#1. Interest Rate 

Let’s cover one of the basics first. An interest rate is fundamental to all forms of lending. In its simplest form, interest is what you pay a lender to borrow money on top of your principal, or the original amount you borrow. While you’ll always pay back more than what you borrowed, a lower interest rate means you’ll pay back less “extra.”

A lot of things go into determining your specific interest rate, including the amount you’re borrowing, your down payment, your credit score and history, and the length (or term) of your loan. Oh, and market conditions. Market conditions can affect the environment around you—including whether or not you’re in a buyer’s or a seller’s market.

#2. Buyer’s/Seller’s Market

When you’re ready to buy a home, your real estate agent may tell you it’s either a “buyer’s market” or a “seller’s market.” The former, a buyer’s market, is better for you, the borrower, because it generally means there are more available homes than buyers, which means less competition and lower prices. The latter, a seller’s market, is more competitive—often leading to bidding wars and greater potential for losing out on the home you’ve had your eyes on due to increased competition.

In a seller’s market, where homeowners are looking for top dollar from buyers, it’s important to have a bona fide pre-approval from your lender. If you’re interested in knowing what you can afford to offer before you start your house hunt, get your free rate quote here. 

#3. Buydown

A buydown is related to both your interest rate and the market you find yourself in, and it allows borrowers to use cash to temporarily lower their interest rate for a set amount of time—usually one, two, or three years. For example, a 3-2-1 Buydown might allow you to lower your original rate by 3% during your first year of homeownership, 2% during your second, and 1% your third before going back to your initial interest rate.

How are buydowns paid for? There are different methods, but one of the most common is the application of seller or builder credits, issued at closing. So, for example, if your seller offers a $15,000 closing credit, you may be able to apply that cash to the purchase of a temporary buydown. In a high-rate environment or a buyer’s market, where sellers are under a little more pressure to sell, this option could save you thousands of dollars over the lifetime of your home loan.

#4. Closing Costs 

Speaking of closing credits, let’s go over closing costs. Closing costs typically include all of the different fees you’ll pay in addition to the price of your new home, like appraisal, attorney, escrow, and title fees, as well as credit report costs. More often than not, you’ll pay for those with one check at the end of your purchasing process (and they may be included in the same check you write for your down payment). 

A good lender can help you plan for those fees ahead of time to ensure you have the cash set aside when the time comes to spend it.

#5. Equity 

Equity is the overall value of your home, minus your remaining mortgage balance. Like interest rates, your home’s value may fluctuate over time with market conditions, but as long as you owe less than what the property is worth, you’ll have equity. 

Like interest rates, your home’s value may fluctuate over time with market conditions, but as long as you owe less than what the property is worth, you’ll have equity.

For example, if your home is worth $400,000 and your mortgage balance is $300,000, you’d have $100,000 in equity. You can increase your home’s value and subsequent equity by paying down the balance, or by remodeling or renovating the property. 

Did you know that a mid-range kitchen remodel has a return on investment of almost 60%? According to Zillow, a $64,000 remodel can add almost $38,000 of value to your home. 

For additional ideas, check out another of one of our recent blogs, The Renovating a House Checklist You Absolutely Can’t Skip.

#6. Loan-to-Value (LTV) 

LTV, or loan-to-value, is a ratio used to describe the overall size of your loan versus the value of the home you’re buying. It will always be expressed as a percentage and comes from dividing the loan size by the home’s value. LTV is critical in determining your loan options, borrowing power, down payment, and whether or not you’ll need to pay private mortgage insurance (PMI).

Some home loans will require an LTV of 97.5%, which means you’ll need to put down just 3.5%. Other home loans require an LTV of 95% or less, which will require a higher down payment. Remember this general rule of thumb: The higher your down payment, the lower your LTV. 

Remember this general rule of thumb: The higher your down payment, the lower your LTV. 

#7. Debt-to-Income (DTI) 

DTI, or the debt-to-income ratio, is the percentage of your gross monthly income that’s used to pay monthly debts, and it helps lenders determine how much of a risk you are. Borrowers with a low DTI are generally seen as better with money management, and therefore less risky. The exact formula for calculating front-end DTI is:

DTI = (Expenses ​/ Gross Monthly Income) x 100

DTI is often split into two forms: Front-end and back-end. 

• Front-end DTI compares the cost of your living expenses (i.e. rent or mortgage) to your gross monthly income.
  • If your mortgage payment is $1,500 and your gross monthly income is $6,000, your front-end DTI would be 25%. 

• Back-end DTI includes other financial obligations, like credit card payments, student loans, car payments, child support, alimony, and more.
  • If your monthly debts amount to $825 and your gross monthly income is $4,750, your back-end DTI would be 17%. 

