The mortgage loan benefits of credit unions

Image attribution: US-PDGov

While the big bank corporations continue to lumber along with their mantra of "too big to fail" and complaining about the lagging national economy, it's the small community lenders and credit unions that are making efforts to provide mortgage opportunities to the average family buying a home. As a result, these local and community institutions are now representing the best possibility for a home buyer to be approved for a mortgage loan, especially first-time purchasers.

Focused on local service

Credit unions are designed and established to serve and financially help a specific local community group. As a result, many were original established for specific trades or employee groups. However, since those early years in the 1970s and 1980s, many of the same institutions now enjoy looser banking regulations, allowing them to compete directly against banks for the same customer markets. As a result, many can apply to become a member of a credit union in their area without having to be part of the original charter group served.

 

Better positioned to lend

Because credit unions are more conservative in practice than banks, they didn't suffer nearly as bad during the 2008 economic crisis and real estate meltdown. In fact, many credit unions still have many of their mortgage issued during those times alive and well today, still being paid timely. This means that these institutions have far healthier portfolios on their balance sheets and can still generally lend to new customers. They are not burdened by the toxic loans and foreclosure many of the big banks still have on their books.

 

Favor goes to existing members

The above said, credit unions don't just lend to anyone. They tend to favor members who already have accounts with them including checking accounts, savings, CDs, retirement and similar. Where a credit union sees a member is established and a long-term customer, the institution will go out of its way to help on internal loans to that member. Granted, such applicants still have to have a good credit history and rating, and be timely on any other loans that may be outstanding.

 

Better interest rates

Additionally, many credit unions tend to offer lending interest rates that are usually better than what big bank branches offer in the same community. This critical difference can save borrowers approved by their credit union dozens of thousands of dollars over the lifetime of a conventional mortgage.

 

In summary

Where possible, every consumer in the New York-New Jersey area should sign up with New Jersey credit unions, even if just with a simple savings account. By establishing a relationship as a member, a borrower can then take advantage of the services and loan benefits of a given credit union, finding far more reception a loan application versus what the post-real estate crash big banks respond with today.

About the author: Derek is an active finance blogger. He enjoys giving people advice on their financial issues and also doing taxes for multiple people. The article above is for new jersey credit unions.

Things to know before joining a real estate investment group

By Magnus Keith

A real estate investment group is a localized group of people that get together to discuss ways to better approach real estate investment and learn about the topic in general. They are not usually groups that actually collaborate monetarily on buying real houses and properties, though this may sometimes occur. 

Joining a real estate investment group can be a good way to share ideas and become better connected in the world of real estate. However it's important to get a general familiarity and keep certain things in mind before getting involved in such a group. The following are some of things to know before joining a real estate investment group.

Things you can expect to learn

It's a good idea to get some idea of what you can expect to learn when you get into a real estate investment group. As noted above these groups are generally more about getting educated and connected in the real estate world than about getting together with other investors to make actual real estate investments.

Some things you can expect to learn from a real estate investment group are: how to network with other investors, how to learn what properties are available, how to evaluate houses, real estate laws and regulations, and how to analyze and understand market trends. Often, if the real estate investment group is a fairly good one, there will be professionals in the field present to share their knowledge and insights gained from experience.

There are fees

There are usually fees associated with real estate investment groups. More often than not, there is an annual fee associated with a real estate investment group.

All real estate investment groups are not equal

It's important to realize that all real estate investment groups are not necessarily of the same caliber or even general character. The following are some basic types to be aware of:

General information/networking

The large majority of real estate investment groups are for general information and networking. These groups allow participants to meet each other and get a clearer idea of what the real estate world is all about. If informal business partnerships form, this is fine, but the group is not specifically designed for this to occur.

For profit versus non-profit

Some of these groups are set up on a for profit basis and others on a nonprofit basis. It is important to at least know what type you are getting involved in. For profit investment groups may have higher fees or other stipulations that don't apply to nonprofits.

Thinly veiled sales pitches

Some of these groups are essentially thinly veiled sales pitches. They may be hoping to bring potential customers in to then get them involved in an expensive real estate course or have them buy a book. Unless you are specifically looking for this type of thing this is not what you want. If you are seeking a real estate investment group, that is what you should get.

There are many entrepreneurs out there who would love to sign you up for a greatly overpriced course. Don't be bamboozled into this sort of thing. These may not be outright scams, but they are often not worth the money you will spend on them and the benefits of a legitimate, reasonably priced information/networking based group can be much greater.

Scams

Outright scams do exist as well, so beware. Often a telltale sign of this is a greatly inflated annual fee. The appropriate annual fee for this type of group is from around $50 to $200. If it is much above this proceed with caution.

Check out the group

As should be obvious from the above remarks, it is very important to fully check out the real estate investment group you are considering before signing up for it. You can do this by checking with the better business bureau, asking local real estate investors what their opinion of a specific group is and which groups they recommend, by reading online reviews, and by asking friends who may be involved.

If you keep all these factors in mind you have a good chance of finding a real estate investment group that is interesting, informative, and which really connects you with the real estate world. Take your time in selecting a real estate group and make sure you find one that is really right for you.

This article was written by Magnus Keith on behalf of Kanetix. If you need more information on mortgages and the terms used in them, make sure to check out Kanetix mortgage glossary.

