Financing

Finding the Right Home Loan

Fri, 3 Aug 2007 15:30:31 EST

Finding the Right Home Loan Weigh your options to find the right home loan for you.

Finding the right home loan is all about saving money. You took your time finding the right house - shouldn't you also carefully evaluate the financing for that home?

When finding the right home loan, there are several factors to consider. What is your financial situation? How much of a down payment do you have? What are current interest rates? How long do you plan to stay in the new home? Consider these factors, plus others, to help you find the right home loan for you.

How long will this be your address?
Let's start with how long you plan to stay in the home. While no one can know the future with certainty, you can probably make a good guess as to how long you'll stay. If you know your job will require a transfer in a few years or if you're self-aware enough to know that you're part nomad, then this will affect what home loan you choose. If, however, your job doesn't move you around and you are the type who likes to put down roots, then a different type of home loan may be better for you.

• If you may move soon
If you think you may move again within 4 to 5 years, you have may want to consider several different options for the right home loan. If rates are low, you may want to consider a short-term fixed rate mortgage (such as a 10 or 15-year fixed loan) to build up equity for your short time in the home. Another option to consider is an adjustable rate mortgage (ARM) or a hybrid loan. An ARM gives you a lower interest rate than typically offered with a fixed rate mortgage. The catch is that the ARM's interest rate changes. A hybrid loan gives you the benefit of an ARM's lower interest rate, but the security of a fixed loan because there is a fixed period before the rate resets. If you plan to move relatively soon, it may turn out that you sell the house before your rate adjusts.

• If you're in it for the long haul
If you won't be moving again anytime in the near future, then a fixed rate mortgage may be the right loan for you, especially if interest rates are low. A 15-year or 30-year fixed rate mortgage can be the perfect fit if you plan to stay in the home for a long period of time and you prefer the security of knowing what your interest rate (and monthly payments) will be. You can lock in a good interest rate that is guaranteed to you for the 15 or 30-year term of the mortgage.

What about down payment options?
Finding the right home loan also means evaluating options for your down payment. The 20 percent down payment is not necessarily the standard these days.

• No-down-payment mortgage
Yes, you read that right. It is possible to get a mortgage without putting any money down. That means that you finance 100 percent of the purchase price of the home. Sounds pretty scary, right? But, sometimes it can be a viable option. If you live in a market with rapidly escalating prices, it may not be that possible for you to save 10 to 20 percent of the purchase price before being priced out of the market. With a no-down-payment mortgage, you'll get a higher interest rate and you'll have to pay PMI (private mortgage insurance). Also, it'll take you longer to build up equity since you didn't put any money down. Keep in mind that not having equity in your home can be dangerous if home prices fall.

• Piggy-back loan
Another way to finance a home if you don't have enough for a 20 percent down payment is a piggy-back loan. Basically, A piggy-back loan is a combination of two loans that close at the same time to allow you to purchase a home. The most common types of piggy-back loans are an 80/20 mortgage, an 80/15/5, or an 80/10/10. An 80/20 means that you finance 80 percent of the home's purchase price through a first mortgage, but the other 20 percent comes from a second mortgage. An 80/10/10 means that you finance 80 percent of the purchase price via a first mortgage, 10 percent from a second mortgage, and that you make a down payment of 10%. With a piggyback loan you avoid PMI, but your second loan often will have a higher interest rate. Still, this can be a good option if you don't have enough for a 20 percent down payment.

• FHA loan
For the first-time homebuyer, the government runs a program to help you realize the dream of homeownership. An FHA loan lets you get in with as little as 3 percent down.

This really just scratches the surface for your options in finding the right home loan. Know your financial situation and investigate all of the mortgage options so that you can get the right home loan for you.

Pros and Cons of Fixed and Adjustable Rate Mortgages

Wed, 1 Aug 2007 09:30:17 EST

Pros and Cons of Fixed and Adjustable Rate Mortgages Borrowers need to understand pros and cons to make the right choice.

First-time home buyers often struggle to understand the differences between various types of fixed-rate, adjustable-rate and hybrid mortgages. One way to simplify these comparisons is to review the basic elements of each type of home loan. Here's a summary:

Pros and cons of fixed-rate mortgages
The chief advantage of a fixed-rate mortgage is that the interest rate and monthly payments will remain exactly the same for the entire lifetime of the loan, be it 15 years or 30 years. There is no uncertainty with this type of mortgage as neither the interest rate nor the payment will ever be higher or lower than they were when the loan was originated. Fixed-rate mortgages also are easier to understand than more complicated adjustable-rate and hybrid mortgages.

Pros and cons of adjustable-rate mortgages
The chief advantage of an adjustable-rate mortgage, or "ARM," is that you may have lower initial monthly payments. This is because ARMs often offer a low initial interest rate on the loan. You therefore have the potential to save money in lower interest costs if the interest rate on your ARM remains lower than the rate available for a fixed rate mortgage.

