Mortgage

Take Advantage of Your Home Equity: A Homeowner's Guide

 

 

Homeownership offers many advantages over renting, including a stable living environment, predictable monthly payments, and the freedom to make modifications. Neighborhoods with high rates of homeownership have less crime and more civic engagement. Additionally, studies show that homeowners are happier and healthier than renters, and their children do better in school.1

 

But one of the biggest perks of homeownership is the opportunity to build wealth over time. Researchers at the Urban Institute found that homeownership is financially beneficial for most families,2 and a recent study showed that the median net worth of homeowners can be up to 80 times greater than that of renters in some areas.3

 

So how does purchasing a home help you build wealth? And what steps should you take to maximize the potential of your investment? Find out how to harness the power of home equity for a secure financial future.

 

 

WHAT IS HOME EQUITY?

 

Home equity is the difference between what your home is worth and the amount you owe on your mortgage. So, for example, if your home would currently sell for $250,000, and the remaining balance on your mortgage is $200,000, then you have $50,000 in home equity.

 

$250,000 (Home’s Market Value)

-           $200,000 (Mortgage Balance)

______________________________

             $50,000 (Home Equity)

 

The equity in your home is considered a non-liquid asset. It’s your money; but rather than sitting in a bank account, it’s providing you with a place to live. And when you factor in the potential of appreciation, an investment in real estate will likely offer a better return than any savings account available today.

 

 

HOW DOES HOME EQUITY BUILD WEALTH?

 

A mortgage payment is a type of “forced savings” for home buyers. When you make a mortgage payment each month, a portion of the money goes towards interest on your loan, and the remaining part goes towards paying off your principal, or loan balance. That means the amount of money you owe the bank is reduced every month. As your loan balance goes down, your home equity goes up.

 

Additionally, unlike other assets that you borrow money to purchase, the value of your home generally increases, or appreciates, over time. For example, when you pay off your car loan after five or seven years, you will own it outright. But if you try to sell it, the car will be worth much less than when you bought it. However, when you purchase a home, its value typically rises over time. So when you sell it, not only will you have grown your equity through your monthly mortgage payments, but in most cases, your home’s market value will be higher than what you originally paid. And even if you only put down 10% at the time of purchase—or pay off just a small portion of your mortgage—you get to keep 100% of the property’s appreciated value. That’s the wealth-building power of real estate.

 

 

WHAT CAN I DO TO GROW MY HOME’S EQUITY FASTER?

 

Now that you understand the benefits of building equity, you may wonder how you can speed up your rate of growth. There are two basic ways to increase the equity in your home:

 

  1. Pay down your mortgage.

 

We shared earlier that your home’s equity goes up as your mortgage balance goes down. So paying down your mortgage is one way to increase the equity in your home.

 

Some homeowners do this by adding a little extra to their payment each month, making one additional mortgage payment per year, or making a lump-sum payment when extra money becomes available—like an annual bonus, gift, or inheritance.

 

Before making any extra payments, however, be sure to check with your mortgage lender about the specific terms of your loan. Some mortgages have prepayment penalties. And it’s important to ensure that if you do make additional payments, the money will be applied to your loan principal.

 

Another option to pay off your mortgage faster is to decrease your amortization period. For example, if you can afford the larger monthly payments, you might consider refinancing from a 30-year or 25-year mortgage to a 15-year mortgage. Not only will you grow your home equity faster, but you could also save a bundle in interest over the life of your loan.

 

  1. Raise your home’s market value.

 

Boosting the market value of your property is another way to grow your home equity. While many factors that contribute to your property’s appreciation are out of your control (e.g. demographic trends or the strength of the economy) there are things you can do to increase what it’s worth.

