Blog – CTeBockhorst's Blog

When Will Refinancing Pay Off? Calculating Your Break-Even Point

December 24, 2024 by Coleen TeBockhorst

Refinancing can help homeowners save money, but it’s essential to determine if the potential savings outweigh the upfront costs. One key tool in making this decision is calculating the refinance break-even point. This simple calculation reveals how long it will take for your monthly savings to cover the costs of refinancing. Here’s everything you need to know about determining when refinancing will pay off.

What Is the Refinance Break-Even Point?

The refinance break-even point is the time it takes for the savings from lower monthly payments to equal the total costs of refinancing, such as closing fees and other expenses.

For example, if your closing costs are $4,000 and you save $200 per month, your break-even point is 20 months.

If you plan to stay in your home beyond the break-even point, refinancing can offer substantial long-term savings.

How to Calculate Your Break-Even Point

Determine the Total Costs of Refinancing
Refinance costs typically include:

Loan origination fees
Appraisal fees
Title search fees
Attorney fees

These costs generally amount to 2-6% of the loan amount.

Calculate Monthly Savings
Subtract your new monthly mortgage payment from your current one. For example, if your current payment is $1,500 and your new payment is $1,300, your monthly savings are $200.
Divide Closing Costs by Monthly Savings
Use this formula:
Break-Even Point = Total Closing Costs ÷ Monthly Savings
Example: If your closing costs are $4,000 and your monthly savings are $200, your break-even point is 20 months.

Factors That Influence Your Break-Even Point

Several factors affect how quickly you reach your break-even point:

Interest Rates: A larger rate drop leads to higher monthly savings, shortening the break-even time.
Loan Term: Shortening your term may delay the break-even point but reduce long-term interest costs, while extending it may lower monthly payments and speed up the break-even time.
Closing Costs: Higher closing costs lengthen the time it takes to recoup your expenses.
Loan Amount: Larger loan amounts tend to offer greater savings potential with lower rates.

When Does Refinancing Make Sense?

Refinancing might be a good choice if:

You plan to stay in your home for several years.
You can secure a significantly lower interest rate.
You want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM).
You want to lower your monthly payments or pay off your loan faster.
You need to access home equity with a cash-out refinance.

Common Mistakes When Calculating the Break-Even Point

To ensure accurate calculations, avoid these common pitfalls:

Forgetting to include property taxes, homeowners insurance, or mortgage insurance in your calculations.
Failing to align refinancing with your broader financial goals.
Overestimating how long you’ll stay in your current home.

The Long-Term Benefits of Refinancing

Once you pass the break-even point, the monthly savings from refinancing can add up to significant financial benefits, potentially saving you thousands over the life of the loan. However, resetting your loan term may extend repayment time, so it’s essential to weigh the pros and cons.

What’s Ahead For Mortgage Rates This Week – December 23rd, 2024

December 23, 2024 by Coleen TeBockhorst

The rate cut by the Federal Reserve was hotly anticipated, and as predicted, they proceeded with the reduction, signaling the possibility of further cuts depending on inflation data. Although markets were generally receptive to the positive news, other government-related issues had dampened the high spirits temporarily. Outside of the rate decision, the PCE Index (the Federal Reserve’s preferred inflation indicator) has performed positively by beating the forecast. In addition, the Consumer Sentiment was exactly where it should be as expected.

PCE Index

The PCE index increased a scant 0.1% last month, the government said Friday. That’s the smallest rise in three months and just half as much as economists polled by The Wall Street Journal predicted. The barometer of U.S. inflation favored by the Federal Reserve rose more slowly than expected in November, breaking what appears to be a gradual drift higher in prices that forced the central bank to scale back plans to cut interest rates.

FOMC Rate Decision

The Federal Reserve on Wednesday cut interest rates by a quarter point, the third rate cut since it began to lower borrowing costs in September. The central bank’s latest move leaves its benchmark lending rate at a range of 4.25%-4.5%, a two-year low.

