Your Mortgage
Home Loan Options
Creative Financing
No. With a shared appreciation mortgage, or SAM, a borrower receives a below-market interest rate in return for the lender receiving a share, usually 30 to 50 percent, in the future appreciation of the property upon its sale. Introduced in the early 1980's, when interest rates were high enough to make qualifying for a mortgage a real challenge, the SAM has never really caught on. Adjustable rate mortgages (ARMs) proved more attractive.
The biweekly mortgage has become increasingly popular as more people favor paying off their home loan early and reducing interest charges. Monthly payments on these loans are split in half, payable every two weeks. Because there are 52 weeks in a year, you actually have 26 half-payments, or the equivalent of 13 monthly payments per year instead of 12. Under the biweekly payment plan, a homeowner can save tens of thousands of dollars in interest and pay off their loan balance in less than 30 years.
Also called GEMs, these fixed-rate mortgages have monthly payments that increase in increments of 3 percent or more to reduce the principal loan amount. They are often written by the lender at a below market interest rate and have shorter terms. A GEM lets you pay off the mortgage earlier, save tens of thousands of dollars in interest payments, and build equity quickly. A 30-year GEM, depending on the interest rate, can normally be paid off in 15 to 20 years.
A reverse mortgage is an increasingly popular option for older Americans to convert home equity into cash. Money can then be used to cover home repairs, everyday living expenses, and medical bills. Instead of making monthly payments to a lender, the lender makes payments to the homeowner, who continues to own the home and hold title to it. According to the National Reverse Mortgage Lenders Association, the money given by the lender is tax-free and does not affect Social Security or Medicare benefits, although it may affect the homeowners’ eligibility for certain kinds of government assistance, including Medicaid. Homeowners must be at least 62 and own their own homes to get a reverse mortgage. No income or medical requirements are necessary to qualify, and they may be eligible even if they still owe money on a first or second mortgage. In fact, many seniors get reverse mortgages to pay off the original loan. A reverse mortgage is repaid when the property is sold or the owner moves. Should the owner die before the property is sold, the estate repays the loan, plus any interest that has accrued.
A shared equity mortgage, or partnership mortgage, can be a good way to purchase a home with little or no money down. In such an arrangement, the borrower/homebuyer has an absentee partner who, as the investor, provides all or some of the down payment. Equity sharing is not as popular in a slowly appreciating real estate market as in a rapidly appreciating one when equity investors are easy to find. A type of equity sharing called tenants-in-common partnerships is becoming increasingly popular, especially in high-priced markets. First-time buyers are usually most interested in a TIC arrangement because it gives them a way to buy property collectively with an unrelated partner. Loan underwriting standards are more complicated with these types of deals because lenders have more than one party's financial situation to assess. It is a good idea to hire an attorney to help draft a shared equity agreement.
B, C, and D paper loans are types of sub-prime loans. There was a time when they were hard to find. Then when the housing market took off, so did the number of lenders offering them. Not so today. High default rates on sub-prime mortgages made to high-risk borrowers with bad credit or those who had filed for bankruptcy or had a property in foreclosure, now have many lenders either shunning these loans or tightening credit requirements on them. As a rule, these loans have not met the borrower credit requirements of “A” or “A-” category conforming loans. Because mortgage lending is divided into various credit grades, several factors influence whether you receive, say, a “B” or “D” designation, including past credit history, documentation, and your debt-to-income ratio. The more serious a borrower’s problems, the lower the grade of the loan and the higher the rates and fees associated with the loan. At one time, the outrageously high rates on these loans had dropped as more lenders began to offer them. Since the credit crunch spurred by the sub-prime mortgage crisis, rates on these paper loans have shot back up, reflecting in more stark terms their heightened risks.
Also called a fixed-period ARM, these crossbreed loans combine features of fixed-rate and adjustable-rate mortgages. They start out with a fixed interest rate for a number of years – usually 3, 5, 7 or 10 years – and then convert to an ARM. Initially, the interest rate for the fixed period of the loan is much lower than the rate on a fixed-rate, 30-year mortgage by about 1.5 percentage points. As a result, the hybrid allows borrowers to buy a lot more home than they can afford – but at greater risk. The terms and fees for these loans vary widely and when the fixed-rate period expires, homeowners could end up paying considerably more than the current rate of interest. Before considering a hybrid, pay close attention to the terms, fees, and prepayment penalties.
If you borrow at or below the conventional loan limit for non-government
mortgages, you have what is known as a "conforming" loan. If the amount
surpasses the loan limit that is set by both Fannie Mae and Freddie Mac
–now $333,700 for a single-family home – you would then have a "jumbo"
loan and pay a somewhat higher rate because lenders believe these larger
loans carry more risk.
There are also loan limits on FHA and VA loans. Veterans who live in
high-cost areas or who wish to buy or refinance a home loan above
$240,000 can now use their VA status to do so. In instances where the
new loan amount exceeds that price, the VA will allow the new loan
amount to go up to $333,700 – if the veteran either puts down 25 percent
of any amount over the $240,000 or has sufficient equity in the property
to cover that amount.
It is a mortgage in which the entire unpaid principal becomes due and
payable on a given date, five, ten, or any number of years in the
future. The borrower must pay up, refinance, or lose the property.
Interest rates on balloon mortgages are lower than for fixed-rate
mortgages. So their monthly mortgage payments will be lower than the
monthly payments for conventional mortgages.
Balloon mortgages are a good way to keep monthly housing costs to a
minimum if you plan to move or sale well within the period of the
balloon.
It is a short-term bank loan of the equity in the home you are selling.
You may take out a bridge loan, or interim financing, to help with a
knotty situation: closing on the home you are buying before you close on
the property you are selling. This loan basically enables you to have a
place to live after the closing on the old home.
The key to a bridge loan is having a qualified buyer and a signed
contract. Usually, the lender issuing the mortgage loan on the new home
will write the interim financing as a personal note due at settlement on
the property being sold.