 

For example, many homeowners enjoy do-it-yourself projects that can add value at a relatively low cost. Others choose to invest in larger, strategic upgrades. Keep in mind, you won’t necessarily get back every dollar you invest in your home. In fact, according to Remodeling Magazine’s latest Cost vs. Value Report, the remodeling project with the highest return on investment is a garage door replacement, which costs about $3600 and is expected to recoup 97.5% at resale. In contrast, an upscale kitchen remodel—which can cost around $130,000—averages less than a 60% return on investment.4

 

Of course, keeping up with routine maintenance is the most important thing you can do to protect your property’s value. Neglecting to maintain your home’s structure and systems could have a negative impact on its value—therefore reducing your home equity. So be sure to stay on top of recommended maintenance and repairs.

 

 

HOW DO I ACCESS MY HOME EQUITY IF I NEED IT?

 

When you put your money into a checking or savings account, it’s easy to make a withdrawal when needed. However, tapping into your home equity is a little more complicated.

 

The primary way homeowners access their equity is by selling their home. Many sellers will use their equity as a downpayment on a new home. Or some homeowners may choose to downsize and use the equity to supplement their income or retirement savings.

 

But what if you want to access the equity in your home while you’re still living in it? Maybe you want to finance a home renovation, consolidate debt, or pay for college. To do that, you will need to take out a loan using your home equity as collateral.

 

There are several ways to borrow against your home equity, depending on your needs and qualifications:5

 

  1. Second Mortgage - A second mortgage, also known as a home equity loan, is structured similar to a primary mortgage. You borrow a lump-sum amount, which you are responsible for paying back—with interest—over a set period of time. Most second mortgages have a fixed interest rate and provide the borrower with a predictable monthly payment. Keep in mind, if you take out a home equity loan, you will be making monthly payments on both your primary and secondary mortgages, so budget accordingly.

 

  1. Cash-Out Refinance - With a cash-out refinance, you refinance your primary mortgage for a higher amount than you currently owe. Then you pay off your original mortgage and keep the difference as cash. This option may be preferable to a second mortgage if you have a high interest rate on your current mortgage or prefer to make just one payment per month.

 

  1. Home Equity Line of Credit (HELOC) - A home equity line of credit, or HELOC, is a revolving line of credit, similar to a credit card. It allows you to draw out money as you need it instead of taking out a lump sum all at once. A HELOC may come with a checkbook or debit card to enable easy access to funds. You will only need to make payments on the amount of money that has been drawn. Similar to a credit card, the interest rate on a HELOC is variable, so your payment each month could change depending on how much you borrow and how interest rates fluctuate.

 

  1. Reverse Mortgage - A reverse mortgage enables qualifying seniors to borrow against the equity in their home to supplement their retirement funds. In most cases, the loan (plus interest) doesn’t need to be repaid until the homeowners sell, move, or are deceased.6

 

Tapping into your home equity may be a good option for some homeowners, but it’s important to do your research first. In some cases, another type of loan or financing method may offer a lower interest rate or better terms to fit your needs. And it’s important to remember that defaulting on a home equity loan could result in foreclosure. Ask us for a referral to a lender or financial adviser to find out if a home equity loan is right for you or check out of preferred vendor list on our Farrelly Realty Group website

 

 

WE’RE HERE TO HELP YOU

 

Wherever you are in the equity-growing process, we can help. We work with buyers to find the perfect home to begin their wealth-building journey at no cost to the buyer. We also offer free assistance to existing homeowners who want to know their home’s current market value to refinance or secure a home equity loan. And when you’re ready to sell, we can help you get top dollar to maximize your equity stake. Contact us today to talk!

 

The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.

 

 

Sources:

  1. National Association of Realtors -
    https://www.nar.realtor/blogs/economists-outlook/highlights-from-social-benefits-of-homeownership-and-stable-housing
  2. Urban Institute -
    https://www.urban.org/urban-wire/homeownership-still-financially-better-renting
  3. Census Bureau -
    https://www.census.gov/library/stories/2019/08/gaps-in-wealth-americans-by-household-type.html
  4. Remodeling Magazine -
    https://www.remodeling.hw.net/cost-vs-value/2019/
  5. Investopedia -
    https://www.investopedia.com/mortgage/heloc/home-equity/
  6. Bankrate -
    https://www.bankrate.com/mortgage/reverse-mortgage-guide/

 

 

Is it Time to BUY or SELL your Home?   2 Local North of Boston Experts answer this question!

