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\n","featuredImage":{"id":"cG9zdDoxNzExNTE=","databaseId":171151,"altText":"Mortgage Points","date":"2022-11-08T14:42:48","fileSize":87785,"mimeType":"image/jpeg","modified":"2024-09-20T10:51:24","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2019/04/iStock_000066658803_Small.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-9-20","readable":"September 20, 2024","readableExtended":"September 20, 2024, 11:13am ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxOTc=","databaseId":197,"userId":197,"avatar":{"url":"https://secure.gravatar.com/avatar/de3f161a0dddef441091e8d3dcc69baa5c485a01314d2cdeb967be0c26aecc86?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Marie White is a Writer/Editor for SmartAsset, and holds the Certified Educator in Personal Finance (CEPF®) designation. She received her English degree from Stevenson University, with a focus on writing and communications. Marie has more than 15 years of experience working with financial content, having written for publications such as The Oxford Club, Agora Financial and The Trading Pub. Here, she covered topics ranging from stock market news to dividend stock investing and options strategies, as well as real estate investing.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Marie","fullName":"Marie White, CEPF®","lastName":"White, CEPF®","name":"Marie White, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":1,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mwhite","__typename":"User"},"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/mortgage/when-should-you-pay-points-on-a-mortgage","metaDesc":"Mortgage points are paid to a lender at closing in exchange for a lower interest rate. Learn when it's smart to pay for points.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":8,"title":"How Mortgage Points Work and When to Pay for Them","__typename":"PostTypeSEO"},"slug":"when-should-you-pay-points-on-a-mortgage","status":"publish","title":"How Mortgage Points Work and When to Pay Them","postType":"post","subtitle":null,"uri":"/mortgage/when-should-you-pay-points-on-a-mortgage","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoyMw==","databaseId":23,"userId":23,"avatar":"$1d","description":"Gregory Erich Phillips has more than a dozen years of experience in the mortgage industry. He is an active mortgage loan officer and an expert resource on topics including economics, home financing and real estate trends.","additionalMeta":"$1e","email":null,"firstName":"Gregory Erich","fullName":"Gregory Erich Phillips","lastName":"Phillips","name":"Gregory Erich Phillips","postCount":"$1f","slug":"gregory-erich-phillips","__typename":"User"},"editedBy":{"id":"dXNlcjoxOTc=","databaseId":197,"userId":197,"avatar":"$22","description":"Marie White is a Writer/Editor for SmartAsset, and holds the Certified Educator in Personal Finance (CEPF®) designation. She received her English degree from Stevenson University, with a focus on writing and communications. Marie has more than 15 years of experience working with financial content, having written for publications such as The Oxford Club, Agora Financial and The Trading Pub. Here, she covered topics ranging from stock market news to dividend stock investing and options strategies, as well as real estate investing.","additionalMeta":"$23","email":null,"firstName":"Marie","fullName":"Marie White, CEPF®","lastName":"White, CEPF®","name":"Marie White, CEPF®","postCount":"$24","slug":"marie-white-cepf","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ5OA==","children":"$27","databaseId":19498,"categoryId":19498,"link":"https://smartasset.com/mortgage-basics/articles","name":"Mortgage Basics","postCount":247,"slug":"mortgage-basics","ancestors":"$29","parent":"$2c","__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Mortgage points are fees that you pay your mortgage lender upfront in order to reduce the interest rate on your loan and, in turn, your monthly payments. A single mortgage point equals 1% of your mortgage amount. So if you take out a $200,000 mortgage, a point is equal to $2,000. By doing this, you’ll pay more now, but you’ll be reducing your long-term costs. Like any financial decision, this isn’t necessarily a good move for everyone, though. As you decide if paying for mortgage points makes sense for you, speak with a financial advisor about how a home loan can affect your financial plan.

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What Are Mortgage Points?

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Mortgage points are essentially special payments that you make at the closing of your mortgage in exchange for a lower interest rate and monthly payments on your loan. That’s why buying points are often referred to as “buying down the rate.” The move can lower what you pay your mortgage lender in the long run, and it can also get you closer to owning your own home outright sooner.

","

In the home buying world, there are two types of mortgage points:

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1. Discount Points

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Discount points are basically mortgage points as described above. The more points you buy, the more your rate falls. Lenders set their own mortgage point framework. So the depth of how far you can dip your rate ultimately depends on your lender’s terms, the type of loan and the overall housing market. But you can expect to lower yours by one-eighth to one-quarter of a percent. Discount points are tax deductible for the first $750,000 of your mortgage loan.

","

When deciding to pay for discount points, it’s important to weigh how long you plan to stay in your house and how much available cash you have at closing. The longer you stay in your house, the more money you end up saving by buying discount points. Likewise, the more money you have available at closing, then the better chance you have to pay for the discount points.

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2. Origination Points

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These cover the expenses your lender made for getting your loan processed. The amount of interest you can shave off with discount points can vary, but you can typically negotiate the terms with your lender. These are part of the overall closing costs, and some lenders add these in based on your overall credit or borrowing profile. Origination points are not tax-deductible, but thankfully many lenders have stopped forcing origination points. Instead, lenders are offering flat-fee or no-fee mortgage options, especially for strong borrowers.

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How to Calculate Mortgage Points

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Let’s say you take out a 30-year fixed-rate mortgage for $200,000 with an interest rate of 5.5%. Your monthly payment with no points would be $1,136.

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Then, let’s say you buy two mortgage points for 1% of the loan amount each, or $4,000. As a result, your interest rate dips to 5%. You end up saving $62 a month because your new monthly payment drops to $1,074.

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To figure out when you’d get that money back and start saving, divide the amount you paid for your points by the amount of monthly savings ($4,000/$62). The result is 64.5 months, or ~5.3 years. So, if you stay in your home longer than this, you end up saving money in the long run.

","

Keep in mind that our example only covers the principal and interest of your loan. It doesn’t account for factors like property taxes or homeowners insurance. You can also take advantage of the various free mortgage point calculators available.

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When Are Mortgage Points Worth It?

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If you’re buying a home and have some extra cash to add to your down payment, you could consider buying down the rate. This would lower your payments going forward. This is a good strategy if the seller is willing to pay some of the closing costs. Often, the process counts points under the seller-paid costs. And if you pay them yourself, mortgage points usually end up being tax deductible.

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In many refinance cases, closing costs are rolled into the new loan. If you have enough home equity to absorb higher costs, you can pay mortgage points. Then you can finance them into the loan and lower your monthly payment without paying out of pocket.

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In addition, if you plan to keep your home for a while, it would be smart to pay points to lower your rate. Paying $2,000 may seem like a steep charge to lower your rate and payment by a small amount. But, if you save $20 on your monthly payment, you will recoup the cost in a little more than eight years.

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The lower the rate you can secure upfront, the less likely you are to want to refinance in the future. Even if you pay no points, every time you refinance, you will incur charges. In a low-rate environment, paying points to get the absolute best rate makes sense. You will never want to refinance that loan again.

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But when rates are higher, it would actually be better not to buy down the rate. If rates drop in the future, you may have a chance to refinance before you would have fully taken advantage of the points you paid originally.

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Should I Pay for Points on My Mortgage?

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If you can’t afford to make sizable upfront payments at the closing of your mortgage application, you may want to keep the current interest rate and refinance your mortgage at a later date. Refinancing a mortgage is basically taking out a new loan to pay off your first mortgage, but you shop for a better interest rate and terms on the new one. This makes sense if you’ve made timely payments on your old mortgage, have paid off a decent amount of your principal, and improved your credit score since you first obtained the initial mortgage.

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If you have some money in your reserves and can afford it, buying mortgage points may be a worthwhile investment. In general, buying mortgage points is most beneficial when you both intend to stay in your home for a long period of time and can afford mortgage point payments.

","

If this is the case for you, it helps to first crunch the numbers to see if mortgage points are truly worth it. A financial advisor can help you through this process if you don’t know where to start.

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What Are Origination Fees?

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Why do so many lenders quote an origination fee? To get a true “no point” loan, lenders must disclose a 1% fee and then give a corresponding 1% rebate. Wouldn’t it make more sense to quote a loan “at par” and let the borrower buy down the rate?

","

The reason lenders do it this way is because of the disclosure laws in the Dodd-Frank Act. If the lender does not disclose a certain fee in the beginning, it cannot add that fee on later. If a lender discloses a loan estimate before locking in the loan terms, failure to disclose an origination fee (or points) will bind the lender to those terms.

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This may sound like a good thing. If rates rise during the loan process, it can force you to take a higher rate. Suppose you applied for a loan when the rate was 3.5%. When you are ready to lock in, the rate is worse. Your loan officer says you can get 3.625% or 3.5% with the cost of a quarter of a point (0.25%). If no points or origination charges show up on your loan estimate, the lender wouldn’t be able to offer you this second option. You would be forced to take the higher rate.

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Bottom Line

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As with most financial decisions, whether or not mortgage points are necessary for you will depend on your personal situation. Run some simulations using a mortgage calculator like SmartAsset’s to get an idea of how the purchase or non-purchase of points will affect your long-term mortgage payments. In addition, make sure your mortgage payments will fit into your overall budget.

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Tips for Buying a Home

","$2e","

Before you fall in love with your dream home, figure out what prices are actually within your budget. To help you out, check out SmartAsset’s how much home can I afford calculator. All you need to know is where you’re looking for homes, your marital status, your annual income, your current debt and your credit score.

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SmartAsset’s no-cost closing cost calculator will help you understand your total closing costs and amount needed at settlement.

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Photo credit: ©iStock.com/ziquiu, ©iStock.com/courtneyk, ©iStock.com/bonnie jacobs

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When you finance a home with a mortgage loan, you and your lender do business on the primary mortgage market. But there is a secondary market by which the lender recoups the entirety of the funds it lent you by going through outside investors. These investors drive interest rates and underwriting standards to an even greater degree than the initial lender does. A basic understanding of secondary markets can help anyone considering a mortgage. And if you’re looking for a trusted guide to help you through the process, use SmartAsset’s financial advisor matching tool to get paired with a fiduciary financial advisor.

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Mortgage Loans Are Packaged and Sold

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When a mortgage loan funds, it gets pooled with other mortgages of the same rate and term. For example, all 30-year fixed mortgages at 4.25% would end up lumped together. A bigger lender will create a pool of their own loans that fit specific criteria. Smaller lenders may join in a pool with each other.

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Then, lenders package a loan group as a mortgage backed security (MBS) and sell it to an investor. The largest mortgage investors are Fannie Mae and Freddie Mac. They set guidelines for how the loans they buy should be underwritten. A pool of loans that meets Fannie or Freddie guidelines gets sold in whole to the government-backed entities.

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MBS pools can also consist of loans that do not fit Fannie Mae or Freddie Mac guidelines, like jumbo loans. Hedge funds or private investors buy those kinds of MBSs. It’s common for a single MBS to have multiple investors, similar to how a stock has many owners.

","

Private equity purchases of MBSs were common leading up to the financial meltdown of the subprime mortgage market from 2007 to 2008. Since then, however, private equity has been mostly absent from the secondary mortgage market. In fact, the federal government invests in over 90% of mortgages in the U.S. Again, this is done primarily via Fannie Mae and Freddie Mac, though the FHA and VA are involved as well.

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Mortgage Investment vs. Mortgage Servicing

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It’s important not to confuse the selling of mortgage backed securities with the selling of loan servicing. Often, you get your mortgage through a lender or broker. Then, after closing, you make your payments to another company. This is typically a larger bank like Chase or Wells Fargo. This second bank purchased the servicing rights to your loan, but did not finance the full amount. The financing still came from the secondary market, whether from Fannie Mae, Freddie Mac or another source. The investor pays the servicer for collecting the loan payments. Then the investor receives the interest income on the loan.

