Category Archives: home loan

What is Mortgage Lending?

Posted on May 16, 2012 by admin

Mortgage lending is the practice of giving people loans to buy a home. Many different types of financial institutions are engaged in the process of mortgage lending, including banks and credit unions. How Does Mortgage Lending Work When a bank decides to loan someone money for a mortgage, they have an underwriting process that the loan goes through in order to make sure that the loan is a good risk and that the borrower is likely to pay it back. Based on this process, a loan is either approved and granted or denied. When a loan is approved, the mortgage lender has a few different options. The lender can keep it “in-house” or on their books. This means you will keep making payments to the mortgage lender that you originally borrowed the money from. They will make money in the form of the interest that they charged to you and the loan will be an investment that they carry. The mortgage lender also has the option of selling the investment on the secondary mortgage market to investors. This means your home loan can be resold to a different mortgage company. When this occurs, you will often need to make payments to someone different than the original bank that lend you the money. Sometimes, this happens immediately after you get the loan, while in other cases, you may be notified later on that your mortgage servicer has switched. When a bank resells a loan, they make money through the sale of that loan rather than through your interest payments. The investors who bought the loan make money from your interest payments.  The actual process of who the loan is resold to and how it is resold can be complicated, as mortgage products are sometimes packaged and a bank sells a whole bunch of different mortgages at different risk levels at once. As a consumer borrower, the only thing that is important to be aware of is that your loan might be sold and you’ll need to send your payments to someone else (all other terms of your loan do remain the same though, even if it is sold). What about FHA Mortgages? One common misconception that people have is that the government actually gives out mortgages through the Department of Housing and Urban Development (HUD). You may have heard of FHA or VA loans and assumed that this meant the government was a mortgage lender. In reality, however, the FHA or VA just guarantees loans made by other lenders if those loans fall within specific guidelines and meet specific criteria. This means you will go to a regular bank or mortgage lender and you will get your FHA loan through them. The FHA will provide a guarantee to the lender that if you do not pay back the loan, the losses will be covered. Who is Engaged in Mortgage Lending? Any number of financial institutions are engaged in mortgage lending. Most people get their mortgage loan through banks or credit unions. However, it is also possible to get owner financing and get your mortgage right from the person who sells you the property, or to find non-conventional lenders willing to carry a mortgage loan. There are also financial professionals called mortgage brokers that help in the mortgage lending process. These professionals have relationships with a number of different banks and shop around to find a loan that works for you. There is a charge for using a mortgage broker so it may not be worthwhile to pay this cost unless you have a unique situation that might make finding a mortgage lender difficult. Continue reading →

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What is a Mortgage Rate?

