Dreaming of shedding years off your mortgage and saving a ton on interest? You’re not alone. From millennials and Gen Z to those who are preparing to retire, many homeowners are prioritizing early mortgage payoff. Here we’ll explore powerful techniques to pay off a mortgage early like biweekly payments, lump sum payments, and even the potential of mortgage refinance. We’ll answer all your burning questions, like “Is it really better to pay off my mortgage early or invest?” Let’s unveil the best ways to pay off your mortgage early and help you craft a personalized plan for financial freedom.

Why Pay Down your Mortgage Faster?

Now that you’re a homeowner, you aren’t paying your landlord’s mortgage and instead you’re building equity in your own place. Now picture yourself with that same home and free from a monthly mortgage payment, with the financial freedom to invest, travel, retire, or just breathe a little easier. That’s the magic of early payoff.

What are some advantages to paying off your mortgage early?

  • Save Money on Interest: The longer it takes to pay off a loan, the more interest is paid over that time. Early payoff can mean tens or even hundreds of thousands saved in the long run (depending on loan size).
  • Fast-Track to Financial Freedom: Being mortgage-free means a significant chunk of your income is freed up. Depending on your investment strategy, this could allow you to invest more aggressively, save additional money for retirement sooner, or simply enjoy a more comfortable lifestyle.
  • Tap Into your Home Equity: A larger dent in your mortgage balance increases your equity. Your home’s equity can be a valuable resource for unexpected expenses or home improvements.
  • Peace of Mind, Priceless: There’s a priceless serenity that comes with knowing your home is truly yours, with no monthly payment hanging over your head.

What is the Best Way to Pay Off Your Mortgage Early?

There’s no one-size-fits-all approach to early mortgage payoff. The ideal strategy depends on your financial situation, risk tolerance, and long-term goals. Consider these factors when creating your plan:

  • Current Financial Situation: Analyze your income, expenses, and existing debt to determine how much extra you can comfortably allocate towards your mortgage.
  • Risk Tolerance: Are you comfortable with a potentially tighter budget in exchange for faster payoff?
  • Long-Term Goals: Do you prioritize early financial freedom or are there other financial goals you want to focus on?

Once you’ve considered these factors, you can choose the strategies that best suit you.

Understanding Principal Vs. Interest

Before we delve into specific strategies, let’s solidify the role of interest vs principal in your mortgage payment. This is key to maximizing your payoff efforts.

  • Interest: The fee you pay for borrowing money (expressed as APR).
  • Principal: This is the actual amount of money you borrowed for your mortgage to purchase the home.
  • Amortization: The calculation of how your loan is paid down over a specific amount of time when regular payments are made.

Note: There are other costs added to your total monthly mortgage payment (local property taxes, homeowners insurance, HOA fees, etc.), but we’re only discussing principal and interest right now.

Every monthly payment is divided between interest and principal. In the early years of your loan, a larger chunk goes towards interest, with a smaller amount chipping away at your principal balance.

Interest vs payment sample graph. This shows the correlation between interest and principal to make up a total, fixed-rate monthly payment over the amortization period. Early mortgage payoff means more interest saved over the life of the mortgage.

Example: For simplicity, let’s imagine your monthly Principal and Interest (P&I) payment is $1,000. Every loan is amortized over time, meaning monthly payments are split between principal and interest, reducing the loan balance over the span of your loan term. In the beginning, maybe $700 goes to interest and only $300 reduces your loan amount. The next month, your overall principal is reduced by $300 and the interest is now calculated upon your new, lower balance. That’s why early payoff is so powerful – it allows you to pay down the principal faster, reducing the overall interest you pay over time.

Related: Take a look at our amortization calculator.

Strategies for Early Mortgage Payoff

Pro Tip: Before changing your payment strategy, confirm if your mortgage servicer allows extra principal payments without penalties. 

Alright, now that you’re armed with that knowledge, let’s explore some strategies to conquer your early mortgage pay-off strategy. Get ready, these may surprise you!

The Biweekly Mortgage Payment: 

One popular way that some homeowners pay down their principal more quickly is to make biweekly payments. Instead of paying one monthly payment, you pay half the payment every 2 weeks.

Here’s a simple example to show the power of a biweekly payment. Let’s say you have a home loan for $400,000 with a 7% interest rate on a 30-year mortgage. In the example below you would pay $139,850.33 less in interest over the life of the loan with biweekly mortgage payments than if you made standard monthly payments!

There are online calculators available to determine these payments, or we can talk and run the numbers for you!

How Does a Biweekly Mortgage Payment Work?

Because a year has 52 weeks, this works out to 26 biweekly payments. This essentially allows you to make 13 full payments a year instead of 12. That one extra payment really compounds over time! When you pay your principal balance down faster, there’s less money to charge interest on, which lowers the amount of overall interest paid.

Make an Additional Principal Payment

Similar to biweekly payments, you can make an extra payment towards the principal each month. Even a small amount can make a big difference over time. Let’s revisit our example: $400,000 loan at 7% interest with a 30-year loan term. If you consistently put an extra $500 towards the principal each month, you could save a significant amount of money on interest payments in the long run.

Additional Principal Payment

There are online calculators available to determine these payments, or we can chat and run the numbers for you!

Important! Be sure to clearly communicate to your lender that any extra payments should be applied to the principal, not interest. 

Rounding Up: Small Change, Big Impact

Don’t underestimate the power of small changes. Consider rounding up your monthly payment to the nearest hundred and applying the difference towards the principal. This might seem insignificant, but over the years, it can make a dent in your loan amount.

For example, rounding up a $1,950 payment to $2,000 translates to an extra $50 towards the principal each month. Over a 30-year loan term, that’s a total of an extra $18,000 you’ve put towards your loan principal and $18,000 less that interest has had to compound on!

Windfall Warrior: 

Tax refunds, bonuses, or unexpected financial windfalls can be powerful tools for early mortgage payoff. Instead of spending them all, consider putting all or part of that money towards a lump sum payment on your mortgage principal.

Let’s say you receive a hefty $5,000 tax refund. Putting that entire amount towards your principal can significantly decrease your loan balance, reducing your future interest payments.

More Early Payoff Strategies for the Ambitious Homeowner

Should I Refinance My Mortgage to Pay it Off Faster?

Refinancing your mortgage can be a strategic move for early payoff. It involves replacing your existing loan with a new one, typically with a shorter term (like a 15-year loan) and ideally a lower interest rate. For example, if you were to refinance and get a 2% lower interest rate, you could save thousands of dollars on interest over the life of the loan.

Another benefit of a shorter loan term: With a 15-year loan, you’ll be putting more money towards your principal balance each month. This allows you to pay off your house much faster and save on overall interest costs. While your monthly payment will increase because the loan term is shorter, it won’t double (which is a common misconception with shorter term mortgages).

Important to consider: There are closing costs associated with refinancing a mortgage. These upfront fees can be significant. Let’s discuss this to make sure the long-term savings from a lower interest rate outweigh the upfront costs of refinancing.