A Layman’s Guide to Home Equity Loans

Outlining the clear benefits and risks for property investment beginners

By Heather Sanchez

Home equity loans are secured loans that require your home be put up as the collateral security. As a person who’s been involved in real estate investing for many years, I’ve used them to personally finance the renovations in order to flip and sell a property, as well as to secure a home equity loan on one property in order to finance the purchase of another property.

There are a many benefits to home equity loans over other loans, for instance:

• Home equity loans are advantageous for both the consumer and lender

—there is little risk to both as long as you can pay the monthly loan amount, and lenders feel secure because your home asset is the collateral

For this reason lenders are more flexible about the terms and conditions because of the loan’s secure nature

The home owners can utilize the home equity loan for any purpose they want—for example, to pay off personal debt, debt consolidation, home renovations, and even to pay medical bills

The monthly repayment on a home equity loan tends to be cheaper

Credit score aren’t as highly considered for the securing a home equity loan due to the fact that the security of your home is the risk

Most home equity loans are quick to process—approximately 5 business days to secure. The way a home equity loan is structured is also advantageous compared to other loans. Due to the fact that these are fixed loans, the repayment period tends to be longer (i.e., 10 years to 30—depending on the loan amount), and most lenders will offer the maximum amount due to the fact that they can garner more profit from it. You will be granted a home equity loan based on your current mortgage, meaning the loan amount is based on both the volume of the equity you owe in the home (or the outstanding in the mortgage) as well as the current market value of your home. Usually an assessment of your home is necessary in the loan approval stages. 

To secure a home equity loan with a lender

• Fill out a home equity loan application with your bank or financial institution
• You must provide proof of home ownership—via a title search
• As well as the current equity in the home (this is often done with a drive by assessment) as well as based on the type of home you own—obviously a single-family home would garner a larger loan amount than say a condominium or modular home
  
• You must provide proof of employment via pay-stubs or a letter of employment from your current employer, the last years of income tax statements can also be used as testimony
• All of this information is used to judge your debt to income ratio (or your ability to pay back the loan).

The risk of a home equity loan

For the home owner, the obvious risk to an equity loan is your ability to make the repayments each month, on time. If you fail to do so, the bank will repossess your home.

About The Author

Heather is a staff writer for Lifestyles Unlimited where she has been involved in Houston real estate investing for several years. She enjoys analyzing investment trends, laws, and practices while at the same time debunking any myths she may find. As the owner of multiple rental properties and “flipped” houses, Heather believes that Real Estate Investors help put money back into the North American economy.

Guest post: Refinancing your home loan to invest: Beware of the risks

 US-PDGov

By: Allan Jones

Refinancing 

Refinancing a loan simply refers to getting a new loan on the same property to pay off the mortgage or for any other purpose such as investment or business. This second loan is decided upon the equity or value of your home; therefore, if you have a high home equity, you can acquire a large share of money to start a new business or refurnish your home, depending upon your needs.

Why should you refinance to invest 

Using the equity of your home to refinance can help you a great deal as it gives you the benefit of extra income as well as a source to repay your mortgage faster. Refinancing is a helpful resource in generating extra income and revenue for you, and can also fulfill any urgent needs of cash on your account.

Benefits 

You can use the second loan for a more fruitful investment and reap additional income, and open doors for business and trade ventures. The loan can also be used to pay off your mortgage faster and secure your property.

Risks involved in refinancing 

Although the lure of refinancing your home loan is pretty attractive, the benefits and charms come with strings attached. Therefore, it is advisable to learn the finer details and darker aspects of the refinancing package before taking a plunge.

1. Loss in the investment 

It is a gamble to invest your hard earned money in a business due to the constant fluctuating scenario of the market. While there are fair chances that your investment and business may flourish, any losses or setbacks you encounter in the course may make the pay back of your loan difficult and unaffordable. Therefore, make sure you have adequate savings in check before you opt to invest all your equity in an investment. Negative output can not only cost a high debt, but can also make you lose your home.

2. Share market risks 

An investment in the share market can also turn into a bane in the case rates decline suddenly. This can cause a major blow to your finances; therefore, keep this point in your mind when make an investment in the share market.

3. Rise in interest rates 

The income you generate from your investment should be higher than your interest rate in order to have a sound and smooth payback period. As refinancing increases your debt to twice, any rise in the interest rates can increase your monthly payment to a considerable degree.

When is the best time to refinance? 

Refinancing comes with its pros and cons, and the end decision lies in your hands whether it is suitable for your needs or not. However, generally the best time to refinance a loan is when the rates are lower and you have adequate savings intact to deal with a rate increase or complication in the future.

Allan has been blogging about financial news and tips for the last 3 years. Allan's favourite topics include the rising cost of debt, loan refinance strategy and retirement planning. Allan holds a BA in Business Administration with a specialty in banking.

When to refinance real estate loans

 

Wise refinancing is a budget makeover blessing. The decision to refinance also makes financial benefits more possible when utilized to its full potential. This is because aside from being a safe place to live or raise children, the right property mortgage offers the opportunity to build financial security, generate an income and even save money by growing food.

Real estate does not have to provide a yield, and depends on whether or not a property will be a primary residence or an investment. In many cases, mortgagees benefit from accumulated equity, which is the value of a building minus outstanding mortgage owed on it. In effect, this makes real estate a kind of savings instrument. Some  advantages  specific to refinancing mortgages are listed below:

• Lower monthly payments
• Equity enhanced qualification
• Streamlined application process
• Competitive interest rates
• Inclusion of renovation costs

Before re-applying for a mortgage, it is important to go over some key principles. These concepts are important because they affect the affordability, financial advantages and total cost of a mortgage. Moreover, proper understanding and weighing of the following mortgage components and their influence on buyer finances adds reason to refinancing, and makes the right refinancing choice worthwhile. 

