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.

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.

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')

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)

Advantages of Home Equity Mortgage Conversion Saver Loans

Home Equity Mortgage Conversion Saver loans, or HEMC Saver loans are a type of reverse mortgage that's advantages are based in structural differences as compared to standard reverse mortgage loans. The primary differences between standard HEMC loans and the HEMC Saver program are the mortgage insurance premium cost structure and the size of the loan. These adjustments to the Home Equity Mortgage Conversion program operated by the government allow for the following possible advantages.

Mortgage Insurance Premium (MIP)

A major advantage of the HEMC Saver is the Mortgage Insurance Premium which is initially 1.9 percent lower than standard HEMC loans which have a MIP of two percent. The reduction in mortgage insurance premium can reduce the up front cost of this reverse mortgage by more than 25 percent over the standard HEMC loan program. However, it is important to note that the remaining 1.9 percent MIP is not  eliminated, but rather spread out on an annual basis.

Improved loan availability

Since HEMC Saver loans are estimated to be 10-18 percent smaller than standard HEMC loans by the Department of Housing and Urban Development, it follows more applicants have a chance of being approved for reverse mortgages with this program in effect. In other words, for those homeowners with home equity and existing mortgage amounts that disqualify them from standard HEMC loans, the possibility of qualifying for a reverse mortgage under the HEMC Saver loan program may still be possible.

Easier to refinance

With the availability of Home Equity Mortgage Conversion Saver loans, the possibility of refinancing standard HEMC loans is also possible at a more affordable upfront cost. This may be advantageous for those homeowners seeking to get more out of their equity via lower cost. For example, if a Standard $200,000 HEMC loan is offered at a rate of 5.5 percent and the homeowner wants to refinance at 4.5 percent, if the full MPI has already been paid on the standard HEMC, then no MPI will be due on the HEMC Saver if the reverse mortgage refinance to an HEMC Saver is approved.

Cash flow budgeting

Another advantage of the Home Equity Mortgage Conversion Saver loan is its flexibility. Since this type of loan has different repayment requirements to traditional mortgages, a smaller loan with lower upfront costs may be an advantage to those borrowers seeking a tax free alternative to a Home Equity Line of Credit (HELOC). In other words, the U.S. Internal Revenue Service may not charge tax on the money received from an HEMC Saver loan. According to a report by the American Association of Retired Persons, the lower cost of HEMC Saver loans combined with a spread out payment structure can make the loan useful for renovations, and for borrowers who do not intend on living in the home for a long time

Sources:
1. http://bit.ly/9Rmehx (Department of Housing and Urban Development)
2. http://bit.ly/djQq8y (HUD HECM Announcement letter)
3. http://bit.ly/9R7b0w (IRS: Taxable and Non-Taxable Income)
4. http://bit.ly/1v1dkw (Federal Citizen Information Center)
5. http://aarp.us/984r21 (American Association of Retired Persons)

Disadvantages of a reverse mortgage

Disadvantages of reverse mortgages exist in addition to the advantages, however the disadvantages aren't always consistently applicable to all mortgagees. Since reverse mortgages are crafty yet worldly-wise financial instruments that may or may not be the best retirement income opportunity for you, a good understanding of them is useful when weighing your financial choices.

Depending on the conditions within the housing market and your personal circumstances a reverse mortgage also has potential disadvantages that may not exist at the time of origination. Specifically, if the income provided by a reverse mortgage is essential, and for some reason you have to leave your home, that income may vanish as a requirement of reverse mortgages is for them to be paid after leaving the home.

Another disadvantage of reverse mortgage is valuation and interest rate risk. Although the two tend to have an inverse relationship,  if the housing market is experiencing slow sales, low construction levels, and high foreclosures the prospect of price appreciation dims and a larger reverse payout reduced. Even if the reverse mortgage is refinanced at a higher amount in the future, most of the costs of the original reverse mortgage are duplicated in the refinance.

