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.
Not-So-Glorious Home Ownership
According to any number of experts in the media, political arena and at backyard barbecues, we should all own our own homes. Home ownership has always been a goal in the United States as it makes a statement about the stability of your income and makes you a better citizen, among other things. Homeowners have long been extolled as being pillars of the moral society, being more involved in the community, and having more educated children. But how much of that is fact, and how much is mere propaganda?
Recent numbers have certainly shown that far too many Americans own homes that they can not afford. Mortgage delinquency is rising as more mortgage payments are slipping seriously past due. These homeowners fell victim to irrational pressures that push home ownership on the American people. People that are now trying to recover from financial loss associated with an unsustainable mortgage loan, credit problems and personal problems stemming from the desire to follow the propaganda pushing the American dream.
Is Home Ownership for Everyone?
If propaganda is to be believed, we should all own our own homes. Unfortunately, many people buy into this belief but fail to consider if, in fact, owning and maintaining their own home is really the right personal decision. There is no doubt society is telling you to buy a home. But it may very well be that your bank account, your lifestyle and your career are sending a very different message entirely.
There are many home loan programs available from the government and banks that have helped low income families become proud home owners with reduced mortgage down payment programs. Unfortunately, many of those homeowners are now staring at rising mortgage payments and imminent foreclosure. Many of these families and individuals took advantage of the sub prime lending craze that swept the nation in recent years thanks to overall low interest rates, low mortgage rates and in some cases additional government assistance.
Now, with mortgage rates creeping back up, mortgage loan payments are coming up too and money is getting tight. When these sub prime buyers are unable to pay their mortgage, they face eviction and foreclosure. Mortgage refinancing, which seemed like a viable option for mortgage payment relief, became more difficult and often involved an even higher mortgage rates. Not only have they lost any investment up to this point, they have also lost their credit rating and their pride. It’s hard to feel good about yourself after being kicked out of the home you were so proud to own a few short years ago as well as losing the mortgage down payment funds and any other money that may have allocated to make previous mortgage payments and housing maintenance.
Don’t Buy a Home
Home ownership isn’t for everyone. When you own a home you must have time and money to spend maintaining that property. You must learn how to cut and edge the lawn and how time consuming driving from the suburbs to the city can be. Many city dwellers who buy a home in the suburbs chafe at the sudden isolation and removal from community activities.
Others find their free time now consumed by drives to and from work every day. Still others realize that paying homeowner association dues and property taxes isn’t as much fun as they were anticipating.
Many homeowners are not only overwhelmed by the new mortgage payment, referred to as payment shock in the mortgage industry, especially when the home loan is based on an adjustable rate mortgage but are also unpleasantly surprised over the cost of maintenance. Maintenance does not just mean maintaining the yard and cleaning but unlike a rental unit in which the structure is maintained by the landlord, your home physical structure including plumbing, electrical and physical wear and tear is maintained by the home owner.
Buying a home isn’t the right choice for many people. If you are in a career that relocates you often, you may be frustrated trying to sell home after home and losing money in mortgage closing costs and commissions. You may also not be an ideal candidate for home ownership if you are at retirement age. Many retirees would do well to sell their homes (along with the maintenance they represent) and find a high-quality, well maintained rental instead.
But Is It Better To Own a Home?
There is some truth to studies that children are more successful academically in families that own homes. There is no difference between those children and children of long-term renters, however. It seems the mobility of families, not the home location is a factor in educational success. Your children will do just as well in a rental as a home, so long as you live there for a long period of time.
Home owners are not necessarily more involved in the community or better citizens, either. Again, the longer you are in a community, the more involved you are likely to become.
As evidence, you can look too many of the cities in Europe. In the United States, 70% of citizens own their own homes. In the well-educated, successful country of Switzerland, only 34% of residents own their own homes. In Berlin, a mere 11% are homeowners.
Perhaps your desire to own a house springs more from the pressure around you than your actual desire to plant a garden or build a porch. Consider strongly your motivation before following the rest of the country into the home buying craze. Study your own personal choices regarding time and your budget for both the mortgage loan down payment and the monthly mortgage payments. Investigate the mortgage programs available and mortgage rates and do not fall into a false sense of security believing that you can always refinance a high mortgage rate into another home loan. The mortgage calculators may be especially helpful in determining mortgage options and mortgage payments. But, the mortgage calculator and mortgage rates can not determine if the work, time and investment in home ownership matches your individual goals and needs.
Investing for Retirement with Your Home
The huge gains in the housing market in recent years (before the market tightened, of course and housing plummeted) gave inspiration to many home owners as to a better way to save for retirement. Rapid housing appreciation made it possible to turn a $20,000.00 down payment into a $100,000.00 plus capital gain. Why stick your money in boring savings accounts when you can invest for retirement in a place that has real value – your home!
But is investing in a large home a realistic strategy for retirement savings? Many argue that it is, but others find many problems with the assumptions made by those encouraging this form of “savings.”
