Should I Refinance My Mortgage Now?
With all the volatility going on in the market, it seems there is one certainty and that is the word “historical” will continue to be in the headlines. Over the past few months, we’ve seen the Dow Jones Average hit historical highs, the 10-year treasury hit historical lows, and historical daily point movements in the market.
Should I Refinance My Mortgage Now?
With all the volatility going on in the market, it seems there is one certainty and that is the word “historical” will continue to be in the headlines. Over the past few months, we’ve seen the Dow Jones Average hit historical highs, the 10-year treasury hit historical lows, and historical daily point movements in the market. Market volatility will always lead the headlines as it does impact anyone with an investment account. With that in mind, it is important to use these times to reassess your overall financial plan and take advantage of parts of the plan that are in your control.
For a lot of people, their home is their most significant asset and is held for a longer period than any stock or bond they may have. This brings us back to “historical” as mortgage rates continue to drop. Whenever this happens, our clients will call and ask if it makes sense to refinance. In this article, we will help you in making this decision.
3 Important Questions
How much will I be saving annually in interest with a lower rate?
What are the closing costs of refinancing?
How long do I plan on being in the home and how many more years do I have on the mortgage?
If you can answer these questions, then you should have a pretty good idea if it makes sense for you to refinance.
How Much Will I be Saving Annually in Interest with a Lower Rate?
With most financial decisions, dollars matter. So how do you determine how much you will be saving each year with a lower interest rate? Below, I walk through a very basic example, but it will show the possible advantage of the refinance.
One important note with this example is the fact that most loan payments you make will decrease the principal which should decrease the cost of interest. To make this simple, I assume a consistent mortgage balance throughout the year.
Higher Interest Lower Interest
Mortgage Balance: $300,000 Mortgage Balance: $300,000
Interest Rate: 4.5% Interest Rate: 3.5%
Annual Interest: $13,500 Annual Interest: $10,500
By refinancing at the lower rate, the dollar savings in one year was $3,000 in the example when the mortgage balance was $300,000.
Savings over the life of a mortgage at 3.5% compared to 4.5% on a $300,000, 30-year mortgage, should be over $60,000 in interest over that time period if you are making consistent monthly payments.
What are the Closing Costs of Refinancing?
After walking through the exercise above, most people will say “Of course it makes sense to refinance”. Before making the decision, you must consider the cost of refinancing which can vary from person to person and bank to bank. There are several closing costs to consider which could include title insurance, tax stamps, appraisal fee, application fees, etc.
If the cost of closing is $5,000, you will have to determine how long it will take you to make that back based on the annual interest savings. Using the example from before, if you save $3,000 in interest each year, it should take you 2 years to breakeven.
One tip we give clients is to start at your current lender. Banks are in competition with other banks and they usually do not want to lose business to a competitor. Knowing the current interest rate environment, a lot of institutions will offer a type of “rapid refinance” for existing customers which may make the process easier but also give you a break on the closing costs if you are staying with them. This should be taken into consideration along with the possibility of getting an even lower interest rate from a different institution which could save you more in the long run even if closing costs are higher.
How Long do I Plan on Being in the Home and How Many More Years do I have on the Mortgage?
This is important since there is a cost to refinancing your mortgage. If it will take you 10 years to “breakeven” between the closing costs and interest you are saving but only plan on being in the house for 5 more years, refinancing may not be the right choice. Also, if you only have a few years left to pay the mortgage you would have to weigh your options.
In summary, taking advantage of these historical low mortgage rates could save you a lot of dollars over the long term but you should consider all the costs associated with it. Taking the time to answer these questions and shop around to make sure you are getting a good deal should be worth the effort.
Public Service Announcement: Like the stock market, it is hard to say anyone has the capability of knowing for sure when interest rates will hit their lows. Make sure you are comfortable with the decision you are making and if you do refinance try not to have buyer’s remorse if the historical lows today turn into new historical lows next year.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
Planning for Long Term Care
The number of conversations that we are having with our clients about planning for long term care is increasing exponentially. Whether it’s planning for their parents, planning for themselves, or planning for a relative, our clients are largely initiating these conversations as a result of their own personal experiences.
