Spotlight on Finance
By Thomas Connors, Vice President, Capital Region, KeyBank
July’s housing market report from the U.S. Commerce Department offered an unexpected development: new home sales reached their highest levels in nearly a decade, up more than 31 percent from a year ago. This comes on the heels of an April report in the Wall Street Journal that lenders extended $156 billion in home equity loans in 2015—the largest amount since 2007.
For prospective home buyers and current homeowners, this is good news. The housing market is strong, and the value of homes is increasing. So whether you’re looking to buy a new home or make improvements to your existing home, today’s market favors you—the borrower.
Low rates and affordability assistance programs put home ownership within reach.
According to a 2015 Wells Fargo home ownership study, 65 percent of renters want to own a home, but most believe they either can’t afford it or can’t qualify for a loan. The problem with this belief is that there is a misconception about what a good credit score actually is and what it takes to qualify for a mortgage.
A good credit score is 660. And while a 20 percent down payment is ideal, it’s just not realistic for many people. The truth is, several loan programs are available that make home ownership more affordable than most people realize—even if you have very little money down and a credit score below 600.
For starters, Federal Housing Administration (FHA) mortgages require a down payment as low as 3.5 percent of the purchase price. Even if you’ve gone through a bankruptcy or foreclosure, the FHA can help put home ownership within reach. If you have the means to put down 10 percent of the purchase price, the minimum required FICO score is 500. FHA loans are designed to make purchasing a home more affordable than it would be with a conventional loan, especially for the first-time homebuyer. As such, rates are often lower than with conventional mortgages. FHA loans are subject to limits, which vary from state to state.
The U.S. Department of Agriculture (USDA) has its own loan program designed to stimulate home ownership in rural areas across the country. Features of this program include a no-money-down requirement and competitive interest rates. It does require a small fee and upfront premium of 2.75 percent. However, the fees can be rolled into the mortgage. This provides buyers with the opportunity to secure a loan without having to put any money down. Credit restrictions are tighter with USDA loans than they are with FHA loans. It can be difficult to secure a USDA loan with a FICO score less than 620.
Veterans Affairs (VA) mortgages are available only to military personnel, veterans or the spouses of veterans who died of service-related injuries. Qualified borrowers may be eligible for a no-down payment loan without being required to pay private mortgage insurance (PMI). Because the loan is fully backed by the government, it is easier to qualify for a VA loan and still get competitive rates. VA loans are not subject to any kind of income threshold, but there may be limits on the loan amount depending upon the region of the country.
Affordability assistance programs can help low- to moderate-income families with down payment assistance, grants, subsidies, home ownership vouchers, forgivable loans and soft second mortgages. In addition, many banks, including KeyBank, have their own loan products with up to 100 percent financing.
Positive equity can help you tap into needed cash
More than 90 percent of all mortgaged properties in the U.S. have positive equity. This is largely the result of a recovery in the housing market. The byproduct of this is that we are beginning to see fewer refinances and more second mortgages—or home equity lines of credit (HELOCs).
HELOCs are a safe and workable way to access cash to finance remodeling and free up finances for other use, such as paying tuition. They provide cash on an as-needed basis and are best suited for ongoing needs such as home upkeep or to manage the costs of a life changing event. HELOC payments are based on the amount of money accessed from the line of credit. Talk to your tax attorney or accountant for perspective on whether HELOC payments are tax deductible.
If you are considering a HELOC (rates are currently very good for borrowers), obtain your FICO score and gather paperwork and documentation, including W2 forms and pay stubs. Establish what you can easily afford to pay each month by scrutinizing your budget. Then shop lenders to find the best rates and fee structures for your needs.
Assuming home values continue to improve, and you do not treat the equity in your house like an ATM, HELOCs can be an efficient way to manage money and make the most of your home’s value.
Thomas Connors is vice president and district sales manager, KeyBank Mortgage, for Key in the Capital Region. He can be reached at either 518-951-2186 or [email protected] KeyCorp © 2016. KeyBank member FDIC. Opinions, projections, or recommendations contained herein are subject to change without notice and not intended as individual financial, legal or tax advice.
A primer on home loans and lines
Whether you are buying your first home, or improving the one you have, there are a variety of home equity loans and line of credit options to meet your needs—both big and small. Here are the three primary solutions.
Home Equity Line of Credit (HELOC): Based on accumulated home equity, a HELOC offers a variable-rate revolving line of credit that may be borrowed against as the principal is repaid. HELOCs generally have flexible payment options, from interest only to principal plus interest, and often provide borrowers with the ability to lock in fixed rate options.
Home Equity Loan: Based on the amount of equity in your home and has a fixed rate and term, usually between 5 and 30 years. One of the primary benefits is that offers it borrowers the security of a fixed-rate loan. The entire loan is funded at account opening, and cash can be used for a range of purposes, including home improvements, major purchases and debt consolidation.
Home Improvement Loan – A fixed rate loan that does not require collateral and does not tap into the equity in your home. The entire loan is funded at account opening. Unlike home equity loans, money from a home improvement loan must be used for home improvements, which can range from home repairs to remodeling projects, new roof or windows, new patio or driveway, room additions, a pool or more.
If you are considering a home loan or line of credit on your current house, take the time to talk to various lenders about their products so you have a good understanding of interest rates (variable or fixed) and repayment schedules. For example, most lenders put a limit on home equity borrowing, which is typically between 80 to 90 percent of your home’s assessed value.
And know how much you can afford. The lesson we should take from the recent housing market is not that borrowing is bad, but rather that borrowing more than we can afford and depleting your home of all equity is not a sound and sustainable money management strategy.
Finally, don’t underestimate the importance of your relationship with your lender, because working with a lender that already handles your mortgage, car payment or deposits might make a difference when it comes to fees and closing costs.