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Don’t Take The First Mortgage Package On Offer, Get What Works For You

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making-an-offerHome lending is a gigantic industry in the United States; in 2014 lenders originated $1.24 trillion in new home lending and there are more than 7,100 lenders. There are plenty of different mortgage plans available for you to choose. So, as a consumer considering taking on a new mortgage, you can afford to be picky.

The most standard element of home lending is, arguably, the process of qualifying to borrow against real estate in the first place. The funding offer that you get first from a lender is likely to be the offer that fits their portfolio or earns the highest profit margin in the secondary mortgage market. You should look carefully at the terms of the offer and decide if it is what will be the best for you.

The Obvious Terms

There are a few features to watch in the loan that they offer you, some of which will be fairly obvious and relate to your general needs and then some more things that you should look into closely. The obvious things are the term, whether it is a government-backed loan and if it is a fixed or adjustable interest rate.

The Details In The Fine Print

Some of the more subtle things are the interest rate, the cost of mortgage insurance that facilitated a low deposit and the mortgage discount points that you will pay at closing.

The interest rate – The interest rate your prospective lender offers will likely be near the market but never assume anything. If you have focused on other features such as the down payment or discount points the interest rate that they quote might be higher than you would like. Keep in mind that a quarter of a percent increase in your rate can add thousands in costs over the lifetime of a loan.

FHA mortgage insurance – If you go for a government-backed mortgage, make sure that you understand how much to pay for FHA insurance cost and when you pay it. You will have to pay a lump sum at closing and a monthly amount that tacks on to your repayments.

Discount points – The points that you prepay matter; if you have not negotiated on this they may be higher than you want to pay up front or not enough to get the rate you want. There is a direct link between the interest in the repayments and the points that you prepay. When you change the discount points it may give you a way to get terms that suit your agenda better.

The Power To Change The Terms

The loan officer will present all of these terms to you with a written offer, and that is the point at which you can either accept it without question or go through it line by line and decide what works best for you. There might be terms in the fine print that specify paying some of the fees in the closing cost that you may wish to have in the repayments. Alternatively, it might be that you want to pay some of the expenses buried in the repayments at closing instead.

Your loan officer or independent agent will put together a first offer based on what they think you need, what suits them, or maybe the plan they can push through their company bureaucracy most quickly. The question to ask is whether what they present to you is the loan that the loan officer wants to sell because of it is a natural choice, the one they sell most often, or the one that earns the highest commission for the originator.

The originator might be highly experienced and in tune with what you need. Do not hesitate to question anything that is expensive or does not make sense to you. Remember, there are plenty more lenders out there, you are in a strong position to negotiate, or to walk away if you feel you could do better.

Get Ready For The Bump When Your ARM Adjusts!

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ARM BasicsThe Day Has Arrived

That day that you thought was far off in the future when you signed for your adjustable rate mortgage has come. Yes, it’s time for your interest rate to adjust and you don’t know what to expect. Perhaps you secured a low initial rate by going with the ARM or you planned to sell before the first adjustment. If you have a 5/1 ARM, a common type of adjustable conforming loan, you have had five short years, and now your rate will adjust annually for the rest of the term of the loan.

How Does Your Adjustment Grow?

Do you get a jolt once a year or do you get a roller coaster ride? The way your mortgage adjusts either annually or continuously once the initial fixed rate period is complete. The designations for ARMs are less organized than you might expect from the apparent format, a 5/1 adjusts annually, 5/5 adjusts every five years, but 5/6 adjusts semi-annually. A 3/27 ARM has a floating rate that changes with each payment for the 27 remaining years of the loan.

With this impending adjustment, you are transitioning from one stage of your mortgage to another. You have had a few good years at a low introductory rate, and now you will have to pay the current market rate. You have had the benefit of the bank or mortgage underwriter knowing that they have less risk of losing money on the loan over the long-term.

What Changes When An ARM Adjusts?

The interest rate formula for your adjustment comes from some published financial index, for example, the LIBOR or London Interbank Offered Rate, which is about as obscure as anyone outside the banking industry can imagine. However, this is a reliable indicator of the condition of the market and banks throughout the world use it to set rates on a variety of financial instruments.

