Interest Only products have interest-only payment for the initial fixed period (usually 5 years) with a 30-year term. Interest-only payments are in effect for the first 5-years, after which the payment adjusts to a fully amortizing principal and interest payment based on the effective interest rate in effect at the time of the adjustment, the outstanding loan balance at that time and the remaining term of 25 years. Subsequent adjustments to the interest rate and payment will occur in 12-month intervals.
Borrowers, who select an interest-only loan, usually want a lower payment with a cap on potential rate increases and the security of knowing their payments are set for a selected period of time. To qualify for interest-only products, the borrower usually has to have a high FICO score.
MORTGAGE SAVING TIPS
We all want to save money. Since your mortgage is usually your largest monthly debt, it's a great way to save money. There are many ways of reducing the total payout on your mortgage, from making more payment every year to reduce the term to selecting the program that is best for your situation. Here are a few suggestions:
Bi-weekly payment cycle: Most people have heard about this. Rather than making your mortgage payment on the first of each month, your lender changes your billing to once every 2 weeks. If you regular principal and interest payment is $1,000 per month, you would then pay $500 every 2 weeks. By doing this, you are paying $13,000 per year ($500' 26), rather than $12,000 per year ($1,000' 12). The benefit you gain is reducing the term of your loan significantly. On a typical 30-year mortgage, you generally reduce your term by about 5 years.
Make an extra Principal and Interest payment every year: Like the Bi-weekly payment cycle, making an extra mortgage payment each year accomplishes the same end result without locking yourself into the bi-weekly payment cycle. Since you remain on monthly billing cycle, you can chose to make one extra lump sum principal and interest payment each year. To accomplish the same thing on a monthly basis, simply divide your monthly Principal and Interest payment by 12 and add this to your monthly payment, applying the extra toward the principal.
Choose the right mortgage program: Many people feel that a fixed rate program for the life of the loan is the best choice. While this may be true for some people, it is not true for everyone. Statistics show that the average life of a mortgage is now about 5 years. If you plan to live in the home you are purchasing for not more than 5 years or refinance, why pay for the security of a fixed rate for say, 30 years, when all you need is security of a fixed rate for 5 years? The interest rate on a typical 5 year fixed to a 1 year ARM is generally a full percentage point lower than a 30-year fixed rate. This can translate into significant savings on interest during that 5-year period. On a $200,000 mortgage, it's a savings of roughly $7,500 over the 5-year period!
Interest Only Mortgage: Following recent increases in rates, a number of interest only programs have been introduced. These programs offer great flexibility in your monthly payment. For a fixed period of time (usually 10 years) the minimum payment due is the interest only due on the mortgage. These programs do not generally have a pre-payment penalty, allowing you to make principal repayment at any time you chose. Most interest only programs allow you to qualify using the interest only payment, which allows the borrower access to loan amounts larger than those available under fully amortizing programs. It can be a great alternative to allow you to save money on your mortgage payment every month.
RATE LOCKS
The mortgage process should be an enjoyable experience. After all, the mortgage and your ability to repay the debt will enable you to have "the quiet enjoyment" of your new home.
After you've selected your lender, submitted your application and know your closing date, you may now LOCK THE RATE! Rates change daily with the major lenders and to complicate matters, not all lenders base their rates on the same criteria.
The experience and knowledge of your Mortgage Consultant will be very helpful to you at this time. Although no one can predict the future of mortgage interest rates, knowledge of the market and trends in the market do come into play. Your financial advisor may also have some good advice regarding the best time to lock.
BUYING YOUR FIRST HOME?
Each year thousands of people embark on the journey of buying their first home. Many find the buying process to be an exciting yet difficult task.
AFFORDING THE DOWN PAYMENT
According to the National Association of REALTORS®, the number one affordability problem facing first-time buyers is the down payment. Although the standard down payment on conventional loans is 20% of the home's purchase price, many people are unaware that 20% is not always required on the down payment. Today, lenders offer financing programs that can be used in place of the borrower's money to work around the 20%. Here is a sample of those programs and ways to obtain a lower down payment.
