So what do you prefer, something certain, a rate on a home loan that is fix, while you hunt for a home? Or would you prefer to take the chance and wait until you have found the right home to live in before you worry about the interest that you will pay on your homeland?
These can be tricky questions as a small deviation of interest rates one way or the other are likely to have a major impact on the affordability of your new home. That doesn’t mean you will loose everything but fifty or one hundred dollars more or less in a monthly budget can make a difference if times are a little lean.
Is That A Bird In Your Hand Or A Snake?
If interest rates are rising and look like they will be even higher by the time you have selected your purchase by agreeing an mortgage lock. You can protect the rates available now by choosing a lender who will offer to lock your interest rate in now, for when you finally get to close the deal.
Banks and mortgage lenders use the offer of locking in your rate as a way to get business moving. It is a risk for them as much as you, except reversed; they lose if rates go up and win if they go down, when you have locked in your mortgage rate.
How Long Is Your Piece Of String?
The problem with agreeing to a locked rate is that you never know how long it could take to find the right home. You could get into closing and find a cloud on the title that makes it impossible to complete the purchase. Or the seller might choose an offer they like better after protracted negotiations. Sometimes the house that suits you best just doesn’t come onto the market for a long time.
Mortgage Lock Basics In Summary
If you are worried about losing out on a rate lock you might rush to a decision more than you would do in perfect circumstances. So there may be other factors to think about besides the rate you can lock in and what interest rates are doing.
However, if you prefer to know now what the numbers are going to be in the future, now, you might sleep better if you have this side of one of the most stressful things that a consumer can commit to tied down with a mortgage rate lock.
Two Main Reasons To Refinance Your Home Loan
There are several reasons you might consider refinancing your home loan but it comes down to just one of two types of situations: Either you are getting better terms or taking equity out of your home. The particular details of your situation and of the present market conditions will have some impact but it really comes down to one of these two things.
There are a few reasons that you might think to get better terms but they come down to either the property value increasing or you have gained a larger equity stake. There are good reasons to withdraw equity and there are some less good reasons.
Take Advantage Of Better Terms
You might want to change the payment structure of your loan. If there is a balloon payment that you can pay it off. When you have an adjustable rate that has reset and you can get a fixed rate mortgage that gives you more certainty as the future rates look likely to be more expensive.
Withdrawing Equity From Your Home
A good reason to refinance to withdraw equity would be to invest it in an income property. Another reason might be to pay off a high-interest credit card balance. Or you may be looking to do some home improvement that will increase the value of your home. The poorer reasons include things like taking expensive vacations, buying a boat or a racehorse.
There are plenty of good reasons to refinance your home and plenty of finance companies and banks that will be more than happy to help you do it. The equity in your home can be a useful tool and you can leverage it into smart investments by shopping around for more favorable terms. The secret behind home loan refinance is that over the lifetime of a typical thirty-year home loan you are paying a huge amount of interest.
Some Interesting Facts About Interest
The way that mortgage finance works is that interest in due on the balance of the loan and the rest of your payment goes to your principle. Your initial payments are almost entirely interest. Over the full lifetime of a thirty year loan you will pay almost enough for two houses, even at the current low interest rates.
When you refinance there will be a finance charge that is around 3% of your loan, which is added to the balance. Even so, you could potentially save the price of a couple of new cars by refinancing with a ½% lower rate, which will reduce your monthly repayment.
Faster Repayment Means Lower Rates
If you chose to refinance for a shorter term, say you go from a thirty year fixed rate to a fifteen year fixed rate, two things will happen. First lenders will give you a slightly better rate because they like it when you pay back the loan more quickly.
Second the larger payments on a shorter-term loan will pay down the balance more quickly reducing the interest you pay; you will pay much less interest over the lifetime of the loan. So, by cutting the term in half you will increase your payments but they will not be doubled.
Talk to your bank or finance company to find out the exact numbers. Depending on the present market and your particular circumstances and your monthly budget you could save a considerable amount over the lifetime of your loan.
Your Freedom To Leave Is Their Freedom To Make You Leave
Home ownership is something that makes you feel secure. Knowing that a landlord cannot come knocking and reclaim their property because they want to turn it into a coffee house or studio apartments or just take it back to refurbish and rent to someone else for twice as much. In most places tenancy laws make it much more difficult than it sounds to recover a house or apartment from a tenant, but it could happen.
If you own your home you will probably have to deal with taxes, insurance home loan payment and repairs. In either case, there are hassles and burdens that you have to respond to. So the question is: What are the basic differences and what might make one way better for you than the other?
