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Cash-Out Refi vs. HELOC: Which Should You Choose?

Many homeowners, at some point in their lives, need extra cash. The reasons people need a quick cash infusion could be one of many:

  • Major home improvement
  • New vehicle
  • Wedding
  • College
  • Vacation
  • Unforeseen emergency

And who hasn’t heard the story of a now-successful billionaire entrepreneur who put it all on the line to fund a startup by either remortgaging his house or taking out a home equity loan?

The reasons people need money are as plentiful as there are leaves on the trees.

Image showing a large homeHome Equity at All-Time High

With mortgage rates low and home equity rising, it makes sense that people would tap the value of their single biggest investment – their house – for extra funds when the time comes.

According to MSNBC, in October, 2018, untapped home equity — the difference between a property’s value and the amount owed on it — stood at an all-time high of $14.4 trillion.

In June of this year, total refinance volume was up 79.5% from the same week a year ago, which is the highest level since January 2018.

The same can’t be said for home equity lines of credit (HELOC), however. Demand for HELOCs collapsed to 15-year low earlier this year.

Why the difference? And what should you choose if you find yourself in need of extra money?

Refi vs. HELOC

To appreciate the reason for these trends, it’s important to understand the difference between a refinanced mortgage and a HELOC. Here are summaries of the two taken from the website Investopedia.

  • Refinance: “A refinance occurs when an individual revises the interest rate, payment schedule, and terms of a mortgage. Debtors will often choose to refinance a loan agreement when the interest rate environment has substantially changed, causing potential savings on debt payments from a new agreement.”
  • HELOC: “Home equity loans and HELOCs both use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral Because the loans are secured against the value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared to unsecured borrowing sources, like credit cards, you’ll be paying far less in financing fees for the same loan amount.”

So when it comes to tapping the rising equity in your home, which should you choose?

Cash-Out Refi

In the world of refinance, there are many different types. But in the current climate of low rates and rising equity, one refinance option stands out among the crowd when it comes to getting cold, hard cash for the value of your home: cash-out refinance.

“Cash-outs” are common when the underlying asset – aka, the value of a house — increases in value. With a cash-out refi, you withdraw equity of your house or condo in exchange for a higher loan amount. A cash-out refi lets you gain access to the value in your house via a loan rather than by selling it. This option gives you access to cash immediately while still maintaining ownership of your house.

Here’s a scenario:

  • Your home is worth $300,000
  • You owe $200,000
  • Thus, you have have $100,000 in equity

With cash-out refinancing, you could receive a portion of this equity in cash. If you wanted to take out $40,000 in cash, this amount would be added to the principal of your new home loan. In this example, the principal on your new mortgage after the cash-out refinance would be $240,000.

What’s Right for You?

Of course, everyone’s situation is different. And you should consult with your financial advisor before making any big move. But, in general, a cash-out refinance makes sense in a number of situations:

  • When you have the opportunity to use the equity in your home to consolidate other debt and reduce your total interest payments each month
  • When you are unable to get other financing for a large purchase or investment
  • When the cost of other financing is more expensive than the rate you can get on a cash-out refinancing

Another advantage of cash-out refis is that you are free to use the cash in just about any way you want.

If you are considering a cash-out refinance or have questions about refinancing options, give us a call!

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

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What is debt-to-income ratio?

Your debt-to-income (DTI) ratio is the percentage of your income that goes toward paying your monthly debts. DTI can often be overlooked as many people assume that a good credit score and a high income are the only two factors needed to be taken into consideration when seeking to purchase a home.

Image showing building blocksHowever, for many lenders, that’s not enough to be considered a good mortgage candidate. As a borrower, your DTI is utilized in various situations to determine your level of risk. For instance, if your DTI is too high, opportunities to make a big purchase, such as a mortgage, may be limited.

How to Calculate Your DTI Ratio

DTI Ratio = (Monthly expenses ÷ Pre-Tax Income) x 100
Start by adding up your monthly bills such as:

  • Rent or house payment
  • Alimony or child support
  • Student loans
  • Auto payments
  • Other

Next, divide your total sum by your gross monthly income (income before taxes). Multiply by 100. Your result is your DTI ratio.

