Is a Home Equity Loan Right for You?

One major asset that many homeowners tend to overlook when seeking a way out of a financial hardship is right under their noses… or perhaps more accurately, right over their heads: their home.  Your home is an investment and there’s no reason it can’t yield valuable returns for you. 

A home equity loan (HEL) is a loan that uses the equity built up in your home as collateral and it might be just what you need if your circumstances are right.  However, because home equity options are not created equal, here are a few tips to keep in mind before placing your property on the line:

• Home equity loans are intended for those who have a large, one time expense they need to cover quickly.  Because they are paid out in a single advance, if you have a large project in mind that will take an unspecified amount of time and money, you might consider other options such as a home equity line of credit which allows you continuous access to credit.  However, single expenses, such as paying off credit card debt, could be an effective use of a HEL.

• Speaking of credit card debt, a HEL may be a desirable option for those with less than perfect credit.  Lenders tend to see HELs as rather safe because they hold your home as collateral.  The fact that your property is being used as collateral for a HEL is frequently seen as a huge risk and possible downfall of this type of loan.  To ensure you aren’t forced to face this harsh penalty, be sure to know precisely how you are going to pay the loan back and make all your payments on time.

• HELs are generally offered with lower interest rates, and the interest paid on a HEL may be tax deductible.  Be sure to check with your CPA for complete details.

If a home equity loan sounds like it may be the right fit for you, remember to research potential lenders thoroughly.  Check local credit unions as well as larger banks and finance companies to gain better knowledge of available options before committing to a mortgage company.

Source: Informa Research Services

The Affordable Dream Home: Myth or Reality?

One part of the American dream is undoubtedly living comfortably in the home of your dreams.  But exactly how attainable is this?  It may be closer than you think.  In fact, it may be only a modest mortgage and a home equity line away.

But before your hopes float too high, be forewarned: unlike the Hollywood version of this story, the real world American Dream does not happen overnight.  And no, you cannot TiVo to the good part of this story.

So, where do you begin?  First, when shopping for your new home, keep your idea of the perfect home close at hand, but keep your realistic idea of your future closer.  Think about what stage of life you want this property to house.  Furthermore, this mentality should apply not only to the aesthetics of properties, but also to the financial side of home shopping.   Remember that while a home that is too small may result in a smaller mortgage, it will also lend itself to lower price appreciation and home equity.  However, trying to buy a home that is too large could potentially end, not in ownership, but rather, in foreclosure.  Finding a happy medium is the key to being a happy homeowner.

Before you start knocking down walls, be sure you know where the funding for your renovations will be coming from.  Home remodeling is an excellent opportunity to use the equity established in your home to fund a project that could potentially increase your home’s value, and therefore, further increase your home equity. However, note that if this is your preferred source of funding, you must wait until you have paid off enough of your mortgage to tap into your equity or until your property has increased in value.

Plan your remodeling not only around improving your daily life, but also around increasing your home’s market value.  There are a number of sources available on the Internet that can help you decide which renovations can get you the most value for your buck.  For instance, updating a kitchen typically adds more to a home’s fair market value than adding something more basic.

Even if you don’t plan on selling your home after completing your home equity-funded remodel, by increasing your property’s market value through various home improvements, you will have access to larger home equity loans and lines of credit which can be used to finance the purchase of a car, in financial emergencies, or additional home remodeling projects.

When you’re ready to begin transforming your modest abode into the home of your dreams, be sure to hire professionals and ensure that experience is on your side.  How many of us have watched countless hours of home improvement shows and convinced ourselves that we could produce improvements of the caliber only to find that there were very obvious reasons why we keep our day jobs?  Honestly, we’ve all been there.  But like opera singing, cosmetic waxing, and brain surgery, remodeling your home to increase your equity may be a task best left to the professionals (or at least, the very experienced).  It’s always a good idea to ask friends or family for referrals and to use state licensed contractors.

With these basic ideas in mind, you can get one step closer to making the cherished American dream your reality.

Source: Informa Research Services

6 Pitfalls to Avoid When Buying a House

Once you’re on your way to home ownership, there are certain precautions you’ll want to take to further minimize your risks. Here are some tips to make your buying experience a more positive one:

• Know what you’re paying for upfront. Throughout the mortgage lending process, you’ll be faced with a flood of fees, some higher than others. From origination and escrow fees, to title insurance and property taxes, some may seem inflated while others fall in line with your expectations. You should never be afraid to question a fee you feel uncomfortable about or don’t understand.

• Try to avoid an early pre-payment penalty. Everyone wants to have the flexibility of paying off their 30- or 40-year mortgage early. The reward is not only owning your house outright but saving on interest charges. Work with a lender who is willing to waive any pre-payment penalties or can offer you the ability to refinance your mortgage at a better rate.

