When Is the Best Time of the Month to Close?

There really is no best time to close, and if you are purchasing a home rather than refinancing one, the closing date will have to be worked out with the seller, and they normally get preference, as they may be timing the transaction with you to coincide with another transaction or activity, such as buying the next house they’re moving into.

The day of the month you close will, though, impact how much money you will need to take to closing. If you close earlier in the month, you’ll generally need more money to close the deal than you will at the end of the month.

This is largely because of mortgage interest costs. Let’s take a simple example. If the interest you pay on your mortgage, at least initially, comes out to $1,000 per month and you close in the middle of the month, say, on September 15, the lender will want $500 in what is called prepaid interest.

This is to cover the interest from September 15 through September 30. Then your first payment will be due November 1.

For that November 1 payment, you’ll pay the interest (and principal) for the period of October 1 through October 31. This is called paying in arrears or paying interest for a month at the end of that month, and it is how mortgage payments work.

The other thing to consider with regard to when to close is property tax payments. Different taxing bodies, namely counties, collect taxes at different times of the year in what are called installments.

These could, for example, be collected in June and September, with half of the annual tax bill due in each installment. Certain months will require less at closing than others.

A number of factors go into deciding when is the best time to close. I would be happy to go over them with you and help you make the decision that’s best for you. I’m always here to help. You can reach me by phone and by email.

Is There a Best Time to Lock in an Interest Rate for a Mortgage?

This is a really good question and one that nobody, including your lender, would be able to give you a definitive answer to. Mortgage rates are based on what the market as a whole is doing.

In the typical day-to-day operations of the market, fluctuation is normal. And since this fluctuation is expected, nobody can predict what it will do from one day to the next.

In nontypical times, such as when major events happen, both here and in other parts of the world, they can impact our economy and, hence, mortgage rates.

Tying this information into the original question of when you should lock in your mortgage rate, the answer typically is at the end of the process, meaning when you are close to your closing date.

In fact, many lenders will allow you to lock in an interest rate only after they have approved all of your documentation and have seen a completed appraisal on the property. So why is this?

Because it costs lenders money to set aside funds that they intend to lend to a buyer. If they lock your rate too soon and there are challenges down the road that cause the deal to either stall or end completely, they will still incur these costs.

Things that cause this to happen include problems with the accuracy of information that the buyer provided or issues with the property itself or even the seller.

I’m here to help, and I’m just a call or email away. Please let me know if I can answer any questions you have about locking in your interest rate and how any of this works.

What Do Mortgage Points Mean in the Lending Process?

A point in the lending world is one percent of the loan amount you are taking. You are probably most familiar with this term, though, through different forms of lender advertising.

Lenders let you know that you can get a specific rate by paying a certain number of points, or even for zero points. Mortgage lenders make money in a couple of different ways. One is by charging a higher interest rate.

The higher the rate, the more money lenders make from mortgage investors who wind up purchasing your mortgage. If, however, they price their loans too high, they become less competitive in the marketplace.

The other way mortgage lenders make money is by charging fees or, in our case here, points. They offer you a lower interest rate, getting less money from the end investor but make up for the money they get in points.

So why would you ever consider paying points when taking out a mortgage? The answer is that it may save you money in the long term.

The first question you want to ask yourself is how long you plan on being in the property. The longer you will be there, the more likely the savings.

One point paid will drop your interest rate approximately one-quarter of one percent. Let’s look at a very simple example.

We’ll say that you have a $150,000 loan and you decide to pay one point ($1,500) to reduce your payment by $22 per month.

To see the payback period, your calculation would be $1,500/$22. This tells you that it would take 45 months, or just under four years, to pay back the point you paid for.

Please reach out if I can answer any questions you might have about how points work. I’m here to help, and I’m just a call or email away.

How Do Forbearances and Deferments for Mortgages Work?

Homeowners who are having challenges making their mortgage payments will often have several options to get them back on track.

First, it is best to be talking with your lender as soon as you know that you’ll be missing a mortgage payment.

