Posts Tagged ‘loans’

Why Should I Refinance My Home?

refinanceReal estate can be an excellent investment, but since most do not have the money to purchase a home up front, it is usually necessary to use a mortgage. Mortgages are a long term loan and, like any loan, there are sometimes when it may be in your best interest to refinance the mortgage.

Refinancing a mortgage simply means taking the total amount owed and transferring it to a new mortgage and possibly a new lender. While there can be many advantages to this, it is important to determine if refinancing is right for you, as it is necessary to pay closing costs, similar to those paid when the home was purchased.

Refinancing to Change the Term or Rate

There are many different reasons to refinance a home, but the most common reason is to change the term or rate.

Refinancing to change the rate involves taking out a new mortgage that has a lower interest rate. Refinancing to change the term means taking out a new mortgage, which has a lower length than the previous mortgage. Often, people will do both and refinance to change the term and rate. Knowing when to refinance the term or rate involves identifying your break even point.

Refinancing to Cash Out or Consolidate Debt

Refinancing a mortgage to cash out is the process of taking out a loan and using it to remove the equity from the loan. Equity is the amount of money you have put towards the principal of the loan.

So, for example on a $100,000 mortgage, after 10 years, the total owed to the bank is $85,000. This means there is $15,000 in equity in the home. A Cash out loan will give the borrower $15,000 in cash, but they will start over owing the lender $100,000.

In practice, however, cashing out a loan usually also includes the appreciation of the home. For example, in the above example, say that in those 10 years, the value of the home increased by $20,000. Now, even though the homeowner has only paid $15,000 in equity, technically, they have $35,000. This is the amount of actual equity plus the value of the appreciation.

This means that instead of only receiving $15,000 the homeowner could take out a $120,000 mortgage on their home.

Consolidating Debt works similarly, but involves bringing other debts, such as medical bills, credit card bills, or school costs into the loan. So, for example if the borrower owed $20,000 in student loans, they could add this to their mortgage and spread out the payments over the life of the mortgage.

These types of loans are the most heavily advertised, as they are the most profitable for the lender. However, it is not always in the best interest of the homeowner, because ultimately you are taking a big step backwards. With that said, cash out loans and consolidating debt can be a great way to pay off other lines of credit and bring them together under one large loan.

Refinancing to Remove Someone From the Loan

Another common reason for refinancing a mortgage is to remove someones name from the deed. Often this is after a divorce, but it could be a friend, relative, or business partner who simply wants to move in a different direction.

Whenever there are multiple people on the deed of a home, each person is considered to have an interest in the home. It is not even truly necessary for the person to be on the deed, because, as is the case with certain gifts, warranty deeds are often issued. Warranty Deeds indicate that others have an interest in the property and even though their name may not appear on the deed itself, if anyone buys the home, they will need to have all parties removed.

Since there are a number of instances where there is a need to remove someones name from a deed, often refinancing is the quickest and easiest way to remove the name. This can be especially tricky in cases of divorce, because even though a court may assign ownership of a home to one person or the other, this ruling is not honored by the lender.

Refinancing to Remove Private Mortgage Insurance(PMI)

Private Mortgage Insurance(PMI) is sometimes required on mortgages with less than 20% down. It is a type of insurance that covers the risk to the lender. It does not cover the entire cost of the home, but instead only the 20% down-payment.

In some cases, the PMI may be tax deductible, so there is little incentive to remove it, however if it is not and the homeowner has at least 80% equity in the home, refinancing to remove the PMI may be a good idea. It is important to note that it is the homeowners obligation to remove PMI and typically the bank will make no effort to have it removed.

Refinancing to Avoid Foreclosure

Typically, the foreclosure process begins when the homeowner misses three consecutive payments, however recent legislation has made it a little bit more difficult for lenders to foreclose in some cases. Even once a home has entered into the foreclosure process, it is almost always possible to reverse it, providing the missed payments are made up.

There are several loans, often called Foreclosure Bailouts, which are designed to allow the homeowner to refinance the home, any missed payments, and any fees owed to collections agencies. However, it is very important to be careful when accepting foreclosure bailouts, as they are a type of subprime mortgage.

