Mortgage rates hit a new low this week of 6.08% for a 30-year fixed loan—the lowest it’s reached in two years.

Nearly a year ago, mortgage rates peaked at 7.79%, but since the Federal Reserve slashed rates last week for the first time since 2020, rates have finally begun to fall—and so have monthly housing payments.

So just how much does it cost per month to buy a a median-priced home today? We crunched the numbers using the Realtor.com® mortgage calculator.

Monthly mortgage payments at a rate of 6.08%

In August 2024, the national median list price for a home was $429,990.

The typical monthly payment at today’s 6.08% mortgage rate on a median-priced home is roughly $2,080, assuming a 20% down payment and excluding tax and insurance.

This is a $394-per-month improvement compared with when rates peaked in October 2023.

Monthly mortgage payments with a 3.5% down payment

An FHA loan requires a 3.5% down payment for most borrowers.

So, assuming a 3.5% down payment and excluding tax and insurance, the typical monthly payment at today’s 6.08% mortgage rate is roughly $2,509 on a median-priced home.

Homebuyers save $475 per month on mortgage payments compared with when rates peaked in October 2023.

Biggest boosts in buying power

Want to see how much more buyers spend on a mortgage payment today compared with what they were paying when mortgage rates peaked in October 2023?

Below are the top three metros—all of them in California—that have seen the biggest boosts in buying power since mortgage rates dropped.

San Jose, CA

August 2024 median list price: $1,399,000
August 2024 monthly payment with 20% down (at 6.08%): $6,768
October 2023 monthly payment with 20% down (at 7.79%): $8,049
Monthly savings since rates peaked: $1,281

Los Angeles, CA

August 2024 median list price: $1,190,000
August 2024 monthly payment with 20% down (at 6.08%): $5,757
October 2023 monthly payment with 20% down (at 7.79%): $6,847
Monthly savings since rates peaked: $1,090

San Francisco, CA

August 2024 median list price: $969,000
August 2024 monthly payment with 20% down (at 6.08%): $4,688
October 2023 monthly payment with 20% down (at 7.79%): $5,575
Monthly savings since rates peaked: $887

Hurricane Helene, the “strongest in recent memory,” is racing toward Florida’s Gulf Coast and is set to create a “nightmare” surge along the coast with damaging winds across five Southeastern states.

Helene is expected to reach Florida’s Big Bend between 8 and 11 p.m. on Thursday, with winds around 125 mph.

“Certainly nobody in recent memory has seen a storm of this magnitude,” Gov. Ron DeSantis warned.

The governors of Florida, Georgia, South Carolina, North Carolina, and Virginia have all declared a state of emergency, and thousands of people have been forced to evacuate.

Forecasters are also warning of tornadoes and mudslides, and President Joe Biden is sending the head of the Federal Emergency Management Agency to Florida on Friday to survey the damage, according to the Associated Press.

It’s unclear how much damage Helene is set to wreak across the Southeastern states, but homeowners should be prepared. It’s estimated that a staggering 15% to 20% of Florida homeowners lack homeowners insurance.

Why many homeowners don’t have insurance

Today, almost half of the homes in America are at risk of severe or extreme damage from environmental threats, affecting nearly $22 trillion in real estate, according to a recent Realtor.com® report.

To cut their potential losses, “many insurers are stopping coverage in certain places because of the risks associated with climate change and extreme weather,” says Gregg Barrett, CEO of property and insurance company WaterStreet.

Farmers Insurance announced last summer that it wouldn’t be offering any home, auto, or umbrella policies in the state of Florida—which affected about 100,000 customers.

And even if insurance is offered, it’s often so expensive that homeowners decide to forgo it. While lenders typically require insurance, homeowners without a mortgage may decide to do without it.

“Climbing housing and insurance costs have pushed some homeowners to forgo homeowners insurance coverage,” says Realtor.com senior economic analyst Hannah Jones. “The lack of coverage is especially high, and especially concerning, in areas such as Houston and Miami. Homeowners in these metros face a high risk of property damage due to extreme flood and hurricane events, and are therefore confronted with high insurance costs that may feel untenable to many households.”

And even in cases where homeowners can afford the insurance, some are deciding it’s not worth the cost.

“For really the first time ever, we’re seeing a widespread trend of homeowners doing a cost-to-benefits analysis of insurance and deciding on the uninsured route,” says Elizabeth Dodson, co-founder of homeowner management software HomeZada. “It doesn’t help that today’s policies cover less than the policies of the past, making the choice to cancel seemingly easier than ever.”

The rising costs of insurance

Home insurance has gotten much more expensive. Nationally, insurance premiums rose 11.3% in 2023 and shot up 33.8% from 2018 to 2023, according to S&P Global Market Intelligence.

In Florida, the average cost of homeowners insurance has tripled over the past four years.

Florida homeowners paid $10,996 annually for home insurance in 2023—which is more than four times the national average of $2,377, according to a recent report from Insurify.

Insurify predicts costs will increase an additional 7% in 2024, to $11,759.

“Climate change leads to more frequent and severe natural disasters, increasing insurers’ payouts and thus raising premiums to cover these risks,” says Nick Taylor, vice president of mortgage company Better.com.

The risks of not having home insurance 

While homeowners who don’t have home insurance might be saving money now, they face far more devastating costs down the line if their home gets hit by a hurricane—or other extreme weather event.

“Opting out of insurance coverage leaves households exposed to unexpected damage and the resulting repair costs,” says Jones.

The Consumer Federation of America report estimates that $1.6 trillion in property is now vulnerable to an array of natural disasters and other calamities. The analysis also found that going without insurance can affect homeowners’ ability to build wealth and financial security over time.

The rising cost of homeowners insurance “puts consumers in a challenging position: bear the increasing financial strain of home insurance or risk the potential for significant financial losses in the event of property damage without it,” says Travis Hodges, the managing director of omnichannel sales and service at digital insurance company VIU by HUB.

“If you’re just trying to get by, you don’t have the luxury of worrying about climate change,” Dr. Jennifer L. Barkin, executive director of the Center for Rural Health and Health Disparities at the Mercer University School of Medicine in Macon, GA, told the Association for American Medical Colleges in 2023.

Many uninsured homeowners would rather take a gamble on a catastrophic weather event happening, even though it might cost them big in the end.

What to do if you don’t have home insurance

Even if you think insurance isn’t offered or is too expensive in your area, it’s important to check—and shop around.

“Premiums, coverage, and other variables can vary widely from state to state and provider to provider,” Dodson says. There are still relatively affordable coverage options, even in places such as Florida.

“A good place to start your search is by reaching out to local agents and brokers in your area,” she adds.

One option is the federally run National Flood Insurance Program, which provides flood insurance to homeowners with capped increases of 18% a year for most policyholders.

How to protect your home without home insurance

At least 43% of homeowners say they have not done anything within the past five years to protect their property against extreme damage, according to Bankrate’s 2024 Extreme Weather Survey.

Luckily, there are steps you can take to protect your home now to avoid a big bill later.

“As damaging weather events become more common, it’s essential that homeowners know the risks and take steps to make their houses more resilient,” says Cassie Sheets, a data journalist at Insurify in Cambridge, MA.

To protect your home from hurricanes, securing your property is priority No. 1. Hurricane shutters and metal grates can provide a secure barrier against flying debris, high winds, and heavy rainfall.

Hurricane-grade, impact-resistant windows and doors can help reinforce vulnerable entry points—and braces or hurricane clips will secure your garage door.

“Understand where a home may be susceptible to flooding and wind damage in the case of a storm,” says Steve Powell, executive vice president of specialty operations at Sedgwick claims management services.

Seal skylights and roof vents, and clean your gutters and downspouts. Before an extreme weather event, bring in or secure outdoor patio furniture so it doesn’t fly around.

“Homeowners should also be cognizant of the risk of trees coming down,” says Powell—so that you can cut down dead branches or falling limbs before a storm to stop them from becoming dangerous projectiles.

To prevent flooding before it starts, maintaining proper grading is crucial.

“It is critical, especially in flood zones, for homeowners to ensure the ground around their homes slopes downward and away from the foundation,” says disaster preparedness expert Peter Duncanson, who is vice president of training and development at ServiceMaster Restore in Atlanta.

This helps stop water from seeping into the home and reduces the risk of water damage, foundation issues, and basement flooding.

As wildfire season rages in California and as Hurricane Helene threatens to hit Florida, more than a quarter of U.S. homeowners say they’re financially unprepared for the costs associated with extreme weather events.

In fact, at least 43% of homeowners say they have not done anything within the past five years to protect their property against extreme damage, according to Bankrate’s 2024 Extreme Weather Survey.

The survey also found that 15% of homeowners say they would be unable to pay their deductible without going into debt if their home sustained major damage, while at least 13% said they didn’t even know what their homeowners insurance deductible is.

More concerning is that at least 7% of people surveyed admitted to not having any homeowners insurance.

These are sobering facts, especially considering the U.S. experienced 28 separate weather and climate disasters last year alone—which cost at least $1 billion.

Plus, 44.8% of homes in America—with a total value nearing $22 trillion—confront at least one type of severe or extreme climate risk from either flood, wind, wildfire, heat, or air quality, according to the 2024 Realtor.com® Housing and Climate Risk Report.

“Extreme weather could affect any homeowner, whether it be floods, tornadoes, or wildfires,” says Steve Leasure, vice president of operations at Rainbow Restoration in Waco, TX. “It is important to be aware of common cases of extreme weather in your area and be prepared for any scenario.”

If you’re financially unprepared for an extreme weather event at the moment, here are five steps you can take to turn things around before disaster strikes.

1. Check what your existing insurance covers

If you have homeowners insurance, dust off your policy and take a good look at it.

“Carefully read through your policy documents, make a list of covered perils and exclusions, and check coverage limits for different categories such as dwelling and personal property,” advises Sebastian Hov, CEO of 18 Insurance in Los Angeles.

Extreme weather has significantly changed the insurance landscape in a variety of ways. More frequent and severe natural disasters have led to higher premiums.

“Some insurers are pulling out of high-risk areas. Deductibles for weather-related claims are climbing, and coverage for certain perils may be more restricted,” says Hov.

If you don’t have enough coverage, or have the wrong type of coverage, you’ll likely have to pay out of pocket for weather-related repairs.

So what’s covered and what’s not?

Disasters usually covered under a typical homeowners policy include tornadoes, wildfires, hail, cold weather, and snow.

Extreme weather events that are typically not covered by a standard homeowners policy are earthquakes and flooding—but homeowners can purchase additional policies for those events.

When it comes to hurricanes, wind damage is normally covered while flooding is not.

2. Find out your deductibles—then start a fund to cover them

Knowing your deductible amount is as important as knowing what you’re covered for.

“If you don’t know what it is, ask your agent,” says Hov. “If you want to lower it, consider how doing so affects your premium.”

Your insurer might require an increased deductible in some weather-related cases.

For instance, a separate hurricane deductible or “named storm deductible” might be required for hurricane-related wind damage, especially in coastal cities, according to Cassie Sheets, a data journalist at Insurify in Cambridge, MA.

In tornado-prone areas, there is often a separate higher deductible for tornado-related wind damage.

For hail damage, you frequently see larger deductibles in areas where hailstorms hit hardest.

So start saving those pennies.

“Having a dedicated emergency fund to cover your deductible is wise, and ensures you can file a claim when necessary without financial strain,” says Hov.

3. If you are in a high-risk state, shop and compare

In hurricane- or wildfire-prone states such as Florida and California, some major insurers have stopped offering coverage entirely, which can make surviving a storm there all the more challenging.

“Insurance companies have reevaluated how they rate extreme weather risk,” says Sheets. “Some have excluded certain weather perils from their coverage.”

So what can a homeowner do?

“Beyond the possibility of moving to another state, you can shop around extensively for coverage options, look into excess and surplus lines of insurers if standard coverage isn’t available, and consider state-run insurance programs as a last resort,” explains Hov.

4. Protect your home now to avoid a big bill later

When it comes to extreme weather, an ounce of prevention is worth a pound of cure.

As damaging weather events become more common, says Sheets, “it’s essential that homeowners know the risks and take steps to make their houses more resilient.”

Here’s how.

To protect your home from hurricanes

Securing your property is priority No. 1.

Hurricane shutters and metal grates can provide a secure barrier against flying debris, high winds, and heavy rainfall.

“They can help prevent breakages to windows and doors that can lead to a high cost in repair damages,” says Leasure.

To protect your home from hail

To strengthen your roof to protect it from hail damage, consider using hail-resistant roofing materials.

“Some states, like Louisiana, even have grants that can help homeowners pay for the cost of reroofing,” says Sheets.

To protect your home from tornadoes

To prevent flying glass, “I recommended investing in impact-resistant windows,” says disaster preparedness expert Peter Duncanson, who is vice president of training and development at ServiceMaster Restore in Atlanta.

Install storm shutters, secure entry doors, and brace garage doors.

To protect your home from earthquakes

Major earthquake-proofing projects include reinforcing a home’s foundation or bolting the foundation to the frame.

But if you want to start smaller, anchor large furniture pieces to prevent them from falling over during an earthquake.

Or install an automatic gas shut-off valve near the meter to prevent gas leaks in the event of a quake or aftershocks.

To protect your home from wildfires

To protect your property from fire damage, invest in fire-resistant materials like roofing, siding, and windows designed to withstand high heat.

“Also, keeping the area around the home clear of flammable vegetation and installing fire-resistant landscaping are good ideas,” says Duncanson.

Homeowners should install spark arresters on their chimney and regularly clean gutters and roofs to remove any dry debris that might be accumulating.

To protect your home from flooding

To prevent flooding, maintaining proper grading is crucial.

“It is critical, especially in flood zones, for homeowners to ensure the ground around their homes slopes downward and away from the foundation,” says Duncanson.

This helps stop water from seeping into the home and reduces the risk of water damage, foundation issues, and basement flooding.

“Raising the elevation of your home can also be a good idea if you live in a high-risk flood zone or regularly experience flooding,” says Leasure.

To protect your home from snowstorms or extreme cold

Taking the necessary steps to winterize your home is essential.

“Checking for leaks, installing proper insulation, and making sure any cracks are sealed and repaired are some of the best ways you can financially prepare yourself for the extreme weather,” says Matt Eskew of J. Blanton Plumbing, Sewer & Drain in Chicago.

Winter-related damages can be expensive and mentally draining, “so it’s best to be proactive and follow necessary precautions,” says Eskew.

5. Take photos of all of your belongings

Create a home inventory list, and take photos of all of your possessions—and ideally save an electronic file or keep it off your property so you could access it off-site.

In the event of an extreme weather event, this information will make filing future insurance claims so much easier.

It will also help you get reimbursed faster, which will put money back in your pocket at a time you need it most.

A day after the Federal Reserve’s historic interest rate cut this week, mortgage rates dropped to 6.09% for a 30-year fixed loan.

That’s a two-year low—and a steep decline from nearly a year ago, when rates reached a 23-year high of 7.79% in October 2023.

This rate drop has “dramatically improved buying power across the U.S., further bolstered by easing prices in some areas,” notes Hannah Jones, Realtor.com® senior economic research analyst.

So how much are homebuyers now saving? We crunched the numbers to find out. Here are the basics nationwide:

• In October 2023, the national median list price was $425,000.
• The monthly mortgage payment (principal and interest) in October 2023 at the peak rate of 7.79% was $2,445.
• In August 2024, the national median list price was $429,990.
• The monthly mortgage payment (principal and interest) in September 2024 at the rate of 6.09% is $2,082.
• This means that homebuyers nationally save $363 per month since rates peaked. That’s a whopping $4,356 per year.

Curious about how much you could be saving yourself? Homebuyers can use the Realtor.com mortgage calculator to determine their own personal potential savings based on current interest rates, home prices in their area, and other variables tailored to their situation.

Cities that have seen the biggest savings

While the typical homebuyer will save $363 per month, there’s a wide range of savings based on the local housing market.

Generally, savings will be bigger where home prices are higher. Many of these expensive markets have also experienced price cuts since October 2023, which can further pad a buyer’s bottom line.

Here are the top 10 cities that have seen the biggest savings on monthly mortgage payments in the wake of rates dropping to a two-year low.

