Getting a mortgage, paying your mortgage, refinancing your mortgage: These are all major undertakings, but during a pandemic, all of it becomes more complicated. Sometimes a lot more complicated.
But make no mistake, home buyers are still taking out and paying down mortgages during the current global health crisis. There have, in fact, been some silver linings amid the economic uncertainty—hello, record-low interest rates—but also plenty of changes to keep up with. Mortgage lending looks much different now than at the start of the year.
Whether you’re applying for a new mortgage, struggling to pay your current mortgage, or curious about refinancing, here’s what mortgage lenders from around the country want you to know.
1. Rates have dropped, but getting a mortgage has gotten more complicated
First, the good news about mortgage interest rates: “Rates have been very low in recent weeks, and have come back down to their absolute lowest levels in a long time,” says Yuri Umanski, senior mortgage consultant at Premia Relocation Mortgage in Troy, MI.
That means this could be a great time to take out a mortgage and lock in a low rate. But getting a mortgage is more difficult during a pandemic.
“Across the industry, underwriting a mortgage has become an even more complex process,” says Steve Kaminski, head of U.S. residential lending at TD Bank. “Many of the third-party partners that lenders rely on—county offices, appraisal firms, and title companies—have closed or taken steps to mitigate their exposure to COVID-19.”
Even if you can file your mortgage application online, Kaminski says many steps in the process traditionally happen in person, like getting notarization, conducting a home appraisal, and signing closing documents.
As social distancing makes these steps more difficult, you might have to settle for a “drive-by appraisal” instead of a thorough, more traditional appraisal inside the home.
“And curbside closings with masks and gloves started to pop up all over the country,” Umanski adds.
2. Be ready to prove (many times) that you can pay a mortgage
If you’ve lost your job or been furloughed, you might not be able to buy your dream house (or any house) right now.
“Whether you are buying a home or refinancing your current mortgage, you must be employed and on the job,” says Tim Ross, CEO of Ross Mortgage Corp. in Troy, MI. “If someone has a loan in process and becomes unemployed, their mortgage closing would have to wait until they have returned to work and received their first paycheck.”
Lenders are also taking extra steps to verify each borrower’s employment status, which means more red tape before you can get a loan.
Normally, lenders run two or three employment verifications before approving a new loan or refinancing, but “I am now seeing employment verification needed seven to 10 times—sometimes even every three days,” says Tiffany Wolf, regional director and senior loan officer at Cabrillo Mortgage in Palm Springs, CA. “Today’s borrowers need to be patient and readily available with additional documents during this difficult and uncharted time in history.”
3. Your credit score might not make the cut anymore
Economic uncertainty means lenders are just as nervous as borrowers, and some lenders are raising their requirements for borrowers’ credit scores.
“Many lenders who were previously able to approve FHA loans with credit scores as low as 580 are now requiring at least a 620 score to qualify,” says Randall Yates, founder and CEO of The Lenders Network.
Even if you aren’t in the market for a new home today, now is a good time to work on improving your credit score if you plan to buy in the future.
“These changes are temporary, but I would expect them to stay in place until the entire country is opened back up and the unemployment numbers drop considerably,” Yates says.
4. Forbearance isn’t forgiveness—you’ll eventually need to pay up
“The CARES Act is not designed to create a freedom from the obligation, and the forbearance is not forgiveness,” Ross says. “Missed payments will have to be made up.”
You’ll still be on the hook for the payments you missed after your forbearance period ends, so if you can afford to keep paying your mortgage now, you should.
To determine if you’re eligible for forbearance, call your loan servicer—don’t just stop making payments.
If your deferment period is ending and you’re still unable to make payments, you can request delaying payments for additional months, says Mark O’ Donovan, CEO of Chase Home Lending at JPMorgan Chase.
After you resume making your payments, you may be able to defer your missed payments to the end of your mortgage, O’Donovan says. Check with your loan servicer to be sure.
5. Don’t be too fast to refinance
Current homeowners might be eager to refinance and score a lower interest rate. It’s not a bad idea, but it’s not the best move for everyone.
“Homeowners should consider how long they expect to reside in their home,” Kaminski says. “They should also account for closing costs such as appraisal and title insurance policy fees, which vary by lender and market.”
If you plan to stay in your house for only the next two years, for example, refinancing might not be worth it—hefty closing costs could offset the savings you would gain from a lower interest rate.
“It’s also important to remember that refinancing is essentially underwriting a brand-new mortgage, so lenders will conduct income verification and may require the similar documentation as the first time around,” Kaminski adds.
6. Now could be a good time to take out a home equity loan
Right now, homeowners can also score low rates on a home equity line of credit, or HELOC, to finance major home improvements like a new roof or addition.
“This may be a great time to take out a home equity line to consolidate debt,” Umanski says. “This process will help reduce the total obligations on a monthly basis and allow for the balance to be refinanced into a much lower rate.”
When you apply for a mortgage or refinance an existing mortgage, you want to secure the lowest interest rate possible. Any opportunity a borrower can exploit to shave dollars off the cost is a big win.
This explains the allure of no-fee mortgages. These home loans and their promise of doing away with pesky fees always sound appealing—a lack of lender fees or closing costs is sweet music to a borrower’s ears.
However, they come with their own set of pros and cons.
No-fee mortgages have experienced a renaissance given the current economic climate, according to Ralph DiBugnara, president of Home Qualified. “No-fee programs are popular among those looking to refinance … [and] first-time home buyers [have] also increased as far as interest” goes.
Be prepared for a higher interest rate
But nothing is truly free, and this maxim applies to no-fee mortgages as well. They almost always carry a higher interest rate.
“Over time, paying more interest will be significantly more expensive than paying fees upfront,” says DiBugnara. “If no-cost is the offer, the first question that should be asked is, ‘What is my rate if I pay the fees?’”
“Closing costs are typically 2% to 5% of the loan amount,” he explains. “On a $200,000 loan, you can expect to pay approximately $7,500 in lender fees. Let’s say the interest rate is 4%, and a no-fee mortgage has a rate of 4.5%. [By securing a regular loan], you will save over $13,000 over the course of the loan.”
So while you’ll have saved $7,500 in the short term, over the long term you’ll wind up paying more due to a higher interest rate. Weigh it out with your financial situation.
Consider the life of the loan
And before you start calculating the money that you think you might save with a no-fee mortgage, consider your long-term financial strategy.
“No-fee mortgage options should only be used when a short-term loan is absolutely necessary. I don’t think it’s a good strategy for coping with COVID-19-related issues,” says Jack Choros of CPI Inflation Calculator.