","

A mortgage backed security works the same way as a traditional bond. The rate moves inversely to the price. In other words, a higher rate MBS pays more to the investor, who sees it as more likely to pay off early through a refinance. On the other hand, a lower rate mortgage, while paying less, is more likely to be held all the way to maturity. For this reason, a mortgage servicer sees a lower rate mortgage as a more valuable asset, due to the low chances of an early payoff. Any time a loan pays off, the servicer loses the fee income from the investor.

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Competition and Risk in the Secondary Mortgage Market

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When private investors bring mortgage loans onto the secondary market, competition and risk become a much larger part of the game. They begin to drive mortgage rates and fees. For example, if you have a loan with a low credit score, a lender perceives you as risky. Because of this, the lender will charge higher rates and fees in order to attract investors.

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Mortgage rates fall in the balance between what a borrower can afford to pay for his or her loan, and what the investment community is willing to accept as a return on investment (ROI). After the subprime mortgage crisis, individual investors grew unwilling to risk their capital on mortgage backed securities with low rates. As a result, the Federal Government stepped in to fill the void in the secondary mortgage market. This prevented rates from skyrocketing to a place where hardly anyone could afford to own a home. It remains to be seen whether the government will be able to gracefully exit the mortgage market and private investment can return to fill the void.

","

Tips for Buying a Home

","$3c","

Photo Credit: ©iStock.com/G0d4ather, ©iStock.com/simarik, ©iStock.com/TerryJ

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With land in desirable neighborhoods at a premium, townhouses represent a growing share in the real estate market. Townhouses can be an attractive option for many new homeowners–offering something of a “middle ground” between single family homes and condominiums. A townhouse can give you what feels like a single family home in prime urban centers. […]

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","

What Exactly Is a Townhouse?

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A townhouse typically has a unique front and back entrance, is multiple stories, and has one or two communal walls. Common in urban areas, townhomes vary widely by city and region. Whole blocks of rowhouses (another term for townhomes) are common in densely populated east coast cities, as well as in San Francisco. But townhouses can also be free standing.

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The exact definition of a townhouse is murky. Some townhomes have homeowners associations (HOAs) much like a condo. A HOA will likely cover some of the maintenance costs for grounds and other shared areas, but in exchange, you give up some of your control. Even if your townhouse only has one shared wall, you will still have to share some control and cost with the owner next door.

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Many homeowners who wish to live near urban centers choose townhomes as a balance of affordability and privacy. A typical single family home is larger and comes with a yard. In large cities these can be rare and expensive. Urban condominiums are another popular option. Condos are similar to townhouses, but they have some key differences.

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Townhouses vs. Condos

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","

Condos and townhouses share a few common qualities. With both, you have some ownership over the property, but you’re not responsible for every single aspect of residence, like trash collection for instance.

","

The most notable difference between a townhouse and a condo is that the owner of a condo only owns the interior of her unit. The Homeowners Association (HOA) that owns the complex owns the exterior unit, the front and back lawns if they exist and the communal areas. With a townhouse, you own the interior and the exterior as well as any lawn. Because of this, home insurance rates are typically lower for condo owners, since the own less.

","

In terms of appearance, townhouses are a bit less flexible. Townhouses are almost always built in rows, and each unit is multiple stories tall. Condos, on the other hand, vary widely in style and layout. They can be ranch-style, cottages or even in a luxury apartment building.

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HOA fees and maintenance fees are typically higher for condos than townhouses. This is because condo owners often have access to more services and amenities like lawn care, pest control and community spaces like a pool or golf course. This isn’t to say that townhouse owners never have access to these things, but it’s less frequent, and therefore they frequently pay less in fees.

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Financing Challenges

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Unless you are paying cash to buy a townhouse, you will need to obtain mortgage financing. One of the limitations of these types of properties comes from the difficulty lenders find in accurately classifying and appraising townhomes. Mortgage financing is more expensive and restrictive for condos. Some lenders choose to underwrite all townhomes as if they were condos, leading to higher costs. Some have more nuanced guidelines. If you are buying in an area with a lot of townhomes, it’s a good idea to find a lender with experience in the area. Maybe even speak to the other owners to find out who they used for financing.

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When lenders underwrite condominiums, they place restrictions on the number of units that can be rented, rather than occupied by the owner. They may underwrite a townhouse complex the same way. So before buying, it would be good to find out how many units are being rented. Homeowners’ associations often try to restrict the number of units that can be rented as well, so if that is in your own long-term plans, find out if it will be allowed.

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Prepare Before You Buy

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Despite the complications and potential costs of financing, townhouses may offer the most attractive home buying option in many urban areas. The multi-level layout and private entry give the feel of a single family home without the expenses that come from owning and maintaining acreage yourself. Despite the shared wall, a townhouse can feel more private than a condo, yet the homeowner’s association gives much of the same convenience and protection.

","

If you are in the market to buy a townhouse, talk to your realtor and mortgage professional to make sure you know all the details and obligations of the property in question. Before buying it’s also smart to consult a financial advisor about how this could impact your budget and whether it’s an investment that aligns with your short-term and long-term goals.

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Tips for Successful Home Buying

","$4a","

Photo Credit: ©iStock.com/deberarr, ©iStock.com/lawcain

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Mortgage credit certificates (MCCs) can help with your tax bill in relation to your mortgage payments. MCCs come from originating mortgage lenders, and they turn the mortgage interest you pay directly into a tax credit, which is non-refundable. They are most often used by those with lower incomes to aid them in buying a home. If you have questions about how the purchase of a home can affect your long-term finances, consider speaking with a financial advisor.

","

What Is a Mortgage Credit Certificate (MCC)?

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A mortgage credit certificate, or MCC, is a tax credit the IRS gives to low and moderate income homebuyers. Generally the program is only available to first time homebuyers. Terms differ by state. An MCC can be a great way to use your home to save money on your taxes, but there are some drawbacks as well as hidden costs, so use caution in deciding whether to use the program.

","

An MCC is not credited at the closing of the loan, but on the homeowner’s federal taxes in the future. The credit can be used for each future tax year in which the mortgage is held that the homeowner has a tax liability. The amount of the tax credit is equal to 20% of the mortgage interest paid for the tax year. The remaining 80% interest is still eligible as a tax deduction. If the mortgage is ever refinanced, the MCC will be voided, even if the recipient still owns the home.

","

An MCC usually costs around $650 up front, and mortgage lenders may charge an additional $100 processing fee at their discretion.

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The Downsides of Mortgage Credit Certificates

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While an MCC sounds like a great way to save money over the long term, many people who apply for an MCC end up disappointed. The difficulty stems from the fact that the IRS imposes a strict income limit on qualification.

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The IRS determines the maximum annual income for each county in the nation. These limits are close to, but not necessarily tied to, median income figures. Since the maximum income is the same for single or dual occupancy households, it is much easier for a single person to qualify for an MCC than for married couples or families. As part of the approval process, the IRS will review an applicant’s tax returns and count any income shown toward the maximum income for the program, even if the homebuyer is not using an income source for mortgage loan qualifying.

","

Even if approved for an MCC, many people who fall into the income requirements find that they do not have enough of a tax liability to get their money’s worth out of the program. This is especially true for families who receive a child tax credit.

","

A further drawback to the MCC looms if the certificate holder sells their home within the first nine years of ownership. A recapture tax may be due for some of the savings of the MCC. Thus, even if you’re able to maximize tax savings from an MCC, its benefits may disappear down the road through the recapture tax.

","

Consulting Experts About MCCs

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Despite the drawbacks, an MCC can be a good way for many people to reap tax savings through their mortgage, especially if you plan to own the home for longer than nine years. If you are a first time homebuyer, talk to both your mortgage lender and your tax preparer about the program. If your income falls within your county’s limit, your lender and CPA can help you determine if there are any long-term savings the program can offer you.

","

Should you decide to apply for an MCC, you must do it prior to closing on your new home. The lender needs to apply for the program through the IRS, then the IRS needs to approve it, which may take one to two weeks. Once approved, you have 90 days to close on your home purchase.

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Bottom Line

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Buying a home is one of the most exciting times of your life. And the bottom line is that MCCs can help you get into your new home for cheaper. This is especially true for those that are a little strapped for cash, as MCCs provide strong tax benefits for families in situations like this.

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However, despite the potential perks of MCCs, they have some characteristics that may not make it worthwhile for your specific situation. Therefore it’s incredibly important to speak things over with a professional before finalizing any moves.

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Financial Planning Tips for Homeowners

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Photo Credit: © iStock.com/Tinnakorn Jorruang, © iStock.com/Ridofranz, © iStock.com/Paperkites

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You may find the Annual Percentage Rate (APR) on a mortgage loan a confusing aspect of the home financing. You can find the loan APR listed on the Truth in Lending (TIL) disclosure. The disclosure lists the APR figure as a rate. However, be sure to note that is not the interest rate on the loan. Once you learn to understand the meaning of APR, it can be a useful tools when shopping for a loan. It will also help you to understand the true cost of a mortgage.

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Find out now: How much house can I afford?

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How Do You Calculate the APR?

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The formula that determines an APR looks at the closing costs on the loan. Those costs are annualized over the entire term of the loan. Divide the closing costs by 30 for a typical 30 year fixed mortgage loan (or 15 for a 15 year loan). Add that amount to the note interest rate to get your APR. A mortgage with a note rate of 4.25% might have an APR of 4.45%, as a typical example.

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Knowing how to calculate an APR will allow you to compare loan options more accurately. Say the lender gives you the option of a “no-fee” loan at 4.5%, along with the option above. The APR shows that the first option, with the closing costs, is a slightly cheaper loan in the long run. On a true “no-fee” loan, the Annual Percentage Rate will be exactly the same as the interest rate. Check your TIL disclosure to make sure it is, if that is what you have agreed on with your lender.

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If the loan terms include mortgage insurance, the APR calculation will also add in the MI premium. Mortgage insurance becomes necessary when you buy a home with less than a 20 percent down payment. A loan with a 4.25% note rate, which has a mortgage insurance factor of .75%, will have an APR of at least 5%. This is before including closing costs.

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APR Only Applies at the Beginning

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The APR figure is never something you actually pay on your mortgage loan. The APR works only as a comparative tool up until closing, which is when you pay the APR. After that, your note rate is what you pay for the remaining life of the loan. This differs from the way APR works on some other credit accounts, like credit cards, which may have an annual fee. If you refinance your loan down the road, compare your new loan terms to the interest rate on your old loan, not the original Annual Percentage Rate.

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Sometimes it does make sense to take a mortgage with a higher APR. This could minimize your fees. That could be an option if you expect to pay off your loan before the scheduled end date, either through refinance or sale. Let’s go back to the above scenario. The “no-fee” option at 4.5% makes for a better choice if you plan to pay off the loan in less than ten years.

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The Takeaway

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You can certainly use the APR to help determine the best mortgage loan for your needs. However, it should not be the only defining factor. Don’t forget to consider the note interest rate, loan length and actual loan costs when shopping for a mortgage. Combined with these factors, the APR helps give transparency to the loan terms.

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Photo Credit: ©iStock.com/MattKay, ©iStock.com/AndreyPopov, ©iStock.com/franckreporter

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The months of April through July generally account for more than 40% of a year’s housing transactions. This is when people think about whether to keep renting or if it’s time to buy a home. What Is Home Buying Season? …

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The months of April through July generally account for more than 40% of a year’s housing transactions. This is when people think about whether to keep renting or if it’s time to buy a home.

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What Is Home Buying Season?

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Home buying season can vary, but in general, it starts at the end of March (early spring) and lasts through summer and sometimes early fall. Reasons why this time of year sees such a substantial uptick in home sales are varied. Improving weather is a big factor. It is much easier to move in the spring and summer than in the winter. It’s also easier for realtors to show homes when the weather is warm. Enticing home buyers to trek to an open house during winter’s snowy and cold weather is a much harder sell.

