Whether you are a first time home buyer, or you have been purchasing real estate for years, one of your main goals other than finding the perfect piece of property is to make sure that your mortgage rate is as low as possible. Anyone who has had to navigate the tricky waters of the mortgage markets knows that rates can vary day by day and knowing when to lock in the rate can save you thousands over the life of the loan.
When looking for a mortgage one of the most important things to keep in mind is that competition is key to getting the lowest rate. Many first time home buyers make the mistake of not shopping around for a mortgage. They take the first offer that is presented to them and often end up with a rate that can be as much as one or two full points higher than rates for others with a similar financial background. They think that their real estate agent is there to help guide them to the best choice - when in reality they are there to earn their commission. The best advice for new home buyers is to always make sure that you separate your financial transaction of buying the house away from the process of finding a home. The rule of thumb is you should compare rates from at least three different providers, more if you have the time.
Even experienced real estate buyers can sometimes end up over paying their interest. The biggest gotcha is not locking in your rate when you had to the chance. This is especially true in times of economic downturn or when there is uncertainty in the credit markets. Often you have less than 48 hours to lock in a rate once presented to you by your lender. If you are uncertain whether rates are going to go up or down after you lock in a good rule of thumb here is to watch the 10-year Treasury note. Mortgage rates tend to follow the yield for the 10-year note more than they do any other short-term investment, including Fed rate adjustments.
When you do decide to lock in a rate make sure that you get it in writing, including a full disclosure of the terms. Oral agreements won't hold up should you need to pursue legal action. A written agreement protects both you and the lender from any miscommunications. You will know exactly what you are getting on what terms and how long the rate lock is good for. Typically, you want to aim for 30-60 days to give you enough time to find the house that is right for you. However, 30 days is becoming more standard as the rate markets continue on their rollercoaster ride.
You might also want to consider asking about a float-down agreement to lock in the rate. Under this agreement the lender keeps the rate at your locked in value should rates go higher, but if they decrease they lower the rate to match. The only drawback to these agreements is they can be expensive and depending on the size of the mortgage note the cost to enter into such an agreement may very well offset any savings you would gain unless the mortgage rate declined by more than half a point or more in many cases.
Locking in a mortgage rate is the best way to get the mortgage you want at terms you can agree with. It lets you focus on finding the perfect home of your dreams instead of worrying about fluctuating mortgage rates.
During the past five years lenders have seen a boom in the demand for second mortgages as borrowers look to capitalise on the equity in their home. The low cost of borrowing coupled with the spiralling value of homes in the UK has led to a substantial strengthening of the equity position of many a homeowner. The equity position of some homeowners is in fact so strong that they now find themselves in the fortunate position of having more equity in their home than they have debts secured against their home on first mortgages and other loans.
Buoyed by the healthy state of positive property equity confidence is running high when it comes to homeowners committing to further borrowing. Many are taking the opportunity to secure second and even third charge loans against the equity in their property in order to release cash funds. Even the more conservative borrowers are now beginning to see the light, despite experts predicting of an imminent slowdown in the housing market.
If you're thinking about releasing equity in your home through a second mortgage, here are some things you'll need to consider before you take the plunge: -
Interest rates on second mortgages
The interest rates charged on second mortgages are often higher than those that are levied on first mortgages. This is because lenders see second mortgages as a higher risk than first mortgages and so compensate for this risk through fixing higher interest rates on second mortgages.
The increased risk factor on a second mortgage is down to the fact that these types of mortgages are a second charge on the property. That is to say that in the event of you defaulting on repayment to the point that your home is repossessed, the first mortgage lender legally gets first bite of the cherry when it comes to recovery of the loan. For second loans secured against the property, the lender has to wait its turn, running the risk that it may recover only part of the loan advanced or in some cases none of the loan advanced.
Lending criteria
Different lenders have different lending criteria for second charge mortgages. Whilst all lenders are likely to assess applicants for a second mortgage on the value of their home, their ability to repay the loan and their current income to debt ratio, not all lenders will give the same weight to these factors in the final analysis. This is why you may be rejected by one lender but accepted by another on an almost identical second mortgage offer.
Can you afford the repayments?
For a lender to be convinced that you are able to meet the repayments on a second mortgage, you'll need to be sure how you're going to repay the loan. You should never take on a second mortgage without first planning how you will pay the money back.