Posted on May 15, 2012 by admin

A mortgage rate is the amount of interest that your lender charges you when you take a home loan. Interest is essentially the cost of borrowing money. A lender is not going to give you cash for free but is instead going to charge you a percentage of the total amount borrowed in interest. The mortgage rate defines what that percentage is. How is a Mortgage Rate Determined? A mortgage rate is determined by both your finances and the home you are buying, as well as by market conditions at the time when you purchase the home.  Mortgage rates vary across the country and from lender to lender. It pays to shop around to get a competitive rate.  It is easy to check out rates by lenders in your area . The reason mortgage rates are similar is that they are determined by market factors or prevailing economic conditions.  For instance: Mortgage money generally comes from investors who are interested in earning a return on their investment (the return they earn is equal to the interest you pay). Mortgages thus have to be attractive to investors as compared with other investments such as Treasury Bonds. The 10-year treasury yield (amount paid by treasury bonds issued by the government) can thus affect mortgage rates. The Federal Reserve (the central bank in the U.S.) affects interest rates by controlling the money supply. When more money is available, interest rates go down because there is more money to lend. When less money is available, interest rates go up because the market is tighter. Inflation: Inflation is an upward change in the prices of items across the economy, affecting purchasing power (for instance, when milk cost $1.00 last year and $1.10 this year, your purchasing power is affected and your money is essentially worth less). When there is high inflation (your money is quickly becoming worth less), mortgage lenders charge higher interest to make up for the fact that the money they have is less valuable. Supply and demand: When the economy is going badly, unemployment is high and consumer confidence is low, fewer people are going to want mortgages. This drives mortgage rates down since the demand is low. When housing prices are increasing rapidly and the economy is great, there is more demand for mortgages and the rates might go up because of more demand. Because of all of these external factors affecting mortgage rates, many people try to time the market and buy when rates are at their lowest. This can be challenging and is not necessarily the best way to decide when to buy a house unless you are an experienced investor. Instead, you should focus on whether the time is right for you and your family and on whether you can truly afford the house at the current market interest rates. Other Factors Affecting Mortgage Rates While market factors play a big role in setting general mortgage rates, some of the things that you do will also affect your particular mortgage rate. For instance: Your Credit Affects Your Mortgage Rate Having good credit. allows you to qualify for the lowest rates while having bad credit can make it difficult to get a loan or can result in a higher mortgage rate because lenders will see you as a riskier investment for which they want a higher return for taking a chance. Buying a home that is very expensive can result in a higher interest rate. Loans above $417,000 are considered “jumbo” or “non-conforming.” Banks usually don’t keep loans in house but instead resell them. The two major purchases of mortgage loans are Fannie Mae and Freddie Mac, but they will only cover or purchase loans up to the $417,000 “conforming” amount (in certain areas of the country, this amount is higher to account for higher housing prices). A jumbo loan comes with a higher mortgage rate since it is more difficult for the bank to sell the loan if it needs to. The type of mortgage you choose affects rates as well. A thirty-year fixed rate mortgage will have the same mortgage rate over the life of the loan. This gives investors a guarantee of their return and lets you know what you will be paying. Because the loan is held for a long time (30 years), the interest rate is a little higher than a 15-year fixed rate mortgage that is paid back in half the time. The higher rate compensates investors for inflation and ensures they make enough money to make the loan worth their while. An adjustable rate mortgage, on the other hand, typically has the lowest interest rate initially since it is a teaser rate designed to get you to take the mortgage and buy a house. However, this rate can adjust upward over time as it is typically only fixed for a designated number of years before it begins to adjust based on some set formula. Getting a Mortgage As you shop for a mortgage, it is important to compare mortgage rates. The higher the rate, the more you will pay in interest, the higher your monthly payments will be and the more you will pay over the life of your loan. Continue reading →

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How do I Get a Home Mortgage Today?

Posted on May 13, 2012 by admin

A home mortgage, also called a home loan, is a loan to pay a house, condo, apartment or other property. A home mortgage is very different from other types of loans because it is secured (the house is collateral or an asset that the lender can take if you do not pay). It is also a unique loan because you pay it back over a long period of time (sometimes as long as 30 years) and because it has a lower interest rate than most other types of debt (the interest is also tax deductible). Getting a home mortgage is typically essential to buying a house since few people can afford to pay cash for a home. A home loan can also be considered to be “good debt,” since you are using the money borrowed to buy an asset that (ideally) will go up over time. While getting a home loan can be essential and a smart financial move, many people are not sure how to go about getting a home loan. The First Step to Getting a Home Loan The first step to getting a home loan is to make sure you are ready to qualify for one. This means checking your credit to make sure you have a decent or good credit score. If you don’t, you might not qualify for a loan or, if you do, the interest rate might be very high. You will also need to have been at your job for at least a year (or two years if you are self employed) and you will need to make enough money to easily afford the mortgage payments along with payments for all of your other debt (mortgage lenders have a specific “debt-to-income” guideline, which means they will not let you money if your total debt payments exceed a certain percent of your income). Finally, you will need to have some cash set aside, since most mortgage lenders will not allow you to get a home loan unless you can pay for at least 20 percent of the cost of the property you are buying. This means if you are buying a house worth $100,000, you’d need to have $20,000 and the bank would lend you $80,000. Pre-Approval If you believe you are ready to qualify for a home loan based on your income, credit and cash savings, it is time to get pre-approved for a loan. This means you get a lender to look at your information and to decide how much they are willing to lend. You should do this before you start house hunting to make sure you are looking at homes in your price range. A pre-approval is not a guarantee of a loan, but it is a good indicator that the lender will provide you with a mortgage for the amount you have been preapproved for as long as an in-depth review of your finances shows you to be as qualified as the preapproval process did. You can get a preapproval from a number of different lenders. Banks and credit unions both offer mortgage loans. You can also work with a professional called a mortgage broker who helps you to find a loan, but there is a fee to do that. The Home Loan Once you have found a home and made an offer (contingent on getting financing), you will go through the process of officially getting your loan. Here, a more detailed look will be taken at your finances. The bank will also take a look at the home you are buying to make sure that it is a safe investment for them to give you a mortgage. The key to this part of the process is that the bank is going to want to do an appraisal on the home. This gives them an idea of what the home is actually worth- which may not be the same as what you paid. The bank will have a certified appraiser look at your property and at comparable properties to see what the property is worth. This will determine how much the bank will lend to you, as they will lend only 80 percent of the appraised value. If the home appraises for less than you are going to pay, you will have to come up with the additional cash. Settlement Once the bank has appraised the home and reviewed your credit information to determine you are able to qualify, you will be approved for the home mortgage. The last step is settlement. At settlement, you’ll pay the closing costs (the cost for the appraisal, the home loan origination fee and any other costs), and you will sign the official mortgage paperwork. You will be given details about your costs and payments. The money will be distributed to the seller and you will have your home loan. Continue reading →

