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Adjustable Rate Basics: Fixed Or ARM?

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ARM BasicsIs The Adjustable Rate Mortgage Just A Fair Weather Financial Friend?

Given the option, homeowners have always tended to prefer fixed interest rates on their home loans, as opposed to adjustable rates. When you’re paying monthly it’s nice to be able to count on the rate always staying the same. It gives you a sense of control. As you might expect, on the other side of the equation, lenders would prefer to have the control to adjust rates periodically, in response to increased interest rates in the market.

Less Now And More Later Maybe

Before you rush to judge adjustable rate mortgages (ARMs), let’s look at some of the features that they bring to the table. As it turns out, there may be times when having an adjustable rate mortgage works to your advantage. It depends on how the economy performs and how the indexes that define interest rates behave, over extended periods of time. Also, it depends on your attitude towards taking chances with your finances.

Ultimately, the Federal Reserve Board sets market interest rates in response to inflation. Lenders are willing to trade a rate that is closer to the current rate, in return for the chance to charge you a higher rate later, if market rates go up.

When you are deciding whether or not to take on an ARM, you need to consider how much of a discount the initial rate is, compared to the market rate for an equivalent fixed rate mortgage. It will tend to be less expensive and the savings from the first fixed period of your ARM must be weighed against the long-term cost that comes after it adjusts.

For example, a 5/1 ARM home loan means that the first adjustment occurs after five years (sixty months) and adjusts annually after that. That will give you five years at a reduced interest rate, so you can build up some equity. Unfortunately ARMs do have risks. If inflation is significantly higher than you expected, when it’s time to adjust, it will wipe out any savings you initially gain from an ARM very quickly.

Almost Limitless Adjustable Rate Combinations And Permutations

This is just one example of the kind of structures that you can have in an ARM. If you think it might be the right choice then be prepared to shop around before you commit yourself to one particular structure. Finally, you need to be very clear about you attitude toward risks. An ARM may look good on paper but ask yourself if the thought of a pending rate change will cause you to lose sleep at night.

The hope on the part of the lenders, and the fear on the part of the borrowers that rates will increase drastically may never come to pass. In which case, it will work out as a savings to the homeowner, who took a chance on an adjustable rate mortgage at the beginning of the term.

Cash-Out Refinance or Second Mortgage for Debt Consolidation

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Debt Consolidation BasicsCash-out refinance or a second mortgage can be used for debt consolidation if that becomes necessary. If the monthly payments for your various debts are getting too much for you, and you have equity on your home, it makes sense to use that to pay the debts off. The interest you are paying on loans and other debts is much greater than what you gain with tied up equity.

The question is whether it is better to use a second mortgage or cash-out refinance. The former is a loan taken out using your equity as collateral, while the second involves refinancing your mortgage for a higher amount. This should be sufficient to clear your current mortgage and also pay off your debts. Your monthly payment will increase, but should overall be much less than your old mortgage plus all your debt payments.

Which is Cheaper for Debt Consolidation?

You obviously want to make your choice based upon which debt consolidation option costs you the least. You will be comparing your current monthly payments with those of the refinanced mortgage and the second mortgage, assuming you release the same amount of equity with each. Here are some factors you should consider before making a decision.

Cash-Out Refinance

Which is cheaper depends to a great extent on the current interest rate compared to the rate of interest when you arranged your first mortgage. If the new mortgage has a lower rate than the existing mortgage, then cash-out refinance will enable you to repay the new mortgage at a lower interest rate than the first. However, because your principal is higher, your overall monthly repayment will be larger.

However, there are factors other than just the interest rate to take into consideration.

Mortgage insurance: Will you have to pay mortgage insurance on the new mortgage? With a second mortgage, the home itself is the collateral so you may not need insurance. Whether or not you have to pay mortgage insurance on the refinanced mortgage will depend on the equity remaining. If you have a good equity, it is unlikely you will be paying insurance now. It will be an additional charge until your equity builds back up to 20% of the loan amount. Even then, you sometimes still have to keep paying it.