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Along with that, many sellers don’t want to show their homes during the winter due to the holidays. With Christmas, New Years and all the stress that goes into the holiday season, accommodating real estate showings is something many home sellers balk at.

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Another reason home buying season starts with the advent of nicer weather is that home repairs are easier to make when there isn’t snow or ice to contend with. That also ties into home inspections. Inclement weather, as well as a snow-packed roof make it harder for home inspectors to give accurate reports to prospective buyers.

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The school year is a huge consideration for sellers and buyers with school-aged children. Most families prefer to buy and move before the start of a school year, so that the children can start school with their peers. That makes the March to July window even more appealing. Most schools end by May or June, leaving time for parents to close on a home, pack and move in before the end of summer.

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Home Buying Season Isn’t Set in Stone

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All that said, home buying season is a general window, and can really change depending on the place you’re buying (or selling). For example, markets in low-inventory areas, such as San Francisco or Washington D.C. experience home buying season practically year round. It’s always a tough market for buyers in those areas because of high competition.

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While the environment across the U.S. seems to favor sellers at the moment, buyers still hold the leverage and sellers should not get greedy with their list prices. In the aftermath of the housing bubble and bust, buyers are more savvy than in the past. Both experienced and first time homeowners know the risks involved in buying a home. For that reason, they are not likely to jump on a good deal for that reason alone. They want to know that they are buying a home they can live in for many years, in a good neighborhood and with features that suit their needs.

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Buying a Home During Home Buying Season

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If you are looking to buy a home during this year’s hot buying season, give yourself the best chance by coming to the table well-prepared. If you are competing against other offers, you want to give the seller a reason to choose yours over the others. A winning offer is not always the highest one. If there is an “all-cash” offer, it will be hard to compete. But otherwise, there are some things you can do.

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First, make the transaction as easy as possible for the seller. They would probably rather take a slightly lower offer than one that requires them to do repairs before closing.

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Second, line up your mortgage financing ahead of time. Don’t just get “pre-qualified.” Get fully underwritten and approved. If possible, have your lender write a letter that states their closing time period. The faster the closing, the sooner the seller (and the listing agent!) get their money.

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Lastly, be prepared to walk away. If you have been looking for months, this may be difficult, but there will be other houses. Don’t get sucked into overpaying, or pressured into buying a house that needs major work unless you are expecting to do renovations. With low inventory, sellers have an advantage. But that is no reason to get pressured into a purchase that is not right for you and your family.

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Tips for Home Buying

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Before you even start looking at homes, you’ll want to know your budget. SmartAsset’s how much house can I afford? calculator gives you a detailed answer to that essential question.
You can get a head start on the mortgage process by researching possible lenders before you even look at homes. Each lender offers different services and rates so it’s worth knowing which one may be the best fit for you.
Keeping your down payment savings in a high-interest savings account is one of the best ways to earn interest while stashing money away.

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Photo Credit: ©iStock.com/fstop123, ©iStock.com/Weekend Images Inc.

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Before buying a home, you will need to choose who you’re going to work with through the homebuying process. This starts with your real estate agent, though your mortgage loan officer can be almost as important. They can advise you on refinancing or home equity loans if you already own a home. A financial advisor can also help you adjust your financial plan to meet your home loan needs. In either case, once you have a loan expert you can trust, you will likely rely on that person for years, regardless of the company they work for.

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Definition of Banks and Mortgage Companies

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Full service banks are known as federally chartered financial institutions. They offer mortgage loans along with other banking products like checking and savings accounts and business and commercial loans. Many also offer investment and insurance products. Mortgage loans are simply one aspect of their business. The Federal Deposit Insurance Company (FDIC) regulates and audits full service banks.

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On the other hand, individual states regulate mortgage companies. These regulations are considerably more stringent as well. In addition, using a mortgage company means you won’t be able to consolidate all of your financial accounts at one institution. However, this might not be a deal breaker for some people.

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What Are Mortgage Loan Originators?

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Mortgage loan originators go through very different processes between federally chartered banks and mortgage companies. To be a loan originator at a bank, one needs to register with the Nationwide Mortgage Licensing System (NMLS). They also must be fingerprinted and checked for any criminal background. Anyone with a history of financial crime such as fraud cannot practice mortgage origination. However, the FDIC does not require the loan originator to demonstrate any specific knowledge of mortgage practices or programs.

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To work at a mortgage company, however, a loan originator needs extensive training. They must pass two examinations: A national exam and an exam for each state in which they want to practice. These tests stress an understanding of the business and consumer protection laws. Once a loan originator obtains a state license, they must renew each one annually.

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Pros and Cons of Getting a Mortgage With a Bank

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A bank could offer you special benefits as a customer. These may include lower rates and specific loan programs targeting self-employed homebuyers and investors. You should note, however, that lending standards could be stricter because of federal compliance and reporting laws.

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Due to the scope of a bank’s financial activities, most banks service their mortgage loans. So after your loan closes, you will still make monthly payments to the same bank that originated the loan. Many see this as an advantage to using a full service bank.

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Pros and Cons of Getting a Mortgage With a Mortgage Company

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There are some specific advantages to using a mortgage company for your loan. First, they probably have access to a wider range of loan products than a full service bank. Banks structure their own loan programs within guidelines set by Fannie Mae, Freddie Mac, FHA and VA. But if your situation does not fit within their criteria, they will decline your loan.

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Mortgage companies sell the servicing. This way, they have access to loan programs that are structured and offered by a variety of loan servicers, usually big national banks. Unlike a mortgage “broker,” the mortgage company still closes and funds the loan directly. Because these companies only service mortgage loans, they can streamline their process much better than a bank. This is a great advantage, meaning your loan can close quicker.

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In a competitive real estate environment, the ability to close a loan on time is vital. The other advantage to fast closings is that rates and fees are cheaper for shorter rate lock terms.

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You should note that your mortgage lender may sell your loan to another institution after closing. If this happens to you, don’t worry. The loan documents you signed with your original lender are legally binding for the life of the loan. A loan servicer cannot change the interest rate, fees or any other aspect of the loan.

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Bottom Line

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So which do you choose? A full service bank ensures your loan will stay with the same company for the entire term. Do be sure to make sure that the bank does service their own loans. On the other hand, a mortgage company can offer fast closings, product availability, and loan originator expertise. However, the individual is often the most important aspect of home loans. Both kinds of companies have fantastic and knowledgeable loan originators.

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Home Loans and Your Financial Plan

","$80","

Photo credit: ©iStock.com/DOUGBERRY, ©iStock.com/Ridofranz, ©iStock.com/BrianAJackson

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So you’ve found your dream home. You’re ready to make an offer. But what is a fair price? Will there be competing offers? You don’t want to lose this house, yet you also don’t want to pay too much on monthly mortgage payments. Buying a home is one of the most exciting times in your life, but it can also be incredibly stressful. There are three things to consider if you’re debating how much your offer should be. You can also work with a financial advisor to prepare your finances and make sure you’re offering a price you can afford.

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1. What Are the Current Market Conditions and Inventory?

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This is a simple question of supply and demand. Take a look at whether a lot of similar houses are up for sale. Also, notice if houses are staying on the market for a month or more on average. If so, then you are in a buyer’s market. This puts you in a strong position to negotiate. You probably want to open with an offer below the listing price.

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On the other hand, houses could go into contract within a week or two of being listed. At the same time, you may not see a lot of similar homes. When this happens, the market is a seller’s market. In that case, you will likely need to offer at least the listing price. Your realtor is a good first source for getting a feel for the local market. But when you look at homes, you will also get a good feel for these factors yourself.

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2. How Long has the Home Been on the Market?

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Now that you know the market conditions, check out the length of time the property has been up for sale. That answer will give you a clue as to whether the seller has fairly or unfairly priced the home. Let’s say the average home takes a month to go into contract, but the home in question has been on the market for two months. That might tell you that the seller has priced the home too high.

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You may be able to get it with a low offer. However, this could also indicate tepid motivation from the seller. A brand-new listing with a favorable price will likely need a full-priced offer right away.

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3. What is the Competition for this Home?

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In a hot real estate market, there are often multiple offers for homes. You may be up against not only other homebuyers like yourself but investors with “all-cash” offers. If you know there will be competition, you might want to put an “escalation clause” in your offer.

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Here’s how an escalation clause works: say the listing price is $200,000 but you know there are multiple offers. You might make an offer at $205,000 with an escalation clause of $215,000. If no higher offers come in, your offer stands at $205,000. If someone else puts in a higher offer, yours will automatically rise to the stated limit to beat out the other.

","

Before making an offer, you always want a mortgage lender to have pre-approved you. But this becomes imperative if you are in a competitive situation. Getting approval from a lender with a reputation for closing their loans quickly will help your case even further.

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Negotiating Closing Costs

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Price is the main aspect of a home purchase negotiation. You could request that the seller pay a portion, or all, of your loan closing costs. But the factors listed above determine whether you have the leverage to ask for this.

","

When there are multiple offers, you probably won’t have this leverage. It may seem like a $200,000 offer and a $205,000 offer where the seller pays $5,000 in closing costs net out as the same thing. However, it can be advantageous to both parties to structure it the latter way.

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The sales price determines your down payment requirement. So, your out-of-pocket costs decrease if the seller pays for some costs. A seller who owns multiple properties, such as a builder or condo owner, would rather see a higher sales price. This happens even if they have to pay closing costs. That way, it helps set the market for the rest of their sales.

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The Bottom Line

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When shopping for a home, it really does help to do your homework and know the environment where you are buying. This information will put you in a much better negotiating position. Not only that, but it can give you some peace of mind knowing that you made a good investment. You should also make sure you have your finances prepared to move quickly to buy the house once you’ve submitted an offer.

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Tips for Buying a Home

","$8e","

Photo credit: ©iStock.com/fstop123, ©iStock.com/fstop123, ©iStock.com/DOUGBERRY

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\n","featuredImage":{"id":"cG9zdDoxNTM5OA==","databaseId":15398,"altText":"What is Single-Payment Mortgage Insurance?","date":"2014-03-11T11:50:53","fileSize":89751,"mimeType":"image/jpeg","modified":"2014-03-11T11:50:53","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2014/01/11088845464_c115aa830b_o.jpg","__typename":"MediaItem"},"modified":{"datetime":"2022-4-20","readable":"April 20, 2022","readableExtended":"April 20, 2022, 5:51pm ET"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/mortgage/what-is-single-payment-mortgage-insurance","metaDesc":"How much money you put down when buying a house can have a bigger impact than you may know. SmartAsset helps explain single-payment mortgage insurance.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":4,"title":"What Is Single-Payment Mortgage Insurance? - SmartAsset","__typename":"PostTypeSEO"},"slug":"what-is-single-payment-mortgage-insurance","status":"publish","title":"What Is Single-Payment Mortgage Insurance?","postType":"post","subtitle":null,"uri":"/mortgage/what-is-single-payment-mortgage-insurance","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoyMw==","databaseId":23,"userId":23,"avatar":"$90","description":"Gregory Erich Phillips has more than a dozen years of experience in the mortgage industry. He is an active mortgage loan officer and an expert resource on topics including economics, home financing and real estate trends.","additionalMeta":"$91","email":null,"firstName":"Gregory Erich","fullName":"Gregory Erich Phillips","lastName":"Phillips","name":"Gregory Erich Phillips","postCount":"$92","slug":"gregory-erich-phillips","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ5OA==","children":"$95","databaseId":19498,"categoryId":19498,"link":"https://smartasset.com/mortgage-basics/articles","name":"Mortgage Basics","postCount":247,"slug":"mortgage-basics","ancestors":"$97","parent":"$9a","__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

If you buy a house with less than a 20% down payment, and finance it with a conventional loan, you are going to have to pay private mortgage insurance. PMI protects the lender against the possibility of a default. It does not protect you, the buyer, but it does give you the benefit of buying a home you might not otherwise have been able to get. Use SmartAsset’s free financial advisor matching tool to connect with a professional who can provide guidance on how to manage a mortgage within your financial plan.