If, however, there is no buyer for the property you have up for sale,
most lenders will place a lien on the property, thereby making that
bridge loan a kind of second mortgage.
Things to consider: interest rates are high, points are high, and there
are costs and fees involved on bridge loans. It may be cheaper to borrow
from your 401(K). Actually, any secured loan is acceptable to lenders
for the down payment. So if you have stocks or bonds or an insurance
policy, you can borrow against them as well.
It is an agreement between a renter and a landlord in which the renter
signs a lease with an option to purchase the property. The option only
binds the seller; the tenant has a choice to make a purchase or not.
Lease options are common among buyers who would like to own a home but
do not have enough money for the down payment and closing costs. A lease
option may also be attractive to tenants who are working to improve bad
credit before approaching a lender for a home loan.
Under this arrangement, the landlord agrees to give a renter an
exclusive option to purchase the property. The option price is usually
determined at the outset, but not always, and the agreement states when
the purchase should take place.
A portion of the rent is used to make the future down payment. Most
lenders will accept the down payment if the rental payments exceed the
market rent and a valid lease-purchase agreement is in effect.
Before you opt to do a lease option, find out as much as possible about
how they work. Have an attorney review any paperwork before you and the
tenant sign on the dotted line.
Not to be confused with a biweekly mortgage, this type of home loan is
also known as 5/25s and 7/23s. It has one interest rate for part of the
life of the mortgage and a different rate for the remainder of the
loan.
Two steps are 30-year mortgages. They can either be convertible or
nonconvertible. The 5/25s have a fixed interest rate for the first five
years and either convert to a one-year adjustable rate or a 25-year
fixed loan. The 7/23 has a fixed interest rate for the first seven years
and then converts to a one-year adjustable rate or a 23-year fixed
loan.
The initial rate on the two step is lower than on a 30-year fixed
mortgage, but higher than a one-year adjustable. Also, because the
adjustment interval is longer, there is less risk initially than with an
adjustable rate mortgage, or ARM.
Also called an all-inclusive mortgage, it is where a new home loan is
placed in a subordinate or secondary position to the original mortgage
and the new loan includes the unpaid balance of the first.
The wraparound allows the buyer to purchase a home without having to
qualify for a loan or pay closing costs. The contract is made between
the buyer and seller with the seller remaining on the original mortgage
and title. The buyer pays the seller a fixed monthly amount and the
seller uses part of this money towards the existing loan.
The seller benefits by offering the buyer a loan at a higher interest
rate than the existing mortgage, and the lender profits from the
difference in interest in the two loans.
Wraparounds are not for novices and cannot be used when there is a
legally enforceable "due on sale" clause in the first mortgage.
Consult an attorney if you are considering this type of financing.
It is a mortgage held by the seller that can be taken over by the buyer
when a home is sold. Such loans are hard to find because most lenders
stopped voluntarily writing them many years ago. Most new assumable
loans today are adjustable rate mortgages.
An assumable mortgage may be attractive if the interest rate on the
existing loan is lower than the rate the buyer could otherwise get on a
new mortgage, either because of current market conditions or the buyer’s
poor credit history.
To determine whether to assume an old loan or apply for a new one, pay
close attention to the possible assumption fee, usually one point, and
other terms of assumption set forth in the existing loan. One plus:
there are generally few closing costs with an assumable loan.
While an assumable mortgage can speed up the property sale, sellers
should be careful about letting a buyer assume their mortgage. Depending
on the state and terms of the mortgage, a seller may remain liable for
the loan until it is paid off in full. Or the lender may go after both
the seller and the buyer if the loan is not paid.
Also known as a purchase money mortgage, it is when the seller agrees to “lend” money to the buyer to purchase and close on the seller’s home. Usually sellers do this when money is tight, interest rates are high or when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does not actually give the buyer cash to complete the purchase, as does the lender. Instead, it involves issuing a credit against the purchase price of the home. The buyer executes a promissory note or trust deed in the seller's favor.
The seller may take back a second note or finance the entire purchase if he owns the home free and clear.
The buyer makes a sizeable down payment and agrees to pay the seller directly every month.
The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction, and is generally influenced by current Treasury bill and certificate of deposit rates. The rate may be higher than those on conventional loans, and the length of the loan shorter, anywhere from five to 15 years.
Getting Started
You see promotions for them all the time. But banking regulators have gone
after lenders who misrepresent these loans. The reality is that no-cost
and no-fee loans may actually cost the borrower more over the long term
because costs are often hidden by rolling them into the new loan through
higher principal or interest.
The rates on no-cost loans are usually about 1/2 or 5/8 of a percentage
point higher than the "full cost" rate.
A typical no-fee loan includes points and all fees in the loan principal,
so the borrower does not pay or “see” these expenses at the closing.
Instead, the borrower pays them over the life of the loan.
If you are looking to refinance, it may be possible to get a no-cost
program that will lower your rate at no expense to you. Today, lenders are
paying all closing costs, such as title fees, appraisal fees, and credit
report fees. There are no loan fees or points, and nothing is added to
your loan balance.
However, many lenders may charge a loan application fee and some
restrictions may apply depending on the size of the loan.
That certainly is an option, although not one most people can afford. The
national median existing-home price was $217,000 in 2007 and much more
than that in many areas of the country (Honolulu, $643,500; San Diego,
$588,700; New York $469,700). Unless you’re independently wealthy or have
hit the jackpot, it may be difficult to make a “no-mortgage” investment.
And an investment is exactly how you should view it because you get to
save on mortgage interest that is usually paid over the life of the home
loan – interest that could amount to several thousand dollars, conceivably
hundreds of thousands of dollars.
With an all-cash deal, you also save by avoiding loan origination fees, an
appraisal, some closing costs and other charges imposed by the lender. You
enhance your negotiating position with the seller and get to bypass the
rather lengthy loan qualification process, which helps to close the deal
quickly. But if you want to use the home as your primary residence, forget
about taking advantage of the tax breaks available to homeowners with
conventional loans. By paying cash, you basically forfeit those tax
breaks.
