Home Loans and Finding the Ideal Neighborhood
A home loan is used to buy a home that is more than four walls and a roof. What’s outside of the home is also critically important to your home’s overall feel and your lifestyle. A good match between your family and your neighborhood is worth more than a “perfect” house. What good is a terrific home if you feel uncomfortable the moment you walk out the front door? The ideal neighborhood is very personal decision, but here are a few areas to consider:
Community Association
If there is a community association a good place to start is to take a look at the minutes from the community association. Is the association active? What issues have been brought up and hopefully resolved? Is there anything still pending that shows signs of what the neighborhood, and neighbors, might entail?
Local Newspapers
Local newspapers carry a wealth of information on neighborhood activities, crime reports and housing sales. Subscribe to the local newspaper. Read the editorials and learn what columnists are writing about. What is the focus of the community and what is newsworthy? The classified section of the newspaper will also give a home buyer a feel for housing prices and the number of homes on the market. Local newspapers can also provide information on distressed home sales such as foreclosures as well as local mortgage lender ads and local mortgage rates juts to use as a comparative guide.
Local Hang-outs
Find the local hang-outs or malls and strip malls and see what people are talking about. How close are the neighbors to each other? Is the feel of the community close-knit? Distant yet professional? Local shopping areas and dining areas can give a feel for the work force composition as well.
Sidewalks and Parks
Are there sidewalks in the neighborhood? Communities with sidewalks are often more active and social as there is more space for outdoor activities. Local parks can tell something about the composition of the neighborhood. Parks are also nice amenities to have nearby for both children and dog owners. This is especially important for children.
Neighborhood Visits
Visit the neighborhood multiple times to see what you can find out. Come by at night, during the day, in the morning and on the weekend. Are there many retirees? Plenty of moms with babies? Young children playing outside? Maybe a large proportion of teenagers that appear to loiter at the neighborhood stores.
Read the Map
Find a good map of the area to determine where the local libraries, courthouses, post offices and other public buildings are located. Are they nearby? How often do you visit those establishments? Also drive around to find your local bank, supermarket and other stores you visit frequently.
Schools
Arrange a tour of the local schools, especially those your child will be attending. Peek through windows to see how the teachers are teaching and check out the artwork on the walls. Research test scores and find other information such as veteran teachers and student ratios. Look for school ranking information online. Top school districts are frequently used by real estate agents as driver to steer home buyers. On the other hand, average or standard school districts do not appear to be an impediment to home sales.
Drill the Neighbors
Speak with the neighbors, but ask them real questions about traffic, noise, and crime. Ask for their feeling on certain projects you’ve read about and try and read between the lines. Remember, you’ll be living next door to these people – do they strike you as the kind of people you’ll enjoy spending time with? Some neighbors have problems with recent development, fences, boisterous neighbors and more.
Visit City Hall
City Hall will have a variety of information about zoning, new construction and plans for future development in the area. Many buyers pay a premium for house lot overlooking vacant space only to find out later it is privately held and soon to be developed. At some local zoning meetings you will frequently hear about complaints on pending projects over site views. Had the home buyer known the restrictions and possible changes to adjacent properties they wouldn’t have these complaints. Zoning information may also be important for those home buyers that intent on obtaining a mortgage loan to add on significantly to the existing structure.
Real Estate Information
Your real estate agent can help you find information about homes in the area and how quickly they sell. Do homes move quickly? Is one neighborhood more desirable than another? Why?
Tax Assessment
The tax assessor website has a plethora of information including structural and land values, structure condition, and recent sales in the area. Tax rates on real estate have not be a boost or detriment to home sales recently, but it is hard to believe that real estate taxes are not going to eventually impact home buyer’s decision on where to buy a home.
Crime Rates
The local papers often cover crime statistics and it can’t hurt to visit the local police station and research online to find local crime statistics and rates. Potential home buyers may also want to check out websites to find registered sex offenders in the area.
Emotional Quota
Finally, evaluate the neighborhood based on your overall feeling. Does it feel right or is it just okay? Spend enough time poking around to really get a grasp of how the community comes together or stays apart. Then decide if this is the right feel for you.
A new home is a big commitment the mortgage loan and monthly mortgage payment is a big, long term commitment. Do your research on the houses and the neighborhood, buying a home as if you are buying a new shirt may turn into a costly mistake. And never skimp on researching the mortgage loan and mortgage rates.
How Mortgage Interest is Paid and Calculated
Home mortgage interest is any interest that is paid on a mortgage loan secured by a home. The mortgage loan can be for the purchase of a new home, a mortgage that has been refinanced or a second mortgage. On all of these home loans the repayment period will include monthly mortgage payments of principal and interest, unless the home loan has an interest only feature in which case the home loan will not include the repayment of principal. In the terms for the monthly mortgage payment on the home loans the mortgage interest that is paid with each total monthly mortgage payment is paid in arrears. This means that the principal and interest payment will pay for the 30 day period of mortgage interest before the payment due date. A home mortgage loan payment paid on the 1st of April is paying for the mortgage interest that accrued in March.
