Mortgage Community

Sub-prime mortgages can be very important to those who have a bankruptcy lurking in their past, and although the down payment requirements and interest rates can be higher than for traditional loans, sub-prime mortgages can be a good way for borrowers to rebuild their damaged credit and build up a steady payment history.

There are a number of steps all home buyers should take before shopping for a sub-prime home mortgage loan.  Perhaps the most important step is to make sure that all accounts which were involved in the bankruptcy have been closed.  Even if you are sure this has been done, it is important to check.  All consumes can request a copy of their credit report from the credit reporting agencies, and this is a good thing to do no matter what type of mortgage loan you are seeking.

If you spot a mistake in your credit report, notify the credit reporting agency at once, and follow up to make sure the error has been corrected.  It may also be a good idea to ask that a letter explaining the circumstances of your bankruptcy be added to your credit record.  Some lenders will look at your account more favorably if the bankruptcy was brought on by circumstances beyond your control, such as an illness or the loss of a job.

After you have obtained the sub-prime mortgage for which you are qualified, the most important thing is to continue to rebuild your credit history by making on time payments.  After a few years of making regular payments on your sub-prime mortgage, you may be able to qualify for a traditional mortgage loan with lower interest rates.

Even though sub-prime mortgages come with higher down payment requirements and higher interest rates, they are a great way for borrowers who have suffered a financial setback to get back on their feet.  Buying a home is a great investment, and using a sub-prime mortgage for a short time is a small price to pay for the security owning a home provides to you and your family.

Unlike other forms of loans, a home equity loan can be an especially risky loan because of what’s at stake. Although it allows one to borrow a substantial amount of money, usually around 80% of the market value on the home (subtracting whatever is currently owed on the home), you must keep in mind that the most valuable and precious asset available, your very home, is at risk if payments are not kept up. However, for those willing to take the risk there are many upsides as well to this form of lending. We are here to help you balance the advantages and disadvantages of a home equity loan. These are the facts that you need to know.

The Facts

A home equity loan, essentially, is just a second mortgage, and like the first mortgage, the security is in the form of your home. A home equity loan can come in two forms, the first being the term or closed-end loan. Basically, you can receive a lump sum of cash upfront from your lender that must be paid off over a fixed period of time at a fixed interest rate. Your payments will be the same each month. Once you've received the lump sum, you are not entitled to additional funds. This loan, which is very similar to a first mortgage, enables you to know in advance exactly what your payments will be.

Before even considering a home equity loan, one of the first things you should look into are the fees associated with your loan. Home equity loans can be very tricky. You should be smart and look at the fine print to make sure you are not going to be hit with any hidden fees or guidelines that will only end up hurting you dearly in the end. Don’t be afraid to confront your lender with questions regarding your loan. In fact, fees and rates associated can even dropped or lowered by your lender, you just have to be firm and not give in right away. Keep in mind that home equity loans are an extremely competitive market and you should shop around and haggle with lenders to try to get the best possible deal you can involving the least amount of fees. Types of fees can include upfront fees, closing costs, annual fees, etc.

The other form is best defined by its initials, HELOC (Home Equity Line of Credit). The lender decides in advance how much you can draw out in a given period of time. During that period, you can tap into your pre-approved line of credit whenever it is needed. That means you only pay for the money that you actually borrow, a plus for most who are not sure exactly how much money they will require or have ongoing projects. As you pay back your loan, your credit can be used over and over. For example, say you have a $35,000 line of credit. You borrow $15,000 and then several months later pay back $5,000, meaning there is now $25,000 still available.

In summation, the term loan is generally best suited for those who need cash for a one time project. In contrast, the HELOC, or line of credit, can be the best choice for those who have continuous projects.

Home Equity Loans: Positives

Obviously the biggest plus with a home equity loan is the sheer amount of money that can be borrowed. Used wisely, a home equity loan can be a prime choice for getting through tough times. As long as you pay attention to the fine print and take the necessary time to make sure the deal is right for you, a home equity loan should be a pleasant ordeal. Here are some notable positives with this kind of loan:

·        Nothing is set in stone until you sign the contract. Rates are flexible, the market is competitive, and only too many lenders are willing to offer you “great” deals. Due to this and the fact that rates are at an all time low, now is a prime time to get a home equity loan if you are interested in one. When the house is the collateral, the lender has very little to worry about. For this reason, interest rates are generally quite low and can be found in either fixed or adjustable forms.

·        The money! Home equity loans can provide you with a large amount of money, and we all know that there are those times that we just need it. Up to 80% of the market value on your home minus whatever you owe on the house can be borrowed in a home equity loan, good for those rough times.