San Jose, CA

October 2023 median list price: $1,380,694
August 2024 median list price: $1,399,000
October 2023 monthly mortgage payment (at 7.79%): $8,027.97
September 2024 monthly mortgage payment (at 6.02%): $6,775.07
Savings since rates peaked: $1,252.90

Los Angeles, CA

October 2023 median list price: $1,159,000
August 2024 median list price: $1,190,000
October 2023 monthly mortgage payment (at 7.79%): $6,738.94
September 2024 monthly mortgage payment (at 6.02%): $5,762.92
Savings since rates peaked: $976.02

San Francisco, CA

October 2023 median list price: $1,098,000
August 2024 median list price: $969,000
October 2023 monthly mortgage payment (at 7.79%): $6,384.26
September 2024 monthly mortgage payment (at 6.02%): $4,692.67
Savings since rates peaked: $1,691.59

Oxnard, CA

October 2023 median list price: $1,050,000
August 2024 median list price: $1,050,000
October 2023 monthly mortgage payment (at 7.79%): $6,105.17
September 2024 monthly mortgage payment (at 6.02%): $5,084.93
Savings since rates peaked: $1,020.23

San Diego, CA

October 2023 median list price: $999,000
August 2024 median list price: $999,000
October 2023 monthly mortgage payment (at 7.79%): $5,808.63
September 2024 monthly mortgage payment (at 6.02%): $4,837.95
Savings since rates peaked: $970.68

Bridgeport, CT

October 2023 median list price: $889,225
August 2024 median list price: $800,000
October 2023 monthly mortgage payment (at 7.79%): $5,170.35
September 2024 monthly mortgage payment (at 6.02%): $3,874.23
Savings since rates peaked: $1,296.11

Boston, MA

October 2023 median list price: $837,374
August 2024 median list price: $834,500
October 2023 monthly mortgage payment (at 7.79%): $4,868.86
September 2024 monthly mortgage payment (at 6.02%): $4,041.31
Savings since rates peaked: $827.55

Honolulu, HI

October 2023 median list price: $798,750
August 2024 median list price: $725,000
October 2023 monthly mortgage payment (at 7.79%): $4,644.29
September 2024 monthly mortgage payment (at 6.02%): $3,511.02
Savings since rates peaked: $1,133.26

Seattle, WA

October 2023 median list price: $792,250
August 2024 median list price: $775,000
October 2023 monthly mortgage payment (at 7.79%): $4,606.49
September 2024 monthly mortgage payment (at 6.02%): $3,753.16
Savings since rates peaked: $853.33

New York, NY

October 2023 median list price: $729,444
August 2024 median list price: $750,000
October 2023 monthly mortgage payment (at 7.79%): $4,241.31
September 2024 monthly mortgage payment (at 6.02%): $3,632.09
Savings since rates peaked: $609.22

Would-be homebuyers, weary of the sky-high interest rates that have held them back for the past couple of years, finally got encouraging news on Wednesday: The Federal Reserve announced a half-point rate cut, bringing the central bank’s effective benchmark rate to about 4.8%, down from a two-decade high of about 5.3%.

Mortgage rates, which have already dropped roughly a percentage point since May, should continue to trend down as the Fed signals further rate cuts. (Though interest rates and mortgage rates don’t directly correlate, they often move in the same direction.)

But where mortgage rates will land in the wake of the Fed rate cut remains to be seen.

Rates have been on a roller-coaster ride for years, hitting a low of 2.65% in January 2021 and a multidecade high of 7.79% in October 2023. For the week ending Sept. 19, 2024, rates dropped to 6.09%, according to Freddie Mac, a low not seen in over a year.

While this downward movement is good news for homebuyers long kept on the sidelines due to affordability challenges, any rate above 6% might still present a mental stumbling block for those borrowers who feel they missed out on the ultralow rates of a few years ago.

However, “each improvement in mortgage rates has the potential to bring more buyers into the housing market,” says Realtor.com®  senior economic research analyst Hannah Jones.

So what’s the magic mortgage rate number that could finally pull hesitant buyers off the sidelines and back into the game? It depends.

Why 6% still seems high

Though rates have dipped to 6.2%, it’s still a hard pill to swallow for many buyers who feel they missed out on the record lows of 2020 and 2021—even if they weren’t home shopping at the time.

The numbers tell the story: At a mortgage rate of 3%—common during the COVID-19 pandemic—a $400,000 home could have a monthly mortgage payment of roughly $1,686 (assuming a 20% down payment and standard loan terms). But when rates hit 6%, that same home suddenly required a monthly payment of $2,398—an increase of more than $700.

But attitudes might shift if rates dip below 6% and head into the 5% territory.

“According to a recent survey, a sizable 40% of potential buyers would find a home purchase feasible if mortgage rates were to drop below 6%,” says Jones.

The psychological sweet spot of 5%

For many potential buyers, 5% seems to be the psychological sweet spot—the rate that could shift them from window shopping to making serious offers.

While rates around 5% might not be the historical lows of the pandemic years, they represent a more comfortable middle ground for buyers.

Indeed, “32% of buyers would be willing to participate [in the housing market] if rates dropped below 5%,” says Jones. “Moreover, 86% of outstanding mortgages have a rate of 6% or lower, 76% have a rate of 5% or lower, and 57% have a rate of 4% or lower.”

While current homeowners won’t necessarily wait until rates are equal to their current mortgage rate, they will likely look for the gap to be smaller than it is today.

On Wednesday, Federal Reserve Chair Jerome Powell announced a half-point rate cut—the first cut since 2020. It was cause for celebration for many, including homebuyers and homeowners.

To be clear, the Fed doesn’t set mortgage rates, but Fed rates and mortgage rates tend to move in the same direction. So for homebuyers, this is good news since it should lead to lower mortgage rates. But what does a rate cut mean for Americans who already own a house?

The average homeowner is sitting on $315,000 in home equity. This equity is what the homeowner actually owns of the property versus what is still owed to the lender.

Homeowners can tap this equity in a variety of ways, like a home equity loan or line of credit, or HELOC. But since such loans must be paid back with interest, many have been waiting for rates to drop before they dig in.

With this latest rate cut, their window of opportunity might have opened.

“Falling interest rates will have two primary impacts on homeowner’s equity,” says Realtor.com® senior economist Ralph McLaughlin. “First, lower rates means the cost of tapping into home equity goes down. We should expect the cost of tapping into home equity to continue to come down as inflation cools and rate cuts arise.”

The second impact of falling rates on home equity is lesser known but will still come as a nice surprise.

“Second, there is historically an inverse relationship between rates and prices,” says McLaughlin. “That is, as rates go down, prices come up, which means even more potential equity growth for homeowners.”

How much will rates fall on home equity loans?

But how much of a difference will a rate cute make on home equity loans? Not as much as many might hope.

“Any rate drop will be small,” says Kyle Enright, president of lending at Achieve in San Mateo, CA.

When the Fed makes a cut, interest rates on new HELOCs, home equity loans, and existing variable-rate HELOCs will typically be reduced by the same amount, he says.

And if you already have a home equity loan with a fixed rate, your interest rate will stay the same. (Though, you could always refinance if the going rate falls below your current one.)

But all in all, rate cuts are good news for homeowners who hope to tap their home equity.

“Borrowing against one’s home equity is typically cheaper than credit cards or personal loans since the debt is secured by the home,” McLaughlin explains.

How do you tap your home equity?

Even if the average homeowner has over $300,000 in equity, that doesn’t mean the homeowner can tap the whole amount.

Lenders typically allow you to borrow between 75% and 85% of your home’s assessed value because it’s considered less risky for them.

In the second quarter of 2024, the average homeowner had $214,000 in tappable equity, according to recent data from ICE Mortgage Monitor.

There are three ways to tap your home equity: cash-out refinancing, a home equity loan, and a home equity line of credit, or HELOC.

The least expensive way to take equity out of your home varies by lender, and also by personal factors such as your credit score, loan-to-value ratio, and debt-to-income ratio.

Cash-out refinancing

Cash-out refinancing was wildly popular from 2019 to 2021 due to record-low interest rates.

During a cash-out refinance, you get a new loan that’s larger than what you owe. You pocket the difference—but you lose your old mortgage rate in the process.

Because roughly 86% of outstanding mortgages have a rate of 6% or below, most homeowners don’t want to give up their low-interest loans for new ones at much higher rates.

Keeping your low fixed-rate mortgage and getting a HELOC or home equity loan is a smarter and cheaper move, according to real estate investor Erwin Jacob Miciano of South El Monte, CA.

Home equity loan

A home equity loan is a type of second mortgage that allows borrowers to pull cash out of their equity, while using the home as collateral.

The loan comes as a lump sum, typically with a fixed rate.

Last week, the average rate on 10-year fixed home equity loans decreased to 8.61%—and is expected to go down after the Fed’s anticipated rate cut.

“Home equity loans are more structured and make sense for larger, one-time expenses like college tuition or major repairs,” says Robert Shepherd, CEO of Peak & Home Partners in Rockville, MD.

Home equity line of credit, or HELOC

A HELOC, or home equity line of credit, allows you to borrow money against a portion of your home equity.

This revolving line of credit typically has a variable rate, and you can use it when you need to or just have it on hand for a rainy day.

The average HELOC interest rate is 9.25%—and should dip further after the Fed’s expected rate cut.

While those rates are higher than the average interest rate on a typical mortgage, they are still much lower than the average credit card interest rate, which is currently 27.71%, according to Forbes Advisor’s weekly credit card rates report.

They’re also lower than the average interest rate on a personal loan rose to around 12.35%, according to Bankrate.

“A HELOC functions more like a credit line, allowing you to draw funds as needed. So if you prefer flexibility in accessing money over time, a HELOC could be suitable for you,” says Odest Riley Jr., a partner at SoCal Premier Property Management in Inglewood, CA.

The risks of tapping home equity

Homeowners should keep in mind that borrowing against your home equity comes with risks.

“The main downside? You’re putting your home on the line,” says Miciano. “If you default, you risk foreclosure.”

That’s a huge risk.

“Another downside is that if home values drop, you could end up owing more than your home is worth, which can put you in a precarious financial situation,” says Shepherd.

“The downside of borrowing against one’s home are twofold: First, a lien will be put on your home, which means that you won’t be able to sell your home until that debt is either paid off or settled at closing,” says McLaughlin. “Second, if home values go down enough, you could end up being ‘underwater’ on your home, whereby the total amount of debt secured by your home is more than the value of the home itself.”

So before you pull equity out of your home, it’s crucial to consider the possible repercussions.

Additionally, HELOCs have variable interest rates, meaning your payments could increase if rates rise in the future—and some have stiff prepayment penalties, so read the fine print.

“Other HELOCs are interest-only, with a large balloon payment due at the end,” warns Enright. “Homeowners must understand if this is the case and be saving in order to make that payment”—otherwise, they could lose their home.

While tapping equity is beneficial in certain situations, over-leveraging can be dangerous.

“It’s important to evaluate your financial situation carefully before deciding which path to take,” says Riley.

If you’ve been saving for a first home but have been sitting on the sidelines because of high interest rates, get ready: It’s just about “go” time.

In case you haven’t heard, the Federal Reserve recently let slip that it will likely cut interest rates in September. Just the mere idea of a long-awaited rate cut caused mortgage rates to take an anticipatory dip to 6.35% for a 30-year fixed mortgage for two weeks straight.

Rates could go even lower, with the Realtor.com® midyear forecast predicting that rates will fall to 6.3% by the end of 2024.

As interest rates drop, more people might be lured into the market, which could drive home prices up. In other words, if you’ve been hoping to buy a home, now may be the time.

“First-time homebuyers can start preparing for the housing market by getting to know their budget and preferences and becoming familiar with the housing market in the area they hope to buy,” says Realtor.com senior economic research analyst Hannah Jones. “Understanding what is available and how it matches your ideal budget is important to set realistic expectations.”

For reference, the typical starter home (which Realtor.com defines as 0-2 bedrooms) had a median list price of $323,000 in July 2024 and comprised 22% of all available U.S. housing inventory.

With that in mind, here are some things that wannabe first-time homebuyers should start doing right now.

Get to know your starter home budget

Budget is a multifaceted term when it comes to buying a first home.

First, it’s essential to know that nearly all residential mortgages are based on a standard rule called the debt-to-income ratio, or DTI. A person’s DTI is determined by dividing monthly debt payments by monthly gross income, and that ratio is used to help evaluate your ability to repay a mortgage.

“Mortgage programs often are structured with two ratios—one for the housing payment and one for total debts,” says Anna DeSimone, former CEO of Bankers Advisory and author of “Closing the Gap in Homeownership.” “Generally, the housing payment cannot exceed 30% of your total monthly income. However, this ratio can be stretched if you have little or no debt.”

Most lenders want mortgage applicants to have no more than a 43% DTI, though some will accept up to 50%. In general, the lower your DTI, the better your chances of getting a higher mortgage. So if you want to buy a first home, try to get your debts down first.

Next, know what you need to cover your monthly expenses.

“Begin by discussing your desired monthly payment with your lender rather than focusing solely on the amount for which you are pre-approved,” says real estate agent Michael Crute, co-founder of Welcome Home Atlanta. “Many homebuyers make the error of basing their purchase on the pre-approval amount instead of tailoring it to fit their budget and short-term and long-term objectives.”

Crute suggests that first-time homebuyers be mindful of additional costs such as moving expenses, interior and exterior improvements, furniture, utilities, homeowners association fees, prepaid expenses, and unforeseen repairs to avoid overextending themselves.

Snag the lowest mortgage rate possible

Even with interest rates on the decline, it’s good to know how to secure the best possible rate for your financial situation.

“When shopping for a mortgage, keep in mind that ‘one price does not fit all,’ and your options might vary based on your credit score and cash available to cover the down payment and closing costs,” says DeSimone. She adds that homebuyers should check their credit report a month or two before they hope to buy a home or meet with a lender.

Everyone can obtain a free copy of their credit report yearly by law. The Consumer Financial Protection Bureau recommends annualcreditreport.com to obtain your free report.

“Look over your report to see if there are any errors on your name(s), current or previous addresses, and the reported credit information,” says DeSimone.

The site also answers many questions and guides you in reporting errors on your report.

“Your report may not be updated with corrected information for several months,” says DeSimone. “When you meet with your lender, explain that you have contacted the credit agencies and mitigation is pending.”

Crute also encourages homebuyers to ask about incentives offered by builders, such as permanent buy-downs on interest rates, which can significantly enhance the affordability of new-construction homes. Additionally, consider using seller concessions to buy down a point on your mortgage rate, though evaluating the financial benefit of such actions based on current market conditions is important.

Explore financial incentives available to first-time homebuyers

There are several programs meant to assist first-time homebuyers, so start looking into these ahead of time. That way you’ll know what assistance might be available to help you qualify for a starter home before interest rates fall.

“Whether you are applying with a community bank, credit union, or mortgage lender, remember that most lenders are dealing with government agencies such as Fannie Mae and Freddie Mac,” says DeSimone. “Eligibility requirements are basically the same due to the universal underwriting standards, so look at the whole package and ask lenders if they are offering down payment assistance or other incentives for first-time homebuyers.”

Research local housing authorities in your area and search for their homeownership programs, says Crute. But be prepared to meet specific eligibility criteria, such as income limits or buying in designated areas.

Many municipalities, states, and federal agencies also offer programs designed to reduce the cost and burden of homeownership, particularly for first-time buyers. Check with your local banks, as they are often mandated by the Community Reinvestment Act to support economic growth, homeownership, and development within their communities.

CRA programs offer “special loan products, grants, lower interest rates, or down payment assistance tailored to first-time homebuyers,” says Crute.

Familiarize yourself with the housing market

It pays to know the area where you want to live so you can nail down your budget.

A good way to start is by using the Realtor.com home search function to find listings in the cities or towns where you want to buy.

“As an initial step, keep your preferences open so that you can view more homes in a broad price range, such as $300,000 to $400,000,” says DeSimone. “The more homes you view, the better you can define ‘value,’ which requires comparison shopping.”

Homebuyers should take time to read all of the property details, noting the square footage, lot size, type of heating, and cooking fuel, DeSimone suggests. Also, look at all the interior and exterior photos and use the mapping features to explore the area in “street” or “satellite modes.”

After your preliminary research, you can narrow your preferences and take a closer look at specific homes—noting how long they’ve been on the market. Be sure to note the property taxes and applicable HOA dues. As a final step, take a look at “recently sold” homes to see what the final prices were so you have a ballpark range of going rates.

“Your diligent research will be worthwhile, and you will be well prepared to start house hunting with a buyer’s agent,” says DeSimone.

Figure out your timing

Even if interest rates suddenly drop, you shouldn’t panic and think you have to make an offer on something immediately, lest you miss out. Ultimately, many variables go into purchasing a home, and locking down the right interest rate is only one of them. The best time to buy a starter home is when you’re ready.

However, if rates reach the “more reasonable” zone, and you’ve planned ahead, this may be your moment.

“Historically, the fourth quarter presents a prime opportunity for savvy buyers aiming to purchase a home,” says Crute.

Sellers active during the holiday season are typically highly motivated to close deals, and leveraging this period can lead to successful acquisitions at potentially reduced prices.

While buying real estate has long been valued as a smart way to build wealth and pave the way to retirement, many people—especially those living in big cities such as New York, Chicago, and San Francisco—spend their entire lives as renters.

For this urban set, homeownership isn’t a reasonable option due to exorbitant city property prices. Nonetheless, these individuals still need to save for retirement, too.

“Every day in America, 11,000 baby boomers will retire, and shockingly, many of them will outlive their retirement savings,” says Robert Ramirez, a professor of business and faculty chair at DeVry University/Keller Graduate School of Management and author of “Achieving Financial Freedom.” “Money is important whether you own a home or rent, because the future is unpredictable.”

While renters might seem to be at a disadvantage for saving since they “throw away” their money on rent, they have the edge over homeowners in a variety of surprising ways. Here are a few reasons why renting can trump buying a home when it comes to saving for retirement, and some renter-friendly tips for supersizing that nest egg.