To determine whether a no-mortgage purchase is right for you, compare it
to other investments, weighing the risk, return, and liquidity.
Your real estate agent has information on lender loan requirements and
will be able to calculate a rough monthly figure you can afford based on
the maximum monthly payment for the loan, taxes, insurance, and any type
of maintenance fees. This pre-purchase evaluation by the agent can save
you a lot of time spent looking at properties you cannot afford.
Lenders also routinely calculate what you can afford and can pre-qualify
you for a loan even before you begin your home search. This way, you know
exactly how much you can afford to buy.
Lenders generally stipulate that you spend no more than 28 percent of your
gross monthly income on a mortgage payment or 36 percent on total
debts.
Ultimately, the price you can afford to pay for a home will also depend on
other factors besides your gross income and outstanding debts. They
include the amount of cash you have available for the down payment, your
credit history, current interest rates, closing costs and cash reserves
required by the lender, and the type of mortgage you select
Builders will typically offer no-down-payment loans to sell properties in a slow-moving development or a depressed market. Desperate sellers also may commit to finance the down payment for the buyer to move a hard-to-sell home or to make a quick sale. And veterans may buy a home with nothing down through the Veterans Administration’s home loan program. And members of some pension funds also may avoid making a down payment.
Not too long ago, they offered in abundance what are called “stated income
loans," more commonly referred to as “no doc” or “low-doc" loans,
mortgages that require no documentation or little documentation to verify
the borrower’s income and assets. In return, the borrower, who must have
very good credit, make a big down payment—generally 25 percent or more—and
pay a higher interest rate.
Given current market conditions and the sub-prime debacle, these loans
have become more difficult to find, cost more, and are mainly funded by
hard money lenders who do not conform to bank standards.
The loans are common among self-employed borrowers who have difficulty
substantiating all of their income and service industry employees, such as
waiters and hair stylists, whose pay is hard to pinpoint exactly.
Borrowers also may use no-doc loans when they derive most of their income
from commissions or when they have very complicated income structures.
In reality, calling the loans “no-doc” and “low-doc” are misnomers. Some
“low-doc” loans require plenty of documentation, such as tax returns and
profit-and-loss statements. Even “no-doc” loans require a credit report
and a property appraisal.
Putting down as little as possible lets you take full advantage of the tax
benefits of homeownership. Mortgage interest and property taxes are both
fully deductible from state and federal income taxes. Also, making a small
down payment frees up cash that you can use to meet unexpected home
improvements.
Some real estate experts contend it is more economical, however, to make a
larger down payment, thus reducing the amount of debt financed over the
life of the loan. A borrower could potentially save several thousand
dollars, maybe even hundreds of thousands of dollars.
Such loans are offered by government agencies and private lenders,
including nonprofit groups and employers. In fact, there are government
programs at both the federal and state level to help cash-strapped buyers.
Under many state housing agency guidelines, borrowers must usually be
first-time homebuyers or have a limited family income to qualify for low
down payment loans.
The Department of Housing and Urban Development (HUD) offers several
programs through the Federal Housing Administration (FHA) that require
down payments of 3 to 5 percent.
Several times over the past few years, President Bush has proposed a “zero
down mortgage” insurance program for first-time homebuyers with good
credit. First proposed for his 2005 budget, it was promoted as a tool that
would qualify about 150,000 FHA-insured borrowers in the first year alone.
The 2006 budget indicated 200,000 potential borrowers would be helped. The
plans, which required congressional approval, never got off the ground.
Fannie Mae, the nation’s largest supplier of home mortgage funds, has a
popular program for low- and moderate-income homebuyers called Community
Home Buyers. Under the program, borrowers may buy with just 3 percent
down—with a 2 percent gift from family members, a government program, or
nonprofit group—and obtain private mortgage insurance to protect the
lender against default. The program is available through participating
mortgage lenders and requires that borrowers take a home-buyer education
course.
They are the same as conforming and non-conforming loans. A conventional,
or conforming, loan is one not insured by the Federal Housing
Administration (FHA) or guaranteed by the Veterans Administration (VA),
two federal government agencies that make homeownership possible and
generally more affordable for a large segment of the population.
However, that said, many major banks and private lenders now offer
non-conventional, or non-conforming, loans for lower-income borrowers and
those with blemishes on their credit.
In fact, Fannie Mae and Freddie Mac are now the leading sources of
non-conventional loans, thereby making the process of buying a home a lot
easier for more people – but not necessarily cheaper. The interest rates
on these loans are much higher than rates on conventional mortgages.
These are limits imposed by Fannie Mae and Freddie Mac on the amount of
money you can borrow to finance a home purchase. The loan limit generally
increases each year and applies to single-family homes in the 48
contiguous states, with higher limits in Alaska, Hawaii, Guam and the U.S.
Virgin Islands and on homes with two, three and four units.
For example, in 2008, the loan limit is $417,000 for a single-family
owner-occupied property, $533,850 for a two-unit property, $645,300 for
three-units, and $801,950 for four-units.
Theoretically, no limit applies to the amount a lender can provide under
the VA program. But in practice, local lenders generally lend up to
$417,000 in 2008 with no money down.
There are also loan limits for owner-occupied homes under the FHA 203(b)
program, the most common FHA option. The limits vary depending on whether
you live in a "high cost" or "low cost" area, as well as the number of
units that are being financed. In general, the FHA loan limit is $362,790
for a single-family home in high-cost areas and $200,160 in low-cost
areas.
Much like a stockbroker helps you buy stocks, a mortgage broker can help
you purchase a home loan. Because the broker has access to many lenders,
you will be able to select from a wide variety of loan types and terms
that fit your specific needs.
Note, however, that brokers are not obligated to find the best deal for
you. Of course, if you agree in writing to have one act as your agent,
that is an entirely different story. This is why it is important when
looking for a broker to contact more than one, just as you would any other
lender.