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How Do I Estimate a Mortgage Payment?

Posted on May 11, 2012 by admin

Your mortgage payment is the amount of money you have to pay each month to the lender who issued your home loan. It is important to know what your monthly mortgage payment will be and to make sure that you are comfortable paying that amount before you buy a home so you can avoid foreclosure. Estimating a Mortgage Payment There are several different costs that go into a mortgage payment. Two of the costs you will always pay are a payment towards the principle and a payment towards the interest. The principle is the original amount that you borrow- for example, if you borrow $100,000, then this is the principle you owe. The interest is the amount that you pay for the cost of borrowing the money. Each month, you have to pay the interest that has accrued since your last payment. You also have to pay a certain amount of money intended to make the principle (that original $100,000 balance) decline. The amount of the principle that you have to pay is determined based on how long your mortgage term is. For instance, if you borrow $100,000 and take a 30 year mortgage, you will need to pay enough towards the principle each month that the $100,000 will be paid off in full over the course of 30 years. The shorter your mortgage term and the higher your interest rate, the higher your monthly payments will be. Other Costs In addition to the principle and the interest, there are also other costs associated with housing. These include property taxes and insurance. Often, the mortgage lender will collect money each month from you that is intended to pay the property taxes and the insurance. This money will be “escrowed” or put into a special account until taxes and the insurance bill need to be paid. The lender will then pay this amount. Because these are often included in a mortgage, you may wish to factor these costs in as well when estimating your mortgage payment. Your lender will factor these costs in when determining whether you make enough money to qualify for your mortgage and make the payments. This is where the acronym PITI comes from.  PITI refers to principle, interest, taxes and insurance. It is an acronym you will hear mortgage lenders use a lot. Calculating Payments Figuring out how much you are going to pay in principle and in interest can be complex. As such, the easiest way to estimate your mortgage payments is to simply use an online calculator to do so. There are numerous calculators available on the web, including Primerates or Real Estate ABC , that allows you to take account of the principle, interest, taxes and insurance. To use the calculator: Input the term of your mortgage. If you aren’t sure, then use a 30-year fixed since this is the safest and most common type of mortgage. Input the interest rate. If you don’t already have an interest rate from your lender, use the prevailing market rates available on Wells Fargo’s website. Input the loan amount. This should be equal to 80 percent of the cost of the home you are buying since most banks won’t lend more than 80 percent. Input the annual tax amount. You should be able to find this on the real estate listing for the home you are considering buying, or by doing a public records search for your area. Input the amount you will pay for insurance. An insurance agent can help you to determine this, or you can guess at a rough estimate. Once you have input all of the information, hit “Calculate now.” Your estimated monthly mortgage payment for PITI will display in the boxes below, giving you a detailed picture of how much you will have to spend each month for your mortgage costs. Continue reading →

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Mortgage Applications Increase Over the Previous Week