• Watch out for the classic bait-and-switch. We’ve all fallen victim to this one at some point or another. A lender may try to reel you in with low mortgage rates, no money down, or no closing costs, only to disqualify you with a less than perfect FICO® score. If you feel uncomfortable with the lender, or that they are not being truthful, then move on to someone you can trust.

• Don’t let real estate agents pressure you to buy. Realtors are motivated to sell homes in order to earn a commission. They may force you to buy something that doesn’t quite meet your expectations or pressure you to use their mortgage company. Always comparison shop for the best rates and programs. Remember, the real estate agent works for you and has a fiduciary responsibility to protect your best interests.

• Buy only what you can afford. It’s easy to get caught up in the hype of low-interest or no-interest introductory mortgage rates. Staying within your debt-to-income ratios can help prevent you from over-extending your debt. Use one of the affordability calculators to determine the minimum and maximum amount you can afford before going house hunting, and be sure to stick with your estimate.

• Never buy a home on impulse. At some point during your search for a home you may decide to settle for less or get caught up in a bidding war for a house you don’t necessarily want to buy. Staying within your budget can be a real challenge, especially if a lender approves you for a higher loan amount then you can afford. Give yourself permission to walk away from a questionable deal and see how you feel about it the next day.

Source: Informa Research Services

5 Helpful Tips for Future Home Equity Borrowers

As a homeowner, you have probably received offers in the mail to apply for a home equity line of credit (HELOC) or a home equity loan (HEL) . If handled properly, these types of loans can provide you with the income you need to handle your financial affairs. To assure that you are getting the best deal, here are some tips you will want to consider to enhance your buying experience:

• Avoid unnecessary fees.  The market for home equity loans can be very competitive. When shopping for the best offer be aware of any application fees, closing costs, or appraisal fees which can drive up your actual costs. Find a home equity loan that does not penalize you if you decide to pay off your loan early, or one that does not charge you a check writing fee each time you access your account.

• Interest rate caps. Like a variable-rate mortgage, a HELOC is subject to change as interest rates fluctuate. This can work to your advantage should interest rates drop. However, be aware of how frequently your rates can adjust upward each year (e.g., quarterly is better than monthly.) Also look at the lifetime cap or maximum amount a rate can adjust upward each year.

• Try to avoid pre-payment penalties. Everyone wants to have the flexibility of paying off their home equity loan early. The reward is not only being debt free but saving on interest charges. Work with a lender who is willing to waive any pre-payment penalties or who gives you the flexibility to make interest-only payments in case you encounter a financial hardship.

• Ability to convert to a fixed rate.  Since most HELOCs have variable rates and can change at different times of the year, what may seem like an attractive rate in the beginning may skyrocket later, should mortgage rates rise. Look for loan features that will allow you to convert to a fixed-rate loan should this happen.

• Shop for the best rates.  Shop and compare for the best HELOC rates online. Be aware of low teaser rates which will escalate after the brief introductory period. Make sure you know the index and margin used to calculate the fully indexed rate. Determine if the rates you are comparing are competitive once all fees have been integrated.

Source: Informa Research Services

Runners to Your Marks, Get Set, Go Buy a House!

Sometimes being a home buyer can feel a little like being a runner - you have to train (get your finances in order), warm up (get pre-approved for a mortgage), and actually run the race (search for a house or real estate). You cannot expect to run a marathon without any prior training, and the same goes for buying a house. Make sure you do all the necessary work in order to ensure a positive home buying experience.

Runners to Your Marks
Taken from your credit history report, your credit score is based on points you receive for being a good borrower. The most common scoring system used for mortgage approvals was created by the Fair Isaac Corporation® (FICO®), which accesses the three main credit reporting bureaus (Equifax, TransUnion, and Experian). Credit scores can range from as low as 300 points to as high as 850 points. People with average credit usually score around 620, good credit at 660, and excellent credit above 720.

It is important that you maintain a good FICO score because it can help you get a mortgage loan with lower interest rates. For example, someone with a credit score of 620 requesting a $215,000 30-year loan may pay an APR of 7.60%. A score of 720 or higher would qualify them for a 6.00% APR (a difference of 1.60%), or a potential savings of $230 per month. Should their credit score fall below 620, they are then in the sub-prime mortgage category, and their mortgage rate could go as high as 8.53%. During the pre-approval process, the financial institution will tell you what range of interest rates [insert link to mortgage rate tables] you are likely to qualify for. Therefore, you should try to get your credit in order before you start shopping for a loan.