Different types of second charge mortgages
There are several different types of second charge mortgages to choose from. Be sure to get information on all your options and select the type of second mortgage that is most suitable for your circumstances. It is advisable to never borrow more than the current equity value in your home.
Typically, option arm mortgage loans give the consumer four payment options each month - a 30year fixed payment, a 15 year fixed payment, an interest only payment and a deferred interest or minimum payment.
The 30 year, 15 year and interest only payments are based on the fully indexed rate. The fully indexed rate is calculated by adding the margin to the index. The index would most likely be the Libor, MTA, COSI, COFI, or CODI.
Here’s an example:
Let’s say you have a margin of 3.15 and an index of 3.32. This would give you a fully indexed rate of 6.47% (3.15 + 3.32 = 6.47). This is the rate that is used to compute the 30 year, 15 year, and interest only payments.
Depending on the lender and loan program you select, the deferred interest or minimum payment could either stay fixed between 1% and 2% for 5 years or the PAYMENT could start at around 1% and go up or down a maximum of 7.5% annually for 5 years.
The minimum 1% to 2% payment is an interest only payment and is based on a 30 or 40 year amortization.
The reason an option arm loan is called a deferred interest or negative amortization loan is because the difference between the minimum 1% payment and the interest only payment is added to the loan amount each month if the consumer chooses to make the minimum payment. So the loan balance increases over time instead of decreasing.
Once the loan hits the 5 year mark or if the deferred interest reaches 110% or 115% of the original loan amount, the loan will recast. Which means it will convert to an interest only or principal and interest loan at the fully indexed rate.
The fully indexed rate is calculated monthly and therefore could change from month to month.
Here are a few benefits of the option arm mortgage loan:
* The minimum payment is 100% interest; therefore, 100% of the payment is tax deductible
* The deferred interest is mortgage interest so it may be tax deductible
* If the client makes bi-weekly payments, the amount of deferred interest will decrease by approximately 30% or be completely eliminated.
* The minimum payment increases the client’s cash flow
* This loan gives the client several payment options
* It also allows clients to use their mortgage as a financial tool to build wealth.
In closing, here are four important points to keep in mind when selecting an option arm loan program:
1) Get a 30 year amortization (not 40 years). The 30 year amortization will keep the 1% payment option available longer.
2) Choose an index which is less volatile. Like the MTA instead of the Libor.
3) Select an option arm program that has a 115% recast instead of a 110% recast to increase the chances of the payment options being available for the full 5 years.
4) Select an option arm with a low lifetime interest rate cap
For more information on this and other mortgage related topics, please visit:
http://Mortgage-Training.Mortgage-Leads-Generator.com
Please feel free to reprint this article as long as the resource box is left intact and all links are hyperlinked.
Typically, option arm mortgage loans give the consumer four payment options each month - a 30year fixed payment, a 15 year fixed payment, an interest only payment and a deferred interest or minimum payment.
The 30 year, 15 year and interest only payments are based on the fully indexed rate. The fully indexed rate is calculated by adding the margin to the index. The index would most likely be the Libor, MTA, COSI, COFI, or CODI.
Here’s an example:
Let’s say you have a margin of 3.15 and an index of 3.32. This would give you a fully indexed rate of 6.47% (3.15 + 3.32 = 6.47). This is the rate that is used to compute the 30 year, 15 year, and interest only payments.
Depending on the lender and loan program you select, the deferred interest or minimum payment could either stay fixed between 1% and 2% for 5 years or the PAYMENT could start at around 1% and go up or down a maximum of 7.5% annually for 5 years.
The minimum 1% to 2% payment is an interest only payment and is based on a 30 or 40 year amortization.
The reason an option arm loan is called a deferred interest or negative amortization loan is because the difference between the minimum 1% payment and the interest only payment is added to the loan amount each month if the consumer chooses to make the minimum payment. So the loan balance increases over time instead of decreasing.
Once the loan hits the 5 year mark or if the deferred interest reaches 110% or 115% of the original loan amount, the loan will recast. Which means it will convert to an interest only or principal and interest loan at the fully indexed rate.
The fully indexed rate is calculated monthly and therefore could change from month to month.
