Understanding the Risks of Negative Amortization Home Loans

While these loans can be a good deal when short-term interest rates are low, they are not necessarily the right choice when short term loans have a higher interest rate.

Negative amortization or “neg am” occurs when the minimum payment on a mortgage covers less than the monthly interest charged, causing the balance of the loan to increase instead of decrease. Interest Only Loans generally don’t increase the balance due on a home although they don’t diminish the amount due. However, deferred interest loans will increase your loan amount. This can happen with negative amortizations loans, like a Payment Option ARM, where payment choices can be calculated based on certain indexes used for these loans, giving you a variety of choices in payments. They are also known as “Pick a Payment Loans.” While these loans can be a good deal when short-term interest rates are low, they are not necessarily the right choice when short term loans have a higher interest rate.

If you are looking to eventually cash out home equity, you should look for a purchase loan that involves paying some of the principal. Not only is it possible you may not build equity in your home with neg am loans, you also may have a loss of equity through an increased mortgage balance. If you suddenly need to sell your home, you may not be able to get a purchase price high enough to cover your loan. You will also have more difficulty getting a second mortgage behind negative ARM loans.

On a deferred mortgage, the mortgage balance can increase as much as $350 per month for every $100,000 that’s borrowed. The neg am on a $500,000 loan for example, can be as much as $1,750 per month. While there are not many circumstances where I would recommend an Option ARM, there are a few instances where deferred interest or negative amortization loans may make sense.

Neg am loans are good for investment properties when you may be paying a double mortgage. They are also good for self-employed individuals with cash flow issues. If you plan on normally paying some of the principal, but don’t know what your cash flow will be like from month to month, it may be helpful to have the option of a minimum payment.

Do your homework before deciding on a deferred interest mortgage. Although your payments will be lower, there are inherent risks involved and you may be better off with a fixed-rate mortgage.

Cash out Refinance – Things to Know about Refinancing Your Mortgage to Get Cash Out

While there are costs associated with a cash-out mortgage, you should also remember the benefits.

A cash-out mortgage allows you to refinance your mortgage and pull out part of your equity. Before deciding how much to cash to use, be aware of the impact of PMI and equity amounts. However, you may find the benefits of refinancing outweigh the costs.

Cash-Out Mortgage Basics

With a cash-out mortgage, you can refinance for lower rates or to just get part of your equity out. Once the refinancing process is completed, you will end up with a check. You can decide to take up to 85% of your home’s equity in some cases. However, cashing-out a large percent of your home’s value will impact your refinancing rate and might require you to carry private mortgage insurance.

Higher Rates

You may also find yourself paying higher interest rates, at least a quarter percent, for cashing out over 75% of your home’s value. Lenders charge higher rates because there is an increased risk level. Your credit history will also be a factor in the type of financial package you qualify for.

Benefits of Cashing-Out

While there are costs associated with a cash-out mortgage, you should also remember the benefits. You can write off the interest on your taxes (ask your accountant) and you qualify for lower rates than with other types of credit. You can also spread out your payments over a longer period, lessening the monthly financial burden.

Taking out more than 75% of your home’s equity is not necessarily a bad decision. You just need to weigh the financial costs. You may find that in the long-run, tapping into your home equity is better than the other types of credit available to you. You may also discover that the tax benefits offset the slightly higher costs.

Adjustable Rate Mortgage Loans – Understanding the Basics

While an ARM has many benefits, there are other considerations to look at.

Adjustable rate mortgages (ARMs), developed when mortgage interest rates were high. It was and in some cases still is, a way to help you finance the purchase of a home with low interest rates. It is an ideal choice for those who expect their income to rise or plan to move in a couple of years. An ARM also increases your risk for higher payments. Fortunately, lenders also offer safeguards to limit some of your risk to excessively high interest rates.

ARM Features

An ARM starts with a low interest rate, up to 3% lower than a fixed rate mortgage. With lower rates, you usually qualify to borrow more than with a fixed rate home loan.

ARMs usually start with a fixed rate period and end with fluctuating yearly interest rates, increasing or decreasing your monthly payment. So a 3/1 ARM means 3 years of fixed rates, with interest rates changing every year after that. Interest rates are based on an index, usually the rate on the T-bill or LIBOR, and the margin the lender adds to the index.

ARM Safeguards

In order to protect borrowers from sky-rocketing monthly payments, mortgage lenders put in place safeguards. For example, a point cap limits how much interest rates can rise monthly and over the life of the loan. There are also floor limits on how low rates can go, protecting the lender.