Purchasing with a 15-Year Fixed-Rate Mortgage Option:

If it fits well into your budget, a 15-year fixed-rate mortgage might be an option when purchasing a new home. While the monthly payments will be higher than a 30-year loan, you’ll build equity much faster and save a ton on interest in the long run. Let’s discuss your options and we can give you advice on what would be best for you with your personal budget and finances.

Related: Check out our calculator to compare 2 mortgage options!

 

Should I pay off my mortgage early or Invest?

It might not all be about “can I pay down my mortgage early?”, a better question might be “should I?”

  • Cash Flow Flexibility: Putting extra money towards your mortgage might mean tightening your belt in other areas. Make sure you have a solid budget and an emergency fund saved up before diving in. Financial experts recommend 3-6 months’ worth of your expenses set aside for an emergency.
  • Investment Opportunities: The money you put towards early payoff could potentially generate a higher return if invested elsewhere. However, the stock market has inherent risks, while paying off your mortgage guarantees a return in the form of saved interest. Let’s discuss this and talk with your financial advisor to discuss where your bucks will make the most bang!

Ultimately, the decision depends on your financial goals and risk tolerance, but it is important to know all of your options!

Own Your Future, One Payment at a Time

Remember, paying off your mortgage early is a marathon, not a sprint. Be patient, stay disciplined, and celebrate your milestones along the way.

Let’s talk! We can run all kinds of scenarios for you on your current and potential mortgage options. We’ll see how funds can be allocated and the long-term impact of those choices. We’d love to help you calculate your individual situation!



NFM Lending is not a Financial Advisor, Tax Advisor or Credit Repair Company. You should consult with a Financial Advisor, Tax Advisor or Credit Repair Company to learn more. Refinancing an existing loan may result in the total finance charges being higher over the life of the loan.

Tax Day has come and gone, but while tax season isn’t on most people’s list of “favorite day of the year”, there’s a light at the end of the tunnel: your tax refund! The average refund in 2023 was $2,753, and with that kind of windfall, a tropical getaway might seem tempting. But before you jump on a plane, let’s explore how you can leverage your tax refund. A down payment for a first-time homebuyer, or long-term goals like financial freedom and building generational wealth!

Can I Use my Tax Refund for a Down Payment?

Are you dreaming of homeownership? Using your tax refund for a home purchase could lead to several advantages when owning your first home! Here are some benefits to a larger down payment on your loan:

  • Lower Interest Rate: A larger down payment can qualify a first-time homebuyer for a more favorable interest rate on your mortgage.
  • Smoother Pre-Approval Process: A bigger down payment strengthens your financial standing. With less “risk” for a lender to consider, this can make the pre-approval process smoother.
  • Avoiding PMI: With a down payment of at least 20% of the home’s value, you will avoid private mortgage insurance (PMI), which adds to your monthly mortgage payment.
  • Lower monthly payment: This one might be a no-brainer, but a larger down payment means a smaller loan amount. Smaller loan amount equals smaller monthly payment!

Related: Down-payment assistance programs can help first-time homebuyers get started and increase your down payment!

How Much do I Need for a Down Payment on my First Home?

Down payment requirements vary by the type of loan you want to have. Lower down payment doesn’t always mean a better loan program; there are multiple different factors to decide which loan program is right for you. The best mortgage for a first-time homebuyer is the loan that you’re most qualified for. That will depend on several factors, including your debt-to-income ratio, credit score, and yes…down payment.

We take all of these factors into consideration and help you strategize between your options and choose the right one to fit your current and future goals.

Mortgage Types and Minimum Down Payments

 

Common Mortgage Types and Minimum Down Payment

 

Related: Check out our mortgage calculators to do the down payment math yourself!

It’s easy to see how a first-time homebuyer can use a tax refund for a down payment and boost their homebuying strategy, but what about people that already own a home? Other than using the funds for home renovations, how can you use your refund to set yourself up for a better future?

Can I Pay Down Principal or Refi with a Tax refund?

We understand the allure of a vacation, but here’s the thing: by putting your tax refund towards your mortgage, you’re essentially doing two things at once: saving money on interest payments in the long run and building equity in your home faster.

Your tax refund may also be able to help you pay fees associated with refinancing to save you money by:

  • Lowering your interest rate
  • Shortening your loan term (from 30yr to 15yr) 
  • Removing private mortgage insurance (PMI) that may have been required if your down payment wasn’t 20% or more of the cost of your home.

If you’ve decided to use your tax refund on your existing mortgage, there are a few ways to go about it:

1. Applying Tax Refund to Principal

A lump-sum payment directly to your principal balance shortens your loan term, builds equity, and ultimately saves you on interest. The more you pay down the principal, the more interest you save.

Keep in mind:

  • Ensure the payment goes towards your principal, not just a regular payment (principal + interest). 
  • Check for prepayment penalties – some mortgages have them for early large payments. Review your loan terms and talk to your lender if needed.
  • Some lenders might offer “loan recasting,” which recalculates your remaining loan term with the lower principal balance, potentially reducing your monthly payments.

If you’re looking for options to lower your monthly payments specifically, refinancing might be a good fit if rates have lowered since you first bought your home.

2. Using a Tax Refund for Refinancing Fees

Refinancing your mortgage means replacing your existing loan with a new one, potentially with a lower interest rate, better terms, or you could take cash out for projects or major life changes. Here’s where your tax refund can come in handy – it can help cover the refinancing fees, including closing costs and appraisals.

Is refinancing a good option for me?

  • Lower Interest Rates: Perhaps interest rates have dropped since you first took out your mortgage, offering an opportunity to save.
  • Improved Credit Score: If your credit score has improved significantly since the last time you bought a home, you might qualify for a lower interest rate.
  • Debt Reduction: Have you paid off other debts since buying your home? A lower debt-to-income ratio can improve your eligibility for a better interest rate.

Related: How Important is Credit Score When Buying a Home?

How much does a refinance cost?

While refinancing can save you money in the long run, there are upfront costs involved that you should consider. The Mortgage Reports estimates closing costs to range between 2-6% of your loan amount.

Here are some situations where refinancing might not be the best move for you:

  • Recently Closed Loan: Many lenders and loan programs have restrictions on how soon you can refinance after taking out a new mortgage. For almost everyone, you’ll want to wait 180 days before refinancing after your most recent loan began.
  • Minimal Interest Rate Drop: Aim for a rate reduction of at least 1.5-2% to make the refinancing process worthwhile compared to the cost.
  • Short-Term Ownership: If you plan to sell your home soon, refinancing might not make financial sense.
  • Longer Loan Term: Since a refinance is a new loan on the same property, you’ll be starting your loan term over again. A longer loan term might seem appealing for lower monthly payments, but it ultimately means paying more interest overall.

Not sure if refinancing is right for you? That’s why we’re here! Our team can do a complete cost analysis for you before you start the process, making sure you’re confident in your decision before taking the first step.