So what’s a “good” debt-to-income ratio? We cover that in depth in this blog, but a lower DTI is always better. Different mortgages have different debt-to-income requirements, and lenders may have additional requirements beyond that to help mitigate risk. 

#8. Funding Fees

Funding fees, like closing costs, are fees that borrowers pay to fund the loan and protect lenders from loss. Government loans like VA and FHA loans have funding fees, but those may be waived depending on individual loan circumstances. Your loan originator can help you find out if waivers are available for your specific loan type.

#9. Loan Originator

Speaking of loan originators, these professionals are different from mortgage brokers, because they’re representatives of the financial institution that’s helping buyers with the mortgage application process. A mortgage broker, on the other hand, is a licensed professional who works on your behalf to secure financing. 

Basically, a loan originator works for a lender and a broker is an independent agent. 

#10. Underwriting 

Once your application is complete and submitted (but before you get keys at the closing table), you’ll go through underwriting. Underwriting is the process lenders use to assess an applicant’s income, assets, credit, and risk. 

During this process, lenders comb through your personal information and financial records to determine whether or not you qualify for a loan. They’ll determine your LTV, your DTI, your interest rate, and your closing costs, so it’s important to get your affairs in order well ahead of time to ensure the process isn’t held up. 

Did these mortgage definitions help you better understand the mortgage process? Is there anything else we can clarify for you? Let us know on social media, check out our full glossary, or get in touch with one of our experts for more information. We’re always here to help!

The post Home Buying, Defined: 10 Mortgage Definitions You Need to Know appeared first on Cardinal Financial.

Should I buy a house? 10 reasons to say “Yes”

• Long-term stability
• Room to grow
• More privacy
• Control over your space
• Consistent budgeting
• Ability to build home equity
• More potential tax benefits
• Opportunities to grow your credit score
• Unique financing options to fit your lifestyle
• Potential to refinance for better terms down the line

1. Long-term stability

If you’re not ready to put down roots, renting can often be the best fit for you. But when you find the place you can see yourself living for the long term, you can’t beat the stability of homeownership. Depending on your loan terms, a mortgage is typically a 15 to 30-year commitment. Even if you sell your home before the mortgage term is complete, it takes at least a few years of staying put for your home loan to be a good investment. That’s years of getting to know your community, settling into your space, and not living with one foot out the door wondering where you’ll live next.

2. Room to grow

Kids. Pets. Plants. Whatever you want more space for, owning a home can deliver. And while apartments are limited to the square footage on your lease, your home has the potential for additions and renovations when your needs change (and if you do decide to renovate, there’s a loan for that).

3. More privacy

Sharing a wall with neighbors is, as the kids say, “not it.” One of the biggest benefits of owning a home is the privacy of a space that’s truly yours, both indoors and out. Especially with more people working from home, having your own quiet, dedicated space is a game changer.

4. Control over your space

One of the biggest downsides of renting is having to leave the space as you found it when you move out. You also have to adhere to the landlord’s policies. When you own your home, you can decorate it however you want, fill it with as many pets as you want, and generally make it feel like home. Just keep in mind that if your neighborhood has an HOA, they may have a few guidelines you’ll need to follow.

5. Consistent budgeting

If you’ve been renting long enough, you’ve probably noticed that rent rises every time you renew your lease. Between that and miscellaneous amenity fees and utilities, it can be hard to budget consistently when you rent. With a fixed-rate mortgage, you can rely on the same monthly payment due every time, until you pay off the loan or refinance for a new rate.

6. Ability to build home equity

This is one of our favorites. Home equity is the amount of your mortgage that you’ve paid off. In other words, the percentage of your home that you own. Unlike monthly rent, every payment you make on your mortgage gets you closer to paying it off entirely, all while your home equity keeps accumulating. And even though renovations may seem expensive upfront, those actually boost your home equity, too. If you need to, you can also leverage your home equity for more flexible funds with a cash-out refinance.*

7. More potential tax benefits

Taxes aren’t anyone’s favorite subject, but you’ll want to hear this one. When you switch from renting to homeownership, you could potentially qualify for more tax benefits like:

• Mortgage interest (applies to the interest paid on the first $750,000 of your home loan)
• Discount points (pre-paid interest on your mortgage)
• Property taxes (exact amount depends on where you live)

How much you can actually write off will depend on your unique financing situation.**

8. Opportunities to grow your credit score

Not only are there plenty of home loans that don’t require a high credit score, but each monthly payment you make helps improve your credit history. You can even leverage that healthier score down the line to get better terms when you refinance your mortgage. Win-win.