Here are a few benefits of the option arm mortgage loan:
* The minimum payment is 100% interest; therefore, 100% of the payment is tax deductible
* The deferred interest is mortgage interest so it may be tax deductible
* If the client makes bi-weekly payments, the amount of deferred interest will decrease by approximately 30% or be completely eliminated.
* The minimum payment increases the client’s cash flow
* This loan gives the client several payment options
* It also allows clients to use their mortgage as a financial tool to build wealth.
In closing, here are four important points to keep in mind when selecting an option arm loan program:
1) Get a 30 year amortization (not 40 years). The 30 year amortization will keep the 1% payment option available longer.
2) Choose an index which is less volatile. Like the MTA instead of the Libor.
3) Select an option arm program that has a 115% recast instead of a 110% recast to increase the chances of the payment options being available for the full 5 years.
4) Select an option arm with a low lifetime interest rate cap
For more information on this and other mortgage related topics, please visit:
http://Mortgage-Training.Mortgage-Leads-Generator.com
Please feel free to reprint this article as long as the resource box is left intact and all links are hyperlinked.
Many people use the terms mortgage refinance and home equity loan interchangeably, but the two are not the same thing. Before you consider one or the other, be sure you know what your lender is referring to.
The reason the two terms are often confused has to do with the fact that you’ll typically be refinancing your existing mortgage when you have some equity established in your home. Equity is simply the difference between the market value of your home and the amount you owe against it. To put it into dollars, a person who owns a home that has a market value of $100,000 and a mortgage on that home of $60,000 has $40,000 in equity.
That’s not to say that all lenders are willing to loan you an additional $40,000. In fact, many lenders have caps on the amount they’ll loan. It might be that a particular lender will only loan up to 90 percent of the market value of the home. In that case, the loan value of the home would only be $90,000. Though the amount of equity technically remains the same, the amount of loan available depends on the lender’s guidelines.
If you have $40,000 in equity in your home, you may want to cash in on at least some of that money. But how do you go about getting it? The two main options are to take out a mortgage refinance loan or a home equity loan. A mortgage refinance is exactly what the name implies – your original mortgage will be figured into a new loan, giving you a mortgage refinance loan. But a home equity loan leaves the existing loan as it stands. You’ll have a second payment on top of the original mortgage.
So which is better? It actually depends on several factors. Did you get great terms and rates when you financed the original loan? If so, you may want to consider a home equity loan so that you keep those great rates and terms on your original mortgage.
Can you afford to make the “double” payments required? Remember, if you take out a home equity loan you’ll still be making the original mortgage payments and your home equity loan will be tacked on top of that. Some people find that the budget simply won’t stretch to make those necessary payments.
There’s plenty to consider before you decide whether it’s time for a mortgage refinance or you should take out a home equity loan.
Job loss is a grim specter for a mortgage holder. For most of us, that mortgage payment is at the top of the monthly bill payment list. You can talk almost any creditor into short term relief and even long term restructuring – the phone company, your car loan(s), credit card companies; they deal with delinquent payment plans daily. Mortgage companies get nervous much more quickly, but most are willing to consider at least one skipped payment if your unemployment is for a short period.
Mortgage Insurance?
You may not remember this in the flurry of documents and signing sessions that accompanied your home purchase, but you may well have an insurance policy that protects your lender against mortgage default. If you have a loan that is more than 80% of the home’s value when purchased, you probably are also paying for mortgage insurance. It’s incorporated into that list of particulars you pay on every month: principal, interest, taxes, homeowner’s insurance – and mortgage insurance. It’s meant to protect the lender; see what protection it provides for you.
Talk to your Lender
It is important to talk to your mortgage lender. Job upheaval is sufficiently commonplace in this country that many mortgage holders have become flexible about restructuring loans, as long as you are prompt in informing them and honest about your job prospects.
A typical restructuring will allow for lesser payments until your income is reestablished, at which point the bank will again restructure to get you back on schedule. Keep in mind that prospective new employers are almost as likely to check your credit rating as prospective lenders.
Before you enter into discussions with your lender on this prospect, decide what you can afford. Don’t be grateful for whatever is offered, and agree to a financing plan that you can’t meet. Tell your lender that your maximum temporary mortgage payment has to be 60% of the norm, not the 75% they are proposing. If you lose the house, it costs them money too.
