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Fixed or Adjustable Rate Mortgage: Which One Is For Me?

Purchasing a house invariably is an interesting and nerve-racking at the same time. You might be thrilled with the idea of owning a home, particularly if you’re a first time home buyer. The thought of being a homeowner, all the things you will do to the house after you move in, the improvements you will make, kitchen upgrades, etc., these are all exciting, to say the least. However, the thought of financing and all the different types of home loans available out there in the market can be overwhelming and confusing. This is something that most first time home buyers need to understand and prepare for.

The two most common loan options you’ll see in the market are ARM or adjustable rate mortgages, and fixed rate mortgages or FRM. Each of them has its benefits and disadvantages. Which one suits your needs the best this particular time is something that must be tackled to determine which one is the best for you.

Fixed Rate Mortgage vs. Adjustable Rate Mortgage                                       home loans

Fixed rate mortgages are the most common and widely used type of mortgage. The interest rate on a fixed-rate mortgage does not change and remains constant for the whole term of the mortgage. A fixed rate mortgage has a significant advantage overall. First of all, a budget conscious person will find this type of loan most suitable for their needs. Since the interest rate is fixed throughout the life of the loan, a homeowner will have peace of mind knowing that the monthly mortgage payments will not change. It will be easier to come up with a budget that you can consistently keep, month in and month out. Needless to say, it is advisable for the conservative buyer to lean more towards a fixed rate mortgage when looking for a home loan.

Inversely, an adjustable rate mortgage works the other way around. A borrower can get a lower rate initially as compared to a fixed rate mortgage. You can buy a more expensive home that you might otherwise qualify for when getting a fixed rate. More home for your buck! But the interest rate is not set and will eventually change. With the change in interest rate comes along the change in monthly mortgage payments. With such type of loan, it’s tough to budget for future changes in monthly mortgage payments. Since the interest rate is directly tied to the bond market, the rate fluctuates all the time.

True, there is a cap that’s designed to keep the interest rate from changing extensively. Even the slightest fluctuation could be far too much for some homeowners to bear. Certainly, there’s also the chance that the rates will plunge. In such case, since your rate is adjustable, your mortgage payments will drop together with the interest rate.

When deciding whether a fixed rate mortgage or an adjustable rate mortgage is the best option for you, it is imperative that you consider several factors. Do you need a bigger and more expensive home or can you live with a smaller and decent house? Where do you see yourself years from now? Will you be making more money? Will you be moving up in the corporate ladder? How long do you see you and your family staying in the house you’re buying? Is it going to be for the long term or just temporary?

Determine if it is crucial to have the ability to arrange your finances per month without pondering if your home loan will rise or fall, but get a low-interest rate initially. Or would you rather pay a higher interest rate in the beginning but have a peace of mind knowing your mortgage payments will remain the same until such time that the loan has been paid off?

If you believe that you want the best of both worlds, keep in mind that you have other options too. If you think that the interest rate of a fixed rate mortgage is a bit too high right now, but you want the security of not having to worry about fluctuating interest rates, you may opt to buy the rate down in the form of discount points. Doing so will increase the total closing costs; therefore, you will need to bring more money to the closing table. However, it could be worth the initial cost of buying the rate down, especially in today’s market where the rate has been historically at its lowest level in years. More than likely, the interest rate will only go up from here.

If you decide to get an adjustable rate mortgage over a fixed rate mortgage, make sure you know exactly how high you can go with a fluctuating interest rate and still be comfortable with the monthly payments. Factor in the “wiggle room” in your monthly budget, just in case. This could be the difference between being able to afford to keep your house and losing it to foreclosure if the rate goes skyrocket in the future.

by nico2me

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Common Mistakes People Commit When Buying a Home

Buying a home is an exhilarating time. More so for the first-time home buyer. But there’s more to the purchase of a home than simply putting money down and signing on the dotted line. Many homebuyer mistakes happen that can turn a dream home into a nightmare.

Pre-approvedfirst time home buyers

Before stepping into any potential listing, a new home buyer will want first to visit a bank or other lending organizations. Pre-approval for a mortgage loan is the only place to start. Mortgage companies are the rational voice that keeps a first-time home buyer from being their last.  There is a limit that a person can spend on a home. Going over that limit will only cause financial ruin down the road; sometimes very quickly.

