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Taxes and homeowners Perspectives

How The Tax Bill Affects Homebuyers

For years, the US tax code has encouraged Americans, especially first-time homebuyers, to get “a piece of the American dream” by becoming homeowners. Since the 1940s, America has seen the positive effects of building credit and building equity through homeownership.

America is one of the few countries in the world to offer potential homeowners a fixed-rate 30-year mortgage product. Homeowners have benefited for decades from tax incentives that allow us to deduct mortgage interest from our tax bill, and from home equity lines of credit that can help pay for a child’s college tuition.

Get ready for some changes in 2018.

This week, both the US House of Representatives & US Senate passed the most sweeping changes to the US tax code since 1986. The new tax bill cuts the corporate tax rate, revises the existing tax bracket structure at every income level, and includes several significant changes to deductions that historically offered incentives to first-time homeowners.

The bill is ready to be sent to President Donald Trump, and could be signed into law before Christmas, so we at STEM Lending wanted to tell you about several specific changes that are likely to affect your search in 2018:

tax code us tax bill

How The New 2018 Tax Bill Could Affect You:

Mortgage Interest Deductions

Mortgage interest deductions were once thought to be untouchable as a strong incentive for first-time home buyers. The history of this incentive was originally a part of a 1913 tax provision which allowed business owners (ex. farmers) to deduct any interest they paid on business expenses. The mortgage-interest deduction now lets people who buy homes deduct part of the cost of their mortgage on their taxes. According to the Joint Committee on Taxation, MID saved Americans $77 billion last year!

What was finalized in the new tax bill, however, caps the limit on deductible mortgage debt at $750,000 for loans taken out after Dec. 14, 2017.  If you took out a mortgage loan before Dec. 14, you will still be able to deduct interest on mortgage debt up to $1 million. Mortgage interest on second homes can be deducted but is subject to the $750,000 limit.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Mortgage interest

You may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home.

For homes bought before Dec. 15, 2017, no change. But for homes bought Dec. 15, 2017, or later, you may deduct the interest you pay on mortgage debt up to $750,000($375,000 if married filing separately).

Property Taxes

Currently, taxpayer can fully deduct what they pay in state and local property, income, and sales taxes from their federal tax returns. The new tax law in 2018 caps these total deductions at $10,000. This new law may have a very real affect on your bottom line if you reside in a state with above-average local and state taxes like New Jersey, New York, Oregon, or California. *One caveat* the $10,000 cap can be any combination of property, income, and sales taxes. This compromise between House & Senate Republicans was very closely watched, and will surely be a rallying point in the coming months, when midterm elections are held.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Property taxes

You may deduct the property taxes you pay on real estate you own.

You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.

Capital Gains Exclusion

If you’re planning on selling your house in 2018, you know that capital gains taxes = the difference between the price you paid for the house and the price you ultimately sell it for. If you have not lived in the home you are selling for at least two years, your capital gain is treated as taxable income under the ‘ordinary income’ tax brackets (which also just changed). Home sellers can benefit by excluding up to $500,000 for joint filers or $250,000 for single filers for capital gains when selling a primary home as long as the homeowner has lived in the residence for 2of the last 5 years.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Capital gains

In order to qualify for this provision, it is mandatory that you have lived in the home as your primary residence for at least 2 of the last 5 years, before selling.

With all the 2018 tax changes set to take effect January 1, 2018, how will this affect your decision to buy a home? If you are looking at getting pre-approved, or already searching with a real estate agent, give us a call at 646-798-1800, or email us at support@stemlending.com so we can help find you the best mortgage loan. Visit STEM Lending to apply online, or learn more about the mortgage process.

We look forward to helping you find your dream home in 2018.

Immigrants Family Perspectives

Solving the mortgage needs of STEM immigrants in US

Recent immigrants to the United States face unique hardships and challenges when seeking all forms of loans: credit cards, auto loans and most significantly mortgages.

Research done by United States Department of Commerce’s Economics & Statistics Administration has established that Science, Technology, Engineering and Math (STEM) graduates workers drive innovation and competitiveness in the United States by generating new ideas, new companies and new industries.

The US National Foundation For American Policy (NFAP) presented an article on The Importance of International Students to American Science and Engineering in their October 2017 Policy Brief. The article presented statistics based on the US National Science Foundation’s survey of graduate students and postdoctoral scholars and showed an impressive observation: foreign nationals in the US account for 81 percent of the full-time graduate students in electrical engineering and petroleum engineering, 79 percent in computer science, 75 percent in industrial engineering, 69 percent in statistics, 63 percent in mechanical engineering and economics, statistics, 59 percent in civil engineering and 57 percent in chemical engineering.

