What Does Home Price Mean?

Home price is one of the first inputs for mortgage calculation. Home price is calculated depending upon your earnings, debt payments, down payment savings, and the credit score. You might have heard of a 36% rule while buying your home. According to that rule, your main aim should be to keep the debt to income ratio around 36%. It could be even less than 36% or 43% max when you apply for a loan. The ratio gives you clarity about how much you can afford for the mortgage payment. If the ratio is low it means you can afford to pay for a mortgage. Similarly, the higher ratio would mean you will not be able to cope up with it.

To calculate debt to income ratio you have to add up a lot of things. For example, your monthly expenditure on debts, projected loan EMIs, and credit card debts. After that, you have to divide it by your before-tax salary on a monthly basis. As you know, for the calculation of the percentage you need to multiply it from a hundred. The final result is debt to income ratio.

Down Payment

If we go by the general calculations then mortgage lenders expect at least 20 per cent of down payment. The condition applies to conventional loans where there isn’t any PMI. Down payments are not a necessity all the time. In the case of VA loans, you won’t have to make down payments. On the other hand, FHA loans require only 3% of it. So there are exceptions.

It even depends on your mortgage lenders. If they offer you a program with a down payment of 3% to 5%, it is even better. Homebuyers must aim to save 20% of the price of their house before taking up a loan. After all, you have to make down payment. If the down payment is of considerable amount, it can improve your chances of a better loan interest rate. Along with it, your income and credit score is a major criterion for determining the rates. Don’t forget that mortgage calculator considers taxes, insurance, PMI, HOA, etc. too. Yes, the higher down payment will mean lower mortgage value but other factors are important too.

Rate Of Interest

With the help of mortgage rates comparison tools, you can check your qualification for a mortgage. Mortgage lenders also provide interest rate during the pre-approval process. You can also make use of the mortgage rate that they provide you.

Also read: Facts That Sum Up Your Difference Between Interest Rate and APR

It is best if you consult a mortgage broker for a variety of interest rate options. There are websites that display the currently ongoing interest rates for the mortgage. So there are tons of options to find out the interest rate. Make sure you do not totally rely on them. Your debt to income ratio and credit score may even increase or decrease the interest rate.

How Do You Define Mortgage?

If you closely look at the drop-down list you will find the option to select a mortgage. You can select it for a 15-year fixed-rate to a 30-year fixed-rate or even 5/1 ARM. The two former ones have loans on fixed rates. It means the monthly payments and interest rate doesn’t change and stay the same during the loan period. ARM means an adjustable-rate mortgage.

Also read: What Are Some Pros and Cons of Reverse Mortgage?

It typically means that the mortgage rate changes after a few months or years. Generally, it changes once every year. Also, the economic situation affects the mortgage rate. Most people select 30-year long fixed-rate loans as they don’t have any plan to shift. In case, you may move after some years or change the house then ARM is a better choice.

Interest and Principal

The principal is the amount of your mortgage loan that you take from the lender. In return, you promise to return the money with additional money in the form of interest. The interest rate may increase over the course of time. It is a certain percentage of the initial loan amount. The fixed-rate mortgages come with the equal principal and interest sum.

However, with each passing month, the actual number changes as and when you pay the EMIs. The technical term for it is amortization. In the beginning, you have to pay higher interest percentages as compared to the principal. With each passing month, the principal will be more as compared to interest.

What About Homeowners Insurance?

It is a policy that you purchase for your home. The insurance provider will provide coverage in theft, storm, or any other damage. Earthquakes and floods come under different categories of insurance. Based on the type of coverage, the insurance may vary between a hundred to thousand dollars. If you plan to borrow some money to purchase a house, they usually ask for homeowners’ insurance. These types of policies safeguard you from a financial crisis that occurs due to unwanted events. So in a mortgage calculator with Taxes, PMI, HOA, insurance is also an important consideration.

How Does Property Taxes Operate?

Buying a property comes with a set of taxes that your country or district imposes. Just enter your town’s name or zip code in the property tax calculator to get the details. It will provide you with the average effective tax rate of your area. These depend on your state and county. In the United States, if you buy a home in New Jersey you have to pay the highest amount of tax. In the case of Wyoming, the tax is low.

The average rate in New Jersey is 2.44% while in Wyoming it is 0.61. So you can understand that there is a significant variation. It is some per cent of the value of your house. You receive the bill annually. And in certain areas, the government reassesses your home each year. In others, the reassessment occurs once in every 5 years. You have to pay property tax for the benefits like road repair and maintenance, and services.

How Do You Define PMI?

We as homeowners feel that we are at high risk so we need insurance but the lenders also need it. The lenders need to secure loans that are at high risk and that is when PMI comes into the picture. It is private mortgage insurance. If you do not qualify for VA loan and cannot pay a 20 per cent down payment then pay for PMI. The reason behind the payment of 20% down payment is equity.