The short answer is of course that it depends. Renting might be right for you one year and owning another. However, in the United States today the game is tilted in favor of home ownership. That is why around 65% of residences in the U.S. are owner occupied, according to the Census Bureau.
Home Ownership Is Still A Good Deal
Renting gives all of the equity to the landlord if home values rise. You are paying the interest payments for their loan on the property as well as adding to their principle. This got turned around during the property bubble of the last decade. Housing prices but rents did not keep up. So if you wanted to buy a home the interest payments alone were way above market rents. You would have been better off renting at that point in time.
As property values have returned to a more sensible level, rents have caught up. According to the National Association of Realtors, the number of renters paying half of their income or more in rent has increased dramatically. In the urban areas of the country tenants accept high rents as the price to be where they need to be for work, family and quality of life.
The right time to buy is when you are ready. Leasing a rental property lets you keep your options open if you are unsure of where you will be in a year. The costs of buying a home and home loan fees mean that it is a long-term decision, one that ties you down while you wait for your equity to grow enough to cover all of your costs.
Buying And Owning Your Home Made Easy
Financially it usually works out that the cost to buy your home is lower than renting the equivalent house. Government-backed loan programs, such as FHA and mortgage insurance makes low down payments possible. The hassles of finding the money for property taxes twice a year are less of a concern when you finance. Lenders will impound the taxes as part of your monthly payments, making it a non-issue.
It is true that, as a homeowner, you have to worry about insurance and repairs but for many people, dealing with such things in return for the right to control how they fix up their home is a bargain.
Freedom Versus Equity Building
Renting gives you flexibility and the freedom to move, without responsibility. Buying gives you control over your domain and stability that is very desirable at a settled stage of life. If you work out the numbers it tends to favor ownership because of government-backed loans such as FHA and low down payments, as well as the equity stake you will build over time.
If you want the freedom to pick up and leave anytime that is great, but you might have pay a financial premium for it. Otherwise, if you are more settled and looking to build some equity, buying your home might be an option that is priceless.
Why on earth would you be willing to pay for the privilege of paying off your home loan? That is essentially what you will be agreeing to, if your finance company attempts to include a prepayment penalty in the terms of your loan. The simple advice is don’t walk away, run!
Good For Lenders Bad For Borrowers
Banks and other finance companies are in the business of making money. And thank goodness they are too! Because they provide an excellent service that has enabled consumers to reach high levels of prosperity, of which previous generations could not have dreamed.
Lenders like to be able to count on a monthly income and it annoys them when a borrower pays off a loan. That means the lender has to find another borrower to lend their funds to. From the time that you pay off your loan until the time they receive the first payment from the next borrower, they’re losing interest.
Prepayment Penalty Basics: The Short Answer Is No
Fortunately the lending market is big enough and competitive enough to keep this sort of thing in check. So, prepayment penalties are mainly for borrowers with poor credit histories and limited options, also known as the sub-prime lending market.
For the rest of us, penalties can be easily avoided by shopping around. One of your most important demands of a lender must be that they do not include any prepayment penalties.
The Long Answer Is Also No
When you are in the market for a home loan and you are choosing a lender, make sure that you establish that there are no clauses in their contract that amount to a prepayment penalty. If you have poor credit you may not be able to avoid penalties and they usually contain certain limits, such as the first five years.
A penalty may be triggered for even a partial repayment of principle within the penalty period. The particular terms of prepayment penalty clauses will vary according to the policies of each lender, again, shop around.
Since lenders are attempting to put cash into assets and earn some interest, the loss of interest is what prepayment penalties are meant to recover. That means they are generally expressed in terms of that lost income, say, six months of interest on 85% of your loan balance. That can be a pretty big chunk of change! Add on broker’s fees and transfer taxes and all the other costs of selling a home and you’re easily losing money, even in a rising market.
Avoid prepayment penalties if at all possible because they will do exactly what they are supposed to do: Tie you into a home loan with unfavorable terms. Most homebuyers should be able to avoid them with ease. It just requires that you pay close attention when you are reviewing the terms of the loans on offer and decline any that require you to pay for the privilege of paying off your home loan.
The Credit Data Big Three
Credit card basics form one of the key features of modern life. When you think about it, it’s pretty amazing that a person can borrow enough to buy a house, based entirely on electronic records. However, the most important thing to know about credit report basics is that lenders will want to understand who you are, as a financial entity. So, it is vitally important that you know too.
