If you currently have a mortgage you may be wondering how you can lower your monthly payments without refinancing. Recasting your mortgage is one way to accomplish this.
What is mortgage recasting?
Recasting is when a borrower pays a large lump-sum payment towards their principal and the remaining monthly payments are then adjusted to reflect a new amortization schedule. The lower loan amount means you will also pay less in interest over the life of the loan. All the terms of the mortgage will remain unchanged.
How is recasting different from refinancing?
Refinancing is essentially replacing one loan with another one. Your new lender will pay off the balance to your old lender and then you begin making payments with the new lender. This means there are new loan terms including a new interest rate. Refinancing can lower your monthly payments if you refinance for a lower interest rate and because the length of the loan essentially starts over (you pay a 30 year mortgage for a few years and then refinance to another 30 year mortgage with the lower balance). Recasting will not change your pay-off date or your interest rate.
What are the pros of recasting a mortgage?
Recasting is often less expensive than refinancing since you are not paying for closing costs or an appraisal. Recasting is usually easier to qualify for than refinancing as well; your lender might not require proof of income or your credit scores. Additionally, while your interest rate will remain the same, you will still end up paying less in interest as the principal balance is lowered after you make the lump-sum payment. With a refinance, if you replace a 30 year mortgage you’ve paid on for several years with another 30 year mortgage, you may end up paying more in interest as mortgage payments start interest-heavy in the early years.
What are the cons of recasting a mortgage?
For starters, you might not even be able to recast a mortgage; not all lenders allow a recast and certain loans (like FHA or VA loans) do not qualify for recasting. If you have a high interest rate with your current loan, you will not be lowering your rate because the loan terms are not changed. You will not be shortening the length of the loan whereas a refinance could shorten your loan term if you move from a 30 year mortgage to a 20 or 15 year term. It’s also worth noting that recasting requires you to make a large, lump-sum payment (typically at least $5,000.00), thereby tying up your cash in equity. Keep in mind that while less expensive than refinancing, there is still a fee to recast a mortgage as well.
Recasting a mortgage can be an attractive option for someone looking to lower their monthly payments without the hassle of refinancing (as well as spending less than what would be required to refinance). A quick discussion with your lender can help you decide if a mortgage recast might be the right move for you.
Freddie Mac and Fannie Mae both announced on March 25th, 2020 that a two month deferral option is available for some borrowers who are facing a short term hardship (such as being laid off from a job because of COVID-19). If the borrower is able to resolve the hardship within that two month time period and can resume paying their mortgage payments in full, they will be eligible to defer those two months of payments to the end of their mortgage without needing to significantly modify the loan. The deferred payment and interest is due either on the mortgage maturity date, the pay-off date or upon the sale of the property, whichever comes first. Mortgage servicers will be able to start evaluating borrowers to see if they are eligible for payment deferrals beginning on July 1.
Original blog post regarding forbearance plans can be found here.
There is a lot of uncertainty as the number of COVID-19 cases rise in the United States. Schools have closed for the rest of the school year in Virginia and many businesses have had to close or scale back temporarily, meaning that some people have found themselves unemployed. In light of this crisis, Freddie Mac, Fannie Mae, and the Department of Housing and Urban Development (HUD) are suspending all foreclosures and evictions until May 17th, 2020. Similarly, the Supreme Court of Virginia has ruled to suspend all evictions for tenants who are unable to pay their rent now until April 6th. As events continue to unfold, these dates could be extended.
Freddie Mac and Fannie Mae both have forbearance plans for homeowners who are impacted by the COVID-19 outbreak. The forbearance plan reduces or suspends mortgage payments for 12 months. Borrowers in a forbearance plan will not incur late charges during that time. Additionally, the forbearance plan will suspend reporting to the credit bureau for past due payments. Keep in mind that a loan forbearance plan is best used for situations of temporary hardship since the interest continues to accrue even during the forbearance period.
Any homeowners who need mortgage assistance are strongly urged to reach out to their mortgage servicer at this time. It's important to note that some lenders may expect a lump-sum payment at the end of the 12 months while others may offer a repayment plan. Loan modifications may also be available.
The vast majority of borrowers have loans under Fannie Mae, Freddie Mac, or HUD. To see if your mortgage is owned by Freddie Mac, click here. To see if your mortgage is owned by Fannie Mae, click here.