Just in case you do not have enough equity then you are a possible default liability. You are already at high risk and the lender will be on even higher risk with it. For the calculation of PMI, a percentage of your original loan is the key. It could range between 0.3% and 1.5%. Once you are able to pay for at least 20 per cent equity, then you can stop paying for PMI. So entering PMI in the mortgage calculator along with taxes, insurance, and HOA will give you more clarity.

How Do You Define The Term HOA Fees?

If you are new to buying condominium or home you will come across the term HOA. It is a homeowners association fee. This fee is part of the planned community for your home or condominium. You have to pay HOA fees every month or on an annual basis. The fees are for community area management like community pool and maintenance. The HOA is never kept secret to keep it real. You can check its details with the current owners of the house or property. This fee is different from the property taxes and doesn’t even come under homeowner’s insurance.

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Before we start discussing differences between the Home Equity Line of Credit and Home Equity Loan let us get some idea about it. Home equity loan and home equity line of credit are two financial instruments that can be taken against your existing home equity. They are usually taken to improve your financial position. But they put your house in line as collateral. So it is important for you to know all about these kinds of policies and which is better for you. It is always a wise choice to know the pros and cons of a policy before jumping into any conclusion. So let’s start our discussion with the home equity loan.

What is Home Equity Loan?

A home equity loan is simply where you are taking a second mortgage against your house. It might sound a little bit confusing.

Let us take an example.

Also read: Complete Guide to What Is Property Insurance And its Benefits!

Let’s say that your house is worth $200000. You have an existing mortgage on it and you owe $100000 on that mortgage. So that means there is $100000 of equity in the house. Paying your mortgage is a challenge. When you are doing so you might want to use that equity or some part of the equity for some other financial goals that you are looking to achieve. The simple way to do so is by taking out a home equity loan against the property.

Home equity loan might be a 10 or 20-year loan. You have to pay a little bit more interest rate in this kind of policy than you would pay on your regular mortgage. The reason behind it is the risk factor. Because if you don’t make payments then the bank that holds the first mortgage has the first right to your collateral. The lender of the home equity loan would be next in line. So because of that factor, there is a little bit more risk you pay a little more interest rate.

Now let us discuss the home equity line of credit.

What is the Home Equity Line of Credit?

A home equity line of credit is a line of credit that you can be taken by giving up the equity of your house. You can use the credit to consolidate other higher interest rate debts like credit card expenses. A home equity line of credit has a lower interest rate than some other types of loan and the interest may be tax-deductible.

In this type of borrowing, you are borrowing the loan against the available equity in your home. In this case, your house is used as the collateral for the line of the credit that the bank is willing to pay you. When you repay the loan the amount of credit replenished. It is much like a credit card. You can borrow against it again if you need to. The amount that you borrow you pay interest for that only. There is a draw period say for 10 years where you can borrow money and there is a repayment period say 20 years. After the draw period ends the repayment period begins.

Both in the case of home equity and the home equity line of credit the maximum a lender will lend you is the 85% of the valuation of your house minus the outstanding mortgage.  It depends on the lender. Usually, the bracket of loan is between 70-90% of the valuation of your house. To get this kind of loan your credit score should be good. If you have a poor credit score then you will get less amount of money from this policy. If your credit score is on the higher side will give you the opportunity to take out more money from the lender. Paying your bills on time and by keeping your credit card balance on the lower side will certainly help you to improve your credit ratings.

Differences between home equity loan and home equity line of credit

Now it is time to discuss the differences between the home equity loan and the home equity line of credit.

#1: Borrowing the sum:

In HELOAN or home equity loan you can borrow the money in a lump sum. Whereas in HELOC or home equity line of credit you have the ability to borrow or draw money multiple times from an available balance. Its balance is determined by the equity that you are having without any mortgage.

#2: Interest Payment:

In home equity loan (HELOAN), you borrow a lump sum of money. So you are required to pay interest for the whole sum of money that you are borrowing. In home equity line of credit (HELOC) you get a line of credit for your equity. And you pay interest only on the money that you have borrowed not the entire line of credit that you are entitled to.

#3:  Interest rates:

In home equity loan the interest rate is fixed. It gives you a clear idea of how much you have to pay. On the other hand in a home equity line of credit, the interest rates are variable. In changes from time to time. But some banks like Bank of America allows you to have a fixed rate of interest even in case of a home equity line of credit.

#4: Fund disbursement:

In home equity loan the money is drawn in a lump sum. Whereas you can draw money multiple times in home equity loan of credit.

#5: Average APRs:

The interest rates usually fluctuate with the market.

Also read: What are some Pros and Cons of Reverse Mortgage

But Home loan equity line of credit usually has lower interest rates than home equity loans.