Unique needs of immigrants concerning mortgages

With nearly 80 percent of Science, Technology, Engineering and Math (STEM) graduates being international, we at STEM Lending set out to explore what were the major challenges faced by immigrants when attempting to fulfill their American Dream – having a home of their own.

Coincidentally, The Wall Street Journal recently published an article titled Foreigners Seeking Mortgages Face Close Scrutiny. The article underscored that while the mortgage-application process can be daunting for even the most creditworthy borrower, the process is even more challenging for foreigners working in the US, who may not have adequate credit history or a permanent residency. Mortgage lenders typically seek two years of credit history of applicants, however recent immigrants often don’t have two years of residence or credit history in the U.S.

Inadequate credit history translates into unique challenges immigrants face despite having strong job prospects, stable earning potential and consequently, a strong ability to repay a mortgage. One argument that is often cited is that in the event of a job loss, an immigrant visa holder may decide to “dump everything and move back to home country”. The counter argument though, is that a job loss can in fact render a resident declaring a Chapter 7 bankruptcy, potentially eliminating their personal liabilities for mortgage loan.

How is STEM Lending addressing the needs of immigrants looking for a mortgage?

STEM Lending’s co-founder, Shantanu, is himself a first-generation immigrant entrepreneur. After earning a PhD degree in STEM field from the University of North Carolina at Chapel Hill, Shantanu embarked on his professional journey – industrial experience in science and technology jobs in US, while on a visa. Despite stable earnings from graduate school fellowship, it was challenge to obtain loan for even buying a car, let alone a mortgage.

Having first-hand experience of hardships encountered when seeking loans as immigrants, we at STEM Lending are committed to providing fair and accessible mortgages to creditworthy immigrants.

We firmly believe in evaluating mortgage application based on good faith determination of applicants’ ability to repay the mortgage: basing credit assessment on applicants’ income, assets, employment, credit behavior and their monthly expenses. We have partnered with multiple lenders to provide a diverse set of mortgage opportunities under one platform, thereby increasing the number of mortgage avenues immigrants get to explore.

Busy working professionals no longer need to visit multiple banks in person, fill out the same mortgage application form time after time, shopping and hoping to qualify for a mortgage. By streamlining the mortgage experience, we hope to help all creditworthy Millennials, inclusive of immigrants, will be able to gain access to fair credit, without hassle.

Please feel free to reach out to help@stemlending.com or contact us via stemlending.com/contact-us if you have any questions.

Wishing you a happy home buying experience!

– STEM Lending Team

millennials first house Perspectives

How Millennials Have Changed Mortgage Shopping

Tech Savvy Mortgage Millennials

You’ve probably seen us mention (multiple times) that Millennials are the single largest segment of home-buyers in America.

It’s still true. For the 4th consecutive year, Millennials were the largest group of home buyers (34%) according to NAR’s 2017 Home Buyer and Seller Generational Trends study. By comparison, baby boomers were only 30% of buyers. Additionally, Millennials represented 45% of the purchase loan volume in the first three months of 2017.

However, the differences between Millennials & Baby Boomers on how they search and shop for a mortgage lender are drastic.

What Differences Separate Millennial Borrowers from Baby Boomers?

When studies or data on “Millennials” is cited in reference to real estate, many of these “Millennials” do not feel like the term is the best fit or description, as they are 29-36 years old. A large percentage of this population only had a flip-phone in their teenage years, and didn’t get a “smartphone” until their adult years (remember, the 1st iPhone came out in 2007).

However, this Millennial or “Xennial” group has integrated technology into their daily habits. When it comes to mortgage shopping, their first action is not to call a real estate agent or ask their parents –> they go to Google.

Millennials are more likely than older adults to shop around for a mortgage and compare apples-to-apples rates: 86% of 18-34 year-olds shopped around for a loan vs. 75% of 35-54 year olds and 55% of those 55 years and older, According to a Survey of adults in 2016 by Ipsos on behalf of Zillow,

This is why 90% of new prospective homebuyers will use online resources to research homes and the mortgage process before they speak to a real estate agent, mortgage broker or lender.

Millennials Are Actually Comparison Shoppers

Millennials are far more willing to obtain multiple quotes from lenders vs. Baby Boomers or Generation X – on average, Millennials obtained 6 quotes, vs an average of 4 quotes by Gen X shoppers and 3 quotes by Boomers. Websites like Kayak, Yelp!, and even Amazon have honed our Millennial demographic into savvy comparison shoppers, which is why we started STEM Lending as a way to closely align ourselves with this trend.

Lastly, even though 90% of Millennial purchasers still engage with a real estate agent, Redfin data shows that 73% of millennial sellers try to negotiate with the listing agent for a lower commission, compared to 44% of Gen-Xers and 24% of boomers. Nearly 63% of the millennials who tried to get a lower commission rate percent reported being successful.