Renting can be cheaper than buying a home—by a lot

One misconception that many people might have is that being a homeowner is always financially wiser to renting.

However, according to the Realtor.com July 2024 Rental Report, renting is now cheaper than buying a first home by an average of $1,067 per month.

In major cities, the savings are even higher. For example, New York City renters save $2,342 per month by renting over buying. In San Francisco, renters save $2,442 per month. In Boston, the average is $2,336 per month. That’s a healthy chunk of change that can potentially be reallocated toward retirement.

“Renting lets you reside in these regions without paying high sales prices, which really may not be worth it if you’re not going to stay longer than seven years,” says Ramirez.

Why seven years? Ramirez says that’s the average time it takes for home price appreciation and equity accumulation to recoup the costs of real estate agent commissions, closing, and capital gains taxes that come with homebuying and selling transactions.

Plus, early mortgage payments for homeowners are mostly interest. Equity (the amount you actually own in your home) takes years to establish.

According to the Realtor.com mortgage calculator, homebuyers purchasing a home with a 20% down payment at the latest median price of $439,950 and a 30-year fixed interest rate of 6.4% would end up owing $792,551 in interest over the life of the loan.

During that same amount of time, renters could instead save the money they would spend on interest and funnel that toward retirement.

Renting has lower upfront costs than buying

“Renting can often come with lower upfront costs compared to buying a home, such as not needing a large down payment or paying for property taxes—and this lower upfront cost can free up more of your income to be allocated toward retirement savings,” says real estate agent Michael Crute, founder of a new Renters’ Rewards Program with Welcome Home Atlanta, which gives renters money back for paying their rent on time.

“Buying a home requires a 20% down payment, closing charges, property taxes, homeowners insurance, and maybe mortgage insurance,” adds Ramirez. “Instead, renting involves a security deposit and the first and last months’ rent, which is much lower.”

In other words, lifelong renters will not have to pay all the steep initial fees that go along with homeownership. As such, they have the opportunity for more potential liquidity.

Instead of saving every month for a down payment, Crute says that renters who plan to stay renters would be smart to allocate a certain amount of their income to other investment vehicles, such as IRAs, 401(k)s, or diversified investment portfolios, which might offer better returns over time than a house.

Renting has lower maintenance costs

Another thing to keep in mind is that homeownership comes with expenses that renters never have to pay.

“When you rent, your landlord is generally responsible for property taxes, mortgage insurance, homeowners association fees, property maintenance, and repairs, saving you time and money from the homeowner’s headaches,” says Ramirez. “Renters usually avoid these fees, saving them thousands of dollars per month.”

For example: Lawn care, repairs, and preventive maintenance might cost homeowners 1% to 3% of their home’s worth annually, Ramirez says. For example, a $300,000 home might cost $250 to $750 each month.

Plus, property taxes normally hover around 0.5% to 2% of the home’s value, though that varies by location. Still, for a $300,000 home, that might cost $125 to $500 each month.

And depending on the location and features, HOA costs can be $100 to $1,000 per month in communities with shared amenities. Depending on the property and region, Ramirez estimates that homeowners might spend $650 to $2,925 monthly on these fees, which renters can save instead.

Renting means you can move for the right job

Another advantage renting has over owning is that if a fantastic job opportunity crops up elsewhere, there’s little holding you back from moving there quickly.

“Renting allows you to change jobs, or relocate to a new place without the constraints of property ownership,” says Ramirez.

This can be particularly helpful in today’s ever-mobile world, which includes the expansion of remote work or digital nomad lifestyles.

Job opportunities aside, “Renting provides flexibility to move to more affordable areas or downsize more easily as your financial needs change,” says Crute. “This can potentially reduce living expenses and allow more savings to be directed toward retirement.”

Renting allows for rent increase negotiations

While a mortgage with a fixed rate might be set in stone, renters may benefit from variable rent rates.

However, there is also risk. As the housing supply continues to shrink, the cost of housing can drastically increase for renters since management companies increase rates on a supply-demand economic cycle. As such, Crute suggests trying to negotiate rent increases upfront if you’re willing to stay put.

“Some landlords may be willing to lock in a rate or agree to minimal increases for reliable, long-term tenants,” Crute says.

Start the conversation with your landlord by expressing your intent to rent long term and mention the desire for financial predictability.

“A multiyear term is more favorable to landlords because it gives them more peace of mind surrounding predictable finances and maintenance costs as well as reduces the capital expenses they incur to restore the property for new tenants,” says Crute. “Propose a fixed rental rate or a gradual increase plan that works for both of you, allowing you to save the difference each month.”

Tips to help renters save for retirement

So, contrary to popular opinion, you can see how it’s possible to save money for retirement as a lifelong renter. In fact, you might even be able to save more than someone who buys a house.

“By renting strategically and managing savings and investments wisely, individuals can potentially grow their retirement funds without the financial commitments and risks associated with homeownership,” says Crute.

But there’s a catch: You have to be diligent about putting the money away and not spending it on extra dinners out, vacations, or fancy shoes. Instead of caving to “economic leakage” (spending on things you don’t really need), you’ve got to have renters’ retirement fund discipline.

“It’s easy to get caught up in the now, but every dollar you save today rather than spend on nonessentials is a step toward a more secure and better future,” says Ramirez. “The earlier you begin, the more manageable it becomes over time.”

One great way to get started is by using the Realtor.com Rent vs. Buy Calculator. Comparing the costs of renting versus buying allows you to discover how much money you can save as a renter.

“Then, you can take the difference and sock it aside for retirement,” says Ramirez. “This method helps you turn what may appear to be a short-term saving into a long-term investment in your financial future, ensuring you’re establishing a solid nest egg even if you don’t own any property.”

Here are a few ways you can use the money you aren’t investing in a home to help put you on the path to a stronger retirement:

• Create a forced savings plan for yourself. Homeowners are “forced” to save for retirement with their mortgage serving as the means for future wealth accumulation. Renters can replicate this kind of “forced savings” by setting up automatic deposits into a retirement fund each month. “While renting, take advantage of employer-matched 401(k) and investment accounts to accelerate your savings plan,” says Crute. “Many companies will match 3% to 6% of your contributions, which can significantly boost your savings over time.”
• Build an emergency fund. Save three to six months of living expenses. After you’ve met this goal, you should aim to save at least 15% of your income into a retirement account. Budgeting can help you do this. Ramirez also suggests setting SMART (specific, measurable, achievable, realistic, and time-bound) financial objectives. “By creating SMART goals, you can break down your retirement saving target into manageable steps so you don’t run out of money in your old age,” says Ramirez.
• Purchase long-term care insurance. “As a lifelong renter, you won’t have the equity of a home to fall back on for long-term care,” says Ramirez. “By purchasing long-term care insurance, it can protect your assets and help provide for your retirement needs.” Long-term care insurance is crucial because it covers costs not covered by health insurance, Medicare, or Medicaid, such as daily assistance if you can’t care for yourself. Not all LTCI plans are alike. Look for policies with inflation protection, a wide choice of care options (home care, assisted living, etc.), and a strong financial rating from independent agencies to make a good investment.
• Invest your renters’ savings wisely. Ramirez suggests diversifying your investments in a mix of stocks, bonds, and other assets to lower your risk and maximize your portfolio. As an example, if you calculate that renting is saving you $500 a month, and in turn invest that amount in a diverse portfolio with a 7% yearly return (a typical stock market average), you could get a nice return in 10 years. For example, a 7% annual return on $500 monthly investments over 10 years equals $86,752.

The bottom line is that saving as a lifelong renter is possible, but you must prioritize your future comfort as part of your budget.

“Retirement savings assure you can pay rent and keep a roof over your head no matter what life throws at you,” says Ramirez. “You can secure yourself today and tomorrow by investing in your retirement, not only real estate.”

For homeowners gouged by high interest rates over the past couple of years, there’s good news: Interest rates are near the lowest they’ve been in more than a year.

This drop in rates might have some owners wondering if they should take a chance on refinancing. 

“The decline in mortgage rates does increase prospective homebuyers’ purchasing power and should begin to pique their interest in making a move,” said Sam Khater, Freddie Mac chief economist in a statement. “Additionally, this drop in rates is already providing some existing homeowners the opportunity to refinance.”

Some homeowners are apparently already rolling the refi dice in the hopes of saving big bucks.

Refinance applications are up 58.2% from a year ago—their highest levels since 2022—according to the Mortgage Banker’s Association.

So, should you jump on the refinance bandwagon? Here’s what you need to know before calling your mortgage broker.

Adding up the refinancing equation

If you had told a buyer with a 3.15% interest rate in 2021 that 6.49%—the interest rate as of Aug. 15—was considered low, they’d probably think you sounded ridiculous. But times have changed.

In reality, 6.47% is low compared with standard rates in the 1980s and ‘90s. In October 1981, for example, interest rates peaked at 18.63%. In fact, the high interest rates we’ve seen in the past year aren’t even as high as they were at the beginning of the millennium—in May 2000, the rate climbed to 8.64%.

Rates hit a 23-year high of 7.79% for a 30-year fixed loan last October.

Crunching the refi numbers

“Homeowners should be sure to run the numbers and consider the marginal benefit against the costs, as refinancing does incur closing costs,” says Realtor.com®  economist Hannah Jones. “Depending on the expected savings from refinancing at today’s rate, it may make sense to do now, or it may be more beneficial to hold off a bit longer until rates ease further.”

Let’s take a look at what a potential refinance now could look like.

Refinancing from, say, a 7.79% interest rate to 6.49% could significantly reduce your monthly payments and overall interest. For example, on a $300,000 loan, this rate reduction could lower your monthly payment by around $261, saving you roughly $95,600 in interest over 30 years.

However, consider the closing costs, typically 2% to 5% of the loan amount, and the time it will take to break even on these costs (about 31 months for $8,000 in costs). If you plan to stay in the home longer than this break-even period, refinancing likely makes sense.

How costs can add up

Keep in mind, though, that you’ll have to go through the whole closing rigamarole again—including paying for an inspector, an appraiser, your lawyer, and title costs. And depending on the terms of your original mortgage, you might be hit with a prepayment penalty, which is typically between 2% to 4% of your original loan amount. 

So again, it depends on whether your mortgage company will cover these costs—and under what terms they’re willing to do so. In some cases, your mortgage company will take care of those closing costs, but it usually means a higher interest rate on the back end. 

“If you can refinance your mortgage to a lower rate and receive a lender credit to cover the closing costs, then there is no reason not to,” says Joseph Flannery, director of mortgages at Loan Desk in San Mateo, CA. 

Note that when you refinance, your loan will also start over again. So, if you had a 30-year mortgage but had been paying it off for two years, you’d be on the hook for another 30 years—though you can often renegotiate the length of your mortgage.

You can refinance as often as you like

Lindsey Harn, a real estate agent with Christie’s International Real Estate, says clients are already coming to her about refinancing. In fact, she just refinanced her own home.

If you’re eyeing a refinance, Harn recommends that you check in with your lender.

“Ask the loan officer to keep you on their radar when rates hit your target level, so they can quickly lock you in,” she says.

Homeowners who are considering refinancing should know that doing so now will not prevent them from doing so again later.

“There is no limitation to the number of times you can refinance,” says Flannery. “That is one of the benefits of being a homeowner; it’s a one-way negotiation. If rates fall, you can refinance. If rates stay the same or go higher, the lender is stuck with the loan.”

The advantage of float-down interest rates

No matter what, homeowners “should seek counsel with a trustworthy and professional mortgage advisor who can assist with the particulars or their situation,” says Shmuel Shayowitz, president of Approved Funding, a mortgage company based in River Edge, NJ.

A mortgage advisor “should be able to give some guidance as to whether the applicant should wait or lock in immediately,” says Shayowitz. “They should also be able to advise about any ‘float-down’ interest rate options that would be made available during the process if rates dropped before closing.”

A float-down interest rate allows you to take advantage of lower interest rates for a certain period of time after your mortgage is locked in. 

The mortgage rate outlook

Homeowners should also keep in mind that the Federal Reserve has said that they’re planning on adjusting rates as soon as September, though don’t expect to see huge shifts early on. Analysts say they don’t expect the Fed to cut its benchmark rate more than 0.5 percentage points initially.

No matter where rates fall, Flannery recommends that you always do due diligence when looking for the best lender to refinance.

“People wrongly assume that the lender they make their payments to will offer them a better deal on refinancing—big misconception!” he says. “The best thing you can do is shop around for your refinance because the rates may vary by around .5%, and the fees may vary by around $10,000.”

Bottom line: “If the refinance helps you save money and the fees are $0 or negative, then there is no reason to wait,” says Flannery. “If rates fall further, you can always back out of the original application and reapply with a different lender or refinance again. This is why I recommend refinancing and getting the lender to pay for the closing costs. If there are no closing costs, there is no recoupment time to make the refinance worthwhile.”

Lindsay Hardy doesn’t think she’ll ever own a home, and for the past three years, she’s been renting an apartment in the city center of Philadelphia.

“I just ultimately don’t make enough money to afford anything in the city unless it’s a crappy condo or something not in Center City,” says the 26-year-old marketing director. “If I were to purchase my exact apartment in the exact location, my mortgage on that would be at least double, if not more, with taxes and condo fees and interest.”

Hardy, who is originally from Harrisburg, PA, is not alone in thinking homeownership is just not in the cards for her.

Although 40% of Gen Z and millennials think about buying a home at least once a week, they feel hampered by current economic conditions, according to a new poll from homebuilder KB Home and Harris Poll, which surveyed 2,058 adults across generations.

Additionally, 56% percent of younger generations think they’re in a worse position to buy a home than prior generations.

But much of that skepticism might be due to misinformation and the perpetuation of housing market myths

“Millennials and Gen Z have faced significant challenges during their formative adult years, including economic uncertainty and a fluctuating housing market,” says Rob McGibney, president and chief operating officer of KB Home. 

While there are certainly many factors that make homebuying harder these days—from high home prices to stubborn mortgage rates—these are not necessarily roadblocks but hurdles to overcome.

Read on to learn what myths are keeping millennials and Gen Z out of the housing market—and learn how to make homeownership a reality.  

Myth 1: Interest rates are higher than ever

Ralph DiBugnara, president of Home Qualified, believes that growing up during the 2008 financial crisis scarred Gen Z and millennials.

“They came of age when there was a housing crash. But that was a completely different market that was overbuilt and overleveraged,” he says.

Younger generations also saw interest rates plummet during the first year of the COVID-19 pandemic.

“People are just kind of looking for 2% and 3% rates, and we may never see that again,” adds DiBugnara. 

Alex Shekhtman, the CEO and Founder of LBC Mortgage, adds that he often encounters Gen Z and millennials “who believe interest rates are higher than ever.”

At least 54% of Gen Z and millennials surveyed said they thought mortgage rates were now at an all-time high. 

Mortgage rate myth busted

Some people might think baby boomers—the generation between 60 and 78—were able to buy homes for just pennies. The reality is that in the ’80s, interest rates were much, much higher than they are today.

“While rates do fluctuate, they are not as high as many younger buyers think. Historically, we’ve seen much higher rates, and today’s rates are still relatively low,” says Shekhtman.

In October 1981, they peaked at 18.63%, nearly three times the current interest rates. By the end of the decade, they’d dropped to around 10%.

So while interest rates are higher than their all-time low of 2.65% in 2021, the current rate of 6.75% is around what it was in the years before the 2008 financial crisis. 

“Historically, when rates are cut, prices rise—almost every single time,” DiBugnara says. “Taking a higher interest rate now, rather than whenever they start to decide to cut interest rates, is still smarter. No matter what your interest rate is, you’re going to pay more for the house. You can always refinance to a lower rate, but you can’t refinance to a lower home price.”

Myth 2: You need to put 20% down to purchase a home

One of the biggest myths is that homebuyers must put a minimum of 20% down. Only 36% of those surveyed were aware that you can put down much less. 

“One millennial client was convinced he needed to save up for years to meet the 20% down requirement,” says Shekhtman.

Another Gen Z client thought her student loans would prevent her from qualifying for a mortgage.

Down payment myth busted

Both of Shekhtman’s clients were able to buy homes.

“The homebuying landscape has evolved, and there are many resources and programs designed to help buyers,” he says.

FHA loans, which are insured by the Federal Housing Administration, require only 3.5% down.

Military veterans and active service members qualify for Veterans Affairs loans, and buyers in rural areas might qualify for USDA loans. Neither require you to put any money down. Note that USDA has stringent income limits, and you must purchase in one of its approved areas. 

In addition, several federally supported programs, including the Conventional 97, HomeReady, HomePossible, and HomeOne, allow homeowners to put down as little as 3%.

While each has slightly different requirements, generally, one of the applicants needs to be a first-time homeowner (or not owned a home for the past three years) and have a credit score higher than 620, and the home purchase must serve as the primary residence. These loans also require that you pay private mortgage insurance, or PMI.

“The key takeaway for younger generations is to educate themselves and work with experienced professionals who can guide them through the process,” says Shekhtman. “By debunking these myths and staying informed, Gen Z and millennials can make confident, informed decisions about purchasing a home.”

