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I’m almost done reading Endless Referrals, by Bob Burg. This is a must read for people in business. The basic theme is that business professionals need to position themselves as givers because what goes around comes around. This is absolutely my business philosophy. It’s what I love about my job…I have to create relationships and meet people and be helpful and giving in order to be successful. I mean, who doesn’t want to be a giver? The great thing about the book is that it gives you different ideas on how to be helpful and position yourself as a resource. It’s a great read!
When you go to get home financing, your lender will quote you an interest rate and it will usually cost you around 1 point, or 1% origination (both mean the same thing) to get that interest rate. You can opt to not pay any points if you would like but your interest rate would be higher. 1 point is equal to 1% of your loan amount, so if your loan amount is $300,000 you will have to pay $3,000 for that interest rate. Generally speaking, it usually makes more financial sense to pay the point if you’re planning to keep the loan for more than three to five years. If you think that you’re going to refinance or sell your home in a couple years then it usually doesn’t make sense to pay the point.
Here is the best thing to do, have your lender quote you a rate with paying the point and then the rate with not paying the point. Then take your origination cost and divide it by the difference in your monthly payments. That number is the number of months it will take you to make up for the cost of the origination. Which mean every month after that you will be saving because you paid the point. Here’s an example:
$300,000 loan
Origination (or 1 point) will cost $3,000
The interest rate with paying the point will be 6.125%, so your payment will be $1822.83
The interest rate with not paying the point will be 6.5%, your payment will be $1896.20
The difference is $73.37/month.
So take $3,000 and divide it by $73.37 and you get about 41 months. So after 3 and a half years (41 months) you will make up the cost of the origination which means ever month after that you will be saving $73.37 because you paid the point up front.
Also something to remember, your origination cost is tax deductible…make sure you talk to your CPA about it for the details though!
Because I do mortgages, a lot of people ask me about interest rates. Often times you will hear in the news that the Fed lowered or raised interest rates. When you hear that, that doesn’t mean you should go out and refinance your home loan or thank your lucky stars for your low interest rate. The Federal Funds Rate (which is usually what you hear about in the news) directly effects short-term interest rates like bank loans, credit card interest rates, adjustable rate mortgages and not long term fixed mortgages. So the next time you hear that the Fed dropped the rates (which will most likely happen again by the end of the month) know that it will have more of an influence on your credit card interest rates or your home equity line of credit and not on fixed mortgages.
If you have been following the news on the mortgage industry you know there has been a lot of drama lately. Basically, the honeymoon’s over (at least for now) for creative financing. Right now there are very few 100% loan programs but they’re still out there! The FHA and VA governement loans are really great products for first time home buyers with less than perfect credit because they allow you to put little to no money down and still get great rates. Make sure you also ask your lender about other 100% financing options since FHA/VA loans have loan amount limits and more costs attached to them.
Don’t be discouraged by all the hype in the media. Rates are still really good…actually they’re great right now- today 6.125% on a 30 year fixed (with 1 point-see my previous post on points). Right now is a great time to buy and a horrible time to sell. It’s truly a buyer’s market. Winter is traditionally slow because everyone is too busy with the holidays so you’re more likely to find sellers who are willing to negotiate!
Here are some tips:
1. If you don’t have money for closing costs, tell your realtor that you want to have the sellers pay your closing costs. That can be negotiated into your contract. With most loans, you can have the sellers pay up to 6% (of your loan amount) in closing costs. Check with your lender to make sure there aren’t any restrictions.
2. Make sure you ask your lender about any prepayment penalties. It’s important to know about those ahead of time. My take is, unless you don’t have any other option, don’t take a pre-payment penalty.
3. Whether you’re thinking about buying a house this month, in six months, in a year, in two years, go to a lender and get pre-approved now! I love it when clients come to me and they’re not planning to buy for a year or so. That way, I can get them pre-approved and if there are any issues we have a lot of time to resolve them and also I can give them tips on what they can do to maximize their purchasing power. It’s like trying to run a marathon without training…if you just would have trained months in advance you would have been able to run the best race possible! Bad analogy, but go with it.
4. Don’t get comfortable renting! You are throwing thousands of dollars away each year!
5. Just a tip- obtaining auto financing can lower your credit score by about 40-80 points and it can take several months to go back up. Make sure you don’t buy a car right before you buy a house.
6. Remember, all your liability payments reduce your purchasing power. For example, if you have a $300 car payment you will be approved for about $50,000 less than if you didn’t have that payment. Think again before opening another credit card, financing jewlery or buying a car.
Your debt to income ratio is a very important factor in determining how much of a monthly mortgage payment you can afford. The bank likes to see your debt-to-income ratio at about 45% or less. Some programs allow you to go as high as 55% and some only allow you to go up to 39%. But 45% is a safe estimate since most programs accept that.
So, if you need your DTI to be about 45%, how much does that mean your monthly payment needs to be? Take your gross monthly income and subtract your liability payments. Your liabilities are things like, car loan payments, student loan payments, minimum credit card payments, personal loan payments. Think of it as loans that you are paying back. So things like utilities, gym memberships, cell phone service are things that you are utilizing and paying as you go, so those you don’t count. After you subtract your liabilities, multiply it by 45% and that is how much of a monthly mortgage payment (included taxes & insurance) that you can afford.
Example:
You and your spouse bring in together 6,000 a month. Your liabilities are:
$250 car payment
$30 minimum credit card payment
$150 student loan payment
So subtract your liabilities from your gross monthly income and you get $5,570. Then multiply $5,570 by 45% and you get $2506.50. And that is how much of a mortgage payment you can afford.
Remember that payment of $2506.50 includes property taxes and homeowners insurance. Those payments can vary but for general purposes, multiply your desired sales price by 1.25% and divide by twelve for your monthly taxes and multiply your sales price by .2% to get your monthly insurance. Example:
$300,000 house
300,000 x 1.25% / 12 = $312.50
300,000 x .2% / 12 = $50
So your taxes & insurance monthly payment would be $362.50. Subtract that from 2,506.50 and you get $2,144. That means your mortgage payment should be around $2,144.
Wow, I don’t know if anyone really cares about that, but there you go…