Posted on May 9, 2012 by admin

The Mortgage Bankers Association’s (MBA ) Weekly Mortgage Applications Survey , for the week ending May 4, 2012,   calculated a 1 .7 percent  (seasonally unadjusted basis) increase in the  Market Composite Index in contrast to the previous week. The seasonally adjusted figure increased 2.0 percent in week-to-week comparisons. Applications in the convention segment of the market for home loans and remortgage refinance indices made of the increase in Market Composite. The MBAs Refinance Index for conventional mortgages rose 1.8 percent. The government component of the Refinance Index dropped 2.3 percent. Overall, the Refinance Index gained 1.3 percent over the previous week. On a seasonally adjusted basis, the Purchase Index rose 3.4% compared to the prior week. The conventional purchase Index by 5.4 percent (seasonally adjusted). MBA reports an unadjusted Purchase Index increase of 3.8 percent, which fell 0.4 percent below the figure recorded last week. Other Mortgage Activity Metrics The seasonally adjusted Market Composite Index four week moving average showed a gain of 1.13 percent. The seasonally adjusted Purchase Index declined 0.82 percent, but the Refinance Index gained 1.81 percent. The volume of  requests for mortgage refinancing declined to 72.1 percent of all mortgage applications submitted. The previous week, mortgage refinances comprised 72.6 percent of total applications. Refinance applications have fallen to the lowest level since the week ending April 6, 2012. Applications for government-insured financing declined to 35.8 percent compared to 38 percent a week ago. The government share of purchase applications dropped to its lowest point since March 9, 2009. This occurrence might have a direct association with the recent increase in FHA fees in early April, which motivated many FHA homebuyers to finance their loans before the increases went into effect. The Mortgage Bankers Association reports the average contract rate for a 30-year fixed rate mortgage, loan of  $417,500 or less, dipped to 4.01 percent compared to 4.05 last week – the lowest  rate  ever for the MBA survey. FHA loans increased from 3.80 to 3.81 percent. Points on FHA-insured loans, which include the loan origination fee, declined from 0.50 to 0.45 for mortgages with loan-to-value ratios (LTVs) of 80 percent. The 15-year fixed rate mortgage for loans with LTV of 80 percent dropped to a historic low for the MBA survey, from 3.29 percent to 3.31 percent. The average contract interest rates for 5 ½ adjustable rate mortgages (ARMs) decreased from 2.87 percent to 2.83 percent.  Mortgage Application Survey Indices This week’s MBA Mortgage Applications survey provides another sliver of positive news concerning the state of the U.S. housing market. When people feel confident enough to buy homes, it indicates their optimism about the state of the economy and their personal financial future. The MBA has conducted the survey since 1990. The Market Composite Index measures a variety of mortgage and refinances application types, including the following categories: Conventional – conforming, jumbo,  prime and  non prime Government – FHA, VA and RHS Fixed-rate Adjustable-rate The MBA survey measures mortgage applications and refinance applications for 15 indices – on a seasonal adjusted and non-adjusted basis. The survey does not account for seasonal factor in data, but includes holidays. Continue reading →

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Saving for Retirement – 30 Years to Go