Every time someone closes on a home loan they will prepay the mortgage interest from the time the money is disbursed to the beginning of the next month. Then the first regular monthly mortgage payment is due on the following month. For example, you may have a March 15 closing on a home loan, and the mortgage loan agreement calls for the monthly payment to occur on the first of the month. At the closing you will be required to pay the mortgage interest for the remainder of the month of March at the loan closing, approximately half the month. However, your next payment is not due on April 1, but rather will be due May 1. The payment for April which is due on May 1 and all subsequent payments are made “in arrears” or for use of the money for the previous month.
When you engage in a mortgage refinance and see the payoff letter from your existing mortgage, you will notice it is higher than the principal balance. Since the payments are paying the interest in arrears, if you paid a June 1st payment and request to see a payoff for June, the payoff will have the interest due from June 1st to whatever day of that month you want the payoff good for. Each scheduled mortgage payment on a fully amortizing loan is divided between the interest due for the month and the principal amortization, which is the gradual reduction in the original mortgage loan balance.
It is easy to compute your unpaid principal mortgage loan balance after you make your first monthly mortgage payment. Let’s use a home loan of $200,000 with an interest rate of 6%. First, take your principal mortgage loan balance of $200,000 and multiply it times your 6% annual interest rate. The annual interest amount is $12,000. Divide the annual interest figure by 12 months to arrive at the monthly interest due. That number is $1000.
Since your fully amortizing payment on this home loan would be $1199.10, to figure the principal portion of that payment, you would subtract the monthly interest number ($1000) from the principal and interest payment ($1199.10). The result is $199.10, which is the principal portion of your monthly mortgage payment.
Now, subtract the $199.10 principal portion paid from the unpaid principal balance of $200,000. That number is $199800.90, which is the remaining unpaid principal balance. The next month’s monthly mortgage payment will have the same mortgage rate but the amount of interest paid on the loan will be slightly less because the principal balance of the loan is less. Therefore, the next monthly mortgage payment has a larger portion of the payment applied to principal and a smaller portion to interest. In the beginning period of the home loan, these numbers will seem inconsequential but as the numbers of monthly mortgage payments add up, the amount going to interest decreases as the mortgage loan balance decreases.
With each consecutive payment, your unpaid principal balance will drop by a slightly higher principal reduction amount over the previous month. This is because although the unpaid balance is computed using the same method every month, your principal portion of the monthly payment will increase while the interest portion will get smaller.
Note, these numbers are round numbers for purposes of simplicity of understanding. If you are paying off a mortgage loan, you must add daily interest to the unpaid mortgage loan balance until the day the mortgage lender receives the payoff amount. To compute daily interest for a mortgage loan payoff, take the principal balance times the interest rate and divide by 12 months, which will give you the monthly interest. Then divide the monthly interest by 30 days, which will equal the daily interest.
As an example you have $100,000 and you decide to pay off your mortgage on January 5th. You know you will owe $99,800 as of January 1. But you will also owe 5 days of mortgage interest. How much is that?
$99,800 x 6% = $5,988 ÷ by 12 months = $499 ÷ by 30 days = $16.63 x 5 days = $83.17 interest due for five days.
Figured precisely, you would send the lender $99,800.40 plus $83.17 interest for a total payment of $99,883.57.
Mortgage Rates at Sugar River Bank, NH
There are of course a number of banks and mortgage lenders to apply for a mortgage loan with in New Hampshire. One of these banks is the Sugar River Bank which is headquartered in Newport, New Hampshire. Along with the office in Newport, Sugar River Bank has bank branches in Grantham, New London, Sunapee and Warner.
Sugar River Bank offers a variety of home loan options. The bank offers first mortgages for purchases and refinances. The bank provides construction loans or interim loans covering construction costs that are secured by a mortgage on the property financed. The bank has a One Step Construction Loan Program, in which the construction financing is paid off from the proceeds of a permanent mortgage which is originated at the same time as the construction loan. Sugar River Bank has home equity lines of credit and home equity loans that allow existing homeowners to tap into the accumulated equity. The bank also offers land loans as well as mobile home financing.
The standard mortgage loan products include adjustable rate mortgages and fixed rate mortgages. The adjustable rate mortgages come in a wide variety of terms and mortgages rates. The fixed rate mortgages have an interest rate that does not vary over the term of the loan and also comes in a variety of terms and mortgage rates.
Sugar River Bank is currently offering the following fixed mortgage rates and terms:
15 year fixed rate mortgage with one point has a mortgage rate of 4.745% APR.
15 year fixed rate mortgage with no points has a mortgage rate of 4.844% APR.
20 year fixed rate mortgage with two points has a mortgage rate of 5.066% APR.
20 year fixed rate mortgage with one point has a mortgage rate of 5.196% APR.
20 year fixed rate mortgage with no points has a mortgage rate of 5.451% APR.
30 year fixed rate mortgage with two points has a mortgage rate of 5.108% APR.
30 year fixed rate mortgage with one point has a mortgage rate of 5.270% APR.
30 year fixed rate mortgage with no points has a mortgage rate of 5.431% APR.
