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Understanding Mortgage Types

Fri, 05 Dec 2008 19:04:00 GMT

To quote a mortgage broker: "There is a different loan for a different need." In other words, the type of mortgage you get depends on your individual situation. A good lender will get a sense of your needs from your credit report, your assets, and your employment history. He can then recommend some options for you. Here's a rundown on the most common loan types.

Fixed-Rate Mortgage

Interest is fixed for an amount of time; e.g., 10, 15, 20, 30, or even 40 or 50 years, at which point the amortized principal is paid in full.
Pros: Security. You know what your payments will be. You can refinance if rates drop significantly.
Cons: If rates go down, you'll still be paying the initial rate unless you refinance. This is a long-term prospect; if you are keeping your home for 15 or even 30 years, it's a conservative way to go. But you can end up paying more short-term than if you had an ARM.
Watch out: This is a long-term prospect; if you are keeping your home for 15 or even 30 years, it's a conservative way to go. But you can end up paying more short-term than if you had an ARM.

Adjustable-Rate Mortgages (ARMs)

The interest rate fluctuates with an indexed rate plus a set margin; adjustment intervals are predetermined. Minimum and maximum rate caps limit the size of the adjustment.

Pros: Initial rates are lower than fixed. Popular with those who aren't expecting to stay in a home for long, or in a hot market where houses appreciate quickly, or for those expecting to refinance. You can qualify for a higher loan amount with an ARM (due to the lower initial interest rate). Annual ARMs have historically outperformed fixed rate loans.

Cons: Always assume that the rates will increase after the adjustment period on an ARM. You are betting that you'll save enough initially to offset the future rate increase.

Watch out: Check out the frequency of the adjustments. The more often, the lower the starting rate, but the more uncertainty. The less often, the higher the rate, but a little more security. Check the payments at the upper limit of your cap (your rate can increase by as much as 6 percent!); you can get burned if you can't afford the highest possible rate. And planning that a refinance will bail you out is risky; what if you can't afford (or can't qualify) when the time comes?

1-yr. Treasury ARM

The rate is fixed for one year, then becomes adjustable every year. The new rate is determined by the treasury average index plus the loan margin (usually 2.25-2.5%). 30-yr. term.
Pros: Lower rates than a fixed mortgage. When rates go down, you benefit.
Cons: Watch the margin; the margin is added to the index to come up with the new rate after the adjustment period. When rates are going up, you could end up paying more interest than with a fixed.
Watch out: If you are a gambler and think the rates won't increase, this might work for you. But if you are into it for the long or even intermediate run, fluctuating interest rates can mean higher payments over time.

Intermediate ARM

With an intermediate or hybrid ARM, the rate is fixed for a period of time, then adjusts on a predetermined schedule. This is shown by the number of years the loan is fixed, and the adjustment interval (.e.g., 3/1 ARM is 3 year fixed, and 1 adjustable annually). The new rate is determined by an economic index (usually treasury or treasury average index) plus the loan margin (usually 2.25-2.5%). 30-yr. term.
Pros: Lower rates than a fixed mortgage. When interest rates rise, you see more ARMs because they are easier to qualify for.
Cons: When rates are going up, you could end up paying more interest than a fixed-rate mortgage after the initial period.
Watch out: If you aren't planning to keep your house for long this might work for you because you will receive lower rates initially. Be sure to check the rate caps so you know exactly how high your payments can go. Fluctuating interest rates can mean higher payments over time.

Flexible Payment Option ARM

The borrower chooses from an assortment of payment methods every month. There is a "change cap" limiting how much payments can vary in a year.
Pros: Frees up cash when you need it. Good for buyers with variable incomes (e.g., salespeople who work on commission).
Cons: Some options won't cover your interest. With lower payments, your balance increases each month, and eventually your payments will increase substantially. This could lead to negative amortization.
Watch out: Eventually you will be required to pay down the principal and your payments will increase drastically. If you can't make them, you lose the house. Most experts say, "Don't do it."

Interest-only ARM

For a period of time, you pay only interest, and do not pay down the principal.
Pros: If you don't plan to stay in a home long, you can buy something you ordinarily couldn't afford. If you are in a hot market, or a hot neighborhood, you'll have low payments while your house appreciates in value. You can always pay more on the principal while enjoying the low payments. One other great thing about an interest only mortgage is that payments made to the principal reduce your monthly payment. So, if you have a job that has a heavy non-scheduled bonus or commission based compensation plan, you can pay the interest every month and when you get your bonuses pay down the principle to reduce your monthly payment.
Cons: The day will come when you need to pay down the principal. If your home value has fallen, or your income decreased, you could have trouble making the new payments. One strategy is to invest the difference between an interest-only loan and a fixed-rate loan to build up cash reserves.
Watch out: If you can't pay interest and principal at the same time, chances are you can't afford the house. You can only put off the inevitable for so long: the principal has to be paid down. If you can't make payments, you could lose the house. If you plan to sell your house and can't sell it for what you owe, you are in trouble.

