Using a credit line to borrow against the equity in your home has become a popular source of consumer credit. And lenders are offering these home equity credit lines in a variety of ways.
You will find most loans come with variable interest rates, some come with attractive low introductory rates, and a few come with fixed rates. You also may find most loans have large one-time upfront fees, others have closing costs, and some have continuing costs, such as annual fees. You can find loans with large balloon payments at the end of the loan, and others with no balloons but with higher monthly payments.
No one loan is right for every homeowner. The challenge, then, is to contact different lenders, compare options, and select the home equity credit line best tailored to your needs.
Be sure to review the home equity contract carefully before you sign it. Do not hesitate to ask questions about the terms and conditions of your financing. To help you do this, you may want to consider the following questions.
Is a home equity credit line for you?
If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates. And they may provide you with certain tax advantages unavailable with other kinds of loans. (Check with your tax adviser for details.)
At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. And, if you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more freely.
Remember too, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your home, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed payment amounts.
You also may want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money. In addition, you may want to ask about loans for specific items, such as cars or tuition.
How much money can you borrow on a home equity credit line?
Depending on your creditworthiness (your income, credit rating, etc.) and the amount of your outstanding debt, home equity lenders may let you borrow up to 85% of the appraised value of your home minus the amount you still owe on your first mortgage. Ask the lender about the length of the home equity loan, whether there is a minimum withdrawal requirement when you open your account, and whether there are minimum or maximum withdrawal requirements after your account is opened. Inquire how you gain access to your credit line -- with checks, credit cards, or both.
Also, find out if your home equity plan sets a fixed time -- a draw period -- when you can make withdrawals from your account. Once the draw period expires, you may be able to renew your credit line. If you cannot, you will not be permitted to borrow additional funds. Also, in some plans, you may have to pay your full outstanding balance. In others, you may be able to repay the balance over a fixed time.
What is the interest rate on the home equity loan?
Interest rates for loans differ, so it pays to check with several lenders for the lowest rate. Compare the annual percentage rate (APR), which indicates the cost of credit on a yearly basis. Be aware that the advertised APR for home equity credit lines is based on interest alone. For a true comparison of credit costs, compare other charges, such as points and closing costs, which will add to the cost of your home equity loan. This is especially important if you are comparing a home equity credit line with a traditional installment (or second) mortgage, where the APR includes the total credit costs for the loan.
In addition, ask about the type of interest rates available for the home equity plan. Most home equity credit lines have variable interest rates. These variable rates may offer lower monthly payments at first, but during the rest of the repayment period the payments may change and may be higher. Fixed interest rates, if available, may be slightly higher initially than variable rates, but fixed rates offer stable monthly payments over the life of the credit line.
If you are considering a variable rate, check and compare the terms. Check the periodic cap, which is the limit on interest rate changes at one time. Also, check the lifetime cap, which is the limit on interest rate changes throughout the loan term. Ask the lender which index is used and how much and how often it can change. An index (such as the prime rate) is used by lenders to determine how much to raise or lower interest rates. Also, check the margin, which is an amount added to the index that determines the interest you are charged. In addition, inquire whether you can convert your variable rate loan to a fixed rate at some future time.
Sometimes, lenders offer a temporarily discounted interest rate -- a rate that is unusually low and lasts only for an introductory period, such as six months. During this time, your monthly payments are lower too. After the introductory period ends, however, your rate (and payments) increase to the true market level (the index plus the margin). So, ask if the rate you are offered is "discounted," and if so, find out how the rate will be determined at the end of the discount period and how much larger your payments could be at that time.
What are the upfront closing costs?
When you take out a home equity line of credit, you pay for many of the same expenses as when you financed your original mortgage. These include items such as an application fee, title search, appraisal, attorneys' fees, and points (a percentage of the amount you borrow). These expenses can add substantially to the cost of your loan, especially if you ultimately borrow little from your credit line. You may want to negotiate with lenders to see if they will pay for some of these expenses.
What are the continuing costs?
In addition to upfront closing costs, some lenders require you to pay continuing fees throughout the life of the loan. These may include an annual membership or participation fee, which is due whether or not you use the account, and/or a transaction fee, which is charged each time you borrow money. These fees add to the overall cost of the loan.
What are the repayment terms during the loan?
As you pay back the loan, your payments may change if your credit line has a variable interest rate, even if you do not borrow more money from your account. Find out how often and how much your payments can change. You also will want to know whether you are paying back both principal and interest, or interest only. Even if you are paying back some principal, ask whether your monthly payments will cover the full amount borrowed or whether you will owe an additional payment of principal at the end of the loan. In addition, you may want to ask about penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment.