The bank offers the following adjustable rate mortgage terms and mortgage rates:
A one year ARM with 2/6 rate caps and a mortgage rate of 4.385% APR
A 3/1 ARM with 2/6 rate caps and a mortgage rate of 4.404% APR
A 3/3 year ARM with 2/6 rate caps and a mortgage rate of 4.780% APR
A 5/1 ARM with 2/6 rate caps and a mortgage rate of 5.047% APR
A 7/1 ARM with 2/6 rate caps and a mortgage rate of 5.375% APR
All mortgage rates are based on a minimum 20% down payment. Mortgage loans with a LTV greater than 80% require Private Mortgage Insurance (PMI). The mortgage Annual Percentage Rates (APR) are based on $ 100,000 home loan. Mortgage rates and terms are subject to change at the bank’s discretion. For current mortgage rates and home loan information contact the bank directly at 800-562-3145. Additional mortgage loan and mortgage rate information can be found at the bank website located at www.sugarriverbank.com.
To help calculate how these mortgage rates and tems impact the monthly mortgage payment visit www.selectcalculators.com. For auto loans and auto loan rates from Sugar River Bank visit www.selectautorates.com.
Appraisals for Home Loans
For most all home loans an appraisal is required part of the approval and final underwriting process. An appraisal is a document that gives an estimate of a property’s fair market value. The appraisal is a compilation of data pertaining to the property on sales, physical condition, amenities and cost. After a complete analysis of the data gathered an opinion of value is determined. An appraisal is generally required by a mortgage lender before the mortgage loan approval to ensure that the mortgage loan amount relative to the property value is within the appropriate guidelines for the loan requested. The appraisal is performed by an appraiser who is typically a state-licensed individual trained to render expert opinions concerning property values. Although, the home loan borrower pays for the appraisal, the appraisal will be ordered and delivered to the mortgage lender.
An appraisal on a property for either a purchase or refinance is as important as the borrower’s credit history or debt ratio in obtaining the mortgage loan. The appraisal will be an important factor in determining how much of a mortgage loan a bank or mortgage lender will approve. At times when home prices are down it is common to find an appraised home value that does not support the mortgage loan amount and the home loan is subsequently never approved.
Though there is a significant amount of work to be done to perform the appraisal, the appraisal is still an opinion of value or the act or process of estimating the value. The appraiser does not create value; the appraiser interprets the market to arrive at a value estimate of the home. This opinion or estimate is derived by using three common approaches, all derived from available market data.
Appraisers use these three approaches when establishing the value of a given property:
1. Cost Approach: The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal. In this approach the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
2. Sales Comparison Approach: In the comparison approach to determining value the appraiser identifies comparable properties in the neighborhood of similar size, quality and location, which have recently been sold. Ideally, the properties are close in vicinity (within a 1/2 mile radius of the subject property) and have sold within the last six months. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
3. Income Approach: The income approach to determining value evaluates the potential net income of the property is capitalized to arrive at a property value. This approach is of primary importance to income producing properties and is usually used in conjunction with other valuation methods. For single-family residential mortgages it is given little weight. The process of converting a future income stream into a present value is known as capitalization.
After thorough exercise of the three approaches, a final estimate or opinion of value is established. When evaluating single-family, owner-occupied properties, an appraiser most heavily weights the sales comparison approach. The final appraisal report is often very detailed. Material in the final report will include: legal description, tax information and zoning requirements, a description of the lot dimensions and size, neighborhood improvements and amenities, a thorough home description with size, style, quality of condition, room types and features.
If the mortgage company orders the appraisal in conjunction with your home loan request, the appraiser is responsible only to the mortgage lender. Through federal law you are entitled to a copy of your appraisal. In order to get a copy, you have to request it.
The 40 Year Mortgage
In the past several years the mortgage market has seen a slew of new home loan products come and go. One mortgage loan product that was first lobbed into the fray by sub prime lenders was a 40-year term mortgage. Now that sub prime is tapering off, this term is being used on mainstream loan products. The advantage of the 40-year term mortgage is to make the monthly payments smaller and housing more affordable. While 40-year mortgages increase affordability by reducing the mortgage payment, the reduction is very modest.
Undeniably, the monthly mortgage payment on a 40 year term loan versus that of a 30 year term will be lower and subsequently allow some borrowers who would not normally qualify for a home loan be able to afford one. However, the effect of extending the term of a mortgage payment is smaller the longer the initial term is set at. This means that a change from 20-year term to a 30-year term can have a sizeable percentage change in the monthly mortgage payment. The change from a 30-year term to a 40-year term is not nearly the equivalent drop in relative payment amounts. For example, a 20-year mortgage for $250,000.00 at 6.0% has a principal and interest payment of $1791.08. If this same mortgage loan is placed on a 30 year term the payment drops to $1498.88 or 16%. This same mortgage loan amortized on a 40 year term would have a payment of $1375.53, a reduction $123.35 or only 8%.
Furthermore, the total payments on a 30-year term mortgage for $250,000.00 at 6% would be $535,595.47. The added 10 years on the same home loan amortized over 40 years yields a total payback of $660,256.37. The additional monthly payments add $120,660.90 in total charges for just a 6% reduction in the monthly mortgage payment.