Sources/ Additional Reading:
A huge aspect of purchasing a home is finding the right mortgage loan for you. There are several different types of mortgages that each have their own advantages and disadvantages. You should always speak with a mortgage lender to review what your best options would be. Below is a brief outline of some of the most common loans you may want to consider. While reviewing mortgage loans might not seem exciting on the surface, just keep in mind that the right mortgage loan can help save you money and planning how to spend that extra money is definitely exciting.
These loans are most often conforming, meaning they stay within the federal limits set by Freddie Mac and Fannie Mae (government owned mortgage purchasers). In the Shenandoah Valley the cap is $510,400. With these loans, if you put down less than 20% of the purchase price for the home, you will pay a Private Mortgage Insurance premium each month until you reach 20% equity in your home.
Fixed Rate Loans
This is the most common mortgage loan, making up 75% of all home loans. These loans come in 15, 20 and 30 year terms. While the 30 year term is the most popular, the 15 year term will build equity faster, in part due to a lower interest rate. The interest rate stays fixed so the monthly payments remain the same for the duration of the loan; this is great for budgeting and there are no surprises down the road if you plan to stay in your house for several years. The down-side is that you could end up paying more in interest than you would with a different kind of loan.
Adjustable Rate Mortgage Loans
With ARM loans, there is an introductory period when the interest rate is fixed (one month to 10 years) after which the loan interest rate can fluctuate according to the index they are tied to. ARM loans can be attractive to buyers who don’t plan to stay in their house long-term because their initial rates are typically lower than the fixed rate loans but they come with the risk of a much higher interest rate after the fixed period.
Government Agency Backed Loans
Unlike conventional loans, these loans have more restrictions; investment properties and second homes are typically not eligible. However, these loans offer a much lower down payment and typically lower interest rates.
Virginia Housing Development Authority offers a variety of loans designed to meet the needs of Virginia's homebuyers, including Conventional 30 Year Fixed (Fannie Mae No MI, Fannie Mae Reduced MI), plus FHA, VA (Veterans Affairs), and RHS (Rural Housing Services) loans which are listed below. VHDA also offers a down payment assistance grant, closing cost assistance, and mortgage credit certificates. Something to keep in mind is that most VHDA loans are only for first time homebuyers and there is a maximum income and loan limit by region.
Federal Housing Administration Loans come in 15 or 30 year fixed rates and offer a low down payment requirement (can be as low as 3.5%), plus the ability to use a financial gift or inheritance for the down payment. Lower credit score and debt-to-ratio requirements are also advantages to FHA loans, particularly for first time homebuyers. The biggest drawback is that FHA borrowers must pay an upfront mortgage insurance fee of 1.75% of the total loan amount, as well as a monthly premium regardless of down payment size.
USDA/ RHS Loans
United States Department of Agriculture offers Rural Housing Service Loans. They can be a good option if you wish to purchase a single family home that is located in an eligible, rural area. This loan offers a no down payment option and tends to have lower interest rates than a conventional mortgage. The disadvantages to USDA loans are that you will have to pay mortgage insurance premiums and there is an income limit (for Harrisonburg Metro area- not the city itself, which is not eligible- this is $86,850 for a 4 person or less household) as well as a loan limit ($265,400 for Rockingham County).
If you've served in the United States military, you may qualify for a Veterans Affairs loan. A VA loan doesn’t require a down payment and there are no mortgage insurance requirements. There is also no minimum credit score requirement and interest rates tend to be lower. Because these loans come with so many benefits, there are a few restrictions; the property in question must be your primary residence, and it must meet “minimum property requirements" (not a fixer upper) which can prolong the appraisal process. There is also a funding fee associated with the loan.
There are several other, lesser-known mortgage loans (such as Balloon, Bridge, Jumbo, Interest-Only, Rental Property, etc) that may warrant some additional research as you determine the best loan for your situation. While one mortgage type may work for your friend or relative, it may not be the best fit for you which is why you should work with your lender and review the terms of any loan carefully.
Avoid Changing your Financial Profile
If you have your house under contract, this probably means that you have gotten a pre-approval/qualification letter. Your lender will now make a formal loan application. This application is based on your finances at that point. It is vital that you don't make significant changes to you finances until after you close. Problems can occur if you buy a car, open new lines of credit, change jobs, acquire other significant debt, etc. It is a good idea to talk to your lender before making significant purchases that would out you into debt. You also don't want to spend your down payment/ closing costs.
From there, you will have a number of items to complete before closing.
Contract to Closing Check List
When going over the contract, my clients often get overwhelmed. There are a lot of deadlines in the contract that can have serious consequences if missed. I always assure my clients that they don't need to remember all the dates. My goal is to make sure you are informed and on top of everything from contract to closing.