• Time left on existing mortgage
• Future value of property
• Total interest costs of refinance
• Remaining balance of mortgage
• Early payment and loan terms

After identifying and measuring the impact of refinancing using the aforementioned items, the next step to think about is how much a mortgage will cost. How a loan is amortized or paid off over time has a substantial impact on the outlay. To illustrate, interest on a mortgage is not typically paid evenly throughout the life of the loan. Oftentimes, the largest part of the interest is paid in the first five years because lenders know that statistically, mortgagees are more likely to sell the property or relocate after this time period. When reviewing refinancing options, try these techniques to clarify the benefits and any disadvantages:

• Compare mortgages side by side
• Determine interest rate savings
• Evaluate effect of extra payments
• Assess impact of refinancing costs
• Weigh advantages of shorter term

When a mortgage is refinanced at a lower rate, it provides property and home owners a chance to lower their total expenditures. For instance, a mortgage refinance at a rate just 25 basis points or .25 percent lower than a mortgage loan of $125,000 with an original rate of five percent, and including insurance and property tax, costs $6,828.43 less over a term of 30 years. When considering refinance options, take the time to determine if the total savings from the lowered interest rate exceeds the cost of resetting the amortization schedule plus refinancing fees. If they do, then refinancing a mortgage is more likely to be the right choice.

How Property Tax Lien Foreclosure and Non-Payment of Mortgage Affects Taxes

In the event of foreclosure from non-payment of mortgage, the debt due may be 'canceled', the IRS considers cancelled debt  taxable in certain cases. In other words taxable income that would otherwise not have been gained in the event of non-foreclosure is the affect of foreclosure where debt is canceled. Also, income from the sale of property via foreclosure may be taxable to some extent.

Since foreclosure can occur from non-payment of taxes in addition to non-payment of mortgage, the unpaid taxes can lead to a tax-lien foreclosure. In this event the property can be foreclosed by the government from non-payment of property tax and sold. Essentially this process cancels the taxes due via the tax lien foreclosure where the owner owing taxes loses the property.

Reasons Not to Fund Major Home Repairs With a Second Mortgage

A second mortgage should not fund major home repairs because it can 1) increases overall debt to income ratio, 2) lower credit rating through increased debt 3) increase monthly budget costs due to interest on the second mortgage, 4) potentially reset a mortgage amortization schedule so less money is paid into principle every month and 5) may not pay off in an increase in equity value of the home.

In a sense second mortgages can be compared to credit cards with large credit limit and a lower interest rate; the larger the amount of the loan, the higher the total interest owed will be. If a household cannot afford home repairs using existing finances, and is already heavily in debt then the home repairs could be a risky gamble. To illustrate how a second mortgage can be an overextension of debt and a financial risk in addition to the above points are the following three points.

• Financial burdens too high for the borrower may be facilitated by the second mortgage.

• The sales price to mortgage risk ratio may be too low. (www.mrgprofessor.com)

• Bankruptcy may be just around the corner in the event of income interruption.

Alternatives to a second mortgage

While home repairs may be a necessity rather than a profit driven action, a second mortgage may seem like the only option. This is not the case. Second mortgages are an implicit indication of living beyond one's means. If home repairs are too expensive, mortgage holders may be wise to consider the following options. These alternative options can save money on interest accumulated and owed through the second mortgage and lower one'soveralldebt if the alternative involves upfront or short term payment.

• Financing a repair with a contractor.

• Save money for the repair.

• Sell the home as is and buy a smaller home in better condition at the same rates and monthly costs.

• Cut costs to finance the repair.

• Obtain an additional source of income.

• Ask for a tax deductible gift from a benefactor.

• Shop around for a low cost but licensed and fully insured contractor.

The opportunity cost of second mortgages

There is yet another group of people who may still not be convinced second mortgages are a bad idea. People who are banking on their own revenue stream and the benefits of the mortgage may think the second mortgage is a worthwhile risk. It is not worthwhile because of the opportunity cost. Money invested in a home repair is money not invested in 5% certificate of deposit or retirement savings plan.

The opportunity cost of investing in a home repair outweighs the benefit of the home repair itself.

For example, a $20, 0000 second mortgage at 6% annualized interest costs $1,200.00 per year to finance. The same $20, 000.00 in an IRA earning 9% earns $1,800.00 per year and if it is in a CD at 6% $1,200/year. In 5 years the CD would yield $6,000 or closer to a third of the face value of the mortgage and or home repair cost. In other words, if the home repair isn't essential the money is better spent elsewhere.

That's not all, many home repairs can be temporarily fixed with a less expensive measure. For example, major roof repairs can be patched, and foundation cracks can be sealed, While this is not a solution to the problem, it can buy time to save enough money and/or cut costs long enough to finance the repair. For repairs that are absolutely essential and must be completed, 2nd mortgages are not the only sources of financing. Other sources include the following:

• Home Equity Line of Credit.

• Loans against Insurance policies and IRA's.

• Automobile financed loans.

In other words there are more options that may not be as risky as loans against life insurance and IRA's are secured and losing an automobile is better than losing a house in the unfortunate scenario of the loan falling through. What's more home equity lines of credit do not require all the money be used. A home equity line of credit could be used to finance the home repair over time.