Retiring with Your Home
The basic plan for those planning on retiring thanks to their home value is to buy a very expensive home using as much as they can afford with a very large home loan. For example, rather than staying in a $300,000.00 house, they opt for the $600,000.00 home using most of the money they would otherwise be saving for vacations or furniture or other living expenses. Then, when retirement comes around, they simply sell that now appreciated million dollar home, buy another $400,000 one and live comfortably on the equity. For some people, this strategy worked well…for awhile. Instead of buying an affordable home, these investors took out a large mortgage to buy a home they could just barely afford. The large mortgage payment made for belt tightening in other parts of the family budget but housing appreciation and the power of leverage paid off.
The leverage is working in more than one way. First, homes can be purchased with a very small down payment relative to the size of the asset. A $25,000.00 down payment on a $250,000.00 home is more leverage than can be found in just about any other asset class available for an individual. While some home owners may be overly concerned about a large monthly mortgage payment, the power of leverage can lead significant financial gains relative to the value of the investment. For instance should the investment increase by 15% that is not a 15% return on the $25,000.00 down payment but a 15% return on the $250,000.00 home value which is equivalent to a dollar return of $28,750.00 or a 115% return on the $25,000.00 down payment.
In addition there a variety tax benefits for home ownership. Real estate taxes are generally tax deductible as is mortgage interest paid. And while the mortgage interest is by and large tax deductible the mortgage rates are also typically the best interest rate available for consumer borrowing. Mortgage rates are almost always lower than car loan rates, personal loan rates, credit cards and most all forms of borrowing accessible to an individual.
Pros of the Real Estate Plan
With a bird’s eye view this plan looks fantastic. Real estate is touted as an excellent investment and with the returns we’ve been seeing in recent years on homes, you can expect your home to increase tremendously over the next twenty or thirty years. The problems with the plan come as you begin to drill down into the details.
Problems with the Real Estate Plan
The bare bones plan of selling expensive real estate and living on the proceeds is more than adequate, it’s attractive to many buyers – especially those who would greatly enjoy living in a larger home for the next thirty years. But when the yield from the plan is compared to the earnings from more traditional savings, the computations begin to break down.
The housing market has been booming for the past few years. It is beginning to cool, but rates of return are still high in many parts of the country. This is why many people are shocked to discover that historically houses only truly appreciate at 2% above inflation over the course of twenty or thirty years. That’s slightly less than a treasury notes, one of the safest forms of long-term investment.
That million dollar house will be worth $1.8 million after thirty years. When you sell it, you won’t move back into a $400,000 house – those homes appreciated, too. You’ll be moving into a $700,000 house leaving you $1.1 million. A nice piece of change, but that’s before you start considering fees and commissions. That end results also doesn’t include the maintenance and taxes you’ve been paying on your home for the past thirty years.
By comparison, if you stuck with your $400,000 house and simply paid down the mortgage loan over those thirty years while sticking that extra money into treasury notes (which is a very conservative assumption), you would stand to earn $2 million in today’s dollars – almost twice the result of the home plan. And if you invested that money in real portfolios including stocks and a variety of other instruments, you’d be looking at up to three times the return or $3 million.
The biggest problem is simply the uncertainty of the future value of real estate. If an individual invests in a $750,000.00 home that has a mortgage that is barely affordable, a concern arises on what to do should the value of the home remain stagnant. Now the mortgage payment is crippling the home owner’s lifestyle and their assets are not diversified since the majority of their funds are tied up in a house that is not appreciating and is now potentially very difficult to sell.
Savings for retirement using your home is a plan that can work. The trouble is it simply doesn’t work well enough to justify your expensive new home to anyone but yourself. If you want to consider such a plan be sure to study the numbers. Analyze your budget and the cost of the home including the mortgage payment and cost of maintaining the property. Run the figures through a mortgage calculator and look at all the available options before leaping into this questionable retirement strategy.
Condos and Co-ops and Home Loans
Condos and co-ops may be the ideal real estate solution if you’re just starting out or you’re looking to downsize into something with less maintenance and less cost overall. Owning either a condo or co-op will allow the owner to still enjoy some tax benefits afforded real estate ownership in the US as well as potential property appreciation, while the property is maintained by others. That’s not to say, however, that condominiums and co-ops are a trouble free alternative to free standing homes. In fact, quite the opposite may be true.
Condos
Condominiums or condos are individually owned apartments in a building or complex. Owners are free to buy and sell their condo at will. Condo owners have their very own deed and title and simply pay a bit into the upkeep and maintenance of the property. The condominium owner holds legal title to the unit and pays real estate taxes and common charges for the maintenance of the building and common areas. Each condo unit owner owns an individual apartment in what is referred to as fee simple. The general attraction to condominium ownership is the properties can be less expensive than single family housing in the same area.
A condominium owner owns the unit in fee simple which is similar to most all other methods of home ownership, and also may own an undivided interest in the common areas of the condominium such as a pool, playground, lobby area, like parking lots, recreations areas, and hallways.
Co-Ops
Co-ops on the other hand, are not true real estate ownership. Members of a cooperative or co-op own stock in the company that actually owns a building. You’re not paying for an apartment; you’re paying for the right to lease one. Like with condos, you’ll pay a portion of maintenance fees and upkeep, but you’ll also be contributing toward the taxes and insurance on the building. Co-ops are also able to control your use of your unit. In a cooperative apartment complex you don’t actually own any real estate. Rather, you own shares in a not-for-profit corporation. When it comes to sell the property, the member of a co-op may sell their shares in the cooperative whenever they like for whatever price the market will bear, much like any other residential property.
