What is earnest money?

Earnest money, sometimes called a “good faith deposit,” is a sum of money that is included with your offer to purchase a home. Earnest money has become standard, especially in today’s competitive real estate markets. The purpose of earnest money is to tell the seller that you’re serious about purchasing the home.

By backing up your offer with some cash, a seller is more likely to trust that you’ll follow through with the home purchase. This is important because, when the seller accepts your offer (AKA “purchase contract”), the seller is taking their home off the market. If the deal falls through, they’ll have to re-list and spend more time looking for another buyer.

Is Earnest Money Refundable?

While your offer to purchase a home will detail how much money you intend to give as your good faith deposit, you won’t have to send the money until the offer is accepted. Expect the check to be cashed right away, but it does not belong to the seller—the money is held in an escrow account.

Your earnest money will be held in the escrow account until closing. This is because, under certain circumstances, your deposit is . For instance, if the seller backs out of the deal, you will always get your earnest money back. But there are other ways you could get a refund, too.

While the earnest money deposit helps give the seller something to show for lost time if the deal falls through, there are certain “contingency clauses” you can put into your offer that will allow you to back out of the deal and keep your money. Common contingency clauses include the following.

• If you make your offer “contingent upon appraisal” and the home appraises at a value less than what you intend to pay for it, you will be able to get your deposit back and exit the deal if the buyer and seller don’t agree to an amended purchase price.
• If you make your offer “contingent upon inspection” and a home inspector fails the property or finds major issues that were not disclosed to you before (i.e., water damage, mold, etc.), you could either adjust your offer, ask the seller to remedy the issues, or back out of the deal.
• If you make your offer “contingent upon financing” and you fail to secure financing for the home (either because you end up not qualifying or because the lender finds the property unacceptable, you could back out of the deal and get your deposit back.

There are many other contingencies that you can choose to write into your offer, but your real estate agent will be the first one to warn you that adding too many clauses will only complicate things. Sellers will usually favor offers with fewer contingencies because it makes it seem like more of a “sure thing” to them, and they don’t want to take their home off the market for anything less.

While your real estate agent cannot reveal what other offers may have been placed on the home, they can walk you through what standard practice is in the current market, and help you evaluate the property to determine which contingencies are most important to protecting your finances.

What do I have to pay after placing an offer?

Let’s say that your offer is accepted and you pay earnest money into escrow. From there, you’re going to have a few more small expenses that pop up. These expenses are generally within your control, and you may be able to forego some of them, like a home inspection. With that said, these costs generally are only here to protect and benefit you, not the seller.

One of the next key expenses is a home inspection. Inspectors can be hard to find as they’re usually in high demand. Ask your real estate agent for recommendations because you want a professional who is experienced and unbiased (i.e., not friends with the seller).

Another cost you will incur is the title search. This process comes with a small fee. If the title comes up clean, it’s time to close on your mortgage loan, which means putting down the largest sum of money: The down payment and closing costs.

What is a down payment?

Your down payment will be due at the time of closing and it is over and above the “closing costs” that you will need to pay. Closing costs generally equal 3% to 6% of the sale price of the home and help to cover things like the real estate agent fees, escrow services, and so on.

Your down payment, on the other hand, is between you and your lender. Your mortgage lender will expect anywhere from 0% to 30% down, depending on the program you chose. For instance, the USDA has income limits but offers zero-down programs for qualifying areas, while the FHA offers 3.5%-down programs for qualifying buyers.

Other programs, like those through Veterans Affairs, can help you minimize how much money you have to put down. However, putting more down up-front will save you money in the long run. Just think of it this way: Every dollar you put down towards the home is one less dollar you have to pay interest on for the next 15-30 years.

Here are some other things you should note about your down payment:

• There are many state and federal down payment assistance programs that do not require repayment. A knowledgeable loan officer can help you determine if you are eligible for any of these programs and, if you are, they can explain the application process to you. Call Capital Bank Home Loans at 844-954-1786 and an experienced loan officer will assist you in exploring your options for downpayment assistance.
• You may be able to use gifted funds to cover the down payment, or a portion of the down payment but there are stringent requirements. Lenders want to be sure that you can show them where any money and who it comes from and prove that it is not a loan.
• Some programs allow you to take out a second mortgage to finance your down payment and/or closing costs. You should try to avoid this when possible because it means you’ll have very little equity in your home to start with, but it may be an avenue worth considering.
• You can pay more than the minimum required down payment, and it’s generally advisable to do so. By paying more up-front, you’ll save money on interest in the long run. You could also potentially negotiate a lower interest rate because you’re lowering the lender’s risk.