Boost Next Year’s Tax Refund

Let’s say your tax refund this year wasn’t quite enough to make a huge dent on your homeownership goals today. Don’t worry, there are still ways to optimize your tax situation for next year’s return, potentially putting more money back in your pocket to fuel your homeownership dreams.

Here are some key strategies to consider:

Tax Credits for Homeowners

  • Mortgage Credit Certificates (MCCs): These state-issued tax credits can be a game-changer, allowing you to claim a portion of your annual mortgage interest as a federal tax credit, effectively lowering your monthly payments.

Reach out to us to learn more about MCCs and eligibility requirements in your area!

Homeownership Tax Deductions

  • Mortgage Interest: You can typically deduct your mortgage interest payments up to a certain limit depending on your loan amount and filing status.
  • Mortgage Points: If you paid upfront points to lower your interest rate, you might be able to deduct them as well, subject to specific IRS qualifications.
  • Property Taxes: The property taxes you pay on your home are generally deductible. If you dedicate a specific space in your home exclusively for work purposes, you might be eligible to deduct a portion of your related expenses like utilities and internet. 
  • Home Office Expenses: If you dedicate a specific space in your home exclusively for work purposes, you might be eligible to deduct a portion of your related expenses like utilities and internet.
  • Find out more here: The IRS published a great resource for homeowners in 2023 regarding what you can and cannot deduct, MCC credit and other information.  

Keeping good records of your mortgage-related expenses is crucial. This includes your loan documents, receipts for points paid, and documentation of any home improvements you make.

It’s important to note that tax laws can be complex, and eligibility for deductions and credits can vary depending on your specific circumstances. Consulting with a tax professional is always recommended to ensure you’re taking advantage of all the benefits available to you and remaining compliant with federal tax law. We can help you explore these options, or get you in contact with a great Tax Advisor.

In Conclusion

By implementing these strategies and working with a trusted loan officer, you can turn your tax refund into a springboard for achieving your homeownership dreams. We’re here to guide you through every step of the journey, from maximizing your tax refund to navigating the mortgage process.

Get a no-cost pre-approval and explore down payment options for first-time homebuyers – click the Apply Now button above!

 

 

* NFM Lending is not a Financial Advisor, Tax Advisor or Credit Repair Company. You should consult with a Financial Advisor, Tax Advisor or Credit Repair Company to learn more. The pre-approval may be issued before or after a home is found. A pre-approval is an initial verification that the buyer has the income and assets to afford a home up to a certain amount. This means we have pulled credit, collected documents, verified assets, submitted the file to processing and underwriting, ordered verification of rent and employment, completed an analysis of credit, debt ratio and assets, and issued the pre-approval. The pre-approval is contingent upon no changes to financials and property approval/appraisal.

If you’re considering buying a home with an Accessory Dwelling Unit (ADU) or a property with ADU potential, or even adding one to your existing property, this is the article for you. Many Gen Z and millennial homebuyers are loving the idea of an Accessory Dwelling Unit to offset their mortgage with rental income through house-hacking. Other people may be interested in ADUs to gain extra living space for family, or with so many American’s working from home, added office space! There are tons of benefits to an Accessory Dwelling Unit and we’ll consider those and how you might go about owning one in this article.

What is an ADU?

ADUs are smaller secondary residential units on a single-family property. They typically feature a separate kitchen, bathroom, and entrance from the main house.

Types of Accessory Dwelling Units:

  • Apartment over garage
  • Garage conversion
  • Mother-in-law quarters
  • Backyard cottage
  • Granny flat
  • Prefab detached unit (Tiny home)

Who’s Building and Buying ADUs?

In today’s low-inventory housing market, ADUs are a great option for many people. Here are some reasons people build or buy properties with ADUs:

    • Expand living space: Create more space for family or extended family. Maybe a parent can live nearby with some privacy, or a grown child can return home without feeling cramped.

    • Downsize living: Move to a smaller space while staying on your property.

    • Home office or studio: Have a dedicated workspace conveniently located at home.

    • Offset mortgage or generate rental income: Some homeowners live in the main house and rent out the ADU to help pay the mortgage. Others choose to live in the ADU and rent out the main house.

Why are ADUs so Popular?

Making the Most of an ADU

ADUs are versatile spaces that can serve various purposes depending on your goals. Consider if you want more internal space (like a basement conversion) or more yard space. Do you aim for rental income? Maybe you want to downsize and live in the ADU while renting the main house?

    • Multigenerational Living: Many homeowners build ADUs for aging parents or adult children who need a place to live. ADUs offer privacy and independence while keeping loved ones close.

    • Rental Opportunities: With high housing demand, building an ADU for real estate investment can provide a steady income stream. Whether you choose long-term tenants or short-term vacation rentals, an ADU can help offset your mortgage or provide extra cash flow.

    • Short-Term Rentals and Airbnb: Especially in tourist areas, short-term rentals are a popular option for ADU owners. Listing your ADU on platforms like Airbnb allows you to tap into a growing market for unique accommodations. Short-term rentals offer flexibility and potentially higher rental rates during peak seasons. However, be sure to check local regulations and HOA rules regarding short-term rentals before pursuing this option.

    • Home Office or Workspace: If you work from home or need a dedicated space for hobbies, an ADU can be the perfect solution. Design the space to meet your specific needs and enjoy a separate area to focus on work or passions.

    • Guest Accommodations: An ADU can also function as a comfortable and private space for guests. Whether you have out-of-town friends or family visiting or want to offer a unique Airbnb experience, an ADU provides a welcoming place for guests to stay.

Does an ADU Add Value to Your Home?

Home improvement projects like kitchen updates, bathroom additions, and energy-efficient windows can increase your home’s value. Building an ADU is another great way to add value.

ADUs can be profitable in smaller cities and towns as well as urban areas, but provide another great benefit of affordable housing in places where it is highly sought after. A study from Porch showed that in large cities, properties with ADUs typically sell for 35% more than similar homes without them.

Increased Property Value and Rental Income Potential

    • Property Value: Constructing an ADU on your property typically increases the resale value of the property. An appraiser will consider the value of other homes with ADUs when appraising yours. Properties with ADUs often sell for a premium because they offer an income-producing unit and more total living space.

    • Rental Income: In addition to the added value of increased property value, ADUs can provide a steady stream of rental income, helping offset mortgage payments or providing extra cash flow. They can also offer more privacy than simply renting out a room in your main house.

Are There Downsides to an ADU?

There can be a few drawbacks to consider depending on the type of ADU you have, how you use it, and your expectations going in:

    • Space Limitations: ADUs are inherently smaller spaces, which may not be ideal for everyone.

    • Construction Costs: Building an ADU can be expensive, especially if it includes a kitchen, bathroom, and separate entrance.

    • Building and Zoning Regulations: There are zoning regulations and permitting processes to navigate when building an ADU.

    • Privacy Concerns: Depending on the layout of your property and ADU, there may be some privacy considerations for both you and your tenants.

