Cautions and Caveats: Protecting Your Mortgage

Obtaining a mortgage is a major accomplishment, and should be something to celebrate. Unfortunately, however, signing the papers on your home loan doesn’t mean that it will always be smooth sailing down the line. Once the mortgage is set up, there are still a number of different factors that may come into play, which may change the status of your loan. What follows is a list of some of the details of which every borrower should be aware.

What To Know About Escrow

Many first-time homebuyers express some confusion over the role of escrow in their mortgage.  After taking out a home loan, a lender will set up an escrow account for the buyer. A portion of the monthly loan payment will be deposited into this account, and will be used to pay taxes and insurance on the home. This is not mandatory, but can save homeowners the stress of being hit with a large annual tax or insurance payment all at once. Make sure to speak with your lender or loan servicer about escrow, to set up the option that’s best for you.

Effects of Divorce and Ownership Transfer

Many homebuyers are couples, and thus there are often two signatures on all of the loan documents. In fact, in some states, the law requires that both parties living in the home be listed as co-signers on the loan. In the event of a divorce, this can be somewhat of a legal headache; one spouse will need to transfer ownership of the mortgage to another, and this will involve a trip to court. While no one wants to plan for ownership transfer under these circumstances, it is a good idea to at least be aware of the state laws and legal repercussions of a divorce on the status of a mortgage.

Be Aware of Your Rights

Many borrowers are not aware that they have certain rights that will help protect their mortgage and their home in the event of any financial difficulties. For example, there are strict rules that dictate how a lender can and should contact a borrower in the event of a delinquent loan: they are not allowed to call someone at their place of employment, they can only call during certain hours, and they must state the delinquent status in a letter mailed to the borrower. There are a number of other dictates set forth in the loan agreement, so make sure you know how you are protected, just in case.

Avoiding Fraud

There are certain lenders and brokers who may attempt to take advantage of borrowers by inflating the value of a home or pocketing some of the equity. For example, occasionally a seller will work with a broker to flip a house, selling it first to a “set-up” buyer for an inflated price, who will then help sell it for an even higher price to an unsuspecting buyer. When this happens, a borrower may take out a much higher mortgage than necessary. In order to avoid fraudulent deals like this, make sure to work through reputable, licensed brokers and lenders, and avoid buying directly from an independent seller.

It can also be helpful to hire a lawyer to help navigate some of these issues. While this will add to the expense of the mortgage process, it can save hundreds or even thousands of dollars that might have been lost in a misguided, fraudulent, or poorly constructed deal.

Tailoring Your Mortgage: Rate Structures and Repayment Plans

There are a number of things to consider if you are embarking on the process of applying for a mortgage, and one of these is choosing the type of loan you want. More specifically, this means choosing the best interest rate plan for your financial situation. While the housing market dictates these rates to a certain extent, there are still a variety of different rate structure options from which potential homeowners can choose.

Adjustable vs. Fixed Rate Loans

 In terms of home loans, the best case scenario is one where you can lock in a fixed interest rate. Fixed rate mortgages are fairly common (they’re often simply called “traditional” mortgages), and will offer the most stable payment plan. Interest rates are decided upon signing, and each month you’ll pay a portion of the principal plus that interest until the loan is paid off. Loans with adjustable rates are trickier, since the rates change over time. They seem appealing at first, typically because lenders will offer a low interest rate, but these rates can skyrocket quickly, depending on the market. It is best to avoid these unless you know you plan to finance or resell soon.

Simple Rate Loans

Like adjustable interest rate mortgages, simple interest mortgages come with variable interest rates—though these rates change every day. The specific formula for calculating this daily interest is: (principal balance x daily interest rate)/365. As long as you are able to stay current with your mortgage payments, this can be a sound option. Compared to other rate plans, this works best for those who know they can pay off more of the mortgage earlier in the loan term, since there is no penalty for paying extra. If you fall behind on payments, though, you’ll face some difficulty, largely because the amount of principal owed will increase, which will increase your overall payment.

ARM and Interest Only Mortgages

Those who are on a stricter budget might want to consider an interest only mortgage. These are fairly self-explanatory: once your loan repayment term begins, you’ll only pay down the interest for a designated period of time. Once that time is up, you’ll start paying down the principal as a separate loan. ARM mortgages are similar, though these provide homeowners with a bit more flexibility, allowing them to choose whether they want to pay interest or interest plus principal. These mortgage structures make most sense for borrowers whose income levels fluctuate quite a bit, or who know that their salaries will definitely increase in the near future.

Additional Options

Balloon loans, reverse loans, and graduated payment loans are additional options for those who know that they will have trouble making their mortgage payments early on, but will be more financially stable down the line. Of the three, graduated repayment loans are probably the best option, since the payment amount increases gradually, and it is still possible to get a fixed interest rate. Balloon and reverse mortgages are much riskier: balloon loans require you to pay one large lump sum at the end of the loan term, and reverse mortgages increase the amount of principal due every month.