The goal is to keep your DTI ratio as low as possible. The lower the ratio, the less risky you are to lenders. An adequate DTI ratio is below 36 percent. Typically, having a DTI ratio of 43 percent is the maximum ratio you can have in order to be qualified for a mortgage.

Front-End DTI vs. Back-End DTI

There are two variations of DTI: Front-End and Back-End.

A front-end DTI calculates how much of a person’s gross income is going towards housing costs.
Front-End DTI = (Housing Expenses ÷ Gross Monthly Income) x 100

A back-end DTI calculates the percentage of gross income going toward other types of debt (credit cards, car loans, etc.).
Back-End DTI = (Total monthly debt expense ÷ Gross Monthly Income) x 100

The main difference between Front-End and Back-End DTI ratios is that the front-end ratio only considers the mortgage payment and other housing expenses whereas the back-end ratio considers all other types of debt. Lenders will utilize this ratio in conjunction with the front-end ratio to approve mortgages.

Why is Knowing Your DTI Ratio Important?

Your DTI ratio is utilized by lenders as a measuring tool. Your DTI ratio helps lenders determine your ability to manage your finances, specifically, your monthly payments to repay the money you borrowed. Keep in mind that lenders do not know what you will do with your money in the future, so they refer to historical data to verify your income and debt totals. Moreover, your DTI ratio illustrates that you have a sufficient balance between your income and debt, thus, are more likely to be able to manage your mortgage payments.

If you are considering buying a home or have questions about your DTI ratio, give us a call!

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Appraisals vs. Home Inspections image

Appraisals vs. Home Inspections

As Michigan Mortgage Loan Officer Dave Lehner would say, “Don’t buy a money pit!”

What exactly does that mean?

Appraisals vs. Home Inspections imageAppraisals are required as past of the home-buying process. Home inspections are not, but they may be one of the most beneficial things you can do for your financial future. A home inspection will ensure that you don’t buy a money pit.

Here’s the difference between the two.

Appraisals

  • Required.
  • An appraiser provides a professional opinion of the home’s value. They do not analyze the “systems” of the home.
  • The goal is to make sure buyers are not overpaying for a home.
  • A home is appraised based on size, the number of bedrooms and bathrooms, functionality and recent sales of similar properties in the area.
  • The cost is typically between $400 and $575.

Home Inspections

  • Optional.
  • A home inspector will examine the physical structure as well as the “systems” of the house ranging from the foundation to the roof.
  • The home’s HVAC system, plumbing and electrical components, roof, attic, insulation, walls and ceilings, windows and doors, floors, foundation and basement will be assessed.
  • The home inspector is a licensed professional.
  • Buyers can use the inspection results to renegotiate the purchase price and request that the sellers make home improvements.
  • The cost is typically between $300 and $500.

As lenders, we’re responsible for ordering appraisals before proceeding to the closing table. We have no control over which appraiser is assigned to which home. The homebuyer is typically responsible for paying the appraisal fee.

Because the home inspection is not required, inspectors are hired by the homebuyer. We work with a pool of reliable experts and are happy to recommend one that will best meet your needs. The home inspector is working on the buyer’s behalf, so the cost is paid for by the buyer.

If you have questions about appraisals or home inspections, don’t hesitate to reach out. We’re here to help in any way we can!

How to Eliminate Mortgage Insurance

How to Eliminate Mortgage Insurance

Most buyers have heard of Mortgage Insurance and know that it is insurance that does not protect them but rather the lender against them defaulting on the home loan.

What most buyers don’t know is how they can avoid or when it can removed from their mortgage.

Mortgage insurance (MI) comes in the form of a few different names but it is essentially the same thing.

How to Eliminate Mortgage InsuranceConventional loans refer to it as PMI (Private Mortgage Insurance) whereas FHA and Rural Development (RD) refer to it as MIP (mortgage insurance premium).  VA does not have it at all but they have a funding fee on most loans that is added to the principal balance. FHA and RD have a similar add on fee that is called upfront mortgage insurance.

Regardless of what it is called and where it is charged, MI is a fee that lenders use to offset the losses that occur when people don’t pay on their loans.  It is charged to many to pay for the sins of a few.