    • Maintenance and Upkeep: Like any additional structure, an ADU requires maintenance and upkeep.

Does Adding an Accessory Dwelling Unit Increase Property Taxes?

Adding an ADU may increase your property taxes because it increases the value of your property. It’s recommended to reach out to your county assessor’s office beforehand to determine the potential tax impact. Consulting with an accountant or tax advisor can also be beneficial to discuss your specific situation.

Can an ADU Have a Separate Address?

Whether or not an ADU can have a separate address depends on your location. Here are some possibilities:

    • Half address or unit designation: Some homeowners use a ½ address or add “Unit B” or “Unit 2” to the existing main address.

    • Assigned address during permitting: In some states, an ADU is assigned an address during the building permitting process.

    • No separate address: In other states, the ADU may not be assigned a separate address.

ADU Zoning, Rules, and Regulations

Importance of Early Planning

Thinking about building an ADU requires early preparation for a smooth process. Zoning regulations and legal requirements are in place to ensure these projects align with the community’s planning goals. Cities and counties have varying approaches to ADUs;  Some actively encourage them for more housing options, while others have restrictions to protect existing neighborhoods. Understanding the specific rules in your desired location is crucial. Don’t assume what’s allowed elsewhere applies to your area!

    • Contact your local planning department. They are the ultimate authority on what you can and cannot build. Proactive research pays off. Before investing in design plans, consult the planning department to understand restrictions like minimum lot size, height limitations, allowable square footage, and any parking requirements. Some cities even have pre-approved ADU designs to streamline the process!

    • Partner with experienced professionals. Architects and builders well-versed in ADU construction are invaluable. They understand the nuances of the permitting process and can translate zoning code legalese into practical advice for your project. Their knowledge of local regulations can even help you explore creative design solutions that maximize your project’s potential while remaining fully compliant.

Working with Professionals: Contractors and Designers

To ensure your ADU meets all requirements and integrates seamlessly with your property, working with experienced contractors and designers specializing in ADU construction is essential. Here are some qualities to look for in professionals:

  • Licensed and insured
  • Experience building ADUs
  • Provide references and examples of their work
  • Understand local zoning laws and permitting requirements
  •  

Which Loan Types Allow for ADUs?

Financing an Accessory Dwelling Unit can vary depending on how you plan to use it. If you intend to use rental income from the ADU to offset your mortgage or qualify for a larger loan, many loan types will allow for current or projected rental income to be taken into consideration, while others don’t.

Loans That Allow Rental Income from ADUs

    • Conventional Loans: A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or US Department of Agriculture (USDA) loan programs). 

    • FHA Loans: The Federal Housing Administration (FHA) now allows homebuyers to use projected rental income from ADUs to qualify for mortgages on new construction, homes with existing ADUs, or renovations that include ADUs. Learn more about the new FHA financing policies as of 2023.

    • VA Loans: VA loans are offered by the Department of Veterans Affairs to help servicemembers, veterans, and their families buy homes.

    • Construction Loans: build a brand new home and include an ADU in the plans

    • Renovation Loans: From Fannie Mae HomeStyle, Freddie Mac Choice Renovation and FHA 203(k) a renovation loan can act as a bridge between what a property is now, and what it could be with a bit of extra work.

Loans You Can’t Use Rental Income from ADUs to Qualify

USDA Loans: If you’re looking to buy a home outside of a big city, with no down payment, a USDA home loan is a great option. However, you cannot use rental income from an Accessory Dwelling Unit on the property to qualify for the mortgage. With a USDA loan, you would be better off using the ADU for single-family living, multigenerational living situations, or an office/additional space for those residing in the main unit.

Considering the Next Steps with an ADU

If you’re interested in exploring the possibility of adding an Accessory Dwelling Unit to a property you’d like to buy, or purchasing a property with an Accessory Dwelling Unit already onsite, here are some next steps:

    • Get Preapproved! As a home mortgage lender near you, I’m excited to explore if buying a property with an ADU, or building onto an existing property is right for your goals. Together we can determine the budget for your plan and we can guide you through your next steps. We’ll also discuss which loan options are available to you based on your financial situation and how you plan to use the ADU.

    • Talk to an Agent. If you haven’t yet talked to a real estate agent, we are happy to provide a recommendation. Someone who is experienced in buying or selling income producing properties including ADUs will have a ton of knowledge and info to give you. They can guide you around potential pitfalls before you even start searching for the right property.

    • Research local zoning regulations and permitting processes. Contact your local planning department to learn about the specific requirements in your area.

    • Consult with a qualified architect or builder experienced in ADU construction. They can help you assess the feasibility of your project and navigate the design and permitting process.

By carefully considering these factors and taking the necessary steps, you can determine if an Accessory Dwelling Unit is the right fit for you and unlock the potential value and functionality it can add to your current or future property.

 

If you’re in the market for a new home, you’re probably keeping an eye on the current interest rates. When rates are low, it can be easier to jump into the homebuying process, but not so much when rates are high. Fortunately, if you’re ready to buy a home now, there’s something you may be able to do to pave the way for more manageable mortgage payments, regardless of what the market is up to. One of these handy strategies is called a Temporary Buydown.

Explaining Temporary Buydown Mortgages

A Temporary Buydown is an option where a buyer is able to temporarily reduce the interest rate on their new loan, in exchange for a one-time fee at closing. This tactic can give a homebuyer some breathing room and help ease into the full mortgage payment through the first few years of the loan, especially in a high interest rate environment.

How does a Temporary Buydown Work?

There are different buydown options, each offering a specific reduction in interest rate for a set period.

 

At NFM, we offer three different types of temporary buydowns:

  • 1 Year Buydown (1-0 ): This option allows for the effective rate of interest paid by the buyer to decrease by 1% for the first year of the mortgage loan.
  • 2 Year Buydown (2-1): The option allows for the effective rate of interest paid by the buyer to decrease by 2% for the first year of the mortgage loan and 1% for the second year.
  • 3 Year Buydown (3-2-1): This option allows for the effective rate of interest paid by the buyer to decrease by 3% for the first year of the mortgage loan, 2% for the second year and 1% for the third year.
Table chart showing a yearly comparison between a 3 year temporary buydown, 2 year temporary buydown, and 1 year temporary buydown. For each type of buydown, the chart shows the reduced interest rate payment a borrower would make for each year of the buydown period.

Temporary Buydown Example

Let’s say you secure an 8% interest rate on a 30-year fixed-rate mortgage with a 3 year buydown (3-2-1 buydown).

  • Year 1: Your payment will be based on a 5% interest rate (8% – 3% = 5%).
  • Year 2: You’ll make payments calculated at a 6% interest rate (8% – 2% = 6%).
  • Year 3: Your payments reflect a 7% interest rate (8% – 1% = 7%).
  • Year 4 onwards: Your monthly payments transition to the original 8% interest rate for the remaining loan term. 
A bar graph showing an example of a 3 year temporary buydown where the note rate begins at 8%. At year 1, the payment is based on a 5% interest rate. At year 2, the payment is based on a 6% interest rate. At year 3, the payment is based on a 7% interest rate. Then on year 4 and beyond, the payment is based on the original 8% interest rate.