There’s no doubt that down payments can be expensive and, if you’re trying to cover moving costs and other fees out-of-pocket, it can be hard to think about finding extra money to put down more. Fortunately, there are plenty of options available to you. The right lender will walk you through all of them.

Earnest Money vs. Down Payment

Now you know the difference between earnest money vs down payment requirements: Earnest money is paid at the time you place an offer on the home, and you may be able to get it back if you back out of the deal. Your down payment is due at the time of closing and is the amount of money the lender requires to be paid from your own funds.  The down payment is paid to the seller.

Some state and federal programs could provide a grant or financing for your down payment and/or closing costs. A partner like Capital Bank Home Loans can help walk you through your options.

If you’re interested in learning more about how Capital Bank Home Loans can help you on your home buying journey, reach out to our friendly team of experts today to learn more. Call Capital Bank Home Loans at 844-954-1786 to speak with a knowledgeable, friendly loan officer to get started!

For years, the 30-year mortgage has been seen as the gold standard for American homeowners. In fact, according to Freddie Mac, a federally-backed mortgage guarantor, an overwhelming 90% of today’s homeowners opt for a 30-year mortgage to pay back their home loan.

However, home-buying trends are shifting, with Americans starting to delay homeownership due to an aversion to accumulating debt and a rise in remote working lifestyles.

With these new priorities and timelines in mind, is the 30-year “old reliable” approach still the best option for today’s homeowners, or is a 20-year mortgage preferable?

There are a number of factors to examine when deciding which mortgage repayment time frame is best for you. Let’s take a look at some of the top considerations for each.

Things to Consider When Choosing a Mortgage Loan Term

Your Age

Something to consider when selecting a mortgage term is your age. If you’re in your twenties to mid-thirties, you have a long road ahead of you to increase your earning potential and pay off your mortgage over the long term. When your mortgage is paid off, you’ll be relatively young to enjoy the fruits of having this large piece of debt fulfilled and owning your home outright.

Conversely, if you’re in your forties or higher, you may not want to have debt and mortgage payments for thirty years. You’re more likely earning an income in line with your potential and may want to own your home outright sooner. If you have children, you may not want to risk passing a mortgage onto them.

Monthly Mortgage Payment

Because you’re paying for a mortgage over a shorter time period, a 20-year mortgage term results in a higher monthly mortgage payment. Therefore, it’s essential to consider your income, monthly expenses and saving goals when choosing a mortgage term.

Can you comfortably afford a larger monthly mortgage payment? Does doing so still permit you to cover all your bills and expenses while maintaining your saving goals? If so, you may want to consider a 20-year mortgage.

If your income situation is tighter and you’d prefer to have a low monthly mortgage payment, a 30-year mortgage would likely be the better option.

Total Interest

While a 30-year mortgage will result in a lower monthly payment, it will end up more costly cumulatively when compared to the 20-year mortgage. This is because you’ll be paying interest on your mortgage for an extra ten years. Furthermore, interest rates for 20-year mortgages are typically lower. Simply put, the 20-year mortgage incurs considerably less interest than the 30-year mortgage.

While you can write mortgage interest payments off your taxes, interest is still money paid to a bank rather than toward the house’s principal.

Equity Buildup

A 20-year mortgage is designed for you to pay off and own your home outright in 20 years, while a 30-year mortgage is designed to do the same in 30 years. Therefore, with each monthly payment, you’re building equity at a faster rate with a 20-year mortgage than a 30-year mortgage.

If your goal is to build equity in your home more quickly, the 20-year mortgage is a better option. With more equity, you increase your financial net worth, can take out a more substantial home equity loan and can tap into greater equity for another mortgage or other financial pursuit.