A no-fee mortgage may be a smart tactic if you don’t plan to stay in one place for a long time or plan to refinance quickly.
“If I am looking to move in a year or two, or think rates might be lower and I might refinance again, then I want to minimize my costs,” says Matt Hackett, operations manager at EquityNow. But “if I think I am going to be in the loan for 10 years, then I want to pay more upfront for a lower rate.”
What additional fees should you be prepared to pay?
As with any large purchase, whether it’s a car or computer, there’s no flat “this is it” price. Hidden costs always lurk in the fine print.
“Most of the time, the cost for credit reports, recording fees, and flood-service fee are not included in a no-fee promise, but they are minimal,” says DiBugnara. “Also, the appraisal will always be paid by the consumer. They are considered a third-party vendor, and they have to be paid separately.”
“All other costs such as property taxes, home appraisal, homeowners insurance, and private mortgage insurance will all still be paid by the borrower,” adds Yates.
It’s important to ask what additional fees are required, as it varies from lender to lender, and state to state. The last thing you want is a huge surprise.
“Deposits that are required to set up your escrow account, such as flood insurance, homeowners insurance, and property taxes, are normally paid at closing,” says Jerry Elinger, mortgage production manager at Silverton Mortgage in Atlanta. “Most fees, however, will be able to be covered by rolling them into the cost of the loan or paying a higher interest rate.”
When does a no-fee mortgage make sense?
For borrowers who want to save cash right now, but don’t mind paying more over a long time frame, a no-fee mortgage could be the right fit.
“If your plan is long-term, it will almost always make more sense to pay the closing costs and take a lower rate,” says DiBugnara. “If your plan is short-term, then no closing costs and paying more interest over a short period of time will be more cost-effective.”
With the economy in unprecedented territory and the phrase “housing crash” on the lips of economists, mortgage holders have questions. And current homeowners aren’t alone: First-time home buyers in search of a new mortgage also have questions on how and when to proceed.
For borrowers (and potential borrowers) in search of answers, we present your most frequently asked mortgage questions—along with the all-important answers.
Our top 12 mortgage questions range from the basics to more complex financial moves, to assist consumers who’ve been financially affected by the ongoing pandemic. If you have a question we’ve missed, please drop us a line and tell us your question.
1. Are mortgage rates going down?
It depends on the comparison. Mortgage rates are down from a year ago, but up from a few weeks ago. It’s unclear whether they’ll be headed down again.
In a recent realtor.com® article about mortgage rate fluctuations, Matthew Graham, chief operating officer of Mortgage News Daily, said rates are “the most volatile they’ve ever been, by a wide margin.”
Much like the stock market, mortgage rates have been on a wild ride. In early March, rates were at a record low, then went back up.
“Mortgage interest rates are closely correlated with the 10-year Treasury yield, which has stayed below 1% for much of the last month,” says Bill Banfield, executive vice president of capital markets for Quicken Loans and mortgage platform Rocket Mortgage. “In general, bad economic news is good news for mortgage rates. Mortgage rates will likely stay low as long as the 10-year Treasury yield also remains at its low levels.”
2. Why have mortgage rates gone up?
Despite a constant drumbeat of negative economic news, mortgage rates have gone back up after hitting a record low in early March.
We examined this phenomenon in a recent article about the upward trend in rates. In short, homeowners rushed to take advantage of low rates and refinance their existing mortgages. To handle the rush, many lenders raised rates, in hopes of slowing down the stampede.
In the secondary mortgage market, a wave of refinancing created a glut—which sent rates higher. Lenders often bundle and sell some of their home loans as mortgage-backed securities on the secondary market. This frees up cash for lenders to make new loans. More bundled loans on the market meant lower prices for those securities.
But even though rates have crept up, there’s room for them to fall again with so much uncertainty in the marketplace.
“We’re in uncharted territory, so you can’t look to history as a guide to what could happen. It’s hard to predict how mortgage rates will react,” says realtor.com’s chief economist, Danielle Hale. “I don’t think they’ll go up until it’s pretty clear we’re out of the woods. They might move sideways, or they might go down more slowly.”
3. What are mortgage rates today?
Mortgage rates change daily (even hourly), and a number of elements factor in to the rate a borrower locks in. Although many people follow the Federal Reserve’s actions when it slashes or raises the federal funds rate, that doesn’t directly affect mortgage rates.
“You’re not getting [a mortgage] directly from the Fed,” says Mary Bell Carlson, a certified financial planner known as the Chief Financial Mom. “You’re getting it through a service provider, which is a bank or mortgage lender.”
Mortgage rates are influenced by both the federal funds rate and the Treasury bond market. In addition, each lender adds a percentage to the rate to account for various company fees, Carlson says. So even when the federal funds rate is at 0%, you’re not going to finda mortgage that allows you to borrow with zero interest.
The realtor.com mortgage rate finder will give you information on mortgage rates in your area. All you’ll need to do is enter your ZIP code and answer questions such as the following:
If you are looking to buy a new home or refinance
The type of home you want to buy
Where you are in the home-buying process
If you plan to use the home as a primary residence, vacation property, or investment
Your veteran status
Whether you’re a first-time or repeat home buyer
Your projected price range and how much you’re willing to put as a down payment
Financial information such as your household gross income, credit score, employment status, and past bankruptcy filings
Once your information is entered, you’ll see the latest mortgage rates in your area.
And because each lender is different, it pays to research and shop around.
Carlson advises not to limit yourself when it comes to working with lenders and to look beyond your own bank.
“You absolutely want to do your homework and check around,” says Carlson.
4. Should I refinance my mortgage now?
Mortgage rates are low, and if you secured a mortgage in early 2019, 2018, or 2017, you’re likely a solid candidate for a refinance. Be aware, though, a refinance replaces the original loan with a new one and you may have to change lenders.
“It’s a great time to take advantage of how far rates have fallen in the last month, and it’s a pretty dramatic decrease, especially for somebody who took out a mortgage 12 to 48 months ago,” says Banfield.
The realtor.com refinance calculator can help you determine if refinancing is a smart strategy. You’ll need to provide a few critical bits of information to get a well-informed answer:
Original loan amount
Original loan terms and rate
Original loan origination date
The current balance on your mortgage
Whether or not you want to take out some cash
New loan terms and rates
The amount of the new loan you want
The refinance calculator will provide you with an idea of how much you could save, and tell you how long it will take for you to break even. To calculate your break-even point, divide your total refinance costs by the monthly savings you’ll reap. For example: If your refinance cost $2,500, and you’ve knocked $100 off your monthly mortgage payment, your break-even point is 25 months.