The records of almost anything that you have ever officially borrowed are stored in the databases of three very powerful multinational companies: Equifax, Experian and Trans Union. These three companies have made your financial existence their business. Any time a company has agreed to lending you money it is safe to assume that they reported it to at least one of these three agencies.
Financial companies sell your financial information to these services and buy it back, to judge your financial trustworthiness, in deciding whether or not to extend credit to you. This is related to your credit score but it goes into much more detail. Every time you apply for a loan, get credit and whether or not you make your payments is tracked by each of the credit agencies.
Credit Report Basics (As They Relate To Mortgages)
When you decide to purchase a home or refinance your current home, you are going to need approval from your lender before they agree to underwrite your loan. This requires that they get to know who you are. They want to make an accurate estimate of the risk that they will be taking by extending credit to you.
Your lender will request a copy of your records from each of the three agencies. The reports that they will receive will add up to something the size of a telephone directory when printed out, if you have had credit for an adequate length of time to qualify.
Your lender will be looking for records of what you have borrowed in the past, how punctual you were in making your payments and what your financial condition looks like at the time of application. They are trying to establish your behavior and your present net worth, as well as your net worth once they extend credit. Finally they will want to be assured that the monthly payment obligations will fit your budget. All of this information will be available from the records that they source from the three agencies.
Prepare To Be Judged
The laws that govern credit and lending as well as credit reporting state consumers must be able to review their credit files once a year, at no charge. The Federal government has a website that is the only place that is authorized to do this on the World Wide Web. By going to the approved site at www.annualcreditreport.com and requesting your reports.
Not all companies report to all three so you can expect there will be some minor variations on what is posted to your credit report. That is why lenders will be looking at all three reports, they want to make certain that they do not miss any important details. It is prudent to check your credit reports with all three agencies every year, as you are allowed by law. Another good reason is that, because there is the potential for variation in your three credit reports,there is also the potential for some error to crop up in one of them.
One word of caution when you are searching for your free credit report: The only site authorized for this purpose is www.annualcreditreport.com. There are credit-monitoring services and the reporting agencies themselves will offer to give you onetime access with strings attached. Be warned that they will attempt to tie you into a contract for expensive monthly services. While credit monitoring may or may not be something in which you are interested, that is not the objective here. You want to simply establish the credit report basics before you approach any lenders.
Requesting a copy of your three credit reports should be the first step when you are preparing to apply for a home loan. It will help you understand what lenders know about you and you can deal with any obstacles before they derail your application. It’s a matter of credit report basics.
The HARP Refinancing Lifeline In An Ocean Of Debt
The last few years have seen some turbulent times in the home lending market. One of the ways that the Federal government has been helping homeowners to recover is through the Home Affordable Refinancing Program or HARP. The conditions of the market in the mid-2000s were so buoyant that even the most levelheaded buyers became swept away in the currents of the bubble.
The HARP program is intended to help homeowners by giving them more affordable monthly payments and allowing some financial room to breathe. There are some conditions that apply and it will only be worth the effort if the lower payments balance against the cost of refinancing into a HARP mortgage.
When real estate markets are stable or rising, adjustable rate mortgages (ARMs) are a low-cost option for the home. The problem is that many were sold to homeowners with extremely low “teaser rates”. The selling point was that they could re-finance away the risk, when prices went up further. Instead, the bottom fell out of the market and it caused many personal financial disasters.
The Bottom Line For HARP
HARP is specifically designed to help with mortgage payments; there are no options to withdraw cash from the equity of your home. The program is available to struggling homeowners with Fannie Mae or Freddie Mac backed home loans that were funded before May 31, 2009. Your loan to value ratio must be higher than 80 percent.
It may not be immediately obvious whether your mortgage is actually held by one of these two agencies. Your loan may be serviced by other entities, such as Bank of America and still Fannie Mae or Freddie Mac might be holding it.
The HARP basics are pretty straightforward. The program allows struggling homeowners to refinance on favorable terms that include reduced interest rates. That in turn reduces the payments. If you currently have an adjustable rate mortgage that qualifies, you can use HARP to lock-in a fixed rate.
There are also options with shorter terms that might enable you to build equity more rapidly. Closing costs, which are added to the balance, are lower because in most cases you will not be required to get an appraisal or get loan qualification. Recent improvements to the program have reduced the paperwork, which has cut down the processing times.
This Too Shall Pass With Time And Assistance
The inflated appraisals of the last decade tempted far too many buyers into taking on more than they could ultimately handle or into withdrawing equity that vanished with the market collapse. HARP has been one of the solutions that homeowners trapped in negative equity and high payments can turn to for help. It may not be right for your particular circumstances but if you find your mortgage note is held by one of the two eligible agencies then it could potentially be a lifeline to personal recovery.