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Introducing Single-Payment Mortgage Insurance

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The most common way for mortgage insurance to be paid is as a monthly premium rolled into your mortgage payment. Many buyers do not realize that there is also an option to pay the premium as a single lump sum upfront called single-payment mortgage insurance. Paying it upfront may end up being a significant cost saving over the life of the loan.

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For a buyer with good credit scores and a 5% down payment on a $300,000 loan, the monthly PMI cost (depending on the price of the residence) is estimated to be $167.50. Paid upfront it would be $6,450. If this lump sum makes you gasp, consider the fact that after only three and a half years of monthly premiums, you would have paid over $7,000 to the PMI company.

","

While lenders usually allow you to remove monthly PMI once your loan reaches 78% loan to value, in this scenario you would not yet be close to this threshold if paying on a standard 30-year amortization schedule. If you have a chance to lock in a low interest rate for 30 years, single-payment mortgage insurance would allow you to get your payments as low as possible right away. You will probably never need to refinance this loan.

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Another advantage to keeping your payment low through single-payment mortgage insurance is that you will have an easier time qualifying for a mortgage. Lenders use the ratio of monthly debt payments to monthly income to determine qualification, that is, how much home you can afford. Single-payment mortgage insurance results in a lower monthly payment, meaning you can probably qualify for a larger mortgage.

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Why It’s Not for Everyone

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If you are only making a 5% down payment, you likely don’t have an extra $6,450 laying around. However, if the seller is making any concessions toward closing costs, it can be used toward the single-payment mortgage insurance. If you expect to pay down your loan more aggressively than the 30-year schedule, that would be a reason to take monthly PMI. Similarly, if you plan to make improvements to your home, you may be able to get an appraisal after a year or two and demonstrate sufficient equity to your lender to remove PMI.

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Ask your loan officer to do a comparison of costs and monthly payments for you both ways. Most lenders have software that can lay out multiple loan scenarios side by side for easy comparison. Consider all the factors: how much money you have available for loan costs, what you want your monthly payment to be and how long you plan to be in the home.

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Bottom Line

","$9c","

Tips on Home Buying

","$9d","

Photo credit: ©iStock.com/ceejaybrand5k, ©iStock.com/fizkes, ©iStock.com/Patrick Chu

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The most common way to finance a home purchase for first time buyers is with a loan through the Federal Housing Administration (FHA). The 3.5% down payment required by FHA is the lowest down payment option in the marketplace available to the population at large. (Zero down payment loans are only available to veterans and […]

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Related: Do I Qualify for an FHA Loan?

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As a further help to homebuyers, FHA allows up to 6% of the loan amount to be paid toward loan costs by the seller. This would have to be agreed to in the sales contract. It could drastically lower the out of pocket costs of buying a home.

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After the meltdown in the subprime mortgage market, FHA loans became the default choice for first time homebuyers and practically anyone who wanted to make a small down payment on their home purchase. But as FHA’s market share increased dramatically, changes were put in place that make it less of an obvious choice today.

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Related Article: Low Down Payment Mortgage Options

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Mortgage Insurance and Interest Rate

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FHA loans require a mortgage insurance premium (MIP) to be paid both as an upfront closing fee and as part of the regular monthly payment. The upfront premium (typically 1.75% of the loan amount), can be financed into the loan, so it does not increase the cash needed at closing. It can also make up part of the seller contribution.

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But the monthly amount, which in recent years has more than doubled, can really decrease the affordability of an FHA loan. For a minimum down payment FHA loan, the monthly MIP amount is 1.35%. Unlike mortgage insurance on conventional loans, FHA MIP remains in force for the entire life of the loan.

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Base interest rates on FHA loans are usually lower than on conventional loans. But the MIP can make the true cost of FHA financing higher even when the interest rate is lower.

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Suppose you are offered an FHA loan at 4.0%, and a conventional loan at 4.5%. The mortgage insurance factor on the conventional loan is 0.7%. Thus the true monthly cost of the conventional loan would be 5.2%, while the true cost of the FHA loan would be 5.35%. The payment on the conventional loan will be lower even though the interest rate is higher.

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FHA Loans and Down Payment Assistance

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Conventional financing requires at least a 5% down payment. If 3.5% is the maximum amount you have saved to put down, then an FHA loan provides the right down payment assistance for you. But if you can save the extra money, you should consider a conventional loan, particularly if you have excellent credit.

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For anyone with less than perfect credit, FHA financing has additional advantages. Most banks will write FHA loans to borrowers with scores as low as 640 or even 620 with very minimal, if any, additional fees. Conversely, those with scores in the 600s will see their conventional loan rate, costs and mortgage insurance premiums spike dramatically.

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FHA loans are not for everyone. Due to the new mortgage insurance rules, they are also not necessarily a loan you want to plan on keeping for 30 years. But they are a great way to get into a first house, even for those who have not been able to save a great deal to put towards a down payment, or who still have some work to do to fix their credit rating. A few years paying on a mortgage has a positive impact on credit scoring. Paying the mortgage down will also start to build equity. You may be able to refinance into a conventional loan, removing mortgage insurance for good, much sooner than you first expected.

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Photo credit: © iStock.com/Lise Gagne, © iStock.com/efenzi, © iStock.com/Feverpitched

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Most people have to borrow money in order to afford a house. No matter how big your mortgage is, though, you generally need to have at least some cash on hand for the down payment. Historically the rule was that homebuyers should make a down payment worth 20% of the home value. That’s a great number to aim for, but if the home is expensive or your savings are thin, that might not be feasible. To help you as you calculate your down payment, we looked into the typical down payment on a home purchase.

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Consider working with a financial advisor as you explore what amount to put down on a residence.

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Current Down Payment Trends

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The vast majority of people take out a mortgage to buy a home. A 2021 report from the National Association of Realtors (NAR) found that just 13% of primary residence buyers paid for their entire home without taking a mortgage or loan.

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When it comes to down payments, the benchmark amount has long been 20% of the home’s value. This is the number that finance experts and mortgage lenders often recommend. However, NAR’s data shows that most homebuyers do not put down 20%.

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The NAR report found that the typical down payment for first-time buyers has ranged between 6% to 7% since 2018. In 2021 the typical down payment for repeat residence buyers was 17%, and it was 7% for first-time buyers – far lower than the 20% that the old rule of thumb advocates.

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Should You Aim for a 20% Down Payment?

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Most homebuyers make a down payment well below the 20% benchmark. So is there any reason you should try to put down 20%?

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Yes. For starters, the less you borrow, the less you’ll pay in interest. Further, mortgage lenders still use the 20% down payment value as a benchmark when deciding what rate to offer you. In general, the more you put down, the safer it is for lenders to offer you a favorable mortgage. If you can afford a down payment of 20%, lenders view you as a much safer investment. Your down payment amount, in addition to your credit score and other factors, helps determine what mortgage rate you can get.

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The 20% value is also important for private mortgage insurance (PMI). When you get a mortgage from a private lender, you will need to pay this insurance until you have paid at least 20% of the total value of the home. If you make a 20% down payment, you never have to pay the insurance. PMI can be a significant cost, as it ranges as high as 1% of your total loan value per month. So the PMI on a $200,000 mortgage would cost you $200 per month, which can add up over the years. Mortgages from a non-private (i.e. government-backed) lender, like an FHA loan, don’t charge PMI. They do still charge separate mortgage insurance, through.

","

With all that being said, there’s nothing wrong with making a down payment of less than 20%. You’ll pay for PMI if you use a private lender, but you can just factor that insurance cost into pre-purchase affordability calculations. PMI also has less sting if you qualify for a low mortgage rate. One of the best ways to help yourself get a better rate is to clean up your credit. You will get the highest rates if you have a credit score below 580. Getting your credit score to at least 660 can help you shave multiple percentage points off your interest rate.

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The Lowest Down Payment You Can Make

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Conventional mortgages from private lenders usually require a minimum down payment of 5%. However, you can certainly find mortgages if you can’t afford that much. Some lenders, like Quicken Loans, allow you to get a mortgage with a down payment as low as 1%. That means you can get financing for as much as 99% of your home’s value. You need to have a credit score of at least 680 to qualify for that offer.

","

More commonly, there are a number of conventional 97 loans that allow you to make a down payment of just 3%. This is a solid option for people who don’t have much in savings, but interest rates can get quite high. Again, the better your credit score is, the better your interest rate will be.

","

Another option if you can’t afford to put at least 5% down is an FHA loan, which only requires a down payment of 3.5%. You’ll need to have a credit score of at least 580 to qualify. FHA loans are especially popular among first-time homebuyers who don’t necessarily have a lot in savings. Note that FHA loans do not offer better terms for higher down payments. That makes them less appealing if you can afford more than a 3.5% down payment.

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Bottom Line

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The traditional advice is to make a down payment of at least 20% of your new home’s value. This is a great benchmark to aim for because it will get you more favorable loan terms and you won’t have to pay PMI. However, most homebuyers make down payments of 6% or less. This is especially true for first-time homebuyers.

","

Don’t stress if you don’t have the savings for a large down payment. In fact, there are mortgages that require down payments as low as 1%. FHA loans are especially common for first-time homebuyers, and they require a down payment of just 3.5%. Regardless of how much you have in savings, make sure that you don’t overpay for a mortgage.

","

Tips for Buying Your First Home

","$bc","

Photo Credit: ©iStock.com/3283197d_273, ©iStock.com/Kritchanut, ©iStock.com/BernardaSv

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\n","featuredImage":{"id":"cG9zdDoxNzU4Nzc=","databaseId":175877,"altText":"The Tax Advantage of Making an Extra Mortgage Payment This Year","date":"2022-11-09T02:16:00","fileSize":25363,"mimeType":"image/jpeg","modified":"2022-11-09T02:16:00","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2013/12/rsz_istock-547451008-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2022-11-16","readable":"November 16, 2022","readableExtended":"November 16, 2022, 8:00pm ET"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/mortgage/the-tax-advantage-of-making-an-extra-mortgage-payment-this-year","metaDesc":"You can make an extra mortgage payment at the end of the year to qualify for a tax break. Here's what you need to know about the potential tax savings.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"The Tax Advantage of Making an Extra Mortgage Payment This Year | SmartAsset","__typename":"PostTypeSEO"},"slug":"the-tax-advantage-of-making-an-extra-mortgage-payment-this-year","status":"publish","title":"The Tax Advantage of Making an Extra Mortgage Payment","postType":"post","subtitle":null,"uri":"/mortgage/the-tax-advantage-of-making-an-extra-mortgage-payment-this-year","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoyMw==","databaseId":23,"userId":23,"avatar":"$be","description":"Gregory Erich Phillips has more than a dozen years of experience in the mortgage industry. He is an active mortgage loan officer and an expert resource on topics including economics, home financing and real estate trends.","additionalMeta":"$bf","email":null,"firstName":"Gregory Erich","fullName":"Gregory Erich Phillips","lastName":"Phillips","name":"Gregory Erich Phillips","postCount":"$c0","slug":"gregory-erich-phillips","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ5OA==","children":"$c3","databaseId":19498,"categoryId":19498,"link":"https://smartasset.com/mortgage-basics/articles","name":"Mortgage Basics","postCount":247,"slug":"mortgage-basics","ancestors":"$c5","parent":"$c8","__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

If you have a mortgage loan, you are well aware of the tax deduction you get each year for the interest. Once per year, all that interest you pay to your bank gives you a benefit as well. By strategizing your monthly payment schedule, you can further benefit from the tax savings available from the mortgage interest deduction. We cover how it works below. You can also work with a financial advisor to create a tax plan that meets your overall financial goals so that you know when to make an extra payment.