Potential Pitfalls
The biggest problem of buying a condo or buying into a co-op is the close proximity of others. You may be subject to rules set by others such as no dogs and no major renovations. You’ll also be paying into the same building as many others which means you may be looking at trouble if the others, well, don’t pay in. If your neighbors start to default on their maintenance payments and mortgages, you’ll have to help cover the difference. If it happens too much, you may not be able to sell your unit as the whole complex will become unattractive to buyers.
Mortgage guidelines for condos and co-ops are more restrictive. As a general rule, the down payments will be larger and the mortgage rates will be higher. Mortgage lenders generally have even more restrictive lending guidelines for co-ops. There are far fewer mortgage options available, the down payments are often larger than they are for condos and they charge even higher mortgage rates.
Buy In Carefully
If you’re going to buy a condo or are considering joining a co-op, you’d best consider very carefully. The banks and other members of the co-op will be considering you just as closely if not more so. Banks are often hesitant when it comes to buying into group properties.
When a new condominium unit is built, banks often balk at lending money to prospective buyers. The building sponsor most likely owns the bulk of the units in the building which means he could easily turn around and rent them rather than selling them. The bank is also hesitant to put itself at risk if the majority of units are owned by a company that may default on the underlying mortgage thus causing you to default on yours.
Today, however, this is less of a problem as most building sponsors arrange financing prior to building. Prospective owners may establish a mortgage with the arranged lender or with another lender of their choice, but the financing is a bit more secured, which is to your and the bank’s liking.
Understanding Co-ops
Co-ops are very special entities that have grown in areas such as New York City. In a co-op you must not only arrange financing with the bank, but you must also pass muster with the co-op board. The co-op board is comprised of other residents who want to know exactly who is moving in next door. They will dig through every aspect of your finances to be sure you are a suitable resident, and it is not uncommon for applicants to be approved by the bank, but denied by the co-op board.
Protect Yourself
The best way to protect yourself with either a co-op or condominium is to scrutinize the finances and inner workings as much as your own are currently being investigated. Find and work with a knowledgeable realtor and attorney you can trust to help examine the statements of each residence to determine if it is a sound investment.
Understand the differences between styles of buildings as well. You may find newer buildings have lower taxes, while older buildings have different maintenance fees depending on how much is still owed on the underlying mortgage.
Mortgage Info on Condos and Co-ops
Make sure to check the available mortgage programs for either a condo or co-op in the area in which you are home shopping. Co-ops are less common product and the mortgage lenders and banks that make these home loans are usually local to the market. Condominiums are far more common and most all mortgage lenders and banks that make mortgage loans make home loans for condominiums. The mortgage rates may be slightly higher as well as the down payment requirement for these properties and theses terms may change with the geographic area. Some geographic areas have become overbuilt and greater percentage of the condos and co-ops are facing higher foreclosure and delinquency rates on the underlying home loans that will often scare off mortgage lenders from making more mortgage loans to those types of properties.
Ownership in these property types can be very rewarding as long as the buyer and potential home loan applicant is aware of the property and mortgage market and its potential pitfalls. The mortgage calculators can be used to make a variety of mortgage calculations on these home loans as long as the appropriate mortgage rates and loan terms are used for the input.
Negative Amortization Mortgages
It was a mortgage deal that you read or heard about, that just seems too good to be true. A financial institution, bank or mortgage lender says they will allow you to make payments that are so small they do not even equal the current mortgage interest due. This home loan programs would drastically reduce your monthly payments and you were on easy street. Negative amortization mortgage are what this type of mortgage arrangement is called. And it only sounds good in most cases. Interest money you save now will cost you dearly later.
The typical monthly mortgage payment is mainly interest, charged for the use of the money you borrowed on the mortgage. At the start of the mortgage term, almost all of the payment you make each month is paid in interest, with a small portion toward the principal of the home loan. Over the period of the mortgage, gradually the amount paid toward the principal increases, and the interest you pay slowly decreases. This process is the amortization of the mortgage loan. A different type of home loan find mostly with adjustable rate mortgages is called a negative amortization mortgage and it is something not to be entered into lightly.
A negative amortization mortgage allows you to pay less interest for a set period of time, normally this may last for a few to several years. Lets say for discussion that your normal mortgage payment each month is $1000, and of that amount $600 dollars goes toward the interest amount and the rest, $400 dollars goes toward the principal. If you begin a negative amortization mortgage you would conceivably have the option to make a monthly payment of say, $500 dollars, which would pay on the interest and nothing on the principal of the loan. You would still be responsible for the other $100 dollars of interest. This other $100 dollars of interest is then added back into the principal of the mortgage loan, and you then will pay interest on this amount, too.
Negative amortization is made available by mortgage lenders by calculating two different interest rates. The first interest rate is referred to as the payment rate and the second interest rate is simply known as, fully indexed interest rate. On adjustable rate mortgages with negative amortization features, you will find that the payment rate changes are normally capped off at 7.5% of the previous payment amount. However, the true interest rate is calculated by simply the adjustable rate mortgage index plus the margin without the use of periodic caps. However, what the borrower pays is ultimately up to them because the borrower is able to choose which mortgage rate they wish to pay. Because of this, you will find many amortization loans being advertised as “payment option” mortgage loans, due to the fact that you are given an option in how you wish you pay. Even though the borrower is able to have flexibility in how they pay for their home loan, they are still subject to the true mortgage interest rate.