The costs of reverse mortgages are also a disadvantage as origination of the loan run into multiple thousands of dollars. According to the Reverse Mortgage Lenders Association (RMLA), the costs of a reverse mortgage include a two percent origination fee for the first $200,000 and one percent thereafter, an additional two percent mortgage insurance fee, closing costs, appraisal fee and loan servicing fees. So for example, a $190,000 reverse mortgage would cost as much as $8,000-$10,000 to originate.

Qualification for reverse mortgages isn't always a shoe in either. Typically a high ratio of equity to debt should be present to qualify for and acquire the most loan from the property and even then the income may not be as advantageous as other financial strategies such as downsizing the home and reinvesting the surplus capital for another type of income stream that isn't from a reverse mortgage loan.

Reverse mortgage terms may not be flexible either. If you haven't paid your property tax, mortgage insurance or don't meet home maintenance requirements the mortgage may be called in. This could pose a significant problem for tenured reverse mortgages with lifetime income streams. In light of this, being fully aware of the terms of the mortgage prior to origination is a good idea.

Lastly, if you are planning on having a large estate for a charitable foundation or any other number of reasons, reverse mortgages might be a disadvantage to you due to their net worth depreciating effect. Serious health problems can also be a disadvantage in reverse mortgages.  For example, if your health requires relocation into a location other than your home, the terms of the mortgage can require the home to be liquidated and reverse mortgage income to expire. If this scenario hasn't been accounted for in advance it could  pose a significant disadvantage to the financial practicality of a reverse mortgage.

Sources:

1. http://bit.ly/dqrKFD (Reverse Mortgage Lenders Association)
2. http://bit.ly/YcRvH  (Federal Trade Commission)
3. http://bit.ly/owKrR  (Department of Housing and Urban Development)
4. http://aarp.us/bJ8Q3K(American Association of Retired Persons)
5. http://bit.ly/d75ktu (Washington State Department of Financial Institutions)

Guide to Home Loans

Home loans come in many sizes, shapes and forms. There are home loans sponsored by various homeowner development programs, second mortgages, home equity loans, 30 year mortgages 30 year with 15 year balloon payment home loans and so on. A useful way to sort through the mortgage origination nexus is to have a plan. Below is a basic sample guide to help get you started through the world of home loans.

Image source: CCO PD

• Affordability

Before even researching a home a good starting point is determining how much you can actually afford each month, and not how much you think you can afford. The formula used by some home lenders is approximately 29 percent of your gross income. For example, if you earn $30,000 pre tax, 29 percent of that is $8,700 which means the maximum amount of home loan you may be approved for is $725 per month. 



• Loans

After deciding how much home loan you can afford a good next step is to research the different loans available. This way, when you start looking for lenders, you might have a better idea about what they're trying to sell you.  As mentioned previously there are many types of home loans and these loans are designed by purpose, cost and time line. For example, an individual who wants to do some restoration work on an existing home may be interested in a specific type of loan called a FHA 203k Rehab loan.
• Lenders

Another step in obtaining a home loan is finding the right lender. Some lenders work with federally chartered mortgage dealers such as Fannie Mae and Freddie Mac to sell home loans sponsored by the Federal Housing Administration. Other lenders may be the home sellers themselves or private banks.  For households with limited incomes, non-profit loan programs sponsored by the Department of Housing and Urban Development (HUD) may also be an option. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) provide helpful tips on how to search for lenders.

• Origination

The origination of a mortgage is the process of obtaining a home loan. This process can be lengthy and challenging. A good way to be prepared for this part of the home loan procedure is to have finances such as credit history, bills, assets and debt well documented and organized. If you have too much debt, or haven't budgeted probably, your home loan may be rejected despite meeting the minimum income requirements. Having a helpful and knowledgeable loan officer, and Realtor can be helpful but many more persons may be involved including accountants, appraisers, inspectors, title searcher, co-signers, and lawyers.