Many lenders also allow you to convert your ARM to a fixed rate mortgage after a predetermined period.

ARM Considerations

While an ARM has many benefits, there are other considerations to look at. For example, interest rates can rise 5% or more over the course of your home loan. If you plan to stay in your home for several years, a fixed rate may offer lower interest costs in the long term. ARMs are also unpredictable, which makes planning long term financing goals difficult.

Before you apply for an ARM, make sure you are comfortable with the level of risk involved. However, if you expect your income to rise in the future or to move in the next few years, then you may be saving yourself a lot of money in interest payments with an ARM.

Are You Facing Foreclosure?

Don’t ignore letters from your lender Let them know you’ve received their letters and that you want to work with them.

What can you do if you receive a foreclosure notice?

Your lender uses your home as security for your mortgage payments. This means that if you do not make the payments, they can take your home. The process they use to take your home is called foreclosure. If you are behind on your payments, it is important that you act quickly to prevent foreclosure.

What should I do if I am behind on my house payment?

Call your lender Most lenders do not want you to lose your home. Tell them why you are behind on your payments. Ask them to work with you to get your payments current.

Don’t ignore letters from your lender Let them know you’ve received their letters and that you want to work with them.

How your lender can help

Your lender might accept a payment plan for the back payments or give you extra time to pay the loan.

What if my lender won’t help?

You still have options:

Call another lender. Ask if they will give you a new loan to pay off your existing mortgage.

Sell your home. You might get enough money from the sale of your home to pay the loan off and even have money left over.

Talk to a lawyer. Ask if filing for bankruptcy can help you keep your home.

The foreclosure process

Foreclosure begins when you get a Notice of Default in the mail. The Notice of Default tells you that you have not made your payments. It also tells you the amount you owe in missed payments and foreclosure fees.

You have 3 months from the date the Notice of Default is recorded to pay the back payments and fees. You can find the date the notice was recorded on the first page next to the words “recorded on.” If you pay the amount on the Notice of Default, the lender cannot sell your home.

When can they sell my home?

If you don’t pay the amount owed within 3 months, your lender can sell your home. Before they sell your home, your lender must mail you a Notice of Sale. The Notice of Sale will include the date, time, and place your home is to be sold. The notice of sale must be mailed to you at least 20 days before the day they plan to sell your home.

How do I stop the sale of my home?

You can pay the amount due, including fees, up to 15 days before the sale date.

If you wait until the last 5 days before the sale, you will have to pay the entire loan amount.

Once you pay, the lender must record a Notice of Rescission. This proves that that the sale has been cancelled.

Watch out for scams!

Avoid people who promise to stop the foreclosure by having you transfer title of your property. Transferring ownership does not stop the foreclosure. You will still be responsible for the money you owe even if you no longer own the home. Also, it will not keep the foreclosure from showing up on your credit report.

Information given here does not constitute legal advice. Laws may have changed. Always consult an attorney before taking any action.

 

Top 5 Reasons People Get Reverse Mortgages

A thorough cost vs. benefit analysis has to be done in order to determine if a reverse mortgage is the right solution for yourself or a loved one

Let me say at the outset, that reverse mortgages are not for everyone, and although we offer them, a thorough cost vs. benefit analysis has to be done in order to determine if a reverse mortgage is the right solution for yourself or a loved one.

If you’re eligible (a homeowner 62 years of age or older with equity in your principal residence), this may be a quick decision or one that requires a bit more consideration. As with any decision, it’s always helpful to get the perspectives and experiences of others who have faced similar situations and asked themselves the same questions. So for those other folks who have decided to get a reverse mortgage, what were their reasons?

We’ve asked some of our readers and site visitors and below are the top 5 reasons people get reverse mortgages:

1.Retire in style – Most homeowners getting close to retirement age have spent the last thirty years or more making mortgage payments; depending on where you live, this monthly obligation could be anywhere from a few hundred dollars a month to a few thousand dollars a month and beyond. Every month, that one big check goes out the door to the bank and leaves you with that much less cash to save, invest or spend on the items you need and want. How great is it to finally turn the tables on Main Street Bank, where they now send you a check each month? Most retirees have steady monthly costs, such as housing, medical, insurance and other necessary expenses. For non-working retirees, those expenses are managed with a fixed income from retirement accounts, pension plans, social security or other plans. A reverse mortgage allows a retiree to increase their fixed income and provide cash to do some things that they might otherwise not be able to afford to do. Typically, the personal quality of life is the number one reason people get reverse mortgages.