This results at the end of the first month actually owing more on your home mortgage than you did at the beginning of the month, and you pay increased interest on the difference until the mortgage is retired or paid off fully.
Short term lower monthly payments leads to short term gain. Lower payments make it easy to qualify for a mortgage loan. But it also leads to long-term financial pain. You end up with more debt on your original mortgage than you started with and greatly increased mortgage interest payments. The longer that you are in a negative amortization mortgage, the greater sum of money you will wind up paying on your mortgage.
There are times that a negative amortization mortgage makes good sense because of the easy mortgage qualifications and lower monthly mortgage payments. But this is true only in certain cases. If you run into financial trouble, or sudden and unexpected expenses you cannot avoid. Or you are laid off of work and can’t find a job right away, in such cases a negative amortization mortgage may make sense. Entering into a negative amortization mortgage due to necessity or with the knowledge down the road you will be on better footing financially is sometimes a positive choice. Once your situation changes you can arrange to make either additional or increased monthly mortgage payments to take up the slack. Or, if you have the money you might pay it all off at once.
Some people use the undemanding qualifications and lower payments to pay for a house while the value of the real estate increased. In such cases a person may choose to live inexpensively in a house while it appreciates in value, then sell later and realize a profit. The profit can then be used to pay off the mortgage. But if the property does not increase in value or appreciate then you may be saddled with a large expensive mortgage and no way to pay it off. Another valid use was for young couples to use the adjustable mortgage rate feature for easy qualification on tight income or budget. The appeal would be that as young workers their income was more likely to increase rapidly in the ensuing years and handling the negative amortization feature in order to buy the house was reasonable trade off.
There is the chance that, as in life, your financial situation may not improve on the time schedule you anticipated. When this happens you can be faced with some very tough decisions and possibly being forced to sell your home or property.
The mortgage calculators designed to evaluate adjustable rate mortgages can be very useful in analyzing the mortgage payments on a negative amortization home loan. In addition, the mortgage calculator can be very useful in viewing future mortgage rate changes and how they will impact the monthly mortgage payment as well as the total amount of negative amortization that will take place when the mortgage rate rises and the payment is capped.
It is a risky business, so think carefully before entering a negative amortization mortgage. It can be attractive to help cope with some situations, but it assumes a large amount of risk and should be avoided if possible. These home loans are available for both a home purchases and an existing mortgage refinance.
Home Loans, Lot Size and Value
Many prospective home buyers question the value of large lots. Even with bigger house being built, new home lots are shrinking across the country. One way to keep new home prices down for builders has been to squeeze more lots into each development. As the older home owning population continues to age, there will be even more gravitation to small lots. More people in general are being drawn to these homes because they are valuing their free time, since they seem to have so much less of it these days. Some homeowners don’t want the lawn maintenance and water bills that often go with larger lots.
However, it is possible that existing homes may enjoy a competitive sales advantage against new homes because of their lot size. A question then arises on whether it is better to have a big lot, even if it means an older home? Or is best to stick to a new home on a small lot? How much is that lot worth? Big lots may be nice but when the price tag makes the mortgage payment and mortgage amount bubble over your monthly budget suddenly the smaller lot looks like the prudent buy.
Appraisal Value
Mortgages can be very complex debt instruments. Mortgage lenders use a number of tools to determine the mortgage qualifications for new home buyer. Mortgage lenders also use different ways to work out the size of mortgage they will give you including appraising the property and calculating the value of the property you want to buy. Part of the property’s overall value is the lot itself. Lot value is determined by size and location. In general, the larger the lot is compared to the surrounding area the greater the value will be and hence the greater the value of the home.
From an investment potential, a larger lot will generally contribute to the value of the property but will not necessarily lead to a better investment or rate of return. The lot maybe worth a great deal to someone with kids and pets, but there is little difference in overall home appreciation between a home on a large lot and one on a small lot. A large lot is different than acreage. Of course a ranch house on many acres will be valued more highly than a house on 3,000 square feet. But in a comparable neighborhood, a home on 3,000 square feet is appraised at the same rate as the home on 8,000 square feet.
Expansion Value
The value that may actually come from a house on a large lot is in the expansion. You can change the size of a home, but you can’t change the size of a lot. You can raise your property value tremendously by building a workshop or office on part of that land. Or put in a swimming pool which may not raise your property value much, but should make your property more enticing to buyers. If your home can be torn down and the lot subdivided, you can also double your property value simply by selling two separate homes. But remember, unless you have inside information about the property, the value of the subdivision of the property should be factored into the selling price. As far as your own expansion desires are concerned, a larger lot may have more value to you than to the average buyer and this is a factor in your purchase decision you should not ignore.
Aesthetic Value
If your lot offers great views and is well developed, it may aid in selling your home more quickly. A home with a terrific patio and garden may very well be more appealing to you than a small plot of green, especially if you enjoy spending time outdoors or hope to spend your mornings puttering in the garden. The larger lot and outdoor space should also add to better air circulation around the home and superior natural lighting. A larger lot will certainly offer more privacy designs with more outdoor living space in the rear of the property or the front and side property boundaries.