Your ARM will also have a margin above the index that you agreed to when you applied for the loan. Regardless of the change in the index, the margin remains a constant percentage. In the initial terms of your loan, the lender defines the fixed margin and the adjustable index. When you want to get an idea of the new rate you will be paying after an adjustment, the index will be published in the financial press or on the major financial websites.

Does Your Rate Have A Cap?

Your adjustable rate mortgage most likely has at least one type of rate cap that establishes limits on interest rate changes. A lifetime cap limits the total changes in interest allowed on the loan; a periodic cap sets the limit on how much your rate can change at any one time. Some ARMs have initial caps that restrict the first adjustment more than the periodic cap. Check your loan documents to find out what the caps are on your adjustable rate.

There is always the chance that your payments reduce when they adjust; this could potentially happen every time an adjustment is due. But it is human nature that a higher payment of one or two hundred dollars is more distressing than a reduction by the same amount is pleasing.

You will likely pay less than for taking out a new fixed rate mortgage at the time your rate adjusts. If you can console yourself with that and a clear understanding of how your ARM adjustments work, you can rest a little more comfortably and enjoy the payments you are likely to make.

As Prices Go Up How Soon Can I Refinance My Mortgage?

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Mortgage Refinance BasicsDon’t Just Churn Your Finances

Once you have closed on your mortgage, collected the keys and settled into your new home, you might start thinking about how you can get a better deal. Maybe your payments are high, compared to the market rate, or you want to change the term over which you repay the principal from thirty to fifteen years.

If you have equity that you put into the home, you can probably refinance almost immediately. But then you could be piling on the expenses unnecessarily, and it will hit your credit rating right at your weakest point.

So, you may not be able to get the best terms until your equity has grown by more than the costs of a new loan, and your credit score has bounced back from the initial hard credit check and closing on your home loan in the first place.

Do You Have The Collateral?

If housing market values increase, you will gain along with everyone else. One time when you might consider it is when it is more advantageous to refinance than to cancel your FHA or private mortgage insurance. You can eliminate mortgage insurance when you have at least the mandatory equity stake of twenty percent.

Do you risk the cost of an appraisal to find out if your equity is going up? If it is not immediately apparent from discussions with your realtor or authoritative real estate websites that post price estimates, you probably should not.

An Expensive Mistake On The Borderline

If a refinance looks great on paper and you can lock in a favorable rate but then the appraisal is lower than you expected then it was all for naught. With application fees included, you could pay more than $800 before you get a definitive answer on the value of your home.

Your equity depends on the deposit you put down, the payments of principal you have made since then and the conditions of your local real estate market and the upgrades to the property.

If you do refinance you are starting again with the loan, so your term extends, you have to cover repaying your previous financing which may include a significant portion of mortgage costs.

The mortgage discount points that you prepaid on your initial loan will evaporate; you are starting again and will have to pay to get another discount on your rate. Unless of course, you either chose zero or negative points, in which case you might get a better deal. You will pay the costs of closing all over again and perhaps have more costs tacked on to your loan.

Not All Doom And Gloom

You may be in the privileged position of first, having increased equity sufficiently. Second, confidently estimate that you can reduce the cost of finance over the full term by refinancing.

Given these two factors, you are in the position to take action and improve your financial situation as a homeowner. If you can make a re-fi work in your favor, it means you have some equity now, and you can leverage it to increase your wealth down the road.

What Are The Rules For Self-Employed Borrowers?

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Self Employed Mortgage BasicsInformation Is The Key For Self-Employed Borrowers

Independent professionals and freelance workers lack the paperwork that lenders rely on to determine the financial condition of employed applicants. About six percent of the non-agricultural workforce is self-employed. When self-employed people want to purchase homes, they find that they live in a different financial world than the general home-owning public. So, as an independent worker, determined to buy a home, what do you do?

Take The Long View And Maximize Two Things

One lesson that you may have learned working for yourself is that you must be deliberate in your actions and careful in your choices. That mindset will serve you well in finding home loan funding, as with all things. Unless you just happen to meet the financial conditions lenders demand from self-employed borrowers, you will have to plan ahead and do the things that will get you to the point of qualifying for homeownership.

