Welcome to part 2 of 15 things you didn’t know about mortgages. If you missed the first few check them out here. let’s dive right in and take a look.
1-Paying interest at the start
2-Mortgage rates change all the time
4-You can still buy a house with low credit
6-It doesn’t always have to be 20% down
7-Pre-approval helps when placing an offer on your house
8-It’s more difficult for the self-employed VS the employee
9-Renewal should be treated as a new mortgage. Other companies may have better rates
10-A 30 year mortgage can actually be cheaper even though you spend more money.
11-You maybe buying a liability not an asset
12-Banks don’t want to foreclose, they lose money
13-You can get longer than a 5-year term
14-Banks look at where the money goes not just how much you have
15-Getting credit between Pre-approval and house purchase may affect mortgage approval
Your down payment doesn’t have to always be 20%
There are ways that you can purchase a property with less than 20% down. These options are becoming more and more popular because it allows people to purchase a house rather than rent for a lower cost than a conventional mortgage of 20%.
Benefits of securing a mortgage with less than a 20% down payment.
If you are renting you will have to continue to rent and save up for the 20% down payment. This is taking money out of your pocket that you could be putting toward your new house or property.
Having a 5% down payment can keep more of your available money liquid for any repair or upgrades that need to happen to the home after you purchase.
The average price of a home increases at a rate of 3-5% per year so by waiting a few years until you have the 20% down payment, the price of the home you want to buy will have likely increased. This isn’t always the case the housing market goes up and goes down but the average price over a long period will usually go up in value.
There are also some negatives to purchasing a house with less than 20% down
If you are purchasing a house with less than 20% down it may be because you don’t have any more than that. This can lead to having to wait to do potentially necessary repairs. Also, the costs and fees of purchasing a house need to be paid for and may not be able to get absorbed into the mortgage payments.
Having less than 20% down can affect the total amount you can borrow from the lender as it increases the risk they are taking on the loan.
You will be required to purchase mortgage insurance to protect the lender, not you.
Your debt to income ratio will be higher which may make it harder to secure any future loans until you have built up equity.
Pre-approval helps when making an offer on a house
When you are thinking of buying a house where do you start? To purchase a house you need a few things. First, you will need a decent credit score.
Your credit score is a history of your ability to pay expenses on time. Banks and lenders use a credit score to manage their risk in lending you money. The higher your score the better chance of you paying back the loan.
You are also going to need enough money to make a down payment on the house that you want to place an offer on. You need a down payment of typically at least 5%. Having a low down payment of only 5% will mean you must purchase mortgage insurance as well.
You will also need proof of employment normally for at least 2 years with a stable, consistent income.
And lastly getting Pre-approval for a mortgage.
Getting Pre-approval for a mortgage does a few things that benefit the purchaser.
Being Pre-approved will let your real estate broker know you are serious about purchasing a home. Having your real estate broker know you are serious about purchasing a home is an advantage because they will try and find you the deal you need, the right house for you within your budget. Getting Pre-approved will also outline your budget for how much you can actually afford. Can you afford that $600,000 house?
The Pre-approval process will outline everything and let you know where you are at. One of the other benefits of getting Pre-approval is during the offer phase. When you are pre-approved for a mortgage and you make an offer on a house, apartment or any other property you will have eliminated one of the conditions of purchasing.
You may still have conditions such as a house inspection or getting a well tested before purchase but if the homeowner has 2 offers in on his or her property. If one offer is conditional on financing and the other offer isn’t, that greatly increases your chances of having your offer accepted over the other.
The reason this makes such a big impact is that your offer is only valid for a certain period of time. If the homeowner chooses to go with the offer conditional on financing and their financing falls through they must start the whole process of selling their home all over again because your offer will no longer be valid.
It’s More Difficult For The Self Employed To Get Pre-approved vs. An Employee
Getting pre-approved for a mortgage isn’t all-around difficult. But for some, such as the self-employed it is more burdensome to be approved for a mortgage. Not because lenders look down on self-employed people but because it is a lot more work to prove income when you are self-employed.
For a salaried worker typically the lender will need to see a few consecutive pay stubs showing consistent income as well as a year-end tax return so the lender can have proof of total income and get an idea about how stable and consistent the income is.
When you are self-employed your income can vary greatly week to week, month to month. Some businesses are seasonal as well where the business makes most if not all of its money in maybe 10 months of the year or 6 months of the year. Banks and lenders understand this and just go into greater depth during the analysis of income for the self-employed.
This could mean that you need proof for a few years of stable income rather than just one.