The number of conversations that we are having with our clients about planning for long term care is increasing exponentially. Whether it’s planning for their parents, planning for themselves, or planning for a relative, our clients are largely initiating these conversations as a result of their own personal experiences.
The baby-boomer generation is the first generation that on a large scale is seeing the ugly aftermath of not having a plan in place to address a long term care event because they are now caring for their aging parents that are in their 80’s and 90’s. Advances in healthcare have allowed us to live longer but the longer we live the more frail we become later in life.
Our clients typically present the following scenario to us: “I have been taking care of my parents for the past three years and we just had to move my dad into the nursing home. What an awful process. How can I make sure that my kids don’t have to go through that same awful experience when I’m my parents age?”
“Planning for long term care is not just about money…….it’s about having a plan”
If there are no plans, your kids or family members are now responsible for trying to figure out “what mom or dad would have wanted”. Now tough decisions need to be made that can poison a relationship between siblings or family members.
Some individuals never create a plan because it involves tough personal decisions. We have to face the reality that at some point in our lives we are going to get older and later in life we may reach a threshold that we may need help from someone else to care for ourselves or our spouse. It’s a tough reality to face but not facing this reality will most likely result in the worst possible outcome if it happens.
Ask yourself this question: “You worked hard all of your life to buy a house, accumulate assets in retirement accounts, etc. If there are assets left over upon your death, would you prefer that those assets go to your kids or to the nursing home?” With some advance planning, you can make sure that your assets are preserved for your heirs.
The most common reason that causes individuals to avoid putting a plan in place is: “I have heard that long term care insurance is too expensive.” I have good news. First, there are other ways to plan for the cost of a long term care event besides using long term care insurance. Second, there are ways to significantly reduce the cost of these policies if designed correctly.
The most common solution is to buy a long term care insurance policy. The way these policies work is if you can no longer perform certain daily functions, the policy pays a set daily benefit. Now a big mistake many people make is when they hear “long term care” they think “nursing home”. In reality, about 80% of long term care is provided right in the home via home health aids and nurses. Most LTC policies cover both types of care. Buying a LTC policy is one of the most effective ways to address this risk but it’s not the only one.
Why does long term care insurance cost more than term life insurance or disability insurance? The answer, most insurance policies insure you against risks that have a low probability of happening but has a high financial impact. Similar to a life insurance policy. There is a very low probability that a 25 year old will die before the age of 60. However, the risk of long term care has a high probability of happening and a high financial impact. According to a study conducted by the U.S Department of Human Health and Services, “more than 70% of Americans over the age of 65 will need long-term care services at some point in their lives”. Meaning, there is a high probability that at some point that insurance policy is going to pay out and the dollars are large. The average daily rate of a nursing home in upstate New York is around $325 per day ($118,625 per year). The cost of home health care ranges greatly but is probably around half that amount.
So what are some of the alternatives besides using long term care insurance? The strategy here is to protect your assets from Medicaid. If you have a long term care event you will be required to spend down all of your assets until you reach the Medicaid asset allowance threshold (approx. $13,000 in assets) before Medicaid will start picking up the tab for your care. Often times we will advise clients to use trusts or gifting strategies to assist them in protecting their assets but this has to be done well in advance of the long term care event. Medicaid has a 5 year look back period which looks at your full 5 year financial history which includes tax returns, bank statements, retirement accounts, etc, to determine if any assets were “given away” within the last 5 years that would need to come back on the table before Medicaid will begin picking up the cost of an individuals long term care costs. A big myth is that Medicare covers the cost of long term care. False, Medicare only covers 100 days following a hospitalization. There are a lot of ins and outs associated with buildings a plan to address the risk of long term care outside of using insurance so it is strongly advised that individuals work with professionals that are well versed in this subject matter when drafting a plan.
