Along with a cornucopia of other choices to make when taking out a mortgage, borrowers are faced with the decision whether or not to pay points, which can go towards either the fee paid to the bank or loan officer who originated the loan or towards buying down the interest rate. The latter, referred to as discount points, are optional and differ from the former in that paying the loan origination fee is unavoidable and the borrower will end up paying it one way or the other.
Discount points, where one point is equal to 1% of the total loan amount, allow borrowers to secure lower interests. They play a prominent role in how a lender’s products are marketed—institutions that advertise the oft-talked about rock-bottom rates usually require borrowers to pay points in order to actually get those kinds of rates.
The most pressing question about points is, of course, if they actually make financial sense. A borrower who takes out a $100,000 loan and pays two points to buy down the rate from 3.5% to 2.99% may sound as though they’ve secured a much better deal, but will end up saving less than $30 a month on payments. Whether or not paying $2000 upfront for that privilege is worth it is an individual decision, of course, but there are times when taking out a mortgage with points isn’t the best financial decision. For some borrowers, that $2000 might be better spent on more immediate needs, such as closing costs or home improvement.
On the other hand, borrowers who plan to stay in their homes for the long term can end up saving tens of thousands of dollars over time by paying points, and there’s certainly something to be said about taking advantage of the extremely low rates currently available. Like any other factor in a mortgage, this is an area where it depends on the individual case, and borrowers would do well to weigh the pros and cons of points for their personal situation.
Home buying is on the upswing in many parts of the nation, especially after a harsh winter. And with home buying comes a series of decisions, including where to buy, what kind of house, whether to obtain a loan and what are its terms, and so on. One issue that is often overlooked until the end of the transaction is, “Why do I need title insurance?”
Every buyer and seller in a real estate transaction sees charges for a title insurance policy, but few know what the purpose of the policy is, other than something gets insured. Title policies insure that things are what they are supposed to be: in a purchase the title policy is insuring that you are the rightful owner, that no one can come along later and claim ownership of your property. For lenders the title policy insures that their lien has a certain priority on title and that the only liens against title are documented and disclosed. Title insurance covers any title issues that occur up to the date deeds are recorded when the policy is in effect, it does not cover any issues that occur after the transaction.
Title insurance is not cheap, and claims are rare. But when title insurance companies do pay claims, they are usually very hefty, think tens or hundreds of thousands of dollars. Because of this most of the revenue title insurance companies collect do not go to paying claims, in fact the industry average is that only about 5% of premium revenue goes to claims compared with approximately 70% for auto insurance. Title insurance companies spend the bulk of their premium revenue on loss prevention (research).
Claims might be paid if the owner of your current home purchased the property eight years ago from a seller who had a lien against the property that was recorded improperly in the county records and that lender stepped forward to collect on your home and possibly force the sale. Forgeries on deeds, unpaid liens, easements improperly recorded or illegal confiscations of title on the property are problems; bank foreclosures and short-sales can complicate things, as can divorce settlements with a recalcitrant spouse, estate issues, easements, or a private party second from a prior seller.
Title policy premiums pay for all the work done by the title company prior to closing so they can insure the buyer/person refinancing obtains clear title. And if the owner discovers later that they do not have clear title, it is the title insurance company’s obligation to pay to correct any claims that may arise.
Any lender knows that credit, collateral, and character are of the utmost importance in the lending decision. Unfortunately for many people of sterling character, in this day of automation and decision making, credit and collateral have more focus on them, and have become purely a numbers game. In fact one of the biggest issues facing homebuyers today is problems with their credit scores. Available loan products and interest rates will vary significantly with a person's credit score, and loan officers spend a fair amount of time working with borrowers to make sure that their credit score are as high as it can be.
Borrowers are told to make their mortgage payment on time and in no event later than the 30th day of the month. Even one 30 day late mortgage in a year can drop a credit score by 40-50 points and make one ineligible for certain mortgage products. Borrowers should not allow their credit card balances to go above 50% of their maximum credit limits, ideally (for credit score purposes) keeping the balances at 25% of the credit limits.
All minor medical bills should be paid once the insurance company has finalized the person’s share of the bill. Disputed charges are often less than $200, but a Collection Account on a credit report can reduce a credit score by 20-100 points.