Myth 3: You need to have stellar credit to qualify for a mortgage

Only 28% of Gen Z and millennials surveyed were aware that you can get a mortgage with a credit score in the 500s. But in reality, there are several loans you can qualify for with a FICO score in the “poor” to “fair” range. 

“There are so many ‘experts’ now on social media and YouTube, and there’s so much information to get, that it’s harder to figure out what you really should be doing,” says DiBugnara. 

Credit score myth busted

FHA loans require a credit score of 580 or above if you put 3.5% down, or between 500 and 579 if you put 10% down.

These loans do require PMI, but you can ask to have it dropped once you’ve paid off 20% of your mortgage. However, you’ll have to get your prospective home inspected and approved by a HUD appraiser.

VA and USDA loans also don’t have any minimum credit score requirements. 

Gen Z and millennials should remember to look at the “whole package,” says Anna DeSimone, a leading expert in fair and responsible lending and author of Closing the Gap in Homeownership.

She adds that buyers need to see what incentives the lender has to offer—such as down payment assistance.

“Remember that ‘one price does not fit all,’ and the best mortgage program isn’t always about the lowest rate—it’s about finding the most suitable option that fits your household needs, financial capacity, and long-term plans,” she says.

Most people think buying a home automatically involves taking on a 30-year mortgage. But these days, homebuyers are increasingly opting for an alternative route—using their investments to bypass a home loan altogether. 

Mortgages have traditionally been considered a “good” type of debt because of their relatively low interest rates, compared to personal loans.

Yet, with interest hovering around 7%, people are looking for low- or no-interest ways to pay for a home and choosing to liquidate their investment funds instead.

So, should you use investment funds to purchase a home and forgo a mortgage? It all depends on your investment portfolio and your appetite for risk.

The case for skipping a mortgage

Cashing out investments “can be a strategic move, driven by unique market dynamics,” says Kris Mullins, CMO of investment firm Capital Max. Mullins says using investment funds can save money in the long run, especially if you’re facing high interest rates like we see now.  

Buying real estate with your investments “circumvents the immediate financial strain of a mortgage and strategically positions the investor to benefit from both real estate appreciation and the liquidity of their remaining portfolio,” adds Mullins.

This approach leverages the advantages of real estate investment without tying up capital in mortgage payments—and can save a ton in interest payments to boot.

The biggest factors to consider

Your age, employment status, and holdings size will all factor into whether using investment funds for a home purchase makes sense. You should ensure you’re meeting your retirement goals “or have enough cash flow after you buy a house to make up for the lost savings,” says certified financial planner R.J. Weiss.

He says that if you have enough cash flow to replenish your investment accounts after buying the home, using your investments for the purchase is not irresponsible.

However, Mullins stresses that you should also consider your “investment time horizon” as you decide whether to use investment money. An investment time horizon is the length of time you can keep cash in investments without dipping into it for major expenses.  

“If your investment horizon lines up with your home purchase timeline and other financial goals, you can ride out market ups and downs without having to sell off your investments in a hurry,” he says. “So, as that homebuying date approaches, make sure your investments are set up to minimize risk. That way, market dips won’t ruin your homebuying plans.”

Other reasons investment funds are an attractive option

Using investment funds to pay for a home gives homebuyers flexibility, says Andrew Hall, vice president and wealth advisor at Farther.

“Clients can sell investments and have cash quickly,” he explains, which “can be the difference in writing the winning offer in a tight housing market.” 

Thanks to new SEC rulings, money from selling investments is usually available the day after you sell the funds, which gives homebuyers an edge in competitive markets.

Hall also recommends looking into portfolio loans. These loans are when the custodian of the client’s account offers a loan against the balance, similar to a home equity line of credit.

“Different security types receive a different percentage of leverage,” says Hall. “This loan has payment flexibility, can be secured in much less time than traditional mortgages, and can avoid some very high capital gains.”

The lowdown on taxes

Any time you take money out of an investment account, you’ll pay a capital gains tax, which is a tax on the profit your investments have made. Factor those tax dollars into the overall “cost” of using investment funds.

Including the cost of capital gains tax in your calculations gives you a clear picture of the total monetary picture of using your investment funds.

Neglecting to account for capital gains taxes could lead to unexpected financial shortfalls, potentially jeopardizing your overall investment strategy and long-term financial goals.

Beware of using retirement funds

If your only investments are your retirement funds, proceed carefully before using them to buy a home.

There are specific rules and penalties regarding retirement accounts. The IRS assesses a 10% tax on money taken out of a 401(k) before the age of 59.5, in addition to the income tax you’ll pay on those funds. 

Some investment advisors allow clients to take out loans of up to $50,000 against their 401(k) for a certain amount of time without incurring penalties. For instance, if you can’t be approved for a mortgage or the only other options are high-interest loans, this might be an attractive option. If you pay off the money on schedule, it won’t impact your credit score. 

The IRS also has a program that allows first-time homebuyers to withdraw up to $10,000 penalty-free from an IRA to use as a down payment. 

Whatever decision you make around using your investments, Mullins and the other financial experts we spoke with recommend that you consult a financial advisor before making any decisions.

“We advise clients to weigh the benefits of immediate homeownership against the opportunity costs of liquidating investments,” says Mullins. “In many cases, a well-timed divestment can lead to greater long-term financial health.”

However, he warns, “Each decision should be tailored to individual financial goals and market conditions in order to ensure a balanced and forward-thinking strategy.”

You’ve saved for years, found the house of your dreams, and just sent your exorbitant down payment to your mortgage broker. But your mortgage broker never received the payment, and your money has disappeared.

This worst-case homebuying scenario happened to Rana Robillard. The tech executive told CNBC she was in the midst of purchasing a house in Orinda, CA, when she received an email from her broker with instructions on wiring her down payment to them. Robillard sent over her $398,359.58 down payment to a J.P. Morgan account, as instructed.

But she soon realized the email she’d responded to was not from her broker—but from a scammer.

Within seconds, her life savings disappeared—and she lost out on her would-be home, too.

It is a nightmare, and Robillard is one of a growing number of people affected by mortgage wire fraud. According to the latest figures from the FBI, consumers lost $445.1 million in fake email-related real estate scams in 2022, up from $9 million in 2015.

After a spate of publicity, Robillard’s banks refunded her money (after five months), but many other victims are not so lucky. Here’s what all homebuyers need to know to protect themselves.

The price of doing business online

Unfortunately, mortgage wire fraud has exploded in popularity in recent years as scammers gain access to new technology and the real estate industry has moved to do business primarily online, according to Shawn Waldman, CEO and founder of cybersecurity consulting firm Secure Cyber.

The scams usually begin at a title company.

“Somehow, an employee at the title company gets their email password compromised, allowing the threat actor to monitor emails going back and forth,” explains Waldman.

This access gives scammers insight into how to mimic the legitimate conversation you are having with the company and allows them to assess whether or not the scam is worth it moneywise.

“Upon gaining email access, the threat actor is able to read the victim’s emails to better understand the environment for a successful scheme,” Eder Ribeiro, the director of global incident response at TransUnion, explains. “They are able to add rules and use native tools to give them long-term access to the email account without having to actively monitor it. Ultimately, the threat actor is able to hijack client conversations at the right moment, with the goal of obtaining a fraudulent funds transfer.”

The scammer then accesses your broker’s real email address to send a fake email, offering new wiring instructions that enable transactions to go directly to them.

Everyone is vulnerable to targeted crimes

Wire transfers are especially attractive targets for scammers because they occur quickly. Money can disappear through a chain of accounts within minutes.

These types of scams, sometimes referred to as spear phishing attacks, often fly under the radar because, unlike the usual email phishing attacks, which attempt to scam thousands of people at once, these attacks usually target one person at a time.

“These scams are very sophisticated and convincing, and even the most vigilant individuals can be deceived,” says Ribeiro. “They are often meticulously engineered to exploit vulnerabilities in human psychology and security systems. Cybercriminals have shown they are willing to invest a lot of time in creating complicated, realistic schemes when there’s the potential for a large payday.”

Bad actors also use multiple techniques to steal people’s money. For example, a scammer might first contact a potential victim over the phone and then follow up with email instructions.

The emails are more advanced, too. By now, many of us have trained ourselves to look out for clunky wording or misspellings. But scammers are now using generative AI to construct their messages, making them harder to detect, warns Ribeiro.

How to protect yourself from scams

To save yourself from falling victim to real estate fraud, first secure your personal and sensitive information. You may want to pay for identity theft protection, which monitors the safety of your online accounts.

You should also confirm payment instructions directly with your loan officer or agent and verify wire instructions through a known phone number before you send any money.

“Wire transfers can be a convenient way to send and receive money, but keep in mind they usually cannot be reversed,” says Darius Kingsley, head of consumer banking practices at Chase. “Be cautious and always ask if there are other ways to pay if you are requested to send a wire.”

Lisa Gaffikin, a home loan specialist with national lender Churchill Mortgage, recommends that homebuyers call the escrow officer assigned to their file and cross-check the wire instructions with the document given to them when they signed their closing loan package.

“Before they order the wire from their outgoing bank, they should have the banker confirm the receiving wire location and account owner to make sure the recipient matches the title company’s bank account,” she says. “Do not trust wire instructions sent via email solely.”

Waldman advises that you talk directly to your brokerage company about what security controls it has in place to prevent wire interruptions.

Above all: “Never accept someone trying to change the details of the transaction at the last second,” he says. “This should be the biggest red flag.”

During the COVID-19 pandemic, many people struggled to pay their mortgages amid widespread job loss and economic instability. And while the pandemic is officially over, many Americans are still struggling to pay their mortgages.

Plenty of people remain in forbearance for various reasons, including the pandemic’s far-reaching economic effects. Around 7.8 million people received COVID-related forbearance between March 2020 and March 2023, and there are currently 110,000 homes in mortgage forbearance, according to the Mortgage Bankers Association. 

“Because housing costs are the biggest monthly budget item for most households, financial setbacks can impact a consumer’s ability to keep up with mortgage payments,” says Realtor.com® Chief Economist Danielle Hale.

The Department of Housing and Urban Development ended COVID-related forbearance programs in November 2023. Yet because of their success, the Federal Housing Finance Agency recently announced additional measures to help struggling homeowners. 

If this sounds like you, read on to figure out what type of assistance might work for you.

What is mortgage forbearance?

When homeowners miss mortgage payments, they can incur late fees, which negatively affect their credit scores. If they continue to miss payments, lenders may initiate foreclosure proceedings. Additionally, unpaid amounts can accumulate, increasing overall debt and financial strain.

Mortgage forbearance allows homeowners to pause or reduce monthly payments for a set period of time.

“Mortgage forbearance programs can give borrowers time to regroup and get back on their feet and on track with their monthly mortgage payments without generally damaging credit,” says Hale. “Forbearance programs can help keep people in their homes, but a borrower will have to ask for this reprieve.”

Once you’ve gone through a forbearance period, you can apply for a deferment, which allows you to move your missed payments to the end of your loan.

Depending on your forbearance agreement, you might pay back the money at the end of your loan period, in one lump sum at the end of your forbearance period (usually one year) or over a six-month period.

Payment supplement program

The Federal Housing Administration unveiled its Payment Supplement program earlier this year.

It allows lenders to temporarily reduce the mortgage payments of at-need homeowners by as much as 25% for up to three years by having the Federal Housing Administration (FHA) pay the difference.

The program is meant to help homeowners reduce payments without increasing their interest rates. The owner only has to pay the supplement when the home is sold, refinanced, or paid off. 

Note that applications are currently open until January 1, 2025. 

Homeowner Assistance Fund (HAF)

In 2022, the federal government created a $9.961 billion Homeowner Assistance Fund to aid homeowners hit hard by the COVID crisis. While many states are no longer accepting applications for relief, 13 states and the Virgin Islands are still offering funds. 

Those states include Georgia, Idaho, Iowa, Kentucky, Montana, New Jersey, Nevada, North Dakota, South Dakota, Tennessee, Utah, Washington, and Wyoming.

However, some states are still accepting waitlist applications, so check your state’s HAF site to find out what you need to qualify.

In most cases, the funds are grants, meaning you’re not obligated to repay them. The money can be used to make mortgage payments or for any associated home expenses like utilities or property taxes. 

Greg Clement, CEO of real estate investment software company Realeflow, calls the HAF a “game changer, if used smartly.”

But, he says, “Don’t do it alone. Reach out to financial advisors who specialize in real estate. They can offer tailored advice and might see opportunities you’ve overlooked. The real power lies in leveraging professional insights and making informed decisions.”

The program is set to end in September 2026.

Flex Modification programs

Both Fannie Mae and Freddie Mac offer Flex Modification programs, which allow struggling homeowners to alter the terms of their mortgages.

This means you can reduce your monthly payments by moving from a standard 30-year mortgage to a 40-year mortgage. In some cases, you can lower your interest rate.

Just keep in mind that moving to a 40-year mortgage can reduce your monthly payments, but it’ll cost you more in interest payments over the life of the mortgage. 

Clement refers to Flex Modification programs as a “financial Swiss Army knife. They can adapt to your needs. Use them to get the lowest possible payments, but also think about renegotiating your interest rates. The goal is to reduce your financial burden as much as possible while you stabilize your income streams.”

Other helpful options

Doug Perry, a strategic financial advisor at Real Estate Bees in Bethesda, MD, says that homeowners who are unable to make payments should also consider whether it’s time to try to sell.

“Home values are up, so there are fewer borrowers underwater, meaning they owe more on their home than it is worth,” Perry says.

One other possible avenue for funds, says Georgia real estate professional and lawyer Bruce Ailion, is to explore options through your local HUD Community Development Block Grant program, which offers money or foreclosure prevention. 

No matter which option you go with, it’s crucial that you consult your lender. 

“The servicer is going to assess if the problem is something that can be resolved in a reasonable time frame, or if it is something that has a long-term solve timeframe,” says Perry. “A borrower should be prepared with documentation on the hardship—the servicer won’t just take your word for it.”

However, a servicer will typically work with a borrower who has a documented hardship and a reasonable chance of resolving it within a certain timeframe.

If that fails, “Think beyond the traditional routes and use every tool at your disposal,” adds Perry. 

Americans’ retirement plans typically include a 401(k), IRA, pension, or some other account with appreciating assets like stocks and bonds. Yet, some might wonder: What about real estate?

Given how much home values have risen over the past few years, it’s understandable that some might think investing in real estate is a smart way to fund one’s retirement. Some might even forgo their 401(k) and funnel money into a growing property portfolio instead. Is this a wise idea?

While real estate is a tried-and-true path to building wealth, putting all your eggs in this basket and ignoring retirement vehicles such as a 401(k) can come with huge downsides. Here are some of the pros and cons of investing in real estate for retirement.

The pros and cons of real estate as a path to retirement

First, the pros of investing in real estate: You have a tangible asset that appreciates over time but that also provides a roof over your head. Real estate (other than in times of a major housing crisis, of course) is generally more insulated from volatility than the stock market.

And if you have real estate you rent out, there are also tax advantages. For example, up to 20% of your rental income can be tax-free.

“Real estate can be an excellent long-term investment,” says Richard Redmond of Richmond Mortgage Capital in San Rafael, CA. “It’s a proven inflation hedge, and in the right areas over the right time frame, [real estate] can outperform many other investments.”

Yet there are some big pitfalls for people using real estate to fund their retirements. For one, it can be difficult to quickly liquidate assets in an emergency, or tap the equity. Rental properties come with headaches in terms of dealing with tenants, housing repairs, and the whims of a shifting and mercurial market.

“A small investor in income-producing real estate—one limited to a few properties in one area— is very exposed to local market conditions, including the local economy, regulations, and natural disasters,” warns Redmond.

For example, Redmond says he has seen many small real estate investors going after Airbnb-type rental properties only to see either their market become saturated or they’ve fallen victim to regulations that restrict short-term rentals.

“Local jurisdictions passing rent control laws or zoning changes can hit income and affect property values,” Redmond explains. “There are a host of problems that can arise in any one locality that can hit real estate income and values.”

Richard Goncher of Backyard Mortgage Group in Garnerville, NY, says a friend’s property in Newburgh, NY, lost value after a shooting at the local high school.

Properties risk “bad tenants and the local area going out of favor,” he says.

In a nutshell, real estate as an investment “is for someone sophisticated and diligent,” says Mark McDonough of Assume Loans in Brookline, MA.

Even with a management company taking care of things on the property owner’s behalf, he warns, “there are still possibilities of getting burned by a malignant tenant, squatter, or any number of problems that don’t plague a 401(k).”

Plus, McDonough adds, a real estate market can turn quickly. During the depths of the COVID-19 pandemic, for instance, “everyone was looking for lab space, and now you can’t give it away.”

Many financial experts suggest that while investing in real estate can be a piece of someone’s retirement plan, it shouldn’t be your entire retirement plan.

Real estate can be an especially smart move for anyone who has already maxed out their retirement fund contributions, Goncher says. “Diversification is the key.”

“Just remember that you automatically increase your risk by having all your eggs in one basket,” adds Richmond. “If you are a small investor and the particular property or area where you own a rental property runs into unexpected hard times, your returns can really suffer.”