In sum, second mortgages can be risky and are not always even a profitable decision. When it comes to home repair, home repairs can be dealt with in many ways and one should not always think a second mortgage is the best and only way to finance a home repair. The above article elaborates on these reasons and illustrates other sources of financing and problem solving while stating and illustrating reasons why major home repairs should not be funded by second mortgages.

Source: http://tinyurl.com/6a9tchn ('The Mortgage Professor')

Mortgage Backed Securities: Who Really Owns Mortgages?

A mortgage-backed security is a financial instrument that is derived from property mortgages. Essentially, the creation of a mortgage backed security involves the bundling and selling of multiple real estate mortgages. This article will explain the concept of mortgage backed securities, how mortgages become these financial instruments and what happens to the ownership of mortgage loans after they become mortgage backed securities. Section one will illustrate the meaning of mortgage-backed securities, section two will outline the process of mortgage securitization and section three will address the question of mortgage ownership.

What mortgage-backed securities are

Mortgage backed securities are derivatives meaning their value is premised on 1) the quality of the underlying mortgage 2) the price of the real estate the underlying mortgage(s) are for and 3) the up to date payment of the mortgages. Mortgage backed securities are insured by mortgage default swaps, which allow the buyer of mortgage backed securities to receive indemnification in the case of the failure of the underlying mortgages to stay current. Consequently, the credit rating of the mortgage-backed security is important to its insurability and valuation.

Several types of mortgage baked securities exist including "CMO's, REMIC's, PO's, and IO's" (teachmefinance.com) These acronyms refer to the specific nature of each type of mortgage backed security. For example, a Collateralized mortgage obligation (CMO) is different from Real estate mortgage investment conduit (REMIC). In the case of a CMO, mortgages become valued via a group of bonds that's interest, value and longevity are determined by the risk and valuation of the underlying mortgages. A REMIC however, is more like an ownership trust, than a collateralized financial instrument. However, a REMIC has the capacity to collateralize mortgages with financial instruments such as bonds and other forms of ownership.

How mortgages become mortgage backed securities

The process of how mortgages become derivatives or "mortgage backed securities" is quite simple in principle. What isn't as simple is the identification of underlying ownership after a mortgage has been securitized. In other words, the chain of events, legal paper trail and number of steps involved in the creation of mortgaged backed securities can become so elaborate and bureaucratic, that the practicality of tracing both ownership and value becomes overly complicated.

To illustrate, the mortgage application and origination procedure can involve quite a lot of paperwork as many home buyers are aware of. Following this, mortgage companies package and resell groups of mortgages to banks who pay an immediate return on the value of the mortgages for a discount on the present value of future cash flow i.e. value of interest amortization. The banks who buy these mortgages then re-distribute them so they can make a profit off them, these re-distributions are the mortgage backed securities and are classified by the credit rating of the underlying mortgages. These derivatives are then classified and valued by third parties and sold to investors and/or investment organizations. Thus the actual ownership of a mortgage changes several hands and goes through much re-organization and re-distribution after the origination.

The ownership of mortgages after securitization

Since mortgages that are securitized are bundled, packaged, bought, sold, leveraged, collateralized etc., the actual ownership of a mortgage loan as opposed to the mortgage property that is held by the home-buyer, can be obscure. The reason it can become obscure is that after the mortgage is repackaged it transforms into a re-categorized financial instrument rather than a individually traceable group of mortgages. Since the underlying mortgages are classified by repayment risk, the actual ownership become less relevant than the class of the bonds or mortgage derivative, mortgage derivative holder etc.

Since a legal and financial trail of ownership must exist for mortgage backed securities, ownership is traceable, it's just not convenient to actualize an ownership trace on a daily basis when the digital money flow is all that is needed by investors and financial institutions involved. That is to say, so long as mortgages and/or groups of mortgages in the form of mortgage backed securities can be assessed in terms of percentage defaults, foreclosures etc., the actual ownership become monetized rather than personalized in the securitization process i.e. to the home owners, the ownership of title is important, and to the banks, other financial corporations and investors, the value of the mortgage loans is what's important. Such being the case, aggregate numbers become more important than aggregate names making tracing ownership of mortgages difficult after securitization.

Summary

To summarize, mortgage loan rather than title ownership can be difficult to locate after securitization because of the process involved in the transformation of mortgages to mortgage backed securities. Essentially, this process involves a sequence of events in which mortgages become valued, assessed, categorized and packaged and then valued thereafter in terms of aggregate numbers and percentages rather than on a case by case basis in which the mortgage borrowers name is of relevance.

In simpler terms, the value of the mortgage derivatives becomes of higher importance and thus greater priority is placed on the valuation of the derivatives than the defining of ownership. When mortgage backed securities are resold to investors, the investors are simply less concerned with who actually borrowed the mortgage than the quality and repayment of the mortgage and its representative value. Thus, in the process of mortgage securitization, ownership of the resold mortgage, and defining of that ownership becomes less important than the valuation thus the numerical information flow representing value is given more importance and accessibility than the ownership trail.