What are the repayment terms at the end of the loan?
Ask whether you might owe a large payment at the end of your loan term. If so, and you are not sure you will be able to afford the balloon payment, you may want to renegotiate your repayment terms. When you take out the loan, ask about the conditions for renewal of the plan or for refinancing the unpaid balance. Consider asking the lender to agree ahead of time and in writing to refinance any end-of-loan balance or extend your repayment time, if necessary.
What safeguards are built into the loan?
One of the best protections you have is the Federal Truth in Lending Act, which requires lenders to inform you about the terms and costs of the plan at the time you are given an application. Lenders must disclose the APR and payment terms and must inform you of charges to open or use the account, such as an appraisal, a credit report, or attorneys' fees. Lenders also must tell you about any variable-rate feature and give you a brochure describing the general features of home equity plans.
The Truth in Lending Act also protects you from changes in the terms of the account (other than a variable-rate feature) before the plan is opened. If you decide not to enter into the plan because of a change in terms, all fees you paid earlier must be returned to you.
Because your home is at risk when you open a home equity credit account, you have three days to cancel the transaction, for any reason. To cancel, you must inform the lender in writing. Following that, your credit line must be cancelled and all fees you have paid must be returned.
Once your home equity plan is opened, if you pay as agreed, the lender, in most cases, may not terminate your plan, accelerate payment of your outstanding balance, or change the terms of your account. The lender may halt credit advances on your account during any period in which interest rates exceed the maximum rate cap in your agreement, if your contract permits this practice.
http://www.online-home-mortgage-loans.com/home-equity-credit-lines.htm
Tuesday, October 30, 2007
Understanding Mortgage Financing
If you are thinking about buying a house, especially your first one, you may have some basic questions about the home-financing process. The following answers may help. You also may want to obtain some of the free or low-cost information listed at the end of this brochure.
How large a mortgage will you be able to get?
A general rule is that you usually can qualify for a mortgage loan of two to two and one-half times your household's income. For example, if your family has an income of $30,000 a year, you can usually qualify for a mortgage of $60,000 to $75,000.
Lenders use many other factors to determine how large a mortgage they will give you. For example, lenders generally prefer that your housing expenses (including mortgage payments, insurance, taxes, and special assessments) not exceed 25 to 28 percent of your gross monthly income. Other long-term debt (monthly payments extending more than 10 months) added to your housing expenses should not exceed 33 to 36 percent of your gross monthly income. Federal Housing Administration (FHA) and Department of Veteran Affairs (VA) mortgage loan percentages may vary.
In addition, lenders want to know about your employment and credit history. This includes finding out about your job and income and how well you handled and repaid loans in the past.
Legal safeguards exist to ensure this information is used fairly. For example, the Fair Credit Reporting Act states that lenders must certify to the credit bureau the purpose for which this information is sought and that it will be used for no other purpose. The Equal Credit Opportunity Act prohibits discrimination in lending based on sex, marital status, race, national origin, religion, age, or because someone receives public assistance.
How much money will you need for a down payment and closing costs?
Lenders usually expect you to be able to make a down payment of between 10 and 20 percent of the house's price and to pay closing costs, often three to six percent of the loan amount. If you make a down payment of as little as five percent but less than 20 percent, the lender will require you to pay for private mortgage insurance. (Requirements for VA or FHA loans may differ.) Under the federal Real Estate Settlement Procedures Act, the lender must provide you with information on known and estimated closing costs.
How do you shop for mortgage loans?
Mortgage packages vary widely, and it is important to investigate several options to find the one best for you. If, for example, you are using a real estate agent or broker to shop for a home, you may want to consider their suggestions about lenders and mortgage packages. Check real estate or business newspaper sections, which may include brief tables on mortgage availability. Look in the Yellow Pages under "Mortgages" for a list of mortgage lenders in your area. Call several lenders for rates and terms on the type of mortgage you want. In addition, consider trying a commercial "computerized mortgage shopping service," although such a list may reflect only a selection of lenders and you may be charged a fee.
Compare the mortgages offered by several lenders before you apply for a loan. Most lenders require you to pay a fee when you file your loan application. The amount of this fee varies, but it can be $100 to $300. Some lenders do not refund this fee if you are not approved for the loan, or if you decide not to accept the loan terms offered. Before you apply, ask the lender whether they charge an application fee, how much it is, and under what circumstances and to what extent it is refundable.
What kind of mortgage should you select?
There are two major types of mortgage loans -- those with fixed interest rates and monthly payments and those with changing rates and payments. However, there are many variations of these plans on the market, and you should shop carefully for the mortgage that best suits your needs.
