Mortgage Types category archives

You’ve probably heard of the car companies that are offering job-loss protection to induce new car sales: buy a car and if you lose your job in the next few months you can return the car. Some homebuilders have offered job loss payment protection plans too, offering employment assurance programs to spur sales. Now Uncle Sam is thinking about getting in on the act, and is considering leaning on lenders to allow homeowners who lose their job skip some monthly mortgage payments.

With unemployment now above 12% in states like California, Nevada, and Michigan, it’s easy to understand the political appeal of such a proposal. It’s less clear why loan servicers would be willing to do this. After all, they have a contract with the borrower which says they’re owed their monthly mortgage payment. From the lender’s perspective, it’s not their problem whether or not the borrower has a job. As one of Tony Soprano’s guys might say when collecting a debt: “Tell it to someone who cares.”

Alas, despite what you may have read, lenders aren’t bad people. They empathize when their borrowers hit hard times. However, it’s not altruism that’s driving their interest in this potential program. It’s the realization that banks don’t want to foreclose on any more homes than they have to. A bank would much rather have their borrower fall a few months behind on their mortgage, or modify the loan, than foreclose on the home. It’s still too early to know whether the proposals being considered will go into effect, but the advice for now is clear: if you hit hard times and are struggling to pay your mortgage, pick up the phone and call your lender. It’s a difficult call to make, but it just might allow you to keep your home.

This is probably the most frequently asked question I get when I start talking about renovation financing. My questions to anyone thinking about a Do-It-Yourself (DIY) renovation:

1. What is your hourly rate?
2. How many hours will the renovation take?

Most projects end up taking longer than you originally estimated, cost more than you anticipated and require tools you don’t have!

In this example, a DIY renovation can cut the total cost by $15,000, with monthly savings of $82.  

The question is: Do you want to do the work yourself?

I was recently asked this question and these are the ways I am aware that folks can pay for home improvements.

• Cash – With out a doubt the easiest way.  If you have the cash odds are it will be your best option, but not always.
• Contractor Financing – This would be when the contractor actually funds the project and allows you to pay for the work over time.  I don’t know too many…(any) contractors that are in a position or willing to do this.
• Credit Cards – North of 10% interest rates.  Unless you anticipate being able to pay the cards off quickly I would venture to say that is a really bad idea.
• Home Equity Loan – A few years ago this was the preferred method.  Combine the decreasing home values with equity guidelines decreasing the Combined Loan to Value ratios 100% down to 80-85% max.  Currently few if any folks actually have the equity in there homes to obtain an equity loan.

The 1st four sources have some common problems with paying for improvements on a purchase transaction.  If the repairs are need to have vs. nice to have, the repairs will need to be made prior to closing on the purchase.  Paying to repair a property before you own it is probably not the best idea.  Fannie Mae, Freddie Mac, FHA & VA all have minimum property standards that must be met prior to the loan closing, unless you are obtaining Renovation Financing.  Home equity financing has the added hurdle of being based on the current value of the property.

• Purchase or Refinance & Renovation Loans – Unlike equity loans or a regular first mortgage loan, purchase/refinance and renovate loans base the loan amount and your down payment off of the after improved value rather than the current value.  This enables you to tap into potential equity.

In Part II of this three-part series, I will discuss how “Caps” work on an ARM (Adjustable Rate Mortgage).

A cap on an ARM determines the maximum amount your mortgage rate can adjust, or “what it caps out at.”  As mentioned in Part I of this series, a traditional fixed-to-adjustable mortgage is fixed for a period of time then adjusts on a regular schedule.

There are three caps on a mortgage.  Here is how each one works.

Initial Adjustment Cap

When your loan reaches its first adjustment after its initial fixed period, the first rate adjustment is the “Initial Adjustment” of your loan.  The Initial Adjustment Cap will determine the maximum your loan can adjust the first time.  If the Cap is 2%, then your loan cannot move more than 2% from your start rate, up or down.

