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Home Loans Tips
Paying Off a Home Mortgage Early – A Road Map
It is hard to comprehend the fact that most new mortgages are written on a 30 year term. It is even harder to comprehend that the vast majority of these mortgages will never be paid in full because very few people remain in a home for that long. Do you want to be paying a mortgage forever? If you are like most, you would answer with a resounding 'No!'
Here is the best way to pay your mortgage down a little faster than your set term and a way to figure just how fast you can pay it off. There are home mortgage calculators available on the Internet that can tell you how a single or multiple extra payments will influence your overall payoff. It amazes most to learn that by making a single extra payment a year, a person can shave up to 10 years off of a 30 year mortgage term.
Most people would think that making double payments each month would pay your home mortgage off in half of the time, but this is way off. The truth is that every penny of your extra payment goes towards your principal. Your regular payment is split between your principal and your interest, so by making a double payment, you are really making a triple principal payment. Take advantage of these free mortgage repayment calculators to see just how much faster you can pay off your home mortgage.
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Apples to Apples - Comparing Home Loans
When you are shopping for a home, you will find that you can get very different quotes on home purchase loans from lenders and mortgage brokers. When you get multiple quotes, it is important to make sure you compare apples to apples.
Some brokers may be proposing very different loan scenarios than others, so be sure you fully understand each. Here are a few things to look for.
Term – Are the home loans that you are comparing based on similar repayment periods? Monthly payments will look a lot lower on home loans with a 30 year repayment period as compared to a 10 or 20 year. Do not be fooled by a low number based on a long term.
Rate – Not all rates are made the same. First, are you comparing fixed rates or adjustable rates. If you think a rate is too low to be true, it probably is and you are looking at home loans that will eventually adjust based on one financial index or another. Double check that you are looking at home loans with similar rate structures and then compare the actual rates.
Closing Costs – Different lenders, title companies, brokers, and brokerages have different closing costs associated with their loans. When examining closing costs, make sure that the escrows are accurate and that there are no points or origination fees. These fees can be well hidden and make you think you are getting a better deal than you are.
Take these three factors into account when you are comparing multiple home loans and you will be sure to compare apples to apples.
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What to Do When You Miss a Home Loan Payment
Nobody should have to tell you of the importance of making on time home loan payments. However, people still find themselves in a situation where they have trouble making their payment on time and maybe even miss one. If you are in this situation, here are a few things you need to be sure of in reducing the damage the lateness can cause.
First, contact your lender and get the payment in as soon as you can. There may be a late fee associated with the payment and you should pay it as well. Ask the lender if there is any way that you can avoid having this payment reported to any credit agencies and usually they will have options for you to avoid that. A late payment on a home loan is a credit nuisance and is hard to get past.
If you do find no remedy to your lender reporting the lateness to the credit agencies, your next step is to contact the agencies yourself. There is typically nothing you can do to get that taken off of the reporting, but you can make sure that the report accurately reflects the fact that the payment was made and the home loan is still in good standing. This can help you reduce the damage to your credit score.
Lastly, and most obviously, do not do it again. From now on, do what you can to send your home loan payment in at least one week before its due date. The easiest way to avoid this problem in the future is to pay early and get ahead.
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Consolidating Home Loans to Save Each Month
Are you unhappy with the total payments that you have to make each month on your multiple home loans? Most people these days are taking advantage of lower interest rates to consolidate multiple home loans into single loans with a single, lower payment. If you are carrying multiple home loans, or even other loans for cars, education or other things, you should think about consolidating into a single home loan and single payment each month.
The first step in this process is to gather all of the information about your home loans and other loans. Compare these figures to the equity available in your home to see just how much you can consolidate together.
Once you have a rough idea, bring all of this information to a mortgage specialist who can give you a more accurate picture of how you home loans will be consolidated and what your new payments will be. You will see that consolidating multiple home loans may be the best financial move you ever make. By getting a single fixed rate, you have far more security each month than with multiple home loans working on different interest rates.