Options on tapping into home equity for retirement

Homeowners should also keep in mind that renting out a property isn’t the only way to make real estate holdings work for retirement. Those who own even just one house, even if it’s where they live, can tap into their own equity in various ways to fund retirement.

One option for retirees to tap into home equity is a reverse mortgage. A reverse mortgage allows homeowners over the age of 62 to borrow against the value of their home. But there are some catches.

For one, you can take out a reverse mortgage only on a home you’re actually living in. And if you were to leave that home for 12 months or more, like, say, an extended hospital stay or a trip around the world, you automatically default on the mortgage.

Homeowners can also consider a home equity loan, which allows homeowners of all ages to get a loan based on the equity they’ve built. To get one, you’ll need a high credit score, a maximum debt-to-income ratio of 43%, and a demonstrated proof of payment.

While these loans are typically offered only on primary residences, you can get them for investment properties in some cases, but you’ll likely pay a higher interest rate because of the additional risks involved in lending on a rental property.

Another potential way to tap the equity in your investment properties is with a home equity line of credit. A HELOC allows homeowners to borrow funds as they go and as needed. During the period of the HELOC, you need to pay back only the interest on the loan. But a HELOC typically comes with variable interest rates, meaning you could end up paying much more in interest than you planned for.

Home equity agreements are another option, where you get a loan and don’t have to pay it back until you sell the property. Make sure to understand the differences among these types of loans to find the right one for you.

The term “subprime loan” joined the global lexicon during the 2008 financial crisis.

The collapse of America’s housing market was due in large part to the popularity of these types of loans, which offered buyers with low credit and low income—aka “subprime” borrowers—adjustable-rate mortgage loans.

But recently, subprime loans have undergone a rebrand—and some changes—and are now known as “nonprime” and “dignity mortgages.” These loans have become the new game in town for homebuyers with credit scores and histories that are less than ideal.

Lenders are increasingly offering these types of products to would-be homeowners. The question is: Will a subprime loan by any other name be just as dangerous to borrowers as it was in the past?

“There’s a balance to walk between extending enough credit to borrowers to enable access to homeownership, without overextending in an unsustainable way, like we saw in the mid-2000s,” says Realtor.com® Chief Economist Danielle Hale.

Here’s what you need to know about the pros and cons of these mortgage loans.

The roots of the subprime crisis

In the years leading up to the 2008 crisis, lenders relaxed requirements for obtaining mortgages and created a booming housing market. In 2005, for instance, a record 1,282,000 new-construction homes and 7,072,000 preexisting homes were sold. Unfortunately, many of those were backed by subprime mortgages.

Around 30% of the mortgages issued in 2006 were subprime, and in 2007, subprime mortgages made up around 15% of the market.

“Almost all underwriting guidelines were thrown out the window,” says Fairfax, CA, mortgage lender Richard Redmond of Redmond Mortgage Capital of the time.

“Mortgage loans were available that had no credit score requirement and had an income requirement that could be met simply by putting a number on the application with no verification,” says Redmond.

Interest rates were at record lows, and many applied for adjustable-rate loans that would balloon up after a few years.

The problem with subprimes

After these buyers’ adjustable interest rates increased and home values decreased, many homeowners found themselves with negative equity.

When homeowners started to default on their mortgages, it “brought the market to its knees,” says Redmond.

The risky lending practices led to widespread defaults, triggering the financial crisis. Around 40% of all homes with subprime mortgages ended up in foreclosure. The crisis disproportionately affected communities of color.

It took years for the housing market and the economy to recover.

Nonprime loans and dignity mortgages

In the 17 years since the housing crisis, the federal government has enacted several reforms to prevent another subprime crisis from occurring. In 2013, the Truth in Lending Act adopted an Ability-to-Repay amendment, which makes it illegal for mortgage companies to blindly sell mortgages to borrowers without making a “reasonable good-faith” assessment of their ability to pay.

However, there are still ways for nontraditional buyers to get loans—via nonqualifying mortgages. Nonqualifying mortgages—such as nonprime mortgages—offer more flexibility to lenders and borrowers.

What is a nonprime loan?

Nonprime loans exist in a tier between prime and subprime loans, with less stringent credit requirements for buyers.

Nonprime borrowers aren’t required to provide a W-2, so they’re good for people with nontraditional sources of income. (These borrowers must provide bank statements and tax returns instead.)

These loans also allow for a higher debt-to-income ratio. But where subprime lenders would loan to borrowers with credit scores as low as 580, nonprime mortgages require a score of at least 620.

This has expanded the pool of who can obtain a mortgage, but it also comes with a catch: Higher-risk borrowers must put up a larger down payment—sometimes as much as 25%—and are subject to higher interest rates.

Some nonprime lenders offer interest-only payments for a fixed period, which would mean smaller monthly payments for a time. However, homes still accrue interest costs during that time, which means homeowners pay more in the long run.

Pros: Borrowers with less-than-perfect credit who can’t obtain a traditional mortgage can generally get a nonprime loan to buy a home.

Cons: Nonprime loans come with a price: higher interest rates, increased likelihood of default, the potential for negative equity if property values drop, financial pressure from larger payments, and potential market risks if widely used by borrowers.

What is a dignity mortgage?

A dignity mortgage is, again, for people who might not qualify for prime mortgages.

Instead, the borrower makes a 10% down payment and pays a higher interest rate for the first five years of the loan term. If the borrower makes full and timely payments, the lender can adjust the interest rate to a prime rate.

“Dignity loans are subject to the ability-to-repay rule: The borrower has to prove income to qualify,” Redmond says. “Second, the loan-to-value tops out at 90%, not 125%.”

These types of loans comprise a small percentage of all homeowner loans, he adds. They’re particularly useful for people who have generally had consistently high credit but might have suffered a short-term setback that affected their credit score.

“If the dignity loans are actually looking at the credit history and circumstances, and not just today’s score, they could be providing credit to borrowers who not only need it, but are at very low risk of default,” Redmond continues.

Pros: Dignity mortgages offer high-risk borrowers loans with higher initial interest rates that lower after consistent, timely payments.

Cons: Just like nonprime loans, these types of mortgages carry risks such as higher initial costs, potential for default, negative equity, financial strain, and market instability.

The bottom line

Nonprime and dignity loans might be attractive to homebuyers with bad credit or nontraditional work lives—but the risk may outweigh the reward.

Borrowers considering either type of loan should carefully consider their finances and budget.

“Solid underwriting and ensuring that borrowers understand their obligations and how they will fit within their budget, which housing counselors can do, go a long way toward ensuring that individual borrowers are in a good position, which will ultimately be better for both the individual and the market,” says Hale.

Doug Perry, a strategic financing adviser at Bethesda, MD–based Real Estate Bees, also recommends that homebuyers who don’t qualify for prime mortgages apply for a government-sponsored Federal Housing Administration loan.

“An FHA loan does require a lender to document the borrower’s ability to repay the loan and, despite the risky credit standards they embrace, remains a great driver of putting first-time homebuyers in homes,” says Perry.

If you need cash and are thinking about tapping your home equity, one option few people consider—or even know about—is a home equity agreement, or HEA.

Why choose an HEA over a home equity loan or a home equity line of credit (HELOC)? Much of the decision comes down to your desired payment plan.

With a HELOC, once you’re approved for the loan, you can borrow from your line of credit as much or as little as you like, accruing interest only on the part of the loan you’re using.

A HELOC is a good option if you’re working on a home renovation project and you’re not sure how much money you’ll need. But there’s one catch: The term for repayment is typically just 10 years, and the interest rate is variable.

With a home equity loan, the loan is granted in a lump sum, usually with a 30-year fixed interest rate.

And then there is the HEA.

The pros and cons of a home equity agreement

The home equity agreement, also known as a home equity sharing agreement, also allows you to borrow money against the equity in your home. Instead of paying the amount back monthly, you promise to pay back the loan and a percentage of the appreciation of the value of your home when you sell it.

Because this type of loan doesn’t require a monthly payment, lenders are typically more lenient with homeowners’ credit scores and qualifications.

For example, if you have no proof of income or you’re self-employed, it’s easier to get an HEA than a HELOC, which typically requires a credit score of 620 or above to qualify. In general, an HEA allows homeowners with lower credit scores and higher debt-to-income ratios access to a loan.

The HEA is a relatively new loan type, but it’s becoming increasingly popular because of the relatively low barrier to entry.

You can use the money for anything you wish—paying down debt, funding renovations, or even purchasing another home, says Doug Perry, a strategic financing adviser at Bethesda, MD-based Real Estate Bees.

With interest rates high right now, more people are choosing to stay in their homes and build equity. An HEA offers homeowners in a variety of financial circumstances the opportunity to borrow a lump sum of interest-free money.

“One reason people might be thinking about an HEA is that home equity is at a record high, so there is a lot of opportunity for homeowners to tap into money that is otherwise just sitting there,” says Realtor.com Chief Economist Danielle Hale. Plus, with an HEA, “You’re going to pay a lower rate than you would on a credit card.”

What to watch out for with an HEA

But a home equity agreement does have some catches.

If you’re thinking about an HEA, you should know that it’s not yet available in every state. It’s typically serviced by private investment companies—Unlock, Point, and Unison are some of the major lenders.

Additionally, there’s typically a 3% to 5% fee upfront, and you must pay an appraisal fee as well. And you’ll need to decide if having money now is worth the heavy hit you’ll take when the home is sold.

At the time of the HEA, you and your lender will decide on the percentage of future appreciation the lender will take upon sale, which could be up to 40%.

The HEA also often comes with limitations around how and to whom you can sell your home, and what types of renovations you can make—including stipulations that you live at the home during the entirety of the loan period.

And if you thought you could get around paying the loan back by simply not selling your home, you’ll still be on the hook for the amount you borrowed at the end of the term of your loan. Depending on your lender, that period could be between 10 and 30 years.

“They’re like reverse mortgages for people that aren’t old, because you don’t have payments on them,” says Mark McDonough of Assume Loans, based in Brookline, MA.

The HEA doesn’t affect your credit-to-debt ratio, either. But you also can’t borrow as much on it as you might with a HELOC or home equity loan. Both allow you to borrow up to 80% of your home’s value. With the HEA, that number is closer to 30%.

Because of the way it’s structured, “It’s only going to hurt you if you win” in fetching a competitive price for your home, says McDonough.

For example, let’s say the appraised value of your home is $300,000 and you’d like an HEA for $50,000. The HEA investment company might agree to that in exchange for 20% of your home’s appreciation with a 10-year agreement period. If you sell the home for $400,000, that means you’ll owe the investment company $50,000 plus $20,000 (20% of the $100,000 appreciation).

Make sure to fully understand the terms of your agreement before you sign, and consider whether you’re really ready to give up current and future equity in your home for more money now.

Many Americans who want to save more of their hard-earned cash have probably considered moving to one of nine states that collect no income tax from their residents. They are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Yet, while these states help shield residents’ income from the IRS, this doesn’t mean people here are saving more money overall. In fact, other expenses in these areas are rising fast.

Take home prices, for starters: Nationwide, Realtor.com® data shows list prices climbed on average 46.6% between May 2019 and May 2024, according to economist Hannah Jones.

Two-thirds of states with no income tax outpaced this price growth. Over the past five years, Wyoming saw an 82.0% increase in list prices, the biggest increase of any state. Three other no-income-tax states also saw substantial growth in home prices, including New Hampshire (+76.5%), South Dakota (+65.0%), and Tennessee (+52.7%).

And although certain states with no income tax saw list prices rise more slowly over the past five years than the national average—such as Texas (+26.7%), Washington (+35.6%), and Florida (+36.4%)—residents in these states are getting gouged by other expenses.

In Texas and Florida, home insurance costs have skyrocketed due to the risk of property damage from climate-related events. Other states with no income tax often make up for it with a hefty sales tax or high property insurance costs.

All of these extra expenses can add up—making these tax havens less of a bargain than people think.

“States with no income taxes may be not as affordable [as] one would think for a couple of different reasons,” says Realtor.com senior economist Ralph McLaughlin. “First, wealthy households may seek to establish residency in such states in order to avoid paying income tax. This would mean the state would have a wealthier population base, and a wealthier base tends to be correlated with higher home prices. Second, states that have no income tax will need to make up for lost revenue in other ways, which may be from a combination of higher property and sales taxes.”

Why home prices in low-tax states are so high

When it comes to home prices being so high in these states, it boils down to low supply and high demand.

“The emigration away from high-tax states like California, Illinois, and New York and into no-tax states is driving up property values due to increased demand for housing,” explains Miles Romney, assistant professor in the Department of Accounting at Florida State University’s College of Business. “But the supply is relatively constrained.”

When the housing market heats up and prices rise, so do property taxes. And although residents might not have to pay income tax, their state still needs revenue for all the usual purposes such as paying public school teachers and improving infrastructure. Raising other taxes, such as sales, can help fund these services, but that leaves less money in residents’ pockets.

Add to this the fact that some of these no-income-tax states have been hit hard by “crazy weather,” and you have a kind of perfect storm.

“In Florida, the rising insurance costs seem to be due in part to the increased prevalence of damaging hurricanes and storms, which are causing huge losses for insurance companies,” says Romney. This can put further stress on a person’s paycheck.

The high cost of low-tax living

Here are a couple of examples of how the low-tax states are seeing the cost of homeownership escalate.

Florida takes the cake for the nation’s costliest homeowners insurance. The average price per year rang in at an astonishing $10,996 last year. Texas took fourth place, with an average of $4,456. (The national average is $2,377.)

“I live in Florida, and insurance costs are definitely skyrocketing,” says Andrew J. Rose, a CPA and principal of Advisory & Tax Services at Rehmann, a professional advisory firm in Stuart, FL. “But it’s all a balancing act. When you hear your property taxes are rising, that means your home’s value has risen, so it’s easier to justify.”

By the numbers: How low-tax states stack up

Here’s a look at how people who reside in nine states with no state income tax are faring. Data is pulled from such sources as ATTOM Data Solutions, Insurify, the Tax Foundation, and the U.S. Census Bureau.

First, the national averages:

State sales tax: Typically between 4% and 7%
Property tax effective rate: 1.10%
Average property tax: $2,690
Average home insurance per year: $2,377

Next, how the income-tax-free states stack up, arranged alphabetically:

Alaska

State sales tax: 0%
Property tax effective rate: 0.95%
Average property tax: $3,947
Average home insurance per year: $1,116
Worth noting: Local sales tax—separate from state sales tax—can be as high as 7.5% in some areas.

Florida

State sales tax: 6%
Property tax effective rate: 0.76%
Average property tax: $4,476
Average home insurance per year: $10,996
Worth noting: This state has the costliest home insurance, if you can get it at all.

Nevada

State sales tax: 6.85%
Property tax effective rate: 0.48%
Average property tax: $2,660
Average home insurance per year: $1,224
Worth noting: Gambling gives Nevada significant revenue so its residents still get a pretty good deal taxwise.

New Hampshire

State sales tax: 0%
Property tax effective rate: 1.25%
Average property tax: $7,172
Average home insurance per year: $1,225
Worth noting: The state collects tax on dividends and interest.

South Dakota

State sales tax: 4.5%
Property tax effective rate: 1.01%
Average property tax: $3,408
Average home insurance per year: $2,562
Worth noting: The state collects sales tax on purchases (such as groceries) that are often exempt elsewhere.

Tennessee

State sales tax: 7.0%
Property tax effective rate: 0.44%
Average property tax: $1,695
Average home insurance per year: $2,470
Worth noting: This state also collects sales tax on purchases like groceries that are often exempt in other places.

Texas

State sales tax: 6.25%
Property tax effective rate: 1.20%
Average property tax: $4,464
Average home insurance per year: $4,456
Worth noting: The oil industry gives the state significant revenue.

Washington

State sales tax: 6.5%
Property tax effective rate: 0.80%
Average property tax: $5,640
Average home insurance per year: $1,437
Worth noting: The state charges 7% tax on capital gains over $250,000.

Wyoming

State sales tax: 4.0%
Property tax effective rate: 0.53%
Average property tax: $2,930
Average home insurance per year: $2,159
Worth noting: The state charges sales tax on certain personal care items such as feminine hygiene products and diapers.

What’s a homeowner to do as costs creep up?

Those who relocated to low-tax states might be wondering if they made the right decision.

“It is possible that the previous ‘first-move advantage’ has reduced some of the financial benefits of moving to a no-income-tax state,” says Romney. “States with low but not zero income taxes, like Alabama, Missouri, and North Carolina, may be appealing alternatives.”

But there is a rising tide of assistance for those who have no plans to pick up and move. Florida residents are pursuing self-insurance in increasing numbers when they have the resources. (It’s likely you need to own your home outright to swing this because most mortgage companies don’t permit this option.)

And, sometimes these no-income-tax states are finding ways to recalibrate.

“The legislature here in Texas passed sweeping property tax reforms last year, including raising the homesteading exemption significantly, to give homeowners some relief,” says David Crumbaugh, CPA and managing partner/president of Rick C. Reed & Co., an accounting firm in Belton, TX.