When You Sell: How long do you intend living in your home? The longer the better.  If you intend moving shortly after consolidating your debts, then a second mortgage might be better for you.  You can carry that on to your next home. It costs more upfront to rearrange a mortgage, so you should only do that if you have no plans to move.

Other Factors: The amount you need will be a factor, since the more you borrow the better a lower interest rate will favor you. Your tax situation is also relevant, as are the respective terms of your first and refinanced mortgages.

Benefits of Cash-Out Refinance Vs. Second Mortgage

The main benefits of cash-out refinance are that you have only the one monthly payment to make compared with two for the second mortgage. You will also likely have a lower interest rate, although there is a rate where the two options break even with each other.  Generally, the higher your first mortgage rate, the more attractive refinancing becomes.

The main benefit of a second mortgage is that your first mortgage continues unaffected. It also has a fixed interest rate, so you know exactly what you are paying until it has been cleared. If you prefer, you can take your funds as a line of credit, where you pay interest only on what you draw.

If you are considering debt consolidation using your home equity, then these are your two main options. Choosing the better of cash-out refinance or a second mortgage for your situation can be difficult.  It is usually a good idea to seek independent advice from a mortgage adviser.

Avoiding Foreclosure With an FHFA Loan Modification

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FHFA Loan ModificationAvoiding foreclosure is not easy, but an FHFA loan modification can help (FHFA is the Federal Housing Finance Agency.) When you are struggling to meet your mortgage repayments it can take a great deal of work to avoid foreclosure and that dreaded eviction day. A recently federal announcement in March regarding a new loan modification program has given many people hope in their attempts to save their home.

The Home Affordable Modification Program (HAMP) has been in existence for some time, and was theoretically able to help mortgagees facing hardship. However, the bureaucracy needed to initiate financial assistance was counter-productive. Those in trouble had to provide documentary evidence of their hardship, and also documentation revealing their income and expenditure and other financial details.

This level of bureaucracy resulted in significant delays, which reduced the appeal and effectiveness of the program to those using it. In many cases the foreclosure was proceeding at a rapid pace while the bureaucratic process was grinding slowly along.

The FHFA Loan Modification Process

The recently announced FHFA loan modification process is friendlier and makes avoiding foreclosure a quicker and less stressful process. There is no need to provide documentary evidence of income, hardship or inability to pay. If that sounds too good to be true, then read on, because it all makes good sense.

First, there are qualifications that limit those able to apply for help under the FHFA loan modification program:

  • The mortgages must be backed by Fannie Mae or Freddie Mac.
  • You must be at least 90 days but no more than 2 years behind on your mortgage repayments.
  • The mortgage must be a first lien – it does not apply to loans backed by your equity.
  • The mortgage loan must be at least a year old.
  • The amount owed must be a minimum of 80% of the value of the home.

Avoiding Foreclosure Requires Commitment

If you are only a month or two behind with your payments you cannot apply – yet! You must also display an ability to make the revised payments by making three payments by the agreed dates.  If you can manage that, then you should be able to meet all your payments in a similar way.

Avoiding foreclosure takes a commitment from you, and if you fail to meet that commitment, foreclosure will naturally follow. Hence the trial period, after which you are on the FHFA program.

The FHFA loan modification program designed to make avoiding foreclose possible to many people begins on 1st July, 2013. It is due to end on August, 2015 but who knows how it may be extended if it proves a success. Those offering mortgages must identify those that are maintaining their payments, and make them a loan modification offer by July 1st, 2013.

How the Loan Modification Works

  • Mortgage owners will be offered an interest rate the same or less than their current rate.
  • The term will be extended to 40 years.  This will significantly reduce monthly repayments.
  • Those with negative equity will have no interest applied on up to 30% of the unpaid balance.
  • These factors are expected to reduce the average monthly payment by up to 30%.

Avoiding foreclosure is the prime objective, and reducing monthly payments is one way to achieve that. A reduction in the monthly commitment of those defaulting on their monthly repayments is probably one of the best ways to avoid further problems.

The FHFA Loan Modification program does not lower the principal owed, so is fair to lenders while making avoiding foreclosure easier for borrowers with financial difficulties.