Primary Mortgage Market Survey Index

• 15-Yr FRM rates saw an increase of 0.08% with the current rate at 5.92%
• 30-Yr FRM rates saw an increase of 0.12% with the current rate at 6.72%

MND Rate Index

• 30-Yr FHA rates saw an increase of 0.10% for this week. Current rates at 6.42%
• 30-Yr VA rates saw an increase of 0.10% for this week. Current rates at 6.43%

Jobless Claims

Initial Claims were reported to be 242,000 compared to the expected claims of 220,000. The prior week landed at 224,000.

What’s Ahead

With an extremely light release schedule ahead of Christmas, the jobs release data will be the only important release.

Does Your Home Loan Have a Prepayment Penalty?

December 20, 2024 by Coleen TeBockhorst

Buying a home is a huge milestone, and the excitement of closing can lead many buyers to quickly accept any mortgage offer without fully understanding its terms. One important detail to watch for is whether your mortgage includes a prepayment penalty. This fee can be an unwelcome surprise, so it’s crucial to know what you’re signing up for before finalizing your loan.

What is a Prepayment Penalty?
A prepayment penalty is a fee that some lenders charge if a borrower pays off their mortgage within a specified period, typically during the first two to five years. Though less common, some loans still include this clause. The lender charges the penalty to recoup the loss of expected interest from the loan. Prepayment penalties can apply whether you refinance or sell your home, so understanding the conditions of this fee before signing is essential.

How to Determine if You Have a Prepayment Penalty
Don’t wait until the closing process to ask about a prepayment penalty. Review your loan estimate thoroughly after pre-approval. While prepayment penalties are more typical with certain loans, always read the fine print. If anything seems unclear or if there’s a discrepancy between what you’re told and what’s on paper, reach out to your loan officer for clarification.

What Can You Do About It?
If you find out that your loan includes a prepayment penalty, you still have options. For some borrowers, the penalty isn’t a concern, especially if they plan to stay in the home long-term and don’t expect to refinance soon. Sometimes, agreeing to the penalty can lower your interest rate or closing costs.

However, if you foresee moving or refinancing within a few years, this fee could be problematic. In that case, try negotiating with your lender to remove or reduce the penalty. If that doesn’t work, consider shopping around for another lender who offers better terms.

A prepayment penalty can significantly impact your mortgage, but understanding it upfront allows you to make informed decisions. If you do encounter this fee, negotiation and comparison shopping could help you secure more favorable loan terms for your dream home.

What If My Mortgage Pre-Approval Expires?

December 19, 2024 by Coleen TeBockhorst

A mortgage pre-approval is one of the most valuable tools in your homebuying journey. It’s not just a letter stating how much you’re qualified to borrow; it’s a written commitment from your lender that assures sellers you have the financial backing to make a competitive offer.

Having a pre-approval letter in hand can give you a significant advantage in a competitive housing market, signaling to sellers that you’re serious, financially prepared, and ready to move forward.

However, like many things in life, pre-approval letters have an expiration date. If you don’t find your dream home before that date passes, you may be wondering what your next steps should be.

When Does Pre-Approval Expire?

Pre-approval letters typically expire within 60 to 90 days from the date they are issued. The exact expiration period depends on your lender and personal financial situation. A variety of factors may contribute to the expiration of your pre-approval, including changes in your credit, income, or debt. It’s important to stay mindful of the expiration date so you can plan ahead and ensure you’re still on track for purchasing the home of your dreams.

What Happens If You Don’t Use Your Pre-Approval?

It’s important to remember that just because your pre-approval expires doesn’t mean your home search is over. If you haven’t yet found the right property, or if the market has been particularly competitive, don’t be discouraged.

If your pre-approval expires, all you need to do is refresh it. This is a common step in the homebuying journey and is relatively simple to do. You’ll need to provide updated documentation—such as your most recent bank statements, pay stubs, or any changes to your financial situation—to ensure your pre-approval remains accurate and valid. This allows the lender to reassess your qualifications and ensure you still meet the necessary requirements for a mortgage.

Steps to Take When Your Pre-Approval Expires

Contact Your Loan Officer

The first step is to reach out to your loan officer as soon as your pre-approval is about to expire. They’ll be able to guide you through the process of renewing your pre-approval and make sure everything is up to date.
Be open and transparent with your loan officer about any changes in your financial or employment situation that might affect your application. This could include a new job, a change in income, or any other significant financial adjustments.