“My check [for a refinance] is always: How long are you going to stay in the house? If you’re going to stay there longer than your break-even point, that makes sense for you to refinance; otherwise stay where you’re at,” says Robert Parades, a Tampa, FL–based branch manager for Hometown Lenders.
Assuming that a federal rate of 0% means you can get a 0% mortgage rate (Not true!)
Jumping on the refinancing trend too late
Forgetting about the fees associated with refinancing
Refinancing too much equity out of your home in a time of uncertainty
Expecting to lock in your lender’s quoted rates and fees ASAP
Shopping for the right loan for too long
If the calculator shows you could save some money by refinancing and you’re going to stay in your home long enough to break even and then some, make the move sooner rather than later. Rates are creeping back up, and if you’re affected by unemployment or a furlough, you likely won’t qualify for a refinance.
5. My mortgage payment is too high—what can I do?
If your mortgage payment is too high, you might want to consider refinancing if the timing is right.
“We have had a refinance boom. My team rarely does refinances, and I do maybe one refinance a year. In the last 30 days, I’ve done 14,” says Parades. “The interest rates probably about a year ago for somebody with decent credit were about 4.5% or 4.7%. With the government buying all of the mortgage-backed securities, it has deflated those rates to as low as 3.25%.”
6. Can I stop paying my mortgage for a few months?
Because of the pandemic, borrowers all over the country are dealing with unemployment or furloughs. Lenders understand the current economic situation and are offering options to clients who can’t currently pay their mortgage.
“What I’m telling people right now is, if you cannot pay your mortgage this month it’s important to reach out to your mortgage lender and negotiate and talk through it,” Carlson advises. “A lot of lenders are offering relief opportunities.”
Policies vary, but some lenders are allowing borrowers to pause payments for a few months. Several are waiving late fees, penalties, and the reporting to credit bureaus that often come with missing payments.
However, it’s a bad idea to stop paying without contacting your lender. Without a plan in place, you’ll accrue late fees and eventually face foreclosure proceedings.
Keep in mind: When a deferment or forbearance period is over, the missed payments are due, so there is no free money.
However, many lenders are allowing customers to work out terms other than paying a lump sum at the end of the forbearance period. When you contact your lender, be honest about your financial situation.
7. What are the repercussions if I stop paying my mortgage?
Again: Don’t do it. Speak to your lender. Putting your head in the sand and simply not paying your mortgage is a bad move and can have serious consequences.
“The worst thing people can do right now is just bury themselves and not do anything. The payments continue to come, and the [lender] has no idea how to help you,” Carlson says. “It’s better to reach out and be proactive rather than reactive.”
If you stop paying and ask for forgiveness months down the road, lenders might not be as willing to help you. Your decision will also affect your credit score, hampering your chances of obtaining any kind of loan in the future.
Carlson says it’s important to prioritize what you can and can’t pay. She adds it’s better to pay secured debt like mortgage and car payments before credit cards.
“If you don’t pay your credit card bills, they can’t come to your home and repossess your TV. They have no ability to repossess anything or touch your personal property [over missed] credit card payments,” Carlson says. “Whereas, if you don’t pay your mortgage lender, they can absolutely come and take your house.”
8. What is a cash-out refinance?
A cash-out refinance is a way to refinance a mortgage and turn some of the equity in your home into cash. This strategy is often used for home improvements or to consolidate debt. It differs from the main goal of a traditional refinance, which is to lower your monthly payment.
With a cash-out refinance, you’ll get money back from the bank. The loan usually has a fixed rate, unlike a home equity line of credit, which often has a variable rate. Also, a cash-out refinance replaces the first mortgage and doesn’t add a second mortgage like a home equity line of credit.
“If you have been paying down your mortgage in timely manner and you’ve built up enough equity, it’s a good time to tap into it,” says Sathi Roy, head of refinance at Better.com. “If someone is a little strapped for cash right now, it’s a perfect option.”
Roy says her company has seen a 150% increase in cash-out refinances since March.
The refinance calculator can help you figure out how monthly payments could change if you choose to employ the cash-out strategy.
9. What is mortgage forbearance?
“Forbearance [is a program] that would allow a temporary period for a borrower to not have to make a contractual monthly payment amount,” says Sara Singhas, director of loan administration for the Mortgage Bankers Association. “You can either pay a lesser amount of your mortgage—or not pay anything at all—for a period of time.”
At the end of the forbearance period, the amount of the missed payments is due, often in a lump sum. However, lenders do sometimes allow payment plans. Forbearance is for a short and specified term, and does not change the terms of your loan.
Mortgage forbearance requests shot up 1,270% between the weeks of March 2 and March 16. The association also showed the number of loans in forbearance went from 0.25% of all mortgages to 2.66% from March 2 to April 1.
During a forbearance period, lenders will not charge late fees or penalties, report missed payments to the credit bureaus, or begin foreclosure proceedings.
Lenders use the term “forbearance” interchangeably with “mortgage deferment.”
No matter what you call it, don’t let it dissuade you from reaching out to your lender and asking for help. Lenders will not automatically offer forbearance if you miss a payment. A plan must be in place if you think you can’t make your monthly payment. A solid payment history helps in forbearance cases, but in these unprecedented times, many lenders are changing their rules and regulations.
“The important thing to get across to folks is, if you need help, talk to a servicer because there are absolutely ways that borrowers can get assistance with paying their mortgage payments,” says Singhas.
10. What is a loan modification, and how do I get one?
A loan modification changes the original terms of a mortgage loan. It’s different from a refinance in that it does not pay off the original loan and replace it with a new one. Instead, it changes the conditions of the current loan.
“It is usually used when a homeowner has unexpected financial hardship that makes it difficult to make their mortgage payment,” Quicken’s Banfield says. “Under normal circumstances, a modification of a mortgage results in an adverse impact to a client’s credit history and credit score.”
Loan modifications can include an interest rate change, an extension in the payment schedule, a different type of loan altogether, or a combination of these levers.
“A homeowner can only get a loan modification through their current mortgage servicer, because they must consent to the terms,” Banfield explains. “Every servicer has its own standards for loan modification, and homeowners should contact their servicer to see if they qualify for a loan modification.”
11. Should I get a home equity line of credit?
A home equity line of credit, or HELOC, can help you turn equity you’ve built up in your home into cash. This financial tool is usually deployed for home improvement projects or updates. In current financial times, people are using HELOCs to pay bills.
