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The difference between a 30 and 15-year fixed mortgage

A mortgage term is how long it will take you to repay the loan in full. There are a few term options, but most common are 15 or 30-year terms.

Both mortgage options are fixed rate meaning the interest rate and monthly payment is set when the loan is taken. A fixed-rate makes it much easier for a borrower to budget since they know exactly how much the minimum payment is each month for years to come.  No matter what happens with interest-rates, the minimum payment won’t change.

30-year mortgages are by far the most popular mortgage product for American homebuyers – Freddie Mac says 90% of all loans are 30-year fixed. What makes them so appealing? Are there any benefits to a 15-year fixed?

30-year mortgage
Because the term of the loan is longer, there is a higher chance the borrower will default over time, so it’s a riskier option for lenders. But the payoff for borrowers is big – substantially lower monthly payments than a 15-year mortgage.

A lower monthly payment makes homeownership a possibility for more Americans and it may allow some people to purchase more home than they’d be able to with a 15-year fixed. Even borrowers who could afford to make larger payments may choose a 30-year fixed and re-invested or put away the money they’re saving to further their financial stability.

The catch? You’ll save money each month, but you’ll be paying your mortgage for longer. And, in the end, you’ll end up paying much more in interest than you would with a 15-year loan for the same house.

15-year mortgage
Lower monthly payments sound great, so why would anyone get a shorter loan term? Borrowers often choose a 15-year loan because they pay off the loan much faster and with less interest overall. Take the example below.

$275,000 Mortgage
 APRMonthly paymentTotal interest paid
15-year fixed2.529%$1,837$55,737
30-year fixed2.948%$1,152$139,617

The monthly payments are nearly $700 more per month, but over the course of the loan, the borrower saved $83,880. If you can afford a bigger payment, looking into a 15-year fixed mortgage may be a good idea.

Because there’s less time for the loan to be exposed to risk, interest rates for 15-year mortgages are usually lower than that of 30-year fixed. The rate can be around a quarter to a whole percentage point less.

How about something in-between?
If you like the lower payments of the 30-year mortgage but the faster payoff of the 15-year mortgage, consider getting something in between like a 20-year mortgage. There are a lot of different options when it comes to home loans. It’s best to speak with a local loan expert to see what would work best for you and what your payments would be like with each option. Together, you can find the best path forward for your financial goals.

Now is a great time for a renovation loan

If you’re looking to purchase a new home but are struggling to find one you can afford, you’re not alone. Across the country, inventory is low and bidding wars are the norm. In the hottest markets (Austin, Phoenix, Nashville), homes are listed for a week or less before they have more than a dozen offers all for more than asking price. Getting your offer accepted is like winning the housing lottery.

Rather than giving up on your dream to get a new house, try switching tactics instead. There’s a mortgage trick savvy home buyers have used for years to get a beautiful home: renovation loans. Think of it this way… We’re all seen dated and odd houses sit on the market while turn-key houses fly off the shelves. Why not purchasing that ugly house and remodel it into a home that works for you?

Home renovation loans work a little like a conventional mortgage, except the cost of renovating the home is tacked onto the loan. So rather than taking out a loan for the purchase price, you take out a loan for the purchase price plus the renovation budget.

How much might extra might a renovation cost? These top renovation projects give you a quick idea of what homeowners paid in 2020, according to HomeAdvisor:

  1. Home addition ($52,157)
  2. Inground pool ($49,245)
  3. Kitchen remodel ($35,317)
  4. New exterior siding ($13,974)
  5. Bathroom remodel ($13,401)
  6. New roof ($9,375)
  7. New windows ($9,131)
  8. New cabinets/countertops ($5,832)
  9. New flooring ($4,680)
  10. Decking and porches ($3,291)

Homeowners looking to finance a remodel have two options: FHA 203K loan or Fannie Mae’s HomeStyle Renovation loan. Each is a great option, so let’s break them down.

FHA’s 203K remodel loan
This is a great option for families in low-to moderate-income brackets It’s a loan provided by FHA (Federal Housing Administration). It provides a minimum of $5,000 for renovations and major structural repairs. The kicker is you have to hire a HUD consultant to oversee the project and the money can only be used for:

  • Structural alterations and reconstruction
  • modernization and improvements to the home’s function
  • Elimination of health and safety standards
  • Changes that improve appearance and eliminate obsolescence
  • Reconditioning or replacing plumbing
  • Installing a well and/or septic system
  • Adding or replacing roofing, gutters, and downspouts
  • Adding and replacing floors and/or floor treatments
  • Major landscape work and site improvements
  • Enhancing accessibility for a disabled person
  • Making energy conservation improvements
     

Even with those restrictions, it’s a great loan if you’re eligible. Qualifications for getting the 203k Renovation Loan is similar to getting a FHA loan.