If you live in one of these states or are thinking of relocating there, heed this advice: Make sure you have a good accountant on your side. This pro can help you navigate the latest changes in tax codes and snag the best benefits.

It’s tough to buy a home these days with limited funds. To come up with a homebuying budget, buyers must carefully calculate how to manage sky-high home prices, stubborn mortgage rates, home maintenance costs, and perhaps renovations.

Then there’s the ever-daunting down payment, which can feel like the final, massive obstacle standing between the everyday home shopper and the American dream.

But what if buyers could eliminate the down payment from the homebuying equation?

Last month, one of the nation’s largest mortgage lenders, United Wholesale Mortgage, launched a new zero-percent down mortgage program, prompting many bottom-line-minded buyers to wonder if homeownership is indeed within reach.

Yet putting 0% down on a home isn’t a new tactic.

Jerry Devlin of Assume Loans in Brookline, MA, says that low- and no-down payment loans have been popular options for years.

“The two most notable programs are the Federal Housing Administration and Veterans Administration loans,” he explains. “These programs are meant to help make homeownership more accessible for those struggling to save a large downpayment.”

Luckily these low- and no-down-payment loans aren’t just for veterans or first-time buyers. Read on to find out if 0% down is right for you—or an option you should avoid.

Who is eligible for a 0% down mortgage?

Experts say the easiest way to avoid a down payment is to qualify for the VA or FHA low- and no-down-payment programs.

“VA loans allow veterans to buy with no money down, and FHA loans allow anyone to buy with as little as 3.5%,” says Devlin.

However, other zero-down mortgage programs are usually geared toward first-time or low-income borrowers. For example, Bank of America launched a mortgage program that requires no down payment or closing costs, aimed to promote homeownership in minority communities in Charlotte, NC, Dallas, Detroit, Los Angeles, and Miami.

Programs like these are meant to assist lower-income first-time homebuyers. They are restricted to buyers with certain income and asset amounts and often require homeownership education classes.

Which buyers benefit most from these loans?

According to Devlin, loans that require no money down are great for people who want to jump into the housing market and anticipate making more money in the future, perhaps from a promotion or a recent degree or certification.

Meanwhile, Richard Redmond of Redmond Mortgage Capital in San Rafael, CA, says that these programs can also be great for people who want to buy their forever home—or at least a home the buyer intends to stay in for a long time.

“It can be really good if you’re going to settle down somewhere,” Redmond says. “Because you’re going to build equity over time. And even though the interest in the real estate market has its ups and downs, you’re going to be fine over a long period of time. Real estate values usually rise.”

Who shouldn’t use 0% down payment loans?

While putting down little or no money sounds attractive, these loans are not for everyone.

Taking out a massive loan could be troublesome for people who have had issues saving in the past. For instance, if a buyer is tight on funds when they buy a home, they might find themselves underwater when unexpected bills pop up.

Devlin notes that the cost of homeownership can be unexpectedly high when insurance, taxes, and maintenance increases outpace inflation.

“Homeownership can have lots of unanticipated expenses,” says Devlin. “If someone cannot save for a decent down payment, they may also have trouble coming up with the money for unanticipated repairs.”

What’s the catch of a 0% down loan?

Buyers should know that these low-down payment plans can help them get into a home, but this tactic does not make the home cheaper overall. In fact, buyers will likely end up paying a little bit more in the long term.

“You will have a lower monthly payment if you put more money down as certain loan programs will then remove the requirement for private mortgage insurance,” says Cedric Stewart at Entourage RG of Keller Williams in the Washington, DC, area. “But that’s typically a part of a payment up until you put down 20%.”

Private mortgage insurance (PMI) guarantees these loans for the investor from default, and payments range from about 0.3% to 1.15% of a home loan.

Note that VA loans do not require PMI, and FHA loans require mortgage insurance premiums (MIPs), which are similar to private mortgage insurance.

Not putting any money down might also mean buyers will pay a higher mortgage rate on some loans because lenders are taking on more risk. However, VA and FHA loans often offer the lowest going rates.

A 0% down loan might be a great choice, even if you have extra cash

While many buyers are interested in a zero- or low-down payment loan because they don’t have the funds saved up for a 20% down loan, Redmond notes that a small down payment might be a good financial strategy for those with savings.

Some people put everything they can into their down payment, trying to get their rate lower. But a buyer could instead choose to put that money elsewhere in an investment they think will perform better or could simply save the money for a rainy day.

“If it were me, I would like to have the money in my savings account,” says Redmond. “Even if I have to put down very little or nothing for the down payment, knowing that I’ve got, maybe, $10,000 sitting in the bank, I’d like to keep a little money to reserve, just in case.”

If you’re waiting for mortgage rates to subside a bit before you buy a house, there’s plenty you can do in the meantime to prepare—starting with cleaning up your credit score.

In fact, a good credit score can play a critical role in helping you get a mortgage with the best possible rate and other favorable terms. That’s pretty darn important right now, with mortgage rates at near 20-year highs.

Plus, boosting your credit score can take time and can’t be pulled off overnight. Most credit-boosting tactics will take many months to kick in, so it’s best to start sooner rather than later.

So if you’re holding off on homebuying, it’s the perfect moment to polish your credit rating. Here’s how you can use this time wisely so that you’re in the best possible shape once you do decide to dive into home shopping.

Why your credit score matters when buying a home

Your credit score is basically a crystal ball for predicting how likely you are to pay back a loan on time. Credit-reporting agencies (Equifax, Experian, and TransUnion) dig through your debt history to see how much debt you took on, whether your payments were on time, and how often you may have missed payments.

Using debt responsibly and paying it back on time will give you a better score than someone who racks up big bills on several fronts and pays late or skips payments altogether.

As such, the first step to improving your credit score is to know what it is.

You can easily check your score online at sites such as CreditKarma.com. Typically, a score of 629 or lower is considered bad; 630 to 689 is fair; 690 to 719 is good; and 720 to 850 (the top score) is excellent.

How does a credit score affect a mortgage?

The higher your credit score, the better the interest rate and terms will be on your mortgage. For example, the difference between a 625 (bad) credit score and a 750 (excellent) score can add as much as a half-percentage point to your loan’s rate. While an extra half-percentage point might not seem like much, if you multiply that extra fee over the term of 360 months to account for the life of your loan, it can amount to thousands of dollars.

Few of us want to flush money away, so let’s look at how you can make your credit score the very best it can be. Here are some strategies to explore.

Review your credit file

In addition to knowing your score, you’ll want to pore through your credit report. Here’s what you’re looking for: loans or credit cards listed that you never opened (it can happen due to an error or identity theft), misspelled names, or items looking as if they are in collection when you actually paid off the debt long ago.

If you find any glitches, dispute it with both the consumer credit-reporting agency and whoever supplied the bad information. You can also dispute information on your credit report yourself for free, using AnnualCreditReport.com, a federally authorized site.

Keep tabs on your score

Whether your credit history checks out or you find errors that you need to resolve, it’s a good idea to keep tabs on your credit score. This can also serve as motivation when you see your hard work pay off when your score goes up!

You can set up credit-monitoring alerts, says Andrea Woroch, a family finance and budgeting expert.

“You can get automated updates using sites like Credit Karma,” she explains.

Dump high-interest debt

Not all debt is created equal. As you look to lower your debt and raise your credit score, zoom in on the high-interest debt. Typically, this is credit card debt. Since interest rates on credit cards can go well into the double digits, make it job No. 1 to pay that down as best as you can.

On the other hand, for debt like federal student loans, which might have a fixed interest rate in the low single digits, it’s fine to pay just the bare minimum and take your time.

Look at your credit utilization rate

Also, be more aware of how much of your credit limit you’re spending when using your credit cards. Keeping your balance at no more than 10% of your available credit (known as your credit utilization rate) can vastly improve your credit score, says Anthony Marti, CEO and founder of Choice Mutual.

In other words, if your credit limit is $20,000 on your card, that is not license to go out and spend that much. Instead, you want to be tapping only about a 10th of that amount. Some financial experts say you can let that figure rise to 20% or even 30% of your limit, but certainly try hard not to exceed that amount.

Don’t ignore privately held student debt

If you have student loans that are privately held, take a look at whether they are at fixed or variable rates.

“In this climate, your interest rates will rise everywhere possible,” says Michael Jeffcoat, founder of The Jeffcoat Firm. “Private loans don’t qualify for the same payment pause that public loans do.”

While high-interest credit card debt takes precedence in terms of what to pay down, private student loan rates can sometimes be equally problematic, with rates raging into the double digits.

Be careful with new credit

You know when you set foot in a store and they say if you sign up for their credit card, they’ll give you a huge discount or major freebie? It might seem like a smart move, but signing up for new lines of credit can send your credit score drifting downward.

Here’s why: According to the experts at FICO, a major credit-scoring service, research reveals that opening a few new credit accounts in quick succession represents a greater risk of having problems with debt. This is especially true for people who don’t have a long credit history.

It’s better to use fewer lines of credit, pay on time, and keep that credit utilization rate low.

Understand the downside of a skinny credit file

In credit lingo, there’s something called a “thin file.” This means you don’t have much history tapping debt and repaying it. Perhaps you are young or new to the workforce or are just the kind of person who prefers to pay with cash whenever possible, and haven’t used credit cards much or taken out a car loan. This might mean you have a minimal credit file.

This can be problematic since when the reporting agencies look at it, there is little or no track record that you’ve repaid your debts well. This, in turn, can drag your score downward.

If you’re in this situation, it takes time to pad out that credit file. You might start by applying for a secured credit card, which means you put down a deposit (possibly as little as $50), which acts as your credit line. Because you’re securing the credit line with your own money, credit card issuers are more likely to issue these to folks with little credit history. When the issuer reports your payments to credit-reporting companies, your score should rise.

Just remember to keep the balances low and pay on time (maybe even early). Another word of warning: Prepaid and debit cards do not function in the same way and probably won’t pump up your score.

Get a boost from a buddy

There is one time that getting an additional card can help.

“Become an authorized user on a trusted friend or family member’s credit card account,” Woroch advises, provided they have a top-notch credit history. “You will benefit from their positive money management, low balance, and on-time payments.”

Obviously, this isn’t a request to make or be granted lightly. If you are going to, say, ride on your brother’s credit coattails, you need to know he’s not lugging around a big wad of debt, and you have to be beyond responsible about using his credit.

If you’re hoping to buy a home with a conventional mortgage, one number you’ll want to get to know well is your credit score. Also called a credit rating or FICO score (named after the company that created it, the Fair Isaac Corporation), this three-digit number is a numerical representation of your credit report, which outlines your history of paying off debts.

Why does your minimum credit score matter? Because when you apply for a mortgage to buy a home, lenders want some reassurance a borrower will repay them later! One way they assess this is to check your creditworthiness by scrutinizing your credit report and score carefully. A high FICO rating proves you have reliably paid off past debts, whether they’re from a credit card or college loan. (Insurance companies also use more targeted, industry-specific FICO credit scores to gauge whom they should insure.)

In short, this score matters, especially in real estate. It can help you qualify for a home, a car loan, and so much more. Which brings us to an important question: What type of average credit score is best to buy a house?

Inside your credit score: How does it stack up?

The typical credit score range can fall anywhere from 300 to 850, with 850 being a perfect credit score. While each creditor might have subtle differences in what they deem a good or great score, in general, an excellent credit score is anything from 750 to 850. A good credit score is from 700 to 749; a fair credit score, 650 to 699. A credit score lower than 650 is deemed poor, meaning your credit history has had some rough patches.

While FICO credit requirements will vary between mortgage lenders, generally a good or excellent credit score means you’ll have little trouble if you hope to score a conventional loan. Lenders will want the business of homebuyers with good credit, and may try to entice them to sign on with them by offering loans with lower interest rates instead of higher interest rates, says Richard Redmond at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”

Since a lower credit score means a borrower has had some late payments or other dings on their credit report, an issuer may see this consumer as more likely to default on their home loan. All that said, a low credit score doesn’t necessarily mean you can’t score eligibility for a mortgage loan—but it may be tough when looking at qualifying requirements. They may still give you a type of mortgage, but it may be a subprime loan with a higher interest mortgage rate or private mortgage insurance, says Bill Hardekopf, a credit expert at CardRates.com.

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How a score is calculated

Credit scores are calculated by three major U.S. credit bureaus: Experian, Equifax, and TransUnion. All three credit-reporting agency scores should be roughly similar, although each pulls from slightly different sources. For instance, Experian looks at rent payments. TransUnion checks out your employment history. These reports are extremely detailed—for instance, if you paid a car loan bill late five years ago, an Experian report can pinpoint the exact month that happened. By and large, here are the main variables that the credit bureaus use to determine a consumer credit score—including debt-to-income ratio—and to what degree:

• Payment history (35%): This is whether you’ve made debt payments on time. If you’ve never missed a monthly payment, a 30-day delinquency can cause as much as a 90- to 110-point drop in your personal finance score.
• Debt-to-credit utilization (30%): This is how much debt a consumer has accumulated on their credit card balances, divided by the available credit limit on the sum of those accounts. Ratios above 30% work against you. So if you have a total credit limit of $5,000, you will want to be in debt no more than $1,500 when you apply for a home loan amount.
• Length of credit history (15%): It’s beneficial for a consumer to have a track record of being a responsible credit user. A longer payment history boosts your score. Those without a long-enough credit history to build a good score can consider alternate credit-scoring methods like the VantageScore. VantageScore can reportedly establish a credit score in as little as one month; whereas FICO requires about six months of credit history instead.
• Credit mix (10%): Your credit score ticks up if you have a rich combination of different types of credit card accounts, such as credit cards, retail store credit cards, installment loans, and a previous or current home loan.
• New credit accounts (10%): Research shows that opening several new credit card accounts within a short period of time represents greater risk to the lender, according to myFICO, so avoid applying for new credit cards if you’re about to buy a home. Also, each time you open a new credit line, the average length of your credit history decreases (further hurting your credit score).

How to check your credit score

So now that you know exactly what’s considered a good vs. bad credit rating, how can you find out your own credit score and minimum credit score requirements? You can get a free credit score online at CreditKarma.com. You can also check with your credit card company, since some (like Discover and Capital One) offer a free credit score as well as credit reports so you can conduct your own credit check and determine how to reach a higher credit score.

Another way to check what’s on your credit report—including credit problems that are dragging down your credit score—is to get your free copy at AnnualCreditReport.com. Each credit-reporting agency (Experian, Equifax, and TransUnion) may also provide credit reports and scores, but these may often entail a fee. Plus, you should know that a credit report or score from any one of these bureaus may be detailed, but may not be considered as complete as those by FICO, since FICO compiles data from all three credit bureaus in one comprehensive credit report.

Even if you’re fairly sure you’ve never made a late payment, many Americans find errors on their credit file. Errors are common because creditors make mistakes reporting customer slip-ups. For example, although you may have never missed a payment, someone with the same name as you did—and your bank recorded the error on your account by accident.

If you discover errors, you can remove them from your credit report by contacting Equifax, Experian, or TransUnion with proof that the information was incorrect. From there, they will remove these flaws from your report, which will later be reflected in your score by FICO. Or, even if your credit report does not contain errors, if it’s not as great as you’d hoped, you can raise your credit score. Just keep in mind, regardless of whatever credit-scoring model you use, you can’t improve a credit score overnight, which is why you should check your credit score annually—and improve your credit score—long before you get the itch to score a home, save for a down payment, or apply for any type of loan.

While it may be great to be underwater this summer as temperatures soar, it’s not something you want for your mortgage.

Being underwater means the principal of your mortgage is higher than the market value of your home. Having a “seriously underwater” mortgage means that the principal you owe is higher than the market value of the home by at least 25%.

According to a new report from real estate data company ATTOM, around 2.7% of homeowners nationwide are seriously underwater, up from 2.6% last year.

The majority of these seriously underwater mortgages are located in the South, with the city of Baton Rouge, LA, topping the list with the highest percentage of underwater mortgages, followed by New Orleans, Jackson, MS, and Little Rock, AR.

How mortgages end up underwater

Much of the blame for this stems from the COVID-19 pandemic era, when limited inventory and historically low interest rates brought up the price of homes.

“We went through a few years of bidding wars for homes with many going for well above asking,” says Jerry Devlin of Assume Loans in Brookline, MA.

But following the pandemic-era housing boom, many of these areas saw home values drop.

“At some point, the increase in inventory and weakening demand flips the market from sellers to buyers,” explains Devlin. This creates a cratering effect on the market value of many homes.

But pandemic aside, some also suffered additional hardships.

“Louisiana, Kentucky, and Oklahoma are fossil fuel energy-producing states,” observes Fred Goncher of Backyard Mortgage Corp. in Garnerville, NY. “As U.S. policy has changed to frown upon fossil fuel production, the economic activity surrounding these states has declined.

“Wyoming has suffered from the decline in the use of coal,” Goncher adds. “As coal-related jobs have left the state, little has replaced them.

“Without people with adequate income to buy homes, real estate prices declined and caused some homeowners to go underwater on their mortgages,” Goncher says of these states.

Many of these areas have some of the highest unemployment rates in the country.

