Spectrum Of Loan Programs

If you were to rate every possible loan program on a scale from the most conservative to the least conservative, you’d have the 30-year and 40-year fixed amortizing loans on the conservative end and the negative amortization variable-rate loans on the opposite side. Those are the two extremes.

On the conservative end, you’re paying off the loan at a fixed interest rate. Nothing changes. Your payment is exactly the same each and every month, for 30 or 40 years. That means you make the exact same payment today as you will in the year 2036, or even 2046.

On the aggressive end, you’ve got a loan where your payment isn’t even enough to pay the interest on the loan! So the size of the loan is actually getting bigger each month. To make matters worse, the underlying interest rate is variable. That means you can’t even plan the extent to which your loan balance is expected to grow.

We’ll take a look at the whole spectrum but first, we need to examine the interest rate structure. The 30-year fixed mortgage is one of the most conservative options available. It has the least amount of risk. Well, for the bank, the opposite is true. By reducing risk for the borrower, all the market risk is transferred to the bank. If interest rates sky-rocket, the bank cannot change the rate on your mortgage. It’s fixed. They also can’t "call" the loan because you’ve got a full 30 years to pay it off. So the bank could be making more money but they’re stuck with you and your low fixed-rate mortgage.

That’s a risk the bank takes when it gives you a fixed-rate mortgage. And as a result, the bank charges a premium for 30 or 40-year fixed mortgages. In fact, all other things being equal, interest rates get higher when you fix them for a longer period of time. An interest rate that’s fixed for 5 years will be slightly higher than one that’s fixed for only 3 years. A 7-year fixed is higher than a 5-year fixed. A 10-year is higher than a 7. A 15-year is yet higher and a 30-year fixed interest rate has traditionally been the highest. Of course, recently, the lending community has come out with the new 40-year mortgages. When fixed for the full 40 years, the rate is slightly higher than the 30-year. You pay for the luxury of a fixed interest rate; the longer it’s fixed, the higher the rate is.

Remember: "all other things being equal." That’s what we’re talking about here. Given the exact same credit, income and assets; given the exact same closing cost structure; given the same down payment or equity; the interest rate will be higher as you fix it for a longer period of time. There’s no question that rates could be higher or lower if other things in the file are different. For example, if you’re comparing a 2-year fixed Subprime loan to a 5-year fixed A-paper loan, the 5-year fixed would have a lower rate than the 2-year Subprime but there are big differences between A-paper and Subprime loans.

The 30-year fixed is, historically, the most conservative choice. You pay for that security with a slightly higher interest rate but the risk is extremely low. The new 40-year mortgage is now increasingly common and by amortizing the loan balance over a longer period, it allows for slightly lower payments. Both of these loans have traditionally required "amortizing" payments; that is, they include both principle and interest.

Recently, the option of a 10-year Interest Only period has been introduced. The rate remains fixed for a full 30 years but you only have to pay interest for the first 10. If you think about it, there’s no reason to have a 40-year loan if you also select the Interest Only option. If you’re only paying interest, the amortization period become irrelevant. Either way, you’re only paying interest. The difference would show up after the Interest Only period expires. With a 30-year loan, the remaining amortization period would be squeezed into the last 20 years. With a 40-year loan, you’d still have a full 30 years to pay the principle down.

Now, how many of us actually plan to spend the next 30 or 40 years in the same house? Perhaps some of us are but the majority plan to move into a different place sometime before 2036 (30 years from now). The trick is to balance the fixed period with the length of time you intend to stay in the property. There’s no sense fixing the interest rate for a period of time when you’ll no longer have the mortgage. There’s no sense paying for a luxury you’ll never benefit from.

In today’s marketplace, you can fix an interest rate for 1 month, 6 months, 1 year, 2 years, 3, 5, 7, 10 years, 15, 20, 30 or even 40 years. So take a minute and think about how long you intend to stay in your current property. 5 years? Maybe 7? If that’s the case, you should only fix your interest rate for 5 or 7 years; maybe 10, just to be safe. That way, you’ll get the lowest interest rate possible while still getting the security of a fixed interest rate for the period of time you expect to keep the mortgage.

Most of these loans – the ones that are only fixed for 3, 5, 7 or 10 years – still have a full 30-year term. The payment is still calculated as if it was a 30-year amortizing loan. Again, if you select an Interest Only option, the amortization schedule becomes irrelevant. It doesn’t matter; you’re only paying interest anyway, at least until the fixed period expires. But for an amortizing loan, the payment is based on a 30-year amortization period and is completely fixed during the initial fixed period. After that, the rate changes to an index plus margin and the loan becomes variable. The margin never changes but the index can move up or down depending on trading activity in the bond markets.

In what circumstances should you select an Interest Only mortgage? Many homeowners today are stretching to make their monthly mortgage payments. Home prices have risen much faster than salaries, so it’s a bigger strain on homebuyers than it was years ago. If you select an amortizing mortgage, you’re basically putting yourself into a forced savings program. Any money you put towards your principle increases your equity. You get all that money back when you sell the house because your loan balance will be lower than it would otherwise, leaving you with more equity. An amortizing mortgage is definitely the ‘conservative’ choice.

On the other hand, you can look at an amortization schedule and see how much of the principle you actually pay down during the first 5 years of a 30-year mortgage. Not much. If you’re only planning to stay in the property for 5 years, the difference in your equity is fairly minimal. Meanwhile, paying interest only would reduce your monthly payment. In California, Interest Only mortgages are extremely common and they definitely serve a purpose for those homeowners who are planning to get into a new, perhaps bigger, property within a few years.

