How much will a lower mortgage rate save me?

By Sabrina Karl

When shopping for a mortgage, you’ll be faced with a sea of rates. But while it’s straightforward to decipher that 3.5 percent is a better rate than 4 percent, it’s not always easy to translate how that will affect your mortgage payments.

A quarter or a half percentage point may not seem like much difference, but it can add up in terms of how much you’ll pay over the course of a year. Take a typical mortgage of $200,000. If you opt for a 30-year fixed mortgage at 4.00 percent APY, your monthly payment for principal and interest will run approximately $955.

If you can qualify for a mortgage at 3.75 percent instead, so a quarter point lower, your payment will drop to around $925. Over the course of a year, you’d end up with about $350 more in your pocket than with the 4 percent loan.

What if you find an even better deal, or rates drop while you’re shopping, and you can score a 3.5 percent mortgage? Your payment would be lowered to under $900 and you’d save another $335 per year. That makes the savings from a rate of 3.5 percent vs. 4 percent (i.e., a half point decrease) about $685 a year, or $57 a month.

This is just one example, but if you borrow more, the impact of a half or quarter percentage point will become more significant. Borrow less, and the impact is more minimal. Likewise, if you borrow for a shorter period, such as a 15-year fixed mortgage, the rate impact will also be lower.

Making the right mortgage choice for you will take numerous factors into account, but it’s always wise to use a mortgage calculator to ensure you understand how different rates and terms will affect your payments.

What documents will I need to get a mortgage?

By Sabrina Karl

Applying for a home loan may be one of the more paper-intensive processes you’ll go through in life. Fortunately, much of what you need you’ll already have on hand or can easily access.

The documents mortgage lenders require generally fall into three categories: those documenting your income, your debts, and your assets. In addition, a variety of miscellaneous documents may be necessary given your situation.

At the top of the list is documentation of your current income, as well as how much you earned the past two years. Lenders will typically want to see your most recent two tax returns.

If you work for an employer, you’ll additionally need to present your latest W-2 form and last two pay stubs, as well as the names and addresses of any other employers over the last two years. Meanwhile, the self-employed will need to provide a year-to-date statement of profits and losses, as well as two years’ worth of 1099s and tax returns documenting the self-employed income.

The next bucket of documentation concerns debts. You’ll need to list all of your current debt balances and monthly obligations, including auto loans, student loans, and credit card balances. You won’t need to provide statements, though, as the lender will verify information against your credit report.

Next comes asset documentation. This includes the last two months of statements for any bank, CD, retirement, and investment accounts you hold, as well as for any life insurance policies with a cash value or owned real estate.

Lastly, various miscellaneous documents may be required given your specific situation, such as a letter confirming any received gift money is not expected to be repaid, proof of one year’s rent payments if you are a renter, or your divorce decree if you’ve divorced.

Many in the dark on homeowners insurance coverage and pricing

By Sabrina Karl

Although the vast majority of homeowners carry homeowners insurance (if you have a mortgage, it’s required), only about a fifth of homeowners have reviewed their policy to understand what it covers, or have shopped around for a good policy price.

A new ValuePenguin survey of 1,849 homeowners with homeowners insurance found that almost half (47 percent) said they don’t know what their policy covers, and 18 percent went as far as saying they have never reviewed their policy.

Meanwhile, although 64 percent reported they review their policy annually, only 71 percent said they feel confident in their understanding of what’s covered.

A common misconception turned up by the survey is the belief that flood damage is covered. One in three respondents (34 percent) believe their policies cover flooding, even though most policies do not. Among millennials, almost 50 percent have this misconception.

Many homeowners may also be paying more than they need to for coverage, since only a fraction are shopping around for the best rate. Approximately a fifth (21 percent) said they researched rates, either by comparing online quotes or working with an independent insurance agent.

So how are most homeowners choosing their homeowners insurance provider instead? More than a third (36 percent) simply opened a policy with their auto insurer, while another 36 percent chose who was recommended to them by friends or family (15 percent), their mortgage lender (12%), or their realtor (9%).

While homeowners insurance can seem like a simple checkbox to mark when you buy your home, and then keep current once a year, policies can range widely in terms of perils covered, deductibles required, and maximum payouts allowed, as well as rates charged. Doing your homework to choose the best coverage, and for the best price, is a savvy homeowner move.

Buying a home? Here’s what to expect at the closing.

By Sabrina Karl

For most homebuyers, the process of house hunting, arranging financing, finding the right home, and making it through an offer and inspection is a months-long process. So it’s fitting to call the day it all finally concludes “the closing”.

In short, the closing is when ownership and money are legally transferred, providing the seller with funds for the sale and the buyer with a deed in their name and keys in their hand.

Depending on the state and the parties involved, the location and number of people around the table can vary. Sometimes both seller and buyer participate at the same time, while other times the two parties’ closings are handled separately.