So, for as long as you own the home, or until you refinance to a new loan with a potentially lower interest rate, you will continue to make the principal and interest payment based on this 8% rate.

Temporary Buydown Calculator

Use our temporary buydown calculator to estimate the cost and potential savings associated with different buydown scenarios. We can also discuss if this makes financial sense for you any time!

Who Pays for a Temporary Buydown?

There are several ways to fund a temporary buydown:

  • Seller/Builder Concession: Traditionally, sellers or builders will offer a temporary buydown as a seller concession to attract buyers, especially in a slow market.
  • Buyer Funded Buydown: You can choose to pay for the buydown yourself at closing. This might be a good option if you have the savings and want to lock in lower monthly payments in the early years of your loan.
  • Lender or Realtor Incentive: In some cases, lenders or real estate agents may offer a temporary buydown as part of a promotional package.

 

 

Funding and Cost Considerations

The party responsible for paying for the buydown pays the amount as a closing cost when the loan is funded. The amount is equal to the buyers interest savings. Meaning the difference between the final note rate and the agreed lower interest rate during the first years of the loan. 

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These funds are deposited into a custodial escrow account at closing. The loan servicer then draws from the account every month to make up the difference between the full loan payment and the discounted bill the homeowner is paying.

 

Temporary VS Permanent Buydown

While both options involve lowering your interest rate, temporary and permanent buydowns have key differences:

  • Reduction Amount: Temporary buydowns offer a more significant initial reduction (up to 3%) compared to permanent buydowns (typically 0.125% – 0.5%).
  • Loan Structure: Temporary buydown funds are held in an escrow account and used to supplement your monthly payments. In a permanent buydown, the lender reduces the loan amount itself.
  • Buyer Qualification: For a temporary buydown, you need to qualify for the full loan amount and original interest rate even though you’ll pay lower rates initially. Conversely, you only need to qualify for the reduced interest rate with a permanent buydown.
 

When is the best time to use a Temporary Buydown?

Temporary buydowns can be a good idea for first-time home buyers who are shocked by the speed at which mortgage rates have risen, and who will deplete their savings on the down payment and closing costs. The temporary payment reduction allows borrowers to replenish savings or spend the money on home upgrades.

The most favorable time to take advantage of a buydown is when the seller or builder is offering to contribute cash towards closing. Sometimes this can happen as an incentive to get a buyer to purchase their home or to encourage the purchase of a home in a newly built community. If this isn’t an option, a buyer can often still pay down the rate themselves. 

 

 

Final Thoughts

Now that you understand temporary buydowns, it’s crucial to weigh the pros and cons against your individual financial situation and homebuying goals. Consulting with a mortgage professional is the best way to determine if a temporary buydown aligns with your needs. They can assess your eligibility, calculate potential costs and savings, and guide you through the entire mortgage process.

Beyond temporary buydowns, there are other strategies to navigate the homebuying journey in today’s market. Our team of home loan experts is dedicated to helping you explore all your options. Additionally, check out our blog for informative articles on various mortgage programs, down payment assistance, and tips for first-time homebuyers.

 

Let us empower you to make informed decisions and turn your dream of homeownership into reality. Contact us today to schedule a free consultation!

*Reduction in payment is the result of builder or seller concessions used to buy down the rate and are not guaranteed by NFM Lending. 5% down payment is the responsibility of the borrower. Available for fixed-rate conventional, VA, USDA, and FHA loans. For new or existing home purchases only. 

We love helping Gen Z and millennials navigate the exciting world of homeownership. Let’s face it, between inflation, student loans, monthly bills and trying to go on vacation someday, saving for a down payment can feel like climbing Mount Everest in flip-flops. But what if there was a way to hack the system, own a piece of real estate and potentially live for free (or close to it)? Buckle up, because we’re diving into the world of house hacking strategies.

What is House Hacking?

Imagine this: you buy a nice duplex in a good area with two separate units. You live on one side, rent out the other, and – plot twist – that rent covers most, if not all, of your mortgage payment. That’s the magic of house hacking! It’s all about buying a multi-unit property (think duplexes, triplexes, or fourplexes) or a single-family home with a rentable space (like a finished basement or in-law suite). You live in one unit and rent out the others, turning your home into an income stream.

Benefits of House Hacking:

With so many young adults hoping to buy homes, and rent prices are brutal these days and house hacking offers a way to save money on your living expenses. Ideally, your rental income covers most of your mortgage payment, property taxes, and insurance (PITI). That translates to living for free (or very cheap) while building equity in your property – a major win-win! 

But house hacking goes beyond just saving money. It’s a springboard for ambitious young adults or anyone interested in financial independence. Here’s how:

    • Jumpstart Your Investment Journey: House hacking gives you valuable real estate experience. You learn the ropes of being a landlord, from screening tenants to managing minor repairs. This knowledge becomes a steppingstone for future real estate investments, allowing you to build wealth and diversify your income streams. It’s often said that the average millionaire has around 7 income streams. So, add rental income to your other income stream(s) and you’re one step closer to retirement!

    • Build Equity While You Live: Remember that house you’re living in? As you make mortgage payments and property values hopefully increase, you’re building equity – essentially ownership – in your property. This equity can be tapped into down the line for various purposes, like a bigger investment property, upgrading with renovations to your current property/properties, or even paying down consumer or student debts.

    • Become a Mini-Landlord Boss: House hacking equips you with valuable life skills. You’ll learn business budgeting basics to manage your property’s finances, hone your people skills when screening tenants, and even develop some DIY prowess for minor maintenance tasks.

House Hacking Strategies:

House hacking isn’t a one-size-fits-all strategy. The beauty lies in its flexibility. Here are some popular house hacking approaches to consider:

House Hacking with Roommates

Maybe you’re not quite ready to jump into managing a separate unit. House hacking with roommates is a fantastic way to test the waters. Here’s the idea: you find a single-family home with extra bedrooms and share it with responsible roommates. Their rent contribution significantly reduces your monthly housing costs, freeing up cash for other goals.

Pro Tip: When screening roommates, prioritize responsible individuals who align with your lifestyle. Open communication and clear house rules are key to a harmonious co-living experience.

Hacking a Multi-Unit Property

Ready to dive deeper? Look into multi-unit properties like duplexes, triplexes, or even fourplexes. These properties offer dedicated rental units that provide a more consistent and potentially higher rental income compared to roommates.  Live in one unit, rent out the others, and watch your rental income potentially cover a significant chunk of your mortgage payment.

Things to Consider: Multi-unit properties come with additional responsibilities like managing separate entrances and potentially maintaining shared yards. Make sure you’re comfortable with the extra workload before taking the plunge.

House Hacking with an ADU

Does your dream home have a finished basement or a separate in-law suite? An Accessory Dwelling Unit (ADU) could be your perfect house hacking setup. You could rent out the additional space for a steady income stream while still enjoying the privacy of your main living area.