Lastly, we have to factor in different interest mortgage rates. As a rule, mortgage loans do not last more than three to five years. Homeowners generally refinance or sell their homes long before their home loan term is due. Even though the average home loan does not last anywhere near their original terms, mortgage lenders will charge a higher mortgage rate for the longer term home loans. Fifteen-year term mortgages are usually about 1/4% lower in rate than a comparable 30-year tem mortgage. The extension to 40 year leads to roughly the same increase of about a 1/4 % from a comparable 30-year term. Having already calculated that the value of the 40-year term is fairly small, what limited monthly savings did exist is partially eroded with the higher mortgage rate.
The 40-year mortgage has a practical purpose of allowing a small segment of borrowers the ability to afford a larger home loan. The disadvantage of significantly larger repayment and a slow down in equity build up, almost completely erases the benefit this mortgage loan would have for most all borrowers. Before choosing the term on a home loan, whether it is for 15, 30 or 40 year term, home loan applicants should carefully review their budget and check the monthly payment on different mortgage loan terms with the appropriate mortgage rate. The mortgage calculator is a helpful tool for quickly comparing the different costs, the different monthly mortgage payments, the mortgage rates and the total costs over the expected life of the home loan.
Mortgage Buydowns
A buydown is a mortgage loan with a below market mortgage rate for a period of time that usually lasts one to three years. The buydown is a temporary reduction in the mortgage interest rate on the home loan that is paid for by paying additional points at the time of the mortgage loan closing. The buydown mortgage loan is created by having the homebuyer or another third party, often the seller or a home builder, making a subsidizing payment to the mortgage lender so that the buyer’s mortgage rate and, therefore, monthly mortgage payment are lowered. The buyer may incur the costs of the additional points or subsidy or the seller may foot the bill for the additional points or the mortgage lender can structure the buy down and fund its with a higher mortgage rate immediately preceding the buy down period over the life of the loan.
A mortgage buy down is a more popular home loan product used by builders in large subdivisions and by sellers in a slow sales market. A borrower may want to buy down mortgage rates because they have cash on hand, expect their earnings to go up, but need a lower monthly mortgage payment in the present. The monthly mortgage payment during the buydown is a fully amortizing principal and interest mortgage payment.
In a mortgage buydown, buyers are essentially paying cash up-front for points, and receiving a reduced mortgage interest rate in return. However, the buy down is only a temporary reduction in the mortgage rate. Typically, mortgage buydowns last from one to three years after the home loan is closed. Each year the mortgage rate will rise by a predetermined amount and the mortgage rate increases will only occur for the two or three years, depending on the type of mortgage buy down.
Each point equals one percent of your total loan amount. For example, 2 points on a $ 100,000 loan will cost $ 2,000, or 2% of the loan amount. The more mortgage points paid for the subsidy, the lower the interest rate will be. If these points can be paid for by the seller as an inducement for the seller to close the transaction, this can be a valuable tool. The mortgage lender may fund or structure the buydown by charging a higher interest rate over the life is loan, this is not very common as the mortgage lender has to protect against early payoff since their compensation for the lower initial mortgage rate is a higher than market rate in the later years of the mortgage loan.
For some borrowers a mortgage rate buydown is more advantageous than choosing an adjustable loan with a payment option that allows for negative amortization like an Option ARM. That’s because with mortgage buydown programs your mortgage payment always includes principal and interest. This means every time you make a payment your mortgage balance grows smaller instead of bigger. The prospect of experiencing negative amortization is always a must to avoid. In addition, the mortgage rate increases for a buy down are predetermined and not market influenced once the mortgage loan is signed.
A typical mortgage rate buydown looks like this:
Payments are reduced and figured on a mortgage rate over a specific term of a few years. The difference between the real interest rate and the lowered interest rate is paid in cash by the seller or sometimes the buyer. It’s like putting $1200 in the bank and withdrawing $100 every month for 12 months to help make your mortgage payment.
One popular buydown is called the 2-1 mortgage buydown. This is a 30-year fully amortized mortgage where the interest rate increases 1% every year for the first two years, at which point the interest rate is fixed for the remaining home loan term.
As an example, consider that your mortgage amount is $350,000 and the interest rate is fixed at 6.75% for 30 years. The buyer or seller will buy down the mortgage interest rate by paying a lump sum.
Here is how the mortgage interest rate would work out over the term of the loan.
First year mortgage interest rate is 4.75%
Second year mortgage interest rate is 5.75%
Years three through 30, the mortgage interest rate is 6.75%
It keeps payments low for 36 months for borrowers whose income is expected to later increase or intend to change the home loan or ownership in the future. The borrower qualifies for this home loan at the 4.75% interest rate and payment amount.
The 3-2-1 buydown mortgage is another version of a 30 year mortgage rate buydown. The interest rate increases 1% every year for the first three years, and then the interest rate is fixed for the remaining term.
