Tag Archives: mortgage loan

Renting vs. Buying: How to Know When Renting is the Best Option

Renting VS Buying | Money Savvy Living

If you are getting ready to graduate from high school or college and are thinking about moving out on your own, it can seem a bit overwhelming—and confusing. There is so much to consider: where you want to live, how much of a payment you can afford, will you have roommates, and what does all of the paperwork actually mean…

 

Let’s start at the beginning. The first thing that you need to look at when you are deciding to get your first place, is whether you should rent or buy. Surprisingly, the answer for most young adults, just leaving their parents’ home, is to rent. Why? Isn’t that just throwing money away, when it could be building equity in your own asset? Not necessarily. Here are 3 reasons, that renting may be your best option.

 

SAVE UP FOR A DOWN PAYMENT

In order to get a conventional mortgage, you can only finance 80% of the loan to value of the home you want to buy. If you are above that amount, you have to pay PMI (private mortgage insurance) or find a lender that will do a 2nd mortgage. Taking a few years to stash some cash away for a down payment on your home—and to cover closing costs—will be a huge benefit to your finances down the road.

 

BUILD YOUR CREDIT

If you are just moving out on your own, you may not have much of a credit history built up, even if you do have a credit card or two. Without much of a credit history, which lenders use to determine your ability to repay the mortgage loan, you may be considered a higher risk consumer, and end up with a higher rate. You can take steps, during the few years that you are saving up for a down payment, to build your credit history and increase your credit score.

  • Get a credit card—having a credit card that you use monthly and make a payment on monthly will start building your credit history in a positive way. While racking up a bunch of credit card debt is not good, utilizing a credit card to pay monthly expenses, then turning around and making a payment to the credit card company (on-time) every month, gives you a credit history because your credit card company, most likely, reports to at least one of the three major credit bureaus.
  • Pay your rent on-time every month—even though most rental owners or apartment complexes don’t report to the credit bureau, you actually can build a rental payment history by paying your rent each month by personal check from your bank. This will give you a paper trail of a rental payment history; and often, lenders will accept bank statements to prove this.
  • Finance a larger purchase, such as furniture or a car—even if you have the cash to buy a car or furnish your new apartment, taking out financing on a major purchase like this is a great way to show your ability to repay a loan and can build your credit.

 

DECIDE ON THE PERFECT LOCATION

If you are just graduating and moving out on your own, chances are you haven’t found your dream job. So unless you know for sure that you plan on living in the same area for at least five years, purchasing a home may not make financial sense anyways. When you purchase a home, there are closing costs involved, and typically, it takes at least a couple of years to recoup those transaction costs. The first few years of any mortgage that you take out is also the time during a loan that most of your payment is going toward the interest. So if you move within the first five years of taking out a mortgage loan, you may actually lose money if you sell your home.  In most short-term living situations you are probably better off to just rent, and then buy when you have settled on a location.

 

Mortgage Refinance: how to know whether it is a good deal or not

Mortgage Refinance Mailer

Have you ever received one of those letters in the mail that tells you how you can save nearly $250 per month if you refinance your mortgage with their company? No closing costs, low rate—sounds great, right? Well, before you sign the paperwork on this, you need to read the fine print. Saving $250 a month sounds great. With the ever-increasing costs of food and other consumer goods, getting a break in the budget can be quite tempting. There are three major details of the offer that are important to know before deciding if it is a good deal or not:

  1. Rate—Make sure that the low rate the bank is offering is fixed, so that it doesn’t fluctuate after an introductory period. If it is only a three-year fixed rate and then adjustable after that, your $300 per month savings will dwindle quickly once the rate adjusts. In fact, depending on the terms of the loan, the rate can adjust, only a certain amount each year, but could end up being several percentage points higher than the original introductory rate.
  2. Loan Points—Are you having to pay points to buy the rate down to the low rate that is being advertised. If it is going to cost you several thousand dollars, even if the amount is rolled into the loan, then the costs could end up out-weighing the benefits.
  3. Closing Costs—Does $0 closing costs really mean there are no closing costs? While you may not be expected to come up with closing costs out-of-pocket, they may be rolled into the loan or there may even be a large pre-payment penalty if you sell your home or refinance within a certain amount of time.
  4. Term—what they don’t usually point out in big, bold print on those marketing letters is that it in order to achieve the $250 per month savings, you are going back to a 30 year term on your mortgage. If you have already been paying on your current mortgage for 10 years, going back to a 30 year term may actually cost you money.

How do you know if the letter you are getting is a good deal? Follow these simple calculations, and you will know for sure:

Scenario: Current mortgage—30 year fixed rate of 5.5%, $150,000 original loan amount, with an $852 monthly payment (principle and interest only—do not include any portion that is paid to homeowner’s insurance), and you have been paying on it for 10 years (120 payments). What you need to calculate is how much you have already paid (total of payments), what you have left (mortgage payoff balance), and total cost of payments of both mortgages.

Calculate Total of Payments:

Monthly Payment x Number of Payments = Total of Payments

$852 x 120 months = $102,240

Calculate Mortgage Payoff Balance:

This is easy because the remaining balance should show up on your monthly mortgage statement. However, you would want to call your mortgage company for an exact payoff amount because if there is any prepayment penalty that would have to be added to the balance. You can also use an amortization calculator to estimate a payoff balance.

$123,527 Mortgage Payoff Balance

Calculate Total Cost of Payments of Current Mortgage: (Yes, this is a big number! You should have seen it on the Truth-In-Lending when you signed your original mortgage papers)

Monthly Payment x Term of Loan = Total Cost of Mortgage

$852 x 360 months = $306,720

Calculate Total Cost of Payment of New Mortgage: If your new mortgage is going to save you approximately $250 per month, (with a lower rate of around 4.17%), then your new principle and interest payment would be $602 per month.

Monthly Payment x Term of Loan = Total Cost of Mortgage

$602 x 360 months = $216,720

The cost of this new loan is lower, however, you need to add the amount that you have already paid to this balance because it is actual cost to you—which you have already paid.

$216,720 + $123,527 = $340,247

Now, just compare the two Total Cost of Mortgage values:

Current mortgage, total cost of mortgage: $306, 720

Potential New Mortgage, total cost of mortgage: $340,247

So even though the new loan offers a lower rate and monthly savings, by taking you back to a 30 year term, you will actually pay more than if you kept the current mortgage that you have. So if you are comfortable with your current payment, keep the current mortgage that you have; if however, your situation has changed and you absolutely need the monthly savings it might make sense to make the change. You can always pay more toward the principle once your financial situation allows it again.

*This scenario is for illustrative purposes only.

*This article is also published on my Examiner.com page.