Putting out all of a person’s finances and facing the reality that there is a limit on what they can spend isn’t glamorous.  But being pre-approved for a specific amount will ensure a purchase that is affordable.  Some people confuse pre-qualified with pre-approval.  They’re not the same.  A person may pre-qualify for a higher sum than what they will be approved for.  Pre-approval is the number that matters.  The pre-approved amount is the loan amount that will be extended for the home purchase.  This is probably one of the biggest homebuyer mistakes made, especially for first-time home buyers, but needs to be done before even looking at a new home.  Credit scores matter greatly for this and building up a good one before considering purchasing a home makes a difference.

Down Payment                                

Having a decent down payment on a new home is essential, and one homeowner mistake that is commonly misunderstood.  A minimum of 10% is required, but shouldn’t be the goal.  Other factors that come into play when buying a home will increase the actual amount needed to close on a house.  Points and closing costs, as well as inspection fees, mortgage insurance, homeowner’s insurance, and property taxes, will increase the down payment significantly.  Then there are the other costs involved such as moving costs that won’t even be counted in the final sale. Budgeting for 20% and putting 15% down will help to cover the other costs that will be there at the final sale.

Higher down payments will decrease the mortgage loan needed and allow for additional funds to be placed in a savings account for other homeowner costs.  These can and will consist of necessary home maintenance such as a new furnace or hot water tank.  It is recommended that a new home buyer put aside 1-2% of their mortgage payment yearly to cover the costs of maintaining a home.

Home Inspections

Many people think that home inspections are unnecessary.  They’ve looked over everything and have found a few minor things that they can easily take care of.  But home inspections are vital to knowing what a person will get with their new home.  Inspectors are trained to look for problems and will find things that won’t be seen by a star-struck new home shopper.

Many times this can be a cost transferred to the seller, but it’s usually the buyer’s responsibility.  It’s an investment that is well worth it and could save thousands of dollars.  Some problems can be negotiated into the selling price of the house, bringing the cost down.  First-time home buyers should never skip this step.  Since they’ve never owned a home before, finding problems is not their area of expertise.

Inspections should be done by an independent inspector.  It may be thought of as a kind gesture by the seller to have their inspector come in, but he is working for the seller.  Hiring an independent inspector will give an unbiased and accurate account of any and all problems.

Buying Agent vs. Selling Agent

Typically, when a person is shown a home, it is done so by the sales agent.  This is the person who is working for the house seller.  Their job is to sell the house.  Misunderstanding this role is a typical homebuyer mistake.  To receive accurate value for a home, having a buyer agent makes the difference.  These agents work for the purchaser to help negotiate on behalf of the buyer.  Too often this small, yet important detail is misunderstood.  To help understand the importance of this role, some people have referenced it to a divorce.  “If you were getting a divorce, you wouldn’t go to your spouse’s lawyer for advice, would you?”  The same thinking can be applied here.

Going it alone-Don’t Do It

Home buyers, especially first-time home buyers, try to cut costs to save money wherever they can. They do tons of research, study the trends and think they’ve got all the knowledge necessary to make their new home purchase by themselves.  This couldn’t be farther from the truth.  Having a financial advisor, a buying agent, and a lawyer are all necessary people to have as part of a team to make sure everything is done right.  A group of individuals working to contribute to making one of the biggest purchases a person will ever make essential.  The knowledge and expertise brought to the table by these people will provide value and fairness during the entire process.  Agents will know specific things to look for and to ask about.  Financial advisors will break down the numbers to assure all areas of owning a home are covered.  Lawyers understand the terminology and read the fine print on a contract to make sure everything is in the buyer’s best interest.  These upfront costs will save thousands of dollars in the end and will make the home buying process enjoyable long after the sale is made.  Buying a home is one of the largest investments anyone will make.  Applying a team of experts to ensure the process goes smoothly, from approval of the mortgage loan to the final turnover of the keys is essential.

There are many things that home shoppers don’t think of when considering buying a home.  These typical homebuyer mistakes can be easily avoided with just a little upfront thinking.  By taking just a few things into consideration, the dream of homeownership can be a sweet reality.

by nico2me

 

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Things to Consider When Applying for an FHA Loan

Those considering refinancing for lower payments or change mortgage terms have different loan options, with FHA loans and conventional mortgages being the most common. The Housing and Urban Development (HUD) insures FHA loans against default, which allows lenders to modify certain criteria for borrowers, called overlays. The government does not back conventional loans, and they conform to separate lending standards. If a borrower chooses the wrong type of loan, the differences can be costly and have long-lasting effects. Below are some details on FHA home loans and their requirements.