·        Save on taxes. Interest that you pay on your home equity loan can be used as a tax write-off to help save you money.

Negatives

Whilst the positives seem attractive, there are also many negatives that go along with a home equity loan. Any interested in this form of a loan should closely evaluate these negatives first and foremost.

·        Obviously the most glaring issue is that the security on the loan is your home; if you are unable to keep up with the payments then you could very easily lose it. Young homeowners are not advised to pursue a home equity loan in particular. Those without substantial savings, plenty of disposable income, and a secure job are also advised to look elsewhere.

·        Bad lenders. Always, always read the fine print or have a lawyer read it over for you to make sure you stay safe. Hidden fees and terms can be written into the deal and it is best to take the necessary time to make sure that the deal offered is right for you.

·        As usual, fees are always a big issue. Home equity loans do carry many different forms of fees on top of the standard rate, and although they can be lowered when drawing up the terms of the loan, it is important to understand the fees and be ready to handle them when they arise.

·        The money. Money is both a positive and negative aspect of any home equity loan because of this fact: those who don’t have money want money, and those who have money want more. Keep that in mind. Will you really be happy with how much you will be getting out of it? How confident are you that you are not going to overspend what you borrowed and get yourself further into debt?

So, when it comes time to make the decision on whether or not a home equity loan is right for you, be sure to examine all of the positives and negatives associated with this type of loan. Just make sure it is the right choice for you. It can be both a very good thing as well as a very destructive thing.

Refinancing is an option offered by many lenders. Feel free to use your second mortgage in order to refinance your first one. Obviously this could also lead to worse problems down the road if you aren’t careful.

For all too many workers, taking a loan against the balance of a 401(k) or 403(b) account seems like a good deal.  After all, you reason, the money you pay back, including the interest, goes right back into your account.  Before you succumb to the 401(k) or 403(b) loan temptation, however, it pays to take a long hard look at just how bad a deal it actually is.

There are a number of important reasons why borrowing money from a 401(k) or 403(b) plan is the worst deal in town.  The reasons to leave the 401(k) or 403(b) plan intact and seek a loan elsewhere are many, and they include:

Ø      Double Taxation – Putting money away in a 401(k) or 403(b) program is a great way to shield the income from current taxes while allowing it to grow tax free until withdrawal.  Along with the Roth IRA, the 401(k) or 403(b) is the best way to save for retirement.  If you invade that nest egg prematurely, you will be pulling out those pretax dollars.  To make matters worse, the money you use to repay the loan will already have been taxed.  When you do eventually withdraw the 401(k) or 403(b) money in retirement, you will get hit with taxes again – a double tax hit.

Ø      What if You Lose Your Job – If you get laid off, or leave your employer to take a better offer elsewhere, you may have to repay the entire balance of the 401(k) or 403(b) loan in just a few months.  Even worse, if you do not have the money to repay, the balance of the loan will then be treated as a withdrawal, making it subject to a 10% early withdrawal penalty.  This treatment will also mean the money is fully taxable.

Ø      Reduced Returns – The whole idea behind the 401(k) or 403(b) program is to harness the power of time to grow your nest egg. If you break that nest egg prematurely, your returns, and your retirement, will suffer.

The bottom line is that borrowing money from a 401(k) or 403(b) program should be a last resort, not the first place you go looking for easy money.  A 401(k) or 403(b) loan can seem like a good deal at first glance, but on closer examination it is anything but.

A mortgage (loan) makes home ownership possible for most of us. Without our mortgage, well…we’d just be renters. When we buy a home, we buy security. It doesn’t matter whether this is our first mortgage or only one of several; each time we take ownership of our home, we take greater control of our life.

What makes home ownership the most desirable of all debt? Everyone must live somewhere. With a traditional, fixed interest rate mortgage, we reduce our debt with each payment, increase our equity or our “assets,” and have a viable tax deduction.

What is a mortgage? A mortgage is a loan made to you by a mortgage lender, for the purchase of a piece of property. The lender holds the title to the property until the loan is repaid in full. If you cannot make your mortgage payment, the lender has the right to sell your home to pay-off your loan.

Why is a credit score so important? Credit scores begin at the low level of 300 and range to a high of 800. Higher is definitely better. From the viewpoint of the lender, your three-digit credit score represents the risk level the lender absorbs by making the loan to you. The lower your credit score, the higher the risk to the lender and the higher your interest rate will be. Conversely, the higher your credit score, the lower your interest rate. A higher credit score will enable the purchase of a home, an automobile, a lake house – anything you need a loan for – to be purchased at a lesser rate of interest.