For conventional loans, if you have 20 percent down, you will not be charged MI.

FHA and RD have mortgage insurance as a monthly fee regardless of the equity position, so even if you put 20 percent down on these loans, you will have mortgage insurance.

I am often asked how clients can get rid of mortgage insurance. Obviously, not everyone has enough savings to put 20 percent down but they don’t want to have this fee on their loan forever.

Again, RD and FHA have it no matter how much you put down, but for conventional loans, there are a couple creative ways to get rid of the mortgage insurance.

Option 1: Pay a fee upfront and not have a monthly mortgage insurance at all. While this helps reduce the total monthly payment, it is not always a wise decision. If the borrower will not be in the loan for long enough to recoup charge to remove it, the benefit it is not advisable to buy out of the MI. Similarly, it does not make sense to buy out of MI in an interest-rate environment that seems to be going down. In other words, if the person is likely to refinance or sell in the next 24 -to-36 months, it probably does not make sense to pay a flat fee to get out of the mortgage insurance.

Given enough time in the mortgage, however, you can save up to 50 percent of what you would otherwise eventually pay monthly.  In other words, paying upfront gives you a discount if you stay in the loan long enough.

Option 2: Have the lender pay it for you. This is called lender paid MI. Buyer beware on this tactic. While this sounds great, there is no free lunch; that maneuver will inevitably increase your interest rate.

Option 3: Get a first mortgage and a second mortgage. Assume a buyer had a 10 percent down payment. They would finance 80 percent of the sale price on the first mortgage but then close the loan with a second mortgage for the remaining 10 percent. It sounds like a great idea until you realize that the interest rate on the first mortgage has a substantial price adjustment when you piggyback it with a second mortgage. Additionally, the second mortgage itself is generally a higher interest rate and oftentimes interest only. In the end, this tactic is not usually worth the effort.

If a buyer opts to have normal monthly MI, which many do, the next question is how does one get rid of Mortgage insurance once they have it?

Previously we mention that that on FHA and RD the mortgage insurance stays on for the life of the loan. This means the only way to eliminate the insurance is to refinance.

For conventional loans, mortgage insurance is eliminated in a couple of different ways.

It is automatically removed once a consumer pays 22 percent off of the originally borrowed loan amount. It can also be removed with an appraisal that shows 20 percent equity. A third way to remove the mortgage insurance is with a refinance.

In an environment where there has been a lot of equity, interest rates have been reduced, and the consumer has paid down the loan enough, refinancing is often times very good option.

All of this is to say that the need for a trusted advisor who manages your debt annually is imperative.   Our job is just beginning once you close your loan. We help you build financial wealth with real estate and manage your debt to your advantage. We are here to guide you.

Now is the Time to Get Your Mortgage Online

Now is the Time to Get Your Mortgage Online

Technology touches all aspects of our lives, from banking to shopping to dating. The mortgage industry is no different. Buying a home today is vastly superior to what it was years ago, thanks to the benefits of online mortgage applications like Home SNAP. Gone are the long wait times, the reams of paperwork, and the outlandish fees.

Now is the Time to Get Your Mortgage OnlineOnline Applications Make a Mortgage Easier

What makes today’s home buying process so much easier? In a word: technology.

Technology has streamlined the mortgage lending process in the same way technology streamlines other transactions. Today, applying for a mortgage is faster, easier, more accurate and less costly for millions of home purchasers. Online tools such as “Mortgage in a SNAP” make the loan application process simpler and faster. They make home-buying a breeze.

Benefits of an Online Mortgage

For home buyers, the benefits of technology to the mortgage application process are easy to summarize.

  • Convenience
  • Accuracy
  • Lower fees
  • Speed

Online mortgage apps speed up mortgage lending in multiple ways. Technology reduces paperwork. It eliminates the need to send documents via the mail. It nullifies the need to meet in person to sign documents.

Convenience

Online mortgage apps provide convenience to mortgage lending by allowing borrowers to complete their applications any time, from anywhere. Borrowers also have the ability to login and view the status of their loan application at any time. Online mortgage platforms like “Mortgage in a SNAP” allow users to apply for a mortgage without having to meet or call a loan officer.