Private Mortgage Insurance (PMI)
Since its creation in 1957, private mortgage insurance (PMI) has helped 20 million people buy a home sooner for less money down. Most lenders will accept less than 20% if the borrower purchases PMI, which provides lenders with the assurance that they are protected in case the borrower defaults on the loan. The borrower must pay the insurance until a large amount of the principal balance on the loan is paid or until the appreciation value of the home is 20% or more of the property value.
Federal Housing Administration and Veterans Administration Loans
There are two types of government programs that feature a lower down payment option for people who can't afford the 20% down. The Federal Housing Administration (FHA) loan and Veterans Administration (VA) loan offer down payments as low as 10%, and in some cases, even lower; FHA loans sometimes only require 3% down, and VA loans often do not require any down payment. The FHA and VA loans both have specific eligibility requirements. Talk with a mortgage professional to determine if you are eligible for an FHA or VA loan.
Local and State Housing Associations
Many local and state housing associations serve residents by working with lenders and other agencies to provide alternative financing resources. Often these associations provide mortgage loans with low down payment requirements to assist low- and moderate-income homebuyers. Qualification standards and policies for such loans may vary by state. To obtain more information on a program in any specific state, contact your local housing association or a mortgage professional in your area.
Additional Products
Some lenders have other products available to help low- and moderate- income borrowers become homeowners, such as flexible loan programs. These products offer adaptable features to provide borrowers with suitable finance options. Borrowers may even include gifts and loans into the finance plan.
Other Down Payment Sources
Another way to afford a down payment is by using funds from an IRA. IRA funds can be withdrawn to make a down payment on a house, as well as to make improvements to the house. However, it is important to consider early withdrawal penalties when using these funds. Buyers may also use income tax refunds for a down payment, or borrow against their pension plan.
When trying to afford a down payment, there are outside sources to consider as well. Relatives can assist borrowers by giving money as a tax-deductible gift. The money can then be applied toward the down payment. When a borrower is considering any lower down payment option, it is important to know that a lower down payment may significantly increase monthly payments. If interested in learning more about ways to afford a down payment, contact a mortgage professional who assists first-time buyers in realizing their goals. With a down payment secured, the next step is to learn how much you can afford to spend on your new home. A pre-approved mortgage allows homebuyers to go shopping for their home with a pre-approved amount in hand.
Pre-approved versus Prequalified
First, it is important to understand the difference between prequalification and pre-approval. Prequalification is basically the lender's judgment on whether or not a borrower is likely to be approved for a loan based on the information supplied to the lender. Pre-approval is the actual approval for a loan from the lender. The approval says that the lender has investigated a borrower's employment information and credit history, as well as the borrower's assets and debts and has given the borrower a commitment in writing that provides an approval for a monthly maximum mortgage payment.
Shopping for a Home with a Pre-approved Mortgage
It wouldn't make much sense to go shopping for a new sports car when the budget only allows for a used minivan. Shopping for a house without a pre-approved mortgage is much the same, and can lead to an exhausting search that might end with the choice of an unaffordable home. Armed with the knowledge of how much you can afford from a pre-approved mortgage loan, searches on certain types of homes and neighborhoods can be streamlined within specified limits. The seller of the house will know that the buyer is serious and can afford the home. The approval means a borrower will know how much house he or she can afford, the size of the down payment and the amount of the closing costs.
Closing Costs
Closing on a home can be confusing final part of the journey for homebuyers. It is necessary to include the costs of closing in the amount being borrowed from the lender. Generally, closing costs run 2-3% of the total amount borrowed. Closing costs include the title fee, which includes an insurance policy to ensure legal title to the property and closing agency fees; recording fees to enter the mortgage and deed in the public records; and pre-paid interest, which may be charged depending upon when the loan closes. Often times the seller of a house is willing to contribute to the closing costs to make funds available for the down payment.