2.Pay hospital or medical bills – For many older Americans and retiree’s, medical issues are an increasing reality in their daily lives. With the ever rising cost of healthcare, this can put tremendous demands on a fixed income. Ongoing medical treatments, prescription drug regimens, or a large one-time (possibly unforeseen) medical bill are all top reasons that people get reverse mortgages.

3.Improve or modify a home – While this may not be an expansion of the home, the early part of retirement is a great time to re-purpose your house to accommodate the way you will be living for the next ten, twenty, thirty years and on. Maybe it’s time to expand the kitchen, widen the hallways or remove some steps, or exchange the old pool in the backyard for a beautifully landscaped garden. As we get older, a top reason people get reverse mortgages is to outfit their home for their new lifestyle.

4.Dream vacation anyone? – What better time to just get away than when your working days are behind you and the weather turns a bit gloomy? Proceeds from a reverse mortgage have allowed many homeowners to take that vacation they’ve always dreamed about, but never had the time or resources to take.

5.Pay off high interest rate or problematic debts – With the large amount of debt that the American consumer accumulates over a lifetime, it should be no surprise that this is a top reason people get reverse mortgages. Whether its high interest rate credit cards, a relative’s student loan debt, or even a potential foreclosure that must be dealt with, reverse mortgages can be a very effective way to get a large sum of cash to manage other debts.

We offer reverse mortgages in either a lump sum or line of credit, and unlike most lenders, we charge no origination or broker fees, saving you thousands of dollars. For a free personalized illustration, contact me anytime.

Basic Mortgage Terms You Should Know When Buying a House

Understanding these terms will allow you to avoid many of the pitfalls that exist in the real estate market

Educating yourself on the various mortgage terms you will run into will help you make better decisions when deciding which home you want to purchase. When you sign a mortgage contract, your home is used for collateral and it is your responsibility to make sure your payments are made on time each month.

The first term you should know is principal. The principal is basically defined as the amount of money you borrow for your home. Before the principal is provided you will need to make a down payment. A down payment is the percentage you will put towards the principal. The amount of the down payment will often depend on the cost of the home. Once you pay off the principal, the home is yours.

The next term you will need to know is interest. Interest is a percentage that you are charged to borrow a certain amount of money. Along with the interest rate, lenders may also charge you points. A point is a portion of the total funds financed. The principal and interest makes up the majority of your monthly payments, and this is a method that is called amortization. Amortization is the method by which your loan is reduced over a given period of time. Your payments for the first few years will cover the interest, while payments made later will be applied towards the principal.

A portion of your mortgage payments can be placed in an escrow account in order to go towards insurance, taxes, or other expenses. The next term you will hear a lot is taxes. Taxes are the amount of money that you have to pay to your state or government. When it comes to your home, these are known as property taxes. These taxes are used to build roads, schools, and other public projects. All homeowners must pay property taxes.

Insurance is another important term that you will hear in the real estate community. You will not be allowed to close on your mortgage if you don’t have insurance for your home. Home insurance covers your home against floods, fire, theft, or other problems. Unless you can afford to repair your home if it is damaged, it is usually a good idea to get insurance for your home. If your home is located within a zone that is known for having floods, federal laws may require you to have flood insurance.

If the down payment you put towards your home is less than 20% of the total value, you will often be charged additional premiums on your insurance by the lender. This is done to protect you in the event that you default on your loans and fail to make payments. Without this, many people would not be able to afford a house.

These are the basic terms you will need to know before your purchase a home. Understanding these terms will allow you to avoid many of the pitfalls that exist in the real estate market. You want an interest rate that is low, and you should always try to get a fixed interest rate if possible. This will allow you to focus your income on making payments towards the principal, and this will help you pay off the loan faster. A mortgage is an important part of your financial picture, and you want to make sure you pick a home that you can afford. If you fail to make your payments, you may lose your house.

7 Tips for Establishing Credit for Home Equity & Mortgage Loans

Your credit score will always be a key ingredient for low interest rates when qualifying for a mortgage or home equity loan.

According to Experian, a credit score is a number lenders use to help them decide: “If I give this person a loan or credit card, how likely is it I will get paid back on time?” The information from your credit reports is used to create your credit score. Your credit score will always be a key ingredient for low interest rates when qualifying for a mortgage or home equity loan.

Before applying for a mortgage or home equity loan, get your free credit report from each of the three major credit reporting agencies (CRAs): Experian, Equifax, TransUnion. Under federal law, you are entitled to one every year. Order online at annualcreditreport.com, or call 1-877-322-8228. Check to make sure someone else’s information isn’t mixed into your report. If so, contact the CRA immediately and have them delete it.