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Hurricane Damage? Use a Home Improvement Loan to Fix it Up
The number of weather phenomena that have struck the US in the past few years are astounding. Particularly the hurricanes that have ravaged the south east. If you are a homeowner who has had some hurricane damage that your insurance can't cover completely, look into a home improvement loan to repair the damage.
A home improvement loan for specific home improvements is fairly easy to secure fast. Because hurricane damage often includes things such as a roof or windows that must be repaired to make the home livable, these home improvement loans are acted on quickly.
First, get quotes for the improvements that you need to make. Once you have those, bring them to lenders who specialize in home improvement loans. With the quotes, the lender should be able to easily evaluate the risks and rewards associated with the home improvement loan and will give you a quick response.
Don't let mother nature ruin your home investment. If you have had damage to your home that needs repair, look into a home improvement loan to remedy your situation.
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Student Loans? Pay Them Off From Your Home Mortgage
The costs of education have risen like few other industries over the last few decades. However, education has gotten no less important so how are students to make it. Most of them end up taking out large amounts of student loans. Granted, these loans are often at very good interest rates, but many end up paying them for the rest of their lives.
If you have these types of student loans but also have a home mortgage, you should ask a mortgage broker about paying off your student loans from your home mortgage. Although the interest rates are lower for student loans, the fact that the repayment terms are far shorter than the typical mortgage loan translates into a much larger monthly payment.
For people looking to reduce the monthly costs of their education loans, using equity from a home mortgage can be the best solution available. Gather all of your student loan information along with your home mortgage information and visit with either a local mortgage broker or an online lender. Either should be able to give you a full evaluation of how your situation can change with this type of consolidation.
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Getting Home Mortgages Online – Safe and Swift
There is a great concern today over the security that the Internet provides. Professionals and regular users will always attest to the fact that the security of your information is totally in the hands of the website you provide it to. When it comes to finding a home purchase loan online, the websites that provide them offer the best in security for your most sensitive information.
Do not let security concerns stand in your way of shopping for home mortgages online. You may end up missing out on the lowest rates available. Another great reason to shop for home mortgages online is because of the expedited process as compared to a traditional mortgage broker. Because of the automation of the process, home mortgages from online lenders can sometimes go from application, to quote, to closing, in only a few days. There are different underwriting procedures and processes for online home mortgages and these combined with the automation can make for a swift closing.
If you are looking for home mortgages and are not sure if you should shop online, remember the security that comes with your information and the speed with which you can get to the closing table. Combine those with the low rates that are found online and you have no reason to doubt anymore.
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Tax Benefits of Home Mortgages
There are many benefits that come with home mortgages. Home ownership is a benefit in itself, but a larger, more tangible benefit comes from the tax breaks that you can qualify for as a home owner. Taxes will vary based on the state and locality in which your home rests. However, there are invariably many tax benefits that come with home mortgages.
Did you know that every penny of interest paid on your mortgage is tax deductible? It's true. Home mortgages and their payments are made up mostly of interest payments. Since you pay taxes on your home, the taxes are waived on your mortgage interest to avoid double taxation. Compare this to paying rent, where you get no benefit.
One state in particular has a great benefit from home mortgages. That is Florida where they have the Homestead Act. The Florida Homestead Act states that a homeowner can declare their residence as their primary, homesteaded, property. They can then take an income deduction of up to $25,000 on their returns for their homesteaded properties. In a state like Florida that is already great for taxes, home mortgages will add a whole new level of tax friendliness.
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How to Qualify for a Home Loan
Qualifying for a mortgage is one of the most important components of getting the mortgage you want. If you qualify, the rest is relatively easy once you know how to do it. Before you find the “home of your dreams” you should determine what size mortgage you qualify for. Here’s how to do it:
Determine your household gross monthly income . Do not use your “net” income (gross minus taxes, insurance deductions, or other reductions). Use your gross salary or monthly total wages before taxes and other deductions. Do not include overtime or special extra income unless you can prove it is regular and consistent.