Approximately two-thirds of all Americans own their own home. With the proper planning, the dream of homeownership is within reach for every motivated individual. By talking with a mortgage professional, prospective homebuyers can find out exactly how much they will need to save for the down payment, closing costs and other valuable information to help them prepare for homeownership.
The Importance of Pre-Approvals when purchasing a new home
What is the difference between a Pre-Approval and a Pre-Qualification? A lot! Some banks, lenders and brokers take information over the phone from potential borrowers and do not verify the documentation (i.e. pay stubs, W-2's, credit reports, etc.) that the information given is accurate. Wham, a faxed Pre-Approval is sent over to the REALTOR® (which is in violation of regulatory privacy laws), the offer is accepted, and now the fun begins. When the documents are gathered by the loan officer and are not what was represented by the borrower on the phone, the loan interest rate and sales transaction could be in jeopardy. The loan could be denied and the earnest monies put down by the buyer could be at risk. This is NOT beneficial to any of the parties involved. The mortgage industry is continually bitten by unscrupulous loan originators who do not do the right thing. It is not only the easy and lazy way out but it is misleading too, not only for the buyers, but also the REALTOR® and the seller. The example above is basically a Pre-Qualification. A loan originator or loan officer has taken down information, probably checked the credit and, if all makes sense and the ratios work, a Pre-Qualification letter is sent to the borrower. Without the borrower's consent, the letter should never be sent to the REALTOR®. A Pre-Approval pertains to all of the pertinent verified information for a loan, which is gathered by the borrower who is not under agreement on a subject property. The loan is written up and submitted to an underwriter for approval. Once approved, the Pre-Approval can be given to the borrower and used at their discretion. This allows the buyer/borrower more negotiating room when coming together on a price of their new home.
Fixed Rate vs. ARM Rates
One of the most frequently asked questions of all loan officers is "should I take a fixed rate or an adjustable rate mortgage (ARM)". Both have their advantages, fixed rates offer the security of knowing exactly what the monthly payment will be for the life of the loan. Adjustable rate mortgages have lower interest rates, sometimes as much as 1.25% lower than comparable fixed rates.
One of the biggest misconceptions surrounding ARMs is that the rate can change at any time and that the amortization for the loan is not 30-years. An ARM mortgage has an initial time frame, which the rate is fixed; after that period, the rate will adjust based on an index and margin but cannot exceed rate caps specified in the program disclosure. As an example, a hypothetical five year ARM (the most popular ARM) is fixed for the first five years, after the 60th month the rate is set by adding 2.75% (the margin) to the index at that time, today's is 1.38% (one year treasury bill). Under the terms of the five-year ARM program, the caps are 2% per adjustment and 6% over the life of the loan. This means the rate cannot go up or down more than 2% in any given year and the maximum it could move would be 6% over the initial rate for the life of the loan.
When shopping for a mortgage, borrowers should look at how long they will be needing the mortgage. In many cases, borrowers refinance their mortgage within five years for debt consolidation, college education, home improvements or lower rates. First time homebuyers should consider an ARM. The average these borrowers hold a mortgage is less than five years.
By using a five-year ARM, the savings over 60 months could be substantial. If you compare today's five-year ARM against the thirty year fixed rate for a $350,000 mortgage you will find the interest savings to be over $14,500.00 in the first five years. For example, comparing the five-year ARM at 4.875% to a thirty year fixed rate at 6.00%, the per month savings will be $243.25. Depending on the adjustment after the five years, one could save even more. In addition to the savings, ARMs are also a great way for borrowers to maximize their buying power. By having a lower payment, borrowers are able to qualify for a larger loan.
The Big Credit Score...
In an effort to continually educate my borrowers, I would like to share an article published by John Galligan who is the Director of Electronic Banking Services at the United States Treasury.
Consumers often sit in Mortgage lending offices and wonder (or agonize) about whether they will qualify for a loan based on their Credit Scores.
Now that consumers are able to know their credit scores, their agonizing should abate. However it will now be incumbent upon consumers to understand how they got their scores and how to maintain them as high as possible.