Lenders really don’t want your home back and would rather work out terms with you so you can keep it. It is expensive for them to maintain a home, then go through the process of selling it, then hope they can sell it for more than you owe them.

Two of the options that lenders may offer you if you’re behind on your mortgage payments are what are called forbearances and deferments.

Forbearance: This is where the lender lets you make either reduced or no payments for a specific period of time. At the end of that period, you would be asked to catch up on all of the missed payments. Depending on the arrangement, this may be due as a lump sum at the end of the forbearance period or may be able to be paid over time.

Deferment: A deferment works similarly to a forbearance in that you’ll be able to skip a number of payments before resuming them. Here, though, you may be able to enter into an agreement with the lender to put the missed payments onto the end of the loan.

If you have any questions about asking your lender for either a forbearance or a deferment, please give me a call and I’d be happy to answer them.

Financial Steps To Take Before Buying A House

Once you feel ready to buy a house, the process usually happens fast. Whether it’s a buyers’ or a sellers’ market, you will quickly get excited about a house you see and want to jump on the chance to put an offer in. Before you begin this process, it’s vital to take a few financial steps so you’re prepared for what buying a house will look like. Not only will you feel more comfortable with the home-buying process once you have a grasp on your finances and learn about your options, this will allow you some time to save up more money or work on bettering your credit score. 

Have a grasp on your finances 

If you don’t already, start paying careful attention to all areas of your finances and be more proactive about your situation. Avoiding checking your account balance and only paying the minimum on credit cards isn’t being proactive enough when you’re preparing to buy a house. Start looking at your bank account more regularly; this will help you see just how many things you can cut costs on and how much money you can put in your savings instead of towards frivolous spending, after all, buying a house is a big financial investment.

This is also the time you want to check on the status of all of your loans, credit cards, and any other things you’re financing. At the least, make sure these accounts are in good standing, that you’ve been paying them on time for at least a year and none of your credit cards are over their limit. If possible, pay off any bills you can in total. This might not be possible for larger bills or if you’re aggressively trying to save for your future house, but if you have the extra cash this is a smart way to use it right now.

Paying off debts you have lowers your debt-to-income ratio, which is great when you’re looking to buy a house. Lenders look into your ratio to ensure that your income exceeds your current debt, this gives them a glance into your spending habits. If you have a lower debt-to-income ratio, you are less of a risk for the lender because you’re more likely to make your mortgage payment and less likely to default on the loan.

Finally, know your credit score! It’s a myth that checking your credit score can harm it, when you check your score on a website, this is considered a “soft inquiry” and does no harm to it! A “hard inquiry” is when someone like a mortgage lender checks your score, and this is when it can be affected. Therefore, you only want a lender to do this one time throughout your home-buying journey. It’s good to be informed on where you stand with all of your debts, so don’t be afraid to check that score. 

Research different loan options 

Before buying a home, you need to learn about different loan options to figure out which one is best for you. Luckily, there are many types out there to make it more accessible. Here’s a little information on different loan types so you can consider which one is best for your current financial situation:

  • Conventional loan – This loan is not backed by a government agency, like some others we will review shortly, it’s best to put at least 20% of the purchase price as a down payment so you don’t have to pay for mortgage insurance. Additionally, you usually need at least a credit score of 620. All in all, this loan is best for people who are in fantastic financial standing and who are less likely to default on the mortgage loan.
  • FHA loan – FHA loans have unique requirements because they are government-backed, this means that if you default on the loan, the lender is protected. Therefore, the financial requirements are a little looser. You can be approved for an FHA loan with only 3.5% down and a credit score of 580. This is a great option for people who haven’t been saving to buy a home or don’t have a great credit score right now.
  • USDA loan – This loan is also government-backed by the U.S. Department of Agriculture, which helps people buy homes in rural regions to encourage economic development in these areas. This will specifically help those that have average-to-low incomes for their area. If you feel like this describes you, then look into USDA loan qualifications.
  • VA loan – VA loans are another government-backed loan option but are for Veterans, Servicemembers, and their surviving spouses only. With this loan, there are competitive interest rates and no down payment or private mortgage insurance needed. If you’re a Veteran or another qualifying member, this is a great option for home buying!
  • First-time buying grants – Although this isn’t a loan and you will need one to buy, considering different grant options in your area is definitely worth it. Grants are gifts that don’t need to be repaid that can cover the cost of closing, the down payment, or even cover part of the total purchase price. You will likely have to do the heavy lifting on this because most mortgage lenders usually don’t offer the grants but it will be well worth it to try!