Millennials (18-36) have changed the way individuals shop for a mortgage; they demand transparency, simplicity, and multiple lender options.

Are Millennials Engaging With Traditional Lenders Differently? How?

Since the financial crisis began in 2008, we’ve seen the percentage market share of the mortgage market shift dramatically. To put it in perspective, By the end of 2016, 6 of the nation’s top 10 lenders were non-banks, while banks contribution to new mortgage loans fell to 21%, according to The Washington Post. Keep in mind that as recently as 2011, 50% of all new mortgage money was loaned by JPMorgan Chase, Bank of America and Wells Fargo.

Banks No Longer Make the Bulk of U.S. Mortgages

As lenders have changed, so have consumers, and their behaviors. Millennials have reported a higher willingness to switch banks (A recent Accenture study showed 18% of millennials switched their consumer bank partner within the last 12 months).

Millennial Expect a Digital First Mortgage Process

Whether a preference for technological automation, or the desire to educate themselves online first to narrow the knowledge gap, Millennials’ expectations when engaging with mortgage brokers or lenders demands the following:

  • Seamless user experience enabled by technology 
  • Trust through transparency on pricing and fees
  • Honest, transparent communication from mortgage experts 
  • Educational tools for customers with a longer lead time until they buy

Millennials want a parallel track –> they want a seamless process that can be 100% online, and a mortgage product expert ready and able to step in to provide concierge level help should they have a question.

Trust through transparency means having a bulletproof platform where a customers’ personal information will reside, should they need to work on their application in chunks over a period of days or weeks.

With apps like Acorns, Clarity Money, and now Rocket Mortgage, today’s mortgage shoppers expect to be able to access all their information digitally, even if the application itself still happens at home on a desktop. Companies like STEM Lending who can integrate with third party vendors such as Plaid, Finicity, and TurboTax to verify income and assets seamlessly, are in the best position.

How Have Lenders and Brokers Responded?

A number of mortgage lenders have created incentives to attract and retain Millennial homebuyers. Chase Bank recently announced it will give 100,000 reward points, to existing credit-card customers who take out a home loan with the bank for a limited time. Capital One offered cardholders earned air travel miles if they purchased property or refinanced their home with the bank. Wells Fargo gave out rebates to cardholders to use for its mortgages and home equity loans. Several other lenders have announced similar programs to launch in 2018. Eagle Home Mortgage, a mortgage lender and a subsidiary of Lennar, also recently announced a new mortgage program that will help homebuyers pay off their student debt, by directing up to 3% of the purchase price to pay their student loans, with the caveat that they buy a new home from Lennar.

At STEM Lending, as a leading online mortgage broker, we will work with you to understand your specific financial situations, your priorities in the homebuying process, and find you the best mortgage rate, regardless of lender. Explore your options on our website, here: https://www.stemlending.com/apply/

 

Mortgage Pre-approval Application Perspectives

How to prequalify for mortgage?

Home buyers can simplify the steps of buying their dream home by prequalifying for a mortgage. So, what exactly does a prequalify mean?

Mortgage pre-qualification enables you to estimate how much you can borrow from a lender. This helps you plan for the maximum price of the home you can afford using a mortgage financed by that lender.

Clearly, for maximum value, you would want to explore multiple lenders, comparing their mortgage products and the interest rates they quote. This is where working with an online mortgage broker such as STEM Lending helps you save. You can compare multiple options with much lesser time spent as compared to shopping offline. Explore options here: https://www.stemlending.com/apply.

What are the factors influencing the prequalification amount?

Factors that influence the dollar value of pre-qualification by a lender include:

  • Credit score
  • Monthly disposable income
  • Financial assets; and
  • Overall debt at the time of application.

It is essential to build up a strong credit score and monitor your credit before applying for pre-qualification. To learn more, check out STEM Lending’s article on credit report monitoring: Proactively monitor credit report before seeking mortgage.

A key metric to understand regarding mortgage pre-qualification is your monthly Debt-to-Income ratio, often abbreviated as DTI. The debt-to-income ratio is: (Sum of all the Monthly Debt Payments) divided by (Gross Monthly Income).

This number is measure by which lenders assess your ability to repay the mortgage, since a high debt-to-income ratio can render the borrower miss a scheduled mortgage payment in the event of a large unforeseen expense, increasing the potential likelihood of default.

Common metrics that are included in monthly debt payments, thereby impacting the DTI, include:

  • Monthly payment on new mortgage
  • Student loan payments
  • Credit card payments
  • Auto loan payments
  • Home appliance loan payments; and
  • Other recurring debt payments present in credit report.