Fannie Mae’s HomeStyle Renovation loan
These renovation loans are available through Fannie Mae and don’t have restrictions like the 203k FHA loan. You can use the funds for virtually anything you want. Add a tennis court, an inground pool, an over-the-top fountain – and you can do it to both your primary residence as well as a secondary vacation or investor home. The improvement has just two requirements in order to be eligible:

  • It must be permanently affixed to the property
  • It must add value to the property

This loan has a lot of possibilities for new purchasers, investors, and secondary home buyers. It’s an opportunity to purchase and renovate a home to gain quick equity.

Refinance and renovate the home you’re in
If you can’t purchase the home you want, consider refinancing with a renovation loan and make your current home the one you want. Renovation loans are available for the initial purchase of the property or when refinancing. Doing it now while rates are low may be a smart move for some homeowners.

If you’re open to getting a fixer-upper home and renovate it, reach out to your local Mann Mortgage lender. Together, you can talk about the market in your area, what you’d qualify for, and they can even recommend a builder to work with.

Getting a mortgage for a tiny home?

What counts as a tiny home?

 

What defines a tiny house (also called tiny homes) is, of course, their size. A tiny house is considered a home under 400 square feet (the average traditional home was 2,301 square feet in 2019). Some are built on permanent foundations with a septic tank and solar panels, but most often they’re built on trailers so they can be hauled from one location to another. This has led to some municipalities labeling tiny homes as “recreation vehicles” unsuitable for a primary dwelling. 

Why would you want a tiny home?

 

They’re affordable, they consume less energy, and (if they’re on wheels) you can pick up and move where the wind blows you. They cost about the same per square foot as a standard home, but because there’s less square footage, they can be a great option for people who don’t want or can’t afford a large mortgage. In the last few years, they’ve been very popular with 25-40 year-olds that use them as a step towards buying a traditional home. But they’re equally popular with people over the age of 55 who use them as a way of downsizing, a mobile home for visiting family, or as a second home on their property for visitors. 

Can you build a tiny home anywhere??

 

Despite the growing enthusiasm with tiny houses, it’s still hard to find a place to build one for full-time use. Zoning laws and building codes have minimum size restrictions that most tiny homes won’t meet. Some cities have begun to create tiny house-friendly zones, but they’re rare. Your best bet? Keep your tiny home on wheels or don’t use it as your full-time residence. If that’s not an option, be sure to talk to your local mortgage originator or other housing expert that understands your local building codes and zoning restrictions to see if you can live in a tiny home or not. 

Home loans for tiny homes?

Maybe. If your tiny house is on wheels (and most are) it’s almost always classified as a recreational vehicle (RV). You can’t get a home loan for an RV even if you plan to live it in full-time – you’ll need an RV loan. But, if you build your tiny home on a permanent foundation, you may be able to get a home loan for it. Home loan originators (your bank, mortgage company, or credit union) will likely have a minimum amount they can loan for a home, usually around $50,000. So long as you meet their minimum requirements, you may be able to get a mortgage for the tiny home of your dreams. Your best bet is to reach out to your loan originator directly to see whether you would qualify for a tiny house home loan. 

Other options for purchasing a tiny home

 

If you already own a home and want to add a tiny home to the property it’s on, consider getting a home equity line of credit to finance it.  To talk to a loan officer at Mann Mortgage on options and potential alternatives, please get in touch.

The future of tiny homes

 

Job losses due to Covid, stagnant wages, and increased property prices all make it more difficult for first time homeowners to break into the market. There will certainly be a market for tiny affordable houses, but the real hurdle is the lack of legal places to live in one. The American Tiny House Association and the Tiny Home Industry Association are both working hard to promote best practices in home construction and recognize them as a safe and permanent housing option.  

If you have any question about tiny homes in your community or whether you’d be eligible for a home loan for your tiny home, contact your local mortgage expert at Mann Mortgage today. 

What is a home equity line of credit?

A home equity line of credit (HELOC) uses the equity you’ve built in your home as collateral to get an additional loan. Since you’re using your home as collateral, lending institutions generally are able to offer much more favorable interest rates than you would get from an unsecure borrowing source (like a credit card company).  

How much money can you get from a HELOC?