Sources:

1. http://www.allbusiness.com/personal-finance/real-estate-mortgage-loans/953732-1.html
2. http://www.teachmefinance.com/Financial_Terms/mortgage_derivative.html
3. http://www.sec.gov/answers/tcmos.htm
4. http://financial-dictionary.thefreedictionary.com/Real+Estate+Mortgage+Investment+Conduit
5. http://images.google.com/imgres?imgurl=http://1.bp.blogspot.com/_

How Robo Signing Impacts Home Owners

Robo-signing is a process used by mass mortgage owners that can impact homeowners by facilitating a confusing and potentially fraudulent foreclosure process. Instead of using the proper officials to verify and notarize ownership and delinquency information on mortgages, robo-signing expedites this process via proxy authentication, human or computer. Since home ownership documentation is typically both recorded and required to prove ownership, the use of robo-signing may have the potential to overlook actual ability to verify ownership, and right to foreclose via abuse of the affidavit procedure.

The issue of robo-signing is a legalistic and bureaucratic one. Since mortgages are highly regulated financial instruments, robo-signing holds the potential to sidestep regulatory requirements such as authentic documentation and homeowner rights. However, due to a rule called 'safe harbor', a certain amount of good faith in transfer of securities such as mortgage backed securities is in some ways permissible. If good faith is violated through fraudulent practice however, the mortgage owners could have a legal problem on their hands. Thus, in cases where robo-signing has been proven to be in violation of good faith, safe harbor may not apply due to the competing affidavit authentication requirement.
The above robo-signing scenario impacts the homeowner by placing them in a situation of bureaucratic limbo. Moreover, homeowners can be harmed by robo-signing because a process that should be fairly straight forward for them becomes navigation of a maze of mortgage repurchases to determine who to pay and what the next step should be. In other words, robo-signing impacts homeowners by complicating and obfuscating servicer information. This can lead to undue stress for the homeowner and may also delay the mortgage modification process.

Robo-signing can also impact homeowners by stalling the foreclosure process. If, in some cases the authentication cannot take place or is delayed due to a filing error, locating and verifying the documents authorizing foreclosure is, or should be postponed. Whether or not this is a good impact on homeowners is debatable. The delay may allow them more time to live without making mortgage payments, but it may also make it that much more difficult to catch up on the mortgage given the opportunity.

How robo-signing impacts homeowners is an example of how documentation short-cuts can lead to financial problems for financial institutions later on. By gambling on the fact ownership papers can be located, rather than should be located, is an act of faith that requires the mortgage buyers to take on additional risk. This derivative risk is related to the problems that caused credit default swaps and mortgage backed securities to be an issue during the financial crisis of 2008. That is to say, risk is underestimated due to overconfidence in the derivative processing.

Sources:

1. http://bit.ly/c6zuyf (New York Attorney General)
2. http://bit.ly/bdpBFf (Federal Deposit Insurance Corporation)
3. http://bit.ly/bybalj (FDIC: Safe harbor extension)
4. http://bit.ly/ciFACS (NOLO)

Where to look to get the best mortgage rates

Looking for the best mortgage interest rate need not be complicated or difficult. To make it less difficult, first identify the type of loan you are looking and qualify for, then find out what companies or organizations service these types of loans. For example, if you are seeking affordable housing solutions and have a low to medium income, you may even qualify for a zero percent forgivable mortgage through programs such as Community Frameworks. Similar programs exist nationwide, but are subject to resource and application limitations.

For mortgage borrowers who only qualify for non-subsidized mortgages, good rates can still be found. The most recent edition of a national newspaper's business section should have basic average mortgage rates such as 30 year, 15 year and Adjustable Mortgage Rates. Sites like mortgageloan.com can help you look for and compare the best  average mortgage rates by region, loan type, loan amount and credit.  However, this does not mean you can't get a lower rate than the national average. This is because other factors can influence what your actual mortgage rate will be.

• Regional differences

Different regions of the country may be experiencing different economic conditions which can also influence mortgage rates. For example, Nevada, California and Florida all experienced large home price depreciation and foreclosures in the years following the housing bubble burst in 2007-2008. These conditions may make mortgage rates in these areas lower than in other areas of the country. For example, on October 22, 2010, several of the 30 year fixed rate mortgages on Zillow.com were quoted at rates as much as 50 basis points or half a percent lower than the national average of 4.24 percent.

• Selecting a financial institution

When looking to get the best mortgage rates, another thing to consider is the financial institution or mortgage lender. If you are purchasing a home directly from an owner via a rent to own type situation, the rate may be privately negotiable as the lending formula is probably not the same as a mortgage bank. Mortgage banks and banks that offer mortgage loans may differ due to competition. For this reason where you look for mortgage rates in your area could yield several different rates.

• Type of mortgage loan

The type of mortgage product can also influence what you find in places that offer mortgage loan products. For example, the rate and terms of a 203(K) FHA mortgage rehab loan can differ from an REO mortgage on government owned property. Each loan may be subject to different housing regulations and therefore varying interest rate allowances, benchmarks and restrictions. This is especially the case with government and non-profit mortgage loans.

• Mortgage rate variables

The best mortgage rates are dependent on a few financial variables that are ideally factored into the equation when looking for them. A mortgage loan officer should be able to inform you about some of these factors when applying for a mortgage. A basic rule of thumb is the less risk there is to the bank, the lower the rate will be. Risk is calculated using debt to income ratio, credit score, down payment amount, asset worth etc.

• Lowering mortgage rates

After having looked for the best mortgage rates and found some ballpark estimates you then have a mortgage rate with which to improve upon. For example, if you are looking for a 15 year refinance for under $100,000.00 what can you do to lower the rate from the existing quote you are given by a broker, online rate quote, or mortgage lender?  For example, you may be able to purchase 'points', which is essentially an extra upfront cost that is entered into your good faith estimate and lowers your mortgage rate.