These home loans are most advantageous when the seller pays for the buy down. The most common transactions where the buy down is used are on new homes or new construction. In these cases, the builder is willing to pay points to induce the buyer with lower monthly mortgage payments and a lower mortgage rate. Home builders generally prefer to provide incentives to prospective borrowers rather than make absolute reductions in the price of the home.
The bottom line on these mortgage products is that with the buy down you are able to drop the mortgage rate and monthly mortgage payment on your home loan without incurring the risks associated with of an adjustable rate mortgage or interest only home loan.
Mortgage Loan Refinance Break Even Analysis
Mortgage refinancing is a measurable sector of in mortgage lending. Mortgage refinancing is normally comprises at least 50% of all mortgage loan applications. When you refinance your existing home loan there are many factors to consider in choosing the optimal term, loan amount, and mortgage rate. The best way to measure the costs and benefits from refinancing is to compare all the costs of the existing mortgage and the new mortgage over a future period of time. The decision to refinance should only be made if the long term savings outweigh the initial expenses. One such tool to help make this cost and benefit decision for home loan refinance is a measurement called the break even period.
The break even period is the number of months it takes before the savings from the lower rate of a refinance covers the costs of the new mortgage refinance. In order to find your break even point, you will need to first determine the amount of time it would take for you to cover the amount of money you spend on closing costs. An example of this would be if you spent $2400.00 on closing costs for a new home loan to reduce the monthly mortgage payment by $115, it would take just under 21 months in order to cover the costs of the refinance or reach the break even point. As long you intend to hold the new home loan for a period beyond the break-even point, the new mortgage loan pays for itself.
There are several types of refinancing options available. If you already have an existing mortgage, simply replacing it with a new first mortgage at a lower mortgage rate may be an option for you but many borrowers are adding additional funds to the refinance or doing a cash out refinance to pay off other debt. Measuring the break even point is more difficult in these cases since the debt being paid off with the cash out transaction generally has much lower term left on it.
When existing homeowners are refinancing more debts into the refinance home loan transaction, extra care should be taken to make sure they are receiving a beneficial mortgage with the appropriate mortgage rate and term that matches the debt being paid off. In these situations it is wise to measure the cost of the home loan and review the savings on the debt you are paying off. The break even point on this debt should be measured over a similar time frame or term. Therefore, don’t just add $15,000.00 in credit card debt pay offs to your cash out refinance and calculate how much you are saving over a 30 year mortgage. The calculation on the savings should be performed as if you were to pay this portion off in a much shorter period that would be comparable to the amount of time it would take to pay off the debt the way it is structured now.
Before you make a commitment to refinance your mortgage, it’s important to do your homework and determine whether such a move is the right one for you. In order to get the best possible refinancing deal, you’ll need to shop around and conduct a detailed cost comparison to see which mortgage offers the greatest financial return.
But what really matters is how long it will take you to break-even on the transaction and whether you plan to stay in your home that long. In other words, make sure you understand, and are comfortable, with the amount of time it will take for your overall savings to compensate for the cost of the refinancing. Use the mortgage calculators to help with the evaluation on process on the home loan closing costs, mortgage payments as well as the break even time period.
Before you make a commitment to refinance your mortgage, it’s important to do your homework and determine whether such a move is the right one for you. And of course, it is always important to evaluate the mortgage rates and mortgage loan programs that are available. A mortgage refinance is all about the numbers, shop and compare to find the best mortgage that fits your needs.
Mortgage Loans and Loan to Value
LTV, or loan to value, is only one of the factors mortgage lenders use to evaluate or underwrite a home loan. LTV is expressed as a percentage or ratio. The ratio is calculated by dividing the mortgage loan amount by the value of the property. An example of this ratio is if someone was obtaining a $200,000 mortgage loan for a property that is valued at $400,000, the LTV of this transaction is 50%. Mortgage lenders use the loan to value ratio as a significant measure of risk in making a mortgage loan decisions.
The LTV is a very important consideration for the mortgage lender and the mortgage applicant for several different reasons and its risk measure will change with the home loan type and request. As a simple tool to measure risk, the higher the loan to value on a home loan, the riskier the home loan is perceived to be. Loan to value is essentially measuring the amount of equity in a property. This equity is a result of either the down payment amount, a larger down payment would equal more equity, or a reduced balance on a existing mortgage loan for a refinance request or an increase in property value.
Loan to values therefore measure the amount of equity in a property. The greater the equity, whether it be with a large down payment or appreciation when you already own the property, the more committed to the property a borrower generally will be and the larger the cushion there is to absorb losses by the mortgage lender should a borrower default on their home loan. Not only our borrowers more committed when there is more equity in the property, but the lenders loan balance has a greater level of protection should a borrower default. Certainly, 100% loan to value home loan transactions are defaulting at a higher rate than lower loan to value home loan transactions are.
If you are applying for a mortgage to purchase a home, the loan to value is measure of how much money has to be placed as a down payment to buy the property. In order for the mortgage lender to determine the value aspect of the loan to value ratio they will look at the lower of the purchase price, or appraised value of a home, when you are purchasing a new house. If the home appraises for an amount greater than the purchase price, this may make the transaction more desirable for you the borrower, but the mortgage lender will now use the lower sales price figure to determine the mortgage loan underwriting evaluation. Because of this, the mortgage lender will not have to worry about lending more money than the actual property is worth or lending more than you would be willing to purchase the property for or got caught in an over inflated purchase transaction.