Pro Tip: Got credit challenges? We’ve got strategies to help you navigate them here.

9. Unique financing options to fit your lifestyle

Rent is, well, rent. Not much about it changes regardless of your circumstances. When you apply for a home loan, you can choose from a wide variety of mortgages that are actually built for your unique goals. For example, many first-time home buyers enjoy the flexible down payment and credit requirements that FHA loans offer. If you’re not quite ready to take on a house, a condo loan is a great way to transition. And if you qualify, VA loans offer some of the best benefits around.

10. Potential to refinance for better terms down the line

Even though a mortgage is a big commitment, it’s actually more flexible than you think. The rates you have now don’t necessarily have to be the rates you have forever. As you build home equity and credit, you can eventually leverage that to refinance your loan for different rates or cash out. You can even refinance to a different mortgage type altogether (from FHA to Conventional loan is a popular route).

Are there any reasons I should NOT buy a house?

The answer to “Should I buy a house?” really comes down to whether or not the timing is right for you. A mortgage can involve more upfront costs than renting, and a home loan application is a lot more involved than applying for a rental. When you own, you’re also responsible for any maintenance issues that arise. So, if the flexibility of renting still outweighs the commitment of a home purchase, now might not be the right time for you. Just remember that even if you’re not looking to buy a home now, it’s never too early to start planning for it.

*Using your home equity to pay off debts or make other purchases does not eliminate the debt or the cost of the purchases, but rather increases the loan amount of your mortgage to be paid according to your new mortgage terms.

**This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

The post Should I Buy a House? 10 Benefits of Owning a Home appeared first on Cardinal Financial.

10 Tips for Refinancing a Home Loan

• Calculate your savings
• Consider your home equity
• Make a plan to pay off your loan
• Get to know the refinance process
• Get multiple refinance quotes
• Do the math before deciding to buy down your rate
• Factor fees and closing costs into your refinance budget
• Read your closing documents carefully
• Find small ways to cut costs
• Weigh the pros and cons of staying with your current lender or getting a new one

1. Calculate your savings

Will refinancing a home loan actually save you money? A simple budgeting tip for refinancing your home loan is to use a refinance calculator. It factors in your original loan amount, APR, and term; your new loan amount, APR, and term; and various fees associated with the transaction to come up with an estimated new monthly payment and savings. The right calculator can help you shop for the right loan, give you a good idea of what to expect, and calculate how long it might take you to recover from the costs of refinancing. Doing your own research can be beneficial, but keep in mind this is an estimate. You’ll have a better idea of your real payment and costs once you get in touch with a loan originator.

Pro Tip: Many Borrowers tend to think refinancing is all about the rate, but we recommend focusing on your savings (or, for cash-out refinances, the amount of equity you’re tapping into).

2. Consider your home equity

No matter your refinance goals, your home equity is key to reaching them. The more equity you have in your home, the easier it is to refinance. With the exception of a few loan programs, most lenders will verify that you have at least a small amount of equity in order to refinance. That doesn’t mean a lack of equity should keep you from applying though! There are loan programs, like the FHA Streamline refinance, that are built especially for homeowners with little to no equity in their homes. Ask your loan originator about refinancing options for homeowners with low equity if you think you’ll have trouble refinancing.

3. Make a plan to pay off your loan

Once you’ve decided that refinancing is a financially wise decision, it’s time to sit down and figure out how you’ll pay back the loan. Your long-term mortgage plans aren’t just about your rate. Talk with your financial advisor and come up with a plan to pay off the loan that leaves room for your other living expenses. Don’t rely on unpredictable income like tax refunds or employment bonuses to reach your payment goals. You can still use these to make additional payments, just think of them as a “nice to have” in your plan rather than essential.

4. Get to know the refinance process

Refinancing can be a quicker process than a home purchase, especially if you get a streamline refi. However, most of the steps of the process still apply. You’ll want to consult your loan originator before you take out a line of credit, change jobs, transfer large sums of money, or make any other major financial decisions. 

Pro Tip: Watch this video for an overview of the refi process.

5. Get multiple refinance quotes

Don’t be afraid to chat with a few different mortgage lenders and get a loan estimate from everyone you talk to. A loan estimate outlines the offer the lender is willing to make in detail, which allows you to make a clear comparison between offers so you can more easily decide which lender to choose.

6. Do the math before you decide to buy down your rate

These days, the average time an individual owns their home is often shorter than the time it would take them to recuperate the closing costs. If you choose to buy down your rate, there are many tools available online that can help you do the math. And, as always, your loan originator should be able to calculate this for you over the phone, so consider giving them a call.