The important thing to remember, obviously, is that your original principle balance never gets any smaller. In that sense, you’re basically renting the house and banking on appreciation to build equity. During the past 10 years with house prices rising between 10 and 20% each year, this strategy has paid-off handsomely. But what happens when the market starts going sideways as it is today? What happens if prices remain the same or even go down a bit?

Also, consider the fact that you’ll have to pay 5 or 6% real estate commissions when you sell. If you put 20% down on a house and only pay interest for 5 years and if house prices remain stable, you’ll actually lose money on the deal. You’ll start with 20% equity. If you end up paying 5% real estate commissions, you’ll sell the place with only 15% equity (20%-5%) so you’ll have less money after you sell the place than when you bought it 5 years earlier. And that doesn’t include the closing costs associated with the original purchase. Those generally run about 2% so you’d end up losing 7% of the house’s value during the 5-year period.

If the place actually drops in value, the situation gets even worse. I recently spoke with someone in this situation. He bought a place 10 months ago and can’t keep up with the mortgage payments. His situation is even worse because he’s got a prepayment penalty in his loan. Meanwhile, his home hasn’t appreciated a cent. Between real estate commissions and the penalty, he’ll be out over $35K if he sold today (he originally did 100% financing). If he rents it out, he’ll still be under water about $1500 per month. Either way, he’s in a bad situation. You have to be careful. Profit is not guaranteed.

That brings me to the last major loan program; one that is gaining in popularity. It’s a bit scary, actually, because this last type of mortgage is the least conservative of the bunch. It’s called an Option ARM and it gives the borrower a choice of 4 different payment options each month. They can pay a minimum payment which is based on an artificial starting interest rate of just 1%. They can pay the Interest Only payment. They can pay the 30-year amortized payment or they can pay the 15-year amortized payment – the highest of the 4.

We’ve all heard about these 1% mortgages. They’re heavily promoted and most of the marketing is deceptive. I personally believe that less than 10% of the people who get into these loans truly understand what they’re getting into. There’s no research to support that – it’s only my opinion. Let’s take a closer look and unravel the hype surrounding these loan products. Believe me; they’re not as great as they may appear.

First off, rates have never been 1% and they never will be. 1% is a marketing label that helps sell loans. They calculate the payment assuming a 1% start rate, but this minimum payment is less than the Interest Only payment. You’re under water right from the start. The difference between this minimum payment and the Interest Only payment is referred to as "deferred interest" and it gets added to your mortgage balance each month. It’s called Negative Amortization and it erases your equity every time you make that low minimum payment.

The next thing is that these loan programs are not fixed. They’re variable right from the first month. The minimum payment structure is indeed fixed for the first 7 years (in most cases), but that’s an artificial payment – a Negative Amortization payment. Those minimum payments don’t reflect the true interest rate at all. The underlying interest rate on these loans is variable and can change every month.

Third, the 30-year amortized payment is not fixed either. When people hear "30-year", they automatically assume "fixed". That’s not the case here. There’s a big difference between "amortized" and "fixed". With a variable interest rate, the 30-year amortized payment changes each month. And these days, it’s probably getting higher, not lower.

We have to admit that there is value in these programs for people who fully understand them. In an appreciating real estate market, they can make it easier to maintain an investment property or provide flexibility for someone with an uneven income stream. But if the real estate is not appreciating, these programs erase your equity and destroy potential profits. So be careful.

Things You Need To Know About Self Certified Mortgages.

If you are hoping to get a mortgage then be sure and bring everything of significance to your appointment with a mortgage broker. By providing all the essential information at the outset, it minimizes delays and makes the process easier. Requested information might comprise: utility bills, proof of identity and address, records on credit cards or other loans, pay slips and proof of monthly income. Oh wait. Is that a problem?

While lenders usually need proof of income, sometimes people may have difficulty proving how much income they make. Perhaps they are self-employed or have not been trading long enough to produce any accounts; maybe they have more than one job or rely on large bonuses or commissions as part of their total income. Contract workers, freelancers, unsalaried company directors, or low wage earners with higher assets would all have problems in providing income records. These people need to consider self certified mortgages.

They are often referred to as non-status mortgages. The work environment is changing and companies don’t always have 9 to 5 jobs anymore. Several individuals now receive monthly income from different sources.

This isn’t a main problem. In fact, this is why self certified mortgages were designed for legitimate reasons where income could not proved in writing the traditional way. Therefore a lender could rely on self certified mortgages, or, a self assessment of income.

These types of mortgages usually have a higher interest rate than a mortgage where you can prove your income in writing. There is no other real use for self certified mortgages besides this; it’s more of a risk and ends up costing more. Therefore, if a person could somehow prove his or her income it would be much easier and less expensive. However, self certified mortgages were designed because sometimes that just cannot be done.

There is no need for a person to provide accounts, bank statements, pay slips or other income-related documents why applying for self certified mortgages. Instead a lender will run a credit check, analyze the credit score and work from there. In some cases the lender would request a reference from a creditor or landlord.

The standard deposit is 15% of the final price, though a 25% deposit would lower the high interest rate with self certified mortgages. The minimum deposit would be 10%, though at such a low deposit and high-risk mortgage, few lenders would accept the deal.