Initially, they offer relief, but over time it ends up costing the homeowner much more. Of course, when facing foreclosure, often subprime mortgages are the only option.

Other Reasons to Refinance

There are a number of other reasons why refinancing a home may be a good idea. For example, if the home has liens on it, it is sometimes possible to refinance and remove the liens, absorbing them into the total loan amount.

It is also becoming common to refinance a home and take out additional funds for remodeling. For example, if the home needs a new roof, but the homeowner can not afford to pay for it, it is sometimes possible to refinance to include the cost of the renovations.

When Not to Refinance

For each reason to refinance, there is a reason not to. Many of the offers most homeowners receive to refinance are from subprime lenders and while they may seem like a good offer at first, will end up costing the homeowner much more in fees.

It is always important to explore all of your options and make sure you calculate the break even point, which is the number of months it will take for the closing costs associated with refinancing to be offset by the saving of refinancing. There is no set rule, but it is generally not recommended to refinance if the break even point is greater than 48 months.

Finding the Right Mortgage

When purchasing a home, few homeowners have enough money to buy the home without using a mortgage. Mortgages, which are a special type of home loan, have been used for hundreds of years, but today’s mortgages are much different from those used in the middle ages.

One of the biggest differences between modern mortgages and those of the past is that today, the person who takes out the home is actually considered the homeowner. In times past, the person who held the mortgage, which was often a member of nobility, was considered the homeowner.

Until the person had paid off their home, they not only did not own it, but had very few rights. This began to change in the twentieth century and has gradually moved towards more rights for the homeowner. However, even though today the bank is not considered the homeowner, they do have a lien on the home, so in someways, the change is more of a symbolic one.

Start by Checking Rates at Your Bank

There are many places to get a mortgage, although in today’s housing market, many lenders are being much more conservative in who they offer loans to. One of the best places to start when looking for a mortgage is your own bank.

Your banks don’t always have the lowest rate, but because you already do business with them, they are often going to be able to give you an answer much more quickly and might be willing to overlook less than perfect credit. Also, in many cases, you can find out whether you qualify for a mortgage at your own bank without having to pay an application fee.

When starting to look for a mortgage, starting with your own bank will give you a very general feel of what types of rates to expect, as well as whether you will likely be able to receive a loan from other sources. It is important, however, to not only focus on your bank as the only option, but instead it is essential to use their offer as a basis of comparison against other loan sources.

Mortgage Brokers: A Useful Tool, but Be Careful

Usually, checking out the rates of a mortgage broker is the next step. A mortgage broker is an individual that has relationships with one or more lenders, but is not directly associated with them. Instead, the mortgage broker gets a cut from all mortgages they sell, which is referred to as their points.

Sometimes, mortgage brokers, especially those who are associated with more than one lender, have access to some great deals, but it is important to always remember that they only get paid if you take the loan. Since a mortgage brokers salary is commission based, there is almost always some form of bias associated with their suggestions. For example, it is not uncommon for some lenders to offer special bonuses to brokers if they sell a certain loan, so this will affect what type of loan they push.

Of course, this in no way means that all mortgage brokers are acting solely in their own best interest, but there is the risk of a conflict of interest that all prospective homeowners should be aware of.

Why Down Payments are Important

Mortgages are actually a quite old type of lending device, with records showing that the use of a mortgage actually dates back several thousands of years. However, traditionally, the land owner did not have many rights and were not well protected.

One of the biggest differences with older mortgages and newer ones is that during the middle ages, the person holding the mortgage, which was usually a king or land baron, actually owned the land and could do pretty much whatever they wanted with it. Until the person had actually paid off the mortgage, they had, for all intensive purposes, no rights.

This went on for some time, but during the twentieth century, the government began to pass a number of laws, such as the Truth in Lending Act and Fair Credit Reporting Act, which were designed to protect the rights of the homeowner, instead of the lender.

Today, mortgages remain a very popular tool and are often a necessity when it comes to purchasing a home, as most people do not have the money saved up to buy a home.

How Down-Payments Work

When purchasing a home, it is important to save up some money for a down payment. For much of the twentieth century, a 20% down-payment had been the standard, with pretty much no banks or mortgage lenders offering a home without at least 20%. Recently, however, lenders have relaxed this requirement and, in fact, leading up to the current financial crisis, lenders had begun to take no down payment at all.