Bankruptcy – The Poison Pill
The long term answer to keeping your home while unemployed is filing for bankruptcy. The unattractive fallout from exercising this option is known to most of us, although the hard and fast rules have changed somewhat. What used to be seven years of no credit at all has become credit card eligibility after two years. Depending on the circumstances of your bankruptcy, you may be eligible for high risk auto loans and other debt within two to three years after bankruptcy. That assumes, of course, that you have regained employment status and are once again making mortgage payments. Also, bankruptcy has become so common that the Federal Government is on the verge of making it a much less attractive option for consumers.
Near Term Borrowing
With near-term unemployment and an unclear future, many people have put mortgage payments on their credit cards until the limits on those cards are reached. It may blow holes in your credit rating, but it will keep you current on the mortgage and stave off bankruptcy. You can attempt to obtain a home equity loan to fill the hole in your monthly budget, but those are much harder to come by when you’re unemployed. If there are others in the household who are employed, the home equity loan may be a viable option.
Getting 100% financing with bad credit can get you into a home with little out-of-pocket expense. However, higher rates will make the loan more expensive than financing with a down payment. There are some cases when zero down can be a benefit, especially if you plan to move or refinance soon.
The Cost Of Zero Down
Zero down will cost you more with higher interest rates. These rates will also increase your monthly payments. Some financing companies also require you to pay additional points or fees at closing. It is best to request quotes for 100% financing from many lenders to find the best offer.
You can reduce these rates with an adjustable rate mortgage (ARM). These types of loans are the easiest to qualify for and start with lower monthly payments. The only drawback is that rates and payments can increase over time. But you always have the option of refinancing to lock in your current rates.
Saving On Living Expenses
While 100% financing can be expensive, it will save you money on living expenses. Purchasing a home is an investment, unlike rent. Your monthly payment is increasing your home’s value. Time and market demand will also increase your property’s value.
By working with a subprime lender, you don’t have to worry about private mortgage insurance (PMI) with zero down. Lenders absorb the risk with the higher rates. You also have the tax deduction of your interest payments each year and in some cases, the closing costs of the loan.
Financing Based On Your Future Goals
Zero down loans do have a place for homeowners. If zero down means the difference between renting and owning, then invest with the 100% financed loan. By keeping some cash reserves, you improve your credit score and protect yourself from a financial emergency.
If you plan on moving or refinancing in a few years, then a zero down loan doesn’t have the full financial impact. Since you are paying interest on a short period, you don’t suffer years of higher rates.
As with any type of mortgage, shop around for lenders. Be honest about the financing package you want. And remember, you can refinance for better rates and terms as your credit score improves.
There are a multitude of different lender types in the housing market and before refinancing or borrowing it pays to know who's who. Each option has it's pluses and minuses it comes down to choosing the person or institution that suits your needs and who you feel comfortable with. Here's a brief intro:
Mortgage Brokers
Mortgage brokers are responsible for introducing borrowers to lenders - they act as an intermediary offering prospective borrowers information on various lending institutions and their products. With the various types of lending institutions available, not to mention the vast array of products on offer, the borrower has various options and choices. The task of the mortgage broker is to determine the most suitable loan for the borrower. While the broking service is often free, a small fee may be charged, and the broker will generally receive commission from the lender they recommend.
Mortgage Managers
Mortgage managers are lending specialists who arrange funding for home and investment loans. Unlike banks,building societies and credit unions, mortgage managers do not have a base of customer deposits with which to fund their loans instead they source their funds via a process known as securitisation. This is a process whereby assets with an income stream are pooled and converted into saleable securities. The mortgage managers job is to set up the loan and perform a liaison role with all parties involved, namely originators, trustees, credit assessors and borrowers. They provide the customer service role and are there to manage your loan throughout its term.
Credit Unions
A credit union is a cooperative that is owned and controlled by the people who use its services. Each member is both a customer and a shareholder in the credit union.Deposits from members are used to fund loans to other members, with the credit union business structure facilitating the process. Credit unions serve people who share a mutual interest, such as where they work, live, or go to church. Credit unions are non profit organisations, and because there are no external shareholders there is no pressure to earn profits at the expense of customers. Like banks, they offer a wide variety of banking facilities such as loans, deposits and financial planning. Credit unions main function is to serve members needs rather than make a profit. They therefore put a great deal of emphasis on customer service and meeting the needs of members.