Shop around for lenders and rates 

To ensure you get the best interest rate on your loan, be sure to shop around for lenders. It might feel easy in this already long process to go to a friend that is a banker or go to the bank you already use. However, it’s financially smarter to shop around for quotes from different lenders to ensure you’re getting the best deal.

Interest rates can differ depending on the type of loan you decide on, based on what was discussed above you can decide which loan type is best for you. In general, people with more money down and a better credit score will benefit from a lower interest rate, because they are less risky to the lender. However, this is why it’s important to shop around for lenders because you may find an amazing one who’s willing to work with you.

Educating yourself to make the best decision possible is extremely important in this step of the home-buying journey. Be prepared by calculating what your interest rate could be before you even go to see a lender. The last thing you want is to be taken advantage of by a bank.

Regardless of if you’re a first-time homebuyer or seasoned in this area, there’s always room for improvement when it comes to your finances. Getting your financials in the best shape possible is vital before you can move forward in this journey, and you’re the only one that can do this. Next, begin to search for a realtor, lender, and lawyer that will help the rest of this process go as smoothly as possible!

What if I Have Little or No Credit History?

While credit is one important part of a total buyer profile when financing a home, there are ways, in addition to traditional credit, that you can prove to a lender that you have a positive payment history.

This is called alternative credit or nontraditional credit, and there a number of ways you can show payment history. One way you can do this (for example, if you rent) is to show cashed checks written on or before the day that the payment is due.

Other bills that you pay each month can be used in the same way. If you pay gas, electric, or monthly car insurance bills, you’ll also have a written record of your payment history. Cell phone bills work the same way.

If you are younger and just starting to build your credit history or don’t currently have any of the above items, you still have options.

There are several ways to actively build credit, especially if you are in a longer-term time frame to be purchasing a home.

One way is to start with a few smaller-type credit cards, such as from a gas station or a department store. What you can do is to use them regularly, even for small purchases, then pay them off each month.

In the eyes of the credit bureaus, the companies to whom the creditors report your payment history each month, you have consistent on-time payment history, and this is a good thing.

Another option is to look into what are called secured credit cards. This is where you give the credit card issuer the entire limit of the card when you sign up, say $500. You then basically borrow against yourself when you use the card. As you make payments, the card issuer reports your payment history to the bureaus as if it were an actual credit card.

If you have questions about any of this, please reach out. I would be happy to go over the options and help you determine what is right for you and your circumstances.

Factors that Make Up Your Credit Profile and Score

There are a number of factors that go into making up your credit score, which is a part of your overall credit profile. Lenders pull your credit scores from the three credit bureaus, Experian, Equifax, and TransUnion, which calculate your credit score by using a credit scoring model.

One significant part of your credit score is, of course, payment history. How well do you manage the debt that you have now? Are you making your payments on time? Do you have any collection accounts or judgments?

Another key part of your credit score is how much debt you are carrying and, specifically, how much of it you are carrying in relation to what you have available to you.

Do you have a maxed-out credit card? Do you have several of them? The ratio of balance to limit is a factor in your credit scores. A $200 balance on a card with a $1,000 limit looks much better than one with a $950 balance.

Too many installment accounts, such as car loans, or other types of fixed payment loans with high balances tend to drive down credit scores, as it gives the impression that you might be overextended.

The last factor that we’ll look into is the age of your debt. Maintaining a good payment history over a long period of time is a good thing.

The last thing you want is to apply for all kinds of credit cards just before you apply for a mortgage. This may make you look desperate in the eyes of the lenders.