Lenders may set DTI thresholds for mortgage applicants and many lenders may not pre-qualify applicants with Debt-to-Income ratio greater than those thresholds. To learn more about DTI, and how it impacts your mortgage application, check out STEM Lending’s article: Explaining Debt-to-Income “DTI” and Its Importance.

Notably, other factors also indirectly impact the DTI by means of monthly mortgage (Debt) payment. These include:

  • Approved mortgage interest rate
  • Loan-to-value ratio (LTV)
  • Credit score
  • Property usage
  • Late payment history and
  • Any foreclosures or bankruptcies on record

Pre-qualification is not the same as Pre-approval

First-time home buyers should note that mortgage pre-qualification is not the same as pre-approval. Pre-qualification is a conditional approval of the mortgage — an estimate of how large a mortgage one can afford. However, it doesn’t create a binding commitment between the home-buyer and the lender. Pre-approval, on the other hand, involves a detailed review of applicant’s debt, income, assets and credit history and the borrower can receive a Pre-Approval Letter documenting the amount that the borrower has been approved to borrow. To learn more about differences between Pre-approval and Pre-qualification, read STEM Lending’s article: Mortgage 101: Pre-approval vs. Pre-qualification Letter.

To take the first step in getting prequalified for a mortgage and save on your mortgage, contact STEM Lending for a free initial consultation:

  1. Message: stemlending.com/contact-us
  2. E-mail: hello@stemlending.com
  3. Call: +1 (833) 600-0490 (toll free)

STEM Lending also offers simple and free mortgage calculators for you.

Wishing you a happy home buying experience!

– STEM Lending Team

Mortgage Refinance Perspectives

Mortgage Refinance 101: when to refinance and why?

Refinancing a mortgage can potentially be a great financial strategy, especially when the original mortgage was purchased at relatively unfavorable terms.

However, there are definite costs associated with pursuing a refinance transaction, which is why its important to understand when to refinance and why. In this STEM Lending post, we cover why you should consider refinancing the mortgage and if so, when is a good time to refinance.

So lets cover the basics: what really is refinancing a mortgage? Refinancing refers to replacing an existing mortgage with another mortgage under different terms. In US, refinancing terms may vary based on economic factors, including projected risk and borrower’s credit worthiness. Usually refinancing is done for borrower’s primary residency mortgage.

Interest rates are currently close to all-time low (see figure below on Average US 30-year Fixed Mortgage rates), therefore mortgage refinancing remains a good option for many homeowners, especially if you bought your mortgage before the 2008 financial crisis:

Refinancing programs in United States

There are several mortgage refinance programs available in the United States, including:

  • Adjustable Rate Mortgage (ARM): You may chose to refinance to an adjustable rate mortgage if you project interest rates may go down in the future. As we highlighted earlier, current interest rates are already at historic lows so substantial future reduction in interest rates is unlikely.
  • Fixed Rate Mortgage: By refinancing to a fixed-rate mortgage can help you plan for monthly mortgage payments well in advance thereby helping you set a budget with predicable cash flows.
  • Cash Out Refinance: Using cash-out refinancing, you can convert part of your home equity into cash, which can be used for expenses such as home repairs
  • HARP: Federal Housing Finance Agency’s Home Affordable Refinance Program helping home-owners experiencing significant drop in their home values refinance with better mortgage terms.
  • FHA Streamline: refinancing existing FHA-insured mortgages requiring limited borrower credit documentation and underwriting.
  • USDA Streamlined Assist Program: available to existing USDA home loan borrowers, by US Department of Agriculture (USDA), providing more affordable refinance payment terms to borrowers with low or no equity.
  • VA Cash-Out Refinance Loans: providing qualified veterans an opportunity to withdraw cash for a near term need from their existing conventional or VA loan.

Two important factors to keep in mind regarding refinance are: (i) Refinancing resets the clock on your mortgage, so a fresh 30-year refinance on an existing 30-year mortgage will extend the mortgage duration to a fresh 30-year duration from the day of refinancing closure, although at a potentially lower interest rate and monthly payment. (ii) There are transaction costs associated with accomplishing a refinance, including a concept of points as we discuss below. Even with mortgage clock reset and transaction costs, refinancing can potentially be a valuable financial decision, for following reasons:

Motivation for refinance

Mortgages can be refinanced for multiple reasons:

  1. Reducing monthly payments by lowering the interest rate.
  2. Debt consolidation of multiple mortgages into one for a potentially different term based on prevailing interest rates.
  3. To reduce the risk of rate fluctuation, switching from an adjustable rate mortgage to a fixed-rate mortgage.
  4. To make cash accessible by altering the terms of mortgage (cash-out refinancing).

Also note that there can be potential tax benefits available with refinancing, particularly if the borrower doesn’t owe the Alternative Minimum Tax.