Update Financial Documents

Your lender will need to verify your current financial situation before issuing a new pre-approval. To do this, you’ll need to provide your most recent bank statements, pay stubs, tax returns, or other requested materials.
These updates will allow the lender to reassess your qualifications and determine if you still meet the criteria for your desired loan program. The more timely and accurate your documents are, the faster the process will go.

Obtain a New Pre-Approval

After reviewing your updated documents, your loan officer will issue a new pre-approval letter, which will have an updated expiration date. This new letter will enable you to continue your house-hunting journey with confidence.
Keep in mind that your new pre-approval will reflect your current financial standing, so it’s important to stay on top of any changes that could impact your mortgage application.

Exploring Down Payment Options for Homebuyers

December 18, 2024 by Coleen TeBockhorst

Saving for a down payment is a common hurdle for many homebuyers, but there are several ways to make it happen. Whether you’re tapping into savings, receiving a gift, or utilizing assistance programs, understanding your options can make the journey to homeownership smoother.

Common Sources for Down Payments

Gifts from Family or Friends

Gifts can come from immediate family members, relatives by marriage, legal guardians, or close friends (with proper documentation).
Lenders require a gift letter confirming that the money doesn’t need to be repaid.
Eligibility rules vary by loan program, so check with your lender.

401(k) Funds

Loan Option: Borrow up to $50,000 or 50% of your vested balance and repay it over five years with interest.
Early Withdrawal: Withdraw funds, but expect penalties and income taxes if you’re under 59 ½.
While it offers quick cash, consider the impact on your retirement savings.

Second Mortgage

Use equity from your current home as a down payment on a new property.
Requires managing two mortgages, so careful planning is crucial.

Down Payment Assistance Programs

Commonly available for first-time homebuyers or low-to-moderate income families.
Some offer forgivable second mortgages that don’t require repayment if specific conditions are met, such as staying in the home for a set period.

Personal Savings and Investments

Use your own savings or sell investments like stocks or bonds.
Consider tax implications and the impact on long-term financial goals.

Loan Program Differences for Down Payment Sources

Conventional Loans

Accept savings, gifts from family, and proceeds from investments.
Second mortgages are sometimes allowed but may have restrictions.

FHA Loans

More flexible, allowing gifts from family, friends, employers, or charities.
Compatible with many down payment assistance programs.

VA Loans

Often requires no down payment. If needed, gifted funds from the family are acceptable.

USDA Loans

Typically don’t require a down payment, but if needed, personal savings and gifted funds are allowed.

The best down payment option depends on your financial situation and goals. Give us a call to help clarify your choices and guide you toward the right path. Whether you’re using savings, gifts, or assistance programs, the journey to homeownership is within reach.

Condo Financing vs. Single-Family Home Mortgages

December 17, 2024 by Coleen TeBockhorst

Purchasing a condo can be an exciting step, offering a more affordable option or an appealing lifestyle in certain areas. However, financing a condo differs significantly from securing a mortgage for a single-family home. These differences arise from the shared nature of condo ownership, affecting the underwriting process, appraisal requirements, insurance needs, and sometimes even the interest rate. Understanding the nuances of condo financing will help you make more informed decisions when it comes time to purchase a condo.

Key Differences in Condo Financing

1. Appraisal Process

Single-Family Homes: A typical appraisal for a single-family home only evaluates the property itself—looking at its condition, size, location, and comparable homes in the area.
Condos: Condo appraisals are more comprehensive. Not only does the appraiser assess the individual unit, but they also review the condition of the entire building, the shared areas (like hallways, elevators, and parking garages), and the management of the Homeowners Association (HOA). Any issues with the overall building or HOA could impact the value of your unit, and therefore, your mortgage approval.