Accuracy

Online mortgage apps improve the accuracy of mortgage lending. All of the financial data is calculated and transferred automatically by computers. There is no room for error.

Lower Fees

For all of the reasons cited above, online applications lower the fees of mortgage lending.  Mortgage lenders like Mortgage 1 use technology to reduce expenses by automating parts of the underwriting process. By offering faster closing and greater insight into the process, mortgage technology not only creates a more convenient experience, it also lower costs.

Benefits of Online Mortgages for First-Time Buyers

Technology provides many advantages to first-time home buyers, specifically. Many of today’s first-time home buyers are technologically savvy, having grown up using computers and smartphones their entire lives.

According to the National Association of Realtors, consumers who grew up using computers and smartphones make up 34 percent of home buyers. As these buyers enter the real estate market, they seek out mortgage lenders who provide convenience and technology solutions. Online mortgage applications do just that. And more.

Are you ready to take advantage of technology to make your home buying process easier? Click here to get the online process started.

This blog post was written by experts at Mortgage 1. Michigan Mortgage is a DBA of Mortgage 1.

Tips to prepare your home for sale

Tips to Prepare Your House for Sale

The summer market is still going strong in West Michigan! And it’s a great time to sell your home.

You goal – and your Realtor’s goal – will be to get you the best sales price possible. Here are a few small projects you can do to make sure that happens.

Tips to prepare your home for saleFocus on the Exterior

  1. Start with power washing. Wash your siding, sidewalks, decks and any other outdoor structures to make them look good as new.
  2. Clean out your garage and de-clutter your yard.
  3. A new front door, or a new coat of paint on your current door, will give your home a much-needed face lift.
  4. Wash your windows – inside and out – so people can appreciate the view.
  5. Keep the lawn mowed and spruce up your landscape. There’s no need to spend hundreds of dollars and completely redo the space, but pulling weeds and trimming trees can go a long way. If your local greenhouse is open, purchase a hanging basket or two to add color to your front porch.
  6. Don’t forget the little things. Make sure all of your exterior lights are in working order, make sure your house number is visible and purchase a new welcome mat to impress potential buyers.

Make Sure the Interior Feels like “Home”

  1. Organize and de-clutter so buyers see how much space is available inside your home.
  2. Make sure every inch of your home is clean so buyers have an easier time imaging their new life in your existing space.
  3. If the budget allows, fresh paint and new carpet can help your home sell faster and for more money.
  4. Decorate – or remove decorations – so every room has a clear purpose that will appear to a majority of buyers.
  5. Make sure you fix anything that’s broken. Buyers will use imperfections as an excuse to write you a lower offer.
  6. Before your scheduled open house, make sure the trash is taken out, kitchen counters are clear, all lights are working and dirty laundry is hidden.

The little things can go a long way!

If you’re working with a Realtor, don’t hesitate to lean on them for advice. They will help you identify the must-fix items before buyers step foot in the door.

We wish you luck selling your home!

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Advantages of Making Extra Mortgage Payments

A house is the biggest purchase most people make in their lifetimes. The mortgage they obtain to finance that house is likely the biggest single investment they will ever make.

Image showing a large home and yardEven with the popularity of shorter terms and creative loans, most mortgages are still the tried-and-true 30-year conventional variety. First-time home buyers staring down the gauntlet of 360 payments spread over the next three decades of their life can feel like there is no end in sight. And for those who dare to look at their amortization schedules, that no-end-in-sight feeling can be even greater.

But there is a way to get ahead of the game: making extra mortgage payments.

Why It Makes Sense to Make Extra Mortgage Payments

Why does it make sense to make extra mortgage payments? Put simply, you will save significant amounts in interest. Most mortgage contracts allow borrowers to make extra payments, and they allow all of the extra money to be applied to the principal amount of your loan. That means you are paying down the real amount of the loan – the money you borrowed – faster. Because the interest part of your loan is calculated on the amount of principal you still owe, reducing your principal amount greatly reduces the interest amount.

According to the web site interest.com, “a $200,000 30-year home loan with an interest rate of 5% would cost $186,512 in interest with the traditional 12 payments a year. Make the equivalent of 13 monthly payments every year, and the loan will be retired in 26 years and you will pay only $153,813 in interest — a savings of $32,699.”