While the no money down mortgage had become very popular, as credit continues to tighten up, most lenders have moved away from this and to a more traditional down payment structure. However, it is still possible to get homes for 10% down and there are still probably some lenders who might even offer no money down loans, but paying a down payment is in the best interests of the homeowner.

Why Paying a Down Payment is Important When Purchasing a Home

The advantage of having a down payment are several fold. For one, it lowers the total price of the home, so the principal of the loan amount is greatly reduced. As a result, a great deal less interest is paid over the course of the loan and the monthly payment is also much lower.

For example, take a home that is $100,000 and financed with a fixed rate mortgage of 4.5% over 30 years. Without a downpayment, the average monthly payment will be $506.69 and over the course of 30 years, $82,406 will be paid as interest. If, on the other hand, you paid a 10% down payment of $10,000, the average monthly payment will be $456.02 and the total interest paid will be 74,166.

As you can see from the above example, by paying even just a 10% down payment, you significantly lower the amount of interest paid on the mortgage, as well as the monthly payment.

Another big benefit of paying a down payment is that you are building equity in your home. Equity is the difference in what the home is worth and how much you owe on the mortgage. Overtime, as you pay off the loan, you build equity, which can be turned into cash when you sell the home or used to borrow against. By paying a down payment, you are instantly putting equity into your home.

About the only person that benefits from a non-money-down mortgage is the lender. In the end, they end up making much more in interest over the course of the home loan.

Fixed Rate vs Adjustable Rate Mortgages

In life, often buying a home is the biggest monetary investment a person will ever make. In most cases, especially in the United States, the homeowner does not have the money to purchase a home upfront, so uses a special type of loan called a mortgage. There are many types of mortgages, but, today, the Adjustable Rate Mortgage and the Fixed Rate Mortgage are the two most common kinds.

Mortgages are actually nothing new and date back many hundreds of years. However, over time, the rights of the homeowner has been increased and made stronger. In the times of Kings, the person who held the mortgage was, for all intensive purposes, the homeowner and had full control over the property until the mortgage was repaid. However, today, the bank is not considered the homeowner and can only take possession of the home if the loan holder does not pay, with even this not being a process without some judicial oversight.

Another change that has occurred recently is the types of mortgages used. The Fixed Rate Mortgage was, traditionally the primary type of home mortgage for many years, but today there are a number of other loan devices, of which the Adjustable Rate Mortgage is becoming more and more popular.

Fixed Rate Mortgages

Fixed Rate Mortgages are much easier to understand than other types of loans. The loan holder has a fixed time that they must repay the loan by, usually 15 years or 30 years, and a fixed interest rate for this entire time. So, if you get a 30 year fixed rate mortgage at 6.5%, you will know that each mortgage payment for the next thirty years will be at the same rate.

Fixed Rate Mortgages offer a number of advantages, mainly that your interest rate can not usually be raised, well at least providing you make the payments. This makes it very easy to plan payments, while also protecting your investment against inflation and higher interest rates.

Adjustable Rate Mortgages

The Adjustable Rate Mortgage(ARM) is much new by comparison to fixed rate mortgages, first becoming popular in the early nineties. Adjustable Rate Mortgages are mortgages that have an interest rate that is adjusted every few years. The period of when the interest rate increases varies, but it is often every two or three years.

When an adjustable rate mortgage reaches its adjustment rate, the loan holder will change the interest rate to reflect the current market. Most ARMs are restricted to only raise one point(1%) each adjustment, but this is not always the case. It is possible for the interest rate to go down, such has been the case for many recently, but this is not something that should be counted on.

It is also possible that the interest rate will not raise the entire 1%, or whatever the limit is, but again this should not be counted on. In addition to having a limit of how much the interest rate can change with each adjustment, there is also usually a limit on how high the interest rate can raise over the course of the entire loan. For instance, there might be a 8% adjustment allowed over the entire course of the mortgage.

Since understanding how and ARM works can be a little difficult, it is often easier to look at an example adjustable rate mortgage and see how it works.