2. HOA Involvement

Single-Family Homes: There’s no HOA involved in most single-family homes, which means the lender only needs to evaluate the financial aspects of the borrower.
Condos: Lenders take a closer look at the Homeowners Association (HOA), as its financial health and management can have a significant impact on the property’s value and your ability to repay the mortgage. This includes reviewing the HOA’s budget, reserve fund, insurance coverage, and maintenance of shared spaces. Additionally, your HOA fees are included in your debt-to-income (DTI) ratio, so they factor into your loan eligibility.

3. Insurance Requirements

Single-Family Homes: Homeowners typically only need a single policy for their home, covering both the dwelling and personal belongings.
Condos: Condo financing generally requires two types of insurance:

Personal Condo Insurance: This covers the contents of your unit and any improvements or alterations made to it.
HOA Master Insurance: This policy covers the building structure and common areas, such as the roof, walls, hallways, and parking lots. You’re required to have both types of insurance to fully protect your property and meet lender requirements.

4. Interest Rates

Single-Family Homes: Conventional interest rates for single-family homes are typically lower compared to condos.
Condos: Because lenders perceive slightly higher risks with condos (due to shared ownership and potential HOA issues), mortgage interest rates on condos may be slightly higher. The interest rate will also depend on the condo’s financial health and whether it meets lender criteria.

Financing Specific Condo Types

1. Non-Warrantable Condos

These are condos that don’t meet traditional underwriting guidelines. Examples of non-warrantable condos include those with high rental occupancy rates or ongoing litigation. These properties generally require alternative financing, which could involve higher interest rates, larger down payments, or both.

2. Condotels

Condotels are condo units that function like hotel rooms, often used for short-term rentals. These properties are typically ineligible for conventional loans because they don’t meet standard underwriting guidelines. Financing for condotels may require specialized loan programs or higher down payments.

3. New Construction Condos

Financing for pre-construction or newly constructed condos can be more complex. Lenders may require detailed approvals for the project, including reviewing the builder’s track record and the condo association’s plans for managing the property. Conventional mortgage products may not be available until certain milestones are met in the construction process.

Loan Program Requirements

Different loan programs have varying rules for condo eligibility:

1. FHA Loans

For a condo to be eligible for FHA financing, it must be included on the FHA’s approved list of condo projects. If the condo is not approved by the FHA, you may not be able to secure an FHA-backed loan. FHA also limits the number of units in a complex that can be rented out to maintain eligibility.

2. VA Loans

The Department of Veterans Affairs (VA) also has strict guidelines for condos. One of the primary criteria is the percentage of units in a building that are rented out. If the condo complex has too many units being rented, it may not be eligible for a VA loan. Additionally, the complex must meet other VA-specific standards for property management and condition.

3. Conventional Loans

For conventional loans, the rules are typically more flexible, but the property must still meet the guidelines of Fannie Mae or Freddie Mac. These guidelines often require the condo project to have a strong financial history, adequate reserve funds, and good management. Some lenders may offer more leeway than others, but many still follow Fannie Mae and Freddie Mac’s criteria.

Financing a condo may involve additional steps, but with the right guidance, it can be a smooth and straightforward process. Working with an experienced loan officer is key—they can assist in determining if the condo meets lender requirements, review HOA documentation, and help you navigate the approval process. Give us a call and we will work with you to ensure everything is in order and help make your condo purchase a reality.

What’s Ahead For Mortgage Rates This Week – December 16th, 2024

December 16, 2024 by Coleen TeBockhorst

Last week featured a light release schedule, with the key highlights being the CPI and PPI reports. The CPI has proven to be exactly within expectations, signaling the Federal Reserve should be on track for another planned rate cut. However, this was offset by higher-than-expected PPI inflation. Despite these mixed signals, both indicators show stable trends, and overall inflation appears to be moving toward the Federal Reserve’s target. The Federal Reserve remains committed to reducing inflation until their goal is achieved.

Consumer Price Index

Consumer prices rose in November at the fastest pace in seven months. Still, the latest inflation report is probably not hot enough to sidetrack the Federal Reserve from cutting interest rates again next week. The consumer price index climbed 0.3% last month — in line with Wall Street forecasts — to match the biggest increase since April.