Mortgage Insurance Rules for FHA and Traditional Loanshome finance using an FHA loan

There are distinct differences between FHA loans and conventional mortgages, and borrowers should understand those differences so they can make informed decisions. The main difference between the two loan types is in mortgage insurance requirements. FHA loan requirements set forth a monthly mortgage insurance payment, which lasts for the entire loan term. Additionally, the borrower must pay a 1.75% fee upfront when they get a loan. With conventional loans, the lender must remove the insurance premium if the loan amount is brought down to less than 80% of the home’s purchase price or appraised value.

Credit Qualifying Criteria

Another significant difference lies in each loan type’s qualifying criteria. The Federal Housing Administration typically has lower credit score requirements than traditional lenders, and the waiting period after a foreclosure, short sale, or bankruptcy is shorter with an FHA loan. With conventional financing, a borrower must wait for seven years following a foreclosure to get prime rates, but with an FHA loan, the waiting period is only three years.

Down Payment Requirements

Down payment requirements are substantially different for FHA and conventional loans. With Texas FHA loans, the minimum down payment is 3.5% compared to a 5% requirement for a conforming loan. However, a low-down payment of 3% for a conventional loan typically comes with strict qualifying criteria, while FHA loans are more attainable. Unless a buyer has perfect credit, significant savings, and a steady, high income, they may find it easier to get a small down payment loan through the Federal Housing Administration.

The Advantages of Refinancing or Purchasing a Home with the FHA

For borrowers with less-than-perfect credit, FHA loans offer some significant advantages, such as those listed below:

  • A small down payment: It’s possible to get an FHA loan with a 3.5% down payment.
  • Modest credit requirements: Lenders accept borrowers with credit scores of 580 or less in many cases. Conventional loans require a minimum of a 620 mid-FICO score to qualify.
  • Competitive rates: Federal Housing Administration loans have rates comparable to those offered by conventional loans.

Challenges to Consider With FHA Loans

While FHA loans are a great tool for many home buyers, there are some challenges to consider. Before getting a loan through the FHA, borrowers should be aware of the following factors.

Mortgage insurance is mandatory. All loans offered through the FHA require borrowers to pay monthly insurance premiums of about .85% of the loan value.

There’s an upfront funding fee for mortgage insurance. These loans come with an upfront payment requirement of 1.75% of the loan value.

The premium will not disappear. Unlike a conforming mortgage, where the insurance requirement is removed when the owner has sufficient equity in the home, FHA mortgage coverage premiums stay in place for the entire loan term.

Streamline Refinancing With the FHA

If a homeowner wants to refinance an existing FHA mortgage with another FHA loan, streamline refinancing is a viable option. According to HUD (the US Department of Housing and Urban Development), streamlining refers to the required paperwork, not the fees, costs, and lending criteria.

Cash Out Refinancing

A cash-out refinance (aka Texas section (a)(6) loan) is available to holders of conventional loans but not available for FHA loans in Texas. As implied by the name, this home lending option allows the borrower to cash out a percentage of his or her home equity. There’s a limit of 80% of the value of the property in cash out loans. If a borrower doesn’t know their loan to value ratio, they should consult a mortgage expert.

Home Improvement Loans

An FHA loan used to improve the functionality and features of the property is called the FHA section 203(k) loan. It combines both the cost to purchase or refinance a house plus the cost of its rehabilitation through a single mortgage. There are different types of 203(k) loans available, depending upon the actual needs to a borrower.

Some lenders offer a conventional home improvement loan, but that is far and few in between. The other option a borrower has is to take a cash-out loan or the section (a)(6) loan and use the proceeds to improve and rehabilitate their home.

Other Options: Is FHA Loan the Right Choice for Every Homeowner?

Because of the differences between FHA and conforming loans, it is important for borrowers to make a decision that suits their situations. While conventional loans have no upfront funding fee and a disappearing mortgage insurance requirement, they are not right for every homeowner. If a borrower has damaged credit due to foreclosure or bankruptcy, FHA lending is easier to obtain at a lower rate.

Some borrowers may be eligible for low-interest, one hundred percent financing home loans through the VA or USDA. HARP is also available for some homeowners. VA loans are guaranteed by the US Department of Veterans Affairs, and they make it simpler for active duty military members and veterans to get a loan to buy or refinance a home. USDA loans are home loans guaranteed by the United States Department of Agriculture. The property must be located inside the USDA eligible area map to qualify for USDA financing. HARP (the Home Affordable Refinance Program) is a government-backed program that helps borrowers with very little or no equity in their home, refinance their loan to a lower rate, thus, lowering their monthly payments, without an extra mortgage insurance.