Compare their fees and ask questions, particularly about how they will be
paid. Sometimes their fees appear as points paid at closing or the
compensation is factored into the interest rate, or both. In any event,
haggle with the broker and the lender for the best deal.
Real estate agents normally maintain contact with several brokers. Ask
your agent for recommendations.
A mortgage makes homeownership possible for most people. In the simplest
terms, it is a loan that is secured by real property. The lender holds
title to the home until the loan is completely repaid. If you fail to pay
up, the lender has a right to take the property, sell it, and recover the
money that is owed.
The amount of a mortgage will vary greatly depending on the down payment
you make to reduce the amount of money that is needed to finance the home.
You may put as much money down as you like, or you can sometimes pay as
little as 3 to 5 percent of the purchase price, or sometimes nothing at
all. The more you put down, the more you reduce the amount that is
financed, thereby lowering your monthly payment.
The monthly payment consists of both principal and interest but also
typically includes additional amounts to cover property taxes and
insurance – specifically hazard insurance and private mortgage insurance,
the latter of which is required for down payments less than 20 percent of
the purchase price.
Homebuyers in the U.S. have access to several different types of mortgage
loans.
Conforming loans have terms and conditions that adhere to guidelines
established by Fannie Mae and Freddie Mac, the two, big quasi-government
corporations that purchase mortgage loans from lenders then packages them
into securities that are sold to investors.
Their guidelines are far-reaching and as such set borrower credit and
income requirements, as well as the down payment, and maximum loan
amounts.
Non-conforming loans are for buyers, such as the self-employed or people
with poor credit histories, who do not qualify for mainstream loans.
When you apply for a loan, long, steady employment is always seen as a
plus, as is a large down payment, a good credit rating, a history of
regular savings, and property located in a “good” neighborhood.
Not so good in the lender’s mind: frequent job changes without salary
increases, self-employment in a new venture, bad debt history, no previous
borrowing record, and dilapidated property.
Do not be discouraged. These are standard lender pre-dispositions when
evaluating your application, but when it comes to making a loan decision,
most lenders will tell you nothing is completely carved in stone.
Consider, too, that credit you have qualified for—say, credit cards—can
work against you, even if never used. This is because those credit cards
are looked upon as being open credit lines—and while they have not been
used, they could be used, and potentially used up to the maximum dollar
amount allowed by the credit card companies. As a result, their perceived
risks lower your credit, or FICO, score.
A lot will depend on the length of time you plan to live in the home,
other financial obligations, and potential savings gained from comparing
the monthly costs of a home against the up-front costs and closing costs
involved with a particular loan.
Also, you will need to be comfortable with whatever choice you decide to
make. Trust your instincts and do not be pressured into signing for a loan
that will not really work for you.
You can get a home loan from several different sources—a credit union,
commercial bank, mortgage company, finance company, government agency,
thrift (which includes savings banks and savings & loan associations),
mortgage broker, and even the seller.
Note, however, that many lenders have tightened their credit standards in
light of increasing foreclosures and higher delinquency rates. Begin your
search by calling at least half a dozen lenders to inquire about the types
of financing available, current rates on each loan type, loan origination
fees and number of points, other loan features and their credit
requirements for borrowers.
Once you actually apply for a mortgage, the lender will pull a recent copy
of your credit report. That inquiry and any and all others are recorded
and become a part of your credit file. Normally, several inquiries during
a short period are viewed negatively, as a sign you are trying to open
several new accounts. Such a move lowers your credit scores; and lower
credit scores mean you will be offered a higher mortgage interest rate.
However, there is a caveat. Credit scoring software generally detect that
you are shopping for a single mortgage, if you shop within a short, 30-day
window. So multiple inquires pulled roughly within this time frame will
only count as one inquiry and should not affect your FICO, or credit,
score.
Checking your own score also will not lower your credit score.
It protects them should you default on the loan, especially if you fail to
make payments in the early years of the loan when more is owed on it.
Foreclosure, property fix-up, and resale costs could result in a loss on
the mortgage loan.
That is a bad situation the lender wants to avoid. So they have
historically required cash down payments of 20 percent of a home’s
purchase price.
However, if you purchase private mortgage insurance, the down payment
requirement can drop to 5 or 10 percent of the purchase price.
Few lenders will lend the full value of a home unless they have special
guarantees, such as that offered by the Veterans Administration (VA) under
its mortgage assistance program.
Interest Rates
The main reason buyers sign on for these type of loans, which add 10 years
to the traditional 30-year mortgage, is to take advantage of smaller
monthly payments.
According to real estate experts, the shorter-term loan is usually more
advantageous for the homebuyer. The drawback becomes apparent simply by
calculating the cost of additional interest payments, which can total
thousands for the privilege of just saving the difference of a few dollars
in monthly mortgage payments.
It depends who you negotiate with. Some lenders are willing to haggle on
both the loan rate and the number of points, but this is not typical among
more established lenders.This is why it pays to shop around for the best
loan rates. And know the market so that you sound informed when talking to
a lender. Read the published rates in local newspapers or check the
growing number of Internet sites that publish such information.Also,
always make a point to consider the interest rate along with the points to
access which loan is truly the best.
Interest rates are much more open to negotiation on purchases that involve
seller financing. While they are usually based on market rates, some
flexibility exists when negotiating on the rate.
The interest rate on a purchase money note is negotiable, as are the other
terms in a seller-financed transaction. To get an idea about what to
charge, sellers can check with a lender or mortgage broker to determine
current mortgage rates on loans, including second mortgages. Most interest
rates, however, are generally influenced by current Treasury bill and
certificate of deposit rates.
Because sellers, unlike conventional lenders, do not charge loan fees or
points, seller-financed costs are generally less than those associated
with conventional home loans.
Understandably, most sellers are not open to making a loan for a lower
return than could be invested at a more profitable rate of return
elsewhere. So the interest rates they charge may be higher than those on
conventional loans, and the length of the loan shorter, anywhere from five
to 15 years.