To achieve this, I take all the critical dates and things you should be aware of and put them on a checklist. I then send you regular updates on what the next action items are. This way, if you want to get ahead of the game, you have access to all the steps but if you find all the steps overwhelming, I will break them down and give them to you as needed.
Buying a house is one of the biggest financial decisions the average person makes. I am here to make that process as smooth and as painless as possible.
A home is, for most of us, the biggest expenditure we will ever make. How do you figure out how much home you can afford?
New websites for homebuyers make it easy to make these calculations, once you know the key numbers to plug in. The biggest number is your gross annual income. Once you have that figured out, you will need to figure your monthly debt. Be sure to include all forms of debt like credit cards, car payments, school loans, etc. The third number you will need is the amount you can make on a down payment. If you have these three numbers, you can just plug them into a calculator, like this one from Zillow. There are quite a few such calculators available on the web. For a slightly more complex formula that includes your credit score and the zip code you’re interested in, go to Nerd Wallet.
Debt To Income Ratio
The main thing that you want to find out from these calculators is your DTI, or debt to income ratio. If you used Zillow’s calculator to figure out how much you can afford to spend on a home, you can then go to their DTI calculator and figure your overall debt to income ratio. A good DTI is considered to be 36% or lower. According to the 36% Rule, you should never let your DTI exceed 36%. In order to be considered for a Qualified Mortgage, 43% is the highest DTI that you can have. It’s important to have a Qualified Mortgage because they have better protections for borrowers, such as a limit on fees.
Another nifty tool you can play with on the Zillow site, Nerd Wallet, or other sites is a mortgage calculator. This tool can show you different interest rates for different time periods, like a 15 year mortgage versus a 30 year mortgage. Playing around with different numbers will give you a sense of how you would need to budget and what the overall cost would be for different mortgages.
Once you have a sense of how much you can spend on a home, then you will need to consider what the housing market is like in the area you want to buy. More on that to come . . .
Sources: https://www.zillow.com/home-buying-guide/can-i-afford-a-house/, https://smartasset.com/credit-cards/what-is-a-good-debt-to-income-ratio
One of the main hurdles in a contract is financing. This is why their are two points at which sellers ask for verification from the buyers that things are moving forward. Most people are familiar with the first, a pre-approval letter. Buyers are often encouraged to get a pre-approval letter before looking for houses and most sellers require to see the letter before considering an offer.
Sellers and buyers are often not familiar with the second "checkpoint" that is built into the contract. This is called the Loan Commitment Letter.
The pre-approval letter is the bank communicating that they have reviewed the buyers information and believe they will be able to get a loan. The loan commitment letter will generally come around 30 days after ratification. This letter usually comes after the underwriters have reviewed the buyer and house in more depth.
It is best practice to make sure you have the loan commitment not contingent upon the appraisal. There will always be contingencies to the loan commitment but a letter contingent upon an appraisal means that it the report hasn't been turned in yet, the underwriter flagged items on the report, or the underwriter hasn't reviewed it.
Like many terms in the real estate industry, it can be hard to really get a handle on what a term like "PMI" means, but we’re breaking down the facts behind PMI once and for all. Read on to see what it actually means, how it works, and why it may have gotten a bad rap.
So, what exactly is PMI?
“PMI” stands for Private Mortgage Insurance.
These days, it’s common for lenders to require it in order to be approved for a mortgage if you plan on putting less than 20% down on the home.
Since buyers who make lower down payments have less automatic equity in the home, they’re considered a bigger risk. Therefore, banks require these buyers to take out a mortgage insurance policy for their protection. These policies shield the bank against loss in the event that the buyer stops making mortgage payments. And, if the buyer defaults on the loan, they have the ability to recoup their investment through the policy.
It’s important to note, however, that this policy will not protect you, as the buyer, if you decide to stop making mortgage payments.
If that happens, your credit score will suffer and you could end up losing your home to foreclosure.
How does PMI work?
How your PMI functions will depend largely on the loan program you choose, so you’ll want to ask your lender to go over the specifics with you in depth. That said, there are a few factors that impact every policy.
Again, the rate you pay will depend largely on the loan program that you choose. FHA loans are standardized while conventional ones are more variable. With a conventional loan, your rate is determined by the lender, based on your credit score and loan-to-value ratio, or how large of a down payment you’ve made. Typically, the higher both those things are, the lower your rate will be.