An option that is rising in popularity is “semi self-insuring”. Instead of buying a long term care policy that has a $325 per day benefit, an individual can obtain a policy that covers $200 per day. This can dramatically reduce the cost of the LTC policy because it represents less financial risk to the insurance company. You have essentially self insured for a portion of that future risk. The policy will still payout $73,000 per year and the individual will be on the line for $45,625 out of pocket. Versus not having a policy at all and the individual is out of pocket $118,000 in a single year to cover that $325 per day cost.
As you can see there are a number of different options when it come to planning for long term care. It’s about understanding your options and determining which solution is right for your personal financial situation.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
The Process Of Buying A House
Buying a house can be a fun and exciting experience but it’s also one of the most important financial decisions that you are going to make during your lifetime. This article is designed to help home buyer’s understand:
Buying a house can be a fun and exciting experience but it’s also one of the most important financial decisions that you are going to make during your lifetime. This article is designed to help home buyer’s understand:
The home buying process from start to finish
The parties involved in the process (real estate agent, attorney, bank, etc.)
Common pitfalls to avoid
What to expect when applying for a mortgage
How to calculate the amount of your down payment
Owning Versus Renting
You first have to determine if owning a house is the right financial decision for you. Society wires us to think that owning a house is automatically better than renting but that is not necessarily true in all situations. From a pure dollar and cents standpoint, it may make sense to keep renting given your personal situation. We typically tell clients if there is a fair chance that they may need to sell their house within the next 5 years, in many cases it may make sense to keep renting as opposed to buying a house given all of the upfront costs associated with purchasing a house. It takes a while to recoup closing costs and when you go to sell your house you will most like have to pay your real estate agent 5% - 6% of the selling price.
Determine How Much You Can Afford
Before you even start looking at houses you have to determine two things:
The down payment and closing costs
The amount of the monthly mortgage payment that fits into your budget
There is no point in looking at $300,000 houses if you cannot afford the down payment or the monthly mortgage payment so the initial step involves determining what you can afford.
Calculating Your Closing Costs
Closing costs are in addition to your required “down payment”. First time home buyers often make the mistake of just using the 5% down or 10% down as a rule of thumb for their total upfront cost for buying a house. They often forget about closing costs which can add an additional 2% - 5% of the purchase price of the house to the amount due at closing. Closing costs include:
Discount Points: An up-front fee that you can choose to pay if you want to reduce the interest rate on your loan.
Origination Charge: Fee for processing your mortgage application, pulling credit reports, verifying financial information, and creating the loan
Rate-lock Fee: If you choose to lock in your interest rate beyond a certain period of time
Other Lender Fees: Document preparation fee, processing fee, application fee, and underwriting fees
Appraisal & Inspection Fees: Fees for the lender to inspect and appraise the value of the house
Title Services: Fee charged by the title agent to determine the rightful ownership of the house you are buying and some lenders require title insurance.
Government Recording Charges: Every home buyer must pay these charges for the state and local agencies to record the loans and title documents
Transfer Taxes: Depending on where you live, your state, county or city may charge a tax when the ownership of a home is transferred
Escrow Deposit: At the closing of your home loan, if you decide to escrow or if an escrow is required, there will be an initial deposit in your escrow account to pay for future recurring charges associated with your home, such as property taxes, school taxes, and insurance. You will typically need to pay for the first year of your homeowner’s insurance in full before your home loan closes.
Daily Interest Rate Charge: This charge covers the amount of interest that you will owe on your home loan from the time your loan closes to the first day of your regular mortgage billing cycle.
Flood Insurance: This is a form of hazard insurance that is required by lenders to cover properties in flood zones.
Attorney Fees: Fees typically vary from $300 - $1,000. Most individuals will work with a real estate attorney to review and negotiate the purchase agreement on their behalf. These fees are sometimes paid to the attorney prior to the closing.
As you can see there are a number of fees that you have to be prepared to pay in addition to the down payment required by the lender. Lenders are required by law to give you a “good faith estimate” (GFE) of what the closing costs on your home will be within three days of when you apply for a loan. However, these are just estimates and many of the fees listing on the GFE can legally change by up to 10%, potentially adding thousands of dollars to your final closing cost bill. A day before your closing the lender should provide you with a copy of your HUD-1 settlement statement, which outlines all of the closing fees.