Convertible ARM

An ARM that can be converted to fixed rate after a period of time.
Pros: Saves on refinance costs, assuming you would have been switching anyway.
Cons: You will have a higher rate for the fixed with a convertible loan. You can't look around for a better deal, which you can with a refi.
Watch out: Saving the cost of the loan and the hassle of shopping loans are a plus, but you might be crying if the refinance rates are lower than your new fixed. Experts say, "Just refinance."

Jumbo Loans

Above Freddie Mac and Fannie Mae conforming guidelines, therefore the big secondary lenders will not secure jumbo loans. 2006 maximum amount for a conforming loan: $417,000.
Pros: When the market is out of sight, the jumbo loans make a purchase possible.
Cons: Higher down payments, and higher interest rates.
Watch out: If you can afford the higher payments, then go for it. But make sure you can afford them.

Assumable Mortgage

An adjustable-rate loan, the balance of which can be assumed by a home buyer.
Pros: Sellers can offer a low interest rate to entice buyers.
Cons: This is almost never a fixed rate mortgage, so the savings might not be all that great.
Watch out: These are rare today. If the buyer who assumes the loan defaults, the bank will go after the original borrower.

FYI - FHA loans are assumable, but are fully-assumable and are not always ARMS.

Balloon Conforming Mortgage

Interest rate is fixed for a period of time, but the principal is not completely amortized. For the remainder of the term, it adjusts to a new fixed rate determined by the Fannie Mae net yield index plus the margin. 30-yr. term
Pros: Lower monthly payments initially. If your career (and salary) has a good future, or you are in a hot market and plan to sell before the balloon comes due, you can save moolah.
Cons: Who knows what that new rate will be? There's a looming debt in your future.
Watch out: You can refinance when the balloon comes due, but you are gambling that you can afford the refi loan.

Balloon Mortgage

The rate is fixed for a period of time, but the principal is not completely amortized during the period. The entire balance of the principal is due as a balloon payment at the end of that period.
Pros: Lower monthly payments, with the idea you can always refi or sell before the balloon.
Cons: A big elephant waiting in the wings
Watch out: It's easy to procrastinate, or your life changes, and then your balloon pops. Refinancing costs might offset any savings you made.

Veteran Administration Loans

A zero-down loan offered to veterans only; the VA guarantees the loan for lenders.
Pros: Nothing down, and no mortgage insurance. The loan is assumable.
Cons: The rate might be higher than conventional loans or FHA loans.
Watch out: Shop around first. Lenders are paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.

Federal Housing Administration Loans (FHA)

Government-subsidized loan with low down payment (i.e., as little as 1-3%) and closing fees included; the government guarantees the loan.
Pros: Low rates for those who can't come up with the down payment or have less-than-perfect credit; great for first-time home-buyers. The loan is assumable.
Cons: If you can afford 5 percent down, you might find better rates with conventional loans

Watch out: Shop around first. Lenders are paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.

Next article: Choosing a Lender

Previous article: Qualifying for a Mortgage

Home Equity Loans and Lines

Fri, 05 Dec 2008 19:08:00 GMT

If you’ve ever asked yourself “What the heck’s a HELOC,” then you’ve come to the right place!

There are two types of home equity borrowing: home equity lines of credit and home equity loans.

A HELOC, or Home Equity Line of Credit, is the right to borrow money from a lender up to a certain amount of money. The “line” is a credit line guaranteed by your house, meaning that if you can’t live up to the terms of the line, then the lender has a right (after a few nasty letters) to foreclose on your house. Typically HELOCs (pronounced HEE-lock) have floating interest rates that can change periodically.

For example, a borrower might obtain a $75,000 HELOC at “prime plus one.” This means that the interest rate is one percentage point higher than the Prime Rate. If Prime is 5.5%, then the HELOC is 6.5%. Remember: The rate is tied to the Prime and could change as much as at every billing date. (The change can be dramatic; e.g., in April of 2007, the Prime Rate was 8.25 percent, whereas in June of 2003, it was 4.25 percent.) Many HELOCs today have a fixed rate feature sometimes called a "Fixed Rate Partition" that allows the borrower to lock a portion of the loan amount at a fixed rate for a period of time. This feature varies greatly between different lenders.

Who should get one: Someone who might need extra cash for home improvements, or is looking at borrowing money to buy a different house (in addition to a mortgage).

Who shouldn’t: Do not use a HELOC to splurge for things like vacations or to finance other consumer debts, like credit card purchases (unless you then plan to tear those cards up!). HELOCs are guaranteed by your house, which means the stakes are very high.

Home Equity Loans are when a lender gives you a set amount of money and you pay it back over a fixed payment schedule. Typically these loans have fixed interest rates. This is a better option for someone who wants to lock in a fixed interest rate, either because they think interest rates are going to increase or because they like the certainty of knowing what their payment schedule will be.