Producer Price Index

The less volatile core measure of the producer-price index rose a scant 0.1% last month, the government said Thursday. That was a tick below the Wall Street forecast. Prices for final demand advanced 3.0% for the 12 months ended in November.

Primary Mortgage Market Survey Index

• 15-Yr FRM rates saw a decrease of -0.12% with the current rate at 5.84%
• 30-Yr FRM rates saw a decrease of -0.09% with the current rate at 6.60%

MND Rate Index

• 30-Yr FHA rates saw an increase of 0.20% for this week. Current rates at 6.32%
• 30-Yr VA rates saw an increase of 0.20% for this week. Current rates at 6.33%

Jobless Claims

Initial Claims were reported to be 242,000 compared to the expected claims of 220,000. The prior week landed at 224,000.

What’s Ahead

A slightly busier schedule just before the end of the year, with many larger reports including the last of the GDP Estimates, Retail Sales, Manufacturing PMI for the year, Personal Income & Spending, and the last Consumer Sentiment report from the University of Michigan.

Why Getting Preapproved Before Your House Hunt Is Crucial

December 13, 2024 by Coleen TeBockhorst

Buying a home is one of the biggest financial decisions you’ll ever make, and you want to make sure you’re as prepared as possible. Whether you’re just starting to browse homes or are ready to put in an offer, one of the most important steps you can take is getting preapproved for a mortgage.

Preapproved vs. Prequalified: What’s the Difference?

While you might come across the term prequalification during your home search, it’s important to understand the distinction between being prequalified and preapproved.

Prequalification is a simpler process where the lender gathers basic financial information to give you a rough estimate of how much you can borrow. However, it doesn’t carry the same weight as preapproval. Prequalification can be helpful if you’re just beginning to look at homes, but it doesn’t carry the same authority or guarantee as preapproval.

Preapproval, on the other hand, is a more detailed and formal process. Since it involves submitting documentation and having your financial information reviewed by the lender, it offers a more accurate picture of what you can afford. A preapproval letter gives you a competitive edge, especially in a competitive housing market.

Why Getting Preapproved Now Makes a Big Difference

Know Your Budget Upfront
One of the main benefits of getting preapproved is that it helps you understand exactly how much home you can afford. A pre-approval letter ensures you won’t fall in love with a house you can’t afford, saving you time and emotional energy.
Stand Out in a Competitive Market
If you’re in a market where multiple offers are common, having a preapproval letter can give you a distinct advantage. Sellers want to know that potential buyers can actually secure the financing needed to complete the transaction. In many cases, sellers may choose an offer from a preapproved buyer over one from someone who hasn’t completed this step.
Faster Home Search and Closing
Preapproval can also speed up the home search process. When you have a pre-approval letter, you can immediately start making offers on homes you love. Furthermore, because the lender has already reviewed your financials, the closing process will likely go much faster, reducing the time between offer acceptance and homeownership.
Secure the Best Interest Rate
The better your financial position, the better the interest rate you can secure. If you receive a pre-approval with favorable terms, it can give you an edge in negotiating the best deal.
Confidence in Your Offer
When you make an offer on a home, you want to feel confident that your financing will be approved. You know that the lender has already done the homework and that you’re in a strong position to secure the loan you need.

How Preapproval Can Help You Make the Best Offer

In today’s housing market, being preapproved is almost a necessity. Without it, you may find yourself losing out on your dream home to another buyer who has already taken the necessary steps.

If you’re thinking about buying a home, getting preapproved is your first step. Give us a call to see what options are available for you.

The Differences Between Hard and Soft Credit Inquiries

December 12, 2024 by Coleen TeBockhorst

Credit inquiries, also known as credit pulls or checks, are a standard part of assessing creditworthiness. However, not all credit inquiries are the same. They fall into two main categories: hard and soft credit inquiries. Understanding the differences between these two types is crucial for managing your credit health and avoiding misconceptions. Below, we explore the distinctions between hard and soft credit inquiries to provide clarity on their purpose and impact.

1. Purpose and Usage

Hard and soft credit inquiries serve different purposes.

