Q & A with Dottie Herman

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Q1 - I am looking to buy a home; however, I have been renting for years so this is a big step. I am unsure how to know what price range I should be looking in. How do I know how much house I can afford after taxes, insurance, mortgage, etc?

A - Generally mortgage lenders require that the mortgage payment, monthly taxes and home insurance does not exceed 30% of your gross income for the month. They also allow another 10-15% for other debt. So if you make $6,000 a month you would be qualified for approximate a $2000 a month payment. Call a local mortgage lender and ask to be pre qualified for a loan amount. This is the first step in finding out what you can afford, after which you can begin to look at what type of homes you can afford.  You may be pleasantly surprised to find that owning is not much more than renting, and may even be the same after the tax deduction benefits.

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Q2 - I have been living in the same home for 24 years and I am almost done paying off my mortgage. My wife just got a nice bonus at work and we would like to use that money to pay off our mortgage early. Do you suggest we do that? If so, how would we go about that? Or should we just use that money and continue to pay monthly? Are there any benefits to paying it early?

A - As long as you can afford to do it, paying off your mortgage will always save you money. If you do not pay off the loan completely the impact on your monthly payment will depend on the type of loan you have. For an adjustable rate loan your monthly payment will change to reflect the lower loan balance. This normally occurs when the loan is due for adjustment. With a fixed rate loan your payment will remain the same but the term will be shortened and each of your monthly mortgage payments will be more principle and less interest each month based on the lower lowered loan amount. You might also want to check with your tax advisor to see how paying off your mortgage would affect your taxes.

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Q3 - My husband and I have lived in our home for 5 years. We have never been late with a payment, and now we would like to take a home equity loan to re-do our bedroom and bathroom as the renovations will cost about 50,000 and we do not have that kind of cash. How do we go about this? 

A - Most Banks and mortgage lenders offer Home Equity lines of Credit or "HELOC" as they are commonly called.  Most lenders will allow you to borrower up to 80% of your homes current value, including the amount of your current mortgage. So if your home was worth $100,000 with a $50,000 mortgage then you would be able to receive up to $30,000 through a HELOC. Most HELOCs are a variable rate and payment that allow you to borrow and repay over and over again using an interest only payment.  Fixed rate, fixed payment loans are also available and would make more sense if you plan to use the full amount and intend to pay it back over a longer period. Also the Fixed rate/ payment loan will protect you from increases in the mortgage rates in the future.

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Q4 - What is the difference between taking a renovation loan, or a line of credit? Is one better to do than the other? We want to make some rather expensive updates to our home and we can't afford to just pay the cost, so what should we do?

A - The basic difference between the two loans is that a line of credit will be based on the present value of your home while a renovation loan will allow use of the improved value after the renovation work.  Since you say you are looking to do expensive updates a renovation loan may be best, especially f you already have a mortgage. If you have a low mortgage amount you may be able to access enough of your homes equity to renovate through a line of credit to cover the costs.  But a renovation loan will also provide you with one fixed rate mortgage when completed. The way these work is that you plan and get firm quotes for all of your work, the lender then appraises the home based on its completed value and the loan you request is then based on this amount,  An example of this: your home is now worth $350,000 and you mortgage is $275,000. The planned improvements total $125,000.  Since your mortgage and cost of improvements add up to more than the value of your home you would not be able to borrower enough against the homes value.  With a renovation loan if the value, after completion, is $475,000, the renovation loan would allow you up to 80% or $380,000 therefore covering the majority of the renovation work.  There are renovation loans that will finance up to 90% of the improved value.  The FHA sponsored program is called the 203K program.  Check with mortgage lenders.

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If you have a real estate question for Dottie, please send it to; Dottie@RealEstateChannel.com.
 
NOTE: Due to high volume of questions, not everyone can be answered, but she'll do her best. 

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