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Ask the Lender Archived Articles

ask the lender

Previously submitted questions and answers for Ask the Lender.

How much home can I afford?
Deanna Bowman
Deanna Bowman
AVP/Mortgage Specialist
MLO #1031822

Purchasing a home seems to be a rite of passage into the adult phase of life in our culture. But, how much home can you afford based on your existing income and debts? Deciding to purchase your dream home takes much consideration and planning. To determine how much of a home you can afford, you need to calculate your expected monthly payment.

Most of your payment will go toward loan principal and interest. However, your monthly payment is also likely to include amounts for property taxes and homeowner's insurance. If you plan to make a down payment of less than 20% of the home purchase price, you will also have to add an additional amount for private mortgage insurance (PMI). Lenders require PMI to insure against the higher risk of default that occurs with loan-to-value (LTV) ratios greater than 80%.

After you calculate your monthly payment, you should calculate your housing and debt ratios. These ratios help you to get an idea of home affordability. Lenders rely on these ratios to help in their decisions to approve mortgage loans.

Your housing ratio is your total monthly payment divided by your monthly gross income. Generally, the ratio should not be more than 28%. For example, if your monthly payment is $1,650, your monthly gross income should be at least $5,892.

Your debt ratio is the sum of your mortgage payment and any other credit card or loan payments, divided by monthly gross income. Debt ratio will obviously be a higher percentage, since most people have other loans or credit card debt. Generally, your debt ratio should not be more than 36%. In this example, with monthly gross income of $5,892, your total loan payments (including the proposed mortgage loan payment) should not be more than $2,212.

How much of a home you can afford also depends on the amount of down payment you have saved. If you don't have one saved, consider these alternatives:

  • Federal government mortgage-financing programs. The U.S. Dept. of Housing and Urban Development (HUD) and Dept. of Veterans Affairs (VA) run loan programs for first-time homeowners and veterans of the armed forces. These programs require little or no down payment.
  • Obtain private mortgage insurance. Private mortgage insurance, discussed above, allows you to make a down payment of as little as 5% of the home purchase price.
  • Borrow against the value of your investments. Some financial institutions offer mortgages that are backed by the value of your investments. With these programs, your investment portfolio serves as the collateral for your mortgage.
  • Borrow from your employer-sponsored retirement plan. Most employers allow you to borrow against the value of your 401(k) plan. (The IRS does not allow you to borrow from an IRA, however.) Remember that if you leave your job, you'll likely have to pay back the full amount of the loan immediately.
  • Withdraw funds from an individual retirement account. While the IRS does not allow you to borrow from an IRA, it does allow penalty-free withdrawals of up to $10,000 for first-time homebuyers. However, you will owe income taxes on the amount of the withdrawal.
  • State government housing programs. Most states have programs to help residents buy their first homes.

In addition to a down payment, you should expect to pay closing costs on your home loan. Throughout the home financing process, there are many people involved to make sure that the home you’re buying is a sound investment for both you and the bank. Everything from your past credit history, to appraisals, to documentation preparation need to be in order.

Your lending officer will work with you to find the option that best works for you. But no one knows your financial situation like yourself. Being conservative in your projections of what you can afford is better than finding yourself in a position of being overextended. Be realistic in how much of your income you want to commit to a mortgage payment each month and still allow for the opportunity to save for your future.

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What are points and is it worth paying for them?
Ty Shingledecker
Ty Shingledecker
VP Commercial/Mortgage Lending

A mortgage customer may often hear about paying points or buying down points to obtain a lower interest rate. First of all we should describe what a point is. Quite simply, one point is equal to 1% of the loan amount. So ¼ point is equally to .25% of the loan amount and so on.

In a typical situation, by paying points a borrower may have the option of lowering their fixed interest rate, which they will have for the life of the loan.

For example if the 15-year fixed rate is 3.00%, the borrower may have the option of paying ¼ point to lower the fixed interest rate by .125%. This would effectively lower their monthly payment and lower their fixed interest rate to 2.875%.

To further explain, say for instance an individual was taking out a mortgage loan for $100,000. A 15-year fixed rate at 3.00% computes to a $690.58 monthly payment, whereas a 15-year fixed rate at 2.875% computes to a $684.89 monthly payment. To get the 2.875% in this example the borrower had to pay ¼ point, at closing, which amounted to $250.

So you might say why would anybody pay $250 to lower their payment by $5.69 per month? Well therein lies the borrower’s individual situation and risk. The breakeven point on this example is 44 months. If the borrower feels that they plan on owning the property for over 44 months or do not foresee themselves refinancing during that time period than buying points up front can be beneficial to them as every month after that breakeven point they will be better off. Conversely if they decide to sell the property or refinance during that first 44 months, looking back they would have been better off not paying the points and going with the initial rate.