Get Set
Before you begin house-hunting, it’s best to find out from your financial institution if you are pre-qualified or pre-approved for a mortgage. But in order to know these things, you first must understand the difference between the two. Do not be caught in an unfavorable home-buying situation due to a confusion of terms.

When a financial institution pre-qualifies you for a mortgage, they are merely giving you an idea of how much you might qualify for. Through the pre-qualification process, you will have to give the financial institution your financial information, including your income, credit score, and debt-to-income ratio. Therefore, when you get pre-qualified, it is based only on what you have told them about your financial situation - the information has not been checked or verified. When you have been pre-qualified, the financial institution will give you a letter which you can present to the seller so they will have an idea of how much you will be able to give them for their house. The next step is to be pre-approved.

Being pre-approved for a mortgage loan not only means that you have told the financial institution your financial information, but also that they have checked all the information and made sure that it is completely accurate. Also, they may have looked deeper into your credit history in order to examine your borrowing habits. A pre-approval will determine the maximum amount you can spend, and it is almost the equivalent of a cash offer because the seller knows that it is secure and trustworthy.

Go!
Now that you have strengthened your credit report and have been pre-approved, you are ready to start looking for the home of your dreams. So, put on your spikes, go to the starting blocks, and when the starting pistol goes off, you can shop for a house with confidence.

Source: Informa Research Services

4 Disadvantages of High Loan to Value Loans

The loan to value (LTV) ratio is the ratio of the amount of money you borrow through a mortgage or home equity loan to the value of your home. When this ratio exceeds 80%, it is considered to be a high LTV loan. Typically, the maximum loan to value ratio lenders will allow is 80%; however, there are times when they will offer customers a loan with an LTV ratio that not only exceeds 80%, but reaches or even exceeds 100%, meaning that they are allowing the customer to borrow more than the value of their real estate. This could mean no down payment on your mortgage, or all (or more) of your home’s equity to spend on an improvement project. Sounds good, right? Maybe not.

When a borrower applies for a high LTV loan, especially on a first mortgage, it is something of a red flag to lenders, because borrowers who cannot make a substantial down payment are more likely to default on their loan. Then, if they are approved, they might be put in the sub-prime category, or they might be given higher interest rates and tighter qualifications. But when a lender sees that a borrower has a very good credit history, they may be willing to allow them to take out a loan with a high LTV ratio, because they know that they are responsible borrowers who are likely to make their payments on time. If you are given an offer like this, you have to take care to understand all the conditions before accepting the loan. Here are four disadvantages that you should be aware of when considering a high LTV loan:

• High Interest Rate.  A high loan to value mortgage or home equity loan is likely to come with a high interest rate.

• Private Mortgage Insurance (PMI).  You may have to get Private Mortgage Insurance with a high LTV mortgage.

• Fees raise your debt. Even if your principal is not more than the value of your house, do not forget to take into consideration the costs and fees. Common fees on both mortgages and home equity loans include closing costs, points, appraisal fees, and prepayment penalties. These and other fees could raise your debt to more than your house is worth, even if your original intention had been to borrow less than 100% of the value of your home.

• You might lose tax benefits. The interest on mortgages and home equity loans is usually tax-deductible, but if you take out a loan with a loan to value ratio above 100%, the amount by which your loan exceeds the value of your house is unsecured. The interest on that extra amount would consequently no longer be tax-deductible.

The most important thing to do, as is the case when you are shopping for any financial product, is to carefully research your different options. Whether you are buying a house and will need a mortgage, or you already have a house and need to borrow some money against it for a large project or purchase, check the ratesand offers of several different lenders before hastily making a final decision, so you can be assured that you are getting the loan that will save you the most money and that will best fit your needs.

Source: Informa Research Services

Know Your Refinancing Options

If you have a home and a mortgage, and you are thinking about refinancing, first you must know both what you want out of your new mortgage and what your different options are, so that you can pick the refinancing plan that best fits your needs.

There are many different situations that will make people consider refinancing their mortgage. Some of the most common ones are:

• They have a fixed-rate mortgage with a high interest rate, and they are looking to get a lower interest rate.

• They have an adjustable rate mortgage (ARM) and are looking to get a fixed rate.

• They have two mortgages and would like to consolidate them into one.

• They have a long-term loan and would like a shorter-term loan so they can pay it off and build equity more quickly.

• They have a short-term loan and would like a longer-term loan so as to reduce their monthly payments.

• They want to move from an interest-only mortgage to a loan that pays down the principal.

• They want some extra cash to make a purchase or to pay off other debt.