Sentimental Value
A large plot of land is also valuable for sentimental reasons. One of the classic values of many cultures is to own the land under your feet, and there is an emotional response to owning a great deal of land. Even if your land is subdivided with a privacy fence, it is still yours and you can dig it up, mulch it and mow it as you please. Although if you have a very large lot, you might have to invest in a riding lawnmower and other yard maintenance equipment to make the property management easier.
Making the Purchase and Obtaining the Mortgage Loan
Most all basic types of mortgages can be used to buy a home on small lot or a large lot. The lot size will certainly affect the home price and the amount of the home loan but home loans become a problem only when the house lot is in excess of five acres or represents the majority of the property value.
Try not to think about your house primarily as an investment. Think of it as your home. Find a neighborhood that fits your needs and a fixed rate mortgage you can afford and don’t pay as much attention to how a home with a larger lot is going to make you rich. The mortgage calculator will help you determine the monthly repayments for a given home loan amount on the home you want.
Mortgage Closing Time and Tax Prorations
Prorations are items that are shared between the seller and the buyer at the time of a home loan closing. The largest prorations will be property taxes. Property taxes can be more complicated than other prorations because of the shear size of property taxes and the potential for increases in tax assessment that can occur either after the contract is signed and the closing on the property takes place or between the time of the last known tax bill and the time the property closing takes place. Tax proration is not a process involved in a mortgage refinance since there is no change in ownership on the property.
In many cases, the closing agent will use the property taxes from the previous year to determine the proration for the sale of the property. For example, let’s say that you close in August, but the new taxes aren’t available until November. Since you have only lived on the property for four months, if the taxes go up are you responsible for the taxes for the entire year? The converse can be true in some locations of the United States where county taxes are paying for services following the due date of the property tax bill. Fewer taxing authorities have you pay for future services and the problems lie with the property tax bill for past services.
In cases where a tax bill coming due is paying for prior months services the proration is a credit to the buyer which flows down to a credit for the funds needed to close on the home loan. At the time of the real estate closing the taxes payable have accrued on the property. As an example, if the property were located in a county that sends it tax bills out twice a year and the first bill is in July for the previous six months property taxes. If the purchase closes in March a proration credit is due the buyer. The buyer will be paying a bill in July that covers the months of March, April, May and June when he was in the property. But the bill also covers the months of January and February in which the seller still occupied the property. In this case, it would be customary for the seller to credit the buyer the amount of funds for those two months at the closing even though the tax bill for this time is not out yet.
The issue gets further complicated since the closing is taking place in March, the amount of the tax bill coming out in July is most likely unknown. It is certainly rare to see a county reduce the tax burden on real estate.
One way to solve this problem is for the buyer and the seller to sign a tax escalation or proration agreement into the purchase agreement. This means that the buyer and the seller have agreed to have an amount of the taxes credited to the borrower or seller greater than 100% of the most recent bill. 115% is a common figure used in the contract. The credit from the seller in the preceding example will now take the previous six month tax bill, divide that figure by the number of days the tax bill covers, this gives us the per day tax liability. This figure is multiplied by the amount of days the seller was in the property since the last tax bill up to the closing and then multiply that by 115% to get the credit for the buyer and the cost for the seller. If this escalation agreement is not part of the purchase contract, it is highly unlikely the seller will credit anything more other than what is mandatory.
It will be hard to get a complete grasp of the home loan closing process and funds needed to close on the mortgage loan without understanding the tax proration procedure. Tax proration will ultimately impact the amount of funds needed to bring to closing on a home loan. Most buyers and sellers don’t completely understand the prorations at the time of the mortgage or home loan closing; in fact many of the professionals at a real estate closing can’t explain the calculations on how all the funds disbursed. Make sure you fully understand any related prorations, consult the real estate agent, title company officer or your attorney regarding when property tax assessments are made, these figures will vary from state to state. Often the mortgage calculators available online can help to obtain estimates on the closing costs of a home loan including assisting with the tax proration.
Balloon Payment Mortgages
A balloon payment mortgage is home loan that does not fully amortize over the term of the loan. The payment on a balloon mortgage loan is calculated over a predetermined period, most commonly for 30 years, but the balance of the loan is due or payable after a specified period before the 30 years. An example of this is a five year balloon home loan. This home loan would have principal and interest payments based on a 30 year loan, but the outstanding balance has to be repaid in full before the end of the five year term. This payment is at the end of the term is how the balloon name was derived.
The most popular balloon mortgages have a fixed rate period of either five or seven years with a thirty-year amortization and generally they will not have a prepayment penalty. At the end of 7 or 5 years the borrower has usually two options to make the final balloon payment. The home can be sold to pay off the home loan or the borrower can refinance the home loan. Either option can be exercised up to the time the term of the home loan ends.
There is another type of balloon option to handle the remaining balance at the end of the term. This option is found in some balloon payment mortgages and has an option to extend the home loan for the remaining term at the prevailing market rates adjusted according to terms in the original mortgage note. The rate then remains fixed for the rest of the home loan term. This feature is referred to a convertible option, since you may convert the mortgage loan to a fixed rate at that time. The home loan may also be referred to as a two-step, the first step is the balloon term and the second step is the conversion. The general conditions to be able to convert include; the home is still your primary residence, you have a good payment history and your payment is current and there are no additional liens on the property.