• Costs

Costs are another important aspect of home loans. These costs can be quite high and are sometimes incorporated into the price of the loan. Typically a down-payment is required, along with private mortgage insurance (PMI) if the down-payment isn't 20 percent of the loan value or higher. A good faith estimate should be provided to you before signing for the home. Study the costs included in this estimate in addition to the terms of agreement. Some mortgage contracts may contain caveats such as pre-payment penalties, non-rental clauses, and loan recapture stipulations that may work against you financially in the future.

Sources:

1. http://bit.ly/8d6DPV (Federal Citizens Information Center)
2. http://bit.ly/eUweCM(Department of Housing and Urban Development)

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

How To Calculate How Much You Can Afford on a New Home

Calculating how much you can afford on a new home essentially involves subtracting the total cost of purchasing the home from the total funds available for the new home. If the number is negative, then either too much money is being allocated to other budget allocations, or not enough money exists for the home purchase.

Steps toward calculating affordability

Step 1: Tally costs

The first step in calculating how much new home you can afford is tallying costs. To do this determine all the expenses the home purchase will require including furnishings and remodeling. This will give you an idea of how much the home will really cost as the sale price is just part of the total cost, albeit the larger part in most cases. The use of a mortgage calculator may also be helpful in this step.

Step 2: Reassess

After total costs have been estimated, reassess them to see how they can be reduced and if they are practical. There's a good chance a second review of your costs will reveal the price of convenience and wants, rather than practicality and needs. For example, not all mortgage lenders charge the same fees, and not all homes may need to be remodeled. Shopping around for homes and mortgages can take time, but can also save money.

Step 3: Budget

When a more reasonable cost basis has been estimated or found, you may need to budget those costs so they are affordable. To do this, gather financial statements, bills, and pay-stubs. If it hasn't already been done, create a worksheet that shows what your monthly expenses are, and how much money is left over at the end of the month. Money may need to be reallocated to pay for expenses associated with the new home.

Step 4: Forecast

Property taxes, insurance costs and unforeseen home maintenance expenses are a real probability when calculating the affordability of a new home. For this reason, building in financial redundancy into a new home's cost is a good idea. In other words, make sure there is enough extra money put aside to account for quick repairs and increases in home maintenance costs. Keep records as they may be tax deductible after and if the home is sold.

Costs associated with new home purchases

When calculating how much new home you can afford it is helpful to be aware of just how many extra costs there may be. Expenses may seem to come out of nowhere with a new home, and being prepared for these expenses is a good idea if you want to stay in the home. The following are some of the costs that may be included and that might be avoidable in some cases.

• Purchase method

If a new home is being purchased in cash or with seller financing, the cost structure is likely to be different than if a traditional mortgage is used through a mortgage lender. Cash purchases and seller financing don't require the same Realtor or agent costs if any, and don't have as many fees as with mortgage lenders.

• Origination fees

What mortgage calculators don't really do is calculate the origination and other fees associated with the cost of the new home if a mortgage is used. These fees and expenses can add up to thousands of dollars and include title search, underwriting, application, inspections, appraisals and more.(1)

• Realtors and real estate agents

If using a Realtor or real estate agent, the buyer of the home may foot the bill which is sometimes split between the seller and buyer representatives. This can add an extra 3-6% on the purchase price of the home. Realtors and agents aren't necessarily needed, but the cost can end up saving more costs if they negotiate well and save you from having to put more money into the home after buying it.

• Downpayment and Interest

The downpayment and interest on a home are two of the larger expenses, but far from the only expenses to calculate into the affordability of a new home. At minimum these costs may amount to an upfront cost of an additional 3-5%. For example, a 3% down-payment on a home sold at $100K with an interest rate of 5% would cost $3,000.00 plus the interest on top of the first months payment or $520.72.(3)

• Warranties

Both new and used homes can come with warranties, but those warranties may cost extra and may not always be the best idea. The U.S. Federal Trade Commission (FTC) claims a an arbitrated warranty dispute can cost thousands of dollars.(2) To properly account for this risk, consider the quality of the warranty and the claims history of the warranty provider.