In either case, others attending the closing might include the real estate agent(s) and representatives of the title insurance company, the lender, the escrow company, and any representing attorneys.

Generally this happens in person at the offices of the title company, the lender, or an attorney. But some companies have begun allowing electronic signatures, executed either ahead of time or on the day of closing.

The most prevalent activity at closing is reviewing and signing documents, with you penning your John Hancock at least a dozen times, and likely twice that. These signatures execute three categories of transactions: transferring the real estate into your name, finalizing your home loan, and executing title insurance.

As homebuyer you’ll also need to bring a check (usually certified or cashier’s) to cover any down payment, closing costs, or other agreed upon contributions to close the deal, unless arrangements were made to pre-wire these funds.

Ask your agent or lender in advance for a checklist of what to bring and what to expect, as it’s the smartest way to help you navigate this big day with as little stress as possible.

The 7 basic steps of buying a new home

By Sabrina Karl

If you haven’t bought a home in a long time, or you’re a first-time buyer, understanding the homebuying process can seem daunting. Here are the seven steps that will take you from your initial start to collecting the keys.

First, you’ll need to evaluate your credit worthiness and finances. You’ll want to check your credit score to determine whether you have improvements to make before house hunting. Then you’ll need to decide how much down payment you can muster. Lastly, use a mortgage calculator to identify how much you can borrow based on a monthly payment you can afford.

Next you can apply for a mortgage. Numerous websites can direct you to the best rates in your area, and once you’ve selected a lender, you can start the pre-approval process. Alternatively, you may opt to work with a mortgage broker.

Once your mortgage financing is lined up, you’ll likely want a real estate agent who can help you find listings that match your price range and criteria. Once you’ve established that relationship and fee agreement, you can start house hunting.

When you find a home you’re interested in, it’s time to make an offer for what you’re willing to pay. If you offer below the asking price, you may receive a counter-offer from the seller, which you can then counter as well.

Once you have an accepted offer, you’ll need to schedule the home inspection. If the sale progresses after addressing any inspection findings, the lender will next want you to schedule an appraisal to determine the home’s value.

Finally, you’re in the home stretch, with the last major step being the closing. After providing your down payment and other required funds, and signing all the necessary paperwork to transfer ownership, the keys will be yours.

Banks vs. credit unions: What’s the difference?

By Sabrina Karl

When shopping around for a top-rate savings account or CD, you’ll likely encounter several credit union options. If you’ve never banked with a credit union before, you might be wondering what the difference is between these institutions and traditional banks.

In short, banks are for-profit institutions that must satisfy their shareholders, while credit unions are not-for-profit with a focus on their member customers. And while almost anyone can open an account with a bank, only customers meeting certain geographic, employer, or other affiliation criteria can join most credit unions.

As a result of their profit status, banks tend to have higher fees and lower interest rates on savings. They may also charge more on loan and credit products. But their strong profit-making ability means they generally offer more products, branches, and ATMs, as well as better online and mobile options.

At a credit union, you may find better savings rates, lower fees, or lower-interest loans, as well as possibly stronger customer service. However, many credit unions offer less branch and ATM accessibility, and many have less customer-friendly mobile sites and apps.

You’ll also need to become a credit union member to be a customer. Each credit union defines a “field of membership” to indicate its affiliation or residency requirements. However, some credit unions accept members nationwide through a very broad member definition.

As for safety, the institutions are equivalent. Whereas your deposits at a bank are federally insured up to $250,000 by the FDIC, credit unions carry the same level of insurance from the NCUA.

For the highest convenience, broadest accessibility, and latest technology, banks will suit some consumers better, but at the cost of potentially higher fees and lower earnings. But for those wanting a top deposit rate or enhanced customer service, a credit union may be the winning bet.

Will changes in the Fed interest rate impact mortgages?

By Sabrina Karl

Though the Federal Reserve hasn’t changed interest rates since December, the prospect of them cutting rates has been much in the news. If you’ll be shopping for a mortgage or a refinance, you may wonder whether the Fed’s actions could impact future mortgage rates.

What the Fed reviews every 6-8 weeks is the Federal Funds Rate. This is what banks pay to borrow money from each other overnight to meet their required daily reserve levels. The higher the Fed rate, the more expensive it is for banks to do business, and as a result, the more they’ll charge borrowers and pay savers.

When the Fed raises rates, as it has done repeatedly the last three years, it primarily affects short-term and variable rates. The most prominent impact shows up in credit card rates and CD and savings account rates. The higher the Fed rate, the more banks will charge on credit card balances, and the more they’re willing to pay consumers for deposits into CDs and savings.

Auto loans can also be affected, as they are short- to medium-term loans. But the impact of Fed rate changes is less dramatic since auto loans generally last at least three years.