That’s nothing to sneeze at.

How to Make Extra Mortgage Payments

When it comes to making extra payments on your mortgage, there are a variety of tactics that can be used. Each has the same goal in mind: to reduce the principal and, thereby, reduce interest.

The tactics for making extra mortgage payments include the following.

Accelerated Payment Schedule

Rather than making your mortgage payment once per month, or the equivalent of every four weeks, you could make payments every two weeks. This biweekly payment plan results in 26 half-payments, which is the equivalent of 13 full payments for the year. The extra payment each year can shave off eight years from a 30-year loan.

Extra Principal with Each Monthly Payment

If you’re looking to chip away at your mortgage at a more gradual pace, pay a little extra each month. Check with your lender to make sure the additional payment goes directly to the principal. Depending on how much extra principal you pay, you could shorten your loan significantly. And, best of all, because your are shortening the loan duration, you will save significant amounts in interest.

One Additional Payment Per Year

Another tactic is to make one additional, principal-only payment per year. Some people who do this use their income tax refund for this purpose.

One Additional Payment Per Quarter

Making an additional payment each quarter results in four extra payments per year. On a $220,000, 30-year mortgage with a 4% interest rate, you would cut 11 years off your mortgage and save $65,000 in interest.

Lump-Sum Payment

Applying a lump-sum payment toward your principal balance when you come into extra cash — a bonus at work, a sizable inheritance — can shave time from your mortgage. This approach isn’t as consistent as some of the other methods, but, if the lump payment is large enough and depending on where you are in your timeline, it can eliminate many years.

This blog post was written by experts at Mortgage 1. Michigan Mortgage is a DBA of Mortgage 1.

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Reasons to Sell this Summer

It’s (officially) summer in Michigan! The sun is shining and temperatures are rising.

For most of us, our air conditioners are running for the first time in months and we’re gearing up for an exciting 4th of July holiday at our favorite lake hangout.

Selling your home may be the furthest thing from your mind; if you’ve thought about downsizing or moving into a bigger home to fit your growing family, now may be the time.

Interest rates are low, home values are high and houses are moving quick in West Michigan.

Here are four reasons why you should consider selling this summer.

  1. There’s very little competition. If you were to ask any Realtor in the area, they’d tell you the same thing. There are not enough homes for sale to meet buyer demands. According to experts, housing inventory is under the 6-month supply that is needed for a “normal” market.
  2. Buyer demand is high. Buyers are on the hunt for their dream home! At Michigan Mortgage, we have a number of pre-approved buyers that have yet to write an offer. According to the National Association of Realtors (NAR), properties were on the market for an average of 26 days in May and 53 percent of homes sold in May were on the market for less than a month.In West Michigan, homes are going under contract before Open Houses are able to be scheduled. Yard signs are changed to “Sold!” in the matter of days.
  3. The home you hope to buy will continue to appreciate. According to NAR, “The median existing-home price for all housing types in May was $277,700, up 4.8 percent from May 2018 ($265,100). May’s price increase marks the 87th straight month of year-over-year gains.” If you’re looking to move up and into a bigger home, you will need to spend more in 2020.Lawrence Yun, NAR’s chief economist said this: “Though inventory is up, the month’s supply numbers remain near historic lows, which has a direct effect on price. Solid demand along with inadequate inventory of affordable homes have pushed the medium home price to a new record high.”
  4. Interest rates are low. Over the past few months, mortgage interest rates have been on a steady decline. This isn’t expected to change. Not only has this trend transformed renters into buyers, it has benefitted sellers when they purchase their forever home.

Summer is here and it’s time for you – and your family – to start living the life you’ve always dreamed of!

Image of a couple searching for homes online.

Five Reasons You Should Consider Refinancing

There are many great reasons to refinance an existing mortgage. Mortgage interest has historically been treated differently than all other debt. In fact, mortgage debt is the only debt eligible for a reduction in federal income taxes.

Done correctly, refinancing can be a good financial move (always consult a financial adviser first, of course). Once you’ve decided to refi, reach out to a Michigan Mortgage professional to get the process going.