Calculating Your Down Payment
The amount of your down payment will vary based on the type of loan that you received to purchase your house. The three main types of home loans are:
FHA Loan
Conventional Mortgage
VA Loan (Veterans Affairs)
FHA Loan: FHA stands for Federal Housing Administration. The loans are made by banks but they are guaranteed by the FHA which added additional protection for the lender. FHA loans come with a minimum down payment of 3.5% which make them very popular. With these loans borrowers pay PMI (private mortgage insurance) premiums both upfront and each year until the loan is paid down to a specified level. Loan limits vary by housing type and county. These loans tend to favor low to middle income borrowers who do not have a means to make the traditional 10% - 20% down payment at closing.
Conventional Mortgage: Minimum down payment varies from 5% - 20%. Borrowers that put down less than 20% will have to pay PMI (private mortgage insurance). Conventional mortgages typically require a higher FICO score than FHA loans. These loans tend to favor borrowers with higher credit scores and have enough cash on hand to make a sizable down payment.
VA Loan: VA loans are available only to veterans. The greatest benefit of these loans is they require no down payment and they allow qualified borrowers to purchase a home without the need for mortgage insurance. VA loans also tend to have more flexible and forgiving requirements. The VA charges a mandatory Fund Fee of 2.15% for regular military and 2.40% for Reserve/Guard on purchase loans.Let’s bring it all together in an example. If you anticipate on buying a house for $200,000 and you plan on taking an FHA loan, the amount that you will need to save for the closing will be in the range of $11,000 - $17,000 (3.5% for the down payment and 2% - 5% for the closing costs). This calculation will obviously vary based on the type of loan you plan on taking to purchase your house.
Determine what your monthly mortgage payment
After you have determined how much you need to save to meet the upfront cost of purchasing a house, the next step is to determine the monthly mortgage payment that fits into your budget.
Step 1: Establish your current monthly and annual budget. There is no way to determine what you can afford if you have no idea where you are now from an income and expense standpoint. Tip: Be brutally honest with yourself when listing your expenses. The last thing you want to do is underestimate your expenses, buy a house you cannot afford, and then go through a foreclosure. You will also have to factor in additional expenses into your budget as if you owned the house today such as lawn care, snow removal, appliances, and maintenance expense. As a renter you may not have any of these expenses now but as soon as you own a house, now when something breaks you have to pay to fix it. Homeownership is often times more expensive than most individuals anticipate.
Step 2: Based on your current monthly income and expenses, how much is left over to satisfy a monthly mortgage payment? The general rule is your monthly mortgage payment (including property taxes, PMI, and association fees) should not exceed 32% of your monthly gross income. Tip: Leave some extra room in your budget for life’s unexpected surprises. For example, furnace need to be replaced, dishwasher brakes, spouse loses a job, plumbing issues, etc.
Step 3: Use an online mortgage calculator to determine the loan amount that meets your estimated monthly mortgage payment. Do not forget to take into account property taxes, school taxes, association fees, PMI, and homeowners insurance when reaching your estimated monthly payment.
The parties involved in the home buying process
There are a lot of different professionals that you will interact with during the process of purchasing your house. It’s important to understand who is involved, what their role is in the process, and how they are compensated.
Buyer & Seller: This is pretty self-explanatory. Most buyers and sellers work through realtors and attorneys to complete the real estate transaction so there is typically little or no direct interaction between the buyer and the seller. However, in a “for sale by owner”, the buyer or the buyer’s realtor/attorney will be in direct communication with the seller since there is no real estate agent on the sellers side.
Real Estate Agent (Realtor): Real estate agents are important partners when you are buying a house. They can provide you with helpful information on homes and neighborhoods that isn’t easily accessible to the public. Their knowledge of the home buying process, negotiation skills, and familiarity with the area you want to live in can be very valuable. In most cases, as the buyer, it does not typically cost you anything to use a realtor because they are compensated from the commission paid by the seller of the house.