Take a 2 Year ARM that starts with an interest rate of 4.75%, which can be adjusted by 1% each period.

For the first two years of the mortgage, the interest rate will be at 4.75%. Then, after two years, the interest rate will be reevaluated and the current market will be taken into account. It will then be raised or lowered, keeping within the 1% limit, so for this example, lets assume it raises by the entire amount.

For the next two years, the interest rate will be 5.75%, which will again be reevaluated in 2 years.

Why Use an ARM?

There are a couple of advantages to using an ARM, but it is not always the best choice. The main advantage is that the introductory interest rate is usually lower than that of a fixed interest rate. So, the first few years will be lower, allowing the homeowner to put some extra money towards the principal of the loan or simply saving some money. Many people go with an ARM with the intention of paying their home down more rapidly or refinancing when the rates equal that of a standard fixed rate mortgage.

ARMS and Sumprime Mortgages

The ARM, and several variants, were one of the most abused loans during the recent real estate bubble bust, which resulted in many foreclosures.

There were a number of details that make an ARM subprime. One of the main factors was there was often no limit on how much the rate could increase, especially if the person missed a payment, which often forfeited many of their rights.

This lack of a ceiling on increases, especially when the homeowner had missed a payment, caused these subprime ARMs to rapidly increase. It was also not uncommon for people to get sucked into negative amortization ARMs, which basically mean the person was not paying all the interest on their loan, which was being tacked onto the end of the mortgage. As a result, each month the person would end up owing more on their loan.

Fixed Rate vs Adjustable Rate

For someone with less than perfect credit, it is often not possible to get a good rate on a Fixed Rate Mortgage, so an Adjustable Rate Mortgage might be the only option. ARMs also sometimes offer such a low initial interest rate that the there are literally hundreds of dollars in differences for the first few years. However, an Adjustable Rate Mortgage is not always the best choice.

It is important to always find out how much an ARM can increase each period and how much it can increase over the course of a loan. ARMs that have no limits, or with unrealistic limits, are most likely subprime, so this is an important consideration.

Mortgage Brokers vs Mortgage Bankers

houseOne of the most important parts of buying a home is obtaining a mortgage. Since most people do not have the money to buy a home outright, they must instead rely upon a lender to loan them the money to purchase the home. As a result, once the mortgage is obtained, the rest is often downhill, although waiting for your offer on a home to be accepted can be very nerve racking. Since a mortgage represents such a long term commitment and investment, which for many is the biggest investment of their life, it is not a decision that should be taken lightly. Instead, it is important to spend some time shopping around and find the best deal.

Typically, one of the first decisions is whether to go to a mortgage broker or a mortgage banker to get your home loan. A mortgage broker is sort of like a middleman, who acts as a go between for banks and people looking for a mortgage. Mortgage bankers, on the other hand, represent actual banks that offer mortgages. Both mortgage brokers and mortgage bankers have disadvantages and advantages, which vary depending on your situation.

Even just twenty years ago, the mortgage industry was dominated by banks. When it came time to get a mortgage, most people went to the bank where they had their checking account and asked for a loan. This slowly changed as other companies and investors began looking at the high returns offered by the mortgage industry and decided to enter into the business of backing home loans.

Mortgages from Banks

One of the main advantages of having your bank finance your mortgage is that they will often take not only your credit rating into account, but also your personal history with the bank. This is especially true of credit unions, which sometimes have a much more personal loan approval process. Mortgages offered by banks are also more likely to be less risky and offer a very competitive rate. They are also typically able to move much more quickly than other lenders to approve or deny a loan. In addition, the fees associated with a mortgage from a bank are often lower, as they will hold the loan for its length, making their money this way.

However, while many banks will take into account your history with them, they also tend to have higher standards, especially in todays market. Gone are the days where mortgage lenders rely primarily on personal feelings, with most instead having a set mathematical formula that the borrower must meet. This means that often, a bank will only offer a mortgage to those with a very high credit score. Since the bank makes a great deal of money from other investments, they can afford to be much more picky.

It is a good idea to spend some time building up your reputation with your bank, such as by taking out a small line of credit and keeping it well maintained.