Sources: (Date of record, October 22, 2010)

1. http://bit.ly/a74Pny (Zillow.com)
2. http://bit.ly/agLURp (Community Frameworks)
3. http://bit.ly/c4SZMo (Mortgageloan.com)
4. http://bit.ly/2VAul8 (HUD)
5. http://bit.ly/anU2YX (Fannie Mae)

A Look at How Construction Loans Work

Construction loans are issued for the time period in which construction is to take place. Since most buildings don't take 15 years or longer to construct, the monthly payments can be higher for construction loans if they are not financed in such a way as to either delay payments until completion of construction or after becoming non-construction permanent loans.

How to get a construction loan

Construction loans require construction loan applications that require information and documentation pertaining to the borrowers financial profile, project feasibility and legitimacy and builder related data. For example, in the case of a construction loan obtained from a bank, information about the builder, contractors, site location and details, in addition to the borrower(s) financial profile can be required.

The following link is a sample individual construction loan checklist that illustrates some of the documents required by construction loan lenders. In the case of businesses applying for construction loans, documents and information relating to the businesses' financial profile are included in the application. As with mortgages, many documents may be requested by the loan officer or the application. Some of the items a lender may look at are listed as follows:

Building related information:

• Construction permit
• Builder references, licenses, insurance and contracts
• Contractor references, licenses, insurance and agreements
• Professional appraisal of construction costs
• Liens on property if any
• Materials and labor cost details
• Land zoning authorization

Individual information:

• Tax filings from previous years
• Pay stubs and employer information
• Assets and liabilities documents
• Credit report and score
• Personal identification
• Cosigner documentation if joint

Construction loan tips

Since construction loans are complicated and involve a lot of details, patience and dedication to properly completing the loan application process is useful not only in protecting the lender, but the borrower from wrongful practices. The construction loan application can assist with reviewing and rethinking the construction, its terms, costs and potential pitfalls.

• Acquire three references from each builder and contractor
• Utilize a building appraiser who is not connected to the builder
• Obtain multiple bids on building contracts and sub-contracts
• Finance through the builder at low rates
• Agree to terms that pay only in accordance with project completion
• Try to get a transition loan that converts to a mortgage after completion
• Establish an escrow account early for construction-mortgage conversion costs

Where to get a construction loan

Construction loans can be obtained from either builders, developers or financial institutions. Not all banks offer construction loans so locating a financial institution that offers construction loans is an essential step in acquiring one. Shopping around for construction loan lenders that have a variety of construction loan products and services and low rates and mortgage lending may be advantageous as a full service construction loan lender could save a lot of headaches associated with obtaining the loan.

Advantages and disadvantages of construction loans

As with many ventures, there are advantages and disadvantages to construction loans. The dream of building a self-designed property can be a nice one and may pay off in the end, but there are many areas where complications can arise and costs can surpass expectations. Being aware of the advantages and disadvantages of construction loans can be helpful.

Advantages:

• Cost of building may be cheaper than purchasing new
• Design specifications can be customized
• Equity may be built into property during or soon after construction
• Location of home can be chosen in accordance with land zoning
• Sales tax on building materials is deductible on IRS Form 1040, Schedule A
• Interest on the construction loan may also be tax deductible

Disadvantages:

• Builder may file for bankruptcy
• Monthly payments can be higher
• More documentation is required than a mortgage
• Annual Percentage Rates can average higher than mortgages
• Strong collaboration is needed to facilitate the building
• A land loan may also be required
• Income may vanish leading to delinquency

Summary

Construction loans are used to finance construction projects such as homes, warehouses, and office space. These types of loans may be converted into permanent loans upon completion of construction and if done, a new application procedure can be bypassed. There are many details involved with construction and consequently, when applying for a construction loan from a bank, the bank will want to know a lot of these details. Some builders offer financing themselves. This simplifies the process but may or may not cost more. As with many things, the pros and cons of construction loans might be best considered carefully and patiently.

Sources:

1. http://www.bankrate.com/brm/news/mtg/20020515c.asp
2. http://www.ownerbuilder.com/ConstructionLoan.shtml
3. http://www.ent.com/rates/ratecategoryoverview.asp?id=14
4. http://www.myownhomebuilder.com/tax-benefits-building-your-own-home/
5. http://www.bankrate.com/brm/news/mtg/20020515h.asp

Mechanics of successfully implementing a 1031 real estate exchange

A 1031 Property exchange is a legal tax avoidance vehicle used in real estate investing. The number 1031 originates in the U.S. Internal Revenue Service (IRS) tax code from which it derives. According to this IRS tax code, the 1031 tax deferment may be applied when an investment property is sold and exchanged for a similar type of property.

The process for facilitating the exchange is conceptually fairly straightforward, however the process may not be. Several parties, financial instruments and events must occur before the exchange takes place. What's more in most probability the 1031 exchange will include at least a few of the following: Contracts, escrow accounts, negotiations, real estate agents/brokers, title companies, mortgage banks, accountant(s( and/or lawyer(s).

The step by step process

1. The property must be held/owned for less than 2 years and the exchange must take place within 180 days of releasing the first property.