First of all, it's important to know the source of the credit score and who has access to it. The most frequent used credit score in the mortgage industry is called a FICO score, named after the company that devised it, Fair Isaac and Company, Inc. Fair, Isaac derives the score based on financial information from your creditors. The score acts like an amalgam of financial information about you. The Credit Score is used as a measure of how risky a credit consumer you are based on financial behavior. Keep in mind that factors other than your credit score, such as employment history and income, also influence creditor's evaluation of you credit worthiness.
The 5 Factors:
The following is a listing of 5 factors that contribute to your credit score. The results of these 5 factors added together compose a score ranging from roughly 300 to 850. with an inverse relationship between your credit score and the predicted risk you pose to the creditor. A high credit score (700-800) means that you are a relatively low credit risk, and a low credit score (300-500) means that you are a relatively high credit risk.
1) Track Record:
Your recent track record counts more than your dated track record. While a 30 day late payment won't affect your score as negatively as a 90 day late payment, the bottom line is to make your payments timely! Timely payments of utility bills (phone and electricity) will not influence your score. Only credit accounts, are folowed by Fair, Isaac unless 1 of your utility accounts goes into collection.
Percentage of total score=35%
2) Amounts Owed:
If you have high balances on a number of credit cards and installment loans, this situation is hurting your score. Additionally, numerous credit cards heighten the "potential" for accumulating high balances that could jeopardize your ability to repay your creditors. Optimally, own 1 credit card, use it judiciously and pay off monthly.
Percentage of total score =30%
3) Length of Credit History:
The longer you have a credit history, the more likely you are to score better in this category. To determine your length of credit history, Fair Isaac looks at the age of your oldest account and averages the ages of all your credit accounts. This is why new credit can have an adverse affect to your score.
Percentage of total score =15%
4) New Credit:
If you have applied for or have obtained new credit cards recently, you are reducing your credit score.The potential for getting into trouble with multiple cards is at play here. Low introductory rate offers converting to additional credit cards add another listing on your credit report that could account against you. Retail store credit, in addition is often provided by finance companies and a # of these accounts may reduce your credit score.
Percentage of total score=10%
5) Type of Credit in Use:
This factor speaks to a"healthy" mix of credit. Here is what an "unhealthy" mix of credit would look like: Numerous credit cards with outstanding balances, plus large mortgage and auto loans. A "healthy mix of credit would entail managing a reasonable # of credit card accounts and other loans with timely payments. It does not mean having one of each type of credit card account.using credit cards wisely, rather than not having them at all will boost your score.
Last year was a record year for mortgage originations. Although the vast majority of these originations were in refinance transactions, home sales also maintained a record pace throughout the year. This is despite a tepid economy and weakening consumer confidence. The hot home sales market has driven up home prices and in most areas of the country, home appreciation rates have risen as well.
These enhanced home appreciation rates mean increased equity value. Homeowners often view the equity in their home as an untapped "savings account". Those wishing to tap into their equity can do so through three primary methods. They can refinance their mortgage and take cash out. They can take an equity loan, or second mortgage. Or they can get a home equity line of credit, sometimes referred to as HELOC.
By refinancing and taking cash out or obtaining an equity loan/line, homeowners can consolidate their debt. This gives them the advantage of converting non-tax deductible interest payments on credit card and consumer debt to tax deductible interest on mortgage debt.
Another trend of homeowners accessing their equity is to purchase more real estate. With interest rates at an all time low, savvy investors are buying income producing properties and/or homes needing renovation. Even though the low rates are prompting more people to take the plunge into homeownership, there will always exist the need for rental properties. Many stock market investors turned off by the losses of the market, have been pouring money into real estate either for their own home improvement projects, for that desired vacation home, or for investment. Whether you're currently renting and deciding whether to dabble into home ownership or you're an old pro at the real estate game and deciding to add to your real estate portfolio, rates are at an all time low. There are a multitude of different loan programs and minimal down payment options available.
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