Line up your income and assets to show that you can handle a mortgage, and be prepared to make twice as many applications as employed loan applicants; even with higher levels of income, self-employed borrowers get turned down more often.

It’s All About Filing Your Taxes

The main feature of self-employment is that you receive all of your income directly from customers, which means you do not have an IRS W-2 from any employers. A W-2 is one of the primary ways that lenders determine the income of employed mortgage applicants.

Your tax filings are the most consistent and authoritative documents you generate as a self-employed person. Lenders will request that you can show at least two years of tax history to include Schedule C of your Federal Income Tax filings. If you own an S corporation or a partnership, you will need your Schedule K-1 to show your income.

Demands From Lenders

Higher down payment – Lenders will wish to see that you have a slightly lower loan-to-value ratio, which means a larger down payment.

A high credit score – Your FICO Score will need to be higher, anything under 700 and you will find that your offers look more like high-interest, sub-prime loans.

Low debt-to-income ratio – You need to be able to make your monthly obligations to creditors comfortably, based on your income and your repayments.

Reserves in the bank at closing – Lenders will want you to have enough liquid assets as reserves after the loan closes. You will need six months or more in reserves, or more.

Financial documents – You will have to include your Schedule C or Schedule K-1 for the previous two years as well as Profit and Loss statements that detail your income and expenses. If you have other sources of earnings such as rental properties, expect to produce the relevant documents that support your case.

A Symbol Of Successful Self-Employment

Time your application to coincide with two good years, preferably showing an upward trend in your income. Save up for a deposit and closing costs, and for ample reserves after closing as well. Finally, start shopping for lenders that appreciate the value of entrepreneurs, freelancers, and independents; you may get turned down more than the wage-earning public, but you will find the right one soon enough.

5 Tips To Finance Rental Units

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Real Estate Investment BasicsPrivate investors often act as lenders to finance deals that provide reliable security on which to earn income and asset growth. This sector of real estate lending and investment is the least regulated, which is a good thing because you can get creative to add value in the deal; it also means that you need to have professional advice on hand at every stage of the process.

The Local Hard Money Lender

A private investor can help you get ownership of real property; you can then install a tenant and refinance at a lower interest rate. These hard money loans secured by real estate are an excellent way for investors to negotiate favorable terms on the right properties.

The investors who make hard money loans have the experience to judge the issues of asset value and risk to make intelligent choices about the loans they write. These lenders make quick decisions, so you get the leverage of a quick close, which gives you leverage in negotiation with owners who are motivated to sell.

Hard money loans are relatively expensive, and short-term solutions but they allow you to gain the title, make all the necessary repairs and improvements, and then rent out to a new tenant at the market rate. Once you have a cash flow from your investment, banks will view it as suitable for lending on favorable terms; you will be able to refinance for the long-term, at a market rate of interest.

Hybrid Debt And Equity investments

A more elaborate variation on this strategy is to find a private lender who will consider becoming an equity partner as well as a creditor. Your offer to this investor is to borrow half the buying price from them and to exchange half of your equity in return for the remainder of the price. If they agree, they earn interest on the loan plus they are entitled to an equal share of the gain as the asset grows value.

The ownership ratio does not have to be a half; it can be any split that you can agree with your lender, who will also be your partner. For example, instead of lending a half, they may consider two-thirds of the value and a half stake in the equity. It is a matter of the market, the property in question, and your negotiating skills.

Banks Love Portfolios

Once you have established a strong track record and a reputation in your business community as a smart developer, you will find doors opening more readily. Banks will consider funding your projects earlier in the process. They will also consider offering portfolio loans secured against some or all of your investments, which will be less expensive and simpler than first borrowing from hard-money lenders and refinancing it later.

Hit The Syndicate Circuit

Create a syndicate of several investors as partners who each take a smaller share in your project; this is more widely used to finance multi-unit properties that are beyond the reach of these investors individually. You become the general partner, responsible for every aspect of the project, and the others become limited partners who provide capital but remain in the background awaiting their shares.