Each lending institution has different guidelines that dictate how much they can lend you. Their guidelines are usually based on your loan-to-value ratio (LTV), which is the amount of principal on your mortgage compared to your home’s appraised value. Most often, you’ll need at least 20% equity in your home (which is a LTV of 80%) to qualify. As example, if your home’s current value is $300,000 and the remaining balance on your mortgage is $250,000, you would have an LTV of 83%. For many lending institutions, you would not qualify for a HELOC.  

However, if your home’s current value is $300,000 and the remaining balance on your mortgage is $175,000, your LTV would be 57.9% and you would normally qualify for a HELOC for up to 80% of the equity in your home. In this example, you may have access to $65,000. 

Be aware that many lenders won’t give you a HELOC for less than $25,000.  

How do you get the cash?

Much like a credit card, you’ll have a revolving line of credit available. You can access your funds through an online transfer, a check, or a credit card. As you borrow more from your line of credit, your payments will increase though the rate of interest will remain the same.  

When Do You Pay Back HELOC Funds?

Most have two phases. The first is the “draw period” which may last years (often up to 10) during which you can access your available credit. During the draw period, you’ll make monthly interest-only payments on the funds you withdraw. At the start of the second phase, you’ll no longer have access to your funds and you’ll have to start making regular principal-plus-interest payments until your balance is $0. Most lenders allow the second phase to last around 20 years. 

Benefits of a HELOC

Even if you get a HELOC, you don’t have to use the funds. As long as your lender doesn’t require you to do minimum draws, it could be a good source of emergency cash or a temporary safety net. If you do need to use the cash, the interest rates are lower than the rates tied to credit cards. 

Cons of a HELOC

The rate on your HELOC might fluctuate, and if it goes too high, you may have a hard time paying off your interest. Furthermore, your lender may decide to reduce your line of credit if your home’s value takes a drastic dip. And, don’t forget your overall debt load will increase with a HELOC or any other second mortgage. 

Is a HELOC right for you?

If you have enough equity built into your home and need cash for a home improvement, to cover medical bills, to pay off credit cards, or to sustain your lifestyle after losing a job, a HELOC might be a great solution. To find your home’s current value and how much you could get from a HELOC, contact your local Mann Mortgage expert today. 

Alternative options

One potential alternative is a cash-out refinance, which you could also use to pay for a home renovation or to pay off credit card bills. Learn more about cash-out refinances. If you have questions on HELOCs or other programs that will let you leverage your home equity, please get in touch with one of our local mortgage experts today.

What is a cash-out refinance?

So What is a cash-out refinance?

A cash-out refinance is a type of loan where a borrower has a mortgage they are currently paying off and they replace it with a new mortgage for more than their remaining principal. The difference between the principal balance of the first mortgage and the new one is given to the borrower in cash.

Cash-out refinance vs a standard refinance

In a standard refinance, borrowers work with their lender to get a lower rate of interest or a new payment schedule. Once the standard refinance is secured, they have a new monthly payment amount based on the new agreement – but their balance on the loan remains the same. In a cash-out refinance, a borrower works with their lender to pay off their home’s mortgage balance with a new loan based on their home’s current value. The difference between the original mortgage the borrower is paying off and the new loan is kept by the borrower. In order to have some equity in their home, most cash-out refinances limit the amount a borrower can receive at 80-90% of their home’s equity in cash (VA refinances don’t have this requirement).

In other words, don’t expect to pull out all the equity you’ve built into your home. If your home is valued at $350,000 and your mortgage balance is $250,000, you have $100,000 of equity in your home. You could do a cash-out refinance of somewhere between $80,000 to $90,000.

Benefits of a cash-out refinance

If interest rates are at a new low, you have equity built into your home, and if you would like cash on hand to pay off high-interest credit cards or fund a large purchase, a cash-out refinance is something you might want to consider.

Cons of a cash-out refinance

There are fees involved in a cash-out refinance, and you’ll have to make sure your potential savings are worth the cost. Like any refinance, you’ll pay closing costs of around 2% to 5% of the mortgage. And if your lender allows you to take out more than 80% of your home’s value, you’ll have to pay private mortgage insurance (PMI). Freddie Mac estimates most borrowers will pay $30 to $70 per month for every $100,000 they borrowed.

And, don’t forget your overall debt load will increase with a cash-out refinance.

Alternative options

One potential alternative is a home-equity line of credit (HELOC), which you could also use to pay for a home renovation or to pay off credit card bills. Learn more about what HELOCs are and how they work.

Should you get a cash-out refinance? If you have enough equity built into your home and you get a great rate, they might be a great solution for a home improvement or renovation. To find out what the current rates are and to check your home’s current market value, contact your local Mann Mortgage expert today.

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