“For some people, it’s their go-to option for savings—a lot don’t have other places to turn,” Carlson says. “Our homes are the biggest asset we own … so it is the asset that we turn to when times are tough.”
You can get a HELOC only if you have equity built up. So if you put 0% down on your home, have an interest-only loan, or have owned your home for less than a couple of years, there likely won’t be any equity to tap.
The interest rate on a HELOC is often variable, meaning it will adjust up during the period of the loan. Even though rates are low right now, there are risks associated with a HELOC.
A HELOC is secured debt, and although a HELOC is a lower-cost option to borrow money than credit cards, there are risks.
“If you don’t pay [HELOC] debt, it is tied to your home,” Carlson warns. “You’re adding a risk, because if you can’t pay that home equity line of credit back over time, your home is now at stake.”
12. Where can I find a mortgage calculator?
A mortgage calculator will help you figure out what you can afford and how much you’ll need to borrow. Yes, realtor.com has a handy mortgage calculator to guide your way.
The calculator will help estimate your entire monthly house payment—the principle, interest, taxes, homeowners insurance, and private mortgage insurance.
In order to use the tool, you’ll need to know:
The price of the home you’re considering
Estimated down payment amount
Mortgage interest rate
As you adjust the different numbers, you will see how your monthly payment can slide up or down. The largest variables at play are the home price and how much money you plan to put toward a down payment.
Realtor.com also provides an affordability calculator to help you figure out how much you can afford to spend each month on your mortgage. To use it, you’ll need to input your information:
Annual gross income
Down payment amount
Credit score range
This calculator provides guidance you’ll need to make an informed decision on how much home you can afford. Carlson also recommends running the numbers based on your net income to see the difference—net income is what you actually bring home each paycheck.
“Roughly speaking, if you can get a mortgage payment that is anywhere between a quarter to a third of your net take-home pay, that’s the sweet spot,” she says. “Because what that means is, if you have a quarter or a third of your income [for a mortgage], that means you’ve got two-thirds or three-quarters left to spend on everything else, including car loans, student loans, utilities, and food.”
With finances in peril due to COVID-19, many homeowners are in search of mortgage relief. Two strategies that many borrowers are anxious to invoke right now are mortgage deferment and mortgage forbearance.
Both tactics allow a borrower to skip monthly payments for a set period. Depending on the lender, there can be subtle differences between the two terms.
“We are seeing the terms being used interchangeably,” says Sara Singhas, the director of loan administration for the Mortgage Bankers Association.
She adds that both tactics allow a temporary period during which a borrower need not make contractual monthly payments. The differences between the two strategies come at the end of that period.
“What happens at the end of the forbearance period is the amount of payments that you missed during that forbearance will be due in a lump sum,” says Singhas.
Sometimes, lenders will work with borrowers to structure a payment plan, instead of demanding a lump sum.
Deferment—especially special programs that lenders have introduced during the pandemic—often allow customers to repay the money over time or to add it to the end of the loan period.
Clearing up confusion about mortgage forbearance
“In the mortgage world, it’s very fluid … [but] what we hear more is the term forbearance,” says Mary Bell Carlson, a certified financial planner professionally known as Chief Financial Mom. “Overall, forbearance is saying, ‘Hey, something has happened, I cannot pay.’”
A book Carlson has dubbed her Bible of the financial world, “Surviving Debt,” by the National Consumer Law Center, makes no distinction between forbearance and deferment.
“They do not even use the word deferment in terms of a mortgage, everything is called a forbearance in this book,” she says.
If a lender does differentiate between the terms deferment and forbearance, the difference will be at the end of the loan period, according to Singhas.
Some borrowers will be able to add extra payments to the end of the loan or make other arrangements to spread out repayment, while others will not. Sometimes, payment terms involve a new loan or a rewriting the existing loan.
Mortgage loan originator Krista Allred says one differentiation can center on foreclosure proceedings and timing.
“Technically, a mortgage forbearance agreement is when you’ve possibly been late, and the lender agrees not to foreclose during that forbearance period,” says Allred. In this scenario, a borrower already has a history of nonpayment before entering into a forbearance agreement.
But with the pandemic only revealing its enormous scope within the past 30 days, many borrowers haven’t been late—yet.
However, because of sudden job loss or because of the quarantine, borrowers have besieged the phone lines of their lenders, to get out in front of the financial iceberg.
Contact your lender for mortgage relief
No matter what you call it, if borrowers ask for help during this crisis, many lenders are allowing them to miss payments and not charge them late fees or penalties.
“The definition really doesn’t matter. The moral of the story right now is to call your lender. Don’t just assume you can skip a payment. Call them, let them know, and make arrangements,” Allred advises.
Carlson struck the same chord and told us that borrowers shouldn’t get caught in the weeds about the semantics of forbearance versus deferment.
She says, “They just need to pick up the phone and say, ‘Hey look, I’m in a bad situation, I’ve lost my job, and I think it’s going to be rough for the next three months.’ From there the lender can come back and say, ‘Here [are the] options.’”
Due to the current financial situation, the mortgage world is shifting. Options that weren’t on the table for borrowers a few months ago might be available now.
Singhas says the length of time that the forbearance could be extended and the options at the end of the term might be different. She adds that borrowers in good standing prior to the current crisis may able to do a modification wherein any monthly payments missed now are simply tacked on to the end of the loan.
Pressing pause on your mortgage
Whatever terminology your lender uses, it’s important for you to understand what is really happening with your loan. Nothing is free. You can’t expect to stop paying your mortgage forever.
“It’s not free mortgage payment, it’s not free money. [Forbearance] is temporarily hitting the pause button on your mortgage, and not having to make the payment,” Carlson warns.
“It does not necessarily pause the interest that is accruing, and it does mean that you’re going to have to make that principal and interest payment at a later date.”
Key questions to ask before seeking mortgage forbearance
When calling your lender, Carlson recommends asking:
What relief options are available?
Will interest continue being calculated during the length of time I am not paying?
Will there be any fees?
How will it be reported to the credit bureaus?
Do I still need to pay for my escrow to cover taxes, insurance, and mortgage insurance?
Singhas says some lenders have decided to allow certain loan modifications. In some cases, they will allow the monthly payment to be changed later in the life of the loan, to include the amount missed during the forbearance.
She adds that the main confusion for consumers right now is the fact that most lenders will not necessarily require a lump sum payment after the forbearance period ends.
“I think some people are panicked that if they get a forbearance, they have to pay it all back immediately,” she notes.
“That’s one option, or they can enter into a payment plan if they can’t make the lump sum, and if they can’t make a repayment plan work, there are other options available to them.”