Real Estate Attorney: Remember, buying a home is a legally binding transaction. A real estate attorney can help you avoid some common pitfalls when purchasing your home. The home buying process eventually results in a formal purchase agreement between the buyer and seller. The purchase agreement is the single most important document in the transaction. Although standard printed forms may be used, a lawyer can explain the forms and make changes and additions to reflect the buyer’s wishes. Examples are:
What are the legal consequences if the closing does not take place?
What happens if the inspection reveals termites, radon, or lead based paint?
Will money be held in escrow from the seller’s proceeds to replace certain items?
How much does a real estate attorney cost? It varies, but expect to pay somewhere in the range of $350 - $1,000. Often times you have to pay the attorney a retainer or pay them in advance of the closing. The amount an attorney charges is usually dependent on the level of services that they are provided to you. Some attorneys may just be preparing the deed while other attorney’s may provide you with a more complete package which can include deed preparation, title examination, purchase agreement review, and lender work. Make sure you fully understand how the attorney’s fee structure works and it often helps to ask your professional network or friends for attorney’s that they have worked with and would recommend.
Bank / Credit Union: Most home buyers need a mortgage to finance the purchase of their house. It is recommended that you contact a few banks and credit unions in your area to compare interest rates, closing costs, and fees associated with the issuance of your mortgage. Similar to selecting a real estate attorney we strongly recommend asking your professional network (accountant, investment advisor) for lenders that they recommend working with. You will have a lot of interaction with the lender throughout the home buying process and working with a lender that makes the underwriting process as smooth as possible will make the overall home buying experience much more enjoyable.
Home Inspector: After your offer has been accepted by the seller you will need to hire a home inspector to visit the house. Your real estate agent will most likely recommend a home inspector to use. The job of the home inspector is to visit the property to make sure there are no issues with the house that may not be apparent to the untrained eye. They look for termite damage, structural issues, mold, condition of the roof, electric, plumbing, drainage, septic, radon levels, etc. A few days after their visit they will provide you with a formal report of their inspection. You typically pay them at the time they conduct the inspection. The cost of a home inspection typically ranges from $250 - $600.
Insurance Broker: You will need to obtain a homeowners insurance policy prior to the closing date. Since you are adding a house to your insurance coverage, often times this is a good opportunity to look at your insurance coverage as a whole because insurance companies will usually offer discounts on “bundling” your insurance coverage. Meaning that a single provider covers your house, cars, and personal umbrella policy. The annual cost of your homeowners insurance will vary greatly depending on the value of your house and where the house is located. For homeowners that have an escrow account associated with their mortgage, the homeowners insurance premium is typically baked into your total monthly mortgage payment , the insurance company issues the invoice directly to the bank, and the bank pays your homeowners insurance directly out of your escrow account.
Timeline: The home buying process from start to finish
Now that we have explained how to determine what you can afford and the parties involved in the home buying process it’s time to put it all together so you know what to expect step by step through the process of purchasing your new home.
Step 1: Get prequalified for a mortgage. You may think you can qualify for a $250,000 mortgage but you really do not know until you actually apply. In the preapproval process you will provide some information to the bank that will be issuing your mortgage such as tax returns, statements showing investment and savings accounts, and they will usually run a credit report. The more intense financial due diligence happens after an offer has been accepted on your house and they are actually preparing to provide you with the loan.
Step 2: Begin looking at houses. Most individuals at this point will hire a real estate agent to help them find and look at houses.
Step 3: Make an offer. Once you find the house that you want, you will have your real estate agent present the seller with your offer. This is where the negotiation process begins. If the seller is listing the house for $200,000, you can make an offer for whatever amount you choose. Once an offer is presented to the seller, three things can happen:
The seller can accept it
The seller can reject it
The seller will counter offer
Your real estate agent can really help you in this process to determine what may be a reasonable offer. It is usually dependent upon how long the house has been on the market, where is the property located, is there a situation that requires selling the house quickly, and what have other similar houses sold for in the area. After making the offer you will typically receive a response within 48 hours. The seller will sometimes give their real estate agent a range saying that they will accept less than the asking price but only to a specific threshold. In most situations the buyer and the seller meet somewhere in the middle. If the house is listed for $200K, the buyer may put in an offer for $180K and after some back and forth they eventually meet somewhere around $190K. But that is not always the case. If there are multiple offers on the house you could end up in a “bidding war”. Offers are “blind bids” meaning that you and your real estate agent have no way of knowing what other people are offering the seller for the house. Buyers are essentially making their “best guess” that their offer will win. You may make an offer for full price only for another buyer to come in two hours later and offer $10,000 over their asking price. You really have to lean on your real estate agent to give you some guidance based on their knowledge of the market.