It takes more paperwork and proof if you are self-employed but all the requirements for a Pre-approved mortgage are the same. Having all of this paperwork ready before trying to get approved will make the process much simpler.
Some things you can do to help in the process when you are self-employed are:
Keep all of your personal expenses separate from your small business.
This can make it easier because you will be required to show proof of expenses, not just gross income. When your personal expenses are mixed in with your business expenses it can become more difficult to prove the actual business income.
Keep a good credit score.
This helps both employee and self-employed of course but your credit history matters just as much when you are self-employed. Now as self-employed you have more expenses so making sure that they are all paid on time is critical.
Pay attention to your debt.
Lots of businesses have a big overhead. The overhead may be machinery, vehicles, tools or inventory any expense or debt even from business credit cards will play a role. The banks and lenders will look at your income to debt ratios to also determine if you can reasonably afford to take on the added debt.
Proof of your assets
An asset by definition is anything that can readily be turned into cash. That is a vehicle, building, cash itself, etc. The more assets you can prove you have the more the lender will favor your request to borrow money for a mortgage. The more assets you have lowers the risk for the lender because those assets can be liquidated to produce cash to pay for the mortgage.
Renewal should be treated as a new mortgage. Other companies may have better rates
Every time your mortgage comes up for renewal, don’t just go with the same lender you had potentially 5 years ago. There are many options available sometimes it may be better to completely restructure the type of mortgage you have all together.
Going to your mortgage broker whenever it is time to renew can save you thousands of dollars in the long run. Even if you can lower your rate by 0.5% throughout a mortgage lasting upwards of 30 years 0.5% interest makes a big difference.
There are more and more lenders coming around every year. Each of these lenders is trying to get as many good quality mortgages as they can the more mortgages they have getting paid on time the more money that the business makes. This, in turn, makes the mortgage industry very competitive. Especially, in recent years where interest rates have been very low and more people can afford to purchase homes or purchase bigger homes.
Do your due-diligence in lowering the amount you give to the banks, your wallet will thank you.
A 30-year mortgage can actually be cheaper even though you spend more money.
This may sound like an odd thing to say but hear me out I can show you how to benefit from a 30-year mortgage in comparison to a 15-year mortgage.
I know, I know, get rid of all debt as fast as possible. I can’t wait to have a mortgage burning party. Freedom 55, debt-free and living the dream.
All great goals, but perhaps there’s another way?
I am going to use some easy numbers to show how getting a 30-year mortgage can benefit you more in the long run than a 15 year with the same price house, even though you spend more in interest.
Here are some numbers our total mortgage will be for $100,000 we will put 5% down ($5000) our interest rate will be 4.5% for both and the amortization periods will be 15 and 30 years, with an adjusted inflation rate of 2% per year.
For the 15 year mortgage, our monthly payments will be a total of $751 a month and the payments for a 30-year mortgage will be $496. That’s a difference of $255 which is important.
As long as you can afford the 15-year payment of $751 and you lower that payment to $496 by extending your amortization period you can invest the difference over the 30 years. Let’s take a look at some numbers if you were to invest the difference rather than just pay the mortgage down faster.
- Total monthly investment: $255
- Length of time invested: 30 years
- Total investments with a 6% return per year with 2% inflation: $320,962.12
But, what about if you kept the 15-year mortgage and after the 15-year amortization you invested the $751 each month for 15 years to match the longer amortization of the 30-year mortgage?
- Total monthly investment: $751
- Length of time invested: 15 years
- Total investments with a 6% return per year with 2% inflation: $249,408.54
After 15 years of investing the $751, you will have a total investment of $249,408.54 that’s a total difference of $71,553.58 between the two.
But what does this mean??
What this means is, with inflation at 2% after all the expenses of the 2 mortgages are paid. You will have a total of $140,732.12 by investing $255 every month for 30 years in comparison to $112681.51 after 15 years paying $751 per month.
Now, there are some variables here that need to be considered. This is calculated with a constant interest rate of 4.5% which may not be possible as we don’t know what interest rates will do in the future. Also, everything is adjusted for a 2% inflation which is average inflation per year but there again there is no guarantee that factors such as these will be the same 30 years from now.
Sometimes, it’s not the totals that you need to worry about. Sometimes, just planning for a long term investment can make a big difference in where you are in 30 years. Learn as much as you can and make the best decisions you can for yourself never invest or change your investment strategies unless you know what to expect.
check out part 3 for more awesome things you didn’t know about mortgages!! Or if you missed it, check out part 1.