.  But stick with it.

The lender may ask for a personal financial statement, but that is mostly your cash, stocks (car if you also have a car loan) and debts you have already compiled.  They will certainly run your credit report.  If you know of any issues, work to get it cleared up first.  There are ways to improve your credit score.

Choosing a mortgage lender.  My first recommendation is always your bank, if they are competitive in the marketplace.  They know you.  Mortgage brokers can provide guidance, but ultimately they are selling your mortgage to a financial buyer, so banks have an advantage.  We can talk about “buying down” a rate with points.  That just becomes a mathematical exercise. 

Now go see your dentist, much less painful!