Because adjustable rate mortgages, or ARMs, fluctuate with the market,
they offer less stability than fixed-rate loans. If an ARM is adjusted
upward, monthly payments will increase, and for a lot of people that can
be too big a risk to take. On the other hand, should rates drop
dramatically, homeowners can reap the benefits of lower rates without
refinancing, thereby saving thousands of dollars.
Lenders first introduced ARMs in the 1980s when interest rates soared into
the double digits, forcing many people out of the home buying market. They
tied the rate to a variable national index, such as U.S. Treasury bills.
Today, many first-time buyers who have difficulty qualifying for a home
loan, still settle for adjustable rate loans because the initial, “teaser”
interest rate of the mortgage is normally two or three points lower than a
fixed rate loan. ARMs are particularly attractive if you plan to be in
your home a short time. They tend to adjust yearly or every three years,
usually within certain limits, or caps, that prohibit the interest rate
from shooting up too high. Make sure terms such as these are spelled out
in any ARM agreement you choose.
Because the interest rate market fluctuates constantly and is subject to
quick movements without notice, locking in a mortgage rate with a lender
certainly protects you from the time your lock is confirmed to the day it
expires.
Lock-ins make sense in a rapidly-rising rate environment or when borrowers
expect rates to climb during the next 30 to 60 days, which is typically
the amount of time a lock-in remains in effect.
A lock-in given at the time of application is useful because it may take
the lender several weeks to prepare a loan application. These days,
however, automated loan practices have cut the time quite a bit.
Lock-ins are not necessarily free. Some lenders require you to pay a
lock-in fee to guarantee both the rate and the terms.
If your lock-in expires before you close on the loan, most lenders will
base the loan rate on current market interest rates and points.
They go up and down with interest rates, based on several esoteric money
market indices that cause the cost of funds for lenders to vary. The most
popular indices include Treasury Securities (T-Bills), Cost of Funds
(COFI), Certificates of Deposit (CDs), and the Libor, which is the London
inter-bank offering rate.
However, the interest rate and payment adjustments do not always coincide.
There is usually a lag between the two.
A number of consumer protections have been built into these loans to keep
them from fluctuating too wildly. But consumers will have to be cautious
when reviewing advertising and other claims about ARMs made by lenders.
The 15-year mortgage offers you a chance to save thousands of dollars over
the life of the loan. This is because the interest rate is typically lower
and amortization is half that of the 30-year loan, which means that the
total interest paid on the 15-year note, as compared to a 30-year note, is
significantly less because of the shorter borrowing period.
Put another way, a 15-year loan accrues principal much more quickly than a
30-year loan, so you get to own your house in half the time.
However, because you are building equity faster and paying down the loan
sooner, a 15-year mortgage requires higher monthly payments.
Get a lender to help you calculate the overall savings of the 15-year loan
versus the 30-year mortgage. In the end, though, base your decision on
your circumstances and overall financial plan, such as whether you are
nearing retirement age and also will have to shell out college expenses
for children, in which case a 15-year loan may not be for you. Remember
that your spending habits, budget, and financial goals should all be
considered before making a final decision.
Long-term, fixed-rate mortgages are preferred by most homebuyers because
they offer security and stability. The interest rate does not fluctuate
over the life of the loan, so the total amount of principal and interest
always remains the same. The monthly payment can change, however, if local
property taxes, which are normally part of the monthly mortgage payment,
increase.
Because the life of a fixed-term loan is usually long – anywhere from 15
to 30 years – you have plenty of time to repay it and there is no call
provision written into the mortgage. A call allows the lender to demand
the balance of the loan be paid in full before the actual payoff date.
On the negative side, the interest rate on a fixed mortgage is usually two
or three full points above the current rate on an adjustable rate loan, at
least initially. But for buyers seeking security, the comfort of knowing
what their payments will be year after year, and no plans of selling their
home in the foreseeable future, this is a small price to pay. If rates
drop, they may be able to refinance their home loan and get a lower rate.
Mortgage Terms
A home equity loan, like a second mortgage, lets you tap up to about 80
percent of the appraised value of your home, minus your current mortgage
balance. But because it is set up as a line of credit, you will not be
charged interest until you actually make a withdrawal against the loan,
although you will be responsible for paying closing costs.
The withdrawals can be made gradually as you begin to pay contractors and
suppliers for handling your remodeling project.
The interest rates on these loans are usually variable. Of particular
importance: make sure you understand the terms of the loan. If, for
example, your loan requires that you pay interest only for the life of the
loan, you will have to pay back the full amount borrowed at the end of the
loan period or risk losing your home.
Subprime mortgages are made to borrowers, usually at a higher interest
rate, who do not meet traditional credit criteria or who have
unconventional borrowing needs.
Factors that can prevent someone from meeting the traditional criteria
could be a high debt-to-income ratio, low reserves at settlement, as well
as past credit woes – bankruptcies, defaults, foreclosures, or chronic
late payments on debt obligations.
It is the cash value of your property over and above what is owed on it,
including mortgages, liens, and judgments.
The amount of equity almost always grows in a home over the years,
although regional economic slumps or overbuilding might result in a
temporary dip in prices.
The good thing is you can borrow against the equity that builds up in your
home and use it for any number of reasons, including home improvements and
to pay for college costs. It also is a source of income for you once the
home is sold.
Equity is also what makes seller financing possible. If you have money to
spare, you can always lend some to the buyer and collect interest on it.
The loan-to-value ratio, or LTV, is the loan amount expressed as a percent
of either the purchase price or the appraised value of the property. It is
an important factor considered by lenders before approving a mortgage.
Few lenders will lend the full value of a property unless they have
guarantees such as those offered by the Veterans Administration (VA).
Otherwise, the risks are just too high because if the borrower defaults in
the early years of the loan, the lender is stuck with a bad loan.
This is why lenders prefer a down payment of 20 percent, with an 80
percent LTV.