“Jobs are the biggest driver of homeownership,” says Devlin. “I would suspect some of the weaker markets may have experienced a significant event like a plant shutdown that would affect the supply-demand ratio.”

Wherever there’s been a population decline, as in Mississippi, you’ll also see an increase in underwater mortgages, Goncher adds.

“Declining population leads to declining real estate prices,” he says. “Declining real estate prices leads to underwater mortgages.”

Even so, the nation is in much better shape now than in 2009, when nearly 1 in 4 homes with mortgages was underwater.

But Devlin warns that this uptick in underwater mortgages could be an early sign of trouble ahead in the real estate market at large.

“Buying a home today has never been more expensive, with some of the highest rates in decades combined with increasingly high costs of repair, maintenance, taxes, and insurance,” he explains. “At the same time, many markets are seeing inventory levels rise to pre-pandemic levels”—all factors that affect the market value of a home.

What to do with an underwater mortgage

If you’re dealing with an underwater mortgage, you have a few options, says Richard Redmond of Redmond Mortgage Capital in San Rafael, CA.

“If you’re happy where you live, then wait it out, because in most real estate markets, time will take care of the problem,” he says.

“If the mortgage is a burden and you’re struggling financially—and you can prove that to your lender—ask for a loan modification. Your chances of getting a yes are much higher if the house is underwater,” he continues.

One additional option: “In some cases, a homeowner struggling to make payments who is underwater may decide to sell their home,” says Devlin. “If they don’t have the money to make up the difference between the sales price and the higher loan amount, they may be able to work out a reduced payoff short sale.”

Short sales can be a better option than just walking away from the property, but will likely affect your credit and ability to buy another home in the near future, Devlin points out.

If you’re truly desperate, Redmond advises, you can walk away from the house—though your credit score will take a hit and you’ll likely be unable to be approved for a conventional mortgage for at least seven years.

If you’ve been hearing a lot about HELOC lately, you’re not just imagining it: The home equity line of credit—a type of second mortgage that allows homeowners to tap their home equity—is being pushed hard by banks and lenders as they struggle to drum up business in today’s challenging high-interest-rate environment. 

“Banks are aggressively targeting owners for lines of credit,” says Shmuel Shayowitz, the president and chief lending officer at Approved Funding.

Indeed, HousingWire announced in May: “The HELOC dam is opening. Are you ready?”

“With demand for these financing products rapidly growing in the higher-interest-rate environment, originators can get in on the action and build their business pipeline by embracing innovation in the HELOC market,” HousingWire reported.

HELOC doesn’t just benefit lenders’ bottom lines; it offers homeowners some unique benefits in today’s market, too. Here’s what those advantages are, plus other info homeowners will want to know to decide whether a HELOC is right for them.

How HELOC offers an alternative to refinancing

In the past, when interest rates were lower, homeowners might have simply refinanced their home loan and taken some of their home equity out in cash. But that’s no longer wise, since homeowners would have to give up their current low-interest loan for a new one at today’s much higher rates.

“Many homeowners are sitting on ultralow-rate mortgages that they don’t want to touch,” says Doug Perry, a strategic financing adviser at Real Estate Bees in Bethesda, MD.

Current interest rates mean “it would be wildly expensive for a borrower who is locked into a low-rate, 30-year fixed mortgage,” says Richard Redmond of Redmond Mortgage Capital. “Getting a HELOC and keeping the low fixed rate first is much less expensive.” 

Another effect of today’s high interest rates is that some homeowners who might like to buy a new or bigger house are deciding instead to stay put—but might still be eager to improve the property they’ve got to make it work for a growing or changing family. A HELOC fits the bill, as it is most commonly used to finance home renovations. 

“Those looking to upgrade their home have nowhere to go, so they are choosing to stay where they are and build,” says Shayowitz. 

And thanks to rising home prices, home equity levels are also unusually high. According to recent statistics from ICE Mortgage Monitor, the average homeowner has around $206,000 in tappable equity. Lenders typically allow borrowers to borrow between 75% and 85% of their home’s assessed value. 

“Many are tapping into this historic home equity to finance renovations and constructions,” says Shayowitz. 

How the HELOC works

The HELOC works much like a credit card where you can borrow against your home equity and pay it back over time, plus interest. Borrowers have to pay interest only on what they use, not on the total credit line. 

“You can treat it just like a credit card, making just the minimum payment and drawing what you want on it,” says Mark McDonough of Washington, DC–based Assume Loans. 

And unlike a credit card, the HELOC has relatively lower interest rates.

On average, says Shayowitz, “HELOC rates could be half of what someone might be paying to their credit card debtors.“

“It’s still the cheapest source of money out there,” says McDonough. “If people have the ability to leverage their real estate, they’re going to do it.” 

Jerry Devlin of Washington, DC–based Assume Loans says a HELOC is great for short-term borrowing because its interest rates can be volatile. 

“Rates on HELOCs are typically tied to the prime interest rates and can change monthly,” Devlin says. “If prime rates go up, so will your HELOC rate. Prime was 3.25% four years ago. It is 8.50% today.”

That’s why he advises that a HELOC be paid off as soon as possible.

“A HELOC is a good source of money to do a home renovation that may take several months, since you only pay on the outstanding balance,” Devlin says. “Once the renovation is done, however, one should have a plan to either pay off the HELOC if rates rise rapidly or replace with a permanent second mortgage.”

As McDonough stresses, failure to pay off a HELOC under the agreed-upon terms could lead to foreclosure. And the popularity of the HELOC doesn’t mean you shouldn’t do due diligence on it.

“I would caution homeowners to be cautious and sensible as they consider their HELOC options and do proactive research to ensure they are getting the best deals possible,” says Shayowitz. 

Ellen DeGeneres is not just a famous comedian, talk show host, and house flipper—she’s now also a mortgage lender, handing out home loans to family members.

Instead of letting her sibling rely on traditional lenders, Ellen helped her brother Vance DeGeneres and his wife  Joanna purchase a $1,439,000 house in Los Angeles’ Sherman Oaks neighborhood. She also extended a similar helping hand to wife Portia de Rossi‘s sibling Michael Rogers and his wife Casey, securing a loan for their $4.9 million home in Santa Barbara, CA.

DeGeneres and Rossi are well known for establishing an impressive property portfolio for themselves—and becoming serial home flippers in the process. Last year, the couple put their stunning, historic, Tuscan-style estate in the heart of Montecito, CA, on the market for $46.5 million—just six months after purchasing it for $22.5 million.

The comedian’s foray into financing homes for family members has made headlines as a tale that highlights not just the generosity of one celebrity but also raises questions about the dynamics of entering such financial arrangements. Why would anyone want to bypass the bank—and why would anyone be willing to fork over so much money?

Here are some of the pros, cons, and pitfalls of family financing to consider.

Why bypass the bank?

These arrangements aren’t unusual—particularly given the high-interest mortgage rates we’re seeing today. By turning to family members, borrowers can often negotiate more favorable loan terms than traditional financial institutions offer, such as a lower interest rate.

“It’s typically a big advantage for the buyer,” says William Anthony, a mortgage loan originator with Ace Land Mortgage.

In private arrangements like this, he says, “I’ve seen rates where they’re at, let’s say, 5% or even 4.75%. But in regular markets, they’re in the sixes and sevens.”

Meanwhile, private lenders like DeGeneres often benefit, too, since this is an opportunity to invest in real estate while earning a return through interest payments. This also allows these lenders to diversify their investments while doing a good deed for someone they care for.

Some home sellers have been known to offer seller financing to buyers, even if they aren’t family members.

“The seller wants to park their capital into an appreciating asset,” Anthony explains. “So, the seller can collect money on interest.”

Negotiating loan terms with loved ones

Negotiating a mortgage with a family member, friend, or home seller isn’t your typical transaction. Unlike dealing with a bank, where the terms are pretty standardized, there’s room for customization in this scenario.

“Seller financing can be very, very creative,” Anthony notes.

But with flexibility comes responsibility, and it’s crucial to establish clear terms and put everything in writing to avoid misunderstandings down the road. Anthony stresses the importance of clarity and documentation in such arrangements.

“The lender can write it up where if the buyer’s not making payments, then they could possibly have a promissory note,” he says. “And the lender could potentially even hold onto part ownership of the deed, as well.”

Family financing pitfalls to avoid

But while the idea of helping a family member achieve homeownership is heartwarming, it’s not without risks. One of the biggest pitfalls is the potential strain it could put on the relationship if things go south financially.

Anthony underscores the need for caution and proper legal guidance in such family financing arrangements.

“You’ve basically taken on the bank’s responsibility,” he cautions. “So if the buyer doesn’t pay, same as the bank, the bank’s got to get ’em out of the house.”

In the event of default, the lender could incur significant costs associated with foreclosure proceedings and property maintenance. Therefore, it’s essential for both parties to carefully consider the potential risks and establish contingency plans to mitigate any adverse outcomes.

While DeGeneres’ approach might not be feasible for everyone, it serves as a reminder that there are alternative paths to homeownership beyond the traditional banking system—whether it’s an A-list celebrity friend or your own mom and dad.

What is a home equity line of credit? If you’ve been looking for a way to get a little money out of your home without actually selling it, you’ve probably come across this option, known as a HELOC for short (pronounced “heelock”).

Clear as mud, right?

Now that you’re no doubt wondering what is a home equity line of credit going to do for me, let us clarify.

What to know about a home equity line of credit

Like a Home Equity Loan (also known as a “second mortgage”), a HELOC allows you to borrow money using the equity in your home as collateral. But the thing that differentiates a HELOC is that it’s like a credit card: You can borrow on an as-needed basis, up to the loan’s limit, over the term of the loan (usually 5 to 20 years). In fact, your lender will actually issue you a small plastic card that looks just like a credit card, to allow you to access your money easily.

This works well for those who want to borrow money but don’t know exactly how much they’ll need, or for people who don’t need to borrow a lump sum all at once and will be paying for something over time —i.e. medical bills, college tuition, or major additions to their home.

For example, let’s say you want to add an extra bedroom and bathroom onto your house, and a contractor has given you an estimate that the project would cost $50,000 total. You could set up a Home Equity Line of Credit for $50,000, and pay for the materials, services, and labor over time, as the bills come due.

“Ideally, the HELOC should be used for home renovations or for big, unforeseen expenses that you don’t have the cash reserves to cover,” says Jason van den Brand, co-founder  of online mortgage platform Lenda.com. “But it should not be used for everyday living expenses, just to make ends meet, or if you just need a very small line of credit.”

How much can you borrow with a HELOC?

What is a home equity line of credit worth financially? The total you can borrow depends on how much equity you have in your home. A lender will usually allow you to borrow approximately 75%-85% of the home’s appraised value, minus what you still owe on it.

To break it down, let’s say you have a home that’s been appraised at $100,000, and you still owe $40,000 on it. Your friendly neighborhood bank would take 75% of your home’s value (in this case, $75,000), then subtract the $40,000 you still owe on it, leaving $35,000. The bank would then set up a HELOC with a limit of $35,000, which you could borrow chunks of over time.

But home equity isn’t the only factor lenders look at. According to the Federal Reserve’s Consumer Finance Division, “in determining your actual credit limit, the lender will also consider your ability to repay the loan (principal and interest) by looking at your income, debts, and other financial obligations, as well as your credit history.”

How to pay off a HELOC

Another convenient aspect of the HELOC is that payments can be relatively flexible. Different lending institutions have different requirements, of course, but some will allow you to make interest-only payments until the term of the loan is up, when you’re required to pay off the whole thing. Others require that you pay a percentage of the principal as you go.

There are, however, some details that almost all HELOCs have in common. They are:

• You pay interest only on what you borrow. So if your limit is $25,000, but you’ve only borrowed $5,000 of that, you’ll pay interest on $5,000.
• Interest rates on a HELOC are variable, which means they go up and down depending on certain economic factors. Some lenders offer a low “introduction” rate, which lasts for a matter of months, but after that, the interest rates will adjust—and continue to readjust.
• Your credit “revolves,” which means that once you’ve paid off a certain amount, you can borrow that much more again. Say for example, you’ve received a $30,000 home equity line of credit so you can do some improvements that will add value to your home. You borrow $10,000 to fix the roof, and you pay that back within a year. At that point, you’ll still have a $30,000 line of credit, and you can go ahead and redo that bathroom.
• Average interest rates for home equity credit lines are generally lower than for other types of home loans, because the lender’s risk is lower. After all, your home is their collateral, and you already have a track record of how well you pay it off for the bank to review.

Risks of a HELOC

HELOCs may sound sweet, but all that free-flowing cash doesn’t come without risks. If you don’t pay off your HELOC under the terms you’ve agreed to, the lender can foreclose on your home. It doesn’t matter how much you’ve paid on your first mortgage; a HELOC (which is considered a second mortgage) can be lethal. So, as with every type of home loan out there, it’s best to be cautious and do your homework.

]]> https://www.realtor.com/advice/finance/adjustable-rate-mortgage-ending-options/ https://www.realtor.com/advice/finance/adjustable-rate-mortgage-ending-options/#respond Fri, 31 May 2024 19:30:56 +0000 https://www.realtor.com/?p=883777

Today’s high interest rates have created a ticking time bomb for the many homebuyers who took out an adjustable-rate mortgage near the onset of the COVID-19 pandemic.

About 330,000 homeowners who got an ARM in 2019 have already seen their five-year fixed-rate term end, and 100,000 more will join them in the next year, according to ICE Mortgage Technology.

With mortgage rates currently at 20-year highs, many homebuyers could face rate adjustments upward that could cause their monthly mortgage payments to balloon or even double.

Facing an adjustment on an ARM can be daunting, but homeowners can navigate these changes in various ways. Here’s how to handle an adjustment without capsizing your financial boat.

Understand your ARM terms

First, it’s crucial to start with a solid understanding of the specific terms of your ARM to make the most financially savvy decision.

“Homeowners should be acutely aware of when their rate will adjust, the new potential rate, and any caps that limit rate increases,” says William Anthony, a mortgage loan originator with Ace Land Mortgage. “This understanding is essential to planning for the future and exploring viable options. Familiarizing yourself with these details allows for better strategic planning and could prevent costly surprises.”

Explore refinancing

Refinancing might seem like a knee-jerk reaction. However, the process and decision to refinance will depend heavily on the borrower’s current rate versus what they would be refinancing into.

For instance, if your rate is set to increase but remains below current market rates, a refi might not be beneficial. Conversely, finding a slightly lower rate could provide significant relief if rates are climbing beyond manageable.

Ask about loan modifications

For homeowners struggling to meet their newly adjusted mortgage obligations, a loan modification might be the right solution. Modifications can adjust the terms or length of your mortgage, such as extending a 30-year loan to a 40-year term, which lowers the monthly payments by spreading them out over a longer period.

“This can reduce both principal and interest payments significantly, easing the monthly financial pressure,” Anthony adds.

Use discount points

Another refinancing strategy involves purchasing discount points. This option allows homeowners to pay an upfront fee to reduce their mortgage interest rate.

“Each point, which costs 1% of your loan amount, typically lowers your interest rate by less than 1%,” Anthony notes. “This can be a wise investment if you plan to stay in your home long term, as it reduces monthly payments and overall interest paid over the life of the loan.”

Use extra cash

For those with investments in stocks or nonretirement accounts, consider liquidating some of these assets to make a significant payment toward your mortgage principal. This tactic can be particularly effective if you’re planning to refinance.

“Although the new mortgage rate might be higher than the adjusted ARM rate, the substantial reduction in principal could lower or maintain the current monthly payment, making it more manageable,” explains Ralph McLaughlin, senior economist at Realtor.com®.

And let’s not forget that maybe you can make the higher monthly mortgage payments if you free up cash elsewhere.

McLaughlin advises ARM borrowers to “try to reduce their total monthly outlays by using extra cash on hand to pay off things like credit cards, auto loans, or student debt that would amount to a net zero change in total monthly payments.”

This strategy optimizes your financial obligations to ensure more of your income is available to handle increased mortgage payments.

Explore home equity and downsizing

Finally, if the adjusted payments become unmanageable and other strategies prove insufficient, selling your home to capitalize on accrued equity is another option.

This approach can provide a substantial financial influx, offering an opportunity to downsize to a more affordable living situation, thereby reducing overall monthly expenses. This strategy is especially pertinent in markets where property values have increased significantly.

“If your home has appreciated and selling it could yield a profit, then downsizing might be the best option,” says Anthony.

“This isn’t about a lower quality of living, but adjusting to a mortgage that you can comfortably afford,” he continues. “If your payments spike—say by $500 or $600 a month—and your income hasn’t increased, using your equity wisely could be essential to keep your financial situation manageable.”

TikTok is synonymous with singing, dancing, skits, and now—mortgages.

Some of the 170 million U.S. users of the popular social media app are also homebuyers in need of loans. Like so many other people in search of a quick hit of entertainment with a dash of needed information, they are turning to the mortgage influencers of TikTok.

For example, in one TikTok video, a man says, “If you’re thinking of buying a house in 2024, you need to pay attention to interest rates.”

The speaker, a loan officer who goes by the handle @buynotrentguy, has hundreds of videos that cover all kinds of mortgage and finance advice, from setting up a trust for a house to buying a home with a parent.