Mortgage pre-approval for real estate financing will put you in a much stronger position when you’re hunting for the home you want to live in. By having this important pile of paperwork out of the way you can be confident that sellers and realtors will take you seriously. They’ll see it as a signal that you’re prepared to negotiate in good faith. It’s a launch pad to owning your own home.
The Difference Between Qualified and Officially Qualified
When you’re shopping around for home financing you are likely to hear the terms pre-qualified and pre-approved. The first term gives you a point of reference on how much you can borrow. However, pre-approval says that you’re certified to actually borrow the stated amount from that lender, in writing. Usually, a mortgage pre-approval is good for ninety days. The only thing left is to find a property that you like, and have an appraisal of its value and condition, to receive the go-ahead to fund your new home.
Once you have a letter of approval from one lender it doesn’t mean that you’re bound by their offer. You might still find alternative financing on better terms. What it shows is that you’ve demonstrated you’re really in a position to commit to the home buying process. In the minds of real estate professionals, pre-approval separates the serious buyers from the window shoppers.
Mortgage Pre-Approval Is Two Of Three Keys To Home Ownership
Lenders will be asking two specific questions when you apply for mortgage pre-approval: Are you likely to behave responsibly and do you have the financial capacity to make the payments? You’ll be judged by your behavior, as recorded on your three credit reports. This gives them a pretty good indication of how you’re likely to act over the long term. They’ll pay close attention to your payment history and how you’ve used or abused your borrowing opportunities in the past.
Lenders will then look for evidence that you have the financial capacity to take on the responsibility of a mortgage. They do this by analyzing your income and assets. They’ll be looking to see that you have a stable source of income and that you can meet your monthly obligations.
The Market Starts To Care When You Get Two Thirds Of the Way There
Pre-approval unlocks home financing in principle. To get the loan in practice your lender will have to give an additional approval for the property you intend to purchase, as it’ll be used as collateral to secure the loan. This stage is not part of mortgage pre-approval but it will need to be addressed before they agree to finally lend to you. The most important thing to remember is that you won’t lose a mortgage because you couldn’t get the house but, if you’re not pre-approved, you’re very likely to lose that house that you just fell in love with. Mortgage pre-approval is two thirds of the battle.
Locking In Your Future Payments
When it comes to fixed mortgage basics, the greatest benefit for homebuyers is peace of mind. You get a little bit more of that when you do not have to worry about your payments escalating when interest rates rise. As long as interest rates remain low fixed rate mortgage financing is bound to be very popular. Of course, if and when interest rates rise, anyone who already has a fixed mortgage is going to be feeling pretty good but, as interest rates climb to the peak of the economic roller coaster, fear will drive new buyers out of the market.
The peace of mind you get from fixed mortgages comes from the certainty that the interest payments in your budget for the upcoming year are going to be predictable. Once the rate is locked-in you don’t have to worry that your payments are going to go up, unless you make the choice to pay off some extra principal and reduce the term of your loan.
The Two Terms Of Fixed Mortgages You Need To Know About
As a borrower intent on securing a fixed rate you have one major decision regarding your fixed rate home loan and that is the term of the loan. Fixed mortgages are usually either 15 or 30 years in length. The monthly payments on a thirty-year mortgage will be less expensive but not by as much as you might expect.
The shorter-term, fifteen-year loans have a lower interest rate and if you do choose the longer term it takes a considerable time to accrue any significant equity in your home. The first few years will be taken almost entirely by interest charges, with only a sliver contributing to principal.
Fifteen-year terms do build equity more quickly, however the larger payments they require are often beyond the reach of borrowers unless they are willing to compromise on the value of the home that they buy. Over the long term of monthly payments the thirty-year term is more expensive. The value in the thirty-year fixed rate mortgage is in the monthly affordability and the certainty of the cost, which makes them popular with borrowers. It is the most popular option for FHA insured home loans.
The View From The Other End
Lenders and institutions that invest in mortgages have a different view of fixed rates. The banks charge a little bit extra for the privilege of locking in your rate. From their perspective it is far more preferable to be able to adjust interest rates when interest rates climb higher. That is why fixed rate mortgages will carry slightly higher interest than the adjustable rate alternatives.
The turbulent recent history of the housing market shows clearly that the future is anything but certain. If you assume that tomorrow will be like yesterday and make your choices accordingly recent history has shown that you can end up in trouble. That has been the attitude of prudent borrowers for many years and very often the deciding factor in how they select their home loans.