The interest rates on balloon payment mortgages are generally lower than that of a 30 year fixed rate mortgage loans. The major advantages of the balloon payment mortgage are; lower interest rates, lower payments and the ability to qualify to buy a larger home. Generally these mortgage loans are considered when the borrower does not expect to be in the home at the end of the fixed mortgage loan term. Of course there are some disadvantages to the balloon mortgage, most notably, continually worrying about the end of the fixed rate period when the large balloon mortgage payment will be due.
The balloon payment mortgage is clearly not for everyone to consider. When interest rates and mortgage rates are low from the short term to the long term, the slight benefit of a balloon with a lower mortgage rate is eroded. Most home buyers however, do not have the same mortgage five or seven years later, they have since moved and paid off or did a mortgage refinance. Weighing the benefits and risks of the features on these mortgage loans against your needs will determine if the mortgage rate and costs of this product should be considered further.
Always investigate the differences in mortgage rates between the balloon mortgage loan and a standard fully amortizing home loan. These homes can be used for both a home purchase as well as a mortgage refinance. Use a mortgage calculator to help compare the mortgage rates, mortgage payments and the amortization schedule on the loan including the balloon payment can be very useful to determine if this type of home loan is right for you.
Turning To Hard Money Lenders for a Home Loan
Hard money lenders are lending institutions that provide mortgage loans for borrowers who do not meet the traditional lending guidelines. Usually the mortgage rates are appreciably higher and the equity in the property has to be more substantial. The equity in the property will be larger either with a larger down payment for a home purchase or through appreciation and principal reduction if the home loan transaction is a refinance. The hard money lenders want to be assured there mortgage loan is not at risk should they have to foreclose. Since the borrower using a hard money lenders has credit or income issues that prevent them from seeking funds in the normal mortgage market, not only are the mortgage rates are higher but the term is often shorter and the fees more costly.
The overall lending standards and procedures for hard money loans are not nearly as rigorous as they are for conventional home loans. In view of the fact that the properties on which these mortgage loans are based have to have substantial home equity in them and the interest rate paid is measurably higher, the loan requirements are reduced. Hard money loans are based on the value of the property, not by the credit worthiness of the borrower. Credit problems and income constraints are normally not a considerable barrier to a hard money lender.
Hard money loans are used predominantly in turnaround situations. Borrowers with poor credit but substantial equity in their property with a need for short-term financing or wish to help remedy a mortgage loan default or pending foreclosure. Hard money mortgage loans, even in these situations, are for those borrowers who understand the cost and risks associated with the loan terms and are not able to get traditional mortgage financing. Because of the recent subprime debacle, it is very likely the activity in hard money lending will increase. Banks and mortgage lenders are turning away potential borrowers with impaired credit or income constraints in significant numbers and the most likely resource for these people is private hard money lending institutions.
As a rule, hard money lenders are small companies or individuals. Finding these hard money lenders can still be very difficult. Many states have enacted regulations covering the maximum rates that can be charged on a mortgage loan. These restrictions on high cost loans make the profit potential for hard money lending difficult and since these home loans are inherently very risky and likely to have high default rates many hard money lenders will not operate in states that unfavorable statues. One other reason for lack of availability of these lenders is housing depreciation. Hard money lending bases a significant amount of the loan approval process on the collateral or home value. When prices head south the hard money lender has to be sure in the event of foreclosure they will not absorb a loss do to insufficient equity to cover their loan balance.
Even with the high mortgage rates and fees, hard money lenders can be a valuable resource for a select group of borrowers. To calculate the expense in obtaining one of these home loans, the online mortgage calculators can quickly calculate the monthly mortgage payments, the mortgage rates, APR’s, different terms and the total cost of these high cost loan. Like all mortgage loans, understand the terms, shop around and don’t sign anything until you are completely satisfied that you aware of what the terms are.
What Is a Mortgage
Before deciding which mortgage may be right for you, understand what it is you are trying to get a hold of. Gaining knowledge of what a mortgage is can be an important tool in searching for the right mortgage and help recognize the value of your rights and responsibilities while you have a mortgage.
Technically speaking, a mortgage is a written legal contract that establishes the rights and liabilities of both the creditor and debtor and creates a lien upon real estate. The mortgage is the pledge of the real estate as security for payment of a debt. The mortgage is actually the lien on the home and not the loan itself. The lender, mortgage company or any financial institution that holds the mortgage, has an interest in the property, they do not own the property. Often the term mortgage or loan or the combination mortgage loan and home loan are all used to mean the same thing.
The borrower or debtor is the party pledging the real estate as collateral for the mortgage loan and is therefore gives the mortgage. The mortgage lender or creditor is the party providing the loan or note that is secured by the property in the form of a mortgage on that property. The borrower is the mortgagor and the mortgage lender or mortgage company is the mortgagee.