Then, follow these tips to help you establish credit and build your credit score:

1. Establish checking and savings accounts and maintain them responsibly.

2. Piggyback on someone else’s good credit by being added to a credit card as an “authorized” (joint) user.

3. Get someone to co-sign a loan for you (e.g., financing a car, or other secured loan) and make your payments on time.

3. Apply for student loans and make your payments on time.

4. Apply for a credit card or a secured card. Make sure the issuer reports to all three CRAs, otherwise the card won’t help you build your credit.

6. Apply for one gas card and one department store card to add to your credit mix.

7. Use your credit cards regularly, but wisely. Make all payments on time because the two most important factors in your score are whether you pay your bills on time and how much of your available credit you actually use.

Establishing and maintaining good credit will make buying a home a lot easier for you. You’ll be able to get a good fixed rate loan instead of having to settle for a variable rate subprime loan. It will also help for times you may need a home equity line of credit for home improvements or a home equity loan for debt consolidation, including paying off student loans.

A Short History of the Mortgage

In the beginning, a mortgage was just a conveyance of land for a fee. The buyer paid the seller a set rate, with no interest, and the seller would sign over the land to the buyer.

Most people know what a mortgage is, due to the fact that many people have one. But, do you know how the mortgage itself came about? Here is some basic history on the mortgage and where it came from:

In the beginning, a mortgage was just a conveyance of land for a fee. The buyer paid the seller a set rate, with no interest, and the seller would sign over the land to the buyer. There were usually conditions that had to be met before the land would be the property of the buyer, just like today, but usually it was based upon the assumption that the land would produce the money to pay back the seller. So, a mortgage was written due to this fact, and the mortgage stayed in effect no matter if the land produced or not.

But this old arrangement was very lopsided in that the seller of the property, or the lender who was holding the deed to the land, had absolute power over it and could do whatever they liked, which included selling it, not allowing payment, refusing payoff, and other issues which caused major problems for the buyer, who held no ground at all. With time, and blatant abuse of the mortgage system, the courts began to uphold more of the buyer’s rights so that they had more to stand on when it came to owning their land. Eventually, they were allowed to demand the deed be free and clear upon the payoff of the property. There were still steps taken to ensure that the seller still had enough rights to keep their interest safe and make sure that their money was paid.

In the U.S., some states have created their own version of the mortgage, which is why they are referred to as “lien states.”  In 1934, mortgages began to be widely used again, and the Federal Housing Administration helped to lower the down payments on homes to make it easier for buyers to purchase a home. During that time, around 40% of people in the United Sates owned homes. Now, that number is closer to 70%, due to the lower interest rates.

Although mortgages today have evolved into many different forms, they are still basically the same essential contract that they were in the beginning. Now, there are many more laws and regulations to help protect the buyer, seller, and creditor. There are also many different ways to lock in a low interest rate, you just need to talk to your mortgage broker about what the rates are now and what kinds of programs they offer to keep those interest rates low throughout the life of your loan.

Choosing a Mortgage That Fits Your Lifestyle

Choosing the right kind of mortgage based on your life style could not only make it easier for you to repay the loan but also save you thousands of dollars.

There are many different types of mortgages with a plethora of features and fees. Choosing the right kind of mortgage based on your life style could not only make it easier for you to repay the loan but also save you thousands of dollars.

First, make an honest assessment of your financial position. Do you have a stable job? If you are in business, does it yield you a regular profit? Calculate your gross income. If you have a very low income that deters you from saving anything then you would do well to opt for a low down payment mortgage. If your income is good enough to have allowed saving for the down payment it’s better that you make a 20% or more down payment. The less you owe the better.

Are you sure that you can repay your loan after a sudden loss of employment? On the other hand, if you as a couple are repaying together, what if your spouse loses their job, can you still manage it? A longer amortization period (30 years) would mean that you pay a smaller amount monthly, which would be lighter on your monthly budget. Also, remember that you pay a higher interest and a larger amount overall with mortgages that are spread over longer periods. A shorter (15 year) amortization period would mean that you pay a larger monthly installment, but a lower interest rate and therefore, a smaller price for the house.

Choosing between a fixed rate loan and one with an adjustable rate is always a gamble. If the fixed rates are low now, it’s better to go for that option. The choice between an Adjustable Rate Mortgage (ARM) and a Fixed Rate Mortgage (FRM) is based on the wider economic outlook, whereas the choice of mortgage is more dependent on your financial situation.

