Mortgage / Home Loans

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What's a Mortgage?

Not all home mortgages are alike. Make sure you obtain the best home loan for your situation.

A conditional conveyance of property as security for the repayment of a loan. In other words - the loan is secured by the property and the property ownership will revert to the lender upon default.

When considering a mortgage there are many things to consider, not just the rate! Loans vary in many ways from prepayment penalties, closing costs, and points due at closing. When comparing loans always ask for a Good Faith Estimate from the lender. This is a breakdown of the anticipated costs in a standard format that each lender uses. This way you can compare loans side by side and see the different charges.

Rates for mortgages range greatly depending on the type. An adjustable rate loan can start as low as 3%+/- while a fixed rate loan can range from 5-7% depending on credit at the present time. When comparing rates make sure you compare "apples to apples".

Interest Only Mortgages

Interest only mortgages can save you money, but you better know both sides!

An interest only mortgage is where the entire monthly payment is for interest on the loan. Usually these loans are amortized over a full 30 years with $0 going toward payment of the principal loan amount.

Advantages

This type of loan enables a borrower to purchase more home. Interest only mortgages usually start with a lower interest rate than fixed rate conventional loans.

Disadvantages

Sometimes a the local market can go down and homeowners can find themselves "upside down". A borrower may find that they need to refinance the balloon payment in 7 years and rates may be much higher causing the payment to increase.

The loans usually have a balloon payment due after 5, 7, or 10 years.

Balloon Payments

Commonly found in interest only mortgages or commercial loans.

A balloon mortgage payment is a lump sum due to the lender after a specified time on a loan. These terms can range from 2 years up to 20 years. This will vary on each lender's unique loan programs.

Balloon mortgage payments are extremely common on owner-carry back loans.

These types of loans are typically considered for short term investments / purchases. The rates can start lower than fixed, but you never know what the rate will be like when the balloon payment is due.

Adjustable Rate Mortgages

An adjustable rate mortgage is just as the name suggests. The rate on the mortgage is adjustable and will change periodically based on some indicator.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the first year's payments. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage--for example, if interest rates remain steady or move lower.

Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off--you get a lower rate with an ARM in exchange for assuming more risk.

Here are some questions you need to consider:

Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
Can my payments increase even if interest rates generally do not increase?

Reverse Mortgages

Reverse mortgages are not very common any more. In this situation the bank actually makes payments to the homeowner and upon death or a specified amount of time the homeownership will revert to the bank.

There are several types of reverse mortgages:

The federally insured Home Equity Conversion Mortgage (HECM), administered by the Department of Housing and Urban Development (HUD)
Single-purpose reverse mortgages, usually offered by state or local government agencies for a specific reason
Proprietary reverse mortgages, offered by banks, mortgage companies, and other private lenders and backed by the companies that develop them.

To qualify for a reverse mortgage, you must be at least 62 and have paid off all or most of your home mortgage. Income is generally not a factor, and no medical tests or medical histories are required. If you seek an HECM, you also must undergo free mortgage counseling from an independent government-approved "housing agency." Financial institutions offering proprietary reverse mortgages may require similar counseling or homeowner education.

The amount you can borrow depends on your age, the equity in your home, the value of your home, and the interest rate. If it's an HECM, federal law limits the maximum amount that can be paid out.

You can be paid in a lump sum, in monthly advances, through a line of credit, or a combination of all three.

FHA Loans Explained

FHA : A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

FHA loans allow consumers to buy a house with as little as 0-3% down, instead of the higher percentages required to secure many conventional loans. This is a great way for first time buyers, or anyone with a shortage of down payment funds, to buy a home.

The FHA does not make home loans--it insures them. If a borrower defaults, the lender is paid from the insurance fund. To get an FHA home loan, you'll need to good credit, and sufficient income to qualify for the loan.

How Much FHA Loan Can You Afford?

For FHA loans, your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms grouped together, and referred to as PITI.

Your total monthly costs, adding PITI and long term debt, should be no more than 41% of your gross monthly income. Long term debt includes such things as car loans and credit card balances.