Common fixed-rate mortgages include 30-year, 15-year, and bi-weekly mortgages. The 30-year mortgage usually offers the lowest monthly payments of fixed-rate loans, with a fixed monthly payment schedule.
The 15-year fixed-rate mortgage enables you to own your home in half the time and for less than half the total interest costs of a 30-year loan. These loans, however, often require higher monthly payments.
The bi-weekly mortgage shortens the loan term from 30 years to 18 to 19 years by requiring a payment for half the monthly amount every two weeks. While you pay about 8 percent more a year towards the loan's principal than you would with the 30-year, one-payment-per-month loan, you pay substantially less interest over the life of the loan. Keep in mind, however, that with shorter-term loans, you trade lower total costs for smaller mortgage interest deductions on your income tax.
Mortgages with changing interest rates and/or monthly payments exist in many forms. The adjustable rate mortgage (ARM) is probably the most common, and there are many types of ARM loans available. The ARM usually offers interest rates and monthly payments that are initially lower than fixed-rate mortgages. But these rates and payments can fluctuate, often annually, according to changes in a pre-determined "index" -- commonly the rate of return on U.S. Government Treasury bills.
Some adjustable loans, for a fee, contain a provision permitting you to convert later to a fixed-rate loan. Another type of mortgage loan carries a fixed-interest rate for a number of years, often seven, before adjusting to a new interest rate for the remainder of the loan. A "buydown" or "discounted mortgage" is another type of loan with an initially reduced interest rate which increases to a higher fixed rate or to an adjustable rate usually within one to three years. For example, in a "lender buydown," the lender offers lower monthly payments during the first few years of the loan.
What features should you compare with different mortgage loan packages?
Probably the single most important factor to look for when shopping for a home mortgage is the annual percentage rate, or the "APR." The APR includes all the costs of credit, including such items as interest, "points" (fees often charged when a mortgage is closed), and mortgage insurance (when included in the loan). Lenders must disclose the APR under the Truth in Lending Act. The lower the APR, generally the lower the cost of your loan. Advertisements that state other rates such as "simple" interest rates, do not include all the costs of the loan.
If you shop for a mortgage loan with interest rates or payments that change, be sure to compare:
* initial interest rates;
* the "cap" -- or how much the interest rate can increase/decrease over the life of the loan, and how much the rate can change at each adjustment;
* how often the interest rate can change;
* how much and how often the monthly payments and term of the loan can change;
* what index is used to determine the rate changes;
* what "margin" is used -- or how much additional a lender can add to the adjusted interest rate;
* the limits, if any, on "negative amortization" -- the loss of equity in your home when low monthly payments do not cover fully the interest rate charges agreed upon in the mortgage contract; and
* any "balloon" payments -- a large payment at the end of your loan term, often after a series of low monthly payments.
http://www.online-home-mortgage-loans.com/mortgage-financing.htm
How large a mortgage will you be able to get?
A general rule is that you usually can qualify for a mortgage loan of two to two and one-half times your household's income. For example, if your family has an income of $30,000 a year, you can usually qualify for a mortgage of $60,000 to $75,000.
Lenders use many other factors to determine how large a mortgage they will give you. For example, lenders generally prefer that your housing expenses (including mortgage payments, insurance, taxes, and special assessments) not exceed 25 to 28 percent of your gross monthly income. Other long-term debt (monthly payments extending more than 10 months) added to your housing expenses should not exceed 33 to 36 percent of your gross monthly income. Federal Housing Administration (FHA) and Department of Veteran Affairs (VA) mortgage loan percentages may vary.
In addition, lenders want to know about your employment and credit history. This includes finding out about your job and income and how well you handled and repaid loans in the past.
Legal safeguards exist to ensure this information is used fairly. For example, the Fair Credit Reporting Act states that lenders must certify to the credit bureau the purpose for which this information is sought and that it will be used for no other purpose. The Equal Credit Opportunity Act prohibits discrimination in lending based on sex, marital status, race, national origin, religion, age, or because someone receives public assistance.
How much money will you need for a down payment and closing costs?
Lenders usually expect you to be able to make a down payment of between 10 and 20 percent of the house's price and to pay closing costs, often three to six percent of the loan amount. If you make a down payment of as little as five percent but less than 20 percent, the lender will require you to pay for private mortgage insurance. (Requirements for VA or FHA loans may differ.) Under the federal Real Estate Settlement Procedures Act, the lender must provide you with information on known and estimated closing costs.
How do you shop for mortgage loans?