If you work out a forbearance or deferment plan with your lender and don’t just skip payments, it can protect your credit.
“It doesn’t show a positive or a negative, but it doesn’t show like a missed payment,” Carlson explains.
“So if you were to ignore it and just not pay anything and pretend it will go away, that’s absolutely going to affect your credit report in the long run. But the forbearance or deferment is a neutral. It’s not positive or negative on the credit report, but it’s a lot better than having missed payments on your mortgage.”
One caveat to keep in mind is that if you can pay your mortgage, pay it, and don’t ask for relief.
“It’s always better to make your monthly payment if you can,” Singhas says.
Here’s one of my favorite stories to tell as a real estate agent, about a young family who achieved what many assume is impossible. Saddled with a mortgage and other baggage, they were nonetheless able to win a bidding war—against three all-cash offers no less—and get the house they wanted.
All-cash offers are typically preferred by home sellers since they’re pretty close to a sure thing. Without the need for a lender to approve a mortgage, the deal is all but guaranteed to go through.
As an agent in a competitive real estate market like San Francisco, I notice that everyone thinks people are buying homes with all cash. This isn’t always true, but nonetheless, this myth tends to scare off buyers who need financing from even trying to compete.
However, I can tell you from personal experience: It is entirely possible to beat an all-cash offer, even if you have a mortgage and other strikes against you. How? Allow me to explain.
Why all-cash offers in real estate rule
My clients—a married couple employed by two prominent tech companies in Silicon Valley—were looking to buy a condo. Upon meeting them, it was immediately clear that they had done a ton of research on the home-buying process and therefore were confident in their ability to purchase.
But in my mind, they were overconfident. They’d never purchased a home before, much less in a competitive market such as theirs. Nonetheless, it was obvious that they wanted to call the shots, so I positioned myself as an adviser rather than a team leader.
Our first offer was for a $1,299,000 condo in San Francisco’s Mission Bay neighborhood. We submitted an offer of $1,150,000 along with a pre-qualification letter from their bank.
It was swiftly rejected.
After this initial attempt, we regrouped. I suggested that we go through the mortgage pre-approval process, and then take it a step further: to have their financial position analyzed and fully underwritten. That way, we could more easily compete with the all-cash offers that were likely rolling in.
Unfortunately, impatience persisted on their end, as another condo in the same building had a rapidly approaching offer date. The listing agent met with my clients during a tour, and pressed them to get their offer ready as soon as possible. We replicated our previous offer, and were promptly rejected, again.
My clients were beginning to think I couldn’t get the job done for them, and I had that sinking feeling in my stomach that I was about to be fired. The signs were all over their faces. Still, they reluctantly agreed to get pre-approved. We finally stood a fighting chance.
Our third offer was a Hail Mary for a beautiful loft that caught my clients’ eyes and hearts. Although it was slightly out of their price range, my once intensely calculated and controlled clients turned into emotional buyers. They loved the place. When we couldn’t come up with the asking price the sellers were looking for, they were devastated.
At that point, my role changed from adviser to counselor. I knew a level of raw emotion would break barriers and allow for trust to be built. I consoled the couple and ultimately showed them my true position: I was on their side in every way. That level of respect ultimately led them to heed my advice and take the extra time to get their financing underwritten.
The underwriting process took two weeks. Once it was done, we submitted our fourth offer, this time on a two-bed, two-bath condo. We learned there were three cash offers already on the table, and that we weren’t the highest bid—another buyer was offering $20,000 more.
To strengthen our position, we used an (occasionally) effective tactic of writing a “love letter” to the homeowners. I felt we had an emotional story to tell, especially considering they had a baby on the way.
It turns out that the sellers had raised their first child in the same condominium. They connected with us, and wanted another family to have the same experience they had in the home. Empathy, rather than logic, kicked in. Against all odds, we won the place.
It’s important for buyers to understand the difference between a pre-qualification, pre-approval, and a fully underwritten pre-approval. In order to beat an all-cash offer, you have to put the time in upfront and be as watertight as possible with your financier’s backing from the moment negotiations begin.
What is pre-qualification?
Pre-qualification is the most surface-level document your lender can give you. It acknowledges that the bank has received all of your self-provided information either verbally or through an online loan application. The problem with a pre-qualification is that the bank hasn’t been provided with any official documents to verify income or assets.
A listing agent (representing the homeowners selling their property) is well aware of the looseness associated with a pre-qualification letter and would likely advise his or her clients that the guarantee of cash makes more sense.
What is pre-approval?
This is the next tier of assuredness. The difference between a pre-approval and a pre-qualification is that, with a pre-approval, income and asset documents have been provided and reviewed by a lender. Most buyers using financing submit an offer with a pre-approval in hand, as most listing agents require one to even consider an offer.
The pre-approval still has holes, however. A review of financial documents is only as good as the person reviewing them. Sadly, many lenders either don’t know how to review these documents in detail, or they do a cursory review.
The reason listing agents prefer cash is because lenders are the biggest variable in the transaction. So it’s crucial you choose the right one.
Most buyers’ hesitation in getting pre-approved, or even pre-qualified, is that they don’t want to have an inquiry on their credit report that could affect their credit score. However, a mortgage inquiry doesn’t have the same impact on your credit score as a credit card or auto loan.
In fact, in most cases the scores aren’t affected at all. You can have multiple mortgage inquiries within a 30-day period and not take a score hit. The system is built this way.
I always advise people to interview at least two lenders from different banks, since a loan is so much more than the interest rate and points. The lender you work with digs through some very personal information. Having a high level of trust and respect for the individual doing that is paramount.
The holy grail of financing guarantees
A fully underwritten mortgage pre-approval is the third and highest tier of security in a financed offer. If a bank has gone through the process of underwriting the loan, it basically means the loan amount is guaranteed, based on income, assets, and credit.
Consequently, these buyers have the green light to purchase the home they desire.
A fully underwritten pre-approval also allows you to close much faster, since 90% of the work has already been completed by the bank. A savvy buyer’s agent will position this type of financing exactly the same as a cash offer; since the money is guaranteed, the playing field is leveled.
The underwriting process takes time upfront—anywhere from a few days to a few weeks, depending on the complexity of a buyer’s financial position. But it gives a buyer an incredibly strong negotiating position, especially in a hypercompetitive market.
People, we have a crisis on our hands: a teacher crisis. One reason for the squeeze: real estate. Rising housing costs and interest rates can prevent teachers from getting a mortgage and living in the districts they serve, creating a lack of teachers everywhere, from Seattle to San Francisco, to Virginia’s Fairfax County.