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What Payments Count Towards a Tax Deduction

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You must make a mortgage payment before the end of the calendar year if you want it to count for a potential tax deduction. Technically, the January payment covers interest that accrued during the month of December, making it eligible for this year’s tax accounting. Paying any further in advance would be considered “pre-paid” interest, making it ineligible for this year’s tax deduction.

","

After the first of the year, your bank will send you a 1098 form itemizing the total interest you paid in the current year. It is measured by the calendar year, not the amortization schedule. What this means is that if you make your January payment now—being sure it posts to your mortgage before Dec. 31—the interest from that extra mortgage payment will count toward this year’s deduction.

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When to Pay Your Mortgage Early

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","

Knowing when to make an early mortgage payment in order to benefit your taxes is going to depend on your individual situation. For example, if you had or expect a large change in your income from one year to the next, that would be a reason to choose to pull the savings into this year, or to defer it to next year.

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If your loan payment includes monthly mortgage insurance, then your savings will be even greater because mortgage insurance is also tax deductible. Of course, if you do this strategy now, you will have less of a deduction for the next year. Conventional wisdom, considering the time value of money, says to take savings now rather than later, if all other factors are equal. But consider the possibility both ways.

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How to Make an Extra Mortgage Payment

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If you plan to make an extra mortgage payment before the end of the year, make sure you communicate your intentions clearly with your bank. Sometimes banks assume that an extra mortgage payment made ahead of schedule is intended as a principal reduction. While there are advantages to making extra principal payments as well, it does not benefit you on your tax bill.

","

If you have a coupon book for your mortgage, you should be able to send in a future payment with the appropriate coupon and a note asking for it to be applied to your mortgage immediately. If you receive a monthly bill for your mortgage, then you will have to mail your payment even if you haven’t gotten the bill yet.

","

Make sure you include very clear instructions with your check, or better yet, go into a local branch if your mortgage lender has one. If your mortgage is set up on an automatic payment withdrawal, you will need to clarify that your check supersedes the next month’s auto-draft.

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Disadvantages of Paying Down Your Mortgage

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Before you make an extra mortgage payment, keep in mind that not all mortgages have a tax-deductible interest. Typically, mortgage interest on an owner-occupied home is deductible, while the interest on a rental property can be counted as an expense against rental income. Interest in a second home or vacation property is typically ineligible.

","

There may be a cap to the maximum amount that can be deducted based on the specifics of your loan and the state you live in. If you are unsure, it is always a good idea to talk with your tax advisor to see if you face any restrictions in mortgage interest deductibility.

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The Bottom Line

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Making an extra mortgage payment that isn’t intended to be a paydown of your principal can provide a tax break because you’re paying more in mortgage interest. This qualifies for a tax break as long as you do it before the end of the calendar or tax year. This can be a good way to get a tax break in a year that you may need if your income was higher than expected. It can also be a nice way to pay down your mortgage faster.

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Tips for Getting a Mortgage

","$ca","

Photo Credit: ©iStock.com/malerapaso, ©iStock.com/Weekend Images Inc.,©iStock.com/bee32

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The days are long gone when you could buy a house without spending any money out of pocket. Lenders and regulators have determined that potential home buyers need to demonstrate some savings ability prior to taking on a mortgage for a home. Even the unexpected and regular maintenance that arises from owning a home can […]

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","

That said, there are some low down payment programs available with very good loan terms. In some cases, the cost to buy a home with a mortgage is not much more than the cost to get into a new rental, when you consider things like first and last month’s rent and security deposits. Below are four loan types requiring low down payments.

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1. Conventional Loans (5% down)

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People think of conventional loan financing as the way to go if you have a 20% down payment. But conventional financing allows for as little as 5% down. It will require mortgage insurance, either paid monthly or financed into the loan. For borrowers with good credit profiles, conventional financing is still the best way to go.

","

For those with less than perfect credit, a conventional loan with 5 percent down may not be a good choice. Conventional loans have rate or fee add-ons for any score under 740. The monthly mortgage insurance cost will also go up as the credit score goes down.

","

If your credit score is over 740, saving at least 5% of the purchase price should qualify you for a reasonably affordable mortgage. If your score is lower, especially below 700, you should consider the next option for your mortgage.

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2. FHA Loans (3.5% down)

","

","

FHA loans only require 3.5% for a down payment. They have long been the top choice for first time home buyers. FHA rates do not change based on credit score and are typically a little bit lower than conventional rates. However, the FHA mortgage insurance premium is considerably higher than the cost well-qualified buyers will get for their PMI.

","

Over the past four years, FHA mortgage insurance costs have more than doubled for most clients. It makes things much less affordable, and has drastically lowered the popularity of FHA loans. However, for those with marginal credit scores, it is still cheaper than conventional financing when you account for the rate and fee add-ons.

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3. VA Loans (0% down)

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The only true no down payment loan is only available for veterans or active military service members. This is a fantastic program, which also has no monthly mortgage insurance. However, it is not available to the general population. If you are a veteran, a VA loan is almost always the best option for buying a new home.

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4. “My Community” & “Home Possible”

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Both Fannie Mae and Freddie Mac have enacted community based programs designed to increase home ownership. They offer favorable financing terms to low to moderate income families. They base income qualification on the median income averages for the county in question.

","

One of the advantages to the program is a small down payment—usually 5%, but in some cases as little as 3%. These programs also usually allow the entire down payment to be from a gift. Fannie Mae program calls the program “My Community” and Freddie Mac calls the program “Home Possible.”

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Other Cash Needs

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When calculating how much money you will need to buy a home, the down payment is only the beginning. Don’t forget to account for loan closing costs. Sometimes the seller will agree to pay some of these. But in a vibrant market, they probably have another offer behind yours, making them less likely to pay any of your costs.

","

You also have to pay upfront for your property taxes and home owner’s insurance. Finally, most of the mortgage programs listed above also require you to have “reserves” in the bank. This is an amount equivalent to from two to six months of mortgage payments. If any unforeseen circumstances arise, the lender wants to know that you have some savings to keep making your payments. This requirement often catches new homeowners by surprise.

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Final Word

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Before you buy a home, consider your abilities to save. The more money you save before applying for a mortgage, the better a position you put yourself in. But don’t let a small balance in your savings account keep you from buying a home. There are still great options available and you don’t want to miss out on a promising opportunity.

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Photo credit: ©iStock.com/Hin255, ©iStock.com/designer491, ©iStock.com/stereostok

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Despite the extreme ups and downs of the last decade, savvy investors know that real estate can be one of the best ways to put your money to work for you. Investors were the first buyers to return in force to the housing market after the big crash. Seeing the opportunity to make a profit, real estate investors were willing to jump into the market when others were still afraid. Even though home values have gone up substantially over the last two years, those same opportunities still exist. However, if you plan to invest in real estate now, you need to be savvy and do ample research prior to buying.

","

There are two ways in which you can count on profiting from your investment in real estate: Renovating the home and then reselling, or earning rental income.

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Flipping Property after Renovation

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Buying homes in need of some work, then selling after improvements, has been a very profitable strategy for many real estate investors. There is still a large inventory of foreclosed, or otherwise distressed homes on the market. Typically home renovation costs pale in comparison to equity gained from such a project. In the case of a distressed home sale, you can usually get the property for below true market value since the seller (often a bank) is motivated to sell quickly. Therefore, when you go to re-sell the property, you should be able to make a handsome profit.

","

That said, this can be a risky project for someone who has no experience in home renovations, or for someone who is tight on available cash. Renovations often have unforeseen cost overruns. Additionally, these projects are hard to finance with a mortgage, so you will be tying up your own funds until you sell the home. If you plan to use a contractor to do the work, make sure it is someone you know and trust.

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Buying a Rental Property

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The most traditional way to make money as a real estate investor is by buying a property and renting it out to a tenant. With a down payment of at least 20 percent, it is easy to get a mortgage for this type of property, as long as your income and credit qualifies you. If the amount you collect in rent exceeds the mortgage payment, along with taxes, insurance and reasonable maintenance costs, then your investment is cash flow positive and can be a good long term source of income.

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The Danger of Counting on Appreciation

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It would be foolish to get into real estate investing thinking that simple market appreciation will produce a profit for you. This behavior helped inflate the housing bubble which burst so catastrophically in 2008. Although some investors did make handsome profits in the run up to the crash, just as many lost their life savings.

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If you believe that home values will continue to appreciate, the best way to profit from it would be to invest in a real estate fund, called a REIT. This way your money remains liquid and you can get out of your investment if you see the market beginning to turn. If, on the other hand, you actually buy a property hoping for appreciation, you may not be able to sell if the market takes a sudden turn.

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Despite all the negative headlines surrounding housing in the last few years, real estate is still a very good investment. Although housing did enter an investment bubble, unlike bubbles in things like stocks or even gold, real estate will always have tangible value. Now is a great time to put your money to work in real estate.

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Photo Credit: flickr

"],"experts":null,"link":"/mortgage/so-you-want-to-invest-in-real-estate","modifiedIso":"2023-08-24T03:43:56.000Z","published":{"datetime":"2013-11-27","readable":"November 27, 2013","readableExtended":"November 27, 2013, 10:00am ET"},"publishedIso":"2013-11-27T10:00:05.000Z","shareInfo":{"title":"So, You Want to Invest in Real Estate…","origin":"/mortgage/so-you-want-to-invest-in-real-estate"},"isNewsArticle":false},"includeReadMore":true}]]}],["$","section",null,{"className":"ArticleSummary_articleSummary__IeaXB undefined","children":[["$","figure",null,{"className":"ArticleSummary_image__nvUWg","children":["$","$L11",null,{"href":"/mortgage/the-hidden-cost-of-downsizing-your-home","children":["$","img",null,{"src":"https://smartasset.com/wp-content/uploads/sites/2/2013/11/Source-again-gdham.jpg","alt":"The Hidden Costs of Downsizing Your Home"}]}]}],["$","div",null,{"className":"fonts_category__lXjI0","children":"Home Selling"}],["$","$L11",null,{"href":"/mortgage/the-hidden-cost-of-downsizing-your-home","children":["$","h4",null,{"className":"fonts_title__B8NZZ","children":"The Hidden Costs of Downsizing Your Home"}]}],["$","time",null,{"dateTime":"2023-9-6","className":"fonts_date___Ofhz","children":"September 6, 2023"}],["$","$L1b",null,{"article":{"id":"cG9zdDoxMTYxOA==","databaseId":11618,"postId":11618,"author":{"node":{"id":"dXNlcjoyMw==","databaseId":23,"userId":23,"avatar":{"url":"https://secure.gravatar.com/avatar/c4dab03c0b7cd5317bf435e26831998bc8300c5e0e83ba5fae6fcb96abc77a37?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Gregory Erich Phillips has more than a dozen years of experience in the mortgage industry. He is an active mortgage loan officer and an expert resource on topics including economics, home financing and real estate trends.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Gregory Erich","fullName":"Gregory Erich Phillips","lastName":"Phillips","name":"Gregory Erich Phillips","postCount":{"pageInfo":{"offsetPagination":{"total":24,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"gphillips","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUwMA==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19500,"categoryId":19500,"link":"https://smartasset.com/home-selling/articles","name":"Home Selling","postCount":{"pageInfo":{"offsetPagination":{"total":16,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"home-selling","ancestors":{"nodes":[{"name":"Mortgage","slug":"mortgage","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Mortgage","id":"dGVybTo4Ng==","slug":"mortgage","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$e5","date":"2013-11-13T12:30:23","excerpt":"

With shrinking savings, and retirement incomes failing to keep pace with inflation, older Americans are looking for alternative ways to save money and increase their cash flow. In many cases, they are also looking for ways to simplify their lives. …

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","

Find out now: How much life insurance do I need?