Posted on May 9, 2012 by admin

If you still have three decades to go before you stop working, then it may be tempting to put off saving for retirement for a while yet, especially since you have so many other expenses in your life right now, like a mortgage payment, car payments, childcare expenses and college education funding for your kids. And how you save for retirement at this point will depend to some extent on how much you were able to save in your twenties . If you were fortunate (or disciplined) enough to pack away $20,000 or more into your retirement savings, then you may be able to get away with easing off on your retirement contributions for a while in order to concentrate on other things. But if you have not yet started to save for retirement, then now is the time to do so. However, saving money in IRAs and employer plans may not be all you can do to prepare for your nonworking years. Start with Your Employer If your employer offers a retirement plan of any kind like a 401(k) plan or 403(b) plan, then this is probably a good place to start your retirement plan if you haven’t already, especially if they offer any kind of matching contributions. Be sure to contribute to the Roth portion of the plan if this is available, because it will allow you to take tax-free distributions from your account at retirement (although any matching contributions will still be taxable because they can only be made on a pretax basis). Otherwise you should open a Roth IRA with a mutual fund company or investment firm that will allow you to invest in stocks or stock mutual funds (a much better alternative if you’re not a sophisticated investor). But your money needs to be growing faster than inflation over time, and equities and real estate are the only two asset classes that have consistently outpaced inflation over the decades. You may want to allocate a small portion of your portfolio into bonds or cash just for the sake of diversification, but your primary focus in your retirement savings at this point should still be growth. Look at Your Debt Retirees who don’t have to make a mortgage payment can live on a great deal less than those who do , especially if they have their mortgages completely paid off before they stop working. It may be wise to refinance to a 15 year mortgage, especially if interest rates are low, as this will save you thousands of dollars in interest payments that you can use instead to pay for education or retirement expenses. For example, if you refinance a $150,000 mortgage from a 30-year loan at 6% to a 15-year loan at 4%, then you have just saved yourself nearly $125,000 in interest over the full life of the loan (obviously, the amount saved will probably be somewhat less depending upon the amount of your mortgage that you have already paid off). If you can’t afford the payment for a shorter loan, consider refinancing for the same term and then do a biweekly mortgage, where you make 26 half-payments per year. This will shave about 8 years off of a 30-year note and about 3 ½ years off of a 15-year note. Those who do this now may even be able to pay off their home loans by the time their kids get to college. Retirement of other debt such as student loan payments and car loans can also be wise moves, because this will free up cash flow for you in the future with no investment risk. For more information on saving for retirement in your 30s, consult your financial advisor. Continue reading →

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Should You Pay Off Your Mortgage?

Posted on April 24, 2012 by admin

For many Americans, there is no greater financial security than having their homes completely paid for. And while this is obviously a worthwhile financial goal in a general sense, there are times when paying off your mortgage may not be a wise move . There are several factors that will determine whether or not you should do this. Taxes Mortgage interest is one of the major deductions listed on Schedule A of the 1040. This expense is often what allows taxpayers to itemize deductions on their returns, and thus claim a litany of other deductions as well, such as charitable contributions, property taxes and other miscellaneous expenses. If you itemize your deductions now, consult your tax advisor to see what impact paying off your mortgage will have on your taxes. Also be certain not to take a distribution from a traditional retirement plan or IRA to pay off your mortgage, because the withdrawal will be counted as a taxable distribution. This will either greatly diminish or completely eliminate the benefit of paying off your loan. Liquidity If you have little in liquid savings, then you’re probably smarter to put your cash into a money market fund than to pay off your home. Everyone should ideally have at least three to six months’ worth of cash on hand in the bank for emergencies, so it’s not usually a good idea to forfeit that just to retire your mortgage a little sooner. Investment Return Paying off your mortgage is never a good idea if the value of your house has declined in recent years and you don’t plan on staying there for a long time to come. If you’re going to sell your house in the next few years, then you’ll need your cash to facilitate the purchase of your new home. However, when you pay off your mortgage, you are essentially “earning” the rate of interest that they are charging you on the loan, because you’re guaranteed not to have to pay that rate of interest anymore . This can improve your cash flow substantially, especially if you are earning much less on your savings that you’re paying on your mortgage. If your home loan is charging 6% and you’re getting 1% at the bank, then paying off your home loan will allow you to escape the spread on your respective rates. And paying off your loan can be a good idea in general if the value of your home is rising.  For more information on whether you should pay off your mortgage, consult your financial advisor. Continue reading →

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Tax Advantages of Home Ownership – More than the Mortgage