Despite those advantages, ARMs are inherently more risky than fixed-rate mortgages. If the initial interest rate on an ARM is lower than the fully adjusted rate, the rate and the monthly payment can increase significantly at each adjustment period. Over time, an ARM can turn out to be more costly than a fixed-rate loan would have been. Since there is no way to predict future interest rates, borrowers should pay considerable attention to just how high their monthly payments can get.

Pros and cons of Hybrid ARMs
A hybrid ARM offers a compromise of sorts between the advantages of a fixed-rate loan and the advantages of an ARM. The interest rate on a hybrid is fixed for a set number of years before the first adjustment. Borrowers who intend to move or refinance their mortgage within the fixed-rate period may benefit from the lower initial interest rate that may be offered on a hybrid ARM. The longer the fixed rate lasts, the less risky the loan will be and the higher the initial interest rate will be.

It's also a good idea to pay attention to the spread between the interest rates on various loan products. For example, the spread between a fixed rate of 6.5 percent and an adjustable rate of 4.5 percent would be 2 percent while the spread between a fixed rate of 6.8 percent and an adjustable rate of 4.2 percent would be 2.6 percent. The larger the spread is, the more potential savings the riskier ARM loan offers over time. When the spread is narrow, a fixed-rate loan is generally considered more attractive.

For more help choosing the right home loan for you, read our article How to Choose the Right Loan.

Top Six Down Payment Mistakes

Tue, 31 Jul 2007 15:30:38 EST

Top Six Down Payment Mistakes About to make a down payment on a home? Here's how to avoid the six most common down payment errors.

Deciding how much of a down payment to make on a home is one of the most crucial steps in the mortgage process. The amount you pay up-front is a major factor in determining how much your monthly payments will be, which makes it a decision that could affect you for years to come. Here are six of the most common down payment mistakes home buyers make and advice on how to avoid making them yourself.

Mistake #1: Making too small a down payment
While lenders do offer mortgages with down payments of less than 20 percent of a home's sale price, these loans require you to pay private mortgage insurance (PMI) -- an additional fee tacked on to your monthly payment to help protect the lender in case you should default on your loan.

In addition, low- and no-down-payment loans frequently carry higher interest rates and so can end up costing you considerably more over the life of your loan. Conversely, a down payment greater than 20 percent may earn you a more favorable interest rate if you have a less-than-stellar credit rating.

Mistake #2: Making too large a down payment
While common sense dictates that the more you pay up front, the better off you'll be, that's not always the case. One mistake first-time homebuyers sometimes make is using such a large portion of their savings for their down payment that they end up not having enough left over to cover closing costs and other expenditures for their new home.

Mistake #3: Not making a down payment at all
Some lenders offer mortgages that require no down payment but these loans can be risky. Paying no money down puts you in the position of having no equity in the home (i.e. you don't own any part of it). Should the value of your home fall, there is the risk that you could end up owing more to the lender than your house is worth. This situation could also make it difficult to refinance your mortgage in the future.

A no-down-payment mortgage may be an effective strategy in certain situations. However, you need to be economically responsible and financially sound to be able to handle the inherent risks involved.

No-down-payment loans often come with a higher interest rate than loans with a conventional down payment. As a result, your monthly payments will be higher, leaving you with less money available for bills and emergencies.

Since you'll be paying less than 20 percent of the home's purchase price, you will also have to pay PMI or be required to take out a second loan (known as a "piggyback loan"). Each of these options increases the monthly cost of owning the home.

Mistake #4: Paying with unseasoned funds
In most cases, a down payment is a pretty substantial chunk of money, and not everyone has the ready cash to cover it. A gift from a friend or family member can help, but don't think that just because you've come up with the full amount that you're necessarily in the clear.

All funds -- whether they're gifts from relatives, loans against an investment portfolio or your own savings -- that have been in your account for longer than two months are referred to as "seasoned," meaning that they're considered your money. If your bank statements indicate a large cash deposit that's less than two months old, your lender will need to know where those funds came from and whether they're gifts or loans. Gift-givers may be required to provide a letter to the lender indicating that they are in a financial position to offer the gift. Also, generally speaking, the larger your overall down payment amount, the less concerned the lender will be about where the money is coming from.

The lender wants assurances that the money you're putting towards your down payment is actually "yours," since it's assumed that if you're investing a significant portion of your own money into the down payment, you're less likely to default on your loan.

Mistake #5: Neglecting to bring a cashier's check to closing
Along with figuring out how much of a down payment you should make, you also need to ask your closing agent exactly how much you will be required to pay at closing. It's not enough to simply bring your personal checkbook to closing. You will a cashier's check to pay the amount of your down payment and your closing costs. Find out ahead of time exactly what the final total will be and obtain a cashier's check for that amount.