Even if a borrower finds it difficult to get a conventional mortgage to refinance a home or make a new home purchase, there are several options. With FHA loans, borrowers with marginal credit can buy a home or make their current mortgage easier to afford.

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A Professional Advice on Refinancing a Mortgage

When considering refinancing a mortgage, you want to know everything you can to make an educated and informed decision. Trying to get a better rate to save yourself money on your monthly bills can make a big difference in your life. Here we will explain the difference between the two different types of refinancing plans: rate and term refinance and cash out refinance. We will discuss what these two different plans are, and the benefits of each. Armed with this information, you should be able to determine which plan is right for you and if you are in a good position to refinance.

Refinancing in general termsrefinance mortgage

When you are refinancing your mortgage, it means you are replacing your original mortgage with another one that may offer you a better deal. Meaning, getting a better interest rate, a better loan term, or both. Paying back a mortgage can be difficult, and refinancing, especially when you have good credit history, can be very beneficial. There could be many reasons that you want to refinance your mortgage, including getting a lower interest rate, agreeing to a shorter loan term, switching between adjustable interest rates and fixed interest rates, or get some cash from your home equity.

Any of these reasons can lead to you being interested in refinancing. You want to make sure you are well versed about what is available out there for you. And do your research so that you can understand how the industry works.

Something also to keep in mind is the mortgage closing costs, which can add up to thousands of dollars. Many people fail to consider this when refinancing a mortgage. I recommended that this number should be the ‘break even’ point. The break-even point is the time it will take for the mortgage refinance to pay for itself. The closing costs divided by the monthly savings. For example, it would take thirty months to break even if the closing costs were $3,000, divided by a $100 savings per month.

It is not the only fee that’s associated with in refinancing. Keep in mind the application fee, the title insurance and title search fee, the lender’s attorney’s fees, and the points and fee incurred in loan origination. Ask what these charges are before getting your loan.

As you can see, there are many issues involved when determining whether to refinance your mortgage.

Rate and Term Refinance

The rate and the duration of the loan are what most people think of when planning about refinancing a mortgage. This type of refinancing is paying off one loan with the proceeds from a new loan that may include greater benefits. So as you pay off that first loan, the refinancing loan will not be the one you are responsible for paying each month. With this type of loan, the benefits could include lower interest rates or a shortening of the loan term to build equity faster, perhaps both.

You also have the option with this category of refinancing to switch from an adjustable rate mortgage to a fixed rate, or the other way around. Determining which type of mortgage is best for you will take many considerations, including the interest rate, the projection of the industry as a whole, how much you have left to owe, and other considerations. You may want to consult with a mortgage specialist to determine your risks and benefits from making a switch.

The other primary factor to think about when choosing a rate and term refinance is the term. Many just look at a better interest rate and want to agree to it. It is not better if the term ends up being longer, so you end up paying more in the long run. The calculation of the break-even point will help you determine whether or not you are getting a solid deal.

Cash Out Refinance

If you are thinking about cash out refinance plan, many pros and cons accompany this choice. Cash out refinance mortgage occurs when you get a new loan to replace the current mortgage, generally at a lower interest rate. The cash out happens when you refinance for more than the amount of the loan balance or pay-off, and you take the difference in cash at closing.

People use this type of loan when they need to make some renovations in their home, or any other reason they are looking for an extra payout. If you can get a lower interest rate and better loan term, this is when many people will take advantage of the cash out option.

You may think that this is like a home equity loan, but there are some fundamental differences:

  • A home equity loan is a separate loan on top of your mortgage; whereas cash out loan refinances the already existing loan.
  • Generally speaking, the interest rates on cash out refinancing tend to be lower than those on a home equity loan, but higher compared to a rate and term refinance. Of course, this depends on your credit rating, the health of the market and other relevant factors.
  • There are closing costs associated with refinancing your mortgage. See above discussing the break-even number. The total closing costs for cash out refinance cannot 3% of the loan amount.

If you can only get a higher interest rate for cash out refinance as compared to your current mortgage, then it does not make sense to choose this option. The cash should be an extra benefit. Also, consider the length of your existing loan, the term of cash out refinance, and the total monthly principal, interest, taxes and insurance payment. All of these can determine whether refinancing is best suited for you or not and if you will end up spending more money.