Posted on April 17, 2012 by admin

From the time that our nation was founded, owning your own home has been considered the American Dream. Congress has given taxpayers several different tax credits and deductions that have effectively combined to make home ownership one of the most tax-advantaged investments in America. The tax breaks available to homeowners include the following: Home mortgage interest deduction – Every year, homeowners who have mortgages on their homes receive a Form 1098 that breaks down the amount of deductible interest that they paid on their home loans and equity lines of credit for the year. This amount is reportable on Schedule A of the 1040, and many homeowners are able to itemize their deductions because of this expense. The only limitation is that interest is only deductible for the first million dollars’ worth of home loans. Real estate tax deduction – This expense must be paid by all homeowners, regardless of whether or not they have a mortgage on their property. Most homeowners can now look up their property taxes online at their state or county treasurer’s website. This expense is also reportable on Schedule A as an itemized deduction. Tax credits – Congress has authorized various types of tax credits over the years, such as the Home Buyers Tax Credit, which gave taxpayers a whopping $8,000 tax credit for those who purchased their first home. The Energy Saver’s Tax Credit also allowed homeowners to take a tax credit for certain types of energy-efficient upgrades to their homes. Unfortunately, most of these credits have expired at this point. Tax-free capital gain on sale of home – This is perhaps the largest tax break afforded to homeowners. It is, in fact, one of the largest tax breaks given to individuals in the tax code, and effectively renders the price appreciation of your home as a tax-free benefit in most cases. Homeowners who file as Single or Head of Household are not required to report the first $250,000 of gain on the sale of their home. Married couples filing jointly can exempt twice that amount. This exemption is an expansion on previous legislation that allowed homeowners aged 55 or above to claim a one-time exclusion of $125,000 on the sale of their homes as long as certain conditions were met. But most of those restrictions have become obsolete. Homeowners of any age can now exclude all gains on any sale of their primary residence up to the aforementioned limits. Furthermore, this exclusion can be used multiple times, as long as it isn’t used more than once every two years. Homeowners must also have used the house they are claiming the exclusion for as their primary residence for at least two of the previous five years before the sale date. This is just a general breakdown of the tax advantages that are available to homeowners and is by no means comprehensive and should not be taken as tax advice. For more information on the tax rules of home ownership, visit the IRS website at www.irs.gov or consult your real estate agent or financial adviser. Continue reading →

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A Construction Loan Can Help Finance the Construction of Your Dream Home

Posted on February 16, 2012 by admin

When you want to build a home instead of buying a home, the process of obtaining financing is much more complicated.  The challenge arises because the home that is supposed to be collateral for the loan is not yet constructed.  If the home is going to cost $200,000 to build, the bank will need to lend you this money before there is actually a $200,000 home constructed on the property.  If the completed home is not worth the $200,000 that was lent to build it, then the bank will be left with insufficient collateral to secure the money that was lent. Because of the added risk to mortgage lenders, not all lenders offer construction financing and there will be more stringent qualifying to obtain a construction loan. The Construction Loan Process To obtain a construction loan, you will be required to have land and a builder or architect selected prior to applying for the financing.  The builder or architect will also have to provide specifications for the home-to-be built so the mortgage lender can appraise the home that is to be completed in order to determine if the home will be sufficient collateral to support the final loan. Consider a person who wants to build a home that will cost $200,000 to build.  The appraiser would review the proposed specifications for the home and compare them to other similarly priced homes to decide if the house would be worth what it cost to build.  If the lender has doubts about whether the home will be worth enough, the home-buyer may not receive the loan or may need to put down a larger amount of money. The minimum amount of money that a homeowner will need to put down in order to obtain a construction loan usually ranges from 20 to 25 percent. The End Loan When you obtain a construction loan, the loan is usually short-term financing that lasts only for the time it takes to build the house.  At the end of this process, the loan then needs to convert to a permanent end loan. To ensure that you are actually able to convert your loan to an end loan, the bank will approve you for the most conservative loan product.  For instance, the bank would approve you for a 30-year fixed rate final mortgage for the total amount you borrowed.  As your home nears completion, you will have your home appraised again and you will complete the approval process for the final mortgage. The Build Process After you have been approved for you construction loan, the builder will usually receive the money to build the house in increments called “draws.”  The builder will be given an initial sum of money in order to begin the build process and will then have draws at periodic increments once milestones in the home build are complete. The builder may receive a portion of the total cost to build once the house has been completely framed, once the drywall is complete, and once the plumbing is done. The schedule of draws is set up at the beginning of the construction loan process and typically you will need to sign off on each draw before the builder receives his money.  The appraiser for your home may also check the progress before each draw is paid out to ensure that things are on track and that the builder is performing the work expected in an adequate manner. At the end of the construction phase, the final amount due to the builder will be paid off by your end loan.  Any extras or overages during the build will also need to be paid at this time in order for the settlement to go through and the home to become yours. Continue reading →

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