Mobility is another factor that has to be actively considered when deciding about your mortgage. Will your job require you to move away from your current place of residence to another? Do you see yourself out of a house in 4-5 years? Alternatively, you do not intend to move out of the town/city where you live, for the rest of your life.

A short stay may not work in favor of buying a house altogether, unless rent prices in the area where you live are higher and real estate prices are appreciating faster. If you plan to sell the house in 5 years and move out, then opt for mortgages where the interest rate is lower in the first few years of the mortgage. ARM mortgage loans are also suitable for short home owning periods. The rate with ARMs is very low during the first few years. Definitely, the monthly payment will be less than the rent you would have paid. Those considering a move to a larger house after a few years can also consider these mortgages.

Assuming that you have thought well about the kind of property you have decided to buy, make sure that you are entering into a debt with complete understanding of all the pros and cons. And lots of luck on your move!

A Mortgage Secret for First-Time Buyers: It Can Pay To Buy More

…many first-time buyers can benefit from an interesting quirk in the mortgage system.

It’s not easy to buy a first home, so here’s a suggestion that may be surprising: Instead of buying one residence, buy several. What I’m suggesting has nothing to do with late night infomercials or books that promise fast and easy wealth from real estate. Instead, many first-time buyers can benefit from an interesting quirk in the mortgage system.

When you hear people talk about “real estate financing” they generally divide mortgages into two categories; loans for owner-occupants and more expensive and tougher loans for investors.

“Investment financing” is for buyers who do not physically reside at a property. “Owner-occupant” loans are for homes, the place where we stay at night, the phone rings and the car is parked.

But there’s a wrinkle:

Owner-occupant financing with little down and low rates is typically available for the purchase of more than a single-family house. Normally you can get owner-occupant financing for properties with one-to-four units as long as you use one as your prime residence.

In other words, your status as an owner-occupant allows you to buy more than just a house or condo. You can actually buy property that produces rent and increases your tax deductions.

When you buy properties with two-to-four units the world of real estate financing changes. Lenders will apply most of the rent to your income for qualification purposes. This means you can borrow more — and also that you can offset loan costs with the rents such properties produce.

Suppose you buy a property with four units. You’ll live in one and rent the others. Each of the three rental units has a fair market rental of $1,000.

In this situation you’re likely to get two benefits. First, the lender will count some portion of the rent — usually three-quarters — as income for you when determining your qualification standards. In other words, $2,250 a month will be added to your income. ($1,000 x 3 units = $3,000. $3,000 x 75% = $2,250)

Why $2,250 and not the whole $3,000? Because the lender assumes you’ll have vacancies, repairs, insurance, taxes and other costs for the rental units.

The lender also assumes something else: For tax purposes, three-quarters of the property in this example will be “investment” real estate. When reporting your income taxes you’ll list your rents and costs for these units. One of these “costs” will be depreciation, an accounting device that will lower your taxes but take nothing in cash from your pocket.

When lenders see depreciation they “add back” that cost when looking at your monthly income. The result is that your effective monthly income for loan qualification purposes will increase even more than $2,250 in this example.

Buying two-, three- and four-unit properties can make great sense, especially for first-time buyers. You’ll have “help” meeting monthly mortgage payments, especially in the first few years of ownership — the time that’s often the most difficult. Later on, if you elect to move you can sell the property or you might choose to keep it and just rent out the unit that had been your residence.

As with all investments, neither annual income nor rising property values can be guaranteed. Some owners may feel uncomfortable having tenants so close and there’s always the potential for insufficient rents, excess vacancies and big repairs.

Also, beware of going too far. While up to four units is okay, five units automatically classifies the property as “investment” real estate under the guidelines for most loan programs, a title which means you cannot use owner-occupant financing even if you live on the property.

The good news, though, it that as an owner/occupant and also as a landlord you’ll learn a lot about the practicalities of real estate investing.

Real estate ownership requires ongoing maintenance and oversight. As an owner-occupant with a few units, you’ll learn “on the job” about making repairs, dealing with tenants, hiring contractors and maintaining property. These are valuable lessons which can provide income and wealth over a lifetime. In fact, many people who’ve become successful in real estate often started with just one small property, owner-occupant financing with little down — and two to four units.

For details, speak with appropriate professionals. Lenders can tell you about available financing; real estate brokers can provide information regarding local rental patterns plus you’ll want a pro to explain the tax benefits of multi-unit ownership.