The Pros and Cons of a 20-Year Mortgage

Pros:

• Pay off your loan sooner: With a 20-year mortgage, you’re making larger payments in a shorter timeframe. So, your loan will be paid off a full ten years earlier compared to a 30-year mortgage.
• Faster equity buildup: Because your timeframe is only 20 years, you gain more equity in your home each month than you would with a 30-year mortgage.
• Reduce total interest: 20-year mortgages generally offer lower interest rates than their 30-year counterpart. Furthermore, the mortgage loan is for a relatively short time period, resulting in less interest over the long haul.

Cons:

• Higher monthly payments: The primary disadvantage of a 20-year mortgage is having a higher monthly payment. Boosting the amount of principal you pay each month allows you to substantially pay down the principal on your home, resulting in a shorter loan period overall. This restricts your access to cash on a monthly basis, so if your income is lower or your other expenses are too high, a higher monthly payment may be unmanageable.

The Pros and Cons of a 30-Year Mortgage

Pros:

• Lower monthly payment: A 30-year mortgage results in a lower monthly payment than a 20-year mortgage. Because you’re spreading out the fulfillment of your mortgage over a longer period, you can reduce your monthly bill. This is especially attractive to those still arriving at their earning potential or those with considerable other expenses.
• Easier to repay early: Since you’re giving yourself extra time to pay off your mortgage, it might be easier to pay ahead each month. This gives you a comfortable cushion and might result in paying off your mortgage significantly sooner than expected!

Cons:

• Higher total interest: With a 30-year mortgage, you’ll likely have a higher interest rate compared to a 20-year mortgage. Additionally, you’ll be making monthly payments for ten years longer, so you’ll pay considerably more interest cumulatively.
• You’ll pay off your home more slowly: If you pay just the minimum monthly payment throughout your mortgage term, it will take you ten more years to pay off your mortgage than if you went with a 20-year mortgage.
• Less equity buildup: Similarly, since you’re more slowly paying off your home, you’re building equity more slowly.

20 vs. 30-Year Mortgage for First Time Home Buyers

Nowadays, many people are becoming first-time homebuyers later in life. Taking into consideration previously mentioned factors — specifically age, monthly payment and equity buildup — it may be better for an older first-time homebuyer to select a 20-year mortgage. If they can afford a higher monthly payment, they can build equity more quickly and pay off the house sooner.

Consider these tips for first-time homebuyers:

• Be realistic about your budget.
• Take steps to maintain and strengthen your credit.
• Get pre-approved before making an offer.
• Build an emergency fund with at least 3 months’ worth of expenses.
• Ask yourself if you’re prepared to stay in your future home for at least five years before selling. If not, it may not be the best time to buy a home.

Which Path Is Best for You?

When selecting a mortgage term length, there are a variety of factors to consider, such as your age, budget and personal homeownership goals. However, every homebuyer’s situation is different, and it’s important that you feel comfortable with whatever mortgage term length that you choose, whether it’s 20 or 30 years.

If your main priority as a homeowner is having the lowest monthly payments possible, then you might want to opt for a 30-year mortgage, with the knowledge that you will ultimately pay thousands of extra dollars in interest.

However, if you are eager to start building equity in your home and can afford a higher monthly payment, you may want to choose a 20-year mortgage. Not only will you own your home sooner, you will also end up paying significantly less in interest over the term of the loan.

Our team of experts at Capital Bank is ready and able to discuss the various options available to you and help you determine your best path. Give us a call today to take the next step on your home purchasing journey!

The reasons for wanting to buy a first home are so personal! You may be facing a life-changing event like marriage or a new baby; you have a new job with a big salary increase and feel ready to start thinking about buying; or perhaps you’re at an age when all your friends have houses and you want to keep up. If you can remove yourself from the emotional aspect, though, whether or not you should buy is definitely better approached as a financial decision.

There are two main financial components to look at when you’re considering buying: the current housing market and your own money situation. Reviewing these will help you decide whether you should wait to buy a house or if now is a good time.

What Is the Current Housing Market Like?

Demand for homes has been very high in 2021, continuing 2020’s pandemic homebuying frenzy. According to a recent Zillow survey, more than one person in 10 changed homes in the past year. However, the pandemic also made many people stay put, resulting in fewer existing homes on the market than usual. Additionally, fewer new homes are being built or are taking longer to build (high prices for materials and a shortage of supplies and skilled labor are the reported causes).