Reverse Mortgages: Some Potential Reverse Mortgage Problems

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Reverse Mortgage BasicsReverse mortgages are forms of equity release. In the USA, they are available to homeowners aged 62 or over who are living in the property concerned as their principal residence.  They can borrow money using the equity on their home as collateral. There is generally no fixed period on the loan, which is repaid when they sell their home or pass away. In the latter case, the lender has first call on the value of the home irrespective of any will.

Although reverse mortgages appear to be a good way for elderly people to make use of the equity while they are still alive, there are some potential reverse mortgage problems. In many cases, the elderly are hitting problems, particularly when they use the equity release to pay off other debts. Here are some of these problems.

Some Common Reverse Mortgage Problems

Fixed-Rate Lump Sum Loans: When the equity is taken as a lump sum, the interest is included in the loan. The interest is therefore compounded over time, and you are paying interest on the interest! Not only that, but increasing numbers of people are taking loans based upon their total equity. Should they have a need for emergency cash at a later date, they cannot get it because they have used up all their collateral.

The Problem of Small Lenders:  Because most of the large mortgage lenders have stopped offering reverse mortgages, those that are still doing so tend to be smaller firms that are not what are known as ‘depository institutions.’ This means that the borrowers are at a greater with these smaller companies. They do not have the financial strength of the larger lending banks such as Wells Fargo and the Bank of America.

Problems with Younger Borrowers: When borrowers aged 62 or just over use their equity in this way, they have little or no finance available to use during their later years of retirement. A reverse mortgage works best for over 70s who are able to use the cash tied up in their home in the latter years of their life.  To use that prior to retirement is to use up all your insurance for a relatively wealthy retirement in your later years: your 80s and 90s!

Aggressive Marketing:  Some companies use aggressive marketing tactics to persuade vulnerable elderly people that reverse mortgages are their best option. They stress the cash they will have to spend, but ignore the fact that they are using up all their equity. They will have nothing to leave their children, and no fall-back in the last years of their life. They fail to explain the effect of interest on their equity.

Are Reverse Mortgages Worthwhile?

Yes, reverse mortgages can be worthwhile if used correctly. You should be aware that they are loans and attract interest just like any other loan. This is often forgotten, since the interest is not paid as it accrues, but added to the reducing equity of the property.

You should first discuss a reverse mortgage with your family.  If they finally agree that you should go ahead, the next step is to seek professional advice from a mortgage advisor. Your advisor will help you select the best company for the loan, and help you make sure you are leaving sufficient home equity for later use.

Keep in mind that you have other options to a straight home equity loan.  An equity line of credit will charge you interest only on what you spend, not on the total amount of credit. There are also programs available for the elderly if you are having trouble paying for your medication or utility bills. A reverse mortgage should be your last resort – not the first.

Using a Second Mortgage for Debt Consolidation

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Debt Consolidation BasicsUsing a second mortgage for debt consolidation is one way of solving your debt problems. However, before opting to take this route you must consider the pros and cons. The pros might be obvious to you, but there are implications that might not be immediately obvious. Here are some of these.

Second Mortgage Subordination

When you take a second mortgage for any purpose and then pay off your first mortgage, the second mortgage automatically becomes the first. This means that if you have taken a second mortgage for debt consolidation, and repay the first while the second is still running, you cannot then take out another first mortgage.

However, the lender financing your second mortgage can agree to subordinate it to a new first mortgage. The latter then becomes your first mortgage and the former remains the second. Second mortgage subordination is not mandatory, and those that agree to it can charge whatever fees they believe appropriate. Technically, these can range from very low to extremely high.

Private Mortgage Insurance Issues

If you are paying private mortgage insurance (PMI), the insurance is legally terminated when the balance of your loan drops to 78% of the original. However, there is facility for you to request the lender to terminate at 80%. If you do so, the lender must terminate the PMI.

However, if you have a second mortgage, for debt consolidation or any other reason, the lender need not do this. You will then be paying a potentially costly PMI for an extra two years.