Investing Requires Sound Legal Guidance

Forming a syndicate or any of these you are the general partner and your investors take a passive role demands the sharp eye of a competent real estate attorney. You can be sure that your hard-money lenders get and limited partners get sound legal advice and if you want a chance to succeed you should too.

Talk to hard money investors in your community; it is not hard to find them in any metropolitan area. Build a network of contacts and start looking for that potential first investments. Once you have cash flow coming in from that first rental unit, you will be at the starting point of a career as a real estate investor.

What Will Influence The Price Of My ARM Rate-Hike?

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ARM BasicsThe Adjustment Depends On The Index

When you take out an adjustable rate mortgage (ARM), you agree to allow your lender to make periodic adjustments to the interest rate that you pay on the balance of your home loan. The mechanics of the adjustments come from the terms that you agreed to at the beginning of the loan. The most critical factor that influences the rate hike is the index. When it is time to adjust the new rate is determined by the sum of the index and a margin, also defined in your loan.

Your lender will select the index and margin that suits their purposes from one of many that are in everyday use as references for mortgage lending. The index will itself be influenced by external factors, many of which are interconnected. Lenders select their indices based on a concern to keep lending rates competitive and profitable; therefore they choose an index that they believe will reflect the state of the home loan market at the time your rate adjusts.

The Factors Behind The Index

Common indices are six-month Treasuries rate, one-year constant maturity Treasuries, Certificate of Deposit Index, and the six-month London Inter-Bank Offered Rate. In turn, these published rates come under the influence of the state of the economy and the actions of the Federal Reserve.

The Federal Reserve funds the lending industry by providing cash to the banks; these funds are the lifeblood of the economy, the banks borrow at a discount lending rate and then loan the funds to their customers at a retail rate, profiting on the difference. The Fed changes the discount rate to influence the economy, to forestall recessions, and to control inflation.

The economy influences the indices through the behavior of investors and the state of businesses. If businesses prosper, employment increases, and the economy expands, it creates demand for goods and services; this increases borrowing and banks increase their rates, which tends to push indices upward. If the economy contracts and businesses experience a downturn, they will cut costs and lay off workers, resulting in decreased demand for loans, influencing indices to drop.

Initial Rates And Following Adjustment Fluctuations

One of the most annoying hazards of having an ARM is rate watching whereby you fixate on the index before the adjustment date. If you have a mortgage that resets periodically based on a published market index the current level of that index becomes a focal point that grabs your attention and holds it.

You might assume that the interest rate on you ARM will adjust upward, but that is not necessarily the case. If the conditions are right, it may remain unchanged or reduce slightly. If you had an exceptionally low introductory rate, a drop is unlikely, but subsequent adjustments will track the changes in the index rate, which will fluctuate with the condition of the economy and the sentiment of the Federal Reserve Board.

Adjustable rate mortgages are an excellent way to get a competitive initial rate. Once the adjustments start they become something of an adventure; the fluctuations in the economy and the index that determines your adjustment set the extremes of the ride.

Why Shorter Terms Pay Lower Interest Rates And Other Interesting Facts

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Where is the logic in the way that lenders choose interest rates? Why are fifteen-year home loans cheaper than thirty-year mortgages? To understand how banks and finance companies set prices you have to look at it from their perspective, the point of view of the people who are lending the money. They are in it to earn a living from the interest that they charge on the home loans they write.

Mortgage Amortization BasicsIt Is All About The Amortization Schedule

The basics are very simple in lending: Give a lump sum in return for security and accept a series of payments in return. Long ago academics and financiers sat down and established the mathematics of interest rate theory. There is a standard way to measure what is and what is not a good interest-paying investment. One of the principles is that a shorter amortization period, with fewer payments, is more desirable than a longer term; this means a lower rate of interest on the loan.

A similar incentive exists for adjustable rate mortgages. One of the risks of lending funds over extended terms at fixed rates if interest is the danger of missing future opportunities if interest rates rise significantly. So that risk is factored into the rate on fixed loans, and the chance to adjust interest rates means that ARMs have a slightly lower rate, if all other terms are equal.