Mistake #6: Incorrectly assessing your debt comfort level
No one knows better than you how much debt you can handle. Trust your instincts; if you'd rather pay as much as you can at the start and have the benefit of lower monthly payments, don't let anyone dissuade you from that. The worst thing you can do is lock yourself into a mortgage that ends up costing you more per month than you can comfortably afford to spend.

What You Need to Know About Private Mortgage Insurance

Fri, 13 Jul 2007 15:30:18 EST

What You Need to Know About Private Mortgage Insurance PMI lets you buy a house with less than 20 percent down -- in exchange for higher payments.

Private mortgage insurance is just what the name implies: insurance that covers the lender in case the home buyer defaults. If you put less than 20 percent down on most mortgages, chances are your lender will require you to have private mortgage insurance, commonly known as PMI.

Unless you have a government-insured loan, such as an FHA or VA loan, you don't have much choice in the matter. And the benefit of private mortgage insurance is it allows you to buy the home you want even if you don't have a large down payment. The lender will obtain private mortgage insurance for you.

Paying private mortgage insurance

There are a couple of ways to handle your private mortgage insurance payment.

One popular payment method is to include private mortgage insurance as part of your monthly mortgage payment. PMI generally costs about one-half of 1 percent of the cost of your house, or $75 a month for an $180,000 mortgage.

Another way of paying for private mortgage insurance is to finance it when you get the mortgage. That would generally increase your interest rate, possibly by one-half of 1 percent. Mortgage interest is likely tax-deductible while private mortgage insurance may not be. (Consult a tax advisor about your situation.)

You can cancel PMI

You don't have to pay PMI forever. You can ask to have it canceled after you have built up 20 percent equity in your home. This means if your home is worth $200,000, you have at least $40,000 in equity in your home. And you don't have to pay down your mortgage to build equity, either. If you have made significant home improvements or your property has appreciated significantly in value, you may be able to cancel private mortgage insurance even earlier. The lender may require you to pay for an appraiser to establish your home's value in today's market.

If you signed your mortgage on or after July 29, 1999, a federal law requires lenders to automatically - with a few exceptions - cancel your private mortgage insurance once you have paid 22 percent of the principal based on the original loan amount.

Lenders do have some leeway to refuse to cancel your PMI if you are not current on your payments, if there are liens against the property or if you have an exceptional amount of debt based on your income.

Some people avoid private mortgage insurance by getting a small home equity loan to "piggyback" on the mortgage. The piggyback loan pays for the rest of the down payment so the buyer is able to put 20 percent down. These loans carry a higher interest rate than the mortgage, but the interest may be tax-deductible. A financial advisor can help you figure out how to determine if private mortgage insurance is the best way for you to buy a home.

This article was originally published at http://www.lendingtree.com/smartborrower/Private-mortgage-insurance/What-you-need-to-know-about-private-mortgage-insurance-.aspx

Why Zero Down Payment Loans Can Be Risky

Thu, 7 Jun 2007 09:30:13 EST

Why Zero Down Payment Loans Can Be Risky A down payment can help to reduce the risks of homeownership.

Mortgages that don't require a down payment help many people purchase a home they otherwise wouldn't be able to afford. That's very good news. But no-down payment mortgages have additional risks that borrowers should understand before they obtain such financing.

What is a down payment?
A down payment is simply a percentage of the home's purchase price. For example, a 10-percent downpayment on a $250,000 home would be $25,000. A down payment also can be expressed as a "loan-to-value ratio" or LTV. A 10-percent down payment would be equivalent to a "90-percent LTV."

The buyer's down payment becomes the new homeowner's initial "equity" in the home. (Equity is the value of the home minus what's owed on the mortgage.) For example, if you borrowed $180,000 to buy a $200,000 home, you would have $20,000 of equity. If you borrowed $200,000 to buy that same home, you would start out with zero equity in the home.

Zero money down can increase your loan costs
No-down payment mortgages are riskier for the lender since the borrower doesn't have any ownership stake in the home and could become "upside-down" if the value of the property dipped below the purchase price. That's why high-LTV loans typically are more costly than loans that require a larger down payment.

A down payment that's less than 20 percent of the home's purchase price triggers the need for either a second loan, called a "piggyback," or mortgage insurance, which protects the lender if the borrower defaults. Either option adds to the borrower's costs of owning the home.

Why having no equity can be risky
Homeowners who don't have equity can't borrow against their home to remodel, add on or make repairs to the home or for such personal reasons as a family emergency, medical expenses or college tuition. Refinancing may be difficult as well.

Lack of equity can be a bigger problem if the homeowner needs to sell the home because if the value of the home has dipped, the sale price might not be enough to pay off the mortgage. If the value of the home stayed the same, a seller with no equity would have to pay the transaction costs out of his or her pocket. That's why soft housing markets make no-down payment loans more risky for lenders and borrowers.