A home equity loan also is a better option than a home equity line if you know exactly how much money you need to borrow and when you want to borrow it.

How to get one: You can get a home equity loan or line either from a mortgage broker or from a bank directly. These loans are also called "second mortgages" because they are typically obtained after the home has been purchased with a first mortgage loan.

Taxes and Interest

Are HELOCs tax deductible? Sort of. Like first mortgage interest payments, home-equity borrowing differs from credit card debt in that you can deduct the interest on your tax return. But this only applies if you itemize your deductions. Also, the tax deduction on interest is limited to loan amounts up to $100,000, with some restrictions.

What determines the interest rate? The Loan to Value Ratio and your credit score determine the interest rate of a home equity loan or line. If your credit score is excellent (760), you may be able to get an interest rate at the prime lending rate, or possibly lower. A good credit score (700-760) will likely get you an interest rate that is about the same as the prime rate. Poor credit will likely result in rates of 1 - 5 points higher than the prime rate. Except in some cases, you should be able to avoid fees such as application or appraisal fees, though you might get hit with an annual fee or a small “recording” fee.

The Good News

Home equity lines can be used by the borrower to pay for anything. You literally get a checkbook for the HELOC and you can write checks to your heart's content until you've maxed out the line's limit. Although HELOCs were originally designed for homeowners to pay for home improvements and other house-related projects, nowadays borrowers use home equity lines for almost anything. Most HELOCs also have online Internet access so you can pay bills online using your HELOC just like you would with a regular online checking account.

HELOCs and home equity loans can also be used as second mortgages at the time of purchase. Frequently they are the second purchase mortgage for 10, 15, or 20 percent of the purchase price when buying a home. Home buyers can avoid buying mortgage insurance (PMI) if they take out two loans instead of one, with no single loan exceeding 80 percent of the purchase price. HELOCs can fill this gap, wherein the first mortgage is frequently 80 percent of the purchase price and the HELOC is the second mortgage.

Like a credit card balance, you can pay down a HELOC at any time, without penalties.

The Not-So-Good-News

Home equity lines are serious stuff, since they’re secured by your house. If you can’t meet the payment obligations such as your minimum monthly balance, your homeownership is in jeopardy. Make sure you do your homework and fully understand all the consequences as well as the benfits. What may be a quick fix for debt relief or vacation plans could end up costing you your best investment.

Real Life Example

Bonnie is buying a $300,000 home and has $30,000 saved for her down payment. She needs to borrow the remaining $270,000. She works with a mortgage broker to take out a first mortgage for 80 percent of the purchase price ($240,000) and a Home Equity Loan for 10 percent ($30,000). The terms of the home equity loan are fixed at 6 percent. On closing, she ends up with a $30,000 home equity loan, in addition to her $240,000 mortgage. She may pay a slightly higher interest rate on the Home Equity Loan than on her first mortgage, but that interest is tax deductible, whereas the Private Mortgage Insurance premiums she would have had to pay with a mortgage greater than 80 percent would not have been.

Real Life Example

Harriet wants to remodel her kitchen because she loves to cook. Also, she has heard that a modern kitchen will help her resale value when she sells the house. (She has used the My Estimator tool on Zillow, and knows that in her area kitchen remodels are good investments.)

Harriet goes to her local bank where she has a checking and savings account and gets a HELOC. The bank orders an appraisal to see if the house value justifies the HELOC. It will also check to see how much equity Harriet has in the house. Her house appraises for $400,000 and she has a mortgage with $50,000 remaining on it, so the bank knows there is $350,000 of equity there ? plenty to support a $25,000 home equity line of credit.
Borrow
Harriet uses the $25,000 line to buy a new refrigerator and oven, and to pay the contractor who does her remodel.

Next article: Refinancing Your Home

Previous article: Types of Lenders

Amortization

Fri, 10 Oct 2008 22:03:00 GMT

Repayment of a mortgage loan through regular monthly installments of principal and interest. At the end of the scheduled payments (e.g., monthly payments for 15 or 30 years), you will own your own home.

Adjustable Rate Mortgage (ARM)

Fri, 21 Nov 2008 23:14:00 GMT

A mortgage loan with payments usually lower than a fixed rate initially, but is subject to changes in interest rates. There are a variety of ARMs that can have an initial interest rate that lasts three to 10 years, adjusting annually thereafter. They are described as 3/1, 5/1, 7/1 and 10/1. A 3/1 ARM starts out with a low rate that lasts three years, then is adjusted annually. A 5/1 ARM has an introductory rate that lasts five years, and 7/1 and 10/1 ARMs have intro rates that last seven and 10 years. The monthly payment amount is usually subject to a cap.

Balloon Mortgage

Fri, 10 Oct 2008 22:17:00 GMT

A Mortgage with a balloon payment.