The importance of the amount down payment for the borrower can’t be disregarded either. An important item to remember, when a property is purchased, the total down payment you make will have to come from your source of money, borrowed funds are unacceptable. If your down payment is less than 20%, you will need private mortgage insurance (PMI). This is insurance you pay to protect the mortgage lender if you don’t repay your home loan in full. With mortgage insurance coverage an extra premium or fee is included within your monthly mortgage payments. The type of home loan you receive, the insurance company as well as the home’s LTV determines the exact premium amount for the private mortgage insurance. Higher loan to value loans or home loans with smaller down payments will have a higher mortgage insurance payment, adjustable rate mortgages will also have a larger mortgage insurance cost.
When an existing home owner is refinancing their home, the appraised value is what will be used to find the value part of the loan to value equation. The biggest component in calculating your home’s appraisal value is by analyzing past sales of comparable homes that are within one mile of your property and were sold within the past year. Houses for sales or listings do not count towards this amount because they are not finalized sales and their prices can either rise or drop.
Mortgage refinances fall into two categories, cash out refinances and rate and term refinances. A cash out mortgage refinance is when you take out funds with the new home loan for anything other than paying off the existing mortgage and closing costs. A rate and term refinance is for paying off just the mortgages and closing costs. In these cases, the new home loan is changing either with a new mortgage rate or a new loan term. When you have to combine a first and second mortgages within a mortgage refinance transaction, you will want to remember than the second mortgage loan needs to have been open for at least twelve months. If your second loan is not “seasoned” long enough, the mortgage lender will consider the consolidation of the two mortgages as cash out refinance loan, thus you are subject to all LTV guidelines and their associated mortgage rate adjustments.
With all mortgage refinance transaction, you will find that the ratio used with the loan amount to appraised value is will be a big determinant of the home loan approval. This is especially true if the borrower wishes to cash out within the transaction. The typical rule for cash out transaction is a maximum amount of 90% of the appraised value for the entire loan amount, which also includes any cash out. And a 90% cash out refinance is the absolute high end of the approval range, meaning the mortgage lender considers this loan the riskiest loan is less likely to approve such a request.
When your LTV is over 75%, you will usually experience a minimum .125%, or 1/8th of a point, increase within the mortgage rate for every 5% in the LTV. An example of this would be when a person takes 85% cash out mortgage loan; their mortgage rate would generally be .25%, or 1/4th of a point, higher than with a 75% cash out mortgage with established mortgage rates. The main reason for the mortgage rate increase is the increased risk factor on the home loan, there is now less equity in the property.
If you require more than 90% cash out rate, there are lenders that will supply this to you. However, the mortgage rates are generally significantly higher than standard rates with the exception of FHA loans. FHA loans allow 85% cash out LTVs without a significant impact on the mortgage rate.
The lower the ratio between the loan amount to the appraised value, the loan to value, the more likely a mortgage lender will accept the risk of the home loan. The risk considerations will be different in owner occupant versus non-owner or rental situations. Loan to values will be more significant in cash out transactions versus rate and term refinance loan requests. As you compare mortgage lender costs and qualification requirements you will see how loan to value can play a key role in the final outcome.
Mortgage calculators are a great tool to evaluate the loan to value on a home loan. www.selectcalculators.com offers a wide assortment of mortgage calculators to help determine LTV and evaluate home loan products and mortgage rates.
Mortgage Refinance Numbers and Costs
Mortgage refinancing is a home loan process in which one or more existing mortgage loans are paid off and replaced with a new home loan. Shopping around for the right home loan has never been more important to assure a mortgage refinance candidate will get the best financing deal.
The requirements for a refinance have become much more restrictive in 2009. A homeowner’s eligibility for refinancing will still be similar to the mortgage loan underwriting and approval process that an applicant went through when they first obtained the mortgage they are now trying to refinance. A mortgage lender will review and evaluate the borrower’s income and assets, their credit history and credit score, outstanding debts, the appraised value of the property, and the mortgage loan amount requested. Unfortunately, the guidelines to approve these home loans are more stringent regarding the parameters such as credit scores, income, assets and property value. In addition, mortgage costs are running higher.
This makes comparing mortgage loan products, mortgage rates and mortgage loan costs that much more important. Shopping, comparing, and negotiating may save you thousands of dollars. The first step is to begin by getting copy of your credit reports to make sure the information in the report is accurate. Credit report errors or discrepancies are a sure fire way to put a real wrench in the mortgage refinance process. Make sure to correct any mistakes and evaluate how good your current credit profile is.
In order to help evaluate whether a home loan is a good deal or not is worthwhile to have an idea on what to expect for closing costs and refinancing costs. Refinancing fees will vary from mortgage lender to mortgage lender and there will be different costs in different states.