Because there is more demand for houses than supply, prices have gone way up – more than 15% in the last year. Sales prices are somewhat balanced out by the current very low interest rates, which translate to more affordable monthly payments, low long-term interest costs, and a bigger home budget.

There are many eager buyers out there looking to snap up a home.

How the current real estate market affects first-time home buyers

Having more buyers in the market than sellers usually means each seller gets multiple offers when the property and location are desirable. That usually results in bidding wars, which drives the final home sales price up. According to Redfin, 54% of homes sold above their asking price in May 2021, more than double the previous year.

It’s very difficult for most first-time buyers to win a bidding war. If you’re a typical first-time homebuyer, you’re young, have a low down-payment with high financing and a pretty strict dollar range for your purchase. A seller may be worried that your financing – and the sale – will fall through.
Most sellers want buyers who can make all-cash or high cash offers that carry guaranteed financing or none at all. Those types of buyers – often people who have sold a previous home – are typically able to increase the purchase price they’re offering, too.

Additionally, mortgage lenders imposed tougher qualifying standards for home buyers during the 2020 COVID pandemic shutdown. Because of increased financial risks, lenders now want to see higher credit scores and bigger down payments (and cash reserves) from borrowers. While these standards may be loosening soon with positive U.S. job reports, they could hurt some first-time homebuyers.

What experts predict for buying a home in 2022

The summer of 2021 has seen the hot housing market cool down a bit. Realtors in the Washington, DC metropolitan area, for example, say that there are still bidding wars for many homes but with fewer offers per house than before. House prices are still rising, but at a slower rate than last year. While interest rates are still very low, expect mortgage interest rates to rise to 3.25%-3.5% by the end of the year, according to a number of economists.

Experts predict that the continued rise of interest rates will flatten the current housing boom in late 2022-early 2023 – fewer buyers, so potentially less competition for first-time buyers. However, when home prices remain high and mortgages carry higher interest rates, then it will be more expensive to wait to buy a house than to buy now.
(H1) What Should My Personal Finances Look Like for Me to Buy a House Now?

Here are the money markers that show you could be financially ready to buy a home.

A stable employment history. You have at least two to five years at the same job.

A good grip on your debt. You have a debt-to-income ratio (DTI) of 45% or less (that’s what most lenders are looking for). To calculate your DTI, add up your recurring monthly bills – rent, credit cards, car payments, student loans, etc. Then divide that total by your gross monthly income and multiply by 100 for a percentage.
• (Total monthly payments/Monthly income) x 100 = DTI
• For example, if you earn $75,000 a year before taxes ($6,250 per month), then lenders would like to see your monthly debt lower than $2,812.50.

Savings to cover the cost of buying a house. You’ve saved more than five percent of the cost of a home in your price range. While some loans for first-time homebuyers require a minimal 3%-3.5% down payment, you also need to cover closing costs when you buy/get your loan – this can be in the thousands or 10s of thousands of dollars. Additionally, you should have cash reserves of a couple of months of mortgage payments in case of emergency.

A good credit score. You have a 500 or higher score to qualify for an FHA loan and at least 620 for a conventional loan, though many lenders require higher scores. Borrower-required credit scores vary among lenders and types of loans, so it’s worth putting in the time to better your credit before you buy: excellent credit scores get better loan terms, saving you money over the life of your mortgage.

Income to cover the cost of owning a home. You have income in your monthly budget for utility payments, HOA fees, and repairs in your monthly budget or your savings. Houses require upkeep to maintain your quality of life (and your investment). Most experts estimate you’ll spend 1% of the home purchase price per year on maintenance – 2% if it’s an old house.

Buying a home at the wrong time for your finances is a mistake that can take years to recover from. Read our 21 First Time Home Buyer Tips – everything you need to know before you buy.

Weighing the Difference Between Renting and Buying

Surprisingly, even in major metropolitan areas with sky-high rents, it could cost more to buy than to rent. It may not seem like that, if you’re simply comparing a calculated monthly loan payment to a monthly rental. But if you factor in property taxes and insurance, monthly utilities (rentals often include some of those), and yearly home maintenance, the cost of owning goes way up! Try our Rent vs. Buy calculator to see what might make sense for you.