Step 4: Offer accepted……now what? Typically, purchase offers are contingent on a home inspection of the property. Your real estate agent will usually help you arrange to have a home inspection conducted within a few days of your offer being accepted. There are usually contingencies in your offer agreement that provides you with the chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage. If the inspector discovers issues with the house you will have to make the decision if you want to ask the seller to fix the issue prior to the closing date. Prior to the close you will have a walk-through of the house, which gives you a chance to confirm that any agreed-upon repairs have been made.
Step 5: Apply for a mortgage. Now that your offer has been accepted the mortgage underwriting process will kick into high gear. The bank will assign you a “loan officer” or “mortgage broker” to serve as the direct contact at the bank throughout the mortgage approval process. You will provide them with the information on the house that you intend to purchase, they will send you the mortgage application with all of financial documents that they will need to formally approve you for the mortgage. The bank will also arrange for an appraiser to visit the house and provide an independent estimate of the value of the house. After all if they are giving you a loan for $200,000, they want to make sure that house is worth at least $200,000 in case you were to stop paying the mortgage then essentially the bank would own the house and have to sell it. You will receive a “commitment letter” from your bank once your mortgage has been formally approved.
You will need to show the bank documentation of the account that is currently holding the cash that will be used for your down payment and closing costs. If someone gifts you money to buy your house, the person that made the gift will most likely have to sign a letter stating that it was an outright gift and not a loan.
Step 5½ : You will simultaneous engage a real estate attorney to begin working with at this time. Your attorney will review the purchase agreement, initiate a title search and review the results, begin prepping the deed, and communicate directly with the seller’s attorney if changes or additions need to be made to the purchasing agreement.
Step 6: Set a closing date. The closing date is the date that you will sign a huge pile of papers and the house officially becomes yours. There is typically an “estimated closing date” set in the purchase agreement but a firm date needs to be set by the buyer, seller, attorneys, and the bank. The seller’s real estate agent, the buyer’s real estate agent, your mortgage broker, and the attorneys on both sides will typically communicate with each other to establish the closing date. A special note……..a lot can happen during a real estate transaction that can delay the closing date. Issues can arise on the seller’s side or the mortgage process could take longer than expected. In other words, even though you have a “final closing date” be prepared for the closing date to change. If you are renting right now and have a lease, if your closing date is May 1st it’s usually recommended that you have your current lease run until May 30th or June 30th in case the closing date gets pushed back. Real estate transactions have a lot of moving parts and a lot of unexpected things that are out of your control can happen.
Step 7: Contact your insurance broker to establish a homeowner’s policy. Your bank will require you to have homeowners insurance on the property. You must pay for the policy and have it at closing. You are free to select your own insurance carrier but the lender will typically require the insurance company issuing the policy to be a specific rating or higher.
Your insurance broker may also help you with your title insurance policy. Many lenders will require you to have a title insurance policy at closing. As part of the home buying process a title search should be conducted which results in a report that shows who owns the property and if there are any liens against the property. Title insurance protects you and the lender up to the full value of the property if fraud, a lien, or faulty title is discovered after your closing.
Step 8: The day BEFORE the closing. It is recommended that you send a reminder email to your real estate agent, attorney, and mortgage broker to confirm that everything is a “go” for the closing the next day. You and your real estate agent should make a final inspection of the property within 24 hours prior to the closing. In many cases, the lender will make a similar inspection before closing. The bank that is issuing you the loan should also be able to provide you with a copy of your HUD-1, which is a long, one page document that details all of the financial activity associated with the purchase of your house. You should review this document with your mortgage broker and/or attorney prior to the closing to make sure everything is accurate.