Is it Time to BUY or SELL your Home?  2 Local North of Boston Experts answer this question!

 

Geri Farrelly, Broker/Owner of Farrelly Realty Group in North Reading and Tom Patch, Loan Office of Mortgage Equity Partners in Lynnfield know the local market and want you to be in the know too.

Tom Patch says, “Everyone can benefit from low mortgage interest rates!”

You don’t want to miss out on the opportunities available right now in the housing market.  Mortgage interest rates are the lowest they have been since October 2016.  Everyone can benefit whether you want to buy a home, sell a home, or refinance your current home.  This is a unique time in history where no matter where you fall in the housing market, everyone can benefit.

Home values have been appreciating for several years now. The annual appreciation rate has nearly doubled since 2012.  It is projected to dip beginning 2020 and not come back up until 2023, according to Home Price Expectation Survey 2019 2Q.  That means it is an excellent time to sell if you want to get the most for your home.

Mortgage Interest Rates are the lowest they have been in 3 years.  That means it is a good time to buy, sell, or refinance. A lower interest rate means a lower monthly payment and the ability to afford more home for your money! 

If you bought a home more than 2 or 3 years back and thought you didn’t want to move because you will never get a rate that low again, now you can move up to a bigger home and still get a super low rate.

If you already own a home and you don’t want to move, you should review your current interest rate.  It has been widely shared that 8.2 million homeowners now have refinance opportunities.  Anyone who owns a home right now should be contacting a loan officer. If you have a rate that is higher than 4.25% you can save money even with closing costs and the other charges associated with closing a loan, in most cases.

 

 “Rates of 4% and, in some cases even lower, create extremely attractive conditions for consumers. Buyers, for good reason, are anxious to purchase and lock in at these rates.”

--Doug Duncan, Chief Economist for Fannie Mae

 

Geri Farrelly, Broker/Owner of Farrelly Realty Group believes that the data (specific to North Reading) continues to show a very strong housing market

The North Reading Transcript has recently had several articles about the Real Estate market in general, but how does our Hometown North Reading market look?  The market from Jan 2018 to July 31st, 2018 to the 2019 market in the same time period was surprisingly similar. 

From January 2018 to July 31st 2018 there were 96 homes sold, and 30 condominiums sold.

From January 2019 to July 31st 2019 there were 101 homes sold, and 30 Condominiums sold.

The average days on market for single families in 2018 was 45.41.

The average days on market for single families in 2019 it was 68.27.

There was a significant increase to the days on market this year.  The reason for this is twofold.  List prices have started a little higher this year coming off such a successful/robust market from last year.  Secondly buyers were willing to sit back and wait for price decreases if they felt the property was priced on the higher end of the market. Also, buyers continue to be savvy, studying the internet and determining the home’s value prior to ever stepping foot in the property. 

“HOME PRICES ARE RISING!”-Geri Farrelly

In 2018 the average list price was $589,724.00 for single family homes.

In 2019 the average list price was $617,602.00 for single family homes. The average list price increased by approximately $28,000.00

In 2018 the average sale price was: $591,156.00

In 2019 the average sale price was: $622,168.00

An increase of $31,012.00, the increase appeared to be a steady climb as compared to last year as the prices where increasing at a much more rapid rate. A steady increase is much healthier for our community’s economic outlook.

The award-winning school system, amazing park system, the proximity to Boston and North Shore/New Hampshire Beaches, as well as the reputation of being such a great community which offers an excellent quality of life for its residents.  North Reading housing inventory continues to be low which leads to a seller’s market, as of today there is 1.76 months’ worth of inventory.  The market is balanced when there is 4-5 months’ worth of inventory on the market.  So, you can see we are significantly below the balanced market.  Which indicates it is an opportune time to sell, if you are thinking about doing so.