How The FHA Built A Nation Of Homeowners
If it were not for the Federal Housing Administration (FHA) insured home loan, the United States would be a very different country in which to live. The FHA has been insuring home loans since 1934. Millions of homes have been bought by people who could only do so because this vital program was available. That doesn’t mean that you must be less affluent to take advantage of the program, the majority of American home purchases could potentially be funded with an FHA insured loan.
Is A Government Backed Home Loan The One For You?
Almost anyone who wishes to purchase a primary residence can apply, there is no restriction on income and you don’t need to be a first time buyer. An FHA home loan enables you to make a down payment as low as 3.5 percent, even if you don’t qualify for private mortgage insurance.
In return for this government backing, you pay a one percent up-front mortgage insurance premium, which is added to your loan balance and monthly premiums, which are added to your payments of principal and interest. This might seem to be a penalty but in reality it enables borrowers to finance home purchases when they cannot afford the twenty percent deposit required for a conventional loan.
The types of mortgages that are available with FHA backing are 30 year fixed, 15 year fixed or 5/1 ARM adjustable rates. The program allows you to purchase a single home, condominium or a building of up to four residential units. Condominiums must be FHA approved to qualify. As of 2014, the upper limit for single-family home FHA loans was at least $271,050 and in counties where housing is most expensive up to $729,750.
There are no prepayment penalties on FHA loans but you can’t assign your home loan to a buyer when you sell. In some circumstances you are also able to use funds from an FHA loan to fund home improvement. They also have features that let buyers and sellers negotiate on the choice of who shall pay the fees. Essentially when you qualify for an FHA loan the government is guaranteeing you as a buyer.
Something For Buyers Something For Bankers
The feature that has made them so popular with the industry, as well as the public, is that loans that conform to FHA standards can be transferred from the banks that originated them to institutions and agencies like Fannie Mae and Freddie Mac, which hold onto them as long-term investments. This secondary market provides the economic advantage that lenders can pass on their conforming loans for cash and reinvest in new lending.
This circle of lending helps more buyers to obtain home loans at reasonable rates. FHA backed mortgages have done much to enable homebuyers to qualify to purchase a home more easily. They allow for low down payments and have no pre-payment penalties. FHA insured mortgages have done much to support the culture of homeownership in the United States.
Is The Adjustable Rate Mortgage Just A Fair Weather Financial Friend?
Given the option, homeowners have always tended to prefer fixed interest rates on their home loans, as opposed to adjustable rates. When you’re paying monthly it’s nice to be able to count on the rate always staying the same. It gives you a sense of control. As you might expect, on the other side of the equation, lenders would prefer to have the control to adjust rates periodically, in response to increased interest rates in the market.
Less Now And More Later Maybe
Before you rush to judge adjustable rate mortgages (ARMs), let’s look at some of the features that they bring to the table. As it turns out, there may be times when having an adjustable rate mortgage works to your advantage. It depends on how the economy performs and how the indexes that define interest rates behave, over extended periods of time. Also, it depends on your attitude towards taking chances with your finances.
Ultimately, the Federal Reserve Board sets market interest rates in response to inflation. Lenders are willing to trade a rate that is closer to the current rate, in return for the chance to charge you a higher rate later, if market rates go up.
When you are deciding whether or not to take on an ARM, you need to consider how much of a discount the initial rate is, compared to the market rate for an equivalent fixed rate mortgage. It will tend to be less expensive and the savings from the first fixed period of your ARM must be weighed against the long-term cost that comes after it adjusts.
For example, a 5/1 ARM home loan means that the first adjustment occurs after five years (sixty months) and adjusts annually after that. That will give you five years at a reduced interest rate, so you can build up some equity. Unfortunately ARMs do have risks. If inflation is significantly higher than you expected, when it’s time to adjust, it will wipe out any savings you initially gain from an ARM very quickly.
Almost Limitless Adjustable Rate Combinations And Permutations
This is just one example of the kind of structures that you can have in an ARM. If you think it might be the right choice then be prepared to shop around before you commit yourself to one particular structure. Finally, you need to be very clear about you attitude toward risks. An ARM may look good on paper but ask yourself if the thought of a pending rate change will cause you to lose sleep at night.
The hope on the part of the lenders, and the fear on the part of the borrowers that rates will increase drastically may never come to pass. In which case, it will work out as a savings to the homeowner, who took a chance on an adjustable rate mortgage at the beginning of the term.