Keep in Mind:  Pay attention to local zoning and permit regulations for specific requirements for renting out any type of ADU. Do your research and ensure your property complies with all the rules before advertising the space. Your friendly real estate agent should be able to help you understand your local limitations (let us know if you’d like us to connect you with someone we trust!)

Getting Started with House Hacking:

House hacking might sound complex, but with the right guidance, it can be a smooth and rewarding experience. Here’s how we can help you navigate the house hacking journey:

The Financials:

    • Loan Options: The absolute best part (in our opinion) of house hacking is that these homes can be purchased with a traditional mortgage (think FHA, VA, USDA and Conventional loans) with more competitive interest rates, depending on your credit score and financial situation than if you were to purchase an investment property separate from your primary residence.

    • Down Payment Assistance: There are fantastic programs available to help first-time homebuyers with their down payment. We’ll explore these options and see if you qualify for any additional down payment assistance programs.

    • Affordability Calculations: House hacking isn’t just about finding a cool property. We’ll do a deep dive into your finances to ensure you’re comfortable with the ongoing costs of ownership, including property taxes, insurance, and potential maintenance needs. We’ll also factor in projected rental income to create a realistic picture of your monthly expenses.

Building Your Dream Team:

House hacking doesn’t have to be a solo act. Here’s how I can help you assemble your dream team:

    • Realtor: A good realtor is your partner in crime when it comes to finding the perfect house hack property. If you aren’t already working with someone, we have trusted, experienced partners we can connect you with who understand the house hacking market and can guide you through the buying process.

    • Property Management (Optional): If managing tenants seems daunting, consider partnering with a reputable property management company. They can handle everything from tenant screening and rent collection to maintenance requests and repairs, freeing up your time and minimizing stress.

    • Lawyer: When contracts are involved, it’s always a wise decision to lawyer up and make sure your lease or rental agreement is rock solid. You don’t want to take on the financial burden of someone else’s mistakes if it can be helped.

Finding the Right Property:

    • Location, Location, Location: Just like any real estate investment, location is key. Discuss with your real estate agent neighborhoods that have a high rental demand and good potential for stable tenant occupancy.

    • Rental Potential: Not all properties are created equal for house hacking; analyze factors like the number of bedrooms and bathrooms in the rentable units, overall square footage, and amenities that might attract tenants and command higher rent.

    • Property Types: It’s obvious to say that different house hacking strategies require different property types. Whether it’s a multi-unit property with separate entrances or a single-family home with a rentable basement, all of that will be covered while you work with your homebuying team.

Conclusion:

House hacking isn’t for everyone. It requires some upfront effort, financial responsibility, and a willingness to learn. But for ambitious go-getters, who are ready to take control of their financial future, house hacking can be a game-changer. It allows you to live for free (or close to it), build equity, gain valuable real estate experience, and potentially set yourself on a path to financial freedom.

Ready to chat? Let’s schedule a consultation to discuss your financial goals and see if house hacking aligns with your vision.

Underwriting is one of the most crucial stages your loan application goes through before you are given a final approval to close on your loan. It might sound intimidating, but underwriting isn’t the headache you might think it is. Here’s a look at what happens during underwriting. 

What is Underwriting?

Underwriting is the process of evaluating and reviewing a potential borrower’s creditworthiness, ability to repay, financial profile, submitted documents, and collateral to determine whether the lender can fund the loan. Essentially, underwriters have the final say in whether you qualify for a loan. Remember all those financial documents you had to send with your mortgage application? After the paperwork has been compiled into a loan package by the processing team, it goes to underwriting for a comprehensive inspection. During the first underwriting phase, the team reviews loan conditions for credit, income, asset, mortgage insurance, and hazard (disaster) insurance requirements. The second phase of underwriting happens towards the end of the mortgage process, where underwriters do a final check of the conditions from the initial approval. The turnaround time for underwriting is usually two days, after which the loan file goes back to the processing team.

What Happens in Underwriting?

Risk Analysis 

To assess your potential risk, underwriters will do a deep dive into your credit score, credit history, income and net worth, and debt-to-income ratio (DTI). A strong credit score is a good indication of how financially responsible you are. Having a solid history of on-time payments increases your score and gives lenders more confidence that you won’t miss payments. Underwriters use your income and assets to determine whether you can afford mortgage payments. DTI measures how much money you have left after paying your existing debts. Having a lower DTI will improve your chances of getting approved. 

Asset and Document Verification

Underwriting will review in detail the documentation provided to validate your income and assets being used in the transaction. These documents come from both you and other third parties, such as your employer or a financial institution. An underwriter’s job is to scrutinize and authenticate the documents in your loan file and make sure they meet the guidelines for the loan type you have applied for. Should any questions arise, you may be asked for additional information or an explanation. The underwriter also ensures the files don’t contain suspicious information or raise a red flag for potential discrepancies. For example, a large deposit into a bank account can warrant a request for an additional explanation or documentation to ensure funds you are using for closing costs or a down payment are coming from a valid source allowed by the guidelines set forth by the agencies. 

Reviewing Guidelines

Underwriters also check your financial profile and loan details against various lending guidelines before they make a decision. There are lending criteria for different loan types, programs, and promotions, so it’s essential that all underwritten loans adhere to those regulations. Underwriters often have to think creatively when faced with ambiguous situations, which can prompt them to ask for additional details. Underwriters also check that the appraiser’s choice of real estate comparisons (comps) support the appraised value as determined by the appraiser and ensuring the collateral is supported by the appraisal.

How You Can Help During Underwriting 

Since your application goes through multiple rounds of underwriting, it can feel stressful wondering whether your loan will be approved or not. To help make things smoother for yourself and your lender, make sure you provide all the needed documents at the start of your application in the correct format. Stay in close communication with your lending team and be prepared to answer any questions and send supplementary paperwork as soon as possible. The sooner you can provide the information, the faster the underwriters can work through your file. It’s crucial to be honest about your finances, as trying to hide things will prolong the process and be discovered nevertheless.

As long as you’re providing clear and concise information and providing necessary documentation in a timely manner, underwriting is nothing to be scared of. Be patient during this time and remember that your lending team is on your side to help you become a homeowner!

If you have any questions or want more information about the mortgage process, contact one of our Licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!

Advancements in artificial intelligence (AI) are taking the world by storm and changing industries across the board, including that of real estate and mortgage lending. AI is an ever-evolving field that uses deep learning algorithms and neural networks to follow human-generated prompts. Here’s how AI might affect how you buy a home in the future.

Virtual Home Staging

Staging is a crucial part of the home selling process, but what if you could stage your home without a single piece of furniture? Virtual staging involves uploading photos of empty rooms of a home and digitally adding photorealistic furniture and decor to enhance it. Some virtual staging companies use human designers to select items and color schemes, but some solely use AI to accelerate the process by generating multiple outputs within minutes. Depending on the software, AI can be used to produce images tailored to the aesthetic of your choice, the style and purpose of the room, create 3D video tours, and even improve natural lighting. Using virtual staging is much more time-saving and cost-effective for home sellers and real estate agents than hiring a staging team. Having attractive listing photos is a huge step up from using poorly staged photos or empty rooms, even if the furnishings are actually nonexistent. Homeowners can also use AI staging as a source of home redecorating inspiration.