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A large house is not always practical for retirees. Whether because an “empty nest” left much of the house unused, or because the upkeep has become too cumbersome. It often makes sense to downsize. On paper, selling a home you own and buying or renting something smaller should increase your savings substantially, as well as lower your monthly costs. But it is not always so simple.

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True Costs of Downsizing

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Consider a hypothetical scenario where a retired couple owns a home mortgage-free that they can sell for $250,000. They want to buy a smaller home, a little closer to care facilities, for $200,000. They hope to add the $50,000 difference to their retirement account. But when they sell their home, the costs for the real estate commissions sucks up 6% of the sale ($15,000). The buyer also negotiates for closing costs of $5,000. Although this couple is not getting a mortgage on their new home, the upfront tax and insurance costs run $3,000. Moving absorbs another $2,000. And some minor improvements to their home, along with new furniture and decorations quickly runs to $10,000. By the time this couple is fully settled in their new home, they have only saved $15,000.

","

Related Article: 5 Ways You Could Be Sabotaging Your Retirement

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Their new home is also placed on an updated tax schedule. Depending on the state and county they live in, their old home may have still been on an old schedule because they had owned it so long. So although they now live in a smaller home, their property tax costs may have actually increased!

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Every scenario will be different, but this is the reality faced by a lot of downsizing retirees.

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Other Options

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Moving into a rental, rather than buying a smaller home, will increase the savings you can put away from your sale. This would only be true if you own the home outright or only have a small mortgage to pay off. You will now be paying a monthly rent, however. So this strategy would be good for retirees who want more savings, but don’t mind an increase to their monthly obligations.

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Perhaps a better strategy would be to move into a rental without selling your home. Your rental income may actually cover the cost you are paying for rent. If you had a large house, consider having it split into a duplex or triplex to increase its rent potential. If you do not want to worry about the logistics, you can hire a property manager to take care of everything for you. You could even stay in your home and rent out the second floor or back half of the house. This both increases your income, and shrinks the amount of square footage you need to take care of.

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Reverse Mortgages

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A reverse mortgage is a way to access the equity you have in the home as an income stipend. This kind of mortgage pays you each month, and when you die, the house goes to the bank. For some retirees, this is a great financial strategy. You get to stay in your home even if you would not otherwise have the income to take care of all the bills that go along with home ownership. However, you should consider carefully before taking on a reverse mortgage, and make sure you do it with a lender you trust.

","

If downsizing is still in your future for logistical reasons, a reverse mortgage would make a future move harder. It also takes away an asset which you might otherwise be able to leave to your heirs.

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Photo Credit: gdham

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Five years after the Great Recession and resulting financial crisis, the economy still has not recovered to the degree that economists and policy makers had hoped. Unemployment is on the decline, the threat of deflation has abated, and the stock market is at all-time highs. Yet Americans are not spending. Consumer spending is the final […]

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Find out now: How much do I need to save for retirement?

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But the economists and policy makers who hope for consumer spending to return to pre-crisis levels will almost certainly be disappointed. The flaw in this hope is to discount the deep scars that were left by the carnage of the recession.

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Shifting Financial Habits

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High levels of consumer consumption fueled the economy for years. But the dark side to that equation was that many people used debt to keep up with the ever increasing expectations of the consumer economy. Even what some people considered “savings” took forms such as home equity or paper value of stock which were themselves fueled by borrowing, rather than true wealth accumulation.

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Having learned the hard lessons of the recession, many Americans who now have good jobs and the ability to save, have become more frugal, unwilling to borrow to support their lifestyle.

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The younger generation of Americans, who began their professional careers around the time of the financial crisis, have shown little interest in following the borrowing and investing patterns of their parents.

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The response to the stock market rally that started in March 2009 and continues four and a half years later is telling. Small investors have mostly stayed away from stocks. Mutual Fund investment in America has shrunk by $521 billion in the five years since the crisis, according to data from Lipper. If you talk to people now, they do not express the feeling that they have missed out on a huge opportunity, (even though a dollar invested at the 2009 market low would be worth $2.60 today). The feeling is that the stock market is too dangerous and people who got burned once don’t want to let it happen again.

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Defining a Generation

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Most economists see this trend as temporary, and the data from past booms and busts supports that analysis. But another thing we witness from past economic cycles is that generational habits can be formed from serious economic disasters. The collapse of Lehman Brothers in 2008 has the potential to be just such an event.

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Just as the generation who lived through the Great Depression remained frugal for the rest of their lives, the generation that came of age during the latest financial crisis are forming habits, some of which will last a lifetime. The long term effects may not be fully realized for decades.

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Impact on the Economy

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Most economists consider increased savings and curbed consumer spending as a negative. When millions of families change their habits in this way it is indeed a drag on the economy. But for the individual household, it is far healthier behavior than reckless borrowing or complete depletion of savings. It may mean that the economic recovery will go slower than hoped. But healthy savings patterns could set the country up for more stable long term growth, just as it did in the generation that followed the Great Depression.

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Photo Credit: yogeshvjaiswal

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Let’s start with the good news: your house has most likely increased in value over the last couple of years. While the recession knocked most property values down to early 2000s levels, most of the country has recovered and home values have increased each year. The bad news is that your property taxes probably jumped […]

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Check out our property tax calculator

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All About Your Property Tax Assessment

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If you’ve owned your home more than a year, you’re likely aware that each year your county sends you a tax assessment with an estimation of your home’s value. The assessment helps determine how much property tax you’ll owe. The assessment is not the same thing as a home appraisal, as it’s for tax purposes rather than resale. For the most part, your assessment is based on general real estate market trends. However, local governments have different methods of assessing property from state to state.

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For example, in New Jersey, your assessed value will be multiplied by an equalization ratio set by the Division of Taxation to ensure a tax district pays their fair share. In Washington state, home value is determined by market value as well as physical inspections. This means if you renovated your home and added a bedroom or more square footage, your tax assessment will generally increase.

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If you want to find out exactly how your home is assessed, check with your local taxing authority. It’s generally the county assessor’s office.

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You Can Challenge Your Tax Assessment

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Look over the entire property tax assessment when you receive it. In some cases, your tax assessment might include an error that bumps the assessed value higher than it should be. Check the square footage and number of rooms listed on as well as any listed improvements. The last thing you want is to be charged taxes for a larger house than you actually own!

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If you have refinanced recently, a full home appraisal would have been done on your house. The appraiser does an in-depth review of your home and the specifics of sales trends in your immediate neighborhood. If your new tax assessed value is higher than the appraised value, you have a strong case to dispute the assessed value.

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If you want to challenge your tax assessment, you can generally find the details about how to do it on the assessment itself. This includes the paperwork you need to file to substantiate your dispute (such as an appraisal, or comparable market value sales) and the deadline.

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The deadline to challenge your tax assessment varies from state to state, but will usually fall sometime in the spring. If you miss the deadline, you will be forced to pay taxes at the new assessment for the current year, and will not be able to challenge again until the next year’s tax cycle.

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While you might hesitate to dispute a process you probably weren’t even aware was happening, if you have any evidence that the assessment is too high, you should raise a flag. After all, you have to pay the property taxes. If the assessment is too high, that means potentially thousands of extra taxes paid over the lifespan of your home.

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Check Your State and County’s Tax Exemptions

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Another way to save money on property taxes is by applying any applicable tax exemption. Most states and some counties will offer property tax exemptions. You can find out what your local government offers by looking through online resources or calling. Common property tax exemption groups include senior citizen exemptions or discounts, veteran, disabled veteran, or disabled individuals.

","

The exemption that’s more commonly used and known in certain parts of the U.S. is the homestead exemption. In some states this can mean as much as a 50% reduction in your home’s assessed value if it’s your primary residence. Unfortunately, not all states offer this exemption. Check with your county or state government to see if the homestead exemption exists where you live.

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Bottom Line

","

","

Taxes are also one of the biggest costs of homeownership. But by doing your homework — both to research the accurate value of your house and to find out if you are in any protected group or region — you can drastically reduce the sting. This can potentially save you thousands over the course of owning your home.

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Tips for New Homeowners

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Thinking about moving to a neighboring town or even a new state? Use our cost of living calculator to get an idea of what food, housing and taxes look like across the U.S.
You’re not limited to saving money just on property taxes. Consider itemizing your tax return so you can claim the mortgage interest deduction. Claiming this deduction means a reduction on your taxable income and can save you thousands of dollars.

","

"],"experts":{"name":"Jennifer Mansfield, CPA","topic":"Taxes","bio":"Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice.","imageUrl":"https://d31s10tn3clc14.cloudfront.net/imgs/jennifer-mansfield.png","email":"jmansfield@smartasset.com"},"link":"/taxes/smartasset-guide-to-lower-property-taxes","modifiedIso":"2017-10-17T16:27:21.000Z","published":{"datetime":"2013-9-25","readable":"September 25, 2013","readableExtended":"September 25, 2013, 12:30pm ET"},"publishedIso":"2013-09-25T12:30:39.000Z","shareInfo":{"title":"How to Lower Your Property Taxes","origin":"/taxes/smartasset-guide-to-lower-property-taxes"},"isNewsArticle":false},"includeReadMore":true}]]}],["$","section",null,{"className":"ArticleSummary_articleSummary__IeaXB undefined","children":[["$","figure",null,{"className":"ArticleSummary_image__nvUWg","children":["$","$L11",null,{"href":"/mortgage/when-to-leverage-a-401k-for-a-home-down-payment","children":["$","img",null,{"src":"https://smartasset.com/wp-content/uploads/sites/2/2013/09/rsz_istock-618056526-1.jpg","alt":"When to Leverage a 401(k) for a Home Down Payment"}]}]}],["$","div",null,{"className":"fonts_category__lXjI0","children":"Home Buying"}],["$","$L11",null,{"href":"/mortgage/when-to-leverage-a-401k-for-a-home-down-payment","children":["$","h4",null,{"className":"fonts_title__B8NZZ","children":"When to Leverage a 401(k) for a Home Down Payment"}]}],["$","time",null,{"dateTime":"2023-2-2","className":"fonts_date___Ofhz","children":"February 2, 2023"}],["$","$L1b",null,{"article":{"id":"cG9zdDo5NzUz","databaseId":9753,"postId":9753,"author":{"node":{"id":"dXNlcjoyMw==","databaseId":23,"userId":23,"avatar":{"url":"https://secure.gravatar.com/avatar/c4dab03c0b7cd5317bf435e26831998bc8300c5e0e83ba5fae6fcb96abc77a37?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Gregory Erich Phillips has more than a dozen years of experience in the mortgage industry. He is an active mortgage loan officer and an expert resource on topics including economics, home financing and real estate trends.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Gregory Erich","fullName":"Gregory Erich Phillips","lastName":"Phillips","name":"Gregory Erich Phillips","postCount":{"pageInfo":{"offsetPagination":{"total":24,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"gphillips","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5OQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19499,"categoryId":19499,"link":"https://smartasset.com/home-buying/articles","name":"Home Buying","postCount":{"pageInfo":{"offsetPagination":{"total":118,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"home-buying","ancestors":{"nodes":[{"name":"Mortgage","slug":"mortgage","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Mortgage","id":"dGVybTo4Ng==","slug":"mortgage","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$107","date":"2013-09-24T10:00:18","excerpt":"

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Wondering where to get the money to make a down payment on a new home? As home prices quickly increase, the amount to make an optimal 20 percent down payment also increases. Meanwhile, you may already have a substantial nest egg built up in a 401(k) if you’ve been working for years. We analyze whether taking money out for your home purchase is worth it. You may also want to work with a financial advisor who can help you make big financial decisions.