These recent types of mortgages are not a worldwide concept. In some countries like the United Kingdom they are very popular, whereas in a country like Italy they do not even exist. While self certified mortgages make life a slightly easier, when you are talking about a mortgage, nothing is really “easy.”

Points & Closing Costs

Should you pay points? What are points? Is that money going directly into the Loan Officer’s pocket? Well, that depends. This article will look at these questions as well as a few others to see which strategy makes the most sense in the long run. We’ll also look at the math to calculate when points make sense and when they don’t.

Let’s start with the definition. A point is 1% of the loan balance. So if you’re getting a $500K loan, one point is $5000. The ‘standard closing cost structure’ will include one point. In fact, the first point is referred to as ‘origination’. The origination is the fee to ‘originate’ the loan. So that first 1% goes directly to the Broker. And depending on your Loan Officer’s volume, he or she will get some percentage of that money.

The remaining portion pays for the lights, the office space, the furniture, photocopier and so on. Part of that money goes to the Loan Officer and the rest pays for the office. That explains the origination. Anything beyond that is referred to as ‘points’ and points are actually prepaid interest; money that goes directly to the Lender. And in exchange for that prepaid interest, the Lender offers a lower interest rate, lowering your payment. We can calculate the breakeven for the decision. You either pay more up front and get a lower payment or you pay less up front and get a higher payment.

Before we look at the math, we have to address a couple of issues. For starters, the points and origination are tax deductible so they don’t cost you as much as it may appear at first blush. If you’re getting a $500K loan (1 point is $5000) and depending on your tax rate, that point may only cost you $3000 or $3500 on an after-tax basis. You’re either paying that money to the government or you’re using it to buy down your interest rate. When calculating the breakeven, always use the after-tax cost.

Secondly, one point buys different amounts depending on what loan you’re getting. If you’re getting a 30-year fixed mortgage, one point will reduce your interest rate by about 0.25%. With loans that are fixed for 5 or 7 years, one point will reduce your rate by about 0.375%. These are not exact figures. They vary by lender and by program. If you’re getting a 2-year fixed loan, one point would reduce your rate by a full 0.50%. The shorter the fixed period, the more one point will buy.

What’s the breakeven for buying the interest rate down? Well, for a 30-year fixed mortgage, the breakeven is usually between 3 and 4 years. In other words, if you sold the property or refinanced the mortgage within 3 or 4 years, you would’ve paid more money buying the rate down. The lower interest rate results in a lower monthly payment but it would take between 36 and 48 months to get the initial investment back. If you kept the house for longer than 3 or 4 years without refinancing, you would’ve recaptured the entire initial investment and be saving money each month for as long as you keep the mortgage.

For a 5/1 ARM or a 7/1 ARM, the breakeven is about 18 months to 2 years. That’s a much shorter period of time because one point buys more in these loan programs. For a 2-year fixed, the breakeven is usually just 14 or 15 months. So if you kept the mortgage for the first two years, you would’ve already saved money by buying the rate down at the beginning. Mathematically speaking, most people are better off buying the rate down.

The problem is that ‘points’ don’t sound very good. It sounds like you’re getting ripped off. Brokers know this so they generally don’t tell you the reality because they’re worried it’ll make their quote appear less competitive. But the reality is that they can help you save a bunch of money if you don’t refinance every year or two. And with lower interest rates behind us, the refinance boom is definitely over and people who refinance now should plan to keep their mortgages for as long as possible. Remember, it doesn’t matter what anybody tells you, refinancing costs money and you should try to do so as little as possible.

The industry has gone beyond avoiding ‘points’. They’re actually avoiding the origination as well. Again, the origination is the first 1% and most people mistakenly refer to it as a point, even though it’s technically different. Anyway, the industry’s been marketing ‘zero point’ loans for a few years already and most people jump at it, thinking they’re saving money. Well, the same math is true for the first 1% as for the second or even the third. If you’re not paying the 1% origination as a closing cost, rest assured, it’s hidden in a higher interest rate. Nobody’s doing loans for free out there and most banks have a minimum 1% origination anyway so you’re paying for it one way or another.

The reason this works is because Lenders pay Loan Officers rebates for loans with rates higher than the current market rate. Assume certain circumstances regarding credit, income and assets yields a market rate of 6.5% and the Loan Officer sells the loan with a rate of 7%, the Lender will pay the Loan Officer a rebate on that loan. If the closing costs do not include the origination, the Loan Officer just needs to raise the interest rate high enough to get a rebate of at least a 1%. And if they want to make more than 1%, they only need to raise the rate a bit more.

This goes even a step further when Loan Officers market ‘no cost loans’. Again, refinancing costs money and the fees associated with a purchase or refinance get paid one way or another so if they’re not itemized in the closing costs, they’re hidden in a higher interest rate. In today’s lending environment, you can mark up a loan so high that you get 2 or even 3% rebate after the loan closes. Don’t get fooled by ‘no cost loans’. It’s just a marketing gimmick.

There are four main categories of closing costs. First, you get the origination and any points you pay to buy the rate down. The second is the lender fees including underwriting and processing. Third, you get all the third-party fees like the credit report, appraisal, flood certification, notary and tax service. The forth category includes the escrow and title fees such as recording, settlement, courier and title insurance. For purchase transactions, there’s one more category for transfer taxes. In California, transfer taxes range from $1.10 per $1000 to almost $15 per $1000 in some municipalities.