2. Locate and hire a financial intermediary ex- mortgage bank with a real estate services division and/or execute the exchange through an Escrow account transfer

3. Determine the type of 1031 transfer. For example: Simultaneous exchange or delayed exchange.

4. If simultaneous and using an investment intermediary, the intermediary acquires both properties through an escrow account and exchanges them to the parties involved.

5. If a delayed exchange, the property is sold, however the sellers proceeds are held by the escrow until a new property is located. A replacement property must be found before 180 days and identified as such be the former seller.

6. An exchange contract must be created and agreed upon by all parties and the exchange takes place.

Properties invested in outside of the United States do not qualify for this tax break and unless a subsequent exchange occurs following the first exchange, tax may be incurred on the sale of the exchange property when the latter property is sold.

Delayed 1031 exchanges

In the instance of a delayed 1031 real estate exchange, the property investor first sells a home to a buyer with the intention of trading the property at a later date. This later date is usually either under 45 or 180 days.

During the transfer period the property's value is held through an escrow account until an exchange property is located. When a property is located, a written document informing the escrow manager must be filed. The process for buying the second property then begins which may include the several parties and financial instruments mentioned above.

Additional tips to consider

• Excess money acquired through or from factors relating to the exchange but not included in the exchange is subject to taxation.

• More than two properties may be involved in the exchange

• The exchanged investment property must adhere to the same ownership criteria as the original investment property Ex if held in joint tenancy, the newly exchanged property must also be held in joint tenancy by the same owners to qualify.

• An exchange property can be acquired before the original property is sold i.e. reverse 1031 exchange. While it is possible for an experienced and knowledgeable property investor to facilitate this process with as few collaborators as possible, it is probably advisable to utilize at least a real estate broker for their know how and experience in the 1031 process.

The tax benefits alone could pay for the Realtor's commission and save a lot of headache regarding contracts, locating suitable properties, setting up escrows, title searches etc. 1031 real estate exchanges involves specific tax code provisos. So it may be helpful to investigate the legal specifics and requirements of the tax code before initiating the exchange.

Understanding the loan amortization schedule

A loan amortization schedule is a repayment plan that is calculated before repayment of a loan begins. Typically, amortization schedules are used for fixed interest long-term loans such as mortgages and are recorded on spreadsheet using interest rate calculation software or hand calculation.

The information included on an amortization schedule often consists of columns and rows that include payment dates or periods, declining balance amounts, interest rate and payment amounts. Amortization schedules can either be non-compounded or compounded although the latter is the more likely to be used by various financial institutions.

Non-compounded amortization schedules

A non-compounded amortization schedule is calculated by dividing a total loan amount by a pre-determined repayment plan with or without interest. For example, a no interest loan such as a medical deductible may be broken down into standard fixed payments or perhaps in some cases with graduated i.e. increasing payments.

Standard payments would divide the loan balance equally by the number of payments whereas graduated payments would increase by a fixed amount thereby gradually becoming larger. Those payments are then listed side by side on the amortization schedule with declining balances and payment dates or periods.

A non-compounded amortization schedule with interest is calculated without subtracting periodic interest paid to a loan balance. Rather, the interest on the loan, if any, is calculated one time and then divided among the remaining payments. For example, a loan in the amount of $167,000.52 at an interest rate of 5.75% would have an interest payment of $9602.53.

Since the interest is not being compounded over time, the interest may be divided equally or unequally by the length of the loan depending on the terms of the loan. So if the loan terms are for 15 years, with monthly payments the interest amount will be $53.35 per month. This type of amortization is more cost effective and harder to acquire than a compounded amortization schedule because the total amount of interest is front end rather than continual i.e. the total interest is calculated once rather than 180 times as is the case in compounding.

How reverse compounded amortization schedules are calculated

A more common type of amortization schedule begins with the starting loan balance and an interest rate to determine first payment and then reverse compounds i.e. the subsequent payments will be lower because the principal balance on which interest is calculated is lower.

For example, with a starting balance of $167,000.52 at a fixed interest rate of 5.75% the annualized interest will be $9602.53. If the loan repayment terms are schedule to be annual then $9602.53 will be due in the first year. However, if the payments are monthly, which is more common, the first payment will be determined by dividing $9602.53 by 12 since there are 12 months in a year. So, for a monthly schedule, the first payment due will be $800.21.

Since amortization schedules use reverse compounding, the remainder of the payments will not be $800.21 as would be the case with an amortization schedule that does not compound. In the case of reverse compounding the first payment of $800.21 is deducted from the principal balance of $167,000.52 to make the new balance $166,200,31. Then the second month's interest is calculated on the new balance i.e. 5.75% of $166,200,31 for a second payment of $796.38 or $9556.62/12 using annualized interest. This method of amortization will end up costing more because the interest is calculated for each month of repayment rather than one time only.

Amortization schedules serve multiple purposes. Those purposes include 1) Assist financial institutions and borrowers in negotiating or calculating repayment terms 2) Provide a digital and/or paper record of agreement and 3) Allow financial institutions to generate added revenue using reverse compounding.

Amortization schedules usually have columns in which payment periods or dates are in one column, declining balance is in a second column, interest calculated is in another column and then the new balance is in the last column and carried forward to the next line of the declining balance column.

Amortization is often calculated using reverse compounding which allows a greater amount of interest to be charged to the lenders. When this method of amortization is used it is to the borrowers advantage to pay the loan off in as short a term as possible.

How to Choose a Mortgage, Apply and get a Mortgage

One of the most important things to do before applying for a mortgage is to research the different types of mortgages and mortgage lenders. The reason this research is so important is because there are many lenders who simply don't care how much money goes out of the borrowers pocket and into the lenders pocket.