He’s just one of many “mortgage influencers” on the platform dishing out advice. But is the advice sound?

To answer that, we combed TikTok to find the best mortgage videos on the platform and asked mortgage professionals to weigh in.

What the pros think about TikTok advice

Jerry Devlin of Assume Loans, a company in Brookline, MA, says that many TikTok videos can be helpful in explaining some of the “do’s and don’ts” of buying a home.

“It is particularly helpful reaching a younger, first-time homebuyer market that might otherwise think buying a home is out of reach,” he says.

However, Devlin notes that not all videos are helpful or accurate.

“I particularly do not like those that ‘predict’ where rates or home prices are going. Those, in my opinion, are irresponsible,” adds Devlin.

Richard Redmond, a mortgage broker and author of “Mortgages: The Insider’s Guide,” adds that social media videos shouldn’t be a buyer’s only source of mortgage information.

“Buying a home is probably the biggest purchase a person will make in their life, and how it is financed may be the most important financial decision most people will make,” says Redmond. “It is worth spending some time to get educated enough to make an informed choice about getting a mortgage.”

Buyers should talk to at least two lenders, ideally a mortgage broker and a banker, Redmond adds. These experts should be “experienced, referred by trusted sources, and have great online reviews.”

So, while TikTok videos shouldn’t be the beginning and end of your financial education, they can be a quick, accessible, and even fun way to prepare yourself for homebuying.

Here are some notable TikTok videos to check out.

1. For buyers who think mortgage terms sound like gibberish

@thatlenderbecca

I just get too excited #mortgagetalk #lender #funnyvideo

♬ original sound – Sacha

In this clip, Texas mortgage lender @thatlenderbecca makes a point of saying that many buyers don’t understand some of her industry’s technical terms.

She speaks to the camera while gibberish language plays over her words.

“What my clients hear when I forget they don’t speak mortgage,” reads the text.

If you don’t know what a basis point or a jumbo mortgage is, this is a good reminder for buyers to familiarize themselves with at least some key terms. Here’s a helpful guide.

2. For buyers curious about the future of mortgage rates

https://www.tiktok.com/@thatmortgageguy/video/7364436186498092330

Another video discusses inflation and rates after a recent Federal Open Market Committee meeting, in which the Federal Reserve decided to keep the short-term policy rate steady at a range of 5.25% to 5.5%.

“While the news wasn’t great for homebuyers,” the video states, referring to the rates staying the same, “it could’ve been worse.”

Devlin says that this poster, @thatmortgageguy, a mortgage banker with hundreds of videos and more than 800,000 followers, is “one of the biggest influencers in this space.”

He adds that @thatmortgageguy reports mortgage-related news while educating. It’s a good account for easy-to-digest updates on the housing world.

3. For buyers who have rate concerns

@buynotrentguy

The team can help you buy a house in 49 states #2024housing #buyahome #mortgage

♬ original sound – Buynotrentguy

Speaking of rates, @buynotrentguy recently posted a video about whether home shoppers should wait for rates to go down or brave the market while rates are relatively high. He encourages buyers not to delay, saying that when rates eventually drop, home prices are likely to rise.

“People that buy now can sit in the house, wait for rates to drop,” he explains in the video. “As that happens, their home price will go up, they will actually gain equity during the period that they’re waiting. They can then refinance to the lower rate.”

What the pros say: Redmond says this is good advice—as long as rates actually drop.

“This is basically ‘marry the house, date the mortgage‘ advice,” he says, referring to a popular homebuying strategy.

Home shoppers shouldn’t depend on predictions, he adds. “Interest rates are notoriously difficult to predict. … You might as well use a Magic 8 Ball.”

He recommends a more careful strategy: “When you finance a home purchase, you should be confident that if interest rates do not drop, you will still be able to afford your mortgage.”

4. For buyers curious about whether a loan estimate is the final price

https://www.tiktok.com/@the.mortgage.mentor/video/7260679794273111339

“Mortgage loan officers are getting pretty desperate,” @the.mortgage.mentor starts in one post.

The market is hard for everyone: buyers, agents, and even lenders, she says in the video. Some lenders are “pulling some pretty shady tactics” to get buyers to work with them and are “grossly underestimating” their loan estimate. (A loan estimate is just that, a document that estimates anticipated closing costs, monthly payments, and the interest rate, among other things.)

“Surprises are great, but not when it comes to buying a home,” she says. “You don’t want to have to show up to closing and, surprise, you have to pay $2,000 more.”

What our pros say: Redmond reminds buyers that @the.mortgage.mentor’s claim that loan officers are “desperate” is a generalization.

“Some are and some do lie, but most care too much about their online rep to make a habit of it,” he says. A good loan estimate was designed to protect consumers—and can be very valuable.

5. For buyers curious about how to show proof of funds

@loansenseiphatchau

Mortgage Proof of funds – When you buy a home, you will need to show proof of funds with bank statements. Typically lenders will need at least 2 months. Acceptable funds: -checking/savings -gift funds -401k(retirement) #CapCut #mortgage #mortgagememe #funny #realestate #homebuyer #realestatepro

♬ original sound – LoanSensei PhatChau

In one video, posted by a loan officer who goes by @loansenseiphatchau, a scene plays out from “The Office” in which one character repeatedly asks another, “Where?”

Over the clip, the text reads: “POV: Your loan officer asks where you keep your down payment.”

Below, the TikTok user explains that a buyer’s funds should be in checking or savings accounts, gift funds, or a 401(k)—but not in cash.

While it’s not mentioned in this video, it’s generally recommended that assets not be in mutual funds and stocks since this money can’t be withdrawn easily and the amount can change quickly based on market conditions.

Home shoppers will also need to submit a proof of funds letter showing they have enough to purchase a home when presenting an offer letter.

6. For buyers curious about how to pay off a mortgage early

https://www.tiktok.com/@joseluizmorales805/video/7252804848683617582?lang=en

Josie Luiz Morales, or @joseluizmorales805 on TikTok, is a real estate agent and investor from Ventura, CA, who posts about buying, selling, and finances.

In one video, he discusses paying off a 30-year mortgage in 15 years by increasing monthly payments.

“This is something the bank won’t tell you because they make more money off you,” he says in the video before explaining how homeowners could pay off their mortgage early by paying 15% more each month.

What our pro says: Redmond explains that owners can indeed pay off their mortgage early if they can afford to increase their monthly payments.

However, he says Morales’ claim that the banks “won’t tell you” this fact is “complete hogwash.”

“Almost all residential loans are securitized and aren’t held by a bank. Whoever originated your loan has zero interest or investment in whether or not you pay it off 15 years early,” Redmond explains.

In addition, he explains that when homeowners pay additional principal on a mortgage, it’s “the same thing as putting money in a savings account at the mortgage interest rate, so you need to be satisfied with that return.”

He notes that if a homeowner isn’t happy with their interest rate, they could potentially be better off using that extra cash for another, more lucrative investment.

Wondering how to get a mortgage, but scared to death you’ll mess things up? To be sure, buying a house is exciting, but there’s a fine line between excitement and pure, unadulterated fear.

This emotional roller coaster can be partly explained by the fact that “money represents so much more than just currency,” according to Emily Stroud, a certified financial adviser and author of “Faithful Finance: 10 Secrets to Move from Fearful Insecurity to Confident Control.”

Consciously or not, you may equate money with power or safety. As such, funneling a large portion of your dough toward a home can be nerve-rattling.

“People put a tremendous amount of stress on themselves to not mess up,” says Nick Holeman, a certified financial planner at Betterment, an independent online financial adviser.

So in case you find yourself freaking out, here are the Jedi-like mind tricks that can help you navigate the scarier parts of the mortgage and home-buying process—and keep your cool.

Educate yourself on how to get a mortgage

“The level of financial literacy in America is dismal,” says Holeman. “Money is often too taboo to be spoken about in the home, and isn’t well-taught in school either.”

That doesn’t absolve you of fiscal responsibility. It means you’re going to have to work harder to understand the info that you need when it comes time to buy a home.

Take baby steps—like checking out a home affordability calculator that crunches the numbers instantly on your income and debts and estimates what price house you can afford.

Once you can do that without hyperventilating, you can research the more nuanced idea of debt-to-income ratio (how much you owe versus how much you make) and making sure yours is no more than 36%. (Higher than that and you may not comfortably buy a house and keep your shirt.)

Too soon? Hands feeling a little clammy? Then ease off the money talk and…

Learn from other home buyers

“Friends or family members who’ve purchased a property likely felt the same anxiety you’re feeling,” points out Chris Taylor, a broker and investment property specialist with Advantage Real Estate in Boston. “They can be extremely helpful by sharing their own experience and answering any questions you may have.”

You know your Uncle Fred who managed to buy a great home after bankruptcy? Your worrywart friend who’s already on her third home? Now’s a good time to ask them to share their secret sauce.

Understand the basics of a mortgage

Before you make open houses a hobby, study up on the basics of applying for a mortgage, making a payment, and some of the costs associated with being a homeowner. Ever heard of private mortgage insurance? Know about closing costs?

“Don’t go nuts,” cautions Taylor, “but get familiar with some of the key terms and major steps.” Consider it exposure therapy. Check out our stress-free guide to getting a mortgage for more info.

Talk to a mortgage lender

Before you ever set foot in a house, you should meet with a mortgage lender. This pro can walk you through the steps you need to take to get ready for the home-buying process IRL. For one, he can tell you exactly how much money you’d be pre-approved for, so you can shop for houses you know you can afford.

After you have your financial affairs in order, “you’ll be able to enjoy the process of purchasing a new home without fear and anxiety,” says Stroud. (Well, maybe not “enjoy.” Let’s say “tolerate.”)

Just don’t forget to…

Find professionals you trust

Sometimes it’s hard to entrust your financial information to strangers, even if they’re the ones willing to loan you the money you need to buy a place! As such, it’s essential that you shop around for a mortgage—not only to find a professional you click with, but also to ensure you get the very best interest rate, which can vary from lender to lender. The difference of even a quarter of a percentage point could save you thousands throughout the life of your loan. And remember, although you’re borrowing money from them, they’re still working for you.

As such, all home buyers should meet with at least three lenders and compare what they have to offer, or meet with a mortgage broker who can survey all the options on your behalf. Same goes with finding a trustworthy real estate agent who can help you find a home that suits your needs.

Stay focused on the numbers that count

“Getting a mortgage is about more than buying a house—it’s having access to a home, a place to live, a place to raise your family or retire, a place that will bring memories for years,” says Ray Rodriguez, regional mortgage sales manager at TD Bank. (No pressure!)

Of course, seeing the amount of your entire mortgage on paper may give you sticker shock. You wouldn’t be the first (and you won’t be the last) prospective buyer to panic, to wonder “How am I ever going to pay that back?”

Breathe. And choose a more accurate number to fixate on: your monthly payment.

“As long as you’re comfortable with that, the [home-buying process] will be easier to visualize,” assures Rodriguez.

And trust that, in general, the money you pour into that mortgage every month helps increase your home equity, which means that over time, this home becomes officially yours with no lender lording over. In other words, you have nothing to fear.

High interest rates are one of the most significant hurdles buyers face when jumping into the housing market right now. As anyone who purchased a home in the last few years knows, interest rates have more than doubled since 2020. For a 30-year fixed-rate mortgage, you’re looking at an average interest rate somewhere between the mid-6% and +7% as of late.

So if you need to move, you might feel financially overwhelmed by the prospect of giving up your low, locked-in interest rate for a new rate that could be twice as high.

Enter “mortgage porting,” the practice of transferring the terms of your existing mortgage over to a new property. But how exactly does it work, and what will you need to qualify? Here’s some expert advice on what you’ll want to know before you consider porting your mortgage.

What is porting a mortgage?

Porting a mortgage essentially means transferring your mortgage to a new house. This will include the current terms of your loan, such as the interest rate and payment schedule.

But you can’t simply take your loan and plop it onto your new home. Instead, porting a mortgage often involves reapplying for your current loan, even though you already qualified once.

The only catch? You have to find out whether you and your mortgage are eligible.

How to determine if your mortgage is eligible

The thought of saving tons of money over the life of a new loan is a game-changer if you’re currently shopping for a home and facing high interest rates. But make sure you can port your mortgage before diving too deeply into your new home search.

“Eligibility for porting a mortgage is varied—you never know what you’re gonna get,” says financial advisor James Allen, of Billpin. “Some lenders allow it, others don’t. And not all mortgages are portable.”

For example, most variable-rate mortgages (a type of loan where the rate is not fixed) can’t be ported at all.

Another thing that will affect your eligibility is the amount of your mortgage as it compares to the home you want to buy.

“You can’t port if you’re moving into a less expensive home and don’t require the entire existing mortgage,” says Dennis Shirshikov, of real estate investment company Awning.com.

However, you might be able to port your mortgage if you’re moving into a home with an asking price equal to or higher than your current home loan.

“If the mortgage you’ll need for the new property is larger, your lender may offer you a ‘blend and extend,’” says Allen. “It’s like mixing the old and new, where you end up with a rate that mixes your old and current rates.”

Are you eligible?

Another thing to consider is whether you, as a borrower, are eligible for porting.

“The standard requirement is an excellent repayment history and meeting your lender’s affordability criteria for the new property,” says Shirshikov.

Your lender will likely want you to complete an entirely new loan application, including affordability checks and a credit check for you and your co-applicant.

Some lenders may even impose additional conditions, such as asking you to top-up your mortgage (i.e., borrow against any equity you have in your home) if the new property is more expensive.

When porting is a good idea

Porting your mortgage makes sense if you secured more favorable loan terms in the past and won’t be able to replicate them without porting.

“Porting is most advantageous when your current mortgage rate is significantly lower than market rates,” says Shirshikov. “However, if the current market rates are lower or the same, it might be worth exploring a new mortgage instead.”

How to port your mortgage

The first step in porting your mortgage is talking to your existing mortgage team.

“Speak with your current lender to confirm portability and understand the process,” says Shirshikov. “Remember to consider all costs, including potential penalties or fees associated with porting, to make sure it makes sense financially.”

While lenders usually make eligibility decisions promptly, processing time can still take up to several weeks. So it’s a good idea to start the process early.

“The timeline depends on factors like the real estate market and your personal circumstances, but typically it aligns with the closing date of your new property,” says Shirshikov.

The final word

Before settling on porting your mortgage, be sure to shop around the market and confirm that your current interest rate is still the best one out there.

Depending on the kind of loan you need, the amount, and any other life circumstances that might have changed since you last took out a mortgage—there could be better rates on the market.

The bottom line? Porting a mortgage is about as much work as applying for a new one, so always make sure it’s a deal worth securing.

Buying a new or slightly used car and purchasing a home are two of the biggest financial steps we make in our lives, but did you know one could affect the other?

When you apply for a car loan, the size of your monthly payments and how well you maintain those payments can factor into your mortgage approval. Here’s what you need to know before you take on these big purchases.

Credit scores

An auto loan can have a big impact on your credit score, which in turn has a big impact on whether you will get approved for a home loan and what rates you will get.

First, when you apply for an auto loan, the inquiry will appear on your credit report and lower your credit score temporarily.

“If you have very good credit, there is probably nothing to worry about,” said Peter Grabel, a mortgage loan originator for Luxury Mortgage Corp. “However, if the inquiries reduce your score from a 701 to a 699, for example [below the lender’s credit threshold], it could impact your mortgage rate.”

How you manage your auto loan will also affect your credit score. If you make your payments on time, your score will go up. If you miss a few payments, you will hurt your chances of getting a home loan.

Debt-to-income ratio

Lenders use your debt-to-income ratio (or the amount of your monthly debts versus your take-home pay) to determine your ability to repay your mortgage. Under the new qualified mortgage rules, your monthly debts—including your auto loan—cannot exceed 43% of what you bring home. If your auto loan pushes you above the limit, you may not qualify for a home loan.

Borrowing power

When you apply for pre-approval on a mortgage, lenders will compare your debt-to-income ratio and housing expenses such as property taxes and insurance to determine how much you can borrow for a home. If you have a large car payment to make each month, it will lower your borrowing power.

“A $430 auto payment [could] reduce your mortgage borrowing power by $100,000,” Grabel said.

With less borrowing power, you’ll have less money to work with and may have to opt for a smaller or cheaper home if you cannot raise the additional funds yourself.

Timing big purchases

“If you are planning to apply for a mortgage in the near future—six months or less—you should avoid applying for any type of credit if possible,” said Grabel, since taking on a large loan can affect your credit rating and your debt-to-income ratio.

And don’t confuse a pre-approval with a finalized mortgage.

“Your credit will be monitored up to the day of closing,” Grabel said. “If this new debt causes your ratios to go over the limit, your loan may be jeopardized, even if you were previously approved and cleared to close.”

Using car loans to build credit

While taking on a car loan will have an impact, it could be a positive one if you have limited or poor credit. If you take on a car loan six to 12 months before applying for a mortgage and make timely payments, your credit score will increase.

Also, “Mortgage lenders typically like to see at least three active trade lines,” Grabel said.

If your credit is limited, having a well-managed auto loan works in your favor.