How do you proceed with refinancing? We recommend you to reach out to a licensed professional mortgage broker who can help discuss your mortgage options and guide you whether you will benefit from a mortgage refinance.

To explore your refinancing options with STEM Lending in more detail, we encourage you to reach out to contact@stemlending.com or contact us via stemlending.com/contact-us / +1-833-600-0490 (toll free), if you have any questions regarding refinancing. We offer free initial consultation to discuss your mortgage options. We also offer a number of handy mortgage calculators to help you compute the mortgage monthly payments and other analytics.

Mortgage Points

A fraction of the net mortgage value is often required to be paid upfront for refinancing. Usually, this fraction is expressed as percentage of  the mortgage amount and is referred to as points, i.e. 1 point equates to 1% of total mortgage amount. Larger upfront payments for refinance (i.e. larger number of points) often yield reduction in interest rates in the refinanced loan.

For further information, feel free to contact us:

  1. stemlending.com/contact-us
  2. Mortgage Calculators – Essential for financial planning

Wishing you a happy home buying experience!

– STEM Lending Team

New Homes. New Homeowners. Perspectives

Unexpected Costs for First Time Homebuyers

How to Keep New Homeowner Costs in Check

Buying your first home is an exciting and breathtaking experience. However, as you become a new homeowner you’re focused on closing and moving into their home with no hassles, it’s easy to be naive about the unexpected costs involved in being a homeowner.

Some of the unexpected costs are unavoidable, such as closing costs. Other costs may depend on where you live, the kind of home you purchased, and your lifestyle choices. Additionally, most people are unprepared for any unexpected repairs that come up just as you’re moving in.

At STEM Lending, we are committed to helping you understand the full picture of what your true costs of owning a home are. Read below to learn more about unexpected costs that can arise when buying a home.

Property Taxes

A common mistake homebuyers make is to find a dream house, plug in the principal and interest rate payments into their calculator, and use that number (ex. $2,000) to compare vs. their current rent. This calculation is incorrect as it leaves out a major expense — property taxes!

Find out what your expected property taxes are by checking the MLS (Multiple Listing Service), divide it by 12 and then add that to your estimated monthly payment.

Buyers are typically required to pay for three months’ worth of city & county property taxes at closing. You may also have a choice of rolling your monthly mortgage payment + monthly property tax bill into one lump payment, but this not required in every location.

Be aware that property taxes (just like HOA fees) always go up — sometimes by 1-3% per year, so make sure you’ve saved enough for a cushion for any unforeseen tax increases.

Closing Costs

As we’ve mentioned in previous blog posts, closing costs can be a very unpleasant experience, especially if you are surprised at the last minute. Between January 2016 – January 2017, ClosingCorp, surveyed 1,000 first-time and repeat homebuyers to gauge their biggest surprises.  Here were some of the findings:

  • 17% of all homebuyers were surprised closing costs were even required
  • 35% of all homebuyers were surprised that their closing costs were higher than expected
  • 24% of all homebuyers were surprised by unexpected costs regarding mortgage insurance

Educating yourself on the specific state requirements for closing costs is key. Some states allow the seller to pay some or most of the closing costs, but to be on the safe side, budget for 2-3% of your home’s value to be paid at closing.

Home Maintenance

As a new homeowner, all of the landscaping, lawn-care, and maintenance is now all on your budget. If you’re a first time homeowner, you probably have never had to be responsible for a lawn or the grass on the other side of the sidewalks. You will need to budget additional funds to buy home maintenance tools such as a lawnmower, shovels, and rakes.  If you live in a colder climate, you may need to purchase a snowblower to help plow the snow in a big snowstorm.

Overall, plan on spending 1 to 2% of your home’s value every year in maintenance and upkeep, according to the Harvard University Joint Center on Housing Studies.

Furniture

One of the largest triggers for a family to move away from large city apartments to single-family residences is the need for space. If you and your spouse have just had a second child, or are thinking of expanding your family, you’ll likely be moving to a much larger house. This means that you will likely have to buy more furniture to make your house a home.

There are ways to reduce your expenses by buying furniture from your friend’s parents (who may be downsizing) or by shopping estate sales. You can also space out your furniture purchases over months. Given how expensive items such as beds, couches, and dining tables can be, consider what your total expenditure on furniture based on the square footage of the house.

Utilities

As a current homeowner, believe me when I say: your utilities costs can be as high a number as your property taxes. The seasonality of these bills is a big factor in how they appear as an unexpected cost. Additionally, if you were previously a renter, depending on the state where you lived, you may or may not have had to pay for heat or hot-water.

In the U.S., energy costs account for 5 – 22% of families’ total after-tax income, according to a national study. Although climate and location plays a significant role in consumption, the age of the housing stock also plays a role.