Buying private mortgage insurance, which insures the lender against
default, can reduce the LTV to 90 or 95 percent, making it possible to
have a down payment of 10 or 5 percent.
Some mortgages have prepayment penalties written into them. This means you
will have to pay the lender a percentage of the principal, or some other
stated amount, if you decide to repay the loan early.
The prepayment clause is usually in effect for only one to three years and
may be waived for special circumstances. Lenders impose the penalty to
recover any losses related to your early payment.
Ask about prepayment penalties before signing for a home loan. If you are
applying for a new loan, the penalty should be disclosed in the
truth-in-lending statement.
It is a loan against the equity in your home. Financial institutions will
generally let you borrow up to 80 percent of the appraised value of your
home, minus the balance of your original mortgage.
You may incur all the fees normally associated with a mortgage, including
closing costs, title insurance, and processing fees.
Home improvement loans are often written as second mortgages. And
sometimes you can get a college tuition loan by using a second mortgage.
In case of default, the loan is paid off from the proceeds of the sale of
the property, after the first mortgage has been paid off first.
When you amortize a loan you basically pay off the principal by making
regular installment payments. This typically takes place gradually over
several years.
Negative amortization is when the mortgage payment is smaller than the
interest that is due, which causes the loan balance to increase rather
than decrease. Negative amortization only happens with adjustable rate
mortgages (ARMs) with certain features, including an initial payment that
does not cover the interest due, a feature that is supposed to increase
the affordability of the loan.
With negative amortization, a persistent rise in interest rates reduces
the equity in the house unless the negative amortization is offset by
house appreciation.
Negative amortization has to be repaid, which means your payment will rise
in the future. The larger the negative amortization, the more you will be
required to amortize the loan in full.
The annual percentage rate, or APR, is an interest rate that differs from
the loan rate. It is the actual yearly interest rate paid by the borrower,
including the points charged to initiate the loan and other costs.
The APR discloses the real cost of borrowing by adding on the points and
by factoring in the assumption that they will be paid off incrementally
over the life of the loan. The APR is usually about 0.5 percent higher
than the loan rate and is commonly used to compare mortgage programs from
different lenders.
The Federal Truth in Lending law requires mortgage companies to disclose
the APR when they advertise a rate. The APR is usually found next to the
mortgage rate in newspaper ads.
Also referred to as PMI, it is insurance you pay to protect the lender in
case you default on the home loan. It is required when borrowers put down
less than 20 percent of the purchase price.
Usually, a small fee is paid at the outset and a percentage of the face
amount of the loan is added to the monthly payment.
Refinancing
You most certainly can. During the most recent refinancing boom, for
example, many homeowners refinanced their home loans two or three times
within relatively short periods of time because interest rates kept
treading downward, making it extremely attractive to trade in one loan for
another.
Just remember that refinancing is basically like applying for a mortgage
all over again. Each time you refinance, you will still have to go through
the application process, get a home appraisal, and likely incur closing
costs. Also, if you have a pre-payment penalty clause in your present
mortgage, you will have to pay that penalty if you refinance. So be
certain that it is actually worth it for you to refinance.
With a refinancing, you pay off an old loan on your home and take out a
new one, usually at a lower mortgage interest rate. To refinance, you will
generally need to have equity in your home, a good credit rating, and
steady income. You can borrow a percentage of the equity to cover
remodeling costs, debt consolidate, and college tuition.
When you refinance, you will incur all the closing costs that go along
with getting a new mortgage. So unless you are doing extensive renovations
and can get a mortgage interest rate at least two points below your
current loan rate, you may want to select another financing option.
It can be difficult to do after a bankruptcy, unless you are willing to pay very high interest rates and fees. However, if you are contemplating bankruptcy, first talk with your lender and explain your situation. If your mortgage payments are current, the lender may be accommodating and refinance your loan, thereby helping to ease your financial burden.
Many people flock to refinance while mortgage interest rates are low,
particularly when rates are about two percentage points below their
existing home loans.
Other factors, like when to finance, will depend on how long you plan to
hold on to your home and whether you have to pay considerable fees to
refinance. It also will depend on how far along you are in paying off your
current mortgage.
If you expect to sell your home relatively soon, you are not likely to
recoup the costs you incurred to refinance. And if you are more than
halfway through paying your current mortgage, you probably will gain
little by refinancing. However, if you are going to own your home for at
least another five years, that is probably long enough to recoup any
refinancing costs and realize real savings as a result of lowering your
monthly payment.
In fact, if it costs you nothing to refinance, you can gain even more.
Many lenders will let you roll the costs of the refinancing into the new
note and still reduce the amount of the monthly payment. Plus, there are
no-cost refinancing deals available.
Contact your lender, and its competitors, before you refinance.
Other Mortgage Considerations
Foreclosures
Sometimes. But it is a complicated process and a lot will depend on the
lender.
This process is called a “short sale,” which occurs when a lender agrees
to write off the portion of a mortgage that is higher than the value of a
home. But, usually, a buyer must be willing to purchase the property
first.
A short sale may be more complex if the loan has been sold in the
secondary market. Then the lender will need permission from Freddie Mac or
Fannie Mae, the two major secondary-market players.
If the loan was a low down payment mortgage with private mortgage
insurance, the lender also will need to involve the mortgage insurance
company that insured the low down payment loan.
The short sale can keep the homeowner from landing in bankruptcy or
foreclosure. But it is not an easy procedure to approve, and it involves
as much, if not more, paperwork than an original mortgage application.
Instead of proving your credit worthiness and financial stability, you
must prove you are broke. And any remaining difference between your home's
value and the balance on your mortgage is considered a forgiveness of
debt, which usually means it is taxable income.
They can remain on your credit record for seven to 10 years.
However, a borrower who has worked hard to reestablish good credit may be
shown some leniency by the lender. And the circumstances surrounding the
bankruptcy may also influence a lender's decision. For example, if you
went bankrupt because you were laid off from your job, the lender may be
more sympathetic. If, however, you went through bankruptcy because you
overextended personal credit lines and lived beyond your means, it is
unlikely the lender will readily give you a break.