7. Factor fees and closing costs into your refinance budget

When you’re refinancing a home loan, you have to pay many of the same fees you would with a home purchase. Property taxes, homeowners insurance, and closing costs are just a few of these fees. Make sure you set aside some money to cover these expenses at closing.

8. Read your closing documents carefully

Don’t just sign your closing documents—review them carefully. After all the moving parts of the refinance process have settled, it’s possible that there may be a mistake or two on your closing documents. Mortgage lenders are legally required to give you a closing disclosure before you reach the closing table. Take the opportunity to make sure these documents represent the offer you agreed upon at the beginning of the refinance process. 

9. Find small ways to cut costs

When it comes to lowering your refinance costs, every little bit helps. So, one of the most timeless tips for refinancing a home loan is to look for small ways to cut costs. For example, some lenders allow lower monthly payments when you opt-in to auto-pay instead of paying manually each month. Other potential ways to save could include:

• Timing your refi to the market. When rates are low, take advantage!
• Getting a streamline refi to avoid appraisal fees
• Avoid big purchases before applying to keep your credit score where you want it

10. Weigh the pros and cons of staying with your current lender or getting a new one

Deciding whether to stick with your lender or choose a new one for your refinance is up to you. On one hand, a new lender might be more incentivized to offer you lower rates. On the other hand, sticking with your current lender means they already have all your mortgage history available, which can help you speed up the process. And if you’ve taken out an FHA or VA loan and plan to refinance to the same loan type, your current lender can help you streamline your refi. This typically means less paperwork, no appraisal required, and faster turn times.

If all this sounds like a lot to consider, don’t worry! You made it through purchasing a home, and your refinance is within reach, too. And if you have any questions or concerns, we’re here to help.

The post 10 Tips for Refinancing Your Home Loan appeared first on Cardinal Financial.

SPEAKING WITH YOUR FINANCIAL ADVISER IN ADDITION TO YOUR MORTGAGE LENDER IS THE BEST WAY TO HELP YOU ANSWER YOUR REFINANCE QUESTIONS AND DECIDE IF YOU’RE IN A POSITION TO REFINANCE YOUR HOME LOAN.

There are several different ways to refinance your mortgage and each has its merits. To know which refinance method you should choose you’ll have to ask yourself some questions. You’ve got plans; now you just need to figure out how to get there. And it’s important to note that your plans will largely dictate the type of refinancing that’s best for you. Here, we’ve listed seven refinance questions to get your mind moving in the right direction—and to prepare you for future conversations about it with your lender.

1. how long do I plan on living in my current home?

How long you plan on living in your current home is a crucial factor when picking the optimal time to refinance. You’ll want to calculate when you’ll break even, because when you break even, the savings finally outweigh the costs. (Not sure when you’ll break even? Use our refinance calculator to find out.) For example, let’s say you plan on living in your home for at least five years and, based on your calculations, you expect to break even at 17 months. In that case, it’s probably worth it to stay in your home and reap the savings.

2. am I trying to lower my interest rate?

Currently, rates are on the rise, so if you bought your house in the last few years, it probably won’t save you any money to refinance now. However, if you purchased your home more than a decade ago and have not refinanced in the last 10 years, rates are probably low enough for a refinance to make sense. In the case of trying to lower your mortgage interest rate, you’ll want to check with your lender—they’ll be able to tell if you can get in at a lower rate.

3. do I want to pay off debt?

Trying to pay off other debt? Refinancing could free up some money you’d normally put toward your monthly mortgage payment. Have you heard of cash-out refinancing? With a cash-out refinance, you could borrow against your home equity and pay off some debt. Cash-out refinancing is also a popular option for homeowners looking to consolidate debt. If you have debt in multiple areas, a cash-out refinance would combine all of it into one convenient payment, giving you more disposable income.

4. should I tap into my home equity to make a big purchase?

Fourth on our list of refinance questions to ask yourself is about equity. Are you looking to make a big purchase in the near future? Maybe you have your eye on a new car or new furniture. Did you know you could fund that purchase with your home equity? Or maybe your kid is going off to college in the fall. You could refinance and put that cash from your home equity toward tuition, books, or school supplies. Got landscaping or home renovation plans? You could pay for those plans debt-free by refinancing your mortgage and tapping into your home equity. Sounds great—we know. But here’s the kicker: you can only borrow against your home equity up to 80%, meaning you have to retain at least 20% equity in your home after you refinance.

5. should I use my home equity to invest in a rental property?