For origination and points, you can calculate it yourself. The origination will be 1% of the loan balance. If you have a first and second mortgage, it will be 1% of the combined mortgages. If you’ve decided to buy the rate down with extra points, just add an additional 1% for each point you’ve decided to buy. If you’ve got two loans, the points probably only apply to the first mortgage. You could buy the rate down on the second mortgage as well but it’s less common.

The second category is lenders fees. These fees vary widely. Some lenders have underwriting fees as low as $350. Others are as high as $1300 or even higher. Also, if you have a second mortgage, there may be a second underwriting fee and I’ve seen those as high as $600. Another fee you’ll see is processing. That’s another lender fee and I’ve seen those range from about $250 to $1000.

Here’s my opinion on lender fees. If they’re charging a lot for underwriting, they’re probably using that revenue to help subsidize competitive rates. It’s just a different strategy. It’s not like some lenders are making huge profits while others are making nothing. The lending community has become extremely competitive and individual companies will try to get their revenue from different places. At the end of the day, these fees will be fully disclosed through the APR and that’s always the best way to determine the competitiveness of your quote.

As for processing, anything over $500 is a rip-off. All Loan Officers have processors. They’re real people who process real loans and chase all the conditions required by the Lender. It’s a tedious job and these people have to get paid somehow. I’ve got no problem with a processing fee as high as $500. Personally, I charge $395 for processing. But a processing fee of $1000 is a complete rip-off and I would push back hard on anyone trying to charge me that much.

Third party fees are next. In California, you can expect to pay from $350 to $500 for your appraisal depending on what format the lender requires. You can expect $15 or $25 for your credit report, $25 to $75 for tax service, $10 to $20 for your flood certification and $60 to $200 for your notary. Why such a big variance for notary? Because you can have a mobile notary come to your home for the signing. That’s a lot more convenient but it’ll cost you, usually $150 for a single mortgage and $200 for a first and second combo. I should know. I had a signing service before I started originating loans. If you sign at the Title Company, the notary fee is usually $60.

The forth category includes your escrow and title charges. Escrow fees will range from $250 and $900, depending on the size of the transaction. Expect between $100 and $160 for recording and $35 to $100 for courier services, depending on how many times the documents have to be couriered around. Title insurance is frequently the second largest fee on the closing statement, next to the origination. Title insurance can run you anywhere from $500 all the way to $3000 or more, depending on the value of the property.

All of these fees constitute what’s called ‘non-recurring’ closing costs. That means they’re all one-time fees. There’s another category of fees called prepaid items or ‘recurring’ closing costs. These are bills you would’ve had to pay at some point anyway. But because of the transaction, some of those bills are collected ahead of time. These generally include prepaid interest, property taxes, hazard insurance and, in some cases, HOA dues.

A major distinction with prepaid items is whether or not you have an impound account. An impound account allows your property taxes and hazard insurance to be collected at the same time as your mortgage payment. The obvious advantage is that you don’t have any surprise bills during the year and your monthly housing payment includes everything. But the downside is that you have to put some money aside in a reserve account at the time the transaction closes. That means you have to bring more money in at closing, giving the illusion of higher closing costs. In fact, it’s your own money and you’ll eventually get it back but it’s worth discussing with your Loan Officer before you get to the signing.

Overall, if you decide not to have an impound account, you can bank on closing costs and prepaid items between 2% and 2.5%. If you decide to include an impound account, you can expect between 2.5% and 3% in total closing costs and prepaid items. These are generalizations to be sure but they give you a fairly good idea of what to expect.

Mortgage Tips - Pay Your Mortgage Weekly

It’s official. The math does not lie – you should pay your mortgage WEEKLY. I have just completed all the math that you do not want to go through to find the truth. I wanted to know the best way to pay a mortgage to save as much money as possible. Here are the conclusions that you want to take away from my studies.

Was it better to pay you mortgage weekly, bi-weekly or monthly?

-> Paying you mortgage weekly would save you 1294.12$ on a 200 000$ mortgage amortized over 25 years (rate of 5.4%). Now that’s not a ton of money but it does not cost you anything. You do not have to increase your payments at all to save. So take the saving and run with it.

-> The higher the interest rate the more you will save. If we double the interest rate, the savings are 7.08 times larger. That means that there is an exponential factor that increases, power of this strategy.

-> Paying your mortgage weekly generates 43% more savings than paying your mortgage bi-weekly.

How to increase your savings by weekly accelerated payments?

Recently many people have started to use a strategy called weekly accelerated mortgage payments. That means that they not only save money by paying weekly but they also make their payments a little bigger and save a lot of money.

To do this they simply take their monthly mortgage payment and divide it by 4. Since there is a little more than 4 weeks in a month (actually there are 4.33) they end up making 4 weekly payments more every year.

-> On a 200 000$ mortgage (rate 5.4% amortized over 25 years) the extra payment would only be 23.25$ per week.

-> You would pay out the mortgage 3.7 years earlier

-> The total savings would be 23 173.78$. Not bad! (for details visit the resource box)

Paying your mortgage weekly and accelerated is worth it! The savings on the capital you use to increase your payments is equal to having a return on investment of 7.52%. Not bad for a guaranteed return!

Saving money does not have to be complicated: pay your mortgage weekly. If you can accelerate your payments a little, you’ll save more. If paying your mortgage weekly is not possible then pay it bi-weekly. It’s not as good as paying weekly but it’s better than paying monthly!