Talk with your lender immediately. The lender may be able to arrange a
repayment plan or the temporary reduction or suspension of your payment,
particularly if your income has dropped substantially or expenses have
shot up beyond your control. You also may be able to refinance the debt or
extend the term of your mortgage loan. In almost every case, you will
likely be able to work out some kind of deal that will avert foreclosure.
If you have mortgage insurance, the insurer may also be interested in
helping you. The company can temporarily pay the mortgage until you get
back on your feet and are able to repay their “loan.”
If your money problems are long term, the lender may suggest that you sell
the property, which will allow you to avoid foreclosure and protect your
credit record.
As a last resort, you could consider a deed-in-lieu of foreclosure. This
is where you voluntarily “give back” your property to the lender. While
this will not save your house, it is not as damaging to your credit rating
as a foreclosure. Exhaust all other viable options before making a
decision.
It can happen. But a lot will depend on your circumstances and the
mortgage interest rate you are willing to pay. Generally, most lenders
will consider your request for a home loan two to four years after your
foreclosure. Predatory lenders will issue a home mortgage in less time.
But beware – they routinely charge high mortgage interest rates, fees, and
penalties for this privilege.
A quality lender will expect you to show that you have cleaned up your
credit. Providing a reasonable explanation about the circumstances that
led to the foreclosure – such as exuberant medical expenses – is also
helpful.
Other Mortgage Considerations
The Federal Housing Administration (FHA) is an agency within the
Department of Housing and Urban Development (HUD). Its main goal is to
help provide housing opportunities for low- to moderate-income families.
FHA has single-family and multi-family mortgage programs but does not
generally provide mortgage funds. Instead, it insures home loans made by
private lenders.
Meanwhile, the Veterans Administration (VA) guarantees home loans made
available to veterans, reservists and military personnel, without any down
payment. VA loans frequently offer lower interest rates than normally
available with other kinds of loans, thereby making it easier for veterans
to qualify for a home loan.
The maximum loan amount VA will insure varies by region. There is no
restriction on the purchase price as long as the borrower has the cash to
make up the difference between the loan amount and the purchase price.
Many builders offer financing incentives to help move more buyers into a project. In fact, major building companies often have their own mortgage brokerage subsidiaries, while many other builders routinely refer buyers to "preferred" local lenders. If it is a buyer's market in your area, you can be sure developers will offer incentives such as low-down-payment financing or interest rate subsidies.
Yes, although many are designed to assist first-time homebuyers, generally
defined by lenders as people who have not owed a home in three years.
HUD offers several programs through the FHA that require down payments of
as little as 3 percent. Veterans can get loans from the VA to buy, build,
or improve a home, as well as refinance an existing loan at interest rates
that are usually lower than those on conventional loans.
VA guaranteed loans are made by private lenders. The guarantee made by the
VA protects the lender against loss if you fail to repay the loan, which
also requires no down payment.
Most states have a housing finance agency that offers help for first-time
homebuyers. And many local governments offer down payment assistance for
first-time buyers.
Stay in touch with federal, state, and local housing offices regularly.
They offer many programs that come and go based on a changing economy and
political administrations. Some city and county programs are available
only in targeted neighborhoods where local leaders are trying to spark
reinvestment or increase the homeownership rate.
Funds can disappear quickly, so stay on top on what is going on.
Lenders prefer that you do. But relax, you are not penalized in any way
for receiving parental help. An estimated one-third of all first-time
buyers purchase homes with a loan or a money gift from parents.
Lenders also will approve gifts, with the proper documentation, from
relatives, friends, an employer, church, municipality, or nonprofit
organization – although stricter restrictions may apply for gifts from
friends and relatives other than parents.
Expect the lender to ask you to present a gift letter stating that a
repayment of the "gift" is not expected. The amount of the gift and the
date it was given should be clearly stated in the letter, along with the
donor's name, address, telephone number and relationship to you.
The lender also can ask to see a few bank statements to ascertain if the
money was recently placed into the account.
gift may be more acceptable than an actual parental loan, particularly if
the loan must be paid back immediately, which could contribute to an
increase in your monthly debt – something a lender may frown on.
Yes. Among the most popular:
Title 1 Home Improvement Loan. HUD insures the loan up to $25,000 for a
single-family home and lenders make loans for basic livability
improvements – such as additions and new roofs – to eligible borrowers.
Section 203(k) Program. HUD helps finance the major rehabilitation and
repair of one- to four-family residential properties, excluding condos.
Owner-occupants may use a combination loan to purchase a fixer-upper "as
is" and rehabilitate it, or refinance a property plus include in the loan
the cost of making the improvements. They also may use the loan solely to
finance the rehabilitation.
VA loans. Veterans can get loans from the Department of Veterans Affairs
to buy, build, or improve a home, as well as refinance an existing loan at
interest rates that are usually lower than that on conventional loans.
Rural Housing Repair and Rehabilitation Loans. Funded by the Agriculture
Department, these low-rate loans are available to low-income rural
residents who own and occupy a home in need of repairs. Funds are
available to improve or modernize a home or to remove health and safety
hazards.
Unfortunately, it is a pretty bad blemish. A property foreclosure is one of the most damaging events in a borrower's credit record. In terms of the effect on your credit history, a deed in lieu of foreclosure – where you voluntarily “give back” your property to the lender – or a short sale – when the lender agrees to write off a portion of the loan that is higher than the value of the home – is not as adverse as a forced foreclosure.
The Fannie Mae Community Home Buyers Program lets first-time buyers with
little cash obtain 95 percent financing. Borrowers may put down as little
as 3 percent of their own money, with a 2 percent gift from family, a
government program, or nonprofit agency, and obtain private mortgage
insurance to protect the lender against default.
The Fannie Mae program is administered through participating lenders, and
income limits vary by state. But the income restriction is waived when
borrowers participate in the Fannie Neighbors program. Fannie Neighbors
also has lower income requirements for borrowers who want to buy in
designated central cities.