There are four main mortgage refinancing options available that can meet the needs listed above:

1. Cash-out or Cash back Refinancing. This plan allows you to refinance your mortgage for more than you currently owe, and the difference - the equity - is converted into cash for the homeowner.

2. Low Fixed-rate Loan. If you currently have a high fixed-rate mortgage and the rates have dropped due to market conditions, then you may want to refinance to a low fixed-rate loan. Also, if you have an ARM, you might consider this option in order to get the security of a fixed rate. Even if your adjustable rate is low now, it is not guaranteed to remain that way; but if you get a low fixed-rate loan, then you lock that low rate in for the life of the loan. This option is a good choice if you are not planning on moving within the next five years.

3. Shorter-term Loan. If your main goal is to quickly build up equity and to pay off your mortgage sooner, then the shorter-term loan is probably your best choice. A lot of times, if you refinance to this type of loan, your monthly payments will be higher, but you will pay substantially less interest and your mortgage will be paid off sooner. Also, you would benefit from a larger tax deduction on interest if you move from a 30-year fixed to a 15-year fixed loan. There are some cases, however, in which you may be able to refinance to a shorter-term loan without raising your monthly payment - if you’ve had your current mortgage for enough years.

4. Longer-term Loan. If your current monthly payments are higher than is comfortable for your financial situation, then you might want to consider refinancing to a longer-term loan. This will result in a decrease in your monthly payments, since you will have more time to repay the loan.

Examining your current mortgage and knowing how you would like to improve it are the first steps you need to take when starting the refinancing process. Once you know this, you can choose the option that will best help you achieve your goals.

Source: Informa Research Services

Get Your Home Equity Loan Into a Relationship

Banks will encourage their customers to have multiple accounts and services with them. It is good for them because they are more likely to have long-term customers, and it is good for you because you get special incentives and discounts for having your multiple accounts at one bank. These accounts are said to have a relationship with each other, and this is sometimes called “relationship banking.”

For example, if you have a checking account, savings account, and home equity loan all open with the same bank, then with a relationship banking program, the balances in all three of them may contribute to the combined balance requirement.  Also, some fees on the checking account, such as the maintenance fee and foreign ATM fee, may be waived if your accounts have this relationship.  Thus, with relationship banking, all of your accounts help to maintain the others.

What This Means For You
If you are a homeowner and thinking about opening a home equity loan or line of credit, then you should consider relationship banking. If you already have one or more accounts open at a bank, then you should ask your current bank if they offer a relationship banking program, and if so, what benefits you would receive if you were to take advantage of it by opening a home equity loan with them.

Here are some of the possible benefits that would result from having your home equity loan account in a relationship with your other accounts:

• The balance in your home equity loan account may contribute to the combined minimum balance requirement.  When this minimum balance is maintained, the monthly maintenance fee for your checking account is usually waived.

• Other fees, such as check imaging or foreign ATM withdrawal, may be waived.

• You might be offered a lower interest rate on your home equity loan.

But you should also be sure to check other banks and financial institutions for low interest rates on home equity loans. It is possible that a low enough interest rate without relationship banking may save you more money in the long run than a relationship banking product with a higher interest rate. Be sure to do your research by comparing the products and rates of different financial institutions, including your own.

Other Things to Keep In Mind
When you have a home equity loan as part of your banking relationship, it is often required that your monthly payments on the loan be paid automatically from your checking account.  This may or may not be a desired characteristic, depending on your situation.  You may enjoy this feature because it takes the hassle out of making your payments; you may dislike it, however, if you prefer making payments yourself so you know when money is going out.  It really depends on your unique situation and preferences.

Always be sure to shop around for the best interest rates and payment plans. Compare all your options before making a decision so you can get the home equity loan that’s best for you.

Source: Informa Research Services

Interested in Interest-Only? Here’s What You Should Know

It used to be the case that you had only one choice when it came to paying off your mortgage - the conventional principal and interest plan.  Every month your payment would consist partially of interest (what you owe the lender for using his or her money) and partially of the principal (the actual amount you borrowed), and you would have the loan paid off, little by little, after a certain number of years.

But in 2001, a new type of mortgage was introduced - the interest-only mortgage - in which borrowers are required to make payments only on interest for an introductory period of usually three, five, or ten years.  When this period is over, the principal is then paid down, either in one lump sum or in monthly payments.  This means that, compared to the traditional mortgage, the initial monthly payments are much lower, but the future principal and interest payments will be much higher.

Why It’s Good
An interest-only mortgage is also good for people who either have limited funds now but are expecting to earn more in the near future, or whose income is mostly in the form of infrequent commissions or bonuses.  In both of these cases, the borrowers will not be under pressure to make initial monthly payments that are beyond their means, but once they start earning more or receive those bonuses, they will be able to pay off their principal as well. Therefore, with an interest-only mortgage, you have the ability to buy a house that you normally would not be able to afford.