Calculate your monthly debt obligations. Do not factor in your utility expenses (telephone, electricity, heat, etc.). Just consider your regular monthly debts, including auto loan payments, credit card monthly payments, student loan payments, and other installment loans you have.
Divide your monthly debt obligations by your household gross income. The result will be a percentage that indicates how much of your gross monthly income you spend on outstanding debts before you add a mortgage payment into the mix.
Use one of the many mortgage calculators available online to calculate a potential mortgage amount and monthly payment. If you do not have access to the Internet, visit your local library to connect or get information on how to calculate a mortgage amount and payment. Should you already have a trusted mortgage broker or lender, talk with them to determine the maximum mortgage amount you qualify for and what that monthly payment might be at current interest rates.
Your projected new mortgage payment, including prospective monthly real estate taxes and homeowner’s insurance, should not exceed 25-35% of your gross monthly income. Then add a projected new mortgage payment and your current monthly obligations. Divide that amount by your regular household gross monthly income. The resulting percentage should be between 36-48% to safely qualify for the mortgage you need.
Once you have completed this process, you will have mastered a key ingredient in the mortgage process. You will know the general range of properties that will be available to you and what your prospective budget will look like after you close on your new home.
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Single Family, Condominium, and Multi-Family Home Mortgages
There are some differences that you should know. The qualification percentages are the same as are most of the documents you need to submit. All primary requirements (appraisal, credit report, income verification, etc.) are the same. The differences:
Condominium: Project documents need to be part of your loan package. Documents include condominium bylaws, budget, and all related information regarding rules and regulations. This information comes from the Homeowner’s Association and should be obtained by your mortgage lender. You should also have copies of this information because it shows how your new neighborhood is managed and notifies you of any deed/living restrictions (types of pets, insurance coverage provided by the master policy, what costs are covered in your homeowner’s dues, etc.)
Condominium: In addition to your prospective principal, interest, taxes, and insurance (PITI), monthly homeowner’s dues are added for your qualification. These dues must be paid every month, are set by the Homeowner’s Association based on operating expenses (insurance, water, landscaping, trash removal, etc.) and a fund to cover future repairs (roof, painting, road paving, windows, etc.) Should you fall behind in these payments, the Homeowner’s Association can and will file a lien against your home. Depending on the amenities offered by your project (pool, tennis courts, bike trails, etc.), your homeowner’s dues can vary widely from approximately $150.00 to $500.00 per month.
Condominium : If the project is not yet 100% complete, you will need documentation from the developer regarding the complete plans for the entire project, percentages of owner occupied units versus investor owned units, and the projected date when the project will be turned over to the Homeowner’s Association for control.
Multi-Family : You will receive income from the other units in your new home which affects your debt-to-income ratio in a positive way. You will have income that should be calculated in your debt-to-income ratio for mortgage qualification purposes. A vacancy factor of around five per cent will be calculated, but the remainder of market value rent income will lower your effective mortgage payment.
Multi-Family : Your appraisal cost will be quite a bit higher, around double the expense for a single family or condominium appraisal. Current rent amounts and market rent data must be analyzed to arrive at a fair market value (FMV) for the property.
Multi-Family : Your mortgage file will need either copies of your prospective tenant’s leases or “tenant-at-will” letters, which state that they live in the property on a month-to-month basis and verifying the rent amount they pay. This is the seller’s responsibility, not yours, but you should be aware of this requirement and stay on top of your mortgage lender to obtain these documents in a timely fashion.
Your mortgage application file will contain this additional information if you are purchasing a condominium or multi-family home but all other information remains the same. The other important difference is your interest rate. You might find that your best rate is slightly higher than one you might find for a single family home. While the increase should not be significant, you should shop around to find the best terms available.
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Owner Occupied Property vs. Investment Property
Owner-occupied (O/O) mortgage loans have the lowest interest rates available in the market. Lenders are well aware that a borrower will take all measures to protect the property he/she lives in. The owner’s “attachment” to the property is just as emotional as it is financial. This reality is reflected in the lower interest rate. You will pay about one to one and one-half per cent higher for an investment (non owner-occupied) (NOO) property.