You will also need to confirm with your attorney/mortgage broker the amount of the certified check that you will need to bring to the closing. A certified check is a special type of check issued by a bank that guarantees that the funds to back that check are guaranteed by the bank issuing the check.
Step 9: The date of your closing. You made it!!!!!! Today is the day your new house officially becomes yours. There are two primary things that you need to bring with you to the closing:
Certified check
Homeowners policy and proof of payment
The actual closing is conducted by a “closing agent” who may be an employee of the lender or title company, or it may be an attorney representing you or the lender. The lender and seller, or their representatives, and the real estate agents may or may not be at the actual closing. It is not unusual for the parties to the transaction to complete their roles without ever meeting face to face.
For the most part, your role at closing is to review and sign the numerous documents associated with a mortgage loan. The closing agent should explain the nature and purpose of each one and give you and your attorney an opportunity to check them before signing.
At the conclusion of the meeting you receive the keys to the house and you are officially a new homeowner.
Step 10: Begin making your monthly mortgage payments. One of the top questions that we get is “What is an escrow account?” You will hear that term a lot when you are going through the mortgage process. Think of an escrow account as a separate savings account that is attached to your mortgage. When you make a monthly mortgage payment, it is made up of a few components:
Principal & Interest Payments: Amount applied against your actual loan
PMI (if applicable): Mortgage insurance
Escrow: Cash reserve to pay taxes and homeowners insurance
If my monthly mortgage payment is $2,000, only $1,100 of that amount may actually be applied against the loan. The other $900 may be used to pay my monthly PMI and the remainder is deposited to my escrow account.
When your property taxes and school taxes are due, the county that you live in will typically send those tax bills directly to the bank holding your mortgage and then the bank in turn pays those bills out of your escrow account. The bank will typically mail the homeowners a receipt that the tax bill has been paid. It’s basically a forced monthly savings account for your anticipated tax bills. The same thing is true for your homeowner insurance premium payments. The bank that is holding your mortgage forecasts how much your taxes and homeowner insurance is going to be for the next 12 months and then builds those amounts into your monthly mortgage payments. The bank does not want you to lose your house because you were unable to pay your property or school taxes. The property and school tax bills show up once a year and depending on where you live those bills can be for thousands of dollars.
If there is additional money left in your escrow account after the taxes and homeowner insurance has been paid, the bank is usually required to send a portion of that additional cash reserve to the homeowner in the form of a check. Those are fun checks to get in the mail.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
First Time Homebuyer Tips
Buying your first home is one of life’s milestones that everyone should have the opportunity to experience if they choose. Owning a home gives you a feeling of accomplishment and as you make payments a portion is going to your personal net worth rather than a landlord. The process is exciting but one surefire piece of information that I wish I
home buyer tips
Buying your first home is one of life’s milestones that everyone should have the opportunity to experience if they choose. Owning a home gives you a feeling of accomplishment and as you make payments a portion is going to your personal net worth rather than a landlord. The process is exciting but one surefire piece of information that I wish I knew when buying my first home is that you will come across surprises. Whether it be a delay in closing, an issue with financing, or closing costs being higher than expected, it is important to know that you can do all the preparation possible and still be hit in the face with some setbacks.
This article will not only touch on some of the important considerations when buying your first home but will give examples of possible setbacks and how to avoid them.
Know Your Number
The most important piece of information to have when purchasing your home is how much you can spend. The purchase of your home should not be the only goal to consider. All of your other financial objectives such as paying off debt (i.e. college and unsecured) and saving for retirement must be taken into consideration. Also, it is recommended you have an emergency fund in place that would cover at least 4 months of your fixed expenses in case something happens with your job or some other event occurs. Knowing your number does not only include what you can afford today but how much you can afford monthly moving forward. If your monthly cash flow becomes dangerously low or negative with the addition of a mortgage payment (including mortgage/property taxes/homeowners), the house may be too expensive.
NOTE: Just because you are preapproved for a certain amount does not mean you need to spend that amount.