Since the borrower pledges his or her property as security for repayment of a debt, the mortgage creates a lien against the borrower’s property. The lending institution, mortgagee, holds that lien. In return for holding the lien or mortgage on the property,the mortgage company is also agreeing to loan you money. The terms of how much money is loaned to you, at what interest rate or mortgage rate and for how long is established in the note or promise of repayment, but not on the mortgage itself. If you don’t keep your promise of repayment and default on the loan terms, the mortgage that pledges your property as security gives the lender the right to initiate foreclosure and sell the property to satisfy the debt if necessary.
The foreclosure action starts due to the failure to make the timely mortgage loan payments. Foreclosure allows the mortgagee to declare that the entire mortgage debt is due and must be paid immediately. This is accomplished through an acceleration clause in the mortgage. Failure to pay the mortgage debt once foreclosure of the property occurs, leads to seizure of the security interest, the home and land, and it’s sale to pay for any remaining mortgage debt. How the foreclosure process is carried out depends on state law and the terms of the mortgage.
There are several types of mortgage loans available with a variety of terms, mortgage rates and costs. Which home loan is best for any particular borrower depends on many factors about financial position and lifestyle choices. Using a mortgage calculator is a good start to compare different mortgage rates, terms and products. Research the terms and cost and comparison shop thoroughly to match the right mortgage loan to your needs whether its is to purchase a new home or an exiting mortgage refinance.
What Is a Mortgage Refinance
Refinancing is defined as taking one mortgage loan and replacing it with another. A refinance is useful for homeowners who want to lower their mortgage payments, change the length of their existing mortgage, or taking cash out for any worthwhile purpose.
Historically, refinance transactions were used mainly when interest rates and mortgage rates were falling. Homeowners would seek to refinance at interest rate that would be below what they had on their home loan when their first bought the property.
Reducing the existing rate on a mortgage or altering the existing length of your loan is referred to as a rate and term refinance. A rate and term refinance isn’t always used by someone to lower his or her payment or change the term of the home loan. In today’s chaotic interest rate environment numerous homeowners are refinancing into fixed rate loans from adjustable rate loans regardless of what the difference in mortgage rates may be. Some homeowners make use of a rate and term refinance to avoid the rate changes coming due on an adjustable rate mortgage and merely refinance into yet another adjustable rate loan with a lower start rate.
Refinancing for additional cash to pay for bills, other loans, home improvements or any other purpose is categorized as a cash out refinance. Paying off any other debts or using the funds from the proceeds of a new refinance for any thing other than paying off the existing mortgage and the costs associated with that mortgage loan, is considered a cash out refinance. A cash out refinance requires that there be sufficient equity in the property to cover the amount of cash requested. If a homeowner has paid down their mortgage for a long period of time or if property values have risen since the time the property was purchased, the homeowner has probably built up some equity in the home that can be accessed with a cash out mortgage refinance.
Refinancing an existing mortgage loan and taking out a new home loan can yield substantial monthly savings by reducing the mortgage rate, shortening a mortgage term to build home equity faster, changing the mortgage product from an adjustable rate mortgage to a fixed rates loan or a fixed rate mortgage into a an adjustable rate mortgage or taking cash out. However, mortgage refinancing comes with a cost to obtain the new home loan. It is essential that home owners who are considering a mortgage refinance transaction evaluate both the costs and benefits before filling out a mortgage application.
No matter which refinancing option you choose be sure to research it carefully. Your refinancing decision depends on current interest rates and mortgage rates as well as your own financial needs. Compare the available mortgage loan programs, gather information, and check out online mortgage calculators to see what type of mortgage refinancing will work best for you. Take your time to decide if refinancing is right for you before starting this new home loan transaction.
What To Do Now That the Mortgage Rate Has Adjusted
When home prices appeared to be appreciated without an end in sight and interest rates seemed as though they were headed to zero, many homeowners jumped on adjustable rate mortgages. These mortgage loans offered low initial payments enabling borrowers to afford the ever rising home prices and were also used to help homeowners who had tight budgets on their existing house payments refinance into a more manageable payment structure. Some of these adjustable rate mortgages were sold to unsophisticated consumers with the assurance not to worry about future mortgage rates since you can just refinance. Well, for some borrowers, refinancing is not a possibility, particularly when many of these home loans had prepayment penalties. With housing now in a down cycle, expected appreciation has vaporized leaving little to no equity in the property, compounding the difficulty to refinance. Those that didn’t refinance are finding the new adjusted mortgage payment a difficult and often painful part of the household budget.
If the interest rate on your adjustable rate mortgage has not adjusted yet, study the paperwork from the mortgage loan closing to determine when and at approximately what mortgage rate it will adjust to. If it has not adjusted, the mortgage rate will be an approximation since you can not predict where the index your adjustable rate mortgage is based on will be in the future.
Keep in mind that the initial mortgage rate on an adjustable rate mortgage has little to do with the future rate changes; this rate was simply a start rate that was in fact a teaser rate. The adjustable rate mortgage interest rate is tied to an index plus a margin to get the interest rate the payment is based on. When you sign for the mortgage loan, you can calculate what this rate would be at that time. The introductory rate is almost always much lower than this mortgage interest rate. Therefore, when the first adjustment time comes, unless the index the loan is based on goes down, you are almost guaranteed the rate your loan is based on is going up. When your first adjustment rolls around, many loans allow a higher increase than for subsequent adjustments. Some adjustable rate mortgages loans can jump to the maximum cap rate, which could be as much as another 5 to 6 percent.