Mortgage lenders are required by federal law to provide a good faith estimate of closing costs within three business days of receiving a mortgage loan application whether it is for a home purchase or refinance. The good faith estimate will provide a detailed approximation of all costs involved in the home loan closing. This document can be very helpful when used to compare costs with different mortgage lenders. Once a mortgage loan is approved and a settlement or closing date is set, the borrower should make sure to get copy of the HUD-1 settlement cost form before the home loan closing takes place.
Here is a list of some of the usual costs and fees that charged on the average mortgage refinance:
Application Fee
Some mortgage lenders and banks charge an application fee at the time of the home loan application. This fee can range from $200.00 to $500.00 and covers the initial costs of processing your home loan request and checking your credit report. If the home loan is denied, you will most likely not be refunded the cost for the mortgage loan application fee. Some mortgage lenders will credit the cost to the closing once the mortgage loan is signed.
Points and Loan Origination Fees
A point is equal to 1 percent of the amount of your mortgage loan. There are two kinds of points you a home loan borrower may pay for the home loan. The first is the mortgage loan discount points, a one-time charge paid to reduce the interest rate of the mortgage loan. The second type of mortgage points are charged by some mortgage lenders as origination fees to earn money on the home loan. The number of mortgage points will vary from mortgage lender to mortgage lender. It is important to review the mortgage points and the mortgage rate between mortgage lenders because the number will often not be directly comparable. As an example one mortgage lender may charge one point for a rate of 5.375% while another mortgage lender will charge 1.5 points for a mortgage rate of 5.25%. The general rule is that mortgage points are fees paid to the mortgage lender or broker for the home loan and are often linked to the interest rate; usually the more points you pay, the lower the rate but this is not always the case. Compare rates and points carefully.
Appraisal Fees
The appraisal fee pays for an appraisal of the home to be performed by an independent licensed appraiser. The appraisal is used to determine the market value of the property, its condition and the overall property market. Some mortgage lenders include the appraisal fee as part of the application fee but many do not. Once the appraisal is completed, you may request a copy of the appraisal and you are legally entitled to that copy even if the home loan is denied. Customary appraisal fees range from $300.00 to $600.00.
Title Search and Title Insurance
A title search and title insurance is used to check and insure the ownership of the property and the existing liens such as other mortgages or judgments on that property. The search fee covers the process of checking these documents and the insurance is to protect the mortgage lender in the event of an error or unknown recorded claim against the property that may very well impact the mortgage lenders security interest or the mortgage loan. If a problem arises, the insurance covers the mortgage lender’s investment in your mortgage. Search fees and insurance vary significantly by state since some state regulates the cost on the title insurance, ranges run from $600.00 to $900.00
Attorney Fees and Closing Fees
The mortgage lender will usually collect the fees paid to the lawyer or title company that conducts the closing for the mortgage lender. Attorney fees on a purchase transaction are a different fee, the attorney fee in a refinance transaction is generally charged in states that require attorneys consummate the home loan transaction otherwise; the title company or other representative handles the mortgage loan closing paperwork. The cost range for these fees is approximately $200.00 to $1,000.00.
Real Estate Taxes and Homeowner’s Insurance Escrow
The mortgage lender will require that the real estate taxes and homeowner’s insurance policy (sometimes referred to as hazard insurance) are paid up to the time of the home loan settlement and that a new escrow is established to disburse future taxes and insurance premiums. The homeowner’s insurance policy protects against physical damage to the house by fire, wind, vandalism, and other causes covered by the policy. The policy insures that the mortgage lender’s investment is still sound even if the home incurs some devastating calamity. The real estate tax escrow insures that the taxes are paid and the property does not become delinquent and subsequently sold for unpaid property or real estate taxes. These charges are technically not closing costs, since they are not charged by the mortgage lender, only collected by the mortgage lender to disburse to the appropriate collecting body. It is difficult to provide a range of costs for the tax and insurance escrow costs since property taxes may range from $1000.00 to $30,000.00.
Private Mortgage Insurance or Mortgage Insurance
These fees may be required on home loans that have less than 20% down payment or over 80% loan to value on a refinance transaction or are insured by federal government housing programs, such as loans insured by the Federal Housing Administration (FHA) or the Rural Development Services (RDS) and loans guaranteed by the Department of Veterans Affairs (VA). If there is not at least 20% equity in the property, mortgage lenders usually require the home owner to have private mortgage insurance to protect the mortgage lender. Insured home loans with private mortgage insurance cover the mortgage lender’s risk that the home owner will not make all the home loan payments. Costs for mortgage insurance have a wide range from 1.75% for FHA loans and 1.25% for VA home loans to .50% on for conventional mortgage loans.
Once you know what each mortgage lender has to offer run the figures the mortgage calculators to see which mortgage loan program and mortgage rates best suits your needs. And don’t forget to negotiate for the best deal that you can. Armed with the right information and a sufficient amount of mortgage comparison shopping, a consumer should be assured they will receive the right home loan with best mortgage rate and lowest costs.