But did you know that several organizations and lenders offer home loans and mortgage help for eligible teachers? Below are seven programs and lenders that can help teachers get funding for a home.
1. Good Neighbor Next Door
Developed by the U.S. Department of Housing and Urban Development, this program was created for eligible teachers and other civil servants, including firefighters, law enforcement officers, and emergency medical technicians.
It offers a 50% discount on HUD-owned homes located in “revitalization areas”—regions with high foreclosure rates and low homeownership—nationwide.
Here’s the catch: Applicants are not permitted to own a home already. They must also commit to using their new house as a primary residence for three years—if they don’t, they will be required to pay the full cost. See homes available through the loan program at HUDHomes.
2. HUD Teacher Next Door
HUD’s Teacher Next Door connects educators to a wide variety of home loans and down payment help for teachers—including Good Neighbor Next Door—helping applicants find local programs and organizations that reduce mortgage rates and closing costs and provide down payment rebates.
Housing in this HUD program isn’t restricted to federally designated revitalization areas, and there are no residency requirements.
3. Educator Mortgage Program
Mortgage bank and lender Supreme Lending’s Educator Mortgage Program offers up to $800 in loan discounts on closing costs and real estate agent fees on home loans for teachers, as well as a speedy loan turnaround and a $400 donation to the school program of their choice.
Available for all teachers and school district employees, the program requires a minimum credit score of 620, but it doesn’t discriminate based upon previous bankruptcy or foreclosure.
4. Homes for Heroes
Intended for firefighters and military veterans as well as teachers, this program discounts 25% of your real estate agent’s fee when buying and selling, as long as you use an agent or broker who has signed up as a program affiliate.
Applicants also receive reduced closing and home inspection fees.
5. Community lending programs for educators
Through a partnership with the United Federation of Teachers, educators may receive a loan through the Union Assist Program at ICC Mortgage. The loan program offers zero or reduced interest, lower fees for processing or underwriting, as well as financing discounts.
6. Home loans for teachers at the local level
For Californians working in an underperforming school, the Extra Credit Home Purchase Program can provide mortgage tax credits to reduce the total they owe to the federal government. Participants must be first-time buyers and meet income and home price limits, which vary by county.
In Baltimore, the Housing Authority offers $5,000 toward a qualifying down payment on home loans for teachers, and the Texas State Affordable Housing Corp. offers fixed-rate Teacher Home Loans and down payment assistance grants.
Many states offer similar home loans, help with down payments, and mortgage assistance for teacher programs. In many cases, Teacher Next Door can connect qualified buyers with the appropriate grants, or you can search for home loans for teacher programs in your state.
7. Teacher-specific housing
In some areas, housing designed or earmarked for teachers is available. North Carolina teachers in Dare County can sign up for DARE, affordable housing complexes rented at below-market rates.
For New York City residents, Teacher Space New York connects teachers with affordable housing, based on income. And in Baltimore, Union Mill, an “urban oasis for teachers and nonprofits,” offers up to a $600 rent discount for teachers.
Your local school district or teachers union should have more information about available educator-only housing.
If you’re considering co-signing a mortgage—say, to help your grown kids buy their first house—it’s wise to take a step back and consider whether this move makes sense. Sure, you’re helping a loved one purchase property, but this type of arrangement could also pose a risk to your own finances (not to mention your relationship with the co-signee).
So before you put your John Hancock on the line which is dotted, ask yourself these four key questions first.
1. What is co-signing, exactly?
When a home buyer uses a co-signer, the buyer becomes what’s known as the “occupying borrower”—the person who is going to be living in the home.
Meanwhile, the co-signer—usually a relative or friend of the occupying borrower—is someone who typically doesn’t live at the property.
Co-signers physically sign the mortgage or deed of trust in order to add the security of their income and credit history against the loan. In turn, both parties take on the financial risk of the mortgage together—meaning that if the occupying borrower defaults on the loan, the co-signer is expected to cough up the cash.
To qualify as a co-signer, you must have a strong credit history and good income, says Ray Rodriguez, regional sales manager at TD Bank. Co-signers get vetted just as ordinary borrowers do—they have their income, credit history, credit score, assets, and debts scrutinized by a lender.
2. What are my responsibilities when co-signing a loan?
If anything affects the occupying borrower’s financial health—for example, loss of a job or severe medical problems—”the co-signer is responsible for the [mortgage] payments,” says Rodriguez.
Moreover, if the occupying borrower misses a mortgage payment, that blemish can go on your credit report, as the co-signer, as well—potentially damaging your credit score significantly.
According to data from the credit analysis firm FICO, someone with an excellent credit score—780 or above—could see it drop 90 to 110 points if mortgage payments are missed.
Another thing to consider: When you co-sign a mortgage, you’re adding that person’s debt to your own, reducing your own borrowing power. As a result, “Your chance of getting a loan yourself in the future could be in jeopardy,” says Janine Acquafredda, a real estate broker at Brooklyn-based House-n-Key Realty.
3. What are the risks of co-signing?
Real talk: When you co-sign a financial product—whether it be a mortgage, a car loan, or a credit card—you could get burned.
In fact, in a 2016 CreditCards.com survey of 2,003 U.S. adults, 38% of co-signers said they had to pay a part of or the entire loan or credit card bill because the primary borrower failed to do so. Furthermore, 28% reported they suffered a drop in their credit score because the person they co-signed for paid late or not at all.
Most often, people co-sign mortgages for their friends or family—but co-signing inherently puts the relationship in jeopardy. Proof: Of respondents in the CreditCards.com survey, 26% said the co-signing experience damaged the relationship with the person they had co-signed for.
4. How do I mitigate my risks?
The good news? There are several safeguards you can put in place to protect yourself as a co-signer.
First, make sure your name is put on the title of the home. That way, if your borrower can’t pay the mortgage, you have the power to sell the property.
Second, take steps to monitor your co-borrower’s mortgage payments. You can do this by setting up email and text alerts to let you know when mortgage payments are posted, or asking the mortgage lender to notify you if the borrower misses a mortgage payment.
This offers a nice protection, since every home loan agreement offers borrowers a grace period for late payments.
Typically, there’s a 15-day grace period, in which case you would have 14 days after the payment is due to help your co-signee pay the bill without incurring a late fee or taking a hit on your credit report, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance.
You’ll also want to establish clear lines of communication between you and your co-signee—and make sure the person knows how to contact you if he or she has a problem with the mortgage.