Choose An Agent You Trust
You will be spending a lot of time with your agent so choose them wisely. It should be someone you get along with and someone you can trust will look out for your best interests. If your agent just cares about receiving a commission, they may push you to purchase a home before looking at all of your options or buying a home you can’t afford. Remember, you are the client and therefore should be treated as such.
NOTE: Just because you never physically cut a check to your real estate agent doesn’t mean you aren’t paying them. In a typical transaction the seller will pay the commissions. An agreed upon percentage will come out of the sales proceeds and go to both real estate agents (the buyer’s and the seller’s) and therefore the cost is built into the price you pay.
Use Your Agent As An Asset
Your agent is likely much more knowledgeable about home buying than you so use that knowledge to your benefit. The agent should be able to help you value homes and determine whether the house is fairly priced. Ask them as many questions as possible throughout the entire process.
On The Fence
If you are on the fence whether or not to buy a home then take your time. If you may relocate because of your job or family don’t jump into purchasing a home. It is not worth paying the closing costs and going through the hassle of home buying if you may move in the near future. We typically use the “5 Year Rule” when making the determination. If you don’t see yourself being in the house for at least 5 years you should consider whether or not you will get your money back when you sell.
Compare Lenders
The banking industry is extremely competitive and it is worth shopping around for the best offer when choosing a mortgage provider. If you aren’t comfortable with numbers, don’t be afraid to ask for help. A difference of 0.10% on a 30 year mortgage could be the difference of thousands of dollars wasted on interest.
Don’t Cheap Out On Homeowners
Don’t choose your homeowners policy based on price. Of course price is one of the considerations but it is not the only one. Make sure your policy is the most comprehensive you can comfortably afford as the cost of increased premiums is likely much less than the cost of coming out of pocket for something not covered. Remember, insurance companies, like banks, are in a competitive industry so shop around.
Down Payment
Most lenders require a 20% down payment of the home value to avoid paying additional costs. This means if the value of the home is $200,000, you will have to pay $40,000 out of pocket! Most lenders offer Federal Housing Administration (FHA) loans that allow you to put down as little as 3.5%. If you choose this type of loan you also have to purchase Private Mortgage Insurance (PMI). This will be a cost added to your mortgage payment until the value of your home is adequate enough to remove the PMI. It is important to factor this in as a cost similar to interest because a 5% interest rate could quickly look like 6-7% if you have to pay PMI.
Closing And Other Additional Costs
There are a lot of out of pocket costs to consider when purchasing a home. Examples of these costs are listed below. An important piece of knowing your number is to consider all the costs that may come up during the process.
Loan Origination Fee
Attorney Fees
Property Taxes
Home Owners Insurance
Appraisal Fee
Inspection Fee
Title Insurance
Recording Fee
Government Recording Charges
Credit Report Fee
Flood Determination Fee
How To Help Avoid Certain Complications
Situation: I bought a house at the top of my budget that I thought was move in ready but needs repairs.
Recommendation: Choose an inspector that has a great reputation and knows the location. There may be issues that are common to the area that one inspector may be more likely to identify. Also, bring a contractor or someone of similar background for a walk through. Repairs can be extremely costly and if you purchased a home at the top end of your budget you may not be able to afford certain fixes. It should be known that all issues cannot be foreseen but taking the necessary steps to diminish these situations will not hurt. Don’t purchase a home that will bankrupt you if repairs need to be done.
Situation: I bought a home I can’t fill.
Recommendation: Closing costs and repairs won’t be the only out of pocket expenses. Complete a summary of items you think you may need to buy after the purchase. This may include furniture, appliances, décor, and fixtures. In these situations it is always better to overestimate.
Situation: My lease is up in a month and I would like to purchase a home.
Recommendation: Purchasing a home is something that requires time and planning. The home will likely be the largest purchase you’ve ever made (depending on the college you choose) so it is not something to rush. If you are thinking of moving after your lease is up or when you relocate jobs, start planning as soon as possible. Feeling forced into purchasing something as important as a home will likely lead to regrets.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.