Essential Tips to Keep Home Improvement Costs Down

Before you strike the first nail, your home improvement projects will face critical make or break points along the way. The choices you make at these points can be critical to the success of the project. To get the most of your home improvement dollar, be sure to follow the steps below to keep your home improvement projects within budget.

Hire a pro - Good architects, designers and contractors will add to the initial cost of the project, but can save you money and frustration in the long run. Their experience will help you find design pitfalls early that can cause budget and timeline creep later. So how do you find a good architect or contractor? The best way is through word of mouth and referrals. Talk to your friends to see if any of them recently used either and if they were happy with the results. Local builders can also provide referrals. Another great source can be your local parade of homes or home builders association. Also, check with your real estate agent if you have one.

Design Fees and Contractor Costs - Most large scale home improvement projects will require the services of a professional interior designer, architect or contractor. Insist that each bid include a detailed propose on the scope and itmeline for the work. Do some analysis to determine if the fees are comparative when you shop for rates. The bargain rate firm may leave you with the clean-up and finishing work. The pricier bid may include oversight costs that you can do yourself. Keep in mind, that you often get what you pay for and cutting costs may harm you in the long run.

Planning is Key - Like any significant project, planning is a key to success. Spend quality time early in the home improvement project to make informed decisions ahead of time. Be sure to adequately review bids from contractors and don't select a contractor just because they are the lowest cost provider or are available immediately. Do your homework. Choose the design materials carefully to avoid costly changes later.

Develop Goals - Develop cost and timeline goals and stick to them as much as possible. Breaking the home improvement project down into smaller elements makes it easier to estimate the costs and manage the timeline later.

Helping Hand - Stay involved and pitch in where you can. By removing old fixtures, cabinets or doing other clean-up work you can save on the overall remodeling project. If capable, do some of the final finishing work yourself to also drive down the costs. Painting, touch up or installing faucets or other fixtures yourself can keep you within budget and give you the satisfaction of knowing you did some of the work yourself. You can also save considerable money if you do the clean-up yourself.

Design Choices and Customizations - Using custom cabinetry, windows, doors or other products can quickly drive the costs up for any home improvement project. This is one of the area where you can exercise a great deal of control over the costs. A standard window at your local home improvement store may cost $250, but a custom-sized window will cost at least double. Some elements of the project may need to be site specific and customized. But some product categories - such as windows, doors and cabinetry - offer a wide variety of standard or semi-custom choices. Adding your own trim or embellishments later may make these standard choices look customized.

Stick to the Plan - Don't let yourself get side tracked. For example, if you are painting your bedroom and you discover that the adjoining bathroom paint now looks dingy, don't get side tracked. Schedule the bathroom paint upgrade for another weekend. The desire to add or change along the way will be tempting and may prove irresistible. If your remodeling projects stick to the original plan, most would finish on time and within budget.

The key to avoiding cost overruns and other pitfalls during your remodeling projects is to properly manage the variables along the way. Estimating the costs is both an art and a science. The better you plan, manage those variables and stick to the original plan the more likely you are to be satisfied with the project and complete it within your cost and timeline budgets.

Home Loan Payment Relief (HLPR) Mortgage Loans

The HPLR mortgage program, available through your credit union, is just one more of the many ways your credit union is serving its members. HPLR stands for Home Loan Payment Relief, and is referred to as the “Helper” Loan program. Once you understand what it actually offers, you’ll see why the name is appropriate. The HPLR program is specifically for those first-time home buyers who are buying a residence they will live in themselves. HLPR loans can be used on single family homes, duplexes, condos, or even co-op properties. These loans are available to families whose median income is less than the median income in the geographic area in which they are buying a home. And sometimes, that limit is extended to a higher level in areas where it’s known to be much more expensive to live.

All the details of this program are available by accessing the link at http://www.cuna.org/initiatives/hlpr/hlpr_borrower.html. There is an extensive amount of information on the program at that site as well as a message from Dan Mica, Credit Union National Association’s president. (CUNA is Credit Union National Association).
To quote Mr. Mica, “Owning your own home is part of the American dream, and for too many low and moderate income families, it’s becoming increasingly hard to reach. The gap between the incomes of average families and the affordability of a first home is a problem. Credit unions believe the HLPR mortgage is an innovative solution that will narrow the gap.”

As usual, credits unions are living up to their stated purposes in offering these loans. They are aware that many first time home buyers would be priced out of the market today with out a program like HLPR. Using this program, first time home buyers can expect to realize savings of $1000-$2000 a year on their mortgage payments. Larger loans may be offered under a HLPR program than with conventional financing, too. That is, lenders may be willing to lend a larger percentage of the home’s value under the HLPR program.

HLPR loans are three-year adjustable rate mortgages. Generally, first time home buyers are people who will find their incomes also going up slowly over time. Further, the initial down payment buyers must make on a HLPR mortgage is only 3%---a far more manageable sum than the 10-20% required to obtain more traditional financing. Even better, the loan can go up only one percentage point a year, and is capped at only a 5% increase for the life of the loan.

First time home buyers are, by definition, new at understanding how home financing works. There are any number of mortgage programs in the marketplace which are far less advantageous to the novice home owner than the HLPR program. Some of these loans may increase far more quickly, or have far less favorable interest rate caps over the life of the loan. Sometimes mortgage lenders tempt first-time home buyers with interest only loans. Imagine the surprise and shock of some of these buyers when they realize they have not been paying down on the principle of the loan, and have been paying literally ONLY the interest owed on the money borrowed. Sure, the payments are lower, but you are not actually gaining any equity position over and above home appreciation.