5. Do I trust the borrower?
Before offering to become someone’s co-signer, ask yourself whether you truly trust the other person to be financially responsible for making the mortgage payments.
Pro tip: Past behavior is a good predictor of future behavior. If the person has had trouble making credit card payments or has a pattern of not meeting other financial obligations, he or she may not be responsible enough to be taking on a mortgage, especially one that has your name attached to it.
The bottom line
Co-signing a mortgage is serious business. You’re not just putting your name on a piece of paper—you’re putting your own finances, including your debt obligation and your credit score, at risk.
I pride myself on being pretty financially savvy—after all, I’m a personal finance writer. I’m well versed in best practices for saving and spending, the ins and outs of HSAs and IRAs, and the basics of investing.
But when it came time to buy my first house, I had to put my ego aside: I was way out of my depth as I navigated the world of mortgages, closing costs, and escrow.
While all of the Budgeting 101 basics still apply to purchasing a home—top tip: Don’t buy anything you can’t afford!—some aspects of the process can come as a surprise to first-time buyers.
Gearing up to buy a house of your own? Get acquainted with these five lessons that I learned the hard way before you start shopping. Then, you’ll be ahead of the curve when it comes time to make an offer on your ideal home.
1. Don’t be fooled by your mortgage pre-approval amount
One of the first steps on the road to homeownership was requesting a mortgage pre-approval letter from a mortgage lender. I was shocked when my husband and I received a letter with a much higher number than we had ever considered spending.
The lender thought we could afford a house that cost how much?!
I quickly learned that a pre-approval letter is just assurance from a lender that the buyer is in good financial standing to take on a mortgage of a certain size. Lenders evaluate your financial history to come up with a pre-approval amount. Don’t confuse that number, though, with your actual budget for buying a house. In other words, just because you’re pre-approved for up to, say, $300,000, doesn’t mean a $300,000 mortgage will fit in your budget.
For us, we knew we didn’t want to stretch ourselves thin with a heftier mortgage, even if we were technically approved to take one out.
2. Closing costs can add up—and be complicated
Closing costs include out-of-pocket expenses like title insurance, notary fees, and the cost of the deed—and they can add up quickly. So when we made an offer on our house, we decided to ask for a credit from the sellers toward our closing costs—a common practice in which, typically, the seller advances an amount in cash that’s then tacked on to the purchase price. But I was surprised when our Realtor® urged us not to ask for too much from the sellers at closing.
“Some loan programs only allow a certain percentage of the sale price to given to the buyer as a credit,” says Joe DiRosa, a real estate agent with RealtyTopia in Pennsylvania.
That means that if you’re offering $200,000 for a house and your lender only allows you to accept 2% in closing costs, you shouldn’t ask for $5,000—that would be $1,000 down the drain, since you can only accept up to $4,000 in credit. Before you make an offer, ask your lender if your loan institutes a limit on closing cost credits.
3. PMI isn’t actually the devil
Private mortgage insurance—PMI for short—is at once a blessing and a curse. Lenders typically require it of buyers who are putting down less than 20% on their mortgage. This puts homeownership within reach for more people, but it also means an additional monthly payment that doesn’t add to the new owner’s equity.
For that reason, PMI sometimes gets a bad rap—better to shell out the necessary down payment cash (if you can) than waste your money on insurance, right? But in some cases, it’s in your best interest to put less money down and pay the PMI.
That was the case for my husband and me. We decided to hold on to some of the cash we would have put toward a 20% down payment and use that money to renovate our home and pay off other debts with higher interest rates. Our PMI payment has been manageable—we pay about $75 a month—and it’s worth it to keep our money in our bank account, where we can use it for projects like replacing the roof, renovating bathrooms, and creating a master suite.
4. You might have to make escrow payments
“Escrow” was a foreign word to me before buying a house. (Confession: I still picture a crow every time I hear it.)
Because we took out a loan with PMI, we were required to pay into an escrow account for our property taxes and home insurance. Escrow simply refers to the separate account where that money is held; basically, our lender sets aside the money for taxes and insurance, which acts as a safety net to ensure that we sock away enough money for those expenses.
While it’s nice to know we’re saving enough for taxes and insurance by paying into escrow, it’s also frustrating for control freaks like my husband and me, who would rather manage our money ourselves—preferably by putting that cash into a high-yield savings account where it can accrue interest. We’re looking forward to canceling our escrow payments as soon as we’ve built up enough equity in our home to remove PMI.
5. You need to budget for surprises (and your own mistakes)
During our home inspection, the inspector ran the dishwasher to make sure it worked—all good. Then, the day after we moved in, we loaded the dishwasher, hit “Start”—and it was dead. After flicking the electrical circuits on and off to no avail, we finally accepted that we would need to replace the dishwasher sooner than we had bargained for.
Several hundred dollars later, we learned that dishwashers are required to have their own wall switch, per local code. It turned out the old dishwasher wasn’t broken after all—the switch was just turned off.
All we could do was laugh, too slap-happy and exhausted from renovating to beat ourselves up much about the mistake. At least we planned to replace the dishwasher sooner or later, and we had enough savings to endure the blow. But the incident was a reminder that costly surprises (and stupid mistakes) are inevitable when you’re new to homeownership—and even when you’re not.
If you’re shopping for a home, odds are you should be shopping for mortgage loans as well—and these days, it’s by no means a one-mortgage-fits-all model.
Where you live, how long you plan to stay put, and other variables can make certain mortgage loans better suited to a home buyer’s circumstances and loan amount. Choosing wisely between them could save you a bundle on your down payment, fees, and interest.
Many types of mortgage loans exist: conventional loans, FHA loans, VA loans, fixed-rate loans, adjustable-rate mortgages, jumbo loans, and more. Each mortgage loan may require certain down payments or specify standards for loan amount, mortgage insurance, and interest. To learn about all your home-buying options, check out these common types of home mortgage loans and whom they’re suited for, so you can make the right choice. The type of mortgage loan that you choose could affect your monthly payment.
The most common type of conventional loan, a fixed-rate loan prescribes a single interest rate—and monthly payment—for the life of the loan, which is typically 15 or 30 years. One type of fixed-rate mortgage is a jumbo loan.
Right for: Homeowners who crave predictability and aren’t going anywhere soon may be best suited for this conventional loan. For your mortgage payment, you pay X amount for Y years—and that’s the end for a conventional loan. A fixed-rate loan will require a down payment. The rise and fall of interest rates won’t change the terms of your home loan, so you’ll always know what to expect with your monthly payment. That said, a fixed-rate mortgage is best for people who plan to stay in their home for at least a good chunk of the life of the loan; if you think you’ll move fairly soon, you may want to consider the next option.