The combination of interest rates at the lowest they have been in years and a strong healthy real estate market make both experts say the answer is YES to the question “Is it the right time to buy or sell your home?”   The good news is there’s still time to make a move before the school year starts and the fall weather sets in. Maybe it’s time to make that change. Reach out to your realtor and mortgage loan officer today to get things moving in the right direction. 

 

 

Tom Patch, MLO#142695,  is a mortgage professional at Mortgage Equity Partners, NMLS#1936. 

Geralyn Farrelly is the Broker/Owner of Farrelly Realty Group, North Reading, MA License # 9533996

 

6 Mortgage Questions And Answers For The First-Time Home Buyer

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Question MarkMortgage questions abound when you're a first-time home buyer. Compounding the challenge is the discomfort interrupting the conversation with a would-be lender or seller to ask about credit scores or how much money you need as a down payment. Everyone knows this stuff, right?

No, they don't all know—so you should ask these questions. Or, at the very least, study up a bit so you know the basics. To help get you up to speed, here's a crash course on the most common mortgage questions (and the answers you need to know). Take five to read on, and wonder no more.

1. What do you need to get a mortgage?

Before loaning you money, lenders want to see proof that you've proven reliable paying off past debts, so you'll need to start establishing credit.

There are ways to verify your past payments on utility bills, cell phone and rent. Getting a credit card is another option, just be sure to pay your bills according to the prescribed terms. Timely payments on car loan or college loans will also help you establish credit and help you get a mortgage.

2. If you have bad credit, how do you improve it?

For starters, check your credit report. It's free to download one copy each year, and you may be pleasantly surprised by what you find. And if the news is bad, there's still hope.

If you’ve got bad credit, frequently it's due to aged activity —an old collection notice, medical bill or something you didn’t know about. Often these issues can be fixed, boosting your credit score fairly quickly.

If you do have a bunch of bad marks and late payments, however, start paying on time and your score will gradually improve. 

3. What’s the difference between a mortgage pre-approval and a pre-qualification?

Pre-qualification is not going to hold the same weight as a pre-approval. You can go online and get somebody to print you out a pre-qual letter. And you’ll find that if you’re negotiating with an agent and they’re looking at a pre-qual letter, it’s probably not worth much to them.

A pre-approval letter — involving lenders fully checking your finances in a verifiable way — takes more time and effort, which is exactly why it carries much more weight. If you're serious about buying a home, get pre-approved to show you mean business.

4. How much down payment do you need for a mortgage?

The gold standard down payment for a mortgage is 20% — so if the home's price is $400,000, you'd have to pony up $80,000 of your own money to get the loan.

If you don't have that much, you can put down less, but you'll have to pay PMI, or private mortgage insurance. It's an extra fee of about $50 to $100 a month that lenders will require to mitigate the risk that you might default on your loan due to your lack of funds.

When you put less down, the trade-off is you actually have to spend more on a monthly basis.

That said, there are some exceptions that allow a buyer to avoid PMI even with a small down payment. Buyers who are in the military, veterans, and family members of veterans may be able to avoid PMI with a Veterans Affairs loan. And once your equity in your home rises above 20%, you can stop paying PMI.

5. What kind of down payment assistance is available?

If you're looking for help with a down payment, the "bank of Mom and Dad" may be a smart start — if your parents have the means to pitch in. Gifted money can help many people qualify for a loan, although you absolutely must tell your lender that the money was a gift. Fibbing on this front will raise red flags.

If private assistance isn't an option, or isn't enough, there are over 2,000 down payment assistance programs across the country that can help, as long as you meet eligibility requirements in terms of income and credit.

Check with one of our real estate agents (or your lender) for more information about programs on the North Shore that will help you become a homeowner.