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Can I Use My 401(k) to Buy a House?

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You can use funds that you have saved in your 401(k) retirement account to buy a house. Typically when you withdraw these funds then you’ll end up paying a 10% penalty and income tax on the amount withdrawn unless you are over 59 1/2 years of age. When you use the funds to buy a house then you might be able to avoid paying that 10% penalty.

","

Your two options for getting money out of your 401(k) account to fund your home purchase is to either borrow the money from your account or to make a withdrawal. Some plan providers allow loans to be taken on your account, which you’ll have to pay back in interest. To withdraw the money without incurring the taxes and penalties you would need to qualify for an exemption for a hardship.

","

Are My Retirement Savings Worth a Down Payment?

","

Conventional wisdom suggests that you don’t touch the money accumulated in your 401(k) until you reach retirement age. The tax advantages of putting money away in a 401(k) are lost if you pull the money out early. What’s more, the fund in which your money is invested will usually charge you its own early withdrawal fee.

","

While buying a home could be the biggest (and best!) investment you will ever make, having a healthy 401(k) is a key part of your long-term financial plan. Gutting your 401(k) now could leave you ill-prepared for retirement. Fortunately, there is a way to take advantage of the savings in your 401(k) without sacrificing your long-term plan.

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Borrowing from Yourself for a Down Payment

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Instead of making a straight withdrawal out of your 401(k), you could instead take out a loan from it. This is a great helpful way to supplement your down payment.

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While you can borrow against your 401(k), note that you will be paying back yourself for the loan’s principal and interest, not to a bank. Rates usually compare well to mortgage rates. So since you’re borrowing from yourself, you will have a variety of repayment options, from monthly payments to lump sums.

","

A 401(k) Loan vs. Mortgage Insurance

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Let’s look at two possible scenarios for a purchase of a $300,000 home. Suppose you have $15,000 in cash for a down payment. You have a credit score of 700. If you take out a mortgage at $285,000 at 5 percent interest, your monthly payment will be $1,530. But with a loan-to-value ratio of 95 percent, your monthly mortgage insurance cost will be around $220. Your total monthly obligation would be $1,750. This would be the payment for the first five years until the mortgage insurance dropped off.

","

If you have a 401(k) worth at least $90,000, you can borrow up to 50 percent of it. This allows you to only take a mortgage loan of $240,000 (80 percent of the purchase price) and avoid mortgage insurance. The mortgage payment would be $1,288. In this scenario, your 401(k) loan will be for $45,000.

","

If your 401(k) loan is also at 5 percent interest, on a typical five-year repayment, your payments to yourself will be $850. This makes for a total monthly payment of in the first five years of $2,138. While this is significantly higher than in the mortgage insurance scenario, remember that the $850 is coming straight back to you. After five years, your monthly payment for the remaining 25 years would be almost $250 less than in the first scenario.

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The Bottom Line

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Financing a home with a 401(k) loan is not for everyone. Obviously, if your monthly income can already barely support your mortgage payment, taking on a five-year payment on a 401(k) loan will be difficult. Even if you can structure it with a lump sum payment, you will still have to qualify as though you were making monthly payments. But for home buyers with good cash flow and minimal non-401(k) savings, this plan could be the perfect way to finance your new home.

","

Tips for Financing Your Down Payment

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You could be wondering, what is an assumable mortgage loan? Essentially, it lets you take over an owner’s loan on a property. All the terms of the original loan, including the rate, remain the same. So if you’re buying a home and the seller has a favorable loan, it may be in your best interest to assume that loan instead of getting a brand new mortgage.

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A financial advisor can help you create a financial plan for your homebuying needs and goals.

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The Benefits of an Assumable Mortgage

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Anyone who wants to know how to assume a mortgage will need to meet with your seller’s lender. After going through an application process, you can take over the loan once you’ve been approved for it.

","

As interest rates rise, it is likely that assumptions will begin to play a larger role in the mortgage market. If the best rate you could get on a new loan was 6.75% but the seller had a loan at 6.00%, it would make sense to look into an assumption. An assumable mortgage loan could also be a good option if you’re going through a divorce and want your spouse to take your home.

","

Fees for assumptions are less than those for new mortgage loans. Whereas many conventional loans require as much as a 20% down payment, FHA mortgages require substantially less.

","

The assumption fee doesn’t include the incidental costs the lender incurs during the transaction, such as a title search. These costs also have to be paid at closing. An appraisal typically isn’t required.

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Check out our mortgage calculator.

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How Your Loan Can Affect Your Credit

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","

In and of itself, assuming a mortgage will not affect your credit rating more or less than getting a new mortgage loan will. That said, there are some potential pitfalls to be aware of when looking through assumable mortgage listings for homes for sale.

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Often, the seller in an assumption transaction has a distressed loan. They might owe more than the home is worth, in which case you will immediately be underwater after buying the real estate and assuming the mortgage. It would be in your best interest to order an appraisal, even if the lender does not require one.

","

Another problem may be that the seller has fallen several months behind on the mortgage payments. The lender should require that the loan be brought current prior to closing. If that doesn’t happen, you could end up with a delinquent mortgage before you even make your first payment.

","

A distressed mortgage will not necessarily hurt your credit, but you would be placing yourself in a situation where keeping up on your payments – and thus maintaining good credit – could be a challenge.

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Once the loan is transferred, you are responsible for the loan from that point forward. Any poor payment history by the previous note holder does not go on your record. But in some cases, your mistakes could affect your seller’s credit.

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Is it better for you to buy or rent?

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Assumability and the Danger of Private Transactions

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Even if a loan is in good standing, it might not be assumable. Government loans (FHA and VA) are assumable as long as the new homeowner qualifies. For the most part, conventional loans usually aren’t assumable at all.

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Sometimes a seller who’s desperate to sell his home and a buyer who really wants the house will enter into an ill-advised private transaction. They draw up a private note, with the buyer agreeing to pay the mortgage to the bank from that point forward. But the paperwork with the lender could remain in the original owner’s name.

","

The lender may not even know that this is taking place. The deed and mortgage with the original owner remains in full force. This is incredibly risky for both the buyer and seller. Both parties must trust the other because both risk having their future borrowing power and credit scores compromised.

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How Much Mortgage Can I Afford?

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Bottom Line

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As a buyer, it’s a good idea to tread carefully when going into an assumption. It can be a great deal if it’s done correctly and you don’t take shortcuts. But if the lender seems to be making things difficult, it might be for a good reason. The seller could be behind on their payments or the loan may not be assumable. Dig a little deeper to determine if the transaction is really in your best interest. Sometimes it’s best to get a brand new mortgage.

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Tips for Buying a Home

","$122","

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The home appraisal plays a key role in the home buying process, both for a purchase and for a refinance. That’s why it’s important to understand the ins and outs of the home appraisal process. In a purchase transaction, the appraisal is used to confirm whether the purchase price is a true market value. In a refinance, the appraiser assesses the value based on market conditions and comparable sales, with no consideration of the loan amount or value estimate of the borrower or the lender. The appraiser also looks for any defects in the home, and if necessary, recommends repairs to be completed prior to loan closing.

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What Is a Home Appraisal?

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A home appraisal is when an impartial third party assesses the value of a home for the purposes of either purchase or refinancing. A mortgage lender uses the appraisal to make sure it’s not lending too much money to the buyer that it couldn’t get back through a sale if the buyer defaults. Appraisals also help a buyer make sure that the price she’s paying isn’t significantly above market value.

","

To determine a home’s value, the appraiser will consider a wide range of factors, including the home’s location, size, amenities, condition and any new features that the owner has installed. Then, the appraiser will use the price of comparable homes to determine the free-market value of the property.

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The home appraisal process can be a frustrating experience for homeowners, especially in a refinance, because this is one aspect of the process over which they have very little control. The value determined by the home appraisal service sometimes seems arbitrary. What homeowners often fail to realize is that the appraisal process is equally frustrating to lenders, since they also have no input in this aspect of the loan transaction. The appraiser has no affiliation with the lender.

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Appraisers and Lenders Allowed No Contact

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Prior to the crash in the housing market, mortgage lenders were notorious for pressuring appraisers to inflate values. This was particularly true for refinances. Lenders often had a cozy relationship with a handful of appraisers who got the bulk of their business, and often consulted the loan officers about what value they needed to make the deal work. This practice was arguably one of the causes of the housing bubble in the middle part of the last decade.

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After the bubble burst, regulators came down hard on lenders’ role in the appraisal process. Now mortgage lenders cannot have any direct contact with the appraiser. A third party who selects the appraiser and coordinates the appointment with the homeowner. This regulation has prevented artificial inflation of values and undue pressure from lenders. However, the added layer of bureaucracy in the process can cause delays. It has also become nearly impossible for loan officers to help their borrowers to coordinate appraisal appointments.

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Home Appraisal Process: Costs and Valuation

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Costs for an appraisal vary by region. Broadly speaking, a single family home or condo will usually range from $300 to $500. Costs will be higher for more complex properties, such as a multi-unit property or a rental property. If the appraiser recommends repairs to complete prior to closing, the appraiser will have to go back out to the property to certify completion. The cost for this is usually $100 to $150.

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The appraiser determines the value of a home based on comparable sales in the same neighborhood. The appraiser will look for similar homes that sold within a six-month period. If the comp is bigger or smaller than the subject property, the appraiser will calculate an adjustment. Similarly, the appraiser will make an adjustment if there are any additional features such as a deck, a view or a yard, which add value to one property but not the other. Cosmetic features like a renovated kitchen or exterior molding do not have a significant impact on value. If a home sold via a foreclosure or short sale, that is given equal weight in comparison as a home sold via a conventional sale.

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If you disagree with the value the appraiser assigns to your home, there is a procedure by which you can dispute the value. However, doing so is very difficult. You have to find your own comps that support a higher value than those the appraiser used. Submit those to the lender’s underwriting department and they will make their own assessment of the value. Realistically, because of the regulatory scrutiny on banks, underwriters are very reticent to changing the value on the appraisal. If you do want to dispute a value, make sure you present a very strong case.

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Tips for Buying a Home

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A lower-than-expected appraisal value can make refinancing difficult. Fortunately, you’re not without options if you find yourself underwater on your mortgage.
Buying or refinancing a home is a huge financial decisions, so it helps to have the guidance of a financial professional. SmartAsset’s financial advisor matching tool can help you find an expert to help navigate the process. Just answer a series of questions about your situation and goals. Then, the program will narrow down your options to up to three advisors in your area who suit your needs.

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If you are thinking about buying a home, one of the first steps you should take is to find out your credit score. Your credit score is one of the primary metrics used to determine whether you will qualify for a mortgage, as well as your loan pricing. There are three credit bureaus—Equifax, Experian and Transunion. When you apply for a mortgage, the lender will pull a merged report of all three bureaus. The middle credit score of the three is what they use to qualify you.

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Find out now: How much house can I afford?

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Tiered pricing impacts qualification

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Lenders adjust their rate and/or fees based on credit score. Any middle score above 740 will qualify you for the best conventional mortgages available. With each 20 point drop below that (720, 700, 680, 660, 640) the lender has “add-ons” to either the rate or loan fee. Most lenders in today’s market will not lend at all to borrowers with a credit score under 620.

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The additional cost, once translated to the monthly payment, can seriously alter the amount you qualify for. If you thought you were getting a rate of 4.25, but now that your credit has been pulled the lender is offering you 4.625, you may not even qualify for the higher payment. If you were planning to put less than 20 percent down, your mortgage insurance cost will also go up because of a low credit score. You might have to put more money down on your purchase, or look for a cheaper home.

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Related Article: How to Buy a House with Bad Credit

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Plan ahead and avoid surprises

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Rather than waiting till loan application and having a credit score surprise, do some legwork ahead of time.