Going Through a Mortgage Broker

Mortgage brokers, on the other hand, typically have several mortgage lenders they work with. This could be an actual brick and mortar bank, but is often simply a group of investors that buys and bundles mortgages and then sells them to other investors.

As a result, the person that initially funds the mortgage is not the same person that holds it in a years time. This can cause some problems, as has been seen in the latest housing market crisis, where the initial lender lacks the incentive to ensure the person has good credit, because they know they will only hold the mortgage for a few months. This can be a bad thing, but it also means that those with lower credit, often have a much better chance of getting a loan from a mortgage lender. Of course, as a consequence of the current housing market, most lenders have become much more strict in their lending.

Since a mortgage broker is simply a middleman, they often have access to multiple lenders and can often offer much more competitive rates and has more options. However, a mortgage broker gets paid by commission and gets a fee based off the total loan amount. This fee is many times greater than that of a bank and also, since they are personally motivated by commission, mortgage brokers do not always have your best interests at heart.

Exploring Your Options

As with any financial decision, it is a good idea to explore all of your options. Many people start with their bank, as this banks can usually move very fast and have a personal relationship, which can often mean a greater chance of approval. By starting with your bank, you can also get a feel of current interest rates, so when you contact a mortgage broker, you have a way to measure what type of deal they are offering you.

Understanding FHA, VA, and RHS Loans

Even though the Federal Government is not directly in the business of financing home mortgages, they do offer a number of programs designed to help make it easier for Americans purchase a home. The main government agency responsible for administering these programs is the Federal Housing Administration (FHA.)

The FHA was created in 1934 and is primarily targeted at those who are unable to get a traditional mortgage due to a poor credit rating or low income. It was created to provide mortgage insurance on home loans made by government approved lenders in the United States. The FHA not only insured mortgages on single family homes, but also multi-family homes, hospitals, and manufactured homes.

The Federal Housing Administration is not the only government agency that provides mortgage assistance. About 10 years after the creation of the Federal Housing Administration, the Veterans Administration (VA) began offering a mortgage assistance program for enlisted personal and veterans of the Armed Services. The Rural Housing Service(RHS) also provides assistance for mortgages on homes in rural areas.

Together, the FHA, VA, and RHS work together to help people who might not otherwise be able to get a home loan by offering a guarantee to the lender. These agencies guarantee that if the borrower defaults, they will pay the remainder of the mortgage.

The Federal Housing Administration is currently the largest mortgage insurance company in the World. It was created while the Great Depression was still fresh in lawmakers minds and many citizens were unable to receive a loan.

A Deeper Look at the FHA

The FHA, and programs like it, help reduce the risk of a default, specifically for borrowers who have less than 20% available for a down payment. Typically, the FHA requires only a 3% down payment, which can be a gift of contribution.

While the FHA will cover a number of different types of homes, they do not offer insurance on multi-million dollar dwellings.

Instead, they will insure mortgages for about $360,000 in areas deemed as high cost and about $200,000 for lower cost areas. In Alaska, Hawaii, the Virgin Islands, and Guam, the FHA will insure homes up to almost $550,000.

While an FHA Loan can be a great choice for someone with poor credit or who has previously filed bankruptcy, they do charge a premium for the insurance. The FHA requires 1.5% of the value of the loan at the time of closing and 0.5% annual charge over the course of the loan.

VA Loans

The Veterans Administration offers mortgage insurance for veterans and insure mortgages for up to $417,000.

As is the case with an FHA loan, a VA loan can be used by veterans who have limited credit or even those who have previously filed for bankruptcy, as long as it has been at least 2 years.

RHS Loans

Rural Housing Service Loans (RHS) became available in 1994, with the passage of the Department of Agriculture Reorganization Act.

RHS Loans are intended to help stimulate rural areas that have been in a recession over the last twenty years. These types of loans are also called Section 502 Guaranteed Rural Housing Loans and do not require a down payment.

RHS loans can be used to help rebuild a rural home or prepare a site for a home, including installing water and septic facilities.

While an RHS loan can be an excellent way to purchase a rural home, the interest rate is based off of the income of the borrower and can go up if the individuals income increases. There are also may be a charge for selling the home early.