Estimates for annual utility bills change with climate, and the national average is ~$3,000. Ask a parent, co-worker, or friend with a home in the same county you’re considering, and go over their most recent utility bill. This kind of real world comparison is very helpful when it comes to considering unexpected costs in home maintenance.

Kids

This may come as a surprise, but kids (young children) can be difficult to keep track of in your new house! They are the biggest joy in your life, but…they can also put holes in walls, draw on walls, and spill all types of juices on carpets and rugs. Kids who’ve just learned to walk could run into a screen door, or throw a toy that breaks a window.

When you were a renter, your biggest fear was losing your security deposit due to damage to the unit. Now that you’re an owner, the costs can be hundreds, if not thousands of dollars more.

Setting aside even a few hundred dollars for accidental damages from children can be a useful war chest as your family grows.

 

Home Mortgage Calculator Perspectives

Mortgage Calculators – Essential for Financial Planning

Mortgage calculators enable us to measure how changes in mortgage terms will impact our future financial outlook. They form an essential tool during the mortgage process, helping homebuyers identify the best terms for their mortgage. Lets get familiar with them.

Key factors in mortgage calculations include:

  • Mortgage Principal
  • Loan Balance
  • Compound Interest Rate
  • Number of Payments per Year
  • Total Number of Payments; and
  • Regular payment amount

STEM Lending Mortgage Calculators

We at STEM Lending offer a number of mortgage calculators for your ready use. Check these:

Further advanced mortgage calculators incorporate other costs associated with a mortgage, including insurance and such as local/state taxes.

Fixed Rate Mortgage Calculators

Monthly payments for a fixed rate mortgage are the amount paid by the borrower every month that ensures that the loan is paid off in full with interest at the end of its term.¹With a fixed rate mortgage, the borrower agrees to pay off the loan completely at the end of the loan’s term, so the amount owed at month N must be zero. The monthly payment formula is based on the annuity formula, depending on:

  • The monthly interest rate, expressed as a decimal, not a percentage. Since the quoted yearly percentage rate is not a compounded rate, the monthly percentage rate is simply the yearly percentage rate divided by 12; dividing the monthly percentage rate by 100 gives r, the monthly rate expressed as a decimal.
  • The number of monthly payments, called the loan’s term, and
  • The amount borrowed, known as the loan’s principal.

The fraction of the monthly payment that is applied to principal pay down equals the amount of payment minus the amount of interest currently paid on the pre-existing unpaid principal.¹

The interest component of the monthly payment, is the interest rate times the amount unpaid at the end of month. Since in the early years of the mortgage the unpaid principal is still large, so are the interest payments on it. The portion of the monthly payment going toward paying down the principal is very small and equity in the property accumulates very slowly (in the absence of changes in the market value of the property). But in the later years of the mortgage, when the principal has already been substantially paid down and not much monthly interest needs to be paid, most of the monthly payment goes toward repayment of the principal, and the remaining principal declines rapidly.

The borrower’s equity in the property equals the current market value of the property minus the amount owed.

Adjustable Rate Mortgage Calculators

Annual percentage rates (APR) calculations for Adjustable Rate Mortgages (ARMs) require many more variables, including: the starting interest rate; the length of time at that rate; the recast; the payment change; the index; the margins; the periodic interest change cap; the payment cap; lifetime cap; the negative amortization cap; and others.¹

In the forthcoming STEM Lending blog posts, we will dive deeper into these steps and the gotchas that you need to watch out for. Please feel free to reach out to contact@stemlending.com or contact us via stemlending.com/contact-us if you have any questions.

Wishing you a happy home buying experience!

– STEM Lending Team

References

  1. Mortgage Calculator
  2. Payment / Amortization Calculator: Showing your monthly payment for fixed rate or adjustable rate loans.
  3. Rent vs. Own Calculator: Comparing the estimated costs of buying vs. renting a home.
  4. Annual Percentage Rate (APR) Calculator: Calculating the annual percentage rate for a loan.
  5. Debt Consolidation Calculator: Calculating the effect of combining other debt with your home mortgage.
  6. Prepayment Savings Calculator: Estimating how additional mortgage payments reduces your interest costs.
  7. Early Payoff Calculator: Computing the additional payment required to pay off your loan early.
  8. Refinance Break-Even Point Calculator: Calculating the number of months to break-even if you refinance.
  9. Tax Savings Calculator: Estimating your early tax savings resulting from property.
Couple's Home Perspectives

Learning basics of mortgages can help you save

Owning a home is a dream of many Millennials throughout the United States. However, with the ever increasing cost of education and ballooning student debt, homeownership often begins with seeking a substantial mortgage.

When it comes to mortgage, making uninformed financial decisions can not significantly harm our financial future, it can even lead to bankruptcy and foreclosure of our homes.