Here are 5 reasons to refinance.

Your credit score has improved since the original mortgage closing. Normally just adding a mortgage account that has been paid on time for a year or more can have a significant positive impact on an individual’s credit score. Mortgage rates are discounted for every 20-point increase in borrowers credit score up to 740. Depending on how much higher a consumer’s credit score has improved, the potential savings could be substantial, especially if combined with reason number two.

Your originally purchased with less than 20 percent down and you are paying Private Mortgage Insurance (PMI). Refinancing can be a great way to remove those extra premiums for their monthly payments. Since 1991, home values have increased an average of 3.3 percent each year, according to the Federal Housing Finance Agency’s (FHFA) House Price Index (HPI). Just in the past year, home prices went up an average of 6 percent across the country.

You want to reduce the terms of the loan. When combined with number one and two on this list, a borrower could actually get a similar payment with a big reduction in years left to pay their mortgage. Going from a 30-year to a 15-year mortgage can result in thousands of dollars of interest savings over the life of the loan.

You want to combine high-interest loans to a lower, tax-deductible payment. Student loans, personal loans and auto loans traditionally are secured with higher interest rates than mortgage loans. Refinancing and paying off higher-interest loans can be a great way to simplify the number of payments made each month and reduce overall monthly payments.

You want a low-cost source of cash for home improvements or investments. Home improvements can improve the value of the home and many investments that pay higher than the after-tax cost of can provide a source of income over the cost of a mortgage.

A consumer’s best move to always to sit down with a Michigan Mortgage professional to determine the best course of action and match their mortgage to the consumer’s goals. If you would like to start, just call.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

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Mistakes to Avoid When Shopping for a New Home

Shopping for a new home can be one of the greatest experiences of a lifetime! When you venture out to purchase a home, make sure you set yourself up for success and an amazing experience.

Avoid these common mistakes:

  1. Not having your financing in order when you are ready to make an offer. It is critical to have a pre-approval from a trusted lender. Especially in a low inventory, competitive market, the buyer who has financing in place is ready to write the offer and “win” the home. So, don’t put yourself in the position of falling in love with a home that you aren’t able to bid on quickly!
  2. Not taking the time to educate yourself by window shopping and researching the market. Noel Berg with At Home Realty says, “A critical step in home buying is going to Open Houses, driving through neighborhoods and having a Realtor who educates you on home values so that you feel comfortable and confident when you find THE home! The more properties you can visit, the more confident you feel making an offer!”
  3. Submitting a low-ball offer. Make sure you look at all of the variables before making a low-ball offer. How long has the home been on the market? If it’s a seller’s market, it’s probably off the table. Does the house need updates, making it over priced? Your Realtor can craft an offer that won’t be too aggressive or offensive in the current market.
  4. Including too many contingencies. Contingencies are basically “walk away” clauses. It is important to protect your own interests, but, typically, the more contingencies in your offer, the less enthusiastic the seller may be to deal with you, especially in a seller’s market. Your Realtor will guide you as to which contingencies are the most critical to protect your interests.
  5. Using the seller’s agent. A real estate agent’s loyalties and responsibilities change depending on the transaction. A seller’s agent works for the seller to get the highest amount of money in the shortest period of time. Their fiduciary responsibility is to the seller at all times. The buyer’s agent works with the buyer to teach their clients about the market, to show them houses, and advise them when it comes time to make an offer and negotiate with the seller.
  6. Blindly listening to friends and family members. Though your friends and family have your best interests at heart, unless they are a Realtor, they are simply not experts; often times offering inaccurate and incorrect advice.
  7. Buying a home that is too expensive. Many buyers get their pre-approval letter and set out to look at houses at the top of the price range without thinking it through. It is important to work through a budget, and evaluate your spending habits and the increased cost of owning a home.
  8. Letting your emotions guide you. Purchasing a home will likely be one of the biggest and most important purchases in your lifetime. So, it makes sense that there will be emotions, concerns and questions weighing on you during the process. Make sure you take the top seven guidelines seriously so that you are empowered by logic, market awareness and professional advice!

A professional lender and Realtor will guide you home with confidence and authority.