Let’s say you have a 5/1 ARM with a 4.5% interest rate and a 2% Initial Adjustment Cap.  After 5 years, the new rate can adjust from 4.5%.  However, it cannot move higher or lower more than the 2% Initial Adjustment Cap.  That means the lowest your loan can adjust is to 2.5% and the highest it can adjust is to 6.5%. 

Periodic Adjustment Cap

The Periodic Adjustment Cap is the maximum amount your loan can adjust each time after the initial adjustment.  Each time the loan adjusts the Periodic Adjustment Cap limits how much your loan can adjust from the previous rate you were just paying. 

Let’s use the same 5/1 ARM loan above as an example.  Let’s assume this 5/1 ARM has a 1% Periodic Adjustment Cap along with the 2% Initial Adjustment Cap.  Without going into margins and indexes (This will be discussed in Part III of this series), here is a worst case scenario rate schedule for 7 years.

5 years at-           4.5%

1 year at-             6.5%     (Initial Adjustment)

1 year at-             7.5%     (Periodic Adjustment)

In a best case scenario, here is your rate schedule for 7 years.

5 years at-           4.5%

1 year at-             2.5%      (Initial Adjustment)

1 year at-             1.5%      (Periodic Adjustment)

Lifetime Caps and Floor Rates

A Lifetime Cap is the maximum your loan can adjust over the life of the loan from your start rate.  This means your rate will never exceed the Start Rate + the Lifetime Cap.  If your ARM starts at 4.5% and has a Lifetime Cap of 5%, your rate will never go above 9.5% regardless of how many times it adjusts and how long you keep the loan.

Your Floor Rate is the lowest your rate can go.  This means no matter how much your rate adjusts down, it will never go lower than your Floor Rate.

Link to Understanding Adjustable Rate Mortgages Part I

Link to Understanding Adjustable Rate Mortgages Part III

I got an e-mail yesterday asking: What is a 203K loan?  Every once in awhile I need to remember that I sometimes use acronyms and assume everyone knows what I am talking about.  The reality is…in many cases the acronyms do more to confuse folks than to clarify.  So I am going to take a step back and explain a little about the “203K” loan.

This loan program can be used for the purchase or refinance of a property that needs work.  It allows you to borrow the funds you need to purchase and renovate the property.  These loans are not new but took a back seat to other ways of financing the cost to renovate.  With property values no longer increasing by double digits, and with equity loans being capped at 70-80% of current values (rather than 100% you could get just a few years ago), the options for financing renovations are limited.  I started a thread on Zillow asking how folks are paying for home improvements.  Inquiring minds want to know! 

In addition to the FHA 203k program similar programs are offered by Fannie Mae and Freddie Mac.

Well….I figured I would give YouTube a whirl… I finally got around to putting some before and after photos together from a K loan I closed on 12/28/2008.

Purchase Price $192,000

Cost of Renovation $32,642

After Improved Value $260,000

Equity After Renovations $35,000+…..$33,000 can make a HUGE Difference!
I sent my clients a link to my blog when I posted it….This was her response:
“Wow, so cool that you used my pics :)   A month ago another lady was driving by and said she was an appraiser using my house as a comp.  She came in to see the improvements and then when we queried her on what she thought we’d be able to get for this house today she hemmed and hawed, then said, prices have dropped since we bought so we’d probably lose money…. because she can see we’ve put in a ton of money (not true, but that’s what she thought).   Then she said in this market with the economy so bad, I’d be able to get $350,000
That made me very happy :)”     -Owner of the home in the video

Here’s a good question posed by carmen25 in Zillow Advice recently:

SBA Loan: can it be used to buy a house?

Carmen explains further about her desire to get a Small Business Administration (SBA) loan:

• Business is paid off.
• My husband owns the business but not the real estate.
• If he were to sell it today, it’s worth $600k.
• Need a loan for $400k.
• Can a SBA Loan be taken out to buy a house?
• Will this be considered an all cash offer for the house?
• What are the guidelines for SBA to be eligible?