Automated Valuation Models 

Home appraisals are a standard part of the home buying and refinancing process to determine the property value. Appraisals consider the characteristics and condition of your home and compare it against recent sales data of similar homes in your area to see how much it could sell for in the current market. Automated valuation models (AVMs) expedite appraisals by using sales data and property records to calculate value to a high level of accuracy. AVMs aren’t new to the mortgage and real estate industries, but advancements in AI have improved their abilities. For example, the current version of Zestimate, Zillow’s AVM, incorporates neural networks to give users a more accurate value. Some emerging AVMs combine computer vision with property data to assess property value from pictures of the home. This can help real estate agents price homes more accurately and give sellers a realistic expectation for how much their home is worth. Additionally, an increasing number of residential (and commercial) property developers use AVMs to pinpoint the best location for new build sites based on local population data. AVMs provide practical figures quickly and efficiently, benefiting homebuyers, sellers, agents, and lenders who need a home value estimate before an in-person appraisal can be done.

Mortgage Lending 

Reviewing mortgage applications and numerous pieces of financial information is an extremely complex task, and AI is quickly becoming an essential tool for mortgage lenders. It enhances the mortgage process for lenders and consumers and is being used for: customer service chatbots, fraud detection, document upload and organization, identifying optimal loan scenarios, underwriting, and cost analysis for buying and refinancing. Automated underwriting systems (AUS) have been around for a while, and they reduce the time it takes to verify and analyze financial information. When an AUS is augmented with AI, it can further reduce human error, improve turnaround time, and use predictive models to indicate lending risk.  

Is AI Good for Homebuyers and Sellers? 

One of the goals of AI development is to facilitate and optimize processes that would normally be time-consuming, difficult, and expensive. Ideally, the time and money saved by using AI will be reflected in the buyer’s closing costs. Real estate and mortgage professionals can also have more energy to put towards creating a more personalized client experience. As AI’s capabilities expand, so do questions about bias and accuracy. Critics worry about a lack of nuance and bias for AI AUS and AVMs. These sophisticated learning models may have a lot of data to draw from, but they can’t always create a comprehensive picture of someone’s financial situation. It is essential that AI developers continually monitor outputs for traces of algorithmic discrimination and use a wide range of data to train the system. The housing and mortgage industries will need to set standards and best practices to promote equity and accuracy. We can also expect more federal and state regulations to protect consumers in the near future. 

The AI landscape is still a new frontier, but it’s clear that it has and will continue to revolutionize how society operates. But even the best-trained AI models cannot replace the creative thinking, knowledge, empathy, and dedication from real-life real estate and lending professionals. 

If you have any questions about buying a home, contact one of our licensed Mortgage Loan Originators. If you are ready to begin t­­he home buying process, click here to get started!

For many aspiring homeowners, coming up with a down payment is a significant obstacle standing in the way of homeownership. While having a 20% down payment isn’t required to buy a home, it can be challenging to gather enough funds to start the home buying process. Read on to learn about different ways to come up with a down payment.

Increase Savings

Saving money is perhaps the obvious first choice when it comes to collecting a down payment. The process of putting away extra money usually happens gradually, so it’s best to start a dedicated savings account as soon as possible.
Increase your savings potential by creating and maintaining a household budget. You might also consider starting a side hustle or asking your employer for a raise to increase your cash flow. Growing your savings will be beneficial when you’re ready to begin your home buying journey, even if you find you won’t need much for your down payment. 

Pro Tip: Consider a ‘high-yield savings account” as you squirrel away your down payment funds. This is a bank account that earns higher-than-average returns, making your money grow faster as it sits in your account. Since the online banks that offer these have low-overhead, they can afford to give significantly more back in interest to their members.

Down Payment Assistance 

Down payment assistance (DPA) programs are an underrated way to partially or fully subsidize your down payment. There are many DPA programs offered to homebuyers at the federal and state level, from both public and private institutions. DPA programs are often tailored to first-time or low-income buyers, but repeat homebuyers may be eligible for certain programs. The DPA funds can come in the form of a grant or a low interest second mortgage that may be repayable or forgiven after a set amount of time. If you’re part of a particular profession, such as teaching or law enforcement, there are DPA programs designed to help you become a homeowner. Taking advantage of DPA allows you to secure your dream home and save for other expenses. Make sure to ask your loan originator if you qualify for any down payment assistance programs.

Gift Funds

Your down payment doesn’t have to come entirely from you; all or part of it can come from family and friends in the form of gift funds. In order to use gift funds in your down payment, have your benefactor send your lender a gift letter detailing the amount given, their relationship to you, withdrawal dates, and a statement that repayment is not expected. Your lender may also need to see accompanying withdrawal and deposit slips to source the money. It’s important to know that if your contributor expects you to repay the gifted money, it will be considered a loan and will be factored into your debt-to-income (DTI) ratio. 

Leverage Your 401(k)

401(k)s are meant to be accessed upon reaching age 59 ½ , but tapping into it earlier can boost your down payment amount if needed. You can either use a 401(k) loan (if offered by your employer), or withdraw funds. Both methods allow you to access cash on hand without going through a lender or credit check. A 401(k) loan lets you borrow against your retirement savings and must be restored within five years with interest. Your employer may pause 401(k) contributions until the loan is paid back. Withdrawing money from your account will lead to a 10% penalty fee, and any amount you remove will be subject to an income tax. You will also forfeit any tax-free retirement earnings that you have accrued. For these reasons, this option is best used only as a last resort. It’s essential to consult with a financial advisor so you fully understand what’s involved. 

Getting a down payment ready doesn’t have to be the thing that stops you from achieving homeownership! If owning a home is something you want to accomplish, it’s ever too early to start saving and preparing for one of the most important purchases of your life.

If you have any questions about buying a home, contact one of our licensed Mortgage Loan Originators. If you are ready to begin t­­he home buying process, click here to get started!

NFM Lending is not a financial or tax advisor. You should consult a financial advisor to assist with your financial goals.

Declaring bankruptcy is financially and emotionally stressful—it’s a situation no one wants to be in. Filing for bankruptcy is a tough decision, but you can bounce back from it and even become a homeowner. 

Bankruptcy Types

Individuals can either file for Chapter 7 or Chapter 13 bankruptcy, and they have different implications for your finances and when you can start the mortgage process. After the initial filing, a bankruptcy court can declare it as discharged (eligible debts are removed) or dismissed (the court is not proceeding with bankruptcy filings because of unmet requirements). Your bankruptcy status plays a large role in your timeline for mortgage application.

Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, certain assets are sold to repay creditors, and any leftover debt is discharged. This is the more severe of the two, and the bankruptcy will remain on your credit report for 7 years. You’ll need to wait a minimum of two years before applying for a mortgage, but it can be more depending on the loan program. The wait is two years for FHA and VA loans, three years for USDA loans, and four years for conventional loans. Individual lenders may set their own waiting periods, as well. The waiting period starts after your bankruptcy is dismissed or discharged.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is not as extreme as Chapter 7; you can keep your assets and must adhere to a court-ordered debt repayment plan. As long as you continue making payments, your assets won’t be seized. It stays on your credit report for 7 years, but the waiting period to get a mortgage can be as little as 1-2 years depending on the loan program, the status of your bankruptcy (dismissed or discharged), and lender requirements. For FHA, VA, and USDA loans, you have to be at least one year into your repayment plan before trying to get a mortgage. For conventional loans, you must wait two years after your bankruptcy was discharged, and 4 years after a dismissal. Generally, you’ll need the court’s approval before applying for a mortgage if you’re still in Chapter 13 bankruptcy.

Improving your Finances 

No matter what type of bankruptcy is on your record, it’s crucial to take measures to rebuild your finances and make smart financial choices. The mandatory waiting period is a prime time to improve your credit profile and show lenders that you’re responsible and financially secure enough to handle a mortgage. First, create and stick to a budget that covers your basic needs and any recurring bills. Gradually, you should ideally see more money in your pocket. Put some of that extra cash into savings so it can be used for a down payment or other housing costs. Strengthen your credit score by always making on-time payments, paying in full whenever possible. Don’t max out your credit cards or apply for new ones to keep spending. Avoid taking on unnecessary debt, and lower your debt-to-income ratio (DTI) by paying down existing debts. Repairing your finances won’t happen overnight—it takes time and consistent work.

Things to Consider

When you’re in a better position to start the homebuying process, government-sponsored loans are an excellent choice to consider, as the waiting periods are shorter and have more flexible requirements than conventional loans. Bankruptcy can be caused by a number of issues, both within and outside of your control. Some loan programs may reduce the waiting period if your bankruptcy was caused by a one-time, extenuating circumstance that is well-documented (such as a medical emergency). You might need to provide your lender with a letter of explanation if an extenuating event caused your bankruptcy. Regardless of what type of bankruptcy is on your record, speak with a loan originator to see what options are available for your situation.

Bankruptcy may feel like a death sentence, but it doesn’t have to be. The speed bump that bankruptcy puts in front of homeownership can be used to your advantage by taking steps to restore your finances. When you’re financially, mentally, and emotionally prepared for homeownership, you’ll be set up for success. 

If you have any questions about the home buying process, contact one of our licensed Mortgage Loan Originators. If you are ready to buy a home, click here to get started!

NFM Lending is not a debt settlement company or credit repair agency. Speak with a licensed financial advisor regarding your unique financial situation.

LTV’s can be as high as 96.5% for FHA loans. FHA minimum FICO score required. Fixed rate loans only. W2 transcript option not permitted. Veterans Affairs loans require a funding fee, which is based on various loan characteristics. For USDA loans, 100% financing, no down payment is required. The loan amount may not exceed 100% of the appraised value, plus the guarantee fee may be included. Loan is limited to the appraised value without the pool, if applicable. Qualifying credit score needed for conventional loans.

Every homebuyer wants a great mortgage rate, but what exactly goes into how the rates are set? No, it’s not astrological movements or cloud formations; it’s a variety of financial and economic elements. Learn how these factors impact how mortgage rates are determined.  

Your Finances

Credit Score

You don’t need a “perfect” credit score to buy a home, but having a strong score gives you access to more competitive interest rates and programs. Your credit score is a significant metric in predicting how likely you’ll be able to pay back the mortgage. Even if you’re not thinking of buying a home in the near future, build up your credit score now so it’s primed for when you’re ready.

Debt-to-Income Ratio (DTI)

Having a high debt-to-income ratio (DTI) means you have little money left after paying your current bills, and it can lead to paying higher interest rates. Take steps to pay off debts, especially high interest ones like credit cards. 

Loan-to-Value Ratio (LTV)

The loan-to-value ratio (LTV) also factors into your rate. If you’re seeking a mortgage that covers over 80% of the home’s price, it’s considered a high LTV and is considered riskier. You’re more likely to be offered a lower rate if your LTV is 80% or under, and you won’t need to pay private mortgage insurance (PMI). 

Down Payment

Though having a 20% down payment is not necessary for all home buying programs, the amount you’re able to contribute to a down payment can affect your mortgage interest rate. Lenders view borrowers who can put down more money upfront to be less risky, and can offer lower rates. The down payment amount can also lower your LTV.

Mortgage Points 

Though it is entirely optional, paying mortgage points at closing (aka, buying down the rate) is another way to lower your interest rate. One point equals 1% of your mortgage, and buying additional points will minimize your rate even further. The discounted rate stays with the loan until you refinance or pay it off.

Federal Reserve Actions

The Federal Reserve is always a hot topic whenever mortgage rates shift, but they don’t actually set mortgage rates. Instead, they determine the federal funds rate, which is how much interest banks are charged for borrowing from the Fed and when exchanging money with other depository institutions. The Fed considers various market indicators when they decide to change the federal funds rate. These factors include: economic growth, inflation, unemployment, the housing market, and the overall health of the economy.

The funds rate has a direct effect on rates for adjustable-rate mortgages (ARMs), home equity lines of credit (HELOCs), and home equity loans, all of which are based on an index. When it comes to fixed-rate mortgages, the funds rate has a more indirect impact as it can spur demand in the bond market. For example, a lower funds rate boosts bond prices and investor demand, leading to lower mortgage rates. Conversely, increasing the funds rate can lessen bond prices and demand, resulting in higher mortgage rates. 

The Bond Market

Mortgages are largely based in the mortgage-backed securities market (investors buy groups of mortgages), which is influenced by U.S. Treasury securities (government bonds). Bond prices and rates have an inverse relationship, and shifts in the bond rate often cause similar movements for fixed-mortgage rates. Mortgage lenders use bond market activity as a guideline to set their lending rates.

Your Lender and Loan Programs

Another thing that makes mortgage rates hard to pin down is that lenders have different criteria for eligibility and don’t all offer the same programs and incentives. Rates and requirements are not uniform across all loan programs. Mortgages with shorter repayment terms tend to have lower rates than those with longer terms, but the monthly payment is usually higher. When deciding which lender and mortgage program to work with, be aware that the advertised rate may reflect a best-case-scenario and can differ from what you may be eligible for. Be sure to work with a loan originator to see what options are available for your unique situation.

There’s no such thing as a universal mortgage rate; rates differ depending on individual circumstances, economic conditions, lenders, and loan programs. Even though you can’t control every aspect that affects interest rates, it’s important to manage the ones you can. Working with a reliable lender and improving your finances will give you an edge when you’re ready to buy a home.

If you have any questions about using mortgage points, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!