This may seem like one of those “too good to be true” financial fairy-tales you may hear about from time to time. But it actually is as good as it sounds, and it is true. Credit Unions are committed to help this segment of their membership become home owners. It’s actually that simple. Think about it this way: if you, the consumer, find yourself with an excellent mortgage loan in a home you love, where will you go when it’s time to finance an automobile purchase or a new roof on that home? It’s likely you will come back to your Credit Union. And that’s the best place for you to be.

You’ve Decided To Refinance, Now What?

Researching and knowing your options is the key to making a responsible decision when you decide to refinance your home. You may wonder how to take advantage of offers like no-cost refinancing, or what type of new mortgage is right for your unique situation. Having the right information and asking the right questions is the key to making a decision you will never come to regret.

First of all, when you refinance, you should keep your long-term financial goals in mind. Something that looks like a great deal in the short-term can actually end up costing you more than if you had never refinanced at all.

No-cost mortgages are one trap homeowners are prone to falling into when they refinance their home. Sometimes, no-cost mortgages are a great way to refinance and save a lot of money. But in some situations, no-cost mortgages can disadvantageous, and some no-cost mortgages are really not the deal they claim to be.

Some lenders say they offer no-cost refinancing when they are actually charging you fees and adding them to the total mortgage amount. Often, these fees stay hidden, and the consumer never knows that they are paying higher monthly payments thanks to a dishonest lender. True no-cost refinancing means that the lender pays all costs on your behalf, charges you no fees for service and DOES NOT increase the total loan amount.

If the interest rate on the no-cost loan is lower than the interest rate on your current mortgage, then you can save thousands by going with the no-cost loan. But be sure to read all contracts thoroughly, and make sure everything adds up. That way, you can avoid being charged any hidden fees that may increase your monthly payments.

Another important decision is whether you should refinance from an adjustable rate mortgage to a fixed rate mortgage. Some consumers see this as a no-brainer – isn’t it always advantageous to lock in an ARM to a lower FRM?

The answer is no, not always. If you do not think that you are going to remain in your home more than a few more years, then the cost of refinancing to an FRM may be more than the money you will save on the interest. Again, always keep long-term financial goals in mind.

When is it not a good decision to refinance? In order to benefit from refinancing your mortgage, you must remain in your home long enough to break even. This is called the “break-even” period, or the period of time it takes for the interest savings to cover the cost of refinancing. Often, lenders will figure your break-even period by simply dividing the cost of the new loan by the reduction in the monthly mortgage payments. This is NOT the correct way to determine the break-even period.

The problem with this equation is that it does not take into account the length of the new or old loan. Depending on whether you refinance for a 30 or 15 year mortgage, your break-even period could be much shorter or much longer than this simple equation might have you believe. Be sure to ask your lender if they took into account the length of the loan when calculating your break-even period.

The decision to refinance your home is one of the most important decisions you will ever make. Knowing what your long-term financial goals are and never losing sight of them can mean the difference between making a decision you regret, or walking away from the closing table a happier homeowner.

What Are The Requirements For Reverse Mortgage?

What exactly are reverse mortgages? Have you heard of them? Well, let’s start off by saying that they could make life easier for you. There are a whole lot of benefits in reverse mortgages that could be very welcome as far as you are concerned when you are in need of money.

Reverse mortgages have been found to be a reasonable solution to many problems for many people. When there are funds required for home improvement or funds for medical aid, etc, people find that they get the funds required though reverse mortgages without really paying for it. At times there are fees involved that can actually reduce the amount that is paid to the house owner and the amount is far smaller than the loan required.

One has to be at least 62 years old to qualify for a reverse mortgage and generally there are no checks like credit or other checks that are carried out. Mobile homes however, do not qualify for a reverse mortgage. Homeowners can be single or a couple and those who have some equity on their home will be able to get this based on whether they own or not only. But if money is owed through a lien or some other mortgage, then it needs to be paid off using the reverse mortgage and if that amount is insufficient, then your personal savings will have to be used.

Another point to keep in mind is that if there is an ongoing case for bankruptcy filed then getting the reverse mortgage will be delayed till the case is over. This is because it needs to be confirmed that the house is not part of any bankruptcy claims and the owners will continue to be title holders of the house.

An additional option is where the local or state government actually helps fund the reverse mortgage and this becomes an additional option. Most of these mortgages which are taken are backed by the FHA. This provides that if the homeowner dies or moves out of the house and the proceeds are not enough to cover the cost of the reverse mortgage, then the FHA will ensure that the balance funds are cleared by them.

Many lenders and governments give out reverse mortgages and if you meet the criteria then you could benefit from it and make your life a little more trouble free. That’s the basic promise that reverse mortgages give you – to make your life a little bit easier when you need to pay money for something.

Benefits Of Mortgage Refinancing

Financial decisions are one of the most important decisions to make in anyone's life. Smart financial decisions go beyond the issues of normal savings or periodical investments. Sometimes you are faced with a tough decision in order to improve your personal financial situation. A mortgage refinance is one such aspect of your personal finance that can breathe some life into your stagnant financial situation.