Keep an Eye on Interest Rates

When using a second mortgage for debt consolidation it is important to keep an eye on the interest rates. Some second mortgage rates are higher than the rates charged on many debts such as some credit cards. A second mortgage is really a secured loan, and is not subject to low rates.

So don’t think that you will be offered 5% – 6%. We are talking more in the region of 12% – 15% depending on the general lending rates for loans secured on property. There is little point in borrowing money on your home to pay a debt that is being charged at a lower interest rate!

By shopping around, you may find rates lower than your credit card rates. The rate you are charged will depend on your credit score. A FICO score of 700 will give you lower rates than a score of 600. The charges you have to pay upfront will also be lower with a higher credit score.

Second Mortgage for Debt Consolidation: Summary

There are pros and cons for using a second mortgage for debt consolidation. Make sure you are saving real money by doing this, and do not take out the loan just to extend the repayment period. A second mortgage should be repaid as quickly as possible, or it will limit your ability relocate and buy another property. This also means, of course, that if you fail to maintain your payments you could lose your home, just as with your original mortgage loan.

Home Loan Basics: Home Equity Line of Credit

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HELOC BasicsThere are many types of home equity loans available to homeowners. Cash out refinance is popular where you can refinance your mortgage and get a lump sum of cash. However, you are committing your equity all at once with home equity loans, in return for a potential lifetime repayment! Another option is a home equity line of credit?

This is a rolling credit agreement where you use the credit when you need it, rather than take it immediately in a lump sum and then ask yourself “What next?”

Home Equity Line of Credit

With rolling credit offered by a home equity line of credit you can use your credit whenever you like. You pay no interest until you actually use it. With regular cash out refinance deals or home equity loans, you are paying interest immediately. Even if you don’t spend a cent for two months you will still be paying two months interest – not so with a home equity line of credit!

If you spot something you would like to buy, and then buy it using your line of credit. That is when you start to pay interest – when you actually spend the money, not when you are allocated it.  So how would you use an equity line of credit? Here are some examples to show you how works.

Home Equity Loans

Some lenders will issue you with a debit card.  When you visit a restaurant, you can pay with the card. When you want to purchase items from a store – likewise.  Fundamentally, whenever you want to spend money, you use the card or checks that may be provided and your expenditure is charged to the line of credit.

You are charged interest on what you spend, and once you have spent the total credit associated with it you must continue with your repayment- just as with a credit card. Whether you take a home equity loan such as this, or seek another means of making use of the cash you have tied up in your equity, is immaterial.

The point is that finance such as home equity loans is available, and a home equity line of credit has earned through the equity you have established on your home. There is no reason why you should not use that equity as you believe you should.

Using Automatic Driveway Gates to Improve Your Equity

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Driveway GatesUsing automatic driveway gates at the entrance to your property and automated garage doors can significantly improve the attractiveness of your home to potential buyers. They can also improve your equity, and even attract a price higher than normal if you are lucky.

People like the idea of automatic driveway gates that can be opened from your car, either using a remote control handset or a button on the dash.  There are few better ways to spend money staging your home than this. You don’t need a massively long winding driveway, just a gate to enter your property that can be electrically operated to swing them open or slide them to one side.

Automatic Driveway Gates: Sliding and Swing Gates

Sliding and swing gates are both popular for driveways, and if your entrance is particularly wide, you can use double gates, each operated by its own electric motor. If your drive is set on a slope, swing gates might be difficult to open. In this case a sliding gate would be appropriate.  Such gates can either run on a rail across the width of the opening, or operate using a cantilever system, where the gate can be balanced on a rail set to the side of the entrance.

You can purchase automatic driveway gates made from cast iron or aluminum. Cast iron can be heavy, which is why aluminum gates are popular due to their relatively low weight. They can be operated by smaller motors which are therefore cheaper.

Aluminum can be used in its natural color, or powder coated to any color you prefer.  It is a very durable metal, and the entire system offers a high degree of security to your home. You can keep out stray dogs and other animals, and prevent others from using your drive as a car park.