As a general rule, PMI tends to run anywhere from $30-$70 dollars per month for each $100,000 that was borrowed. If, for example, you purchased a $300,000 home, you could generally expect to pay between $90-$210 per month towards your policy.
Payment methods also vary by policy. However, there are a couple of common options. All FHA loans, as a rule, are paid in the same manner. They come with an initial upfront payment towards your premium and then a recurring annual payment each year that you hold the loan.
Conventional loans, on the other hand, work on a case-by-case basis. In some instances, your PMI is tacked on to your monthly mortgage payment, along with your mortgage interest and other fees. Like these fees, this portion of the payment does not go towards paying down your principal or building equity.
In other cases, you may have the option to make lump-sum payments or to finance your entire premium through a smaller loan.
Length of policy
This is another instance where FHA and conventional loans differ. Since FHA loans are government-backed, they require that you pay PMI for the entire length of the loan. Conventional loans, on the other hand, typically will allow you to drop your PMI once you build up more equity in the home. Usually, once you’ve paid off over 20% of the loan. However, you’ll want to check with your lender to verify the details of your specific policy.
How to avoid paying PMI
If you’re against paying PMI, you do have some options to avoid having to take out a policy.
These are the most common ones:
Typically, if you can qualify for a conventional loan and make a down payment of 20% or more, you won’t be required to take out a policy.
Thanks to the GI bill, the PMI requirement is waived for qualified veterans. You also have the ability to finance up to 100% of the home’s value.
Many physician loans also forgo this requirement.
Since portfolio and non-conforming loans each have their own unique set of terms, you may be able to find some options without a PMI requirement.
Piggybacking” refers to the practice of taking out an additional, smaller loan to cover your entire PMI premium upfront. However, keep in mind, that with this tactic, you’ll have an additional monthly payment to contend with, one that may come with the higher interest rates that are common among smaller loans.
Though having to pay PMI is not the most fun thing in the world, it’s not always the root of all evil either. It’s crucial to talk your lender about the loan as a whole before choosing the best option for you.
Often, the PMI requirement gives banks enough security to allow them to offer you better interest rates than they would if it wasn’t there, meaning you may actually end up paying less in fees over the life of your loan, all things considered. Be sure to do your research before agreeing to any specific loan terms.
This article originally appeared on OpenListings.
Fannie Mae and Freddie Mac support mortgages with as little as 3% down. This is a significant drop from their previously supported 5% minimum down payment.
This will help low income and first time home owners be able buy a home. However, borrowers will still need to be required to meet strict criteria to qualify for the this type of mortgage. To qualify, buyers will need to have a minimum credit score of 620, offer detailed information on employment and assets, and attend home ownership counseling.
Further good news to buyers potentially interested in this type of loan, private mortgage insurance (PMI) will drop after the mortgage balance is less than 80%. In contrast, FHA loans require a minimum of 3.5% down and the PMI remains active for the life of the loan.
Ask your mortgage broker to see if you can qualify for this program. If you want recommendations, contact me bellow.
Finding extra money each month can be difficult. It may seem that when you are able to put money into your savings account one month, you end up needing it the next month. So, how can you go about saving for a new house? Here are some tips that could help make the process easier.
Sure, this seems obvious but this can be the best tool to help you save! Budget for every dollar you earn in a month and set an achievable savings goal. Then, just track the amount you spend to make sure you don't go over budget. If you stick to your budget, you will be able to put money away. I find that even if unexpected things come up or you don't stick to the budget perfectly, you will still save a lot more if you are trying to adhere to a budget.
Saving For Your First House?
If you are saving for your first house, I would recommend opening a money market account with an institution such as Vanguard. What you want to look for is an account that gives the best returns with the least amount of fees. Money market accounts won't give you amazing returns but they will give you more than most savings accounts. Also, if you want to take money out of your account, it can often take 2 days to post into your personal account. This can be helpful for savings as it may not feel as accessible.
It my also be helpful to figure out how much you will need to save. Let me know if you have questions.
Plan on Selling a House to Buy the New One?
If you already own a house and you are planning on selling it to buy another house, first check with me to see what the house would be worth in today's market. The lack of inventory has made housing prices go up over the past year. You may find that you are in a better position than you thought.
If you still need to save money, try paying off the mortgage as a form of savings. By doing this, you are guaranteed to save(gain) your interest rate. This is likely better than any other savings account or money market account you can find. Furthermore, the more you pay off of a mortgage, the more your monthly payment goes towards principal instead of interest.