Borrowers who apply for an interest-only mortgage plan often do it because they are planning on taking the money that they would normally pay for the monthly principal payments and putting it in some type of savings account.  If this is your intention, then make sure you have a strategy for investing the savings and that you will stick to this plan and continue to put your money away wisely.

Why It’s Not So Good
One disadvantage of an interest-only mortgage has to do with the equity in your home.  Since equity is the appraised market value of your home less any outstanding mortgages, then during the period of interest-only payments, you have zero equity to tap into.  This means that if for any reason you need a large amount of money during this time, a home equity loan or line of credit  may not be an option, and you would have to resort to using other alternatives like credit cards or your savings.  Also, if, during this time, your house loses value, then when it comes time to pay down the principal, you will be paying more than the house is actually worth.

Also, it happens that even though borrowers have the intention of saving the difference between their interest-only mortgage and what they would be paying with a traditional mortgage, they are not always able to accomplish it for one reason or the other.  Then, when it comes time to start making payments on the principal, they struggle because they were not able to save the money.  Therefore, you have to be very careful before going into an interest-only mortgage, and make sure that you have a savings strategy in order to come out ahead.

Don’t Rush Into a Decision
Make sure that when you are getting ready to apply for a mortgage that you carefully consider your situation and know how much you can afford each month, both now and in the future.  You should not just hear the words “lower monthly payment” and jump into an interest-only mortgage without examining its details and those of the traditional mortgage.  You have to be sure that you know what you can afford and which type of payments would fit better into your lifestyle, so that you can choose the mortgage that is right for you.  It is also wise to check with a financial advisor so that you make the best decision for your unique situation.

Source: Informa Research Services

5 Things Lenders Look At When You Apply for a Home Equity Loan
Before you start the application process for your home equity loan, it is helpful to know what lenders look for in potential borrowers.  With this knowledge you can get your documents in order before you apply. This will ensure that you get the best loan possible.

Here are five things that lenders will examine when considering you as a home equity loan borrower:

1. Your credit history. Lenders will look into your credit history, which is a record of your past financial behavior, in order to determine the likelihood that you will responsibly make your loan payments in the future.  Your credit history is contained in a credit report that details such things as your credit card history, the amount of outstanding debt you have, the type of credit in use, the length of your credit history, and the amount of credit you use as compared to the amount that is available to you (referred to as your qualifying ratio).  Your credit history and report also include your credit score, which is a number ranging from 300 to 850 and based on the aforementioned aspects of your borrowing record.  Therefore, the details included in your credit report are represented by one number, in the form of your credit score.  When you apply for a home equity loan, the lender will use your credit score as a guide to determine whether or not you are a credit risk.  Therefore, be sure to maintain a good credit score, so that you will be more likely to receive a loan with a lower down payment and lower mortgage rates.

2. Your source of income. In addition to your credit habits, lenders also like to know about the source and stability of your income.  They know that the details of your situation in this area are a major factor in your ability to keep up with your monthly loan payments.  They want to know such things as whether or not you are self-employed, and how long you have been working in your current field and at your current job.

3. Your debt-to-income ratio. This is a measure of how much of your monthly income goes to paying off debt, such as your mortgage, credit card bills, and car payments.  Most people are expected to have a debt-to-income ratio between 25% and 50%.  The less debt you have, the more likely it is that you will be offered a good home equity loan, because it is more likely that you will be able to pay your bills on time.

4. Loan-to-value (LTV) ratio. When you divide the sum of the amount you owe on your mortgage and the amount of your home’s equity that you want to borrow by the appraised market value of your home, the result is the loan-to-value ratio, or LTV ratio, for a home equity loan (it is calculated differently for a traditional mortgage).

For example, if your house has a market value of $200,000, and your first mortgage has a balance of $50,000, then your equity is $150,000.  Then let’s say you want to borrow $50,000 against that equity.  You add that amount to the $50,000 of your mortgage balance to get $100,000, which is your total debt.  Dividing $100,000 by the $200,000 that your home is worth, you get an LTV ratio of 50 percent.

Typically, the better your credit, the more money a lender will let you borrow, and a higher LTV ratio they will allow.  LTV caps are usually at 80%, but some lenders will give out loans of 100% or more loan-to-value, which means that they are letting you borrow more than what your house is worth.  Be careful though - there are risks involved with high-LTV loans.

5. The purpose for the loan. Even though you are not required to share your intended purpose for getting a home equity loan, it is still a question that lenders will usually ask.

Source: Informa Research Services