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This is a guest post from my sister JP. She was kind enough to help me out by sending an article for while I am in the hospital. In fact when you read this I will have a new baby, I hope anyway.

When my husband and I found out we were pregnant with our second child, we knew that we would quickly outgrow our small, two-bedroom townhouse. We resolved to make it work for as long as we could…and then Obama offered us $8,000 to buy a house. We didn’t have to pay the money back, and with the housing market and interest rates supposedly in a downward swing, it seemed silly not to take advantage of the deal.

We did our best to be smart about the whole process. We set up a separate bank account and started putting money aside every month towards the 3.5% down payment required by FHA (some banks require as much as 20% down on a traditional loan, and that certainly was not going to happen with two kids and two car payments). Although our lease was not up until mid-August 2009, we decided to start looking in April just to ensure that we had plenty of time to find the perfect house.

And we did find the perfect house. At least, we thought we did.

In August of the previous year, we had started looking at houses and eventually decided that we weren’t ready to buy. At that time, we’d fallen in love with a house – or, more specifically, a neighborhood. By April of the following year, the house had just sold, but there were two more houses for sale in the same neighborhood. One was out of our price range, and the other was a short sale and well within our budget. We looked at the short sale, loved it, but decided it was too soon to put in an offer. In the meantime, we kept looking, and nothing else measured up. In spite of the supposed state of the housing market, it seemed like every house that had the square footage we needed was either out of our price range or a total dump. Granted, our price range was not very high ($150,000 max with closing costs paid), and I insisted on staying in West Knoxville. It still seemed, however, like there should have been more options.

When we found nothing that measured up to the short sale by mid-May, we decided to put in an offer with the stipulation that we couldn’t close until July (to keep our mortgage payments from starting until September). Only then did we find out that not only was the house a short sale, but it was also a living trust. We had officially bid on the most complicated house ever.

Everything seemed to be going well. We came in at $135,000 with $5,000 in closing – over $10,000 lower than the asking price after closing costs. The manager of the living trust countered at $138,500 and $5,000 in closing. We accepted. The manager of the living trust sent the offer to the bank for approval, and the bank approved everything…verbally. We started the mortgage process and ordered the inspection, which went very well. After the house passed inspection, we met the homeowners and went ahead and paid them $150 for their fridge, as it was not included in the sales contract. A few days later, the house underwent and passed the FHA appraisal (by this point, we had $700 invested in the house). We were down to the title work, and after that, all that remained was the underwriting phase.

And then, when I was picking up my kids one afternoon, we received a bombshell.

The homeowners had a judgment against them. The house and all of their belongings were being seized by the bank, and they had conveniently moved to Florida. Because of that, we lost the house.

On a more positive note, because we lost that house, we ended up finding another one. Enough time had passed that the other house in the neighborhood had lowered in price to where it was within reach. We bid, we haggled, and eventually we got the other house for $144,000 with $6,000 in closing costs.

Our trials didn’t end there. In fact, we didn’t officially own a house until July 22nd – 4 months after we started looking. I could go on all day about the crack in the basement foundation of that second house, the structural engineer that had to be called out, and the enormous mess when it came time for the underwriting (caused by the government buying up my husband’s student loans).

Instead, I will close with this: Be careful. Have your title work done first, even if you have to pay for it yourself. And don’t give up – the right house (and, for another few months, $8,000) is out there waiting for you.

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Once you have paid off your consumer debt, built up your emergency fund, and started saving for retirement you might be thinking about the best way to tackle that last major hurdle, your mortgage. Mortgages have become what most people see as a necessary evil and just accept it, why not it pay it off, think about what you could do if you didn’t have a mortgage. An important thing to understand when you start thinking about how to pay off your mortgage is that the amount of interest you pay every month is directly proportional to the outstanding principal balance. You will only achieve your goal by reducing the principal balance above and beyond the scheduled amount in your amortization schedule.

Every Two Weeks

This is one of the most popular methods people use to pay off their mortgage early. Essentially you just pay one half of your mortgage payment every two weeks. With 52 Weeks in a year that is 26 half payments or 13 full payments. You get one extra payment every year because two months out of the year you actually make 3 half payments. If you have a $200,000 mortgage financed for 30 years at 5.8% you would pay a total of $222,460 in interest. Using a biweekly scheduled payment you save a total of $44,996 in interest and pay your loan off in 24.8 years with bi weekly payments.

Extra Every Month

Unlike the bi-weekly payments this method would allow you to reduce the principal balance of your account every month. Take your mortgage payment and divide by 12, then pay that amount extra at the end of every month. This would seem to provide the same result as the biweekly method, you pay 13 payments every year, but it doesn’t really work out that way. Because of the way you pay interest on the outstanding principal you actually are going to save more by paying extra every month. Using the same $200,000 example from above you end up saving $52,428 and pay off your mortgage in around 24 years. You end up saving yourself over $7,000 in interest by paying extra monthly.

Other Ideas

In addition to the two main ideas I covered above you can use some additional methods to decrease your interest and accelerate paying off your mortgage.