The balloon payment is the final payment on the loan that is higher than the regularly scheduled installment payment which pays the loan in full.

Bridge Loan

Mon, 13 Oct 2008 21:30:00 GMT

A loan that "bridges" the gap between the purchase of a new home and the sale of the borrower's current home. Usually up to 6 months long. Borrowers need to qualify factoring in their existing mortgage, new mortgage and often a payment for the bridge loan. Borrowers should consult with their agents regardng market conditions and seriously consider having to make mortgage payments on both properties.

Fixed-rate Mortgage

Thu, 23 Oct 2008 00:40:00 GMT

A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms do not change.

Fully Amortized Loan

Thu, 12 Apr 2007 23:56:00 GMT

1. One having payments of Interest and Principal that are sufficient to Liquidate the loan over its term. 2. Self-Liquidating

Example: If the payment schedule on a loan is met, the loan principal will be entirely paid off at the end of the term.

Refinancing

Wed, 21 May 2008 19:05:00 GMT

The act of paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms, such as a lower interest rate. It can also be used to payoff higher-interest debt, such as credit cards or auto loans; this way, you benefit from a lower interest rate and also from the fact that the interest you pay on your mortgage is tax deductible, while the interest that you pay on your credit cards or auto loans is not.

By refinancing you can also reduce the term of your loan. For example, if you originally took out a 30-year loan, and now you are in a situation where you can perfectly afford the higher mortgage payment associated with a 15-year mortgage, then refinancing is the way to change the terms on the loan.

Refinancing can also be used as a way to cash out some of the equity that a property has gained. This way, you take out a loan with which you can payoff your original mortgage and pocket the difference.

External Links

Save on Title Insurance when you Refinance
Get Prequalified

1 reply

No Money Down

Wed, 05 Nov 2008 23:45:00 GMT

When choosing a lender it is important to consider if they can assist you in conserving your resources.

No money down loans are available and can be used to inexpensively purchase property. However you do need to have a mortgage broker and a buyers agent that can work together to ensure that the process happens smoothly.

No money down or 100% financing can be used at all credit levels to purchase condos, single family residences and multi-family homes.

1 reply

Removing contingencies on purchases

Fri, 08 Dec 2006 20:36:00 GMT

It used to be that the mortgage contingency or financing date was one of the most important parts of the purchase and sales contract. This is the date when all conditions have been met, in a satisfactory manner to the investor, and is generally the last hurdle to be cleared before the closing date.

But with the increases in residential house values and the subsequent increase in home owners “net equity”, there is a new dilemma involved in buying and selling a home simultaneously. Obviously using the net equity from the sale of the current home to purchase the new primary residence is the ultimate goal, but all too often these days we are seeing contingency clauses in contracts, making the sale or purchase reliant upon another purchase or sale – and us reliant upon the abilities of another agent.

There are two solutions which allow the purchase to take place without the contingency on the sale of the current home. The first is a bridge loan, the second are transition loans.

A bridge loan lets you borrow a portion of the current home’s equity, and use it to purchase the new residence. These loans require excellent FICO scores (typically 720 ) and a good equity position. They allow the borrower to borrow up to 80% of the appraised value. From these funds the investor pays off all current mortgages, collects 6 months of interest payments and then pays the costs of the loan. The remaining funds are available for use towards the new purchase. Because the mortgages are paid off and six months of payments have been taken, the borrower has no payments on the loan for the next 6 months. If the house sells before 6 months are up the borrower is refunded the unused pre-paid interest. If the loan stays in place after 6 months the borrower makes interest-only payments through months 7 to 12. After 12 months the bridge loan needs to be refinanced in to a longer term mortgage as an investment property.

Bottom line – the bridge loan is a segue loan, for up to 12 months, designed for borrowers with great credit and a great equity position, to utilize the proceeds to purchase a new primary residence.

Transition loans are geared towards borrowers who do not have the equity position or the credit scores to qualify for a bridge loan, and they enable the borrower to purchase the new primary residence without having to sell the current home. These loans typically require FICO scores of 620 or better, and make use of several of the low/no documentation programs that are available. They allow the purchase of the new home without it being contingent upon the sale of the current home; with minimal income and asset documentation. These programs can finance 100% of the purchase, which is key, and the loan is typically paid down and refinanced once the old primary residence sells.

Additionally, some borrowers are taking advantage of programs that allow up to 100% refinancing of their current home, as soon as it is off the market. By taking the property off the market and doing this type of refinance, the borrower can access funds to put down against the new property using one of the low/no documentation loans – securing a better rate and removing the need to refinance immediately upon the sale of the old home.

As you can see, while they may take different paths, both options carry the same vision of eliminating the need to have the purchase and sales contract contingent upon the sale of the current home.

These are short term loans, with long range results, and give the Real Estate industry a positive solution to an ongoing challenge.