Mortgage refinancing involves paying off your earlier debts with the new loan amount. You get to enjoy a number of benefits from refinancing your mortgage.

The most important advantage of home refinance is that it comes with a considerably lower interest rate. Homeowners generally have to carry a heavy mortgage payment every month, so homeowners are often on the lookout for ways to reduce their monthly mortgage payment. The only way of accomplishing this goal is through home refinancing at a lower interest rate, meaning lower mortgage payments.

The mortgage loans come with two types of interest rates, namely fixed rate and adjustable rate. Refinancing your mortgage also allows you to switch from a fixed rate to an adjustable rate of interest. The mortgages with adjustable rates are the most cost effective when the interest rates are low. In contrast, fixed rates mortgage loans are the wiser option when interest rates are high. It is also a good idea to change the mortgage from a fixed rate to an adjustable rate when the interest rate starts going down.

In many cases owning full equity of your home generally requires a period of over thirty years to pay off the mortgage. Refinancing your home allows you to cut the mortgage duration shorter by several years and you will be able to own full home equity in approximately half the time. This will save you thousands of dollars on your interest payments while building up your home equity over the years.

The best part of mortgage refinancing is that it provides you with a huge amount of extra cash. The equity you have built in your home over the years entitles you to this extra cash from refinancing. You can use this extra cash for many purposes, ranging from debt consolidation to home improvement to funding your children's higher education.

In a nutshell, if you want to make a smart financial decision that will allow you to save and gain some extra cash at the same time, there can be no better solution than mortgage refinancing.

Are Long Term Mortgages For You?

The various ways of getting a house these days has definitely become easier, along with the way that it can be paid back. Traditionally, a mortgage on a house meant a maximum of 25 or 30 years before amortization. New mortgages, however, are going way beyond the more traditional limits and are pushing it back to 40 and 50 years. Here are some things you need to know about long term mortgages.

Reduced Payments

Because the payments are now stretched out over a much longer period of time, this means that the monthly payment is also greatly reduced. This point is usually the main selling argument - and it is a good one. If you are looking to reduce your monthly payments for some reason or other, then this may help you.

The Overall Costs Are Greater

Reducing monthly payments, however, are only half of the story. While it does free up some cash on a month by month basis, it also adds longevity to the loan. Longevity always means more interest - much more interest.

Calculate Total Costs

When you actually are ready to consider what such a mortgage will cost you, you need to sit down with the details of a 25 or 30-year mortgage, and compare it with the results. This would be even more important if you are considering refinancing an existing mortgage.

Advantages

A long term mortgage can be very handy under some circumstances. For instance, if you are planning on buying property with the intent to renovate it and then resell it, this type of loan would actually allow you to minimize your own expenses and monthly payments while you are fixing it up. Another situation would be when buying a rental property. While you have renters in, you pay extra on your monthly payments, and in those in-between renters’ occasions, you just make the low regular payment. This type of loan also could allow you to get a larger house than you could otherwise afford.

Disadvantages

A long term mortgage can work against you, too. The added interest has already been mentioned. Another major consideration, though, should be the value of the house itself. Forty or fifty years down the road, what will the house be worth? Or, what will the economy be like - or your health? While these are some "ifs", and unknowable, it still should take up a moment or two or your thinking process. A short term mortgage lessens the risks simply because it is shorter. It also could free up money at the end of the mortgage term to use in more creative - or needed ways when you reach that stage of life.

If you should decide to go with a long term mortgage, be sure to compare it to several other offers. This gives you a degree of flexibility as well as the opportunity to choose the best offer. Also, be sure that there are no early payment penalties so that you could pay it off early if you are able.

Making The Most Of Current Mortgage Rates

If you are on the market for a mortgage you will soon find out, if you haven’t already, that the current mortgage rate is only current for that day and sometimes even for just for that hour. This is well worth taking into consideration when you take out your mortgage. The current mortgage rate, as with other interest rates, is constantly changing. There are several reasons for this constant state of change.

A bank makes money when it loans money to you. The money a bank loans to you is first loan to it through the federal government. The rate at which the bank borrows money is linked to the prime rate, which is the federal interest rate. If you have been following the current mortgage rate, then you know it is usually higher than the prime rate. This is because the bank wants to make money from the money loaned to you. For this to happen, the current mortgage rate must be higher than the prime rate.

Shopping for a mortgage with the current mortgage rate changing everyday can be difficult. Of course, you want to get the best rate possible, but you never know when the rate is going to be up and when it is going to be down.
How exactly can you get the best rate in such conditions? Here are some tips to help you. When you check the current mortgage rate make sure it is a reputable source.

There are several resources that list the current mortgage rate. When you check the rates on a given day, use sources that you can trust to provide you with the most accurate up to date information. Anything less than that isn’t worth it. The last thing you want to do is make a decision based on inaccurate information.

Compare several sources. Never use just one source for the current mortgage rate.

By looking at several different sources for the current rates, you can get a better idea of what the market truly looks like. If for no other reason, you should use a secondary source as confirmation for the rates you view on a primary source.

Pay attention to trends. The current mortgage rate changes all time; you’ve established that. Rather than trying to pinpoint a day when the mortgage rate is at its lowest, look at how the rates change from one day to the next. Better, look at how the current mortgage rate has changed over the past month and week.

If the rate has been steadily increasing, you should probably lock in a rate as soon as possible, because the rates will likely continue to increase. However, if rates seem to be one the decline, you could wait a few days before attempting to lock in a rate. If you are working with a loan officer, he (or she) will be able to provide you with current mortgage rate information, or even give you a resource you can use to check it on your own periodically.