Rather than opt for a risky interest or repayment structure that might backfire down the road, borrowers in financial straits might want to consider the range of government home loans available to them. These come with their own set of regulations and restrictions, but they can potentially save headaches down the road.

 

 

The Ins and Outs of Mortgage Refinancing

In certain circumstances, homeowners may decide that they want to take out a new loan on their home, in order to reorganize their finances. While it can be a bit of a project to apply for a brand new mortgage loan, mortgage refinancing can be worth it. If done at the right time, it can save hundreds of dollars a month in mortgage payments, and thousands of dollars down the line. There are, however, certain risks involved, which are important to take into account.

Why Consider Refinancing?

Mortgage refinancing essentially provides homeowners with a new loan that will pay off the remainder of the previous home loan. While this might sound like it makes little sense, since at the end of the day homeowners are still left with a large loan, refinancing can lower monthly payments in terms of both principal and interest. Moreover, if the amount of the new home loan is a bit more than what is needed to pay off the previous loan, refinancing can help homeowners consolidate other debt as well.

When Should You Refinance?

Those who are considering mortgage refinancing should pay close attention to the market’s interest rates. The best time to refinance a home is when interest rates are low, since this will be key to guaranteeing that the refinance will actually save money. It’s also advisable for someone to refinance only if his or her credit score has increased since the initial loan application, since a lower score may also result in higher interest rates or monthly payments. The key here is to reduce cost and risk, not to increase it.

Risks and Caveats

It is important to remember that there are a number of costs and fees attached to any refinancing. The process is similar to applying for a first mortgage, so closing costs, legal fees, home inspection charges, and credit checks will still apply. In light of the added fees, it’s even more essential to carefully calculate how much money will be saved in the long run—ask yourself, is there a risk that you will end up paying more in the end? Monthly payments might be lower, but if the loan term itself stretches out for a long time, it may not be worth your while to opt for mortgage refinancing.

Qualifications for Refinance

In order to qualify for loan refinancing, applicants will need to demonstrate a solid financial history. New loans will not be granted to those who are behind on their original loan payments. Mortgage refinancing is not meant to be a “last ditch” effort for those in dire financial straits, but rather a savvy and carefully calculated move to further improve financial standings. Borrowers will also need to provide much of the same information as they did during their initial application, to prove that they will be able to cover all of the mortgage payments.

If done at the right time and with the right interest rates, mortgage refinancing can be an incredibly smart move. To ensure that you get the most out of refinancing, make sure to keep your debt to income ratio low, opt for a shorter loan term, and apply for the minimum amount that is needed.

What To Know About Mortgage Lenders

Anyone looking to buy or refinance a home is likely aware that they must deftly navigate and negotiate a variety of different aspects of the home mortgage process. While many people focus on their credit scores, interest rates, and down payments (all important details, of course), they often overlook the importance of learning about the mortgage lenders themselves. This is essential to staying informed about the major investment at hand.

What Does a Mortgage Lender Do?

In the most basic terms, mortgage lenders are in charge of loaning out money to either prospective buyers or to those looking to refinance property. Essentially, these lenders take on the immediate responsibility of the loan, and much of their work is spent assessing the risk of granting a loan to an applicant. Mortgage lenders offer secured loans, which are loans backed by collateral (i.e. the house itself). This means that in the event that a buyer cannot pay back the loan, the lender (usually a bank or major financial corporation) will seize the property.

Lenders vs. Brokers

While the terms “mortgage lenders” and “mortgage brokers” are often used interchangeable, these two positions are not the same. While mortgage lenders actually distribute the funds for a home, the brokers are more accurately defined as “middle men.” There are pros and cons to working through a mortgage broker. On one hand, they often have connections that allow prospective buyers to get a lower interest rate than they would if they worked directly with a lender. On the other hand, brokers do add an extra (possibly time consuming) step to the mortgage process, and of course, they do charge a fee for their services.

Who Are the Major Players?

Even if a loan applicant works directly with a mortgage lender rather than through a broker, there are still a number of different hands involved in the loan process. While mortgage lenders handle the loan itself, they themselves are reliant on investors to provide them with the funds. Additionally, mortgage lenders keep a team of underwriters on staff, who are in charge of assessing both risk and profit potential for the lending company. Mortgage lenders also employ servicers, who handle the day-to-day business surrounding the loan authorization, such as home inspection and fee collection.

What Information Will Lenders Require?

First, mortgage lenders will require applicants to sign an origination agreement, which is really just another term for the initial loan application. This does not guarantee the loan, but does set the process in motion. The mortgage itself is not official until the applicants sign the promissory note, in which they attest to their ability to pay off the loan in specific increments over a dedicated period of time. Mortgage lenders then draw up a lien on the home, which they hold until the loan is paid back in full.