Let’s say you borrowed $300,000 at an initial rate of 4.75%, the current principal and interest payment would be $1,564.94 per month. If the home loan terms contained a cap of 2% per year and the new index plus margin hits the maximum change, the new rate will be 6.75%. At this mortgage rate, your payment would increase to $1,945.79 or about $381 more a month. If your rate adjusted the maximum amount at the following cycle or adjustment period the rate goes to 8.75%, and the payment would be $2,360.10, or a difference of an additional $415 a month. With property taxes increasing, utility bills swelling and the general cost of living going up, short of taking on a second or third job, not many borrowers can afford such extreme jumps in monthly payments.
Some of the options that are available include selling your home, talking to your mortgage lender to arrange payment relief, refinance into a fixed rate mortgage or refinance into another adjustable rate mortgage.
If you are planning on moving, refinancing is most likely not worth the time and costs. If you intend to sell, keep in mind some of the costs you may incur in selling the home. Listing your house for sale with a real estate agent, providing you have enough equity to pay commissions and costs of sale will typically absorb 5 to 10 percent of sales price. You can try and sell your house without representation, providing you can afford advertising and marketing expenses, including the advice of a real estate lawyer.
Refinancing to a fixed rate mortgage is a great option; you will of course have to qualify for the home loan. Mortgage refinance transactions are generally easier to qualify for than a purchase and the paperwork is slightly less rigorous. This option is feasible if you have enough equity and can afford higher monthly mortgage payments. Mortgage qualification will be based on the loan to value or amount of the mortgage loan divided into the property value, your credit history and your debt ratios. It is easier to qualify if you do the refinance as a rate and term refinance. A rate and term mortgage refinance is where there is no new funds are added on to the payoff of your existing mortgage loan other than closing costs, the opposite would be a cash out refinance. The mortgage calculator is a useful tool to measure the mortgage rates, costs and terms to see how your loan may qualify for the best mortgage loan available for refinancing.
If theses options are not practical, talk to your mortgage lender or bank. In most cases, your mortgage lender will be willing to cooperate with you and help you catch up if you have trouble making the payments after the home loan adjusts. Often, lenders are not interested in foreclosing your house except as a last resort because of the costs and time involved in the process. If you believe that you situation is untenable, speak to the lender to see if you can arrange to make lower payments, deferring unpaid interest and penalties even if it will increase your mortgage loan balance. You may also persuade the mortgage lender to come to an agreement on forbearance or postponing your mortgage payment increases based on ability to pay at a future date.
The worst thing a homeowner can do is ignore the coming mortgage rate changes and payment shock and do nothing.
A No Cost Home Loan, Is This Too Good To Be True?
No closing cost loans have existed in the mortgage market for years. They are more prevalent in states with high home values and substantial loan amounts but can be found in almost every segment of the mortgage market. The no cost home loan is truly no cost when the lender charges no fees or closing costs. This occurs because the mortgage lender absorbs the closing costs of a no cost mortgage loan. The mortgage loan is constructed by the mortgage lender so that the mortgage rate they charge is sufficiently high enough to absorb the fees and costs they would normally have in originating a loan. All things being equal a no cost home loan will have a higher interest rate than a loan where you pay the fees, either upfront or at closing. The no cost loan is in effect spreading the costs of the home loan over the life of the via the higher mortgage rate.
When considering a no cost home loan make sure the mortgage company specifies if this truly a no cost home loan and there are no points, title fees, origination points, processing fees, etc… Two costs you will have to pay are the interim interest and escrows. Interim interest is the interest you are charged at closing from the time you get the loan to the beginning of the first payment cycle. If you purchase a home and the closing takes place on the 23rd of the month you will have interim interest from the 23rd to the beginning of the next month. Escrows cover items such as taxes and insurance. On a no cost home loan or any first mortgage loan, the mortgage lender will most likely establish an escrow for the portion of taxes and insurance and that are already due and payable on the property. These costs are not absorbed by the mortgage lender or bank and will have to be paid by you at closing or added to the new mortgage loan.
The two key points to consider in the no cost mortgage loan is what is the mortgage rate compared to the other options and evaluating your needs for this home loan request. Measuring and comparing costs and mortgage rates should be straightforward. Weigh the no cost mortgage rate, term and APR with the same mortgage loan where you pay the costs. Make absolutely sure which cost you have to have in each mortgage loan. Now, evaluate the estimated length of time you will have this home loan. The longer you hold the loan the less beneficial the no cost loan. Since the mortgage rate charged by the lender is greater on the no cost if you hold the loan for a prolonged period the added monthly interest defeats the value of no upfront cost at closing. The shorter your time horizon, the more beneficial it is to pay the higher rate and have the lender absorb the costs of origination.
No costs loans are not a gift from the mortgage industry. They are another mortgage loan product that has both costs and benefits. These home loans are available for either purchasing a new home or an existing mortgage refinance. To help compare mortgage rates for either a refinance or purchase, the mortgage calculators can be very useful tools to compare rates, costs and terms. Research all available loan products, be sure of what your needs are, and then directly compare mortgage rates and costs before signing for the new home loan.