Qualifying for a NOO is a bit different also. Theoretically, everyone can qualify for a NOO mortgage since the mortgage payment (principal, interest, taxes, and insurance) (PITI) is totally covered by the rental income you will receive. Therefore, your personal debt-to-income (DTI) ratio should not be changed. In fact, if you earn a good deal more than your PITI monthly obligation, your DTI will be improved.
Fair market value (FMV) will be based, not merely on the recent selling prices of similar homes in your area, but also on the income stream generated by a NOO property. Mortgage lenders assume (sometimes incorrectly) that you are purchasing investment for long-term income and appreciation (not a quick resale in a few months). Therefore, the monthly income stream and the historical vacancy factors are important in estimating the true FMV of an investment property.
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Fixed Rate vs. Adjustable Rate Mortgages
What’s in a name? Beyond the obvious, one rate remains the same while the other changes, there is no difference in the basic terms of either mortgage type. However, understanding the way an adjustable rate mortgage (ARM) works is very important to your decision making. While the start rate is the same as the rate for the next 30 years in a fixed rate mortgage, the beginning rate is only one component, sometimes a relatively minor component, in an ARM. The terms of an ARM are critical to its desirability. Your future plans for the property being purchased also must be incorporated into your decision of a mortgage type.
If you plan on keeping your new property (or your new mortgage) for the long-term, at least five years or longer, you might be better off with a fixed rate mortgage. The rate will not change, for better or worse, for the entire term of the loan, usually 30 years. If your household income is consistent and should remain so, a fixed rate loan provides the security of an amount that is easily budgeted, regardless of fluctuations in the economy. If you can afford the loan now, you should have the ability to afford it in the long-term.
Should you be considering your new real estate purchase as more short-term, five years or less, you might want to consider using an ARM to finance your home. In the beginning it will definitely cost you less and, in the short-term future, with reasonable adjustment and lifetime caps, it may cost you considerably less, too. There are four major components to an ARM (in addition to the start rate), all of which you must understand to make an intelligent decision about the loan type you want. The components you need to examine:
Index: the base number used to calculate future rate changes. The most common indices are the U.S. Treasury Bill average rate, the 11th District Cost of Funds (COFI), and the LIBOR (London Interbank Offered Rate), none of which fluctuate rapidly or often.
Margin: the percentage that will be added to the index at the rate change date to calculate the new interest rate for the coming period.
Adjustment Cap: the maximum your interest rate can increase at each adjustment period. The most common cap is two per cent.
Lifetime Cap: the maximum your interest rate can increase over the total life of your mortgage loan. The most common cap is six per cent.
ARM ’s come in a wide variety of choices: six month, one year, two year, three year, and five year ARMS are the most common products offered. All are usually full 30 year mortgage loans but revert to one year ARMS after the initial adjustment period, whatever it may be. It should be evident that, depending on the length of time before the first adjustment period, the start rate, while important, has a different level of significance. The start rate of a three or five year ARM is much more important than that of a six month or one year ARM.
For instance, if you opt for a 3/27 mortgage loan, your initial interest rate is fixed for the first three years and reverts to a one year ARM for the remaining term. If you plan on keeping your property or this mortgage for three to four years, this product should be an excellent choice. Should you plan to keep the mortgage for five to ten years minimum, you could find the interest rate up to six per cent higher in as little as six years. If you started at 5.5% (when the fixed rate was 6.5%) you could be at 11.5% in six years. Remember, should that happen, the fixed rate will also be much higher than the 6.5% you could have received at the beginning, so refinancing may or may not make sense.
In summary, think about your future plans for the property and the mortgage before you select the mortgage type you want. Understand the potential risks and rewards you might receive from each before you commit to one course of action or another.