Soft Inquiries: These occur in situations like checking your own credit score, background checks by potential employers, or pre-approval offers from financial institutions. They are typically informational and not tied to major financial decisions.
Hard Inquiries: These are required when applying for a new line of credit, such as a mortgage, car loan, or credit card. Lenders use hard inquiries to evaluate your financial history and determine your loan eligibility and terms. While hard pulls are essential for lending decisions, they temporarily affect your credit score.

2. Impact on Credit Score

The effect of credit inquiries on your score is another significant difference.

Soft Inquiries: These have no impact on your credit score, regardless of how often they occur. For example, you can check your credit score frequently without concern, as soft pulls are unrecorded on your credit report. Institutions conducting soft inquiries without your explicit permission also don’t harm your score.
Hard Inquiries: These can lower your credit score, typically by one to five points per inquiry. While the impact is temporary (about one year), hard pulls remain on your credit report for two years. Excessive hard inquiries in a short period may raise red flags for lenders, suggesting financial instability or risky borrowing behavior.

3. Consent Requirements

Whether an inquiry requires your permission is another key distinction.

Soft Inquiries: These often occur without your consent. For example, financial institutions may perform a soft pull before sending pre-approval offers, or an employer may check your credit as part of a background screening.
Hard Inquiries: These require your explicit consent. For instance, when applying for a mortgage or car loan, the lender must inform you that a hard credit check will be performed. This ensures transparency, as hard inquiries affect your credit score.

Understanding the differences between hard and soft credit inquiries empowers you to make informed decisions about your credit health. Soft inquiries are harmless and routine, while hard inquiries should be minimized to maintain a strong credit profile. By managing your credit wisely, you can position yourself for financial success.

5 Financial Tasks to Tackle Before the New Year

December 11, 2024 by Coleen TeBockhorst

As the year draws to a close, it’s the perfect time to take stock of your financial health and set yourself up for success in the coming year. You can create a solid foundation to achieve your goals by focusing on key areas. Here are five important financial tasks to consider before the new year begins.

1. Review Your Spending

Take a close look at your spending habits over the past year. Were there months or categories where expenses went overboard? Identifying patterns—like higher spending during the holidays or summer travel—can help you adjust your budget. If you don’t already have a clear budget, now is the time to create one. A well-planned budget provides a detailed overview of your income, expenses, and opportunities for savings.

2. Set Savings Goals

Savings are the cornerstone of financial security. Reflect on whether you met your savings targets this year. If you fell short, determine why—whether due to overspending, lack of planning, or unexpected expenses. Start the new year by establishing realistic savings goals, and prioritizing an emergency fund. Experts recommend setting aside three to six months’ expenses for unforeseen events. Once your emergency fund is in place, consider saving for specific goals like a vacation, a down payment on a home, or educational expenses. Automate savings through your bank to make consistent contributions effortless.

3. Tackle Debt Strategically

Debt can hinder financial growth if left unchecked. Begin by assessing high-interest debt, like credit cards, which can accumulate quickly. Choose a repayment strategy that works best for you, such as focusing on accounts with the highest interest rates or using the snowball method, which targets smaller debts first. Consolidation options, like refinancing or personal loans, may also simplify repayment and reduce interest. Addressing debt now will free up resources for your future financial goals.

4. Check Your Credit Report

Your credit report is a critical tool for assessing financial health. Request a free copy of your report from annualcreditreport.com to review for errors or unfamiliar accounts that could indicate identity theft. If inaccuracies exist, take steps to dispute them. Regularly monitoring your credit ensures accuracy and helps you maintain a strong credit score. Choose a date, like your birthday, as an annual reminder to review your report.

5. Evaluate Your Mortgage

Your mortgage is likely one of your largest financial commitments. Review it to see if there are opportunities to save or build wealth. For example, refinancing could lower your interest rate or eliminate mortgage insurance. If you’ve built substantial equity, consider how it might support future financial goals. If you’re planning to purchase a home in the new year, evaluating your financial readiness and exploring pre-approval options can help streamline the process.

Taking these steps before the new year not only sets a strong financial foundation but also gives you peace of mind knowing you’re prepared for what lies ahead. Make it a habit to reassess periodically, adapting to changes in your life and financial priorities.

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