It’s a different story once you pay down/pay off the mortgage. Over the years, as the balance owed shrinks and house values in your area appreciate, the more equity you will have. Owning a home is almost always a good investment for building wealth, if you put in the time.

Pros and Cons of Buying a House Now

Pros of buying a house now:

• Take advantage of low mortgage interest rates
• Take advantage of the many home loan options available
• Build equity quickly from continuing home-price growth

Cons of buying a house now:

• Current housing market favors sellers
• Low housing inventory, so fewer available houses in most large cities
• Competition from cash buyers/previous homeowners who sold at the height of the market
• Tough mortgage standards for borrowers

When deciding whether or not to buy a home, it’s helpful to speak to a knowledgeable, experienced loan officer who can help you weigh your loan options.

Neighborhoods such as subdivisions, planned communities, or condominiums can organize a homeowners association (HOA) to govern the community. HOAs have recently increased in popularity, and Americans have a one in five chance of living in an HOA property. The HOA creates and enforces rules, called Covenants, Conditions, and Restrictions (CC&Rs), that address the maintenance of the properties. Community residents serve on the board of the HOA, and membership is usually a requirement if you buy a house within the community. This means paying the necessary fees, which can go toward keeping up common areas, shared structures, housing exteriors, and other amenities.

Does an HOA Affect the Home Buying Process?

When searching for properties, learning about the pros and cons of HOAs will help you make the best decision for your situation. You have to consider the fees required when you join an HOA. Often the community will come with several perks, making the cost worthwhile, but abiding by the CC&Rs may curb the creativity you want to take with your property. Most importantly, a house with an HOA will change how you qualify and apply for a mortgage.

HOAs and Applying for a Mortgage

Banks and other potential lenders consider how purchasing a property with an HOA affects property values and your financial situation. The required HOA fee could even influence your ability to qualify for a mortgage since it shifts your debt-to-income ratio. Even if the bank offers you a mortgage, a higher HOA fee could mean the mortgage is smaller than you’d need. Failing to keep up with your HOA fees, for whatever reason can also violate the terms of your mortgage, causing problems. Open communication with your mortgage banker about how an HOA mortgage property will affect your finances and ability to secure lending helps smooth potential conflicts.

Are HOA Fees Included in Your Mortgage Payment?

Your HOA fees will constitute a separate monthly or quarterly payment in addition to your mortgage, property taxes, and homeowners insurance. The money could come out of your own bank account or an escrow account, as it depends entirely on the mortgage company whether or not your HOA is included in escrow. Your bank may prefer to include an HOA in an escrow account, even if the payment is separate from your mortgage, because it offers a secure way for lenders to pay the fees themselves rather than depending on the borrower to keep up with the payments.

How HOAs Affect Property Values

A point in favor of HOA argues that it protects the property value of the community. Properties with an HOA are on average valued 4% higher than similar properties not belonging to one. The curb appeal, lawn maintenance, landscaping, and vehicle regulation all contribute to maintaining or elevating this value. Often HOA’s will even have a color palette for house exteriors, creating a desirable cohesion. Unfortunately, if you’re applying for a mortgage, a high HOA fee in a highly valued neighborhood could affect your ability to secure a mortgage, because it changes your payment ratios.

Who Is In Charge of Your HOA?

Every community’s HOA will work differently, and understanding the dynamic in your prospective neighborhood can help you determine whether the property is right for you. Often, people within the community volunteer for their HOAs, and association members elect the people they believe will best represent community interests. Other HOAs are professionally run. You will want to know how the HOA board communicates, how they handle disputes, and how often drama arises. Ask your real estate agent or a community representative for the contact information of the HOA so you can ask questions directly. From there, you can decide if a more active or relaxed HOA suits you better.

Is the HOA Worth It?

The value of an HOA depends on the community and person. Some HOAs offer services such as repairing building lobbies and roofs, community streets, gardens, or sidewalks. Communities with HOAs might feature attractive amenities for their members covered by the fee, like security, landscaping services, gyms, swimming pools, or clubhouses. On the other hand, HOA fees aren’t static and can increase over time with the property value of the community. The emphasis on uniformity doesn’t appeal to all potential buyers, and the CC&Rs may seem arbitrary or strict to someone dreaming of a house their own style. You have to look at the cost of your HOA, what it covers and whether you think it works for you.

