Tag: Purchase Financing

Anatomy of a Mortgage

In exchange for getting this very large loan, the person then agrees to put the house up as collateral against the loan

Introduction

Mortgages were the original home loan agreement. In many ways, the mortgage changed the real estate market completely and turned it on its head in a very good way. Before the advent of the mortgage, the only way for people to go out and get what they wanted in terms of property was to pay for it outright. Since very few people possessed the means back then to pay for property outright, the ownership rights were only there for pretty much the upper middle class. From the middle class downwards, most were excluded from home ownership. Mortgages changed all of that, and to understand how profound a mortgage is, it is important to take a close look at exactly what a mortgage entails.

Agreement

The agreement for a mortgage is one that is the main point of everything else that follows. Under the agreement of a typical mortgage, the person has the ability to borrow money from a lender in order to pay for a house or a property. The amount of money they can borrow varies, but for a Conventional Mortgage, the maximum you can borrow is 80% of the lower of the appraised value or purchase price of the house. Options for mortgages above 80% are available by paying mortgage insurance, which I will discuss in another blog. In exchange for getting this very large loan, the person then agrees to put the house up as collateral against the loan, so that the bank has some way to save itself in the event that the person is unable to pay the loan back.

Interest Rates

Whenever people think about loans, very likely the first thing that they think about is interest rates. There are a number of different interest rates involved in different loans, but when you compare the vast majority of them to what is available under a mortgage, what you find is that the vast majority of those interest rates don’t really match up. The average mortgage has an interest rate attached to it of between 4% and 5% (depending on the loan to value and credit score) and the vast majority of loans that are available on the marketplace today, even if they happen to be secured loans, really can’t match up.

Repayment Terms

Just like with interest rates, the repayment terms for a number of different mortgages are very impressive when compared to a number of other conventional loans. When you’re talking about unsecured loans (i.e. credit cards), then obviously there’s going to be no comparison, but for the most part you will find that mortgage repayment terms are significantly easier to deal with than with most other loans. This is because (a) the collateral being used is extremely strong and (b) the term lengths are longer, so naturally that makes the monthly payments smaller.

Fees

There are some fees for mortgage payments relating to things like late payments and underpayments, but you will find for the most part that fees are not really that important in the grand scheme of the agreement itself. It is important to be aware of what the fees are, and to make sure to pay your mortgage back on time every month.

Closing Costs

Closing costs for a home mortgage can be significant. With the advent of the new disclosure laws that have taken effect in 2015, all fees must be disclosed by your lender at the beginning of the loan process. These fees include appraisal costs, title fees, recording and lender fees. Make sure you receive a lender disclosure at the very beginning of the process.

 

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.

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.

9 ways to save for a down payment on a house

…if you can discipline yourself to regularly set aside funds until you have a down payment, you’ll probably have no trouble making your mortgage payments.

Saving a down payment can be a challenge. But think of it this way, if you can discipline yourself to regularly set aside funds until you have a down payment, you’ll probably have no trouble making your mortgage payments.

Here’s how to get started:

1. Set a goal. Research the housing market, decide what you can afford
2. Determine the required down payment and set that amount as your goal.
3. Open a savings account specifically for your down payment.
4. Keep a budget, make sure it includes monthly payments to your down payment
account, and eliminate unnecessary purchases.
5. Live below your means. Eat at home, put off expensive vacations, and take public transit.
6. Consider getting a part-time job and deposit your earnings in your down payment account.
7. Direct all unexpected revenue to your down payment, including raises, bonuses, tax refunds and inheritances.
8. Pay off debt. It’ll take extra funds at first, but over the long term, your interest savings can bump up your down payment.
9. Set your sights lower. If saving is taking too long, consider a cheaper home. Once you’re in the market and building equity, you can always move up.

Follow these guidelines and before you know it, you’ll be enjoying a home of your own.

Lots of luck!

10 Critical Questions to Help You Choose The Right Mortgage. Part III (Last part)

OK, here are the final five questions to ask your lender…

OK, here are the final five questions to ask your lender…

Can you give me an estimate of my closing fees? Every mortgage involves fees that are paid to the lender and other companies involved in the financing process. Ask for a realistic estimate of what those fees will be, based on the specific mortgage details you’re talking about. Any lender that can’t provide an estimate should be viewed with suspicion.

How much will it cost to pay out this mortgage before the term is up? Sure, you may not plan to pay out your mortgage early, but what if you need to move or refinance unexpectedly. Some mortgages with low rates have HIGH prepayment penalties which make getting out of the mortgage VERY expensive. If your plans could change, it may make sense to pay a slightly higher rate and get a more affordable prepayment penalty. Be sure to ask about the terms and conditions of any prepayment penalty. We do not charge a prepayment penalty on any fixed rate loan.