While the world of mortgage may seem mystical and daunting at first, mortgage-focused information and products are readily available on the Internet. It empowers us to become familiar with basics of how mortgage works, well before we apply for one. With this motivation, we will publish a series of articles helping prospective homebuyers navigate the entire mortgage process.

First, lets learn the basics. Broadly, the mortgage process involves:

  1. Loan Application
  2. Home Inspection
  3. Home Appraisal
  4. Home Insurance
  5. Title Search
  6. Rate Lock-in
  7. Mortgage Terms Review
  8. Down-payment
  9. Closing Costs Payment
  10. Review Closing Documents

Loan Application

With the help of mortgage brokers or lenders, home buyers fills in a Uniform Residential Loan Application, which specifies the following pieces of information required for reviewing the mortgage application: the type of mortgage, terms of loan, property information, purpose of loan, borrower/co-borrower information, employment information, monthly income and combined housing expense information, assets & liabilities; details of transactions; and certain required and optional disclosures. Once the loan application is received by the lender, the subsequent steps in the process outlined above ensues.

If any element of the loan application was inadequately filled, the lender may ask clarifying questions to complete all the required fields in the mortgage application.

Home Inspection

Home inspections are non-invasive examinations of structural conditions of a home. The inspection may include any combination of mechanical, structural, electrical, plumbing, or other essential systems or portions of the home, as identified and agreed, prior to or during the inspection process.

As home inspections are based on visual observations, they only reveal material defects observed on the day of the inspection and not all material problems that have existed in the past. They help home buyers in identifying material defects in a property that can potentially have an unreasonable risk to residents. Notably, home inspection is different from home appraisal as a home inspector determines the condition of it’s structure, whereas an appraiser determines the value of the property(see below).

Home Appraisal

A home appraisal is an unbiased professional valuation of a home’s fair market value. Lenders order an appraisal during mortgage application to ensure that the loan amount requested by the borrower is based on home’s fair market value. A fair estimate of home’s value is important because in the event of a borrower’s default, the lender may need to foreclose and sell the property in the market.

Home Insurance

Mortgage lenders typically require that home buyers purchases home insurance in order to protect the lender if the home is destroyed. Certain perils may or may not be covered as a part of the home insurance policy, including fire, lightning, windstorm or hail, explosion, smoke, vandalism, aircraft or vehicle collision, riot or civil commotion. Notably, flood insurance and other calamities are often not included in home insurance plan, and its important to give due attention to whether buying flood insurance or other will be valuable.

Title Search

A home’s title search is the process of retrieving documents evidencing events in the history of that home’s sale. The goal of title search is to ensure that the person selling the home has the right to sell it and that the home buyer is getting all property rights.

Rate Lock-in

In the rate lock-in step, the borrower locks in the mortgage interest rate with the lender. This step happens no later than 10 days prior to the mortgage closing date.

Mortgage Terms Review

The borrower reviews the terms of the mortgage presented by the lender, to ensure all terms and documents concerning the mortgage are in order. This step happens once the home inspection, home appraisal and title search are completed with no discrepancies observed and the mortgage is approved by the lender. If there are any issues observed during the title search/home inspection/home appraisal, they need to be resolved before the mortgage gets approved.

Down Payment

Once the mortgage is approved and the borrower has reviewed mortgage terms, the borrower will need to deposit the down payment with the lender, which is usually done via wire transfer or cashier’s checks.

Closing Costs Payment

Closing costs are the fees associated with home purchase that are paid by home buyers at the closing of the mortgage transaction. Note that Closing refers to the point in time when the property’s title is transferred from the seller to home buyer.

Closing costs usually have a multitude of fees and they are incurred by either the buyer or seller, so its important to get fully familiar with them beforehand and identify which. They may include:

Attorney Fees; Title Service Costs; Recording Cost; Document/Transaction Stamps or Taxes; Survey Fee; Brokerage Commissions; Mortgage Application Fees; Points; Appraisal Fees; Inspection Fees; Home Warranties; Private Mortgage Insurance; Pre-paid Homeowner’s Property Insurance; Pro-rata property taxes; Pro-rata property taxes; Pro-rata Homeowner Association Dues and others.

Review Closing Documents

In the review step, homeowners review all the documents associated with closing and fulfill homeownership.

In the forthcoming STEM Lending blog posts, we will dive deeper into these steps and the gotchas that you need to watch out for. Please feel free to reach out to contact@stemlending.com or contact us via stemlending.com/contact-us if you have any questions.

Wishing you a happy home buying experience!

– STEM Lending Team

For further information, see these references:

co-borrowers Perspectives

Should I Add a Co-Borrower to my Mortgage Application?