Automatic Garage Doors

If you also have automatic garage doors, either rising or swing doors, these too can be fitted with remote controlled electric motors. How good a sales pitch would it be to inform potential buyers that they can enter the driveway and park their car in the garage without leaving the vehicle – all by remote control!

This is particularly useful if your gate is close to a busy road.  It can be a nuisance stopping your car to get out to unlock the gate. Simply press a button and it opens as you approach it. The gate closes behind you and your garage door opens up automatically to let you park.

If you are selling your home shortly, or even if not and would love this level of luxury for yourself, automatic driveway gates will improve your equity by considerably more than their cost. They are a good investment, fun to use and make selling your home easy.

Mortgage Modification: What Changes Can Be Made?

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HAMP BasicsA mortgage modification is otherwise known as a loan modification. Fundamentally, what is involved is that your lender agrees to a change in the terms of your mortgage. The changes made are intended to make it easier for you to meet your repayment obligations and so avoid foreclosure. In many cases, modifying your mortgage repayment terms is the only way for you to avoid losing your home.

Mortgage Modification: What is Involved

Here are some of the changes that can be made when your lender agrees to modify your mortgage:

Interest Rate Modification: It is possible to have your interest rate reduced so that you are paying less each month. The objective is that your monthly payment is no more than 38% of your income. In fact, the government has introduced a program stating this as part of the federal Home Affordability Modification Program (HAMP.)

Balanced Owed: In some cases the lender might reduce the amount that you owe. This is one of the options available to reduce monthly payments under the terms of HAMP. If this is done, the treasury will help the lender with the costs involved.

Extended Loan Period: If you are negotiating a mortgage modification, it will likely be possible to extend your loan period. If you are on 15 years, it could be extended up to 30 years. Your lender may also come to another arrangement with you.

In the final analysis it is to the benefit of neither you nor the lender for the next step to be foreclosure – you lose your home, and the lender also invariably loses out. You should be able to discuss a mutually agreeable mortgage modification that you feel confident of maintaining.

HAMP: Home Affordable Modification Program

Mentioned above, this is a program introduced by the Obama administration in 2009. To qualify, mortgage loans must have originated on or prior to January 2009. It is well worth while asking your mortgage adviser about this, because it can save a fair amount of money, both monthly and over the period of your mortgage.

There are specified qualifying terms, such as the mortgage must be a first lien on an owner-occupied property, you must be under provable financial hardship and all income stated must be provided with documentary proof. Credit records will be accessed to prove your claim.

The HAMP program is intended to help struggling homeowners come to terms with mortgage lenders that will enable them to maintain their monthly repayments. This invariably involves mortgage modification, the bulk of the costs of which the lenders can claim back from the government.

Among the terms of HAMP, lenders must work to bring interest rates down to a level that will reduce monthly payments to no more than 31% of the borrower’s income. A 3-month trial will then be carried out. If the borrower maintains payments, the mortgage modification will be implemented for 5 years at the same reduced interest rate.

If you are having problems maintaining your monthly mortgage payments, then first approach your lender for a mortgage modification. Ask about HAMP and whether or not you qualify. If in doubt, contact a mortgage professional.

Cash Out Refinance: Refinancing a Mortgage for Cash

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Cash Out RefinanceGetting a cash out refinance is the process of refinancing a mortgage for cash. It is based upon the equity in your home, and you can either take it as a single cash sum or as a line of credit. If you have owned your home for a number of years, and a combination of inflation and mortgage repayment has resulted in your home being worth a lot more than you owe on it, you can refinance it to release some of that equity.

Here is what s involved in refinancing a mortgage for cash.  Many people prefer to make best use of the equity on their home by arranging refinance on their existing mortgage in this way.

Cash Out Refinance

With a cash out refinance, you receive a lump sum cash payment for the value of your home. This leaves you having to renegotiate your mortgage which is part of this process. Your existing mortgage is cleared from the proceeds of your payment, and you keep the equity as a cash sum.

You must then enter into a new loan agreement for the balance to pay on your mortgage when the agreement was made. When you were paid the cash sum, the mortgage company is not buying your home from you, but simply paying the equity. That is the value of your home less the amount you still owe.