We get it. You got bit by the investment bug. In this year’s competitive market, it might seem appealing to dive into all the excitement and purchase your own investment property. There’s good news! You could refinance and put your home equity toward buying a rental property. Especially when you’re trying to make money off this property, using your home equity to buy it in the first place only helps to offset the costs. Bet you didn’t know you could do that with a home loan refinance!

6. do I want to shorten my loan term so I can own my home debt-free, sooner?

Is 30 years too long for you? Just can’t wait that long? If you’re itching to get rid of your mortgage debt sooner, you could refinance for a shorter term. This is a popular option for older borrowers who are eager to own their home debt-free for some time and are planning on passing it down to children or grandchildren. But, if that’s not the life stage you’re in, you might just want to enjoy the benefits of a mortgage payment that’s only made up of taxes and insurance. It’s still a mortgage bill, but one that’s significantly cheaper, giving you more financial wiggle room!

7. am I in a position to take on costs associated with refinancing?

If, after you’ve asked yourself all of these refinance questions, everything sounds great so far, we have one more question for you: can you afford the costs associated with refinancing? It almost seems counterintuitive that refinancing to save money would cost you money, but remember the refinance process is similar to purchasing a home in that there are still various fees associated with the transaction. Things like appraisal fees, title fees, and closing costs still apply. No, you’re not having to come to the closing table with a big down payment, but you will have some up-front costs to pay. Good thing Cardinal Financial is on your side. If you’re a Cardinal Financial customer, ask us about fees we waive for our repeat customers!

In sum, this list of refinance questions is not exhaustive, but it should at least provide a starting point and get you thinking in the right direction. Check out our other refi blog posts below for additional insight!

Know a friend or relative who needs to ask themselves these refinance questions? Share it with them on social media!

The post 7 Refinance Questions to Ask Yourself appeared first on Cardinal Financial.

Homeowners: Close your eyes and picture your house. Got it? OK, now imagine it again, this time as a giant piggy bank with a roof, a chimney, a front door—the works. What if we told you that this isn’t just your imagination, it’s a metaphorical possibility: You could transform your home equity into cash with a cash-out refinance. Are you curious? Read on.

What is a cash-out refinance?

Refinancing is the process of replacing your original home loan with a new one, that may include a new interest rate and loan term. Refinancing can help you consolidate your debt, gain financial stability, oftentimes lower your interest rate, potentially pay off your mortgage sooner, and even get cash out. If those are benefits that catch your attention, stick with us here because it’s about to get interesting.

A cash-out refinance happens when the borrower refinances for more than the amount owed and pockets the difference. This allows you to tap into your home’s equity and turn it into hard cash. Now we’re talking.

What is equity?

If equity is one of those financial terms that you’ve heard before but don’t quite understand, allow us to define it for you: Home equity is the value of a house or property that represents the current market value of the house against its remaining mortgage payments (not including interest). This equity would increase over time if the market value of the property appreciates and as mortgage payments continue to be made.

Let’s break it down even more. Seven years ago, you bought your house for $100,000 and now it’s worth $200,000. You could refinance the house and take cash out for it now that it’s worth more than it was seven years ago.

Even though we’re talking about home equity, don’t confuse a cash-out refinance with a home equity loan or a home equity line of credit (HELOC). These seemingly overlapping terms are actually quite different. A home equity loan or line of credit is its own lien on the property (this would be in addition to your current mortgage if you have one already. Neither of these replaces or changes the terms of your current home mortgage). Conversely, a cash-out refinance is a loan that would replace the terms on your current mortgage. All of these options give you a chance to consider taking advantage of potentially better loan terms with the additional equity that has been accumulated.

What are the benefits?

In the midst of this giving season, debt consolidation sounds pretty attractive—and it’s a major benefit to cash-out refinancing that entices many homeowners. Take advantage of other benefits to this kind of refinance and make practical improvements to your home, like installing a new furnace, replacing a broken dishwasher, or fixing damaged parts of your roof.

If you’re looking to make your home a little more visually appealing, use your cash-out refi to remodel your master bathroom or get those butcher block countertops that are so popular right now. If you wait until the spring to do a cash-out refi, you could pay to have those unsightly shrubs removed from your front lawn or start building that dreamy pergola you’ve always wanted.

You can use the cash from your cash-out refinance any way you want, but many refinancers use this money for home improvement projects like landscaping or remodeling.

What’s the catch?

While cash-out refinancing may sound like music to your ears, we can’t call it a perfect solution. Be advised that lenders usually limit the amount of equity that you can take out of your home. Give us a call to find out if you should take advantage of a cash-out refinance.

The post What You Need to Know About Cash-Out Refinancing appeared first on Cardinal Financial.