HOAs, Mortgages, and You

Are you wondering if HOA fees included in mortgage payments are right for you? HOAs add a new dynamic to the home buying process, and each case is unique. If you have questions about your own property search and mortgage qualifications, our mortgage bankers can walk you through your options.  If you’re interested in more information about applying for a mortgage and what that entails you can work one-on-one with your Capital Bank Home Loans mortgage banker to answer all your questions. We’ll find a financial solution that fits your terms and budgets, without headaches or hassles.

Hoping to buy a house while still carrying student loan debt might seem like a dead end – as in, why even try to get a mortgage? The typical amount of education debt outstanding in 2018 per person was between $20,000 and $25,000, according to the Federal Reserve Bank. On average, that’s a payment of $200-$299 month.

Remember, however, that a lot has changed in the years since college, including your income, your credit score, and your assets. Many people can buy a house if they have student loans.

Debt to Income Ratio

One of the first things a mortgage loan officer looks at is your debt to income ratio. That determines if you can afford monthly mortgage payments while still paying off other debts. To do this, they add up your monthly payments and divide them by your gross income (how much you earn before taxes and other deductions). To get a qualified mortgage, the Consumer Financial Protection Bureau recommends a debt to income ratio of less than 43 percent.

Let’s say you want a mortgage that equals a payment of $1600 a month. Add that to your monthly $260 student loan payment plus a $140 car loan payment, and your total monthly debt equals $2000. If your gross monthly income is $6000, then your debt-to-income ratio is 33 percent (2000/6000) and would meet the benchmark for a home loan.

Credit Score

Your credit score always plays a role in getting a mortgage. Your credit is one way that lenders decide whether or not they want to take you on as a borrower. Credit scores also can determine the interest rate you’re offered on your home loan – typically, good credit qualifies you for lower interest rates.

Reducing or getting rid of debt helps your credit score. It also improves your debt to income ratio. For example, some borrowers sell an expensive car and buy a less expensive one (or take public transportation), to reduce or get rid of monthly car payments.

Here are other ways to improve your credit before getting a mortgage:

• Pay bills early or on time
• Lower the revolving credit you’re carrying (i.e., pay down or pay off credit card balances)
• Don’t make any big purchases for a while
• Order your free annual credit report, authorized by federal law, to look for red flags for lenders. Work with the credit bureaus to get rid of any inaccuracies on your report.

If you’re just starting out to build credit, or starting over, one of the easiest and best ways to do that is with a secured credit card.

Assets and Down Payments

Buying a home usually requires making a down payment. Lenders want you to have skin in the game, so to speak, so that you’re motivated to make the payments on your loan.

If you’ve been working a few years, you may have built some assets that you could use toward a down payment – savings and/or a 401(k) retirement account. You’re allowed to borrow from your 401(k) to purchase a home; then you pay yourself back through regular payroll contributions. Before doing this, however, learn the pros and cons from your company benefits coordinator – there are some downsides.

Consider down payment assistance

In today’s mortgage market, there are a number of low and no down payment loans. For instance, if you’re an armed forces veteran, some VA home loans allow 100 percent financing. FHA loans for first time homebuyers have low, 3.5 percent down payments. Your income may qualify you for assistance, or the state/region where you’re buying a home. A mortgage loan officer can walk you through programs available to you.

Ask for help – gifts and co-borrowers

If you’re lucky enough to have a relative who’ll help you out, there’s no limit on the amount of gift money that can go into a down payment for a primary residence. Or, gifted funds could be used to pay down other debts and lower your debt to income ratio.

Getting a co-borrower or guarantor spreads the lending risk. If you have a guarantor (a co-signer), you and they will be equally responsible for the repayment of the loan. This may enable you to purchase a home when your current financial situation doesn’t meet lender guidelines.

The Most Important First Step

Every homebuyer’s situation is different. The best thing you can do is talk with a mortgage expert who will outline all your options and tailor a mortgage to your needs – before you start house hunting. A loan pre-approval arms you with the knowledge of exactly how much home you can afford to buy, and how.

If you’re in the market to buy a home, contact Capital Bank to speak to a knowledgeable, experienced loan originator.