In practice, the underwriters who originate the loans will usually sell them into the secondary market. Organizations like Fannie Mae and Freddie Mac bundle them together and use the cash flow to securitize the cash flow as bonds.

The stability and value of mortgages as investments matters most to the investors who hold these bonds for the incomes they produce, and so it gives the secondary market an influence over the rate you get offered on the mortgage market. Again, faster repayment means getting investments back sooner and a willingness to accept lower interest payments for lower risk.

Who Is Working For Whom?

Robert Kiyosaki is famous for his books about creating personal wealth. His philosophy is that of differentiating whether you work for your money or your money works for you. When lenders loan cash secured by real estate assets they are putting their money to work. When you borrow to have a home to live in you are the one doing the work. In fact, the connection is that you are working for the lender’s money.

The wealthy approach is to invest in income-producing properties such as real estate and bonds, whereas too many consumers will invest in annuities and reverse mortgages. The difference in the outcomes when you pass is obvious: The former become assets as part of your estate and legacies to your heirs; the latter return to the institutions that issued them.

One of the reasons that consumers have access to mortgage financing is that it is an excellent way for wealthy investors and institutions to earn interest on their capital. When you look at lending from the perspective of investors, you can see that shorter amortization and flexible rates make better investments; it is how they make their wealth work for them rather than the other way around.

How Much Will It Cost To Refinance Your Mortgage?

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real-estate-basicsThe question of the cost of refinancing your mortgage is simple enough on the surface, but the details and the fees add up and appear before you begin and then over the lifetime of the new loan. You need to look carefully at the costs of a refi before you commit to even formally applying for it.

Paying To Qualify

You will have to pay to initiate a mortgage application fee that could be as much as $500. Your refi is for a new loan contract, and the lender will demand a fee for the privilege of starting a new loan. As with any lending, the bank is interested in the qualities of both you and the property.

Credit reports – You will have to show that you are still in good standing with your creditors. Obtaining copies of your credit reports will cost anything up to $100.

Appraisal report – The property that provides the security for your loan also has to prove that it is creditworthy. The appraisal will also have to confirm that there is sufficient equity to repay the previous loan and cover the new lending, which may cost around $400, and you still do not know for certain that you will get approval for the new mortgage. If there is something wrong with the condition of the property or it just does not have the value that you assumed, it could turn out that you spend $1,000 or more only for the lender to decline your application, ouch.

Cost At Closing

Once everything meets the approval of the lender, there is another round of fees to pay at the time that the loan closes. In fact, this is quite a list if you break it down. You will have an origination fee, document preparation fee, title search and insurance fees, recording fee and a host of lesser fees that add up quickly to around 1.5 percent of your initial loan value or more.

Lifetime Cost

Is it worth additional costs? The answer depends on your objectives: If you want to save money in the long-term, and you have found a new loan package that gives you a lower interest rate the savings of interest payments will cover the extra costs to refinance.

It does not take much of a rate reduction to create savings over the life of a thirty-year loan. Likewise, if you reduce the term from thirty to fifteen years, you will save thousands in interest payments. If you plan to sell long before the end of the new amortization period, it will probably be more expensive to pay the up-front cost of refinancing.

How much can you save? Over the life of a thirty-year mortgage, you can save tens of thousands by shaving just a quarter percent from your current rate. If you experiment with an online repayment calculator, you will find that the amount you can save over the life of a loan is on the order of the original balance of the loan, depending on your choices for interest rate and amortization it may be more, or less. If you compare that to the costs detailed above you can see that the key is that re-fi saves in the long term, but it is expensive in the near-term.

When Would You Leave One Partner Off The Loan Application?

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Spouses Go Solo

They do say that two can live as cheaply as one and a marital partnership usually supports the case for homeownership.  However, occasionally one partner has a mark on their credit history that makes the exception to this rule. In such situations, it might be better to leave them off the loan application entirely.

The details depend on state laws, but sometimes it is more expedient for one partner to apply for finance without including the other on the loan. If you take the twin paths of applying for home financing in one partner’s name, while working to improve the other’s credit, you will make positive steps that pay dividends in the long run. Stretching to action now will deliver prosperity later.