In the end, paying points can be worth the investment, it just depends on your individual situation.

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How much are the closing costs?
Rhonda Hogrefe
Rhonda Hogrefe
Loan Specialist

One of the first questions I often hear from first time homebuyers is "how much are the closing costs?" Every purchase is different, so there is not one set amount. Typically closing costs run 2%-4% of the purchase price. Depending on the type of program you qualify for, your credit score may be a factor.

The following is a list of fees that you will typically see: origination fee, appraisal, documentation fee, title services and insurance, and the survey. You also have pre-paid items. These items include pre-paid interest, start up of your escrow account for taxes and insurance, and PMI insurance (if applicable). Maybe you decided to purchase points to get a lower rate. This is also collected at closing.

To help you better understand and be prepared so there are no surprises, you will be provided with several disclosures early on. These are required by law and are there for your protection. The most important are the Good Faith Estimate and the Truth in Lending.

Three days after your application is submitted, you will receive the Good Faith Estimate (GFE). This is a summary of your mortgage terms and settlement charges. This is only an estimate and the actual charges may differ. The estimate defines limits on how much certain fees can change between the estimate and the actual costs. You can evaluate your mortgage application and even explore other possibilities before accepting.

The Truth in Lending (TIL) allows you to see the cost of your mortgage under the terms of your loan. It will give you the APR (annual percentage rate) which combines your interest rate and closing costs and discloses it as a single rate to give you a true cost of borrowing so you can compare. For example, a loan with a lower interest rate may be a bad value if its fees are too high. Likewise, a loan with a higher rate with very low fees may be an exceptional value.

Keep in mind the mortgage tax savings you may be entitled to, but be sure to consult your tax advisor as there are limitations. Points paid on acquisition for a residence is fully deductible on the year they are paid. Thereafter, interest paid on a mortgage is tax deductible if you itemize on your tax return. These tax savings can affect the Effective APR. Again, be sure to consult your tax advisor on these issues.

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How much will my mortgage payments be?
Greg Adams
Greg Adams
SVP Retail Lending

The most popular question we hear from customers when determining whether or not to purchase a home is, "How much will my mortgage payments be?" Greg Adams, SVP Retail Lending, discusses what all is often included in a monthly payment and what you should consider in determining what you can truly afford.

"The mortgage payment of course includes the principal and interest payment that satisfies the accrued interest and a portion of your principal balance based on an amortized schedule, usually over the course of 15-30 years. Additionally, many customers choose to escrow, or add to their payment, the cost of other related items to ensure these items are paid in full and on time. The escrow portion of your payment can include the real estate taxes for the property, the hazard insurance premium, private mortgage insurance and life and/or disability insurance.

In determining how much of a payment you can afford, the standard rule is your housing payment ratio, which includes your principal and interest payment on your first mortgage as well as any subsequent mortgages along with the monthly taxes, insurance and any association dues (condominiums) should not exceed 28% of your gross monthly stable income. Your total debt ratio includes many items depending on your financial situation, such as your monthly housing payment along with your monthly auto, credit card minimum payment, student loan debt and alimony or child support payments. This total debt ratio should not exceed 36% of your gross monthly stable income. The total debt ratio may be affected by losses shown on your tax returns, for example self employment or rental losses. The borrower should prepare a budget of all of his/her monthly expenses and determine for themselves if the home is affordable based on that budget. Borrowers can also access which offers a buyers education web page that helps you when buying your first home.

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What is escrow and how is it figured?
Andrew Rager
Andrew Rager
VP Loan Originator

Many customers choose to escrow, or add to their payment, the cost of other related items to ensure these items are paid in full and on time. The escrow portion of your payment can include the real estate taxes for the property, the hazard insurance premium, private mortgage insurance and life and/or disability insurance.

At the closing of your loan, you will receive an initial escrow disclosure. This disclosure displays an anticipated year of activity which includes the monthly payment, disbursements to pay your taxes and insurance and a running balance on the account. An initial escrow deposit is collected at your loan closing to open your escrow account as shown on the disclosure. The bank is also allowed by law to maintain a two month escrow reserve in case your taxes or insurance should increase. Annually you will receive an analysis of your escrow account. The analysis will list the past year's payment and disbursement activity as well as the running balance. The analysis will also include the same history but for the following year. The annual analysis will determine if there is a sufficient balance in your account. Your account may have a shortage, thus requiring you to make a special escrow payment or an overage that will be refunded back to you if it exceeds $50. The monthly escrow payment will also be adjusted as a result of the analysis. CNB requires that you escrow for your taxes and insurance if you do not have 20% equity in your property; otherwise it is optional.