Final Words:

So to sum up the discussion it is advisable that you should consult with a financial advisor before taking up the policy. Many insurance companies are providing HELOC and HELOAN these days like PenFed, Bank of America, etc. You must study well before taking up a policy. As in case of credit card borrowing the bank cannot take your home from you. But if you choose to convert your credit card outstanding into home equity the bank can take your home as the collateral because you are giving up your equity for the loan.

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We all know about the Home Loan. Don’t we? Reverse Mortgage is exactly the opposite of Home Loan. In a home loan, first, you take a large sum of money from the bank at the beginning of the home loan tenure to buy a house. At that point in time, the bank fully owns your house. Then you start paying EMI to the bank on a monthly basis. You pay the principal amount along with the interest. With time the stake in your house increases and that of banks decreases. When the loan amount is completely paid off you own the house. In the case of Reverse Mortgage at first, you completely own your house. Then the banks make a series of payments to you. With each payment your stake in the house decreases and that of banks increases. At the end of the tenure, the bank completely owns your house. In this article, we will see the pros and cons of a reverse mortgage.

Who Takes Reverse Mortgage?

Generally, Reverse Mortgage is done by the Elderly people who own a house but have very little savings in their account. Reverse Mortgage can be done by those who are above 62 years and own a house of which he or she is a permanent resident. Owning a house gives us social status.

Also read: Home Equity Line of Credit vs Home Equity Loan!

For that people put in their hard-earned money to buy a house and end up having a very little amount of money in their bank account. No one wants to sell their house and enjoy their life with money. In this case, Reverse Mortgage is an excellent option to enjoy your life and live in your own house with dignity.

1. It is good for those elderly people whose children live in some other places and own a house of their own. So it is not a good idea for you to pass on your house to them when you are in the position of a cash crunch.
2. It is good for those also, who haven’t saved for their future medical expenses and now need regular medical assistance.

How does Reverse Mortgage work?

You can take a reverse mortgage if you are above 62 years and you have a house of your own. By taking reverse mortgage policy you can use the money to pay off your debts and live in your own house till you die. A reverse mortgage pays you 60% of the value of your house. You can take the money in one payment or you can take a line of credit where you can withdraw the money when you want to. It totally depends upon you.

Now for the repayment, after your death, your heirs get a 6 months’ time to clear this loan. If they are not in a position to do so then the bank sells your home to get its investment back.

What Are Some Pros and Cons of Reverse Mortgage?

Every financial policy has its pros and cons. Reverse Mortgage is no exception. Now let us discuss the pros and cons of the reverse mortgage.

Pros of Reverse Mortgage

#1: Pay off Existing Loan and also receive cash:

Seniors often face a reduction in income when they retire. Monthly mortgage payments become a burden for them. So if you have sufficient home equity you can opt for a reverse mortgage to pay off your existing mortgage and even can receive cash from the property with this policy.

#2: No More Mortgage Payment:

You don’t have to make any mortgage payments after you get the reverse mortgage policy.

#3: Save for future Needs:

By clearing the existing mortgage the money that is leftover can be put in the bank for your future needs like medical expenses.

#4: No Moving out of the house:

According to a survey, people want to remain in their locality. In the case of older people, the percentage is higher. So rather than moving out you can reverse mortgage your property and enjoy living there till death.

#5: Not taxable:

The money that you receive from a reverse mortgage is not taxable as it a loan not an income.

Reverse Mortgage Cons

#1: Heir’s situation:

The heir inherits the home with a lien. The lien is needed to be paid off within 6 months.

#2: Closing Cost:

A reverse mortgage has a closing cost and there is a possibility that they can be higher than a traditional mortgage. So it is very important that you first compare lenders and get the best rate.

#3: Balance Grows:

The balance on the reverse mortgage grows over the period of time. The only way to avoid this is to make payments on the reverse mortgage.

#4: Spending all Money:

If you use all the money that you receive from the reverse mortgage and the balance grows when you become really old and sick the only way to get money is by selling your house.  In that case, you may get very little money if your property rate increases. In case your property valuation decreases you won’t receive any money.

#5: About Other occupants:

If there are other occupants in your house like a relative or a friend they will be forced to move out in case you die.

Also read: Everything about car insurance and why its important?

Because they have no right over your property. In that case, it is better to discuss this matter with a legal advisor before taking the policy.

#6: If you Move:

If you move to some other place for treatment for a long time there can be an issue in case of the reverse mortgage. According to the terms and conditions, you have to live in your house with sound health which is often not possible.

Conclusion:

So to sum up this discussion it is advised that you consult with a financial advisor before you take up the reverse mortgage policy. It is a good policy if your heirs don’t depend on you and have a house of their own. If it’s not then there are other options for you like renting the house and moving into some other small place which you can afford. If you really want to go for it. Then some of the companies that offer Reverse Mortgage are Quontic Bank, AAG, etc.

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