Example of Cash out Refinance

Let’ say you purchased your home for $200,000 and its value is now $250,000. You paid a $40,000 deposit and have cleared $25,000 of the principal.  You now owe $135,000 and your home is valued at $250,000. Your equity is $115,000. The maximum cash out refinance you can get is for $115,000.

You will theoretically receive $250,000, but $135,000 will be taken to pay off your mortgage. During this process, you will come to a new mortgage agreement based upon the sum that was left to pay. This will be re-amortized over a revised payment period and at an agreed interest rate.  In other words, you are in effect cancelling the first mortgage agreement, and setting up a second for the same property.

You are not obliged to take the full amount of your equity, but can retain some as a deposit on the new loan. In the example above, if you take $75,000 in cash, you can use the balance of $40,000 to reduce the amount of the new loan.

Summary on Refinancing a Mortgage for Cash

You get a loan for the full value of your home, and then repay what is left of the existing mortgage from part of the loan proceeds and keep the rest yourself.  You then refinance based upon the amount of your loan. This gives you cash to spend, and a new mortgage agreement.

Cash out refinance is based upon the equity of your home: its appreciation in value since you purchased it + your original deposit + the amount of capital you repaid. You take out a proportion of the equity of your property as cash, and pay off what is still owed on the mortgage with the rest. When refinancing a mortgage for cash, you then set up a new agreement to pay the loan which can be less than your original mortgage.

Extra Mortgage Payments: Making Extra Payments to a Mortgage

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Making Extra Mortgage PaymentsMaking extra mortgage payments might seem worthwhile when you can afford them, but is it really the best way to use your money? What benefit does making extra payments to a mortgage offer to you? Here are some of the pros and cons of making extra payments over and above the regular monthly mortgage payments you must make.

Extra Mortgage Payments: Benefits

Reduced interest: Your regular payments pay all the interest plus some of the principal. What you would pay in extra mortgage payments would all be deducted from the principal. That means that next month the interest on the reduced principal would be less, and so on. Over time you could pay a significant amount less interest to the lender. This is assuming that you continue your payments over the entire period of your original mortgage agreement.

Private mortgage insurance: Not all extra payments have to go towards your mortgage. If you are paying private mortgage insurance, you can make extra payments to pay off your PMI earlier. Having done that you can then assess whether you want to continue and reduce your mortgage – and its interest as above.

Peace of mind: Everybody feels better when they are paying their mortgage faster than they need to. They feel protected against foreclosure in the event of them hitting bad times. They think that they are doing better than most people with mortgages by paying extra – more than then need pay.

These are just three benefits of extra mortgage payments, although none are genuine benefits. Here are some reasons why, and arguments against paying your spare cash to your mortgage account.

Disadvantages of Making Extra Motgage Payments

Do you gain: What do you actually gain by making extra motgage payments? Mortgage interest rates are very low right now in comparison to what they once were. You could make more by investing your spare cash. Not only that, but what mortgage interest you do pay you can claim against tax. You can practically deduct 1% from your mortgage interest rate that way.

Best to Invest: Would you be paying all you spare cash in extra mortgage payments? How about saving for emergencies? What if you lost your job? It is always wise to have several months mortgage payments tied up in an investment, quietly gaining in value for the day that you might need it. It could pay your mortgage and other expenses for two or three months while you found other employment. Without it, you could face foreclosure!

Lenders don’t care: Your lender would not care if you had paid extra to your mortgage – they want this month’s payment, and the next, and the next! It’s better in your bank than reducing your term from 30 years to 25. Then you could pay the next few months and give yourself time to get back on your feet.

Extra Mortgage Payments: Conclusions

Extra mortgage payments are worthwhile in some situations. If you are not fully committing your income to such payments, and can also invest some to protect you from emergencies, then they can be worthwhile.

However, you should never leave yourself vulnerable to unexpected financial crises. Extra mortgage payments are not recoverable once paid. Investments are, and can see you through difficult times. Consult a mortgage advisor on this, because each person’s circumstances are unique, and the same solution does not apply to everybody.

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