Unlike fixed-rate mortgages, adjustable-rate mortgages (ARM) offer mortgage interest rates typically lower than you’d get with a fixed-rate mortgage for a period of time—such as five or 10 years, rather than the life of a loan. But after that, your interest rates (and monthly payments) will adjust, typically once a year, roughly corresponding to current interest rates. So if interest rates shoot up, so do your monthly payments; if they plummet, you’ll pay less on mortgage payments.
Right for: Home buyers with lower credit scores are best suited for an adjustable-rate mortgage. Since people with poor credit typically can’t get good rates on fixed-rate loans, an adjustable-rate mortgage can nudge those interest rates down enough to put homeownership within easier reach. These home loans are also great for people who plan to move and sell their home before their fixed-rate period is up and their rates start vacillating. However, the monthly payment can fluctuate.
While typical home loans require a down payment of 20% of the purchase price of your home, with a Federal Housing Administration, or FHA loan, you can put down as little as 3.5%. That’s because Federal Housing Administration loans are government-backed.
Right for: Home buyers with meager savings for a down payment are a good fit for an FHA loan. The FHA has several requirements for mortgage loans. First, most loan amounts are limited to $417,000 and don’t provide much flexibility. FHA loans are fixed-rate mortgages, with either 15- or 30-year terms. Buyers of FHA-approved loans are also required to pay mortgage insurance—either upfront or over the life of the loan—which hovers at around 1% of the cost of your loan amount.
If you’ve served in the United States military, a Veterans Affairs or VA loan can be an excellent alternative to a conventional loan. If you qualify for a VA loan, you can score a sweet home with no down payment and no mortgage insurance requirements.
Right for: VA loans are for veterans who’ve served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves. Because the home loans are government-backed, the VA has strict requirements on the type of home buyers can purchase with a VA loan: It must be your primary residence, and it must meet “minimum property requirements” (that is, no fixer-uppers allowed).
Another government-sponsored home loan is the USDA Rural Development loan, which is designed for families in rural areas. The government finances 100% of the home price for USDA-eligible homes—in other words, no down payment necessary—and offers discounted mortgage interest rates to boot.
Right for: Borrowers in rural areas who are struggling financially can access USDA-eligible home loans. These home loans are designed to put homeownership within their grasp, with affordable mortgage payments. The catch? Your debt load cannot exceed your income by more than 41%, and, as with the FHA, you will be required to purchase mortgage insurance.
Also known as a gap loan or “repeat financing,” a bridge loan is an excellent option if you’re purchasing a home before selling your previous residence. Lenders will wrap your current and new mortgage payments into one; once your home is sold, you pay off that mortgage and refinance.
Right for: Homeowners with excellent credit and a low debt-to-income ratio, and who don’t need to finance more than 80% of the two homes’ combined value. Meet those requirements, and this can be a simple way of transitioning between two houses without having a meltdown—financially or emotionally—in the process.
What are mortgage points? The interest rate your mortgage lender offers you when you buy or refinance a house is not necessarily the rate you have to stick with. In fact, you can lower your mortgage rate by shelling out at closing for something called mortgage points. But what are mortgage points and how can they save you some serious cash (like, thousands of dollars over the years you make monthly payments)? Read on for the answers from loan experts.
What are mortgage points?
There are two types of mortgage points:
Discount points: These points, also known as prepaid points, lower your interest rate but increase your closing costs, because payment for them is due at closing. Discount points are a kind of prepaid interest you “buy” from your lender, based on your loan amount, for a lower mortgage rate.
Origination points: These points are charged to recover some costs of the mortgage origination process. This would include compensating your loan officer, notary fees, preparation costs, and inspection fees.
One mortgage origination or discount point typically costs 1% of the loan amount. For example, 1 point on a $250,000 mortgage would equal $2,500.
How do mortgage points lower your interest rate?
The primary purpose of buying discount points from the lender is to reduce your interest rate on your mortgage, and thus lower your monthly payment.
You can pay points during the home-buying process, or when you refinance your home. One point usually reduces the borrower’s interest rate between 0.125% to 0.25%, depending on the lender’s terms, although 0.25% is typical.
For example, if you took out a 30-year, $400,000 loan at an interest rate of 5%, you would pay $2,147 in mortgage payments a month (not including taxes, insurance, or anything else). Paying 2 mortgage points to the lender at 0.25% per point would lower the interest rate to 4.5% and drop the monthly payment to $2,027. You would also need to foot the upfront cost of $8,000 to buy discount points at closing.
Should you buy mortgage points?
Buying points from a lender makes the most sense for borrowers who plan on living in their house and making monthly mortgage payments for many years, either for the life of the loan or close to it.
Consider how long you think you’ll stay in your house and keep your home loan. Generally, if you buy points, you want to stay longer to break even and recoup the money it took to buy the points on the loan. If you sell the house or pay off the loan too soon, you won’t reach the break-even point, and you can lose money.
Let’s go back to the above example of the 30-year, $400,000 loan. The 2 mortgage discount points for $8,000 at closing saves you $120 in monthly payments. It would take about 5.5 years to reach the break-even point of $8,000, before you could start to save money.
However, it would also save you $43,394 in interest over the life of the loan. Deduct that $8,000 in point-buying costs from money saved in interest and you will have actually saved a total of $35,394. Of course, that’s if you see out the life of the loan. If you sell after six or seven years and pay off your mortgage, buying those points from the mortgage lender wasn’t worth it. Know your future plans and move forward accordingly.
You should also consider how much money you have to use for a down payment at the time of closing. If you are looking to pay the least amount possible in mortgage closing costs, and you can’t afford out-of-pocket points on your loan, you may need to opt for a zero-point loan program.
Tax breaks and mortgage points
Because discount points are a form of interest you pay on your loan, they’re usually tax-deductible as mortgage interest for the year you buy your home. However, origination points that are basically document fees for your mortgage are not deductible.
If you’re considering buying discount points, consult your tax adviser to determine if you qualify for these mortgage deductions.
When you refinance your home and pay for mortgage discount points, you amortize the cost of the points over the years you have the loan. If you sell the house or pay off the loan, you can deduct any remaining points in the last year you have the mortgage.
Generally, the bigger the mortgage, interest rate, and mortgage length, the more money discount points will save you. Buying points on mortgages with only a few years left, or on those with already very low mortgage rates, could yield monthly savings of only a few bucks and never reach a break-even point for your closing costs, so be sure to do the math before you finalize any mortgage decision.