For more information email gmorfill@ftmc.net

1 reply

Financing

Tue, 15 Apr 2008 00:27:00 GMT

Basic Mortgage Questions
Understanding Mortgage Types
Qualifying for a Mortgage
Types of Lenders
Choosing a Lender
Home Equity Loans and Lines
Refinancing Your Home
How Mortgage Originators Lie to Consumers
A Guide to Yield Spread Premium
A Guide to the Annual ARM
A Guide to Correspondent Lenders

1 reply

A Hard Money Guide- Multi-Family Properties

Thu, 21 Jun 2007 19:19:00 GMT

One arena where hard money can be helpful is to get a quick loan, in second lien position, against a multi-family property. There is a tremendous need in California for that right now because so many multi-family property owners have low-rate first mortgages at 50-60% loan-to-value (LTV) that were made some years ago. There are two major reasons why the multi-family property owner is reluctant to refinance the first lien to a larger amount:

1- They have a great rate on the first mortgage. Rates for buildings purchased in 2003 or 2004 were term loans with a note rate below 5.5%; today those rates are 6.5% or higher.

2- They have a very restrictive prepayment penalty on the first mortgage. The more common prepayment penalty is offered as a declining penalty over 3-5 years. Commercial Mortgage Backed Securities (CMBS) have a much more restrictive prepayment penalty referred to as yield maintenance or defeasance. Simply put, the borrower must guarantee the lender (who in turn guarantees the investor) a yield for a specific term; this can be much more costly than the declining penalty. Why would someone borrow money with yield maintenance as a prepayment penalty? They received a much lower rate.   We recognize two things in the multi-family market in Southern California:

1- Multi-family properties are undervalued when analyzed on a per-unit basis.   High land costs and rising construction costs make existing properties that have utility as a potential conversion to condominiums valuable. Condominiums can fetch as and average of $300,000 in San Diego County. Many times we'll try to loan up to 60% of the future value of a conversion.

2- Multi-family properties have rising yield potential. There still is a housing shortage in the lower end of the market in Southern California. Vacancy rates are falling and average rents are rising. We'll try to extrapolate how an existing owner might "reset" the rents to reflect the market if the property is improved and deferred maintenance is performed. We'll analyze the debt-service coverage ratio (DSCR) and lend on a 1.0 coverage using "market" rents or future value of rents.

Why would a borrower with good credit and equity borrow money at 13-14% ? The answer is that nobody else funds second mortgages on multi-family properties; we will. Many of our private lenders owned multi-family properties in their more aggressive investing years so they understand the property type.   Sometimes, a multi-family property owner is looking for some quick money for 1-2 years. The amount they need is not much in relation to the first lien and value. Borrowers with a CMBS mortgage often find that the high costs and rates associated with our loans are actually quite a bargain when compared to a full refinance of the first lien.

1 reply

A Hard Money Guide- 7 Tips For Consumers

Wed, 17 Sep 2008 23:51:00 GMT

Hard money loans or private mortgages can be an excellent way to cure a notice of default for homeowners in California if you have equity. Loan brokers are bound by specific guidelines laid out by State and Federal law. The laws are fairly complex and you should be aware that private investors not licensed by the either the California Department of Real Estate or the California Department of Corporations are probably not following the letter of the law.

Essentially, the lending guidelines for owner-occupied properties in California are:

    * A loan-to-value (LTV) of 70% or less. This means that you can not borrow more than 70% of the appraised value of your home.
    * A debt-to-income (DTI) ratio of 55% or less. This means that your total monthly bills, including the new mortgage, should not exceed half of your gross monthly income.
    * The loan must show a material benefit to the borrower and improve their financial situation.

* The lender must determine ability to repay. You must be able to afford the payments or the loan is considered predatory.

Here are the seven tips for consumers when applying for a mortgage:

1- California High Cost Loans: This is defined as a loan where the fees exceed 5.99% of the loan balance or the annual percentage rate exceeds 8% (10% for second mortgages) above the corresponding US Treasury Security.

2- Do not work with an unlicensed loan broker: Loan brokers in California are licensed through the Department of Real Estate or the Department of Corporations (as a California Finance Lender). There are many "foreclosure consultants" who pose as loan brokers, but they are not licensed.

3- Disclosures under the Truth-In-Lending Act (TILA) should be mailed to you within three days of application or a review of your credit report. TILA disclosures include a good-faith estimate of fees, a California Mortgage Loan Disclosure Statement, and an itemization of charges financed. If you are reading this article online, you probably have access to e-mail. Have the loan broker e-mail the disclosures to you immediately.

4- Sudden loan changes due to a loan decline must be communicated in writing. Under the Fair Credit Reporting Act, you are entitled to a written explanation for the loan denial. Any new terms must be redisclosed to you with the TILA documents immediately and no sooner than three days before your loan documents are prepared. Again, ask to have all of these documents e-mailed to you when possible.

