4 smart steps to take before opening a new CD

By Sabrina Karl

If you have money to sock away that isn’t appropriate for the stock market, or you simply want to earn a safe, reliable return, certificates of deposit offer a virtually risk-free way to grow your savings.

CDs have much stricter rules than savings or money market accounts, in exchange for earning a higher interest rate than these other accounts pay. Because of this, savvy CD savers employ a handful of best practices before they open any new CD.

The first is simply shopping around, including among online banks and credit unions, as these two institution types often pay very competitive rates. Shopping for the best rate is critical as you can earn about 20 times more from a top-paying CD versus one paying the national average.

After narrowing your list, check the early withdrawal policy of any institution you’re considering, since the penalties vary widely. Even if you don’t expect you’ll need to cash out early, it’s best to compare how mild or onerous a bank’s penalties are, and to avoid any policy that allows the penalty to eat into your CD’s principal.

Once you’ve chosen an institution and a CD, it’s important to think through how much you’ll deposit. That’s because you only get one shot with your initial CD deposit. Unlike savings and money market accounts, where you can make a small deposit at the time of account opening and then add more later, CDs generally only accept a single deposit.

Lastly, as soon as you open your CD, make a calendar reminder for yourself 2-3 months before the maturity date. This gives you time to decide what to do with the money coming out of the CD, and alerts you to watch for the bank’s notification letter with instructions on how to convey your wishes.

Want to refinance if rates drop again? Here's how to be ready

By Sabrina Karl

When mortgage rates dropped to historic lows early this month, refinancing applications shot through the roof. One source compared the mortgage lender industry during that week as similar to Home Depot before a coming hurricane.

Since then, mortgage rates have been yo-yoing given the uncertainty of financial markets during the coronavirus pandemic, as well as the Fed’s two emergency rate drops. But while current rates may not be enticing, recent rate movements have been exceptionally erratic and in these unprecedented times, it’s entirely possible they will drop to lows again.

That’s why it’s good to prepare now (while lenders are catching their breath) if you think you’ll want to refinance if rates drop again. Having your financial situation in order will be necessary if you want your application approved to lock a new low rate.

The first step is to calculate whether you have enough equity in your home to allow for refinancing. You’ll only be able to refinance up to 80% of your home’s appraised value, so if your current mortgage plus any home equity debt exceeds 80%, you’ll need to wait until you pay down more of those balances.

Second, take a look at your other debts. Do you have credit card balances or personal loans you can pay off before applying for a refinance? The ratio of your debt to your income is one of the primary drivers in lender decisions.

Lastly, assess your credit. If your score is below 760, you may want to bolster it before applying to refinance, since the higher your score, the more likely you’ll be approved and the better rate you’ll receive. Paying off debt is one way to improve your score, but also check your credit report for errors and avoid applying for any new credit until after you refinance.

Opting for a mortgage broker? Here’s how to choose

By Sabrina Karl

Simply dip your toe into mortgage shopping and you’ll immediately encounter more options than you can count. With so many lenders, rates, and loan types to consider, making a smart choice can quickly overwhelm.

That’s why some homebuyers and refinance candidates work with a mortgage broker, helping them narrow the field to best options, and then efficiently navigating the involved paperwork process that follows.

Just as with anyone you hire, choosing the right mortgage broker can mean the difference between a smooth, cost-effective process and a bumpy one with higher costs. Arguably the best place to start is with recommendations from people you know, as favorable word of mouth is one of the strongest indicators that a broker delivers good value to clients.

Interviewing prospective brokers is important, and you’ll want to ask several questions. An obvious one is how they charge for their service. The most typical arrangement is 1-2% of the loan amount. But other fee types exist so it’s important to clarify, as well as whether the fee will be folded into closing.

Another important question is what lenders the broker works with, and how broad that field is. The more options, the better the chance of your broker finding you a top rate and/or low fees.

To get a sense of the rates a broker can provide, you can ask them for a quote if you provide specifics on your credit score, desired loan amount, and planned down payment. If interviewing multiple brokers, ask for rate quotes on the same morning as mortgage rates change daily.

For those wanting to ease the sometimes daunting process of securing a new home loan, mortgage brokers can be a great partner in the process. Just be sure to do your homework on a positive fit and good value.

Record number of homeowners could benefit from refinancing now

By Sabrina Karl

Coronavirus fears and uncertainty are rocking financial markets, and one of the many impacts is tanking mortgage rates. Indeed, home loan rates dropped to their lowest level on record last week, as measured across 50 years of daily mortgage readings.

As a result, refinancing will pay off for a record number of U.S. homeowners, with each drop in the mortgage rate leading to more homeowners who can cost-effectively benefit from lower rates. According to mortgage data provider Black Knight, nearly 13 million borrowers should be able to save money by refinancing.

Black Knight indicates that those homeowners should be able to lower their current rate by at least 75 basis points, which is generally more than enough to offset refinancing fees. Note, however, that the 75 basis points measure is just an average and will depend on the borrower’s individual situation.

No-fee refinancing may also be an option, though no-fee rates are slightly higher. Each borrower will want to do the math of which option is more cost-effective for their situation.

Freddie Mac’s weekly reading of the average 30-year fixed mortgage rate fell to 3.29% last week. The previous low was 3.31% in November 2012. Last week’s average on 15-year mortgages was down to 2.79%.

Thirteen million candidates for refinancing is the highest number of potential refinance candidates on record. It is also an increase of 1.7 million eligible borrowers in just the last week and a 60 percent jump year to date. As a result, the phone is ringing off the hook at mortgage lender offices.

Whether rates will go lower still is debatable. But Black Knight estimates that a decrease in the average of just 4 more basis points — such as from 3.29% to 3.25% — would make another 1.7 million borrowers candidates for a cost-saving refinance.

What's different about a condo mortgage?

By Sabrina Karl

Condominiums are a popular housing choice among young singles and couples, as well as empty nesters and older retirees ready to downsize both their square footage and their responsibilities for home and yard maintenance. But what about financing a condo? Are condo mortgages special? Is it harder to qualify for a condo loan?

The good news is that almost all common mortgages (e.g., conventional, FHA, VA, etc.) can be used for a condo. Further good news is that your borrower requirements are essentially the same whether you’re buying a single-family home or a condo. The lender’s review of your credit, tax returns, income and assets, and debt levels will look for the same things no matter which type of primary residence you’re financing.

Where things differ with condos is that the lender’s willingness to approve your loan will include a substantial review of the overall condo property. First and foremost, they’ll carefully assess the financial health of the condo association, looking at how much money the association holds in reserve to cover future maintenance and emergencies. They’ll also review what percentage of the units are up-to-date on their monthly HOA (homeowners’ association) dues, with conventional mortgages requiring that no more than 15% of the units are delinquent.

The lender will also evaluate the percentage of owner-occupied vs. rented units, with conventional mortgages requiring that half or more of the units are owner-occupied. Finally, they’ll typically check that the amount of common, non-residential space (e.g., fitness, pool, and laundry spaces) doesn’t exceed certain allowances.

As a potential condo buyer, it’s your responsibility to make sure you understand the HOA dues obligations, as they’ll be required on top of your monthly mortgage payment. It’s also wise to check if there is any pending legal action against the condo developer or association.