Sources:

1. http://bit.ly/97ivU2 (Federal Reserve)
2. http://bit.ly/aPpL9J (Federal Trade Commission)
3. http://bit.ly/spG6m (Mortgage Calculator)

Determining your mortgage payoff amount

Your mortgage payoff amount can be determined by 1) looking at your mortgage amortization schedule, 2) calling your mortgage lender, and 3) requesting specific loan payoff amounts and dates in writing. The mortgage payoff amount may include outstanding debt plus any interest, fees and escrow taxes owed on a mortgage loan contract.

Some methods for determining mortgage payoff amounts are discussed below. Determining your exact mortgage payoff amount may vary between lenders due to differences in lending policy, amortization formulas, interest rate calculations, billing cycle and fee structure. For this reason online mortgage payoff calculators may not be exact due to other fees, and/or a difference in the way the calculator performs interest calculations. Nevertheless, mortgage calculators are useful for estimating mortgage payoff amount.

The amortization schedule

The amortization schedule is very helpful in determining your mortgage payoff amount because it shows you how much is due after each billing period for the life of the loan. If you don’t have a recent statement but do have a loan amortization schedule that includes a full payment schedule, the early mortgage payoff amount may be viewable on the column stating total remaining balance of the mortgage.

Amortization schedules often have high front end interest payments and non-adjusted periodic payments. In other words, the periodic amount due does not decline alongside the balance of the mortgage, rather, more principal is paid and less interest is paid over time.

Interest can be calculated in more than one way. 1) the total interest can be calculated and divided by the number of payments or 2) the interest can be calculated monthly. The latter leads to a much higher interest due i.e. the shorter the compounding period, the higher the amount due. For example, a $200K mortgage with a 5% interest rate charged once and divided by a 15 year period loan would be a total of $10,000 divided over the life of the loan. However, if the interest is calculated annually, around $10,000 would be closer to the amount due in the first year alone.

How amortization is calculated

Amortization is calculated by 1) taking the total amount of the mortgage due, 2) multiplying that amount by the interest rate due divided by the compounding period ex. monthly 3) adding that interest to the base amount divided by the term of the loan in months and 4) repeating the process for each month.

For example, a $200,000 mortgage over 15 years, paid monthly would be $200K / 30 x 12=$200K / 180=$1,111.11 (Monthly base mortgage amount due). Add to this the monthly interest which for the first month equals, $200K x .05=$10,000 / 12=$833.33 + 1,111.11 = $1944.44.

The process is then repeated with the new starting balance i.e. $200K -$1,111.11= $198,888.89 x .05=$9944.44 / 12 = $828.70 + $1,111.11 = $1,939.81. However, since mortgage payments are often the same every month, the difference in interest will be added to the principal i.e. $1,944.44-$1,939.81= $4.63 + $1,111.11= $1,115.74.

Other useful mortgage payoff items and tools

• Mortgage loan payoff calculator

A mortgage loan payoff calculator may also be of assistance in either getting a rough estimate of how much you owe or will owe on a specific mortgage loan, or on finding the exact amount of no other input variables are needed to determine the exact mortgage payoff amount. These calculators ask for the duration, rate and payment of the mortgage and calculate a payoff amount automatically.

• Lender payoff statement

Mortgage lenders have records of your mortgage amount due, interest accrued, fees, payment history, and escrow. Paying off a mortgage early can involve calculating the interest due to the day and depending on the mortgage terms, calculation of this interest may not follow a standard compounding formula.

It can be helpful to request a payoff document from the lender specifying the amount due, with the date it must be paid by to pay off the mortgage minus any unused collected tax payments. These documents may be called a Mortgage Payoff Letter, Mortgage Payoff Pro Forma, or Mortgage Pre-payment Statement but may also be termed independently by the financial institution. When requesting a payoff letter it might also be useful to refer to these mortgage payoff legal tips.