Knowing what to expect from a mortgage lender takes a bit of the stress out of the loan application process. This information can also help homebuyers decide whether or not it would be worth their while to work with a broker, or to deal with a lender more directly. As always, the key to finding the best deal with the least amount of anxiety is preparation and research, and this applies to lenders as well.

4 Steps to a Lower Mortgage Rate

 In certain respects, mortgage rates are out of the hands of the homebuyer, since prices are largely determined by market fluctuations. While market rates set limitations on what a buyer can do, however, there are ways that prospective homebuyers can make sure they get the lowest mortgage rate available to them. What follows are four key tips that can help lower these rates, which in turn can save hundreds or even thousands of dollars in the long run.

Opt for Short Term Mortgages

One of the most effective ways to get the lowest mortgage rate possible is to opt for a short-term loan, as this will greatly cut down on interest rates. The standard mortgage loan term is usually 25 to 30 years. While selecting a 20-year loan may save some money, the best option would be to choose a 15-year loan term, since this will lock-in the lowest mortgage rate of the bunch. The caveat to this option, of course, is that it requires a higher monthly payment, so it may not be the most realistic option for those living paycheck to paycheck. For those looking for long-term savings, though, this can certainly help.

Pay Down Other Loans

To help lock in the lowest mortgage rate possible from the get-go, it is also important to establish good credit. This means paying down existing loans, or at the very least, making sure that they remain current and never go into default. Keeping credit card debt to a minimum is even more important, as a high debt to income ratio can wreak havoc on your credit score. Generally, to get the lowest mortgage rate, prospective homebuyers will need a credit score of 760 or higher.

Pay More Up Front

Another way to secure the lowest mortgage rate you possibly can within the current market is to offer more as a down payment. This might be a particularly good option for those who don’t know that they’d be able to manage the higher monthly payments that come with a short-term loan, but who do have significant savings that they might be able to devote to a lump payment. The average required percentage for a down payment will vary according to the situation, but typically remains below 20% of the asking price. If you can manage it, though, a 20% down payment will garner significant savings in the long run.

Consider Your Rate Lock

There is a significant amount of debate as to whether or not closing dates make a difference in mortgage rates. It is generally agreed, however, that rate locks—which are related to official closing dates—can help secure the lowest mortgage rate possible. Basically, a rate lock is the rate a bank promises for a specified amount of time until closing.  Generally, banks offer a 30-day rate lock, but if you opt for a 15-day rate lock (thus reducing the risk for the bank), you can get the bank to lower your rate by a certain percentage.

Negotiating mortgage rates can be a tricky process, but with some careful planning and strategy, it is possible to secure the lowest rate possible. Just remember to maintain good credit, lock in a rate sooner than later, pay as much up front as possible, and pay down the loan as quickly as you can.

Mortgage 101: What to Know Before Applying

The process of applying for a mortgage can be somewhat daunting and not a little bit confusing, particularly for first-time homebuyers. The best way to ensure that this task is ultimately stress-free is to be completely informed about the various aspects of the process overall. What follows is a list of some key details that every homebuyer should consider before embarking on a mortgage application process, which will help to streamline the ordeal and ensure the best mortgage rate.

The Value of Good Credit

One of the most important things to keep in mind before beginning to look for the best mortgage rate is that loan companies value good credit. Thus, prior to applying for a mortgage, those looking to purchase a home should do their very best to ensure that all of their finances are in order, that their debt-to-income ratio is low, and that they do not have any other loans in default status. Individuals with a spotty credit history are likely to be charged a much higher interest rate than those with good credit, and may be asked to put down a larger down payment.

Planning for Repayment

Of course, it’s also important to be realistic when choosing a home and applying for a mortgage rate. Before making any serious decisions, take some time to assess your personal financial situation. That 6 bedroom manse might be beautiful—and with good credit, you might even be able to get a loan to help you buy it—but what kind of toll will that take on your annual income? It’s important to be sure you can pay off your mortgage with relative ease and within the allotted payoff period. The equity in your home should be an asset to you, not a liability. The take-home message: don’t bite off more than you can chew.

Pre-Qualification 

Many individuals who are looking for the best mortgage rate opt to apply for pre-qualification. This step is not mandatory, but it is highly recommended, since it provides the prospective buyer with an idea of the kind of mortgage rate they can expect to get from lenders. To get pre-qualified for a mortgage loan, you would simply provide a lending institution with some basic financial information, which is then used to estimate the mortgage rate. This process does not guarantee or lock-in a mortgage rate, but it can prove incredibly useful in the financial planning process of buying a home. It is also incredibly simple: it can be done over the phone and the estimate is provided almost immediately.

Establishing good credit, crafting a realistic financial plan, and applying for loan pre-qualification are three of the most important first steps to take before selecting a mortgage lender or agreeing to a mortgage rate. Once you have a sense of what you can afford and what a lender might be willing to offer, you can dive into some of the more specific details of the mortgage application process—from selecting the loan type to considering the possibility of seller financing to finding the best lender.