5- Be wary of lenders or brokers who make "equity-based" loans with no regard for your ability to repay. Your ability to repay is identified by your debt to income ratio. Lenders who make no attempt to identify how you will repay the loan nor have an "exit strategy" for you have not met this obligation.

6- Many lenders offer a Home Equity Line of Credit (HELOC). Lines of Credit are excempt from some of the State and Federal predatory lending laws. Be aware that these type of loans tend to be much more expensive, but may be the only financing available to you if you are in foreclosure. Financing with such a high cost loan should be avoided unless absolutely necessary.

7- Finally, lenders like to include a prepayment penalty clause with the loan. This is to insure that their investment return will be secure. Don't sign loan documents that include a prepayment penalty for more than 12 months. High cost loans are "band-aid loans", designed to help you from a bad financial situation. Most sub-prime lenders will offer much better terms than the hard money loan with a 12 month good payment history. If you make all of your payments to the lender in a timely fashion, you should be able to refinance out of the "Band-aid loan" to more favorable terms after a year. A longer prepayment penalty than 12 months will restrict your ability to do that.

The California Mortgage Association is a professional organization which promotes and supports the community-based lenders and brokers. They provide many resources to the consumer.

1 reply

Assumable Mortgage

Mon, 23 Apr 2007 11:15:00 GMT

A mortgage that can be transferred from a seller to a buyer. The buyer then takes over payment of an existing loan.

There are fewer assumable mortgage options in the marketplace today than there were a decade ago. Most conventional mortgages are not assumable. Government loans (FHA and VA) are assumable with a qualifying provision.

1 reply

Managing Remodeling Finances

Thu, 16 Oct 2008 00:23:00 GMT

If you can pay for a remodeling project by writing checks out of your savings account from money you’ve actually saved up, good for you. That’s the least costly way to pay for a remodel since you won’t be paying interest on borrowed money. But if you’re like most people you’ll need a loan for some or all of the project. If you’ve got good credit and equity built up in your home you’ll be able to borrow money from a bank, credit union, or other financial institution. But be prepared to spend a little time figuring out what type of loan is best for you. There are several options and the nuances can be confusing.

Home Equity Loans and Lines

One of the most common ways to finance a remodel is through a home equity loan or home equity line of credit. Establishing a home equity line of credit essentially means that you borrow a certain amount of money at a certain interest rate, which may fluctuate. You can draw on the line of credit at any time. A home equity loan is a straightforward loan in which a financial institution loans you money at an interest rate that is generally fixed. The important point to note about home equity lines of credit and home equity loans is that they are both secured by your home. If you do not conform to the terms of your loan agreement, you could lose your home. That’s important to remember since your home is likely to be your single most valuable asset.

Financial institutions only make home equity backed loans to homeowners whose homes have equity. In other words, if you just bought your house last year with almost no money down and it has not appreciated substantially, you will likely not get a home equity loan or line of credit. If on the other hand you bought the house 10 years ago and have been paying your mortgage on time and the house has appreciated, you will likely get a home equity loan.

Construction Loans

If you’re undertaking a very large remodel it may make sense to refinance your home and take out a construction loan. This is a bit more complicated and means, essentially, that the lender pays off your old mortgage then gives you a construction loan for the duration of the remodel. When the project is over you have a new mortgage that includes both the payoff sum of your former mortgage and the construction loan. This method of remodeling is common on big remodels but is somewhat more complex since the lender becomes a semi-active member of the remodeling team. The lender will likely want to look over your plans and check the credentials of your contractor before you start, and an inspector from the lending institution will make periodic trips to your project to make sure the work is progressing according to the plans and to the building codes. You make monthly payments to the lender just as you would for a mortgage but the loan payments increase each month as more of the loan is paid out to the contractor and the sub contractors. When the project is finished your payments become mortgage payments at either a fixed or variable interest rate, depending on your agreement with your lender.

Tips and Tricks

No matter how you’re paying for the remodel, with savings or with a loan, it’s important to keep good records. Your contractor should submit bills in a regular, orderly fashion for work already completed. If you are paying with money from your savings account or a home equity loan or line of credit, you then write the contractor checks. If you have a big refinance/construction loan with a lender, the lender will probably write the checks to the contractor after the lender’s inspectors have checked the completed work.

More tips for managing your remodeling finances:

Determine how much money you will need for your remodel then shop around for loans.
Be sure you fully understand the terms of the loan, line of credit, or refinance. Lenders are required to explain the terms of the loan in detail. Don’t sign anything until you fully understand it.
You will probably end up working with a lender from your own city or area, and that’s good. You want to be sure the lender is reputable and friends and neighbors can give you suggestions about which banks and savings institutions to use.
Keep accurate records of payments. Keep receipts. If you are writing the check to the contractor and sub contractors, do so on a regular basis, such as once a week or once every two weeks.