Getting approved for a mortgage loan is the first step toward the milestone of becoming a homeowner. It is also the beginning of a serious, long-term financial commitment. For many first-time homebuyers, getting approved on your individual finances or as a co-borrower is a difficult decision.

According to data analysis released by Zillow, 70% of prospective home-buyers frequently search for a home with their spouse or partner.

But when you are actually applying for the mortgage, should you & your spouse both apply as co-borrowers? Or, should you try qualifying for the mortgage on your own?

Education continues to be a distinguishing factor in the first-time homebuyer decision making process, so let’s start there.

Mortgage Definitions

Co-borrowing vs. Co-signing

It’s important to understand the differences between a Co-signer and a Co-borrower. Remember, if you have any additional questions, you can always call STEM Lending, and we will connect you with a mortgage specialist.

Co-Borrower: this is someone whose name is on loan documents along with yours. Both people are equally responsible to repay the loan in this situation. Taking both the primary and co-borrower’s income, assets and creditworthiness into consideration for the loan application may help qualify for a mortgage loan with better rates.

The co-borrower has what is called an “ownership interest” in the home or condominium you are looking to purchase. Co-borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower’s income, assets, liabilities, and credit history are considered in determining creditworthiness.

Co-Signer: a Co-signer is a person whose assets, income and creditworthiness are taken into consideration to help qualify you for a mortgage. Co-signers are liable to repay the loan, but they have no ownership interest in the house.

Co-borrowers

Obviously, having someone with a substantial credit history (ex. a parent, grand-parent, uncle, aunt) co-sign on the home loan can help you get a mortgage with the best interest rates. The benefit for the co-signer (aside from helping you buy your house) is that the regular monthly payments made by the homeowner reflects well on his/her credit report.

Co-signers are liable for repaying the mortgage obligation and must sign all documents with the exception of the security instruments. The co-signers income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the co-signer must complete and sign the loan application.

As you can see, the downside of co-signing a mortgage loan is the risk of default. If you (homeowner / occupier) cannot afford to make monthly payments, your co-signer is liable to repay the loan. This is an extremely important point for all parties to understand upfront.

Non-Occupant Co-Borrower

There is a third, but less known option — the “non-occupant co-borrower.”

A non-occupant co-borrower is a person who is co-borrowing on a home, but not living in it. Non-occupant co-borrowers are a step above co-signers — they’re “partners” in the home’s ownership. This person may be added to a mortgage loan to help you qualify for a mortgage. A non-occupying co-borrower is beneficial from an income or credit perspective.

Some lenders who allow non-occupant co-borrowers, such as Fannie Mae (HomeReady) and Freddie Mac and some conventional home lenders, require a non-occupant borrower to be a relative of the person who will be residing in the home. The non-occupant borrower must be related to you by blood, marriage or law to qualify as a co-borrower who will not reside in the home. FHA loan programs allow non-occupant co-borrowers for home buyers who have little or no income for income qualification so they can meet the necessary debt to income ratios.

As a non-occupant co-borrower, you get the same notices as the borrower so you know if they’re not paying on time; and, you put yourself in position to force a home sale if the primary borrower is not fulfilling their duties to your arrangement.

When you apply for your mortgage, just tell the lender that you’ll be using a non-occupant co-borrower on the loan. Your lender will know what to do.

Fact vs. Fiction

Many non-homeowners think that if they are married, applying for a mortgage as co-borrowers is a requirement: 

Applying for a mortgage as Co-Borrowers is NOT a requirement.

Another commonly held belief is that, by bringing a Co-borrower onto your loan application, you will always improve your chances of being approved.

However, it is crucial to understand that the federal agencies (Fannie Mae, Freddie Mac, Ginnie Mae) that oversee and buy loans from lenders will generally require lenders to use the lower scoring borrower’s credit score (specifically, the median score from  Experian, Equifax, or TransUnion credit reports) to underwrite the loan.

So, even if your co-borrower’s credit is well established and 780, if you have poor credit, it’s very possible that your co-borrower’s credit won’t help you in determining creditworthiness.

What’s the Right Move?

Ultimately, adding a co-borrower to your mortgage loan application will result in having your income history, assets, liabilities, and credit assessed for eligibility and creditworthiness. The interest rate you both are quoted and your overall eligibility will be influenced by each other’s personal financial history, so it’s always a good idea to strengthen your credit as much as possible before applying.

Since you will both have equal responsibility to repay the loan, if you choose to bring on a co-borrower or co-signer, make sure you understand the legal differences. Additionally, given that many co-borrowers are related or spouses, you should discuss what will transpire if things go south (e.g. divorce, sudden death, job transfer, etc…)

Again, for more information on your specific situation, shoot us an email at support@stemlending.com or visit www.stemlending.com for more details.