Paying attention to the current mortgage rate is a good idea if you are shopping for a mortgage.

The Basics Of Mutual Fund Classes

In order to get the most out of your returns, without paying a high fee, you need to be aware of the different classes of mutual fund stocks and their advantages and disadvantages. Mutual fund companies often charge a higher fee when you opt to invest in ‘high risk high return’ stocks. However, paying higher fees does not necessarily ensure high returns because stock prices fluctuate on a daily basis. This makes it difficult even for professional fund managers to predict the future course of a certain stock. Mutual fund classes show the type of stocks covered under each mutual fund and the fees charged. The most common mutual fund classes are A, B, and C.

Class ‘A’ Stocks

These types of stocks attract lower 12b-1 fees and are considered the best if you are planning to keep investment for two or more years. Investing in such stocks makes you eligible to receive discounts, every time your investment arrives at a certain amount. The amount is selected at the time of buying the mutual fund and is referred to as the ‘breakpoint’. Discounts are also offered when you express the intent of reaching the breakpoint within a specified period. However, in case you are unable to reach the breakpoint prior to the deadline, as mentioned in the ‘letter of intent’, you are required to pay the regular front-end fees.

Class B Stocks

These types of stocks are characterized by their contingent deferred sales charge and are appropriate for investors who have limited resources and are looking for long term investment. Small investors prefer these types of stocks because they are not required to pay front-end fees and the deferred sales charge keeps reducing. The other benefit is that these stocks are automatically converted into Class ‘A’ stocks, which have a lower yearly management expense ratio or MER. The only problem with Class ‘B’ stocks is that you are required to pay the deferred sales fees in case you withdraw the funds before the specified period. Another disadvantage is that you do not avail of discounts, since there are no provisions for a breakpoint. This means that you are not able to reduce investment costs even if you increase your investment.

Class C Stocks

These types of stocks work best for those planning to redeem the stocks within a short span of time. They are beneficial because you are not required to pay the front-end fees. The back-end load is less too, one percent in most cases. Even this one percent back-end load is eliminated if you keep the investment for more than a year. Some of the drawbacks of Class ‘C’ stocks include compulsory back-end load, higher MER, zero discounts and lack of provision for automatic conversions.

In order to benefit from your investments, you need to consider a number of factors, such as the time for which you plan to invest, the frequency of your investments and whether you are liable to withdraw the funds in the near future. The analysis of the benefits and drawbacks of each class of stocks will help you to select the most appropriate investment option, based on your specific needs and preferences.

Mutual Funds- A Secure Investment

Mutual funds are a collection of stocks and/or bonds invested in different securities, which include fixed market securities and money market instrumentals. It facilitates investors to put their money under an efficient investment management. There are three types of mutual funds namely, income funds, growth funds, and balanced funds.

The basic principle underlying mutual funds is to pool in money with other people to convert it into funds. Mutual funds generally buy shares in stocks wherein an experienced fund manager performs the task of selecting, purchasing and selling off the stocks himself. Certificates are then issued to the shareholders as a testimony of proof of their partnership and participation in the emoluments of funds.

There are particularly three ways in which you can make money from a mutual fund. They are:

1. Benefits can be earned from the commission on stocks, and interests on bonds. All the income received all round the year is paid by the funds in the form of a distribution.

2. The fund will have an outstanding benefit provided the funds sell high priced securities. Most of the profits are given back to the investors in a distribution.

3. The value of the fund’s share automatically increases with an increase in the value of unsold high priced fund holdings. Accordingly, you can always sell shares of your mutual fund for profits.

Many people find investing in mutual funds an attractive option to that of dealing directly with the stock market because it is comparatively safe. In fact, these days, mutual funds have become the first preference of many investors. Mutual funds provide a balanced and better approach compared to conventional stock market alternatives. It has an added advantage of investing in several distinct sectors and firms, so, if one company suffers losses, the others may be rising. Investing in mutual funds, therefore, minimizes the loss-bearing risk of monetary assets.

In a nutshell, here are the salient points of the advantages of mutual funds:

1. Cost-effectiveness of investing in mutual funds: The main advantage of investing in mutual funds is the efficient management of your finances. Investors buy funds because they lack the competence and time to manage their own portfolio. It is a cost effective method, especially for a small investor because it is expensive to get a manager to manage individual investments.

2. Diversification: Compared to individual stocks or bonds, mutual funds diversify the risk of bearing loss. The basic intention being to invest in a diverse number of assets in order to overcome the negatives of loss making stocks or bonds by the profits reaped by others.

3. Economy of Scale: The transaction expenses are relatively low as a mutual fund is bought and sold in large amounts of credits.

4. Liquidity: Mutual funds provide the opportunity of converting shares into cash at any point of time.

5. Simplicity: It is easy to buy a mutual fund. Most companies have their own automatic purchase plans, and the minimum investment rates are very small.

Therefore, investing in mutual funds is certainly a secure investment as the chance of loss is spread out, and the opportunity for gains are numerous. At the same time, it is both cost-effective and an investment that gives great future returns.

The days of depending on government largesse in meeting old age financial requirements are growing dimmer by the day. Hence, investing in mutual funds can be a wise choice, especially for those who plan for an early retirement and hope to enjoy a secure senior citizenship.