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Once you have your credit report, look at the score and what might be affecting it. Are any creditors incorrectly reporting you late? Are there any judgments or collection accounts listed that you did not know about? Medical collections are often a surprise because medical offices seldom actively pursue collection. But they still put a negative hit on your credit report.

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Take steps to improve your score

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If your score is less than 740, see if there are ways to improve it before seeking a mortgage. Try paying down your credit card accounts with balances close to the credit limit. Paying these balances down to under 50 percent of the limit will already improve your score. Pay off any small collection accounts should you have any. If there are inaccuracies, you might want to talk to a credit repair professional to work on your behalf to correct them.

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Related Article: 3 Ways to Save Money with a 750 Credit Score

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Ideally, once your mortgage loan is in process, you have gotten your credit score as high as possible. The loan process can take from 30 to 90 days, so be careful not to do anything to worsen your credit rating during this time. Do not run up your credit cards or take out any new debts. Most importantly, do not let yourself fall behind on any payments. Most lenders will pull a new credit report just before loan closing. If your score has gone down, the lender has no obligation to honor the original terms, even if your rate is locked in.

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The Takeaway

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As with all aspects of the mortgage process, preparing yourself in advance and being knowledgeable about what lenders look for will make for a smoother transaction, and help you get the best possible loan.

","

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Establishing a good credit rating is one of the most important things you can do to get ahead financially. If you intend to buy a car or home, the financing will be both easier and considerably cheaper if you have a good credit score. If you have no credit history yet, you need to be strategic about establishing and maintaining it. If you have a negative credit history, take immediate steps to repair it. Once you are in good standing, time will be your best friend. One of the ironies of credit is that debt is considered a positive thing. If you have no debt, you would think lenders would see you as low risk. But the opposite is true. What lenders look for is a history of timely repayment on debt.

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Get your free credit score

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Establish Credit for the First Time

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If you have never had credit, you face an uphill battle to establish it. This is the situation for a lot of young people as well as recently nationalized immigrants. For the latter group, a positive credit history abroad does not count toward U.S. credit ratings.

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There are two good strategies for establishing your first credit account.

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The first is to get a secured credit card. Most credit card companies will not give you a standard credit account without credit history. But if you have a deposit account, your bank will usually offer you a credit card secured against your deposits. The available balance is typically small ($500-$750), but if you charge a few things per month and make the payments on time, this will begin to show a positive credit history.

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The second strategy for first timers is to co-sign with someone else who has a positive credit history. Credit card companies and some auto loan companies will be willing to lend to one borrower with no credit if there is a second borrower who has good credit. Mortgage financing is stricter. Often the lender will require there to be two borrowers with good credit and sufficient income to qualify, before they will allow a third borrower who has no credit history.

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Once you have your first account, make absolutely sure that you treat it responsibly. Your actions will literally affect your borrowing power for the rest of your life.

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Repair Damaged Credit

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There are a number of factors that may have damaged your credit: multiple late payments, judgment and collection accounts, maxed-out accounts, or events such as bankruptcy, foreclosure, repossession or charge-off.

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To repair the damage from these events, the main thing that will help is simply time. First, obviously, any balance that is past due or in collection-status needs to be brought current. After that, the longer you make on-time payments, the higher your credit score will go. Six months of on-time payments after negative credit events is good, a year is better, and two years will begin to have a significant positive impact.

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Depending on how bad your credit situation is, you may have to pursue a similar strategy to first-time credit users and get a secured credit card from your bank. But if you already have a credit card, even if it has gone delinquent, once you bring it current, it can be used to re-establish credit.

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Check Your Credit Regularly
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Whether you have no credit, are looking to repair negative credit, or simply want to maintain your credit profile, you should make a habit of checking your credit every year. Get a free report at Annual Credit Report. Check for errors, duplicate accounts, and any negative accounts you may not have been aware of.

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If anything erroneous does show on your report, don’t be shy to dispute it. You should not bear the consequences of wrong information. Contact the creditors directly. If they do not cooperate, engage the help of a credit repair specialist to fight on your behalf.

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Whether or not you anticipate needing financing in the near future, taking the steps now to establish and repair your credit is one of the best things you can do for your financial security.

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The Department of Veteran Affairs created the VA loan program to help veterans and their families buy homes. One of the advantages for the veteran is that the VA limits the number of fees the lender and title company are allowed to charge the buyer. Some of the non-allowable costs are considered “junk fees,” while others represent actual costs of business for the lender or title company. If you are selling your home to a veteran through a VA loan, you need to be aware of these fees because the lender and title company will usually pass them on to you.

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Consider working with a financial advisor as you plan the sale or purchase of a residence.

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Non-Allowable Fees

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The fees the VA prohibits from being charged to the veteran buyer are called “non-allowable fees.” Though these will vary between lenders and title companies, there are two primary fees you as the seller should be aware of. Most lenders charge a fee called a processing or underwriting fee. This is different from an origination fee. This is a non-allowable cost. Some lenders waive it on VA loans, but many will charge it to the seller. The processing or underwriting fee is from the title company and will be called an escrow, settlement or closing fee. Not to be confused with the title insurance cost (which the buyer will pay) this escrow fee is also a non-allowable cost. It differs by state and purchase price, with a range anywhere from a hundreds of dollars to thousands of dollars. Check with a title company in your state to learn what is typical.

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Negotiate With Your Buyer

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If you know that you are selling your home to a veteran, keep these costs in mind during negotiations. Your buyer should come to you with a pre-approval letter from a lender to verify their qualification. The letter will specify if they are obtaining a VA loan. Do not let this discourage you from accepting their offer. Not only is it illegal to discriminate against a veteran, the VA also offers a very good loan program. But it is within your rights to negotiate based on the added cost you know you will incur.

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Ask your realtor to talk with the buyer’s loan officer directly. Obtain a list of exactly which non-allowable fees will be charged. You can also ask for a copy of the loan estimate. Though this list of loan charges is only required to be provided to the buyer, it shows all fees the lender will be charging, even to the seller. If fees are not on the initial loan estimate they cannot be added later.

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Grants and Subsidies for Veterans

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Besides the VA loan program, there are other benefits to buying a home as a veteran. Grants and subsidies from local communities and housing initiatives may be available to help cover some of the loan costs for both buyers and sellers. Though the onus is typically on a buyer to find out if they can get any assistance in buying a home, if you are selling to a veteran, it is to your benefit to know about any programs in your area. These assistance grants can be used to pay VA non-allowable costs in addition to the buyer’s other costs of obtaining a loan. Talk to your community housing authority before listing your home to find out what might be available in your area.

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Tips on Real Estate

","$152","

"],"experts":null,"link":"/mortgage/selling-your-home-to-a-veteran-fees-you-must-pay","modifiedIso":"2023-03-19T02:08:48.000Z","published":{"datetime":"2013-7-28","readable":"July 28, 2013","readableExtended":"July 28, 2013, 9:00am ET"},"publishedIso":"2013-07-28T09:00:21.000Z","shareInfo":{"title":"Selling Your Home to a Veteran? These Are the Fees You Must Pay","origin":"/mortgage/selling-your-home-to-a-veteran-fees-you-must-pay"},"isNewsArticle":false},"includeReadMore":true}]]}],["$","section",null,{"className":"ArticleSummary_articleSummary__IeaXB undefined","children":[["$","figure",null,{"className":"ArticleSummary_image__nvUWg","children":["$","$L11",null,{"href":"/mortgage/buying-vs-renting-by-age-group","children":["$","img",null,{"src":"https://smartasset.com/wp-content/uploads/sites/2/2013/07/age-groups.jpg","alt":"Buying vs. Renting by Age Group"}]}]}],["$","div",null,{"className":"fonts_category__lXjI0","children":"Home Buying"}],["$","$L11",null,{"href":"/mortgage/buying-vs-renting-by-age-group","children":["$","h4",null,{"className":"fonts_title__B8NZZ","children":"Buying vs. Renting by Age Group"}]}],["$","time",null,{"dateTime":"2023-9-6","className":"fonts_date___Ofhz","children":"September 6, 2023"}],["$","$L1b",null,{"article":{"id":"cG9zdDo2Nzc0","databaseId":6774,"postId":6774,"author":{"node":{"id":"dXNlcjoyMw==","databaseId":23,"userId":23,"avatar":{"url":"https://secure.gravatar.com/avatar/c4dab03c0b7cd5317bf435e26831998bc8300c5e0e83ba5fae6fcb96abc77a37?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Gregory Erich Phillips has more than a dozen years of experience in the mortgage industry. He is an active mortgage loan officer and an expert resource on topics including economics, home financing and real estate trends.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Gregory Erich","fullName":"Gregory Erich Phillips","lastName":"Phillips","name":"Gregory Erich Phillips","postCount":{"pageInfo":{"offsetPagination":{"total":24,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"gphillips","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5OQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19499,"categoryId":19499,"link":"https://smartasset.com/home-buying/articles","name":"Home Buying","postCount":{"pageInfo":{"offsetPagination":{"total":118,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"home-buying","ancestors":{"nodes":[{"name":"Mortgage","slug":"mortgage","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Mortgage","id":"dGVybTo4Ng==","slug":"mortgage","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$153","date":"2013-07-03T15:00:52","excerpt":"

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There are many factors to consider when deciding whether to buy a home or continue to rent. Many prospective buyers also wonder how the numbers of renters vs. buyers breaks down by age group. Although the market has changed over the last three years, the information from the 2010 census is the most accurate available breakdown of homeownership by age group. Note that every group shows an increase from the younger category, finally dropping off at over 75 years old.

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United States, 2010

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Under 25 years old . . . . . . . . . . . . . . . . . . . . 22.8

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25 to 29 years old. . . . . . . . . . . . . . . . . . . . . . 36.8

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30 to 34 years old. . . . . . . . . . . . . . . . . . . . . . 51.6

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35 to 39 years old. . . . . . . . . . . . . . . . . . . . . . 61.9

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40 to 44 years old. . . . . . . . . . . . . . . . . . . . . . 67.9

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45 to 49 years old. . . . . . . . . . . . . . . . . . . . . . 72.0

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50 to 54 years old. . . . . . . . . . . . . . . . . . . . . . 75.0

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55 to 59 years old. . . . . . . . . . . . . . . . . . . . . . 77.7

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60 to 64 years old. . . . . . . . . . . . . . . . . . . . . . 80.4

","

65 to 69 years old. . . . . . . . . . . . . . . . . . . . . . 81.6

","

70 to 74 years old. . . . . . . . . . . . . . . . . . . . . . 82.4

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75 years old and over. . . . . . . . . . . . . . . . . . . 78.9

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The numbers for every age group are down slightly from the previous two censuses, and have likely fallen a few tenths of a percentage point further in the last three years, as would be expected in the wake of the housing crisis. This drop has brought them closer to the national mean of around 66%, which has mostly held steady for the last forty years.

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Consider your personal goals

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When thinking about buying a home, what other people in your age group are doing is less important than your personal time horizon. However good an investment real estate may be, first and foremost you are buying a home for yourself and your family. Consider your long-term plans and needs. As a general guideline, you typically need to stay in a home for 5-7 years in order to say you “broke even” on the purchase. So think about what these years have in store.

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Common things to consider for young adults are whether you anticipate getting married or having children. Will your first marital home work for raising a family? How will your career develop in the next few years? Middle aged people often need to consider college costs for their children and the possibility of either an “empty nest,” or a parent moving in. Growing older, how will retirement affect your housing needs and repayment ability? Have you considered the potential for your own reduced mobility? Any of these factors could force you to move sooner than you thought.

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These are merely common themes to consider, and every person’s situation is different. If you foresee general stability in your life over the next 5-7 years, it would be good to consider buying now, whatever your age. Even if you don’t live there forever, it may turn into a fantastic investment down the road!

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Update: So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and your goals. Then the program narrows down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

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