Next article: The Hidden Costs of Remodeling

Previous article: How to Keep Remodeling Costs Down

Picking the Best Mortgage Type

Sat, 17 Feb 2007 18:33:00 GMT

How to Determine Which Mortgage Type is Right for You?

With all the changes in the Mortgage Industry in the past 10 years, picking a mortgage is no longer a matter of choosing between a 30 Year Fixed or a 15 Year Fixed. There are now tens and tens of different mortgage types and, the odds are, one of the new mortgage types is best for you. So, how should one go about figuring out which mortgage type is best for them? There is not a short answer, but I believe you should start by asking yourself the following questions:

How long do you expect to keep the property?
Where are you in your home buying life?
What do you think will happen to interest rates in the coming years?

There are actually several other important questions, but I'll just start with these. Now, let's look at them more closely.

How long do you expect to keep the property?

Of course, this is not always an easy question to answer. Even so, it is worth trying. Do you see yourself keeping this home for at least 5 years? 10 years? Longer? Is your job suseptible to sudden transfers that could force you to move? Like I said, this is often not an easy question to answer so just do your best.

Why do you care? In general, the longer a bank loans you money with a fixed rate, the more expensive the loan will be. Therefore, if you are buying your first home and you expect to move out of it in under 5 years, then there is no reason to get a 30 Year Fixed Mortgage. Perhaps a 30 year loan where the interest rate is for 5 or 7 years would be better. It would certainly save you a considerable amount of money. If however, you expect to keep this home for a long time, then you should move on to the question below related to your view of what interest rates may do in the future.

Where are you in your home buying life?

As mentioned above, if your first home is a small condo or other starter home, then there is a decent chance you will not be there for more than a few years. If you downsizing because you are now an empty-nester, then the odds are high that you may keep the home for quite a while. Either way, take a moment at least to consider where you are in your "home buying life."

What do you think interest rates will do in the coming years?

This question is important because, even if you expect to keep your home forever, why get a 30 Year Fixed Mortgage if you believe interest may come down in the next 3, 5 or 7 years? In other words, the only way it makes sense to pay the extra cost for a 30 Year Fixed Mortgage is if you feel pretty sure that:

You will be in your home at least 8 or 10 years, AND
Interest rates will not drop enough to refinance your loan in the next 10 to 15 years

I hope this information has been helpful to you. If you would like to discuss your particular mortgage situation, feel free to contact me:

Chris McCartney, California Mortgage Broker, 925-913-0711, chrism@LamorindaFunding.com

1 reply

Category - Financing

Tue, 20 Nov 2007 22:22:00 GMT

About Mortgages

Understanding Mortgage Types
Qualifying for a Mortgage
How to Shop for a Mortgage
Looking for the Best Mortgage
Home Equity Loans and Lines
Home Equity Credit Lines
Refinancing Your Home
Option ARMS - The Facts
Reverse Mortgages - What You Should Know
Interest-Only and Deferred-Interest Loans

Mortgage Terms

Appraisal
Abstract of Title
A Guide to Yield Spread Premium
A Guide to the Annual ARM
A Guide to Correspondent Lenders
A Guide to the Good Faith Estimate
Discount Point
Pre-payment Penalty
Glossary

Interest Rates and Fees

The Basics About Interest and Interest Rates
Shopping for Interest Rates Online
High-Rate High-Fee Loans
The Difference Between Interest Rate and APR
List of Closing Costs and Fees
Six Things You Should Know Before You Shop Online for an Interest Rate

Credit Scores

What is a Credit Score and Why is it so Important?
Credit -- What's in a FICO score?
What is a Credit Report
Credit Reports Explained
Hints on Raising Your Credit Score
How to Help Boost Your Credit Score
How to Shop for a Loan with Bad Credit
6 Tips to Get Out of Credit Card Debt
Too Much Debt is Bad for Your Credit
Bad Credit Options
A Qualified Mortgage Consultant can Help Boost Your Credit Score

Lenders

Types of Lenders
Choosing a Lender
Selecting a Lender
Difference Between Direct Lenders and Brokers
How Mortgage Originators Lie to Consumers

Miscellaneous

Buying a Home After Bankruptcy
Financing a Home Improvement Project
Finding Your Maximum House Price
How Much Home Can You Really Afford?
What Renters have to Gain Through Home Ownership
How do You Save Interest

1 reply

Revisiting the FHA Loan

Thu, 05 Apr 2007 18:52:00 GMT

Now that subprime lenders are pulling back dramatically it is time to re-visit FHA loans. As recently as seven years ago (2000) FHA accounted for 14% of the mortgage market. This market share had dropped to below 3% by 2005. I do not have the numbers for 2006 but I am assuming that it dropped even further.

FHA almost blew it

I remember in the middle of 2006 I sat in a conference call listening to some speakers talk about the changes that were coming to the FHA. The powers to be at HUD had finally recognized the loss in market share and the way subprime lenders had eaten their lunch. Numerous changes were being proposed by the Secretary of HUD and these changes were awaiting Congressional approval.