A borrower, whether it is a purchase or a refinance, should not take out new debt during the mortgage process without speaking with their lender. This includes car loans, credit cards, etc., and also includes co-signing a loan for a friend or relative. (Co-signing, from a legal perspective, is the same as signing.) Nor should they have too many institutions run their credit report as each credit pull will reduce a credit score by about 5 points.
Many people are involved in the home loan process and lending decision, and it is in everyone’s best interest to keep credit scores as high as possible.
Through all the changes in the mortgage industry, at least one thing remains constant: the borrower agreeing to pay the creditor (lender) back. After all, why would anyone make a loan to someone who was not going to pay it back? With more and more first time home buyers entering the market, the question occasionally comes up, “How much should my payment be?”
Lenders do their best to judge what the borrower is qualified to pay – borrowers need to establish what they are comfortable paying. What a borrower is qualified to pay is generally fairly simple to answer as it is the result of a mathematical equation within guidelines that establish a limit for what is known as the debt-to-income ratio, or DTI. The DTI is a calculation that determines what percentage of gross income are the total housing payment and/or the total housing payment plus the total monthly debt payments. The total monthly housing payment is termed PITI: Principal and Interest on the mortgage, property Taxes and homeowners Insurance and homeowners association is a condo or townhome.
The figure is usually expressed with two numbers, the top and bottom DTI ratio could look like this: 35/42 which means that a borrower’s total housing payment, PITI, is 35% of their gross income and 42% is the PITI plus credit card payments, car payments, student loans, and other debt that appears a borrower’s credit report.
Most programs do not set a limit for the top ratio, just PITI as a percentage of income, but all have a limit set for the bottom or total DTI ratio. For the most part any loans associated with the Federal Government, therefore set by the CFPB (Consumer Financial Protection Bureau), limit a borrower's DTI ratio to 43% with some exceptions. Other programs outside of the government allow for higher DTIs.
It is important to ensure that you have found a good real estate agent before officially hiring them to represent you. In today's market, it can be difficult to see through all of the marketing and hype about a specific agent. In order to be successful in your search, however, there are some steps you can take to find someone who is a quality agent. Use these tips to help find an agent that it right for you, whether you are a buyer or a seller.
1. Speak to some of their past clients.
You can tell a lot about a real estate agent by speaking to people they have worked with in the past. You will want to find recent clients to show their most recent track record. Any quality agent will have references from past clients and will not be shady about providing you their contact information.
2. Make sure they are licensed.
You can never be too sure about this. Every state has a database of licensed real estate agents and we recommend looking up any agents you are considering to be sure they are licensed.
3. Find out how long they have been an active real estate agent.
While new agents can sometimes be just as good as a seasoned agent, it is rare. Ideally, you want an agent who has been in business for more than 3 years. Otherwise, they may be using you as a learning experience which may not be a great idea for you.
4. Check out their current listings.
If your agent has no listings on the market and they are a listing agent, this may be a sign that you want to stay away. However, there are times when this is common, like during a low point in the market. It is rare, though to not have a single listing so you will want to check to see what they currently have on their plate.
5. Consider choosing someone based on awards.
There are a lot of peer given awards in real estate and it is a great sign of a successful and good real estate agent. This shouldn't be a deal breaker but if you can find a winner, then you are in good hands.
6. Ask them about homes for sale in the area.
This is a test of their knowledge of your area. You want someone that knows what they are talking about in the current market and is staying on top of what the market is doing. If they cannot answer a question about other homes in the area, they may not be a good fit.
7. Interview several agents.
Do not be scared to test the water. The first agent you meet may not be the best one for you. Meet with agents at their open houses or at another showing to see how they are in action and do not settle if you are not completely happy. This is a big transaction in your life and you should interview enough agents to help figure out what you do and do not want.
Content on this site is for informational purposes only. It is not to be construed as legal, financial, personal or other advice. Information and opinions offered are those of independent sources and may not be endorsed by American Mortgage Service Company and/or AmericanMortgage.com. We make no representations as to the suitability or validity of information in a blog on this site. We are not liable for any errors or content of blogs or for any losses, injuries or damages arising from its display or use. There is no obligation to update information provided in a blog on this site.