Mortgage packages vary widely, and it is important to investigate several options to find the one best for you. If, for example, you are using a real estate agent or broker to shop for a home, you may want to consider their suggestions about lenders and mortgage packages. Check real estate or business newspaper sections, which may include brief tables on mortgage availability. Look in the Yellow Pages under "Mortgages" for a list of mortgage lenders in your area. Call several lenders for rates and terms on the type of mortgage you want. In addition, consider trying a commercial "computerized mortgage shopping service," although such a list may reflect only a selection of lenders and you may be charged a fee.
Compare the mortgages offered by several lenders before you apply for a loan. Most lenders require you to pay a fee when you file your loan application. The amount of this fee varies, but it can be $100 to $300. Some lenders do not refund this fee if you are not approved for the loan, or if you decide not to accept the loan terms offered. Before you apply, ask the lender whether they charge an application fee, how much it is, and under what circumstances and to what extent it is refundable.
What kind of mortgage should you select?
There are two major types of mortgage loans -- those with fixed interest rates and monthly payments and those with changing rates and payments. However, there are many variations of these plans on the market, and you should shop carefully for the mortgage that best suits your needs.
Common fixed-rate mortgages include 30-year, 15-year, and bi-weekly mortgages. The 30-year mortgage usually offers the lowest monthly payments of fixed-rate loans, with a fixed monthly payment schedule.
The 15-year fixed-rate mortgage enables you to own your home in half the time and for less than half the total interest costs of a 30-year loan. These loans, however, often require higher monthly payments.
The bi-weekly mortgage shortens the loan term from 30 years to 18 to 19 years by requiring a payment for half the monthly amount every two weeks. While you pay about 8 percent more a year towards the loan's principal than you would with the 30-year, one-payment-per-month loan, you pay substantially less interest over the life of the loan. Keep in mind, however, that with shorter-term loans, you trade lower total costs for smaller mortgage interest deductions on your income tax.
Mortgages with changing interest rates and/or monthly payments exist in many forms. The adjustable rate mortgage (ARM) is probably the most common, and there are many types of ARM loans available. The ARM usually offers interest rates and monthly payments that are initially lower than fixed-rate mortgages. But these rates and payments can fluctuate, often annually, according to changes in a pre-determined "index" -- commonly the rate of return on U.S. Government Treasury bills.
Some adjustable loans, for a fee, contain a provision permitting you to convert later to a fixed-rate loan. Another type of mortgage loan carries a fixed-interest rate for a number of years, often seven, before adjusting to a new interest rate for the remainder of the loan. A "buydown" or "discounted mortgage" is another type of loan with an initially reduced interest rate which increases to a higher fixed rate or to an adjustable rate usually within one to three years. For example, in a "lender buydown," the lender offers lower monthly payments during the first few years of the loan.
What features should you compare with different mortgage loan packages?
Probably the single most important factor to look for when shopping for a home mortgage is the annual percentage rate, or the "APR." The APR includes all the costs of credit, including such items as interest, "points" (fees often charged when a mortgage is closed), and mortgage insurance (when included in the loan). Lenders must disclose the APR under the Truth in Lending Act. The lower the APR, generally the lower the cost of your loan. Advertisements that state other rates such as "simple" interest rates, do not include all the costs of the loan.
If you shop for a mortgage loan with interest rates or payments that change, be sure to compare:
* initial interest rates;
* the "cap" -- or how much the interest rate can increase/decrease over the life of the loan, and how much the rate can change at each adjustment;
* how often the interest rate can change;
* how much and how often the monthly payments and term of the loan can change;
* what index is used to determine the rate changes;
* what "margin" is used -- or how much additional a lender can add to the adjusted interest rate;
* the limits, if any, on "negative amortization" -- the loss of equity in your home when low monthly payments do not cover fully the interest rate charges agreed upon in the mortgage contract; and
* any "balloon" payments -- a large payment at the end of your loan term, often after a series of low monthly payments.
http://www.online-home-mortgage-loans.com/mortgage-financing.htm
Tips for Buying a Home
Buying a home can be a rewarding life experience, as well as a great investment. But having a successful purchase requires some education and research. For first time homebuyers especially, you'll save yourself a lot of frustration--and maybe even money--if you start with a few simple steps.
Know What You Need
The first step is being honest about your needs versus your wants. For example, you may dream of having a big backyard for gardening. But if you have a busy schedule, a low-maintenance townhouse probably makes more sense. You also have to think about the long term. Will the house still meet your needs--or your family's needs--5 years from now?