What documents will I need to provide? Every mortgage requires you to provide some documents. But the number of documents can vary. As the name suggests, “Full Doc” loans require full documentation of income, assets, debt payments, credit history, etc. “Low Doc” loans require a minimum of documentation. However, you normally have to have very good credit and a large down payment to qualify for a Low Doc loan—and they can also carry a higher interest rate. Make sure you find out all the details.

How long will it take to process this mortgage? Once your mortgage application is approved, it can take from two weeks to two months (or more!) to process and fund the loan. Because you’re going to be on a deadline (the closing date of your house), ask the lender for an accurate processing timetable. This will also help you decide whether you need to lock in your interest rate.

What are some of the things that could slow the approval process? Nobody likes surprises, especially lenders! If the information you’ve provided is complete and accurate, there should be no delays. But changes to that information can really make a difference. If during processing, your income changes, you take on a new debt, you get married or divorced, or an undisclosed credit problem comes to light, there will be delays. Make sure you know exactly what the lender needs, so you don’t accidentally leave anything out.

Use this checklist for each lending institution you contact, whether you speak over the phone or in person. It’s a good idea to do all this research on the same day since mortgage rates can fluctuate daily. Be sure to record the company name, contact name, type of mortgage quoted, interest rate, etc. along with all the answers to the questions.

And by the way, feel free to give us a try…I know all the answers!

Good luck!

10 Critical Questions to Help You Choose The Right Mortgage. Part II

The best way to protect yourself is to go through every item on this checklist with each lender BEFORE you go any farther.

Today’s mortgage market is very complex, with more choices than ever before, innovative new features being introduced every day, and unexpected conditions and fees hidden in the fine print. The best way to protect yourself is to go through every item on this checklist with each lender BEFORE you go any farther. Let’s start with the first five in this post, and then we’ll wrap things up on my next post.

 What’s the APR (annual percentage rate) on this mortgage? Be skeptical of the first rate you’re quoted. Always ask if it’s the annual percentage rate. The APR is usually higher because it includes the additional fees involved in procuring a loan. And don’t always believe the APR quoted in ads. Lenders often use bait and switch tactics: they’ll quote a low rate to get you in the door, but it may not include all the points and fees, or it may be almost impossible to qualify for.

 How much of a down payment will I need? Most mortgages require a down payment of somewhere between 5% and 20% of the loan amount. The higher your down payment, the more attractive your rate and terms will be. However, you may not be able to afford a high down payment. If you can’t manage a down payment of 20% or more, your mortgage is required to be covered by private mortgage insurance (PMI), which will involve paying an insurance premium.

 How much extra will it cost to lock in my interest rate? As you know, mortgage rates are changing all the time. If rates rise between the time you apply and your closing date, you can pay thousands of dollars extra over the life of your mortgage. Most lenders will let you lock in the rate you discuss at the time you apply so there are no surprises later. But there’s often a fee for this, so find out how much it might cost. We do not charge a fee to lock in an interest rate that is up to 60 days.

 Are you going to charge any discount points? Some lenders charge prepaid mortgage interest points that can have a big effect on the cost of your loan. Ask for full details.

 What are the guidelines I need to meet in order to qualify for this mortgage? Every mortgage has requirements that relate to your employment, income, down payment, credit history, assets and liabilities. First-time home buyer programs, VA loans and other government-sponsored mortgage programs typically offer easier qualifying guidelines than conventional loans.

OK, stay tuned for my next post, where I’ll give you the final five…

10 Critical Questions to Help You Choose The Right Mortgage. Part I

What I’d suggest is that you sit down with your spouse and consider some of the following issues. Only then will you be able to answer the questions any responsible lender will ask in order to help you choose the right mortgage, rate and features.

Before you even pick up the phone to call a lender, give some thought to your financial situation and needs, both today and in the future. No lender can provide the best mortgage for you without understanding your needs. And they’ll never understand your needs unless you can explain them clearly and specifically. Since there’s a lot of meat on these bones, I’ll start with the issues, and in my next blog post I’ll give you a great checklist that you can use with any lender before you get started.

What I’d suggest is that you sit down with your spouse and consider some of the following issues. Only then will you be able to answer the questions any responsible lender will ask in order to help you choose the right mortgage, rate and features.

• How long are you planning to live in this home?
• How are your finances likely to change over the next few years?
• Which are you more comfortable with: mortgage payments that always stay the same OR payments that rise and fall with the treasury rate?
• How soon would you like to be mortgage-free?
• When will your children be entering college or university?
• When are you thinking of retiring?

OK, now that you have your needs and goals in mind, you’re ready to start making some calls. As I said, any responsible lender will ask you a lot of questions in order to narrow down the options and select the right mortgage for you and your family. But if you want to make sure you’re getting the very best deal available—after all, that’s exactly what you deserve—you have to ask some questions too.

Stay tuned for a detailed checklist on what to ask your lender when you shop for a mortgage…