This leads us to mortgages, which are generally much longer term loans. More important, though, is that mortgage rates are largely influenced by market forces, such as demand from bond investors. This far outweighs the influence of the Fed, making mortgages significantly less susceptible to Fed rate fluctuations. In fact, there have been instances in history where the Fed rate and mortgage rates moved in opposite directions.

In short, no one can’t predict where mortgage rates will head anymore than reliably predicting exactly what the Fed will do. Forecasters will forecast, but nothing is certain until it actually happens.

How to protect your bank account from loan scammers

By Sabrina Karl

Fraudsters have honed numerous ways to separate you from your money, from outright theft of your personal information to sneaky ways of getting you to divulge it voluntarily. Since one of their deceptive tricks is posing as a loan provider, look for these signs of a legitimate lender if you’re looking to borrow money.

The Federal Trade Commission enforces numerous regulations on lending operations, including requiring all lenders to register in states where they do business. So one of the first things you can verify is whether the lender is registered in your own state.

The FTC also prohibits soliciting loans by telephone. So a marketing call for loan products is a strong tip-off that you’re dealing with a loan scammer. Also beware of offers mailed to you or pitched at your front door.

Legitimate lenders are keenly interested in your credit history when determining whether to approve your loan. So watch out for anyone touting guaranteed approval. Also beware if the lender never discloses that they’ll be pulling your credit report.

Another red flag of loan scammers is requiring you to pay application fees by providing them a prepaid debit card, a gift card, or a wire transfer. Although legitimate lenders are likely to charge fees, they typically add them to your loan balance rather than require upfront payment.

Lastly, any pressure to act very quickly before the offer expires is reason to pause. Legitimate loans may indeed have limited windows, but they will be sufficiently long to allow you to weigh options and make a careful choice.

A primary goal of loan scammers is extracting your bank account and social security numbers. So if you notice any of the warning signs above, be sure to keep your information private and move onto a lender you can verify.

APR vs. APY… What’s the difference?

By Sabrina Karl

Anyone who has shopped rates – whether for putting money in a CD or savings account, or for borrowing with a mortgage or credit card – has noticed banks and lenders using two acronyms that are almost, but not quite, the same. Sometimes they quote APR, other times APY. What gives?

APR stands for Annual Percentage Rate, and is the basic rate a bank either pays for deposits or charges for a loan. It’s the fixed percentage applied to your balance over the course of the year.

But as many savers and borrowers know, interest grows when it compounds. And that’s where APY comes in. APY stands for Annual Percentage Yield, and it’s the rate you’ll actually yield as a result of compounding.

Mortgages typically compound monthly and credit cards daily. For bank deposits, compounding may occur this often, or may just happen quarterly or semi-annually. The more compounding periods in a year, the bigger the gap between APR and APY.

That’s because interest is charged on previous interest each period. Do it just twice a year and the compounding effect is slight. But if it’s done 12 or even 365 times in a year, compounding will inflate the APY to a noticeably higher number than the original APR.

From there it’s easy to see why mortgage and credit card lenders typically quote the lower APR, while banks soliciting your deposits tend to quote the higher APY.

How much of a difference can it make? Take a mortgage quoted at 4.5 percent APR. After compounding monthly, the rate you’ll actually pay by the end of the year, or the APY, will be 4.59 percent.

Understanding this allows you to ensure you’re comparing apples to apples – APR to APR, or APY to APY, but never mixed – whenever you shop rates.

Why you should still consider local mortgage lenders

By Sabrina Karl

Anyone shopping for a home loan can see that online players have become a dominant force in the mortgage marketplace. Whether it’s big-name traditional banks or online-only lenders, the push to shop nationwide is as strong as ever.

But working with a local lender can still offer benefits, especially for certain types of homebuyers.

When you apply locally, you’ll be working directly with an individual loan officer, and most likely will meet with them face to face. This may seem simply quaint to some, but for others it can feel like a welcome friendly face during an otherwise intimidating process.

The feel-good aspect of personalized service is only part of the equation, though. For instance, self-employed homebuyers or those with multiple income streams may have difficulty gathering all their documentation, and a loan officer can assist in that process.

Mortgages by local lenders can also be approved more speedily, in some cases, since you are applying to an individual instead of a massive department that receives hundreds of applications a day.

A local loan officer may also be more flexible in approving your the loan. Whereas big lenders have rigid underwriting guidelines, a local lender may have more leeway. This is particularly true if it will keep the mortgage rather than sell it to Fannie Mae or Freddie Mac.

Local lenders often can even help if they foresee your application being rejected. They may be willing to work with you on steps that will strengthen your application so that your mortgage can be approved in the near future.

Rates and fees will of course be an important consideration. But for homebuyers who may want or need a more personal touch, a speedier process, or greater approval flexibility, the lenders in your community are worth a look.