Found money: I consider found money to be anything you weren’t expecting to get, like gifts, bonus’ and that $20 you found laying in the street. Take any of this found money and throw it at your mortgage, every time you reduce your principal balance beyond a regular payment you are decreasing the interest and moving that payoff date closer.

Raises: If you are lucky enough to get one of these increasingly elusive perks at your job, look at it and see if you really need it. If you don’t need it go ahead and start paying that increase straight to your mortgage and get rolling to true financial freedom.

Side Hustles: These are those little side jobs you do that earn you some extra money. Anything from CashCrate to blogging or more traditional side hustles like hanging Christmas lights or mowing yards can earn you extra cash you can use towards paying off your mortgage, or any other debt for that matter.

Additional Thoughts

Obviously with both the biweekly and monthly methods you aren’t limited to just paying 1 extra payment per year and the more you can pay the quicker you are going to get get it paid off. If you combine these methods with the found money and raise theories you are going to kick your mortgage companies ass. Be careful though and watch out for those payment plans with the mortgage company they usually are going to charge you extra for anything other than the single monthly payment.

Photo: (vauvau)

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As I mentioned in my Net Worth Update yesterday, I am going to cover mortgages this week at Suburban Dollar. Today is a post dedicated to those people who make their living selling mortgages, the Mortgage Brokers. They aren’t your bank, or any bank for that matter. They have gotten a bad rap lately and have taken a good chunk of undue blame for the mortgage meltdown.

What a Mortgage Broker isn’t

A mortgage broker is not a lender. They aren’t your bank and they don’t actually lend you the money to fund your new loan. If you were to go to your bank to get a loan that bank would be the lender and the broker so the money would come directly from the company of the person you are working with. A broker on the other hand works like an intermediary between you and a pool of lenders.

What a Mortgage Broker Does

Typically your broker is going to get your basic information, income, creditworthiness, etc.. and determine the best type of loan for you FHA vs Conventional and then looking at the pool of lenders they have available determine which one is a best fit for your specific situation. They will also monitor their lenders for a rate you are looking for and lock it in when they see it. The broker is going to take your application and make the initial assessment on whether or not you are going to qualify for a loan. It is possible your loan could still fall through in underwriting, but not very likely.  Brokers handle the majority of the paperwork you end up signing and they make sure they have all of the appropriate documents in your file, T’s are all crossed and i’s are all dotted. They will request your appraisal and make sure it will cover the loan amount requested. Once they have all of the appropriate documentation they will send your paperwork to the lender for final approval, underwriting.

How Does a Mortgage Broker Get Paid

Brokers are paid in a couple of ways. The first and most upfront way is in the origination fee on the loan. You are charged the origination fee to cover the costs associated with paperwork and other administrative requirements for the application process. The broker is going to get a cut of that origination fee and the Broker company will get  most of it. Brokers can also get paid through what is called a yield spread premium. Essentially there is what is called a Par Rate for mortgages, anything above Par will result in the broker receiving money from the lender. So if Par is 1% and he gets you locked at 1.5% he is going to get a YSP paid to him from the lender he sells the loan to. A typical yield spread you could expect to pay on loan is going to be between .5% and 1% of the amount of the loan. If you were getting a $150k loan with a yield spread of .5% the broker is going to make $750.

Keep in mind that the fees the broker is going to get paid on are usually negotiable, even if they say they aren’t. Some things are out of their control like the appraisal fee, title insurance fees, and other third party fees. Origination fees, Yield Spreads, and other broker related charges could be negotiable. Make sure you are looking for a broker who is not going to be charging ridiculous fees with a 3% yield spread. Brokers need to get paid too so don’t expect them to do your loan for free but their fees should be reasonable, make sure they are willing to discuss what their YSP is going to be upfront.

If you are buying a new home you should also try to negotiate the realtor fees, they are going to be getting 6% of the value of your home where your broker is looking to make at best between 1 and 2% of the value of your loan.

What Should You Ask Your Broker

  1. What are your fees? And are you willing to negotiate them?
  2. What costs am I likely to incur for each type of loan?
  3. Do you offer rate locks and for how long? (guarantees an interest rate for set amount of time)
  4. What is your Yield Spread Premium?
  5. What is Par Rate at each of your lender?
  6. Is there a pre-payment penalty? (If they say yes… walk away)

Stay tuned tomorrow for more mortgage fun.

If you are currently looking to either refinance or buy your first house and live in KY, MO, SC, or TN you can e-mail for info on the broker I used, he will shoot you straight.

The Rest of Mortgage Week

05/06 –Fixed VS. ARM Rate Mortgages

05/07 – Par Rates, Points, and PMI

05/08 – What to Expect When Closing Your Loan

Photo: (WoodleyWonderWorks)

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Refinancing Now Could Save You Thousands

April 6, 2009

When I purchased my home three years ago I thought I was getting a steal at 5.875% APR, why would you ever want to refinance a loan like that I told myself.  Times have changed and rates have reached the lowest either I or my Mortgage Broker have ever seen them.  If you have been […]

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April ’09 Update

April 2, 2009

Ahhh here we are again. Here is my monthly net worth update. It has been a better month with all of my Assets increasing accept the house, and all my debt decreasing. My wife got a bonus so we paid off the furniture, I will have the other $576 gone before mid month which will […]

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