Unless you like to move a lot, are a real estate agent, or loan advisor, it can be challenging to navigate the world of mortgages.
When it comes to mortgages, you have to deal with industry jargon from the onset. Therefore, it pays to educate yourself to understand how mortgages work, the common jargon, and strategies that you can employ to get the best deal.
Read on for an overview of mortgages and what you should know before signing a contract with a lender.
Choosing the Right Mortgage
Just like you’ll spend a lot of time evaluating various houses to find the perfect one for your family, so should be the case with a mortgage. Finding the right mortgage is all about doing your homework well.
To begin, search online for lenders that you can approach. Look at their ratings and reviews to know what to expect. Here are the important things to check:
Lender’s Track Record
The last thing you would want is to choose a lender who does not come through for you at the closing time. When it’s just hours before closing, you should already have gotten approval from the lender. If not, you may miss the closing date, and the seller can pull out of the offer.
Check reviews of the prospective lenders to find out what people are saying about their track record for closing dates. Top lenders can get a buyer’s final approval less than a week before the closing date. Some lenders also offer a closing guarantee, i.e., if they miss the closing date, they’ll pay you a certain amount of money.
Check the Lender’s Fees
Find out all the fees that you’ll pay for the mortgage. Some lenders charge extra fees like flood certification, tax service, credit report, mortgage application, underwriting, and processing fees. Since you will be paying for the house, you do not want additional expenses in the form of extra fees.
Ask the lender about fees upfront. The total fees are usually indicated in the mortgage contract. Get a copy of the contract and go through it to understand your fee obligations. You can also hire a real estate attorney to help you interpret the fees outlined in the contract.
Check the Lender’s Reviews
Look at the reviews of the top lenders you are considering taking a mortgage from. Some lenders may be offering really low rates but have less than stellar reviews. Choosing such lenders will be a bad move.
Given how stressing the home-buying process is, you don’t want a lender that is not communicating or will miss your closing date. Choose a lender with top-notch customer service.
What is an Underwater Mortgage?
When you have a mortgage, the last thing you would want is to be underwater on it, i.e., owing more than the worth of your home.
When you get underwater on your mortgage, it’s easy to be stressed and overwhelmed. However, there are several strategies that you can employ to manage the underwater mortgage:
Do You Have an Underwater Mortgage?
Follow the steps below to determine if you have an underwater mortgage:
- Find out how much you still owe on your mortgage. Check your most recent mortgage statement or your account online to know how much balance you owe. You can also contact your lender directly to inquire about how much you still owe.
- Find out the value of your home. You can determine the worth of your home through different strategies. Some of the strategies will produce a more accurate value than others. If you are simply looking for an estimate of the home, ask a local real estate agent for prices of similar homes in the neighborhood. For more accurate results, you’ll need to get the house appraised.
- Subtract the amount you owe from the current value of your home. For example, if your current mortgage balance is $300,000, but the value of your home is just 200,000, then you are underwater on your home by $100,000.
How to Manage an Underwater Mortgage
Being underwater on your mortgage can be overwhelming. However, there are various options you can pursue than can turn things around:
i) Build more equity in your home
First, you can opt to stay in the house and build more equity. Paying off your home slowly takes a lot of discipline and patience. You may need to increase your income so that you can save more to put towards the mortgage payment. Depending on your situation, you can also trim your budget down to the basics, and allocate the extra income for the mortgage payment.
ii) Refinance your mortgage
It is impossible to refinance your house when you have an underwater mortgage. Most lenders will not offer you a refinance loan unless you have built at least 20% equity in your home.
However, if you have an underwater mortgage, consider the HARP program. Through the program, homeowners that are upside down on their homes can qualify for refinancing.
To qualify for refinancing under the HARP program, you must have been made on-time mortgage payments over the past six months. Moreover, you must not have been late with more than one payment over the last 12 months.
Keep in mind that the HARP program only applies for homeowners who took loans before May 31, 2009, and have built less than 20% equity.
iii) Sell your house
The other option you have is to sell your house and use the money you get to pay the outstanding mortgage amount.
If you choose this option, timing will be everything. For example, if you sell your home while its value is down, you will lose money. When you are underwater, the only way you can sell your home through the normal process is by having extra cash on hand. You’ll need the cash to make up for the difference between your mortgage balance and the current value of your home.
Selling your home to address the underwater situation can work, but is not the ideal option.
The above is an overview of how to choose the right mortgage and address an underwater mortgage situation.