Laws Limit How Lenders Look At You

It might tempt you to wait until you both have high credit scores but real estate keeps on moving and tends to grow to keep pace with inflation. If you can qualify and acquire real estate under challenging circumstances, then you will be riding high when you have finally overcome your obstacles. So while you might have to compromise on the choice of properties now, the equity that you build over time will position you to dictate terms in the future.

Like so many financial activities today, loan applications require a credit check before they gain final approval. Sometimes problems with credit because of events cause honest people to go into debt. You might have been the victim of identity theft or had excessive bills due to medical issues.

The Equal Credit Opportunity Act constrains the questions that lenders can ask about spousal income or ask about marital status, except in certain clearly prescribed circumstances. The lack of dual income will change the equation of your debt-to-equity ratio and that will determine how much you can borrow.

Matters Of Loans And Titles

In some cases, you may be able to use your spouse’s income, but your spouse might have to quit their claim to your shared home. On the downside, your partner’s income might not be included to calculate the amount you qualify to borrow. How does leaving one partner or spouse off a deed impact their claim to sharing the home? As married partners you are still likely to be entitled to an equal share, it depends on your state’s laws about community property.

The requirements vary by state and by case. A hidden benefit is that in the future, if you cannot make the payments, your positions could be reversed, and your partner’s credit is unaffected while yours is suffering for the hit you’ve taken now; you would be no worse off than you are now.

Credit Not Joined As One In Marriage

Just because you have married and agreed to share everything, it does not mean that the credit agencies will go along with that; they do not issue joint credit scores or reports. In the near-term it might just be the best choice to leave one of you off the loan application and start building equity in your home now so that you can move up to the bigger home and lifestyle when time are better, and credit scores have healed.

Prequalifying When You Still Have Outstanding Student Loans

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Mortgage Qualification BasicsIt is a fact of modern life that if you have attended college in the last decade, you are likely to carry a debt from the effort. You might have ambitious plans about how you want to live your life and find that this debt is the greatest obstacle in your path. Specifically, how do you clear the way to buy a home if you still have a balance on your student loans? Will it take half your adult life and selling your soul?

Student Loans Give You A Path To A Better Life

Fortunately, it is not as bad as all that. In fact, you may be closer to qualifying than you think. Student debt is not an insurmountable challenge, but you may have to work hard to achieve the goal of home ownership while you are still paying for your education.

The United States carries a collective student loan balance of more than $1.2 trillion, and students who graduated from college in 2014 had an average of $33,000 in outstanding loans. This level of indebtedness is a trade-off that gives graduates access to better-paying jobs in the long-term, at the expense of lifestyle and relative affluence in the short-term. The sacrifice eventually pays off even if it might seem like it never will right now.

Turning A Plan Into Action

Student loans do influence your ability to qualify for financing, but this debt counts most explicitly on your debt-to-income (DTI) ratio, which is one of the numbers that loan officers will scrutinize when they are deciding if they want to lend to you. The fact that lenders are looking at DTI rather than your total levels of debt matters because it is easier for you to reduce your monthly debt servicing costs than it is to reduce your total amount of debt.

Do not take on any more debt; hold off on buying a new car or spending on credit cards. Real estate holds and grows in value, unlike cars, possessions, and experiences, which will still be there when you are a more affluent homeowner. Contact you student loan servicer and apply to reduce your monthly repayments. Look for ways to earn extra income whether it is through a pay raise, a weekend job or by finding a better paying career.

Make Your Goal A Reality With Work Now And Experiences Later

It might require you to adjust your expectations and demand that you work hard to achieve this worthy goal, but it is possible to buy a home while you still have student loans. The best way to discover how close you are to buying your home is to start taking steps to get prequalified. You will not need a credit check as a part of the process, but it will give you a fair understanding of how close you are to your goal.

If the worst outcome would be to find out just how far you have to go in paying off your debts, it at least gives you more information on which to base the plan you execute to pursue your goal. However, in all likelihood, you will discover that your student loans are less of a burden than you had expected and that the path to buying your first home is almost within your reach.

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