How do you know you will qualify for a mortgage? A home buyer can choose to be pre-approved for a home loan. The pre-approval process assesses your credit report and your debt-to-income ratio, along with other pertinent considerations such as employment. Pre-approval offers great peace of mind for both the buyer and a seller. Pre-approval gives the buyer an advantage over competing buyers who are not pre-approved, as the seller knows the pre-approved buyer will not be turned down for a loan, and the buyer is confident that no embarrassing details will come up with the real estate agent or seller.

Pre-approval will advise how much money you can borrow – providing a “top-of-the-range” price that you will not want to exceed. You will know your total monthly payment as well as all closing costs, based on the highest loan amount available to you.

Pre-approval is not the same as being “pre-qualified”. Pre-approval is a more in-depth process and is generally considered to be better than pre-qualification.

What is “escrow”? Some states close by “clearing escrow” and some have a “closing.” Escrow requires both buyer and seller to deposit monies and/or documents with an impartial third party, such as a title company or bank. Funds or documents are released to buyer and seller when all requirements have been met.

What are closing costs? Closing costs are due, upfront, before all documents are signed and completed. There are two cost categories: the down payment and the closing costs.

·        The down payment: This is the money you invest in your home -- your equity. Your loan amount is the money needed to buy the home, less your down payment. The more money you “pay down,” the less your monthly payments will be. Down payments can be very little…maybe 5 percent or less, or as much as you want to pay.

·        The closing costs: This is the total of all fees due other than the down payment. These costs can include property taxes, homeowner’s insurance, fees for appraisals, surveys, electrical, mechanical, plumbing and pest inspections, and attorney and realtor fees, if applicable. Private mortgage insurance (PMI) is a part of closing costs if your down payment is less than 20 percent of the value of your property. The lender will have loan origination and processing fees, and you may choose to buy discount points.

What documents are needed for mortgage-approval? While this may vary from lender to lender, the most common are: a sales contract signed by all parties, proofs of monies available for escrow or closing, a list of current and past residences (two year period) with contact information for landlords, W-2 forms for the past two years and a recent pay stub showing year-to-date earned income,

balances on all loans, credit cards – all debts owed with account numbers, and account numbers for bank accounts, savings accounts, stocks and bond, etc.

What are “points” or “discount points”? A point is one percent of the amount of the loan. A discount point on a $100,000.00 loan costs $1,000.00 at the time of escrow or closing. When a buyer purchases a point, it reduces the amount of interest due over the life of the loan, which reduces the amount of your monthly payment. The upfront cost of the discount point(s) is tax deductible.

What is Private Mortgage Insurance (PMI)? The lender requires Private Mortgage Insurance when a buyer pays less than 20 percent down on the property. This insurance reimburses the lender if the buyer defaults on the loan. If the real estate market “drops” for a short while or if the property has fallen into a state of disrepair, the lender may not be able to fully recover the amount of the loan. The PMI insurance steps-in and secures the debt. The PMI insurance is a part of each monthly payment. When the buyer achieves a 20 percent equity or ownership in the property, the PMI insurance is dropped from the payment.

Why is homeowner’s insurance important? First, the lender requires the property to be sufficiently insured – you cannot close the loan or escrow, without it. Your insurance company will be required to show proof of coverage to the mortgage lender. Second, depending on the type of coverage, property insurance replaces your home in the event of specified disasters.

What determines property taxes? Property taxes differ from city to city and neighborhood to neighborhood. Property taxes are included in each monthly payment, so it is wise to discuss and compare specific “neighborhoods” with your real estate agent or get the information from your City Hall. 

What determines the interest rate? Generally, lenders begin with the current prime rate set by the U. S. Federal Reserve. The lender considers your credit report and overall credit worthiness, and adds to the set prime rate, but a reputable lender will always be competitive in the marketplace. Depending on your credit history, your interest rate may be better or worse than your neighbors.

What is included in a monthly mortgage payment? A traditional fixed-rate, monthly mortgage payment consists of the:

• Principal payment - the amount of the loan after the down payment.
• Interest payment - the money the lender charges you for the loan.
• Taxes - usually property taxes and, perhaps, Private Mortgage Insurance.

What is an amortization schedule? At loan closing, you should receive an amortization schedule showing every payment, by month and year, through the end of your loan. A thirty-year loan will have 360 payments shown, detailing each monthly payment by the amount paid toward the principal (your equity) and the amount paid to interest, taxes and insurance.