VA Loans Explained

VA Loan : A government-backed mortgage loan supported by the US Veterans Administration.

Banks and mortgage companies make a special type of home loan to veterans of the U.S. Armed Services. A portion of each loan is guaranteed by the Veterans Administration (VA), and protects the lender's investment if the borrower defaults.

The guaranteed amount of a VA loan is called an entitlement.

The current maximum entitlement for loans up to $144,000 is $36,000, with the exact figure determined by your loan amount.

The maximum entitlement for VA home loans over $144,000 is $60,000.

An entitlement is not a cash payment to you or to the bank. It is the amount the VA promises will be paid to the lender if you default on your loan. If that happens, the VA may pursue you to recover those funds.

Eligibility Requirements for VA Loans :

V isit the VA website to check for VA eligibility

Pros and Cons:

What Are the Benefits of a VA Loan?

100% financing available, no down payment loans are common.
No Private Mortgage Insurance (PMI).
No prepayment penalties.
Loan qualification can be easier than if you were applying for a conventional loan.
Sellers may pay all closing costs.

What Are the Negatives of a VA Loan?

VA loans made prior to March 1, 1988, can be assumed with no qualifying of the new buyer. If a buyer of an assumed VA loan defaults, the veteran homeowner may be liable for funds.
Sellers are often asked to pay a portion of closing costs, so they may not be eager to negotiate the sales price of the home.

Conventional Mortgages

Loans not insured by the government and follow rules set by Fannie Mae or Freddie Mac are usually called conventional loans.

In contrast to FHA loans, a conventional mortgage has debt to income ratios of 28% and 36%.

For conventional loans, your monthly housing costs should not exceed 28% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms grouped together, and referred to as PITI.

Your total monthly costs, adding PITI and long term debt, should be no more than 36% of your gross monthly income. Long term debt includes such things as car loans and credit card balances.

Benefits of conventional loans:

Typically, lower interest rates.
Quicker closing dates.
Less inspections required.

Drawbacks of conventional mortgages:

More down payment required.
Higher credit score requirements.

Bad Credit Mortgages

It's definitely possible to obtain a mortgage with bad credit. It may not be through a bank of your choice, but there are places to go if you have bad credit.

The first place would be to check on the internet and then try on the local level. There may be local investors in your area who make loans to people at higher interest rates (for the added risk of bad credit). These type of people usually advertise in the paper or may be known by top local agents.

If you can't get a loan through that method or through your bank you can try to do a seller financing type of mortgage where the seller is more like the bank and you make payments to them. There is usually a balloon payment due after a few years so you need to keep your credit clean so you can refinance. More down payment is usually required by the seller as well as a higher interest rate.

Should I Refinance?

A mortgage refinance is when you go get new financing on your home. There are many types of refinance loans. From the conventional fixed rate type to equity lines of credit for things like major purchases or remodeling.

Why Refinance? Some of the top reasons are:

Better interest rates
Balloon payments due
Cash out refinance (where you withdraw equity)
Remodel/Redecorate
Divorce (to buy the other person's share)

Many times a refinance is done with the thinking that all interest is tax deductible, but you should always check with your tax professional before. This is not always the case.

There are many types of mortgage refinance loans available:

Interest Only
Adjustable Rate Loans
Cash Out Refinance (to get cash for other purchases)

Mortgage refinance should not be confused with home equity lines of credit!

Seller Financing

Seller financing is sometimes also called owner financing or seller carry back.

Seller-financing arrangements usually involve the buyers securing the largest portion of their purchase money from a mortgage company and getting a smaller second loan from the sellers. For example, they may finance 75% from a lender, put in 15% from savings, and ask the sellers to finance the remaining 10%. The terms and interest rates on seller carry-backs are negotiated on a case-by-case basis. Sellers should ensure that the note protects them to the fullest. They may be able to negotiate a note that provides a better return on their money than 1-to-5 year CD's or treasury notes.

Use common sense when considering such a loan.