Locking in a Mortgage Rate
When a consumer contacts a mortgage lender to compare mortgage rates and mortgage products, in most cases, the terms that the consumer is quoted represents the mortgage terms for that immediate time period. The mortgage rate and costs that are given will almost always be those mortgage terms that are available to borrowers settling on their home loan agreement at the time of the quote. These quoted mortgage rates and mortgage terms may not be the terms available at the mortgage loan settlement that will take place a few weeks to several weeks later.
A mortgage loan lock or mortgage rate lock is a lender’s commitment to offer a certain interest rate with any related origination or discount points for the borrower for a specified period of time. This assures that the mortgage rate will remain available while the home loan application is processed and underwritten and cover that time period from mortgage loan application to mortgage loan closing.
Sometimes you have no choice as to when you settle on a mortgage interest rate. You have your eye on a house or condominium, and you are ready to go with a quick closing time frame, so you accept the current mortgage rate or apply for an adjustable rate mortgage that usually does not have a rate lock.
But what if you can wait, and believe that mortgage rates are falling and may continue to fall, you may want to take a shot at predicting the low point of the market and get the lowest possible mortgage rate. Wall Street is thrilled when interest rates fall a quarter of one percent, so why shouldn’t you be thrilled too?
Some of the time you will be fortunate and hit at just the right moment, and other times you will miss. It’s a bit of a gamble. You may look at today’s mortgage rate, use a mortgage calculator to calculate the monthly mortgage payment and be satisfied with where your mortgage payment is now based on the current mortgage rates.
Mortgage lenders tie mortgage rates to the interest rates on mortgage backed securities. It is possible to go online and find the current prices and interest rates for mortgage backed securities however, the rates on mortgage backed securities closely follow the interest rates on ten year Treasury bonds. This is not a direct relationship but the correlation with these rates is very high. As ten year Treasury rates moves down, mortgage rates generally will too. It’s fairly easy to follow the financial markets in the newspaper, online, or on television, and you may feel comfortable watching how the Treasury markets, bond prices and interest rates work.
Changes in interest rates on mortgage bonds will usually cause quick changes in consumer mortgage rates. Home loan rates may change dramatically due to the changes in mortgage bond rates from the day a prospective home owner fills out an application for a mortgage loan to the time they take possession of the home or close on the transaction. Watching the bond market action gives you a leg up on the near future direction of mortgage rates.
So, you get approved by a lender and you believe you have their best offer. At this point you need to decide whether to lock in the interest rate or not. What risk are you taking if the rate isn’t locked. If mortgage rates rise a great deal during the mortgage application process, it could bring about a significant change in the monthly mortgage payment. If your mortgage interest rate and points are locked in, you should be protected against mortgage rate increases while your home loan application is processed.
To avoid a mortgage rate change from having an adverse impact that may increase the new payment based on this rate change to a point that a borrower may no longer qualify for the home loan program, the mortgage rate lock is a great tool. To protect against this uncertainty, mortgage lenders allow the borrower to lock-in the mortgage loan’s interest rate, guaranteeing the borrower the prevailing loan rate for a specified period of time, often 30-60 days.
This protection will generally affect the mortgage one way or another. A locked-in mortgage rate will usually prevent the home loan applicant from taking advantage of mortgage rate decreases, unless the mortgage lender is willing to lock in a lower rate that becomes available during this period. The mortgage rate lock therefore prevents mortgage rate changes that are higher and can drastically impact the cost of the home loan but also prevent the borrower from obtaining a lower mortgage rate should interest rates decrease before the mortgage loan closes. How do you decide to lock in the interest rate?
It turns out that you will probably pay more money to lock in the rate even if locking in the rate turns out to be the right thing to do. That’s because a mortgage lender will usually charge you in some way to lock in the mortgage rate. You may pay higher points, or what is called the loan origination fee, in order to lock in the low rate. Sometimes the mortgage rate is even raised a tiny bit so that you can lock it in. You pay a bit more because the mortgage lender is taking on the risk that rates could go up while the transaction is processed, so the lender could end up losing money if the loan is funded at a lower-than-market interest rate.
A thirty day interest rate lock might cost a borrower one-half of a point at closing, and a sixty day lock might cost a full point. These fees are paid at closing. If a borrower doesn’t want to pay for a lock through points, the fee can be added into the interest rate.
Most borrowers are willing to pay a small and reasonable price for the peace of mind associated with knowing what their interest rate will be at closing. However, interest rates may continue down, in which case you’ve paid a fee for no good reason.
Or have you? As the borrower you are free to go elsewhere for a loan if you don’t like the interest rate before the closing. Your mortgage lender won’t tell you, and it’s a pain to go through the entire process again, but in the long run it may be worth it. Moreover, if you decide to pull out of the arrangement, the lender may be willing to renegotiate the mortgage rate. Especially in a market where there is competition for borrowers, a lender won’t let you walk away easily. It never hurts to ask for a lower mortgage loan rate.
Once you are satisfied with the terms of a home loan you have shopped around for, you may want to obtain a lock-in agreement from the mortgage lender or broker. The lock-in should include the mortgage rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in the mortgage loan rate at this time or added on to the cost of the loan. This fee may be refundable at the home loan closing.