Please let me know if I can answer any questions you have about how all of this works. I’m here to help, and I’m just a call or email away.

Having Property Ownership Rights without Being on the Loan

Yes, you can have ownership interests in a property without being on the loan. To fully understand ownership and payment responsibility, let’s first talk about some terminology.

The loan that you take out to purchase or refinance a home is referred to by lending institutions as a note. This is the document you sign at closing that says who is making the payments on a property. We haven’t yet said anything about ownership of that property. The note has nothing at all to do with ownership.

On the other hand, a mortgage, which is a different document than the note, says who owns the property but says nothing about who is paying for it.

The mortgage is held as collateral against the note. If you get far enough behind on the note, the lender can take possession of the mortgage, meaning that they then have ownership rights to your property.

There can and may be different people on the note and mortgage. You can agree to be on the loan, but you or your spouse may waive your ownership rights to the property. You may want this to be the case.

For example, if either you or your spouse were in some type of legal or financial trouble, such as if you were being sued, or if you were the owner of a business that is in distress and creditors were going after your personal assets, you may consider this option.

Your real estate attorney can take care of all of this for you with documentation you sign at closing.

On the flip side of this, you may want, for whatever reason, somebody who isn’t on the loan to have ownership interest in the property. This may be some type of close relative or a trusted associate.

If you have further questions about how all of this works, I’m here to help. I’m just a call or email away.

Will I Be Able to Get Cash Back at Closing or Not?

This will depend on what type of loan you are taking and from whom you are taking it. If you are taking out a purchase loan, then you wouldn’t likely be able to take any cash out of the transaction.

There are, however, three types of refinance transactions that you could take cash from. One is a no cash-out refinance, also called a rate and term refinance. Another is a limited cash-out refinance. The last one is just called a traditional cash-out refinance transaction. A rate and term refinance is just as it sounds. You do it because you want to replace your existing mortgage with another because the terms are better.

You do it because you are getting a better interest rate, getting a lower payment, or possibly both. If you are able to pay your closing costs out of pocket, you can even keep your same loan amount. You can also choose to roll associated costs into the new mortgage, but then your loan amount would increase. A limited cash-out refinance allows you to get a limited amount of cash back. For FHA, the amount is $500, and for conventional loans, it’s up to $2,000.

How much money as a percentage of your home value you can take will vary by program. According to a 2019 HousingWire.com article, FHA, for the first time in a decade, has lowered the total amount you can borrow against your home, including cash you take. It is now 80% of the home’s value.

Conventional loans will go higher, depending on your credit scores. Please call me with your questions regarding purchase and cash-out loans, and I’d be happy to answer them.

How to Get Yourself into a Buy-Ready Position

The two words that best describe how to prepare yourself for home ownership from a financial perspective are these: plan ahead.

Before anything else, the first thing you need to do is figure out, regardless of what prices are doing in your chosen area, what you can realistically afford for housing, month after month and beyond. You and only you will be making the mortgage payment, and you need to enter into a purchase that truly works for you.

Once you are at that point, you then reach out to a mortgage professional, we here can help, to see how much house you can afford with your realistic housing budget.

In addition to the monthly payment that you’ll be taking on, there are other considerations, such as the amount of money you’ll need to close the transaction. Beyond your down payment, there are other expenses, such as closing costs, lender fees, interest expenses, and asset reserves.

Saving money for a home purchase can take time, and in keeping with our plan-ahead theme, having at least some idea of how much you’ll need for it sooner rather than later is a good thing.

There are other considerations that will factor into the transaction and determine what interest rate you’ll pay. One of these is what your credit report looks like.

If you are carrying too much debt or the debt you have (such as credit cards) is maxed out, your lender may ask you to either pay some of it down or pay it off completely.

Are there items on your credit report that are incorrect or shouldn’t be there at all? Just as with paying off debt, this can be managed but may take time to complete.

Give us a call so we can help you get in the best buy-ready position you can be in when you start looking at homes.