Mortgages are more often than not about bottom lines and profit for mortgage lenders, and to a lesser extent economic development. There are three considerations that can be considered when determining which type of mortgage to apply for. Those considerations are provided below as an informational source to aid the mortgage application decision.

Types of mortgages

• Interest Only Mortgages

Interest only mortgages pay nothing on the base loan of a mortgage making most if not all of a monthly mortgage payment apply to that interest as determined by the amortization schedule. The advantage of this type of mortgage is the monthly payment can be smaller, but the disadvantage is that it will be more difficult to build equity in the home. The reason for this is equity is built from home appreciation in addition to capital investment i.e. buying the value of the home by paying off the mortgage.

• Adjustable Rate Mortgages (ARM):

Adjustable rate mortgages have a lot to do with the housing crisis of the mid to late 2000's. Many of these mortgages were written for home buyers who did not completely understand the implications of the mortgage terms or who were overly optimistic about their ability to pay their mortgages at a later point in time.

The reasons adjustable interest rate mortgages are able to cause so much default and foreclosure is because when interest rates rise, so do the mortgage amounts. For example, a $100, 000.00 ARM with an initial interest rate of 5% would cost $416.00 without insurance, property tax and capital payments built in.

If an ARM was not an interest only mortgage, the actual mortgage amount would be somewhere between $500-$600/month with capital investment and other costs. For each 1% rise in interest rates that mortgage goes up by $100.00 per month. Depending on the size of the mortgage a 1% increase may or may not lead to a dramatic increase in payment, however for increases more than 1% on smaller mortgages and larger mortgages with increases of 1%, the annual increase can end up being in the thousands of dollars.

• Fixed Rate Mortgage

Fixed rate mortgages are as the name implies, mortgages with interest rates that do not change for the life of the loan. Whether it be a 15, 20 or 30 year mortgage, the interest rate will be steady for this kind of loan. An advantage of fixed rate mortgages is the borrower does not have to fear a dramatic rise monthly payments when interest rates change. However, if interest rates drop, the fixed rate mortgage holder is left with a monthly payment that could have been lower with an adjustable rate interest only mortgage.

• Prime, Alt-A, and Sub-Prime Mortgages

A few other categories of loans are the credit ratings and income reporting requirements of the borrowers. Generally, borrowers who have very good credit ratings and solid earnings statements and asset capital are considered to be prime mortgage borrowers. Borrowers who have good credit ratings but do not fully document income when applying for mortgages are classified as Alt-A mortgages. The last and riskiest category known as Sub-prime, are for those lenders with poor credit ratings and/or limited income and asset leverage.

Types of lenders

Lenders are very important in the mortgage process as they determine whether or not funds will be available in time to make a successful bid on a home. Many factors go into the lending process which can take as long as 2 months in some cases. Those factors include loan officer know how and experience, research of lenders, financial soundness of the lender, lender requirements and bureaucracy, and overall process functionality and integration as loans may start off with a loan officer but end up with an accountant for approval. Making sure the application gets from start to finish can sometimes take a little prodding.

• Online Banks

When applying for a mortgage online, banks will offer what they call a "pre-qualification". A pre-qualification is essentially a statement of willingness to consider financing based on a credit check. Pre-qualifications are not the same as pre-approvals which are bank guarantee funds will be supplied to the lender in the form of a loan.

There is a little harm in obtaining one or two pre-qualifications, but too many may negatively affect one's credit score so it is wise to only request pre-qualification from banks one is seriously considering borrowing from. The more creditable and financially sound the online bank, the wiser the choice may be. Incentives for using online banks may include but not be limited to lower interest rates and settlement costs.

• Federally backed banks

Banks such as Fannie Mae and Freddie Mac are not managed by the Government but are linked to the Government through loan subsidization programs. These programs have strict lending requirements but are fairly secure and cost effective if a mortgage borrower qualifies for such financing. Often, these types of loans are reserved for first time home buyers and/or home buyers with income levels below a certain dollar denomination.

• Private and national banks

Other brick and mortar lenders include private and public national banks. Some of these banks have stellar reputations and financial security and offer competitive rates and a variety of mortgage loan products. An advantage with such banks is the fact one can access a loan officer who will be quite important in determining how the loan gets processed and answering any questions regarding the application procedure.

It is important to research the differing incentives, interest rates and benefits of private and public lenders because they can vary considerably. Also, since the value of mortgages can become quite large, being frugal with percentage points and percentage point reduction programs can end up costing thousands of dollars in the long run.

Paperwork requirements

Paper work requirements vary with the standards and requirements of the mortgage lender. Paperwork may include tax returns from the last 5 years, complete documentation of assets and liabilities, pay stubs, credit reports from all borrowers, loan education and testing materials, application forms, disclosures, and any other relevant paperwork such as proof of marriage, prior bankruptcy rulings if any, and all debts owed. Generally speaking, all lenders will require some income, credit, and asset reporting with the application.

Determining which type of mortgage to apply for can take and should take a little time in order to research the right lender, type of mortgage, convenience, cost effectiveness, accessibility of loan officers and accountants, practicality etc. Feeling completely confident with a mortgage is important in the home buying process because there are so many variables involved of which the mortgage is one significantly important part. The information provided above can be used as a supplemental reference and/or starting point when searching for a mortgage.