What types of mortgages are available to the home buyer? Among the most popular are the:

• Fixed Rate Mortgage (FRM): Considered the “traditional” mortgage, it is repaid over a period of thirty years with a “fixed” rate of interest. The interest rate is “locked-in” (cannot be raised and will not be lowered) for the life of the loan. The same concept can be applied to fifteen-year loans or any other period approved by the lender.

• Interest Only Loan: This loan is actually an “option” that is considered a part of or, attached to, a mortgage. The buyer pays interest-only each month for a specified period of time, usually seven years or less. After the specified period, payments increase dramatically for the life of the loan.

• Adjustable Rate Mortgage (ARM): An adjustable rate mortgage is set for a specific term, maybe 30 years, but will typically have a lower rate of interest than the current fixed rate mortgage. This lower interest rate is for an initial period of time. An example is a three-year ARM, also known as a 3/1 ARM, with a fixed rate for the first three years, then adjusting each year thereafter. The adjustment can be based on several indexes, such as U.S. Treasury Bills and Certificates of Deposit, and will likely “cap” or limit the interest rate you can be charged over the length of the loan. An ARM can be a 1/1, a 5/1, etc., depending on the lender.

• Balloon Mortgage: This mortgage offers a lower rate of interest for up to seven years or so, amortized at the lower interest rate. At the end of the specified time period, the total amount of the loan is due in one large “balloon” payment.

• Reverse Mortgage: This mortgage is usually available only to a person who owns full equity in a home and is 62 years old, or older. A lender “buys” the property from the homeowner but allows the homeowner to continue living in the home. The homeowner may receive payment in several ways: a single lump sum, as a credit line or as a monthly payment deposited into the homeowners bank account. If you move or when you die, ownership reverts to the lender, and is not a part of your estate.

The wording used when talking about mortgages can make getting a mortgage a confusing and frustrating process. Here are a few of the most common mortgage terms, and what they mean to help you with your mortgage search, as well as a formula to help you determine what your future mortgage payment may be.

Adjustable Rate – An adjustable rate is an interest rate that is going to change periodically as the index changes. The amount you make in payments will go up or down depending on your current interest rate.

Amortization- A method of paying off your mortgage in which a portion of you payment each month goes toward the principal balance the other toward the interest you owe. At first, the majority of your payments go toward the interest on your loan, toward the end of your loan term the majority of each payment goes toward paying the principal.

Annual Percentage Rate (APR)- The yearly cost of having being granted a line of credit for your mortgage expressed as a percentage.

FHALoan- A special type of loan that is backed by the Federal housing Authority. Should the borrower default on the loan the bank is guaranteed to get their money for the home by the federal government.

Grace period- the amount of time that your mortgage payment can be late, without incurring a late charge or a negative report on your credit report.

Index- The number which future interest rates is based on. Usually a percentage.

Interest Rate- The charge, or cost of being granted a line of credit to purchase your home.

Jumbo Loans- Large mortgage Loans that exceed a certain amount. Currently that amount is $203,150.

Lock In- A commitment you receive from a lender for a specified period of time regarding your interest rate. Should you “lock in” a rate of 5%, then that interest rate will not increase or decrease during the specified time period.

Payment- What you are expected to pay on your mortgage each month.

Prepayment Penalty- A fee that is charged should you pay off your loan before it hits its maturity date.

Principal- The total amount of your loan, before interest.

VALoan- A home Loan much like a FHA home loan where the Veterans Administration insures that the loan will be paid should you default on it.

Variable Rate- An interest rate that will change periodically depending on the index.

What is Home Equity?

Home equity is when your home exceeds the worth placed on it by the mortgage company when you took out your home loan. Although most of your property is currently being used as collateral to ensure that you repay your mortgage, you still have ownership over the amount of equity that is in your home.

What Does This Mean for You?

This means that you can take out another loan against the equity in your home if need be. This can be great for those who run into an emergency and require further monetary resources than a personal loan can provide. For example, consider this:

- If you have a large amount of debt on high interest credit cards, you can take out a lower interest rate loan against the equity in your home to pay off this debt. This way, although you will still owe the money, you may not have to pay as much in the end.

- If you want to upgrade or remodel a part of your home to make its value grow even further, you could use the equity already in your home to do so. This can be ideal for those who plan on selling their home and want to increase its overall value before placing it on the market.

- If you currently do not have enough money coming in to pay the bills for some time, a large loan may help you get by. Financial hardship can surprise many families when an adult is suddenly laid off or when someone in the family requires extensive medical attention that is not fully covered by insurance.