6. What types of home loans are available?

Loan types vary widely, but typically fall into two camps. The first includes loans with an adjustable rate, meaning the interest rate could change after a period of time. The second includes loans that are "fixed" or "term," meaning the rate will stay the same for the length of the borrowing period. Generally, term or fixed-rate loans are more common and considered the safer option, but it all depends on your circumstances, including how long you plan to stay in the home.

As a first-time home buyer it’s expected that you’ll have a number of questions, so don’t be afraid to ask them. The more you educate yourself about the home buying process, the better … after all, purchasing your first home is a pretty big deal!

Have a lingering question we didn’t answer here? Feel free to contact us.

Don't Get Burned by a Credit Freeze

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credit freezeBaby, it’s freezing outside.

With Equifax and other companies reporting massive data breaches this year, more consumers are putting a freeze on their credit reports. And while a credit freeze won’t affect a borrower’s ability to qualify for a mortgage, it does require the borrower to take additional steps during the application process.

Exactly what does a credit freeze accomplish?

A credit freeze blocks anyone — including lenders and employers — from accessing your credit report. Requests for a credit freeze must be submitted by mail, online or over the phone to the three major credit bureaus individually (Equifax, TransUnion and Experian). You’ll need to provide your name, address, date of birth and Social Security number. The fees vary by state but are minimal -- some are free and the most costly ones are $10 each time you place or lift a freeze. Payments can be made using a personal check, money order or credit card. Fees are generally waived for victims of identity theft.

Once placed, a credit freeze stays on your credit report until you lift or remove it. Existing creditors (or debt collectors acting on their behalf) will still have access.

Do keep in mind that while freezing your credit can prevent others from opening new lines of credit in your name, it also prevents you from opening an account yourself. It can affect your ability to purchase a new cell phone, secure a store credit card or pass the security review associated with an application for employment.

Borrowing? Here's what you need to know

If you’ve instituted a freeze on your credit but now want to apply for a loan, you will have to contact each credit bureau to temporarily lift the freeze.

If you're a borrower applying for a mortgage, that freeze will probably only have to be lifted once, because the credit report will be good for the typical 30- to 45-day period from contract to closing. But there are certain situations where another report needs to be pulled by the lender nearer to the closing. In that case, as the borrower you may have to lift the freeze — and pay for it — multiple times.

In addition, borrowers could run into problems in competitive housing markets where you need to close quickly. In those instances, it might be tricky to unfreeze the credit in time for the lender to pull credit reports and complete the underwriting and pre-closing process.

Here are a few considerations if you’re applying for a mortgage with frozen credit.

Check your own credit in advance

While freezing your credit protects you from the time the freeze becomes effective, it does nothing to correct existing credit issues. Get a copy of your credit report from each of the three reporting agencies, check them carefully and correct any errors before you apply for a mortgage.

Get fraud alerts

While a credit freeze “locks down” your credit, a fraud alert still allows creditors to pull your credit report as long as they verify your identity first, according to the Federal Trade Commission. For example, a business may call you to verify that you are the person requesting new credit. However, while fraud alerts may make it more difficult for others to open new credit accounts in your name, they may not prevent misuse of your existing accounts. Placing a fraud alert is easier than a credit freeze. You need only to contact one of the reporting agencies, which in turn is required to notify the others. A fraud alert is free of charge.

Know how the freeze works

Understand the logistics of lifting the freeze — and make sure you allow enough time for the lender to pull credit reports. Consumers who deal directly with the three credit-reporting agencies are given a PIN (personal identification number) to provide, either by phone, online or mail, every time they want to lift or remove the freeze, according to David M. Blumberg, a spokesman for TransUnion. Alternatively, consumers can lock or unlock their credit using a third-party service like TransUnion’s TrueIdentity, which is available online or in an app.

Putting a freeze on your credit report can protect you from identity theft; just be sure to do your homework first.

If you are concerned about fraud and identity-theft issues, contact information for the three major credit bureaus are listed below.

Equifax: 888-349-9960, www.equifax.com

Experian: 888-397-3742, www.experian.com

TransUnion: 888-909-8872 www.transunion.com