• Mortgage bills

If your mortgage contract allows early payoff of a mortgage without penalty, or if the mortgage must be paid off the amount owed should be visible on a statement issued by the mortgage company. These bills may show the amount due for a given month so pay off before or after the billing cycle due date may require under or over payment. Statements can also be different depending on the type of mortgage. For example, a variable rate non-reverse mortgage statement.

Mortgage payoff tips

• Calling the mortgage lender to inquire about early payoff is a good idea as they may have a specific procedure for handling mortgage payoffs. Often there is a payoff expiration date, after which the total payoff amount changes.

• If paying by check, a cashiers check may be required. Always have a record of how and where the payment came from and to whom it was paid.

• Amortization schedules also show monthly amounts due so the number on these mortgage documents may only be accurate if the payment is processed the day of the end of the billing cycle.

• Make sure there is no pre-payment penalty or fee in the mortgage contract. If pre-payment is not allowed you may receive credit as illustrated in this pre-payment credit letter.

• Amortization formulas may vary making a pre-determined amortization payoff amount incorrect. Confirming the amount due with the lender can resolve any numerical discrepancies.

• Utilize a Mortgage Payoff Affidavit to legally affirm and document the payoff.

• Paying off the mortgage in person with the mortgage lender may facilitate obtaining better records of the mortgage payoff.

Guide to sub-prime mortgage loans online

Sub-prime mortgages are loans to property buyers who's credit rating is generally below 650 or C or below if a letter rating system is used. Sub-prime loans can become more risky to both borrowers and lenders if they are coupled with a type of loan that will reset to a higher monthly mortgage payment in the future. Sub-prime mortgages can be obtained both at banks and online via online mortgage loan providers.

To obtain a sub-prime mortgage online, one should have a credit rating disqualifying them for an alt-a or prime mortgage, both of which are subject to higher credit score requirements. Sub-prime mortgage lenders can be found on the internet and assist individuals with sub-par credit scores obtain mortgage loans if said applicants pre-qualify. Sub-prime mortgages may include either higher interest fixed loans, interest only mortgages or adjustable rate mortgages.

Benefits of online sub-prime mortgage loans

The benefits of sub-prime mortgages are they allow home-buyers with weak credit an opportunity to build credit where that chance may otherwise have not existed. Sub prime mortgages may also have affordable payments if the mortgage loan amount is small enough and if the interest rate is low enough at the time of acquisition i.e. if the prime rate is low at the time of the loan, this is likely to have a favorable affect on the mortgage rate. Sub-prime mortgages also offer the opportunity of home ownership to individuals who might otherwise not have that chance.

Advantages of online sub-prime mortgage loans

There are several advantages to online sub-prime mortgages. Specifically, the mortgages are easier to attain with bad credit than prime loans. Also, in the case of an online sub-prime mortgage broker, several financial institutions may be searched and compared for lending rates and offers. If the loans are adjustable rate mortgage with short term fixed rates, they may be advantageous if the borrower plans on selling the associated property within that time period.

Disadvantages of online sub-prime mortgage loans

Disadvantages may be realized if the prime rate rises to high or rapidly causing adjustable rates to rise or if the mortgage borrower passes the fixed period of an adjustable rate loan.

Furthermore, interest only sub-prime loans may incur excessively high payments if the mortgage amount is very high since a percentage amount increase in cost is multiplied the size of the loan.

Sub-prime mortgage loans are considered a high lending risk within the banking industry and consequently charge higher interest rates to adjust for that risk. Sub-prime mortgage loan applications can be applied for online using web search engines and financial institutions with online banking facilities.

Within the sub-prime lending market are also varying types of loans such as adjustable rate mortgages, fixed interest rates and interest only loans. Additionally, fees and costs associated with the mortgage may differ between online financial institutions making comparison shopping and research a useful in obtaining the best possible after origination cost.

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.