Reverse Mortgages is a unique loan available to those 62 and older. It allows the homeowner to take part of the their equity in their home and turn it into income with out selling, giving up title, or taking on monthly mortgage payments

• Seniors will never have to leave their home as long as taxes and insurance payments are made and the home is kept in reasonable condition
• No income qualifications
• No credit score requirements
• No monthly mortgage payments required
• No repayment of the loan until the last borrower moves out permanently or passes away
• Proceeds paid in lump sum, monthly payments, line of credit or any combination
• Independent consumer counseling required

To find out about all the options available to you or a family member, contact a reverse mortgage specialist that you trust.

Zillow Mortgage Marketplace today launched two unique graphs and tables on every loan quote borrowers receive from lenders.  These graphs give borrowers an unprecedented amount of information presented in a dynamic, visual way that allows them to fully understand the details of each quote, including the makeup of payments over the life of the loan, and how much they will pay in cumulative costs over time. 

Payment Schedule 

The payment schedule graph shows the payment for the first month for every year of the loan. By hovering over any bar, borrowers can see how much of the monthly payment will go toward the principal, interest and mortgage insurance (if applicable). Clicking on any of these payments expands the year to display the complete monthly payments for that year. Clicking again returns borrowers to the year-by-year view.

Below the graph, a detailed amortization table lists the total monthly payment (also broken out by interest, principal, and mortgage insurance), the outstanding principal, and the interest rate for every month throughout the life of the loan. 

Cumulative Costs

The cumulative costs graph allows borrowers to see how their principal grows relative to the interest, fees and mortgage insurance over the life of the loan. Hovering over any year will give the cumulative costs paid up to that year.  This graph enables borrowers to see the grand total they will pay over time.  The table below the graph breaks down the costs paid each year throughout the life of the loan.

To use these graphs to find the right loan for you, simply submit a loan request on Zillow Mortgage Marketplace, and then click through to see the Quote Details on the quotes you receive from lenders.

Understanding Adjustable Rate Mortgages Part I

In this three-part series, I will discuss what to look for in an adjustable rate mortgage (ARM).  I will talk specifically about fixed-to-adjustable rate mortgages such as 3/1 or 5/1 adjustable rate loans. 

Many consumers view ARMs as risky or dangerous loans.  There is no question that these mortgages come with more coherent risk than a fixed mortgage, but they can often be useful for the right consumer in the right situation.  Truly understanding these loans is the first step.

First, let’s cover why people shop for these loans and discuss how they can be beneficial.

Here are some basic questions you should ask yourself before looking for an ARM:

1. Do I know how long I will keep this loan or property?
2. Will I be able to budget for a fluctuating payment once the rate begins to adjust?
3. Is the risk of an adjusting rate/payment worth the savings of an initial, low interest rate for my goals?

If you answered “Yes” to some or all of these questions, it’s worth exploring an adjustable rate loan to see if it fits your goals.

ARMs have a fixed rate for a period of time, and then the rate is adjusted according to the index a particular loan is based on.  When shopping for an ARM, it’s important to first consider the length of the fixed period.  ARMs often have fixed periods of 2, 3, 5, 7 or 10 years before they adjust.  This initial rate is the first number displayed in the name, while the second number represents how often the rate will adjust after the initial fixed period.   For example, if you have a 3/1 ARM, your rate will be fixed for 3 years.  After the third year, the rate will adjust once and stay the same for the next year.  To minimize risk, pick a term that coincides with how long you plan to keep the loan.  If you have a property you plan on selling in the next 3-4 years, you may want to shop for a 5/1 ARM.  If you plan on selling your property between 5-6 years, you may want a 7/1 ARM.  

I usually recommend clients to take a slightly longer fixed period than their planned timeframe for the loan, just to be prepared for unexpected delays.  That said, be prepared to pay a higher rate for a longer period of time.  Most ARMs will have a lower rate for shorter fixed periods and a higher rate for longer fixed periods.

Link to Understanding Adjustable Rate Mortgages Part II

Link to Understanding Adjustable Rate Mortgages Part III