Find a Real Estate Agent
A real estate agent can pre-qualify you for a loan, answer questions about neighborhoods, recommend lenders and even coordinate the closing--all while saving you time and money. To find the right agent, look for someone who makes you feel comfortable and listens to your needs. You also want to find a professional who knows the community and current market. Top agents, like those who advertise in Homes & Land Magazine, are great resources for information about their area.
Crunch the Numbers
It's extremely important to have a clear idea of your financial situation before you start looking for a home. Not only will this help you set a budget, but financial records will come in handy when you start shopping for a loan. Make sure to talk with several lenders before making a decision. While interest rates and closing costs are important considerations, you also want to your lender to explain things in a way you can understand and make time for your questions.
Compare Neighborhoods
Focus on areas that meet your needs, budget and personal taste. Factors to pay special attention to include convenient access to transportation, employment, schools and stores. The right neighborhood should also make you feel safe, offer recreational opportunities, and have adequate police and fire protection. To help find your ideal location, consult with your real estate agent and try speaking with residents in the neighborhood to learn more information.
Inspect Houses Carefully
During any house showing, be alert for signs of structural weakness, water damage, pest infestations or other things that just don't "look" right. Conversely, don't overlook an otherwise suitable home just because it has cosmetic problems like outdated carpet or a bad paint job. Most importantly, never purchase a home without first having it thoroughly examined by a professional home inspector.
Negotiation and Contingencies
Don't rely on price as your sole bargaining chip. Contingencies may be written into the contract to specify how certain aspects of the transaction will be handled--everything from standard contingencies like pest inspections, to contingencies for the seller to leave the drapes or pay the buyer's closing costs. Make sure any verbal agreements are written into the contract and that you read ALL the fine print before signing. If you have questions, consult with your real estate agent or real estate attorney.
The Closing
The closing represents the completion of the sale. Be prepared to sign numerous documents as well as pay funds for loan costs, property taxes, insurance and other fees. Try and get a copy of the documents prior to the close so you can contact the settlement agent or escrow officer if any of the information seems wrong or is unclear.
http://barnettrealestate.homesandland.com/Site/Articles/index.cfm?WEBPAGEID=&WEBSITEID=22842&Editorial=EA_Buying
Know What You Need
The first step is being honest about your needs versus your wants. For example, you may dream of having a big backyard for gardening. But if you have a busy schedule, a low-maintenance townhouse probably makes more sense. You also have to think about the long term. Will the house still meet your needs--or your family's needs--5 years from now?
Find a Real Estate Agent
A real estate agent can pre-qualify you for a loan, answer questions about neighborhoods, recommend lenders and even coordinate the closing--all while saving you time and money. To find the right agent, look for someone who makes you feel comfortable and listens to your needs. You also want to find a professional who knows the community and current market. Top agents, like those who advertise in Homes & Land Magazine, are great resources for information about their area.
Crunch the Numbers
It's extremely important to have a clear idea of your financial situation before you start looking for a home. Not only will this help you set a budget, but financial records will come in handy when you start shopping for a loan. Make sure to talk with several lenders before making a decision. While interest rates and closing costs are important considerations, you also want to your lender to explain things in a way you can understand and make time for your questions.
Compare Neighborhoods
Focus on areas that meet your needs, budget and personal taste. Factors to pay special attention to include convenient access to transportation, employment, schools and stores. The right neighborhood should also make you feel safe, offer recreational opportunities, and have adequate police and fire protection. To help find your ideal location, consult with your real estate agent and try speaking with residents in the neighborhood to learn more information.
Inspect Houses Carefully
During any house showing, be alert for signs of structural weakness, water damage, pest infestations or other things that just don't "look" right. Conversely, don't overlook an otherwise suitable home just because it has cosmetic problems like outdated carpet or a bad paint job. Most importantly, never purchase a home without first having it thoroughly examined by a professional home inspector.
Negotiation and Contingencies
Don't rely on price as your sole bargaining chip. Contingencies may be written into the contract to specify how certain aspects of the transaction will be handled--everything from standard contingencies like pest inspections, to contingencies for the seller to leave the drapes or pay the buyer's closing costs. Make sure any verbal agreements are written into the contract and that you read ALL the fine print before signing. If you have questions, consult with your real estate agent or real estate attorney.
The Closing
The closing represents the completion of the sale. Be prepared to sign numerous documents as well as pay funds for loan costs, property taxes, insurance and other fees. Try and get a copy of the documents prior to the close so you can contact the settlement agent or escrow officer if any of the information seems wrong or is unclear.
http://barnettrealestate.homesandland.com/Site/Articles/index.cfm?WEBPAGEID=&WEBSITEID=22842&Editorial=EA_Buying
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