Fannie Mae's new Start-Up Mortgage will assist buyers of all income levels
with a 5 percent down payment. Applicants do not need a lot of income to
qualify and can have less cash for closing than with traditional
mortgages. Borrowers receive a 30-year, fixed-rate mortgage with a
first-year monthly payment that is lower than the standard fixed-rate
loan.
Homebuyers who borrow under either program must attend a seminar on
homeownership and the home buying process.
For a list of participating lenders, call Fannie Mae, the nation’s largest
supplier of home mortgage funds at (800) 732-6643.
According to the Millennial Housing Commission created by Congress, few
lenders are willing to administer home improvement loans. Most prefer to
make home equity loans or unsecured consumer loans because they are easier
to manage. Home improvement loans usually require inspections and
irregular draws on the loan amount as work is completed, which forces
regional or national lenders to find local partners to provide oversight.
Financing repairs and improvements with home equity is okay for most
homeowners, but it difficult for many first-time buyers. They have
lower-incomes, smaller savings, and have made lower down payments on their
homes than first-time buyers a decade ago. So they have little equity to
borrow against. Unfortunately, it is often lower cost older homes
purchased by first-time buyers that need the most work.
Unless you have a cash reserve, you will have to shop around for the best
borrowing terms. In addition to the options listed above, you can ask
relatives for a loan. Borrow against your whole life insurance policy.
Refinance your existing mortgage. Get a second mortgage. Contact the
government about home improvement programs. And – only as a last resort –
borrow from a finance agency, which generally tend to charge higher rates.
Check with your state. It may provide special protection through the filing of a homestead exemption, which exempts some or all of the value of your equity in the homestead – the home that you live in and the land on which it sits – from claims of unsecured creditors. Whether to file a homestead exemption will depend on your situation. Contact your county recorder's office for details.
It is all those things that appear on your credit report that are
unflattering. They include: missing a credit card payment, defaulting on a
previous loan, filing for bankruptcy in the past seven years, or not
paying your taxes.
Other black marks include a judgment filed against you – perhaps for
non-payment of spousal or child support – or any collection activity.
It is not easy but certainly doable with both commitment and time.
By law, any unfavorable information in your credit file can stay there
from 7 to 10 years. Today, however, a creditor must remove credit
blemishes in a timely fashion if you challenge them and they turn out to
be false.
The first step in any recovery plan is to get copies of your credit
records. You are entitled to free copies if you have recently been turned
down for credit. Otherwise, request copies for a fee from the three major
credit-reporting agencies: Experian, (800) 311-4769; Equifax, (800)
685-1111; and Trans Union, (800) 916-8800.
If you see any incorrect information, let the credit reporting agencies
know. Also contact the companies that reported the negative claims against
you.
If the credit report is correct, move immediately to take care of any
outstanding delinquencies, tackling a little at a time until you get back
on the right track. In fact, make an effort, if at all possible, to repay
your debt in full and on time for six months to a year to prove you are
working hard to repair any damage.
Freddie Mac, Fannie Mae's counterpart, also offers low or no-down-payment
home loans through partnerships it forms with various state governments to
expand homeownership opportunities across the country, particularly for
those persons with low or moderate incomes.
Coming up with a down payment has traditionally been one of the biggest
obstacles to buying a home. Freddie Mac also works with lenders through
its Alt 97 program to make mortgages that require only a 3 percent down
payment available to borrowers. The program is not restricted to low or
moderate income buyers.
Just about every state now offers loans for renovation and rehabilitation
at below-market interest rates through its Housing Finance Agency or a
similar agency. Call your governor’s office to get the name and phone
number of the agency in your area.
At the municipal level, many cities also have programs for special
improvements to certain blocks and neighborhoods they are trying to spruce
up. Call City Hall, as well as a Community Development Agency in your
city.
The interest rates on these loans are often higher than on secured loans and you generally will not be able to get a tax deduction for the interest paid. However, the costs to obtain an unsecured loan are usually lower. And the relative ease of getting this type of loan makes it popular for small projects costing $10,000 or less. The lender evaluates applications based on credit history and income.
A mortgage credit certificate, or MCC, makes it easier for eligible buyers
to qualify for a mortgage loan. Offered by many city and county
governments, they allow first-time buyers to take advantage of a special
federal income tax write-off.
Under MCC programs, the lender can reduce the housing expense ratio – the
percentage of gross monthly income applied toward housing expenses – by
the amount of the tax savings. Normally, lenders reject loans if the
housing expense ratio is too high.
Program requirements for MCCs vary, although most adhere to the following
guidelines:
The buyer must live in the home being purchased with an MCC-assisted
mortgage.
Total household income cannot exceed certain limits.
The buyer cannot have owned a principal residence within the past three
years. This restriction may be waived if a property is purchased within a
certain targeted area.
The purchase price must fall within an established limit.
More information is available by calling your local housing or
redevelopment agency, or contacting your real estate agent.
You get to save thousands of dollars and shave years off the life of your
loan because the additional payments made toward your monthly principal
basically constitutes a partial prepayment of your mortgage.
Each mortgage has specific terms describing how and when prepayment may
occur. Some lenders impose a penalty if you repay the loan too soon.
The total savings potential also will depend on how long you plan to live
in your home. If you expect to move in the near future, do not expect to
reap savings as large as those gained by people who pay ahead of schedule
until they own their home free and clear.
Unless your credit is absolutely abysmal – with all kinds of judgments, liens, excessive delinquencies or non-payments, foreclosures and bankruptcies that show no attempt on your part to make progress – you can generally get a loan.
More and more borrowers are finding ways to become homeowners despite past credit problems, a lack of a credit history, or debt-to-income ratios that exceed traditional limits. This is because a greater number of lenders are willing to take a chance with borrowers today that they once turned down for home loans.
If you are denied a mortgage, ask the lender for a full explanation. If you feel you are creditworthy, then appeal the decision in writing.