Building Societies
Building societies operate in the same manner as banks and obtain their funding primarily through customer deposits. As with credit unions, customers are members. In a sense they own the society, which is why they are often referred to as mutual societies.
Banks
In Australia banks are regulated by the Reserve Bank. Banks are the original lending institutions and for the most part they source their funds through customers term deposits and savings deposits via their branch networks. Customers are paid interest on deposited funds and these funds are then available to lend to borrowers. In turn, these borrowers pay interest to the bank on the sum lent. The margin between interest paid on deposits and interest received from loans provides banks with their major source of revenue. A downside of Banks is that Banks generally have a large network of branches supported by many staff members involved in the day to day operation of taking deposits and lending funds. Much of the banks profits are swallowed up in the maintenance of their branch structures, whereas various other types of lenders don't have such hefty overheads.
Purchasing a home is a major expense that requires a significant and long term financial commitment. When you initially apply for a mortgage, you are approved for loan funding based on your financial status at the time of application. Most people do not expect that their financial situations will get worse over time, but in some cases that is exactly what happens. Whether through the loss of employment or the death of a family member, it is an unfortunate fact that many people find themselves in situations that keep them from being able to keep up with their home loan payments.
<b>Importance of Mortgage Protection Insurance</b>
For many families, making mortgage payments would become difficult or even impossible in the event of the death of one or more members of the household. Before investing in a home, it is important to stop and think about how the house payments could be made if a major source of household income were to become permanently unavailable as the result of an unanticipated death.
While no one wants to think that their family will ever face a worst case scenario, it's necessary to make contingency plans for every possible situation. Mortgages are such a large expense that it is important to consider how one's family would be able to avoid the threat of foreclosure, in addition to losing a loved one, if such a situation were to arise. Fortunately, it is possible to protect your family from having to face the possibility of such a situation by investing in mortgage protection insurance.
Simply put, mortgage protection insurance is a life insurance policy that will pay off your mortgage following the death of one or more covered individuals. The primary purpose of this type of coverage is to reduce the financial burden placed on surviving family members following the death of a loved one. Homeowners who invest in this type of insurance coverage are making an important commitment to their families. This type of converge can ensure that one's family will never be forced out of its home as the result of income loss following the death of a family member.
<b>Who Needs Mortgage Protection Insurance?</b>
In single income households, or families in which one partner earns the majority of the money, many people think that the only covered life needs to be that of the primary breadwinner. However, it is likely that the death of a non-working spouse, or one who works part time, can also have a serious impact on a family's ability to continue to afford to make mortgage loan payments.
Many people make the mistake of focusing only on income loss following death. They neglect to think about the expenses that will increase if either adult household member is no longer around. For example, if the non-working spouse is staying home with young children, the family does not have to pay for full-time child care. However, if that parent were no longer there, the working parent would have to pay for child care, which is a significant expense, in order to continue working.
<b>Where to Get Mortgage Protection Insurance</b>
There are a number of different options for making sure that your family remains financially able to stay in its home following the unexpected death of one or more members of the household. Many banks and other lenders offer mortgage protection insurance policies that can be purchased at the time you close on your home loan.
These types of policies are specific to one's mortgage, and proceeds are disbursed to pay off the remaining loan balance upon the occurrence of a covered event. It is also possible that the company who carries your homeowners' coverage offers a mortgage protection policy. Payments for these types of polices can generally be included in the escrow payments for homeowners insurance and property taxes that are included in your monthly house payment.
Another mortgage protection insurance option, however, is to take out term life policies on the adult members of the household. These types of policies put more control in the hands of the surviving family members. Policy proceeds can be used to pay off the mortgage in a lump sum, as with a traditional mortgage protection insurance policy, or the individual can choose to continue making monthly payments while investing or otherwise utilizing the remaining funds.
No matter which coverage option you select, the important thing is to make sure that your family is protected even under the worst possible circumstances. When you think about the alternative, the cost of mortgage protection insurance really seems to be quite small. When you purchase mortgage insurance protection, you are investing in peace of mind for yourself and for your family.