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Am I better off refinancing?
Brent Kohn
Brent Kohn
VP Loan Originator

With interest rates currently at historic lows, the quick answer to this question is probably yes. But in order to make sure refinancing makes sense for you and your situation, you need to ask yourself these questions:

  • How long will I be in this home?
  • Do I plan to payoff my current mortgage early?
  • How many years do I have left on my current mortgage?
  • How much do I owe on my current mortgage?
  • What will the cost be to refinance my current mortgage?

Let's say you have plans to move or relocate within 4 years. If the monthly savings you gain from a lower interest rate does not cover the cost of refinancing within 48 months, then you are wasting your time and money refinancing your current mortgage.

If you have been paying extra each month on your existing mortgage and you have less than 10 years left to pay, you really need to do some number crunching to determine if the savings is worth the cost of refinancing. You may determine that even though you are lowering the interest rate significantly on your existing mortgage, the savings will not outweigh the costs.

The cost of refinancing is the same regardless of the amount of the loan; whether it's a $300,000.00 mortgage or a $25,000 mortgage. The resulting savings however is much different. It may cost you $1,100.00 to refinance. On a 15 year term, the savings over the life of a $25,000.00 mortgage may only be $1,500.00. Whereas, the lowered interest rate on a $300,000.00 mortgage may save you thousands of dollars over 15 years.

Some people think that you have to drop your rate by 1% or more in order for refinancing to be worth your time but that is not necessarily the case. You will need to answer the above questions and take a close look at your situation. Our website offers a calculator that can aid you in determining if refinancing is right for you. If you'd like to discuss your options, call your local CNB office and ask to speak with a mortgage lender.

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Can I borrow extra?
MaryAnn George
Mary Ann George
VP Loan Originator

As part of the mortgage process, many consumers borrow more than the actual cost of the home purchase in order to consolidate debt, pay for closing costs or just to have a little extra cash. Below are some things to consider if you want to borrow more:

Consolidating debt - If you have 2-3 different loans, such as credit cards or personal loans, you can consolidate all these into your mortgage by re-financing - assuming you have that much value in your home. By combining you will lower your monthly installment payment and have fewer bills each month. Just be sure you are diligent to not fall into the same spending patterns, or you will have wasted the re-finance fees, lost equity in your house and possibly added years to your mortgage for no reason.

Financing closing costs - There are a few things to consider when you roll the cost of your refinance into your mortgage. Be sure it does not exceed 80% loan to value. If it does, Private Mortgage Insurance (PMI) will have to be added to your monthly payment, decreasing the amount of your monthly savings. Also, adding closing costs to your loan amount reduces the overall savings you gain from re-financing and you should consider the amount of time it will take you to recoup those costs. However, assuming you'll be in your home for awhile, the difference in the payment is usually very small and many people prefer to keep a few thousand in their pockets as opposed to paying it out.

Taking cash out - Consider what you plan to use the money for. If it's for something long-term, say improvements to your home that will increase its value or college education, it might be worth adding that additional amount to your loan. If you plan to spend the money on a vacation or a car, consider you'll be paying on that item for 15 or 30 years depending upon the term of your mortgage. That car might be in the junk yard before it's actually paid for.

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How do I obtain a pre-approval?
Rod Stover
Rod Stover
SVP Mortgage & Commercial Lender

A home is one of the most important purchases you will make in your life time. As with any major decision, the more research and planning you do, the better you will feel about the decision you make. The pre-approval process helps you find the right price range, choose the appropriate loan program (term) & may determine the interest rate you receive. In order to avoid feeling overwhelmed, we can guide you through the process and help you find the right fit for your financial situation.

Getting started...

Evaluate your household budget and determine a maximum payment you feel comfortable with for your mortgage loan. If you do not have a budget and need some help, go to Mortgage Guaranty Insurance Corporation(MGIC)'s website,

  • Click on HOMEBUYERS at the top of the page.
  • Click on HOMEBUYER EDUCATION on the lefthand side.

The link to this site will provide many resources regarding the home-buying process, from pre-approval to closing your loan. MGIC has also prepared a series of newsletters designed to help you. These newsletters cover topics that include: budgeting, the importance of credit, protecting your identity and understanding your credit report.

Obtaining your pre-approval...

Schedule a meeting with one of Citizens National Bank's mortgage lenders. A list of things to bring to your appointment is located here. During the pre-approval process the lender will work with you to find the right product and term that best fits your financial goals. To obtain a pre-approval, a lender evaluates your credit history, and calculates your housing and debt ratios. You should expect to verify your income, length of employment and source of down payment.

A pre-approval letter shows the seller(s) and/or the realtor(s) that you are a serious buyer and this will put you several steps ahead of other interested buyers that have not started the application process yet. If a lender denies pre-approval, you should investigate immediately. Without a pre-approval, your chances of obtaining a mortgage loan are jeopardized. If a lender bases the decision, in part, on information in your credit report, you have the right to receive a free copy of the report.

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