We were told to be ready for some exciting changes that would give subprime lenders a run for their money! Well the subprime lenders sure as heck have run with their money as most of them are now OUT Of money. From what I have heard (I haven't been able to verify this) and what I also assume, the changes that were being proposed last year will be dropped. I do not see how Congress will create a government sponsored subprime lending fiasco in this climate.

Most mortgage brokers who have come into the industry in recent years do not have FHA experience. They will not know how to use this loan and also its target market. So what is FHA? Who is it for? How can FHA help the credit -challenged borrower with low income?

Short Primer on FHA

FHA allows 97% financing with the remaining 3% contributed by as a gift from a non-profit. This essentially results in 100% financing. FHA is not a credit score driven program. While it will look at credit score in making its decision it doesn't deny a borrower outright solely based on credit score. However, you will never get an approval for a borrower with a very low score. It should be noted that FHA also can use non-traditional credit to make a manual credit decision.

For those borrowers with a higher than 565 credit score (I'm estimating here based on my experience), FHA guidelines use a series of compensating factors to make its underwriting decision. In this situation compensating factors become important. Compensating factors can be a combination of the following:

A strong and stable job history - the longer the better
A strong and stable rental history - the longer the better
A greater than 3% down-payment - the larger the better
A savings account with at least three months in payment reserves
Change in housing payment - the smaller the better (a borrower going from a $800/month rent to $1200/month mortgage is better positioned than one going to a $1800/month mortgage)
No recent derogatory accounts (within the past 12 months)
Taken a home-buyers education class
A debt to income ratio lower than the traditional measures

Not all have to be fulfilled in order to receive an approval but a few of these compensating factors can go a long ways towards obtaining a full approval.

Questions? Call me or write me. I'll be happy to help you.

1 reply

Your equity - your freedom

Fri, 17 Aug 2007 21:29:00 GMT

If you are a home owner and have equity, Mortgage Payment Deferral may be what you have been looking for.

Mortgage Payment Deferral FAQ

1. What is 12MoDef?

12MoDef, which is short for 12 Month Deferral, is a proprietary, patent pending mortgage product offered by Mortgage Payment Deferral, Inc. This product is an add-on that can be included in any refinance transaction. The net result is that the home-owner's mortgage payments are paid out of a special trust account for a period of anywhere from 3 months to 3 years. Let's assume the deferral period is 12 months for the remainder of this FAQ.

2. How does MPD work with a refinance of a home?

In addition to accomplishing the borrower's goals of the refinance, 12 months of mortgage payments are placed into the trust account at the close of escrow. This money comes from the equity of the home in the form of a cash-out refinance. During the 12-month period during which the mortgage payments are made by the Trustee, the buyer doesn't have to make a mortgage payment from their income. In addition, they are earning a preferred rate of interest on the money sitting in the trust account.

3. How does MPD work with the purchase of a home?

This product is currently unavailable for purchase transactions due to lender restrictions.

4. How does the borrower know that their mortgage payments are being made on time?

Each month, the borrower will receive a statement in the mail from Mortgage Payment Deferral, Inc. This statement includes their current mortgage statement, showing that timely payments are being made; as well as their current trust account statement, showing how much money is left in the account and how much interest they have earned. In addition, in each statement we remind you how many months until you need to start making mortgages "out-of-pocket".

5. What happens at the end of the 12 months?

When the final mortgage payment is made from the money in the trust account, the account is closed and all of the accrued interest, as well as any left over balance is mailed to the home-owner in the form of a check. The home owner is then responsible for making their mortgage payment.

6. Are there certain Mortgage Companies that I have to use in order to be eligible for 12MoDef?

No. As long as your bank or lender is an MPD licensee you can use them. See our "preferred partners" page for a list of eligible mortgage companies.

1 reply

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Understanding Mortgage Types

Fixed-Rate Mortgage

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1-yr. Treasury ARM

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Convertible ARM

Jumbo Loans

Assumable Mortgage

Balloon Conforming Mortgage

Balloon Mortgage

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Real Life Example

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Refinancing

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No Money Down

Removing contingencies on purchases

Financing

A Hard Money Guide- Multi-Family Properties

A Hard Money Guide- 7 Tips For Consumers

Assumable Mortgage

Managing Remodeling Finances

Home Equity Loans and Lines

Construction Loans

Tips and Tricks

Related Links

Picking the Best Mortgage Type

How to Determine Which Mortgage Type is Right for You?

How long do you expect to keep the property?

Where are you in your home buying life?

What do you think interest rates will do in the coming years?

Chris McCartney, California Mortgage Broker, 925-913-0711, chrism@LamorindaFunding.com

Category - Financing

Revisiting the FHA Loan

Your equity - your freedom