When considering this type of refinancing loan, think about how much money you would save each month, and on what you plan to spend the extra money. That can make the difference between choosing a rate and term refinance or a cash-out refinance, or even a home equity loan.

In conclusion, if you are considering refinancing your existing mortgage, speak with an expert to determine your best options and look at the going rate on the market today.

 

by nico2me

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Mortgage Loans Available in Texas | Loans For All Types of Borrowers

The other name of mortgage loan is a “mortgage”. This is a very common term for people who are either involved in real estate business or working in a bank. The mortgage is used by the clients of real property to raise funds in order to buy real estate by the present owners of the property for raising funds for any of the purposes while putting a lien on the land or home that is being mortgaged. This loan is held on the assets of the borrower. So, if you are shopping for a home or real estate property, then there are chances that you might be looking for home loans as well. Nowadays, a one mortgage loan does not meet all the requirements of the clients. This is because every element of the life of the purchaser affects the type of loan they will need. For example, where they live, how long they are planning to stay put, their income, etc. all the factors varies from person to person and for this reason, the type of loan also differs. There are five most common types of mortgage loans available in the market.mortgage loans in texas

  1. Conventional-conforming loan: The conforming loan is one of the most common types of mortgage loans that conform to the guidelines offered by the GSE. The most popular aspect of this is the size of the loan, which is $417,000 for almost all the single family residence. The other guidelines generally deal with the size of the down payment, the loan-to-value, the debt-to-income ratio, the middle FICO score as well as the credit history, etc. The conforming loans are neither guaranteed nor insured by the federal government in any way.
  2. FHA: The FHA is an acronym for the Federal Housing Administration. This FHA mortgage program is a type of insurance program that is managed wholly by the Department of Housing and Urban Development, commonly known as HUD; this is a department of the federal government. These loans are available to all customers, not just the new ones or first time home buyers. The government insures the loan against all the losses that can happen from the borrower’s default. One of the best advantages of this loan is the down payment requirement. A borrower is only required to make a down payment of no more than 3.5% of the purchase price. But, the disadvantage of this loan program is, you will need to pay for the mortgage insurance for the life of the loan. The only way to cancel the Mortgage Insurance Premium or MIP is to either pay off the entire loan or refinance the existing FHA loan to a conventional-conforming loan.

This type of loan is appropriate for the home buyers with a small saving for the down payment. These loans come with a lot of caveats. Firstly, most of the FHA home loans are limited to certain loan amounts as dictated by each respective county.

  1. VA: One of the most popular mortgage loan programs is a VA loan. These are a bit special from the other two available in the market. The US Department of Veterans Affairs or in short, the VA, provides a home loan program, especially for the members and families of the people in military service. This is the reason it is different than the other loans available. This signifies that the VA will guarantee the loan for any loss that may be caused by the default of the borrowers. The main benefit of this loan program is that loan borrower can get 100% financing to buy a home, which is one of the two loan programs that offers a true zero (0) down payment.

This is reserved for people who have served in the military of the United States of America and their eligible spouses.  The VA loan program is an excellent alternative of the traditional mortgages available for those who served. If you qualify for this loan, you can get a beautiful house with no down payment or requirement of mortgage insurance. But, you should also keep this in mind that, the VA has very strict guidelines on the collateral of the home that you buy. It must be for a primary residence and the property must meet the minimum requirements of safety, soundness and security.

  1. USDA: To help the families in the rural area, the US Department of Agriculture designed the USDA home loan program. There are two (2) types of programs under this: (a) Direct and, (b) Guaranteed. Both offer 100% financing, so, no down payment is required for both loan programs. This loan program is handled by the Rural Housing Service or in short RHS. This loan is mainly provided to those who wants to buy a house in a designated rural area and have very low or modest income, but not able to get enough housing through the traditional financing.
  2. Non-conforming Jumbo loans: If you’re looking to buy a property with a high value and can manage a larger monthly mortgage payment, then you should consider a non-conforming jumbo loan. Jumbo loans are for mortgage loans that exceed the loan limits set forth by the GSE’s, or any loan that exceeds $417,000 is considered a Jumbo loan. Special rules apply for this type of loan. Generally, a borrower must have impeccable credit, a good down payment, and adequate reserves.

These are five main and basic types of mortgages available in Texas. You can choose the one that will not only suit your needs but also your budget. Which one suits you?

by nico2me