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Less Than 30-year Mortgage Options
Until about 20 years ago, you would request a mortgage term that matched your projected time period. Since the creation of the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), in the early 1970’s, most home mortgages are sold to FNMA, FHLMC or other major mortgage loan purchasers. These loans are put into “pools” and re-sold into the investment markets, primarily competing with bond offerings. Because of this, almost all first mortgage loans are written for either 15 or 30 years only, allowing potential buyers of mortgage securities to calculate their “yield” (projected earnings).
This doesn’t mean you cannot have a mortgage with a maturity shorter than the stated term. Here’s how it would work for you.
If you wanted to be mortgage-free in 22 years, you get a 30-year mortgage. Have your mortgage professional calculate what your payment would be IF it were a 22-year loan. Make that payment every month and your mortgage loan will pay off in 22 years! Why? Every dollar above the required payment for a 30-year loan is applied to your principal balance! You will get an additional benefit. Since your lender’s computer is only looking for the required 30-year mortgage payment, should you find yourself in a cash bind at any point, you can revert back to the scheduled payment, thereby saving you much needed money and keeping your credit rating perfect for your mortgage loan. A final – and most important benefit – if you follow your 22-year mortgage schedule, you will save thousands of dollars in interest, the amount of savings growing every month.
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Interest-Only Mortgages
Interest-only mortgage loans are relatively new products in the industry. A market or less than market interest rate will be offered and the lender requires a payment only equal to the interest on your balance. The interest rate may change at specified intervals or increases could be agreed upon in advance of closing. An interest-only mortgage can be either a very beneficial product or a loan that you might come to despise. Much depends on your
Financial situation,
Plans for the property securing the loan,
Frequency of the interest rate adjustments, if any, and
Your personal outlook on real estate and finances.
For instance, if you’re paying “market rate” interest, the difference in the first few years of the loan will not differ greatly from a normal first mortgage, since over 90% of your monthly payments will go to pay interest anyway. The “cross-over” (when you pay more to principal than to interest) usually doesn’t occur until sometime in the 11th year of a 30-year mortgage loan anyway. Also, if your intention is to keep your property and your loan long-term, an interest-only mortgage loan may become a curse rather than a benefit.
However, often you might be able to get an interest-only loan at below market rates, which sometimes will result in a monthly payment 30-50% less than a normal fixed rate mortgage loan. The obvious benefits of a program like this –
Much easier qualification rules or the ability to qualify for a larger loan,
Greatly improved cash flow every month, the excess of which could be applied to the principal on your loan, and/or
As long as you are not mortgaged to the “max”, it is possible that in rapidly appreciating value periods, your property will increase in fair market value (FMV) fast enough to allow you to sell for a good profit or refinance to a low rate normal fixed or adjustable rate mortgage loan.
An interest-only mortgage loan is definitely not for everyone. If you have a problem with budgeting, disciplined spending habits, or have wildly irregular income patterns, this product may be beneficial (lower monthly payments) or detrimental (no principal payments, spending above reasonable budget amounts, etc.), depending on your financial condition and habits. Be honest, not greedy. If you believe you will not allocate extra cash to principal, you might be better off with a normal fixed or adjustable rate mortgage, which force you to reduce principal and budget effectively.
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Advantages of a 15-year Mortgage
There are three primary advantages of a 15-year mortgage loan versus a standard 30-year loan.
You will be mortgage-free in one-half the time.
You will be given an interest rate between one-quarter and one-half per cent lower than a comparable 30-year mortgage loan.
Your payment will not double, as you might at first think, but will only be 35-45% higher than a 30-year mortgage payment.
Since there are fewer and fewer people concerned about “mortgage burning” ceremonies, the 15-year mortgage is not used very often any longer. However, it can save you thousands of dollars of interest expense because of the rapid repayment and lower interest rate you receive. Here is an example of your savings with a $200,000 mortgage loan:
As you can see, you could save a huge amount of interest, real money, by using a 15-year mortgage loan instead of a 30-year product. If you’re going to keep your property for a longer period of time (over five years), you should give a 15-year mortgage serious consideration if you can afford the higher payment.