A seller or buyer should seek professional advice when considering this option. Many things come into play when determining the terms of such an agreement. They include buyer's credit, buyer's down payment, how soon the seller will need to cash out, etc.

Closing Costs / Fees

Mortgage closing costs and fees include appraisal, funding / origination fees, title company fees, title insurance, and others.

Closing costs will vary, depending upon the financing costs and the time of the month that you close. Your Realtor or lender will be able to give you an estimate of all these costs, including the points on your loan, private mortgage insurance (if required), the title search, title insurance, attorneys' fees, and any transfer taxes or recording fees changed by local government agencies. There may also be property taxes, homeowners' association fees and insurance that must be prepaid.

There is a federal law which requires mortgage lenders to give prospective buyers an itemized, "good-faith" estimate of their closing costs. Sometimes buyers arrive at the closing with this document firmly clutched against their chests, and proceed to question each item on the form that does not match perfectly. These "good-faith" estimates are just that--estimates. The lender's charges will be fairly accurate, but the charges for attorneys, termite inspections, title insurance, and other items that appear on the closing sheet may be a little bit different. Some pro-rated items, such as taxes or homeowner's association fees, will also be different if you don't close on the date that was used to calculate the estimate. The purpose of the disclosure law is to give you a ball park figure of your closing costs. But the estimate you are given won't be to the penny--probably not even to the dollar!

Mortgage Myths

Nationwide surveys indicate that a large number of potential home buyers count themselves out of the market because of widely-held myths about home financing.

Some of the most popular myths include:

Home buyers need large down payments
The loan process works against people under age 35
Owning a home is more expensive than renting
Minorities have no chance of getting a mortgage.

Many qualified first-time buyers were unaware of special programs designed especially to make a home affordable to them. The surveys found that many people view the mortgage process as "difficult, stressful, and incomprehensible."

The home loan industry is always looking for new ways to dispel these myths because lenders want more business, not less. The alternatives to traditional 20% down, thirty-year fixed mortgages is astonishing. Mortgage brokers are experienced in explaining today's financing and debunking the myths.

Assumable Mortgages

Assumable loans were once quite popular, but not anymore. If you want to find one you'll have to look hard (and think of older homes).

To find out if a loan is assumable

Look to the loan documents to determine if it is assumable by someone else. Then talk to the original lender about specific requirements based on the value of the home.

Assumable loans permit a borrower to take over a loan from another borrower without any change in the loan terms. Such loans still exist but they aren't very common or popular (for buyers) in a low-interest-rate environment. In addition, today's new assumable loans are almost always adjustable rate mortgages.

VA loans made prior to March 1, 1988, can be assumed with no qualifying of the new buyer. If a buyer of an assumed VA loan defaults, the veteran homeowner may be liable for funds.

A Mortgage for You

There is no mortgage available to fit everyone's loan needs. Some things to consider when looking for your ideal mortgage:

How long do I plan to live in this home?
- If you plan to move pretty soon you may want to consider an adjustable rate mortgage while rates are low. This can save you hundreds of dollars vs. a fixed rate loan.
How much do you have to put down?
- For a lot of people, this will determine what kind of loan to get. If you don't have much down payment you may want to consider FHA loans or VA loans if you are eligible. Conventional loans typically require more down payment.
Are you a saver?
- If you don't save money well or aren't confident about your future credit you probably should steer clear of any mortgages with a balloon payment such as an interest only loan.

Some general guidelines:

If you plan to live in the home for a long time - consider fixed rate mortgages.
If you plan to move within 3-5 years - consider an adjustable rate mortgage or interest only.
If the you are an investor and plan to rent the property out - consider fixed rate.
If you can, try to work around the mortgage insurance. This can be accomplished in a number of ways.
- Obtain a 75% loan, 20% second loan, with 5% down.
- Obtain a straight 80% loan with 20% down payment.
- Get a seller to carry back a portion to help.
- There are newer programs where you may obtain 80% first loan and a full 20% second loan. The rate is usually normal on the first and higher on the second.

Apply for a Loan: Home Loan - Refinance - Home Equity - Pre-Approval