How Do You Know If You Have Equity in Your Home?

If you have remodeled your home since your last mortgage or property values have risen significantly due to development in your area, then you should have some equity in your home. The best way to discover what your equity is, is to have the home reliably appraised. Once you discover the value of your property, then you can begin to determine what your options are.

Fifty-Year Mortgages:

Is More Always Better?

Following close on the heels of the interest-only mortgage, the fifty-year adjustable rate mortgage (ARM) is the new kid in the in-crowd of specialized loans.  Just as it sounds, this is a loan which has an end date fifty years from its inception, which, for most people, means a lifetime of loan payments. 

HSH Associates, Financial Publishers, refers to this type of loan as a “Hybrid ARM”, of which there are many varieties.  Without getting into the finer points of interest adjustment ratios, the bottom line question is “What makes a fifty-year mortgage attractive to home buyers?”  The simple answer to that is that the payments are lower.  With the loan stretched out over fifty years, payments can be as little as half of those for a 30 year mortgage, and even lower comparative to a 15, 10, 5 or 1-year ARM. 

A home valued at $500,000, for instance, with a 5/1 adjustable rate mortgage of $400,000 at the current rate of 5% (many hybrid mortgages offer unusually low rates, and this is just one example—check with your lender for current rates in your area), your monthly payment would be $1816.56, of which $1666.67 will be interest at the beginning of the payment series.  You would reach the half-way point (owing $200,000) after 453 payments (37 years and 9 months).  By that time you would have paid a total of $822,901.63 of interest and principal.  Again, note that you would be nearly 40 years into the mortgage and still owe $200,000 of principal! 

Now consider that a standard 30-year 1/5 ARM would cost far more initially--$2796.87 per month—but you would reach the halfway point in 265 payments (that’s a little over 22 years) and would have paid $617,642.11 by that time.  That’s a saving of roughly $205,000.  Run the numbers out to the end of the loan period and the difference grows dramatically.

The purpose of a long-term loan is the reduction of the monthly payment so that more of your income can go to pay down other debt.  The longer the term, the lower the payment.  But the interest continues to accrue.  The more quickly you pay down the loan, the less interest you pay in the long run.  Pay slowly, and interest mounts quickly.  In some cases of “payment-option” ARM’s, it is quite possible to enter the “negative amortization” zone.   That is, you can make your monthly payment and owe more than you did before you sent the check. 

By now you are probably muttering about the fact that the numbers above are based on a house price that is above average for many places in the country and a mortgage interest rate to match.  In fact, 1/5 ARMS are in the neighborhood of 6.35% and rising, and I chose a higher-than-average price because many home buyers still believe that it is fiscally sound policy to buy all the house they can afford . . . and then some.  The hybrid (reverse, interest-only and 50-year payout) mortgages have made it possible for people to buy more house than they can rationally afford in the hope that housing prices will continue to boom and there will be significant equity into which they can tap down the line when they need cash.  The average housing price has climbed in some areas into the area that used to be reserved for the elite, and the price is buying less and less house.

Sadly, this “buy all you can buy” philosophy, which was prevalent in the mid-70’s, doesn’t hold water in an economy that is both inflationary and dangerously fragile.  Corporate downsizing, out-sourcing, and the current trend towards smaller raises and give-backs in the form of benefits packages are taking the air out of the balloon.  Though the housing bubble isn’t in danger of an immediate and drastic burst, it has almost stopped growing in some areas.  According to sources in central New Jersey—always a high-priced market—houses are staying on the market longer and the bidding frenzy that drove them up has begun to slow.  They are selling for the asking price instead of at a premium.  New development houses are selling faster than existing homes, but the market has assumed a slow-and-steady pace that differs considerably from the rush of a year ago.

So, take on a 50-year mortgage, figure you probably won’t be staying in your present home for the entire fifty years, and you can begin to see that the low payments disguise a serious problem when you want to sell.  You may have paid hundreds of thousands of dollars, have little in the way of equity in the house, and wind up handing over whatever the market brings directly to the lender with nothing left for a down-payment on your next home.  Worse, if you have continued the game by borrowing against the equity you did manage to accrue, you could conceivably “go negative”—that is, owe more than you did when you took out the original loan.

Regulators are concerned with the surge in foreclosures.  Foreclosures are at an all-time high primarily because borrowers are overwhelmed by the choices they are being offered.  There are so many options, and so many of those are alluring in their promise of lower, more manageable monthly payments, that buyers are signing before they truly understand what they are in for in the long run.