Maybe you noticed that mortgage rates have dropped and are tempted to refinance your current loan (as thoughts of the money you could save dance through your head). But is refinancing a good idea for you? Will it actually save you money in the end? Here are some questions you should ask yourself before you decide to refinance.

How much equity do you have in your property?
If you have at least 20% equity in your home, refinancing might make it possible for you to reduce or eliminate the Private Mortgage Insurance that you pay. This could significantly decrease the amount of your monthly payments.

How much could you save?
There are plenty of handy calculators out there that will help you crunch the numbers on a refinance. These calculators usually take into consideration your current monthly payments and the amount you have left to pay on your loan, and then tell you what your monthly payment would be for different loan terms at current rates. You may want to compare the results from several calculators to get a better idea of whether refinancing would benefit you.

How are rates these days?
When rates are low, refinancing becomes more attractive to homeowners. Current rates should not be the sole factor in deciding to refinance, but they do play a big part in determining your monthly payments.

What do your credit history and debt-to-income ratio look like?
As with any loan, your credit history will be taken into consideration when your rates are determined. The amount of debt you have compared to your income will also be looked at. A low debt-to-income ratio and excellent credit will work in your favor.

How long do you plan on living in the house?
If you are planning to move in a few years, it might not make sense to refinance to a longer loan term. You should calculate a break-even point where monthly payments plus closing costs add up to less than you would have spent in that time period before you refinanced. If you expect to remain in your same home past this point, it might be worth it to refinance.

Before you make any major decisions on refinancing, you should sit down with a mortgage professional to weigh the logistics of this option. Whatever you decide, make sure you are informed!

Sources: Bank Rate. www.bankrate.com. Super Pages. www.superpages.com. Smart Money. www.smartmoney.com.

Predatory lenders are lenders that use unfair and abusive tactics to take advantage of their borrowers. They may do this in a variety of ways, though many of them involve deception and excessive pressure toward an agreement that will ultimately result in the loss of money for the borrower and a financial gain for the lender. There are certain things that you should look out for when selecting a lender to avoid those with malicious intents. Don’t be a victim of predatory lending!

Don’t be a target: Predatory lenders usually target those who may not be educated on current lending practices. Common targets include less educated individuals and the elderly. If you are looking into securing a loan for a home or refinancing, educate yourself by participating in a homebuyer seminar. Many times these seminars are free to attend.

Understand your agreement: Sometimes predatory lenders will try to mislead you as to what you are agreeing to by failing to accurately disclose the terms and conditions of your contract or by altering the contract after you have signed it. To play it safe, have an attorney look over the contract before you sign. Never leave blanks in a contract. Blanks create opportunities for predatory lenders to add conditions that you were not aware of.

Resist the pressure: Another tactic that predatory lenders will use is to pressure borrowers into loans that they can’t afford to repay. If you feel uncomfortable with the estimated monthly payment that a lender comes up with for you, do the math. Predatory lenders count on you defaulting so that they can cash in on a repossession or foreclosure from you. You should never agree to borrow money that you know you will not be able to repay.

Don’t lie: You should be skeptical of a lender the second they ask you to lie or withhold information on your loan application. Making false statements about things like your income, how long you have been employed, or the amount of your debts is considered fraud and you may be held legally responsible.

Shop around: Predatory lenders often tell their victims that they have no other options for financing and that they better act fast. They will play into your desperation for homeownership. When you are committing to something as large as a home loan, take your time and explore your options. You will get a good idea of fair and reasonable rates by gathering multiple estimates.

Do your research: Find out the values of other homes near yours. Sometimes predatory lenders will have homes appraised at a much higher value than they are worth so that you will take out a larger loan with higher rates. If you feel like the appraised value of your home is unjustly high, hire an appraiser with a good reputation to give a more accurate number.

It pays to be well educated and informed before you buy a home. You should never agree to something as significant as a mortgage without realistic expectations for what to expect. The Department of Housing and Urban Development provides a list of informational resources by state that you should consult in regards to issues on predatory lending.

Have you been the victim of a predatory lender? What are other tactics they use?

Photo by: momilkman // CC BY 2.0

You’ve been preapproved! (…or was it prequalified?) But what does that really mean? Is it the same as prequalifying? The terms ‘preapproved’ and ‘prequalified’ are often confused or used intermittently, but they are not the same thing. Before you go shopping for a house, you should know what each term means what they can do to toot your horn.

Prequalification

A prequalification is simply an estimate of how much money you can borrow. You may get a prequalification from a lender. The process usually involves submitting financial information, such as your income, assets, and debts, and the amount you anticipate having for a down payment. The lender will then evaluate your information and provide you with an estimate of how much they think you can afford to pay for a monthly mortgage.

There is no guarantee from the lender that you will actually be approved for this amount once you apply for the loan, it is just a ballpark number to give you an idea of your price range. Prequalifying through a lender does not indicate a commitment on either side, you to that particular lender or that lender to you. There is also no cost involved in prequalifying (it’s free!).

The best time to get a prequalification is before you even start looking. It will give you a good idea of what you can afford, and let sellers know that you are serious about buying. Because there is no cost or commitment involved, there’s really no reason not to!

Preapproval

A preapproval will provide you with a more serious figure to work with. In order to be preapproved for a loan, you will need to provide the lender with actual documentation of your income, assets, and debts, and hand over your Social Security number. The lender will also need to run a credit check on you so that they can generate a more accurate amount. Unlike a prequalification, a preapproval will generally involve an application fee.

Along with your preapproval, the lender will provide you a letter of commitment, which will include the maximum amount of money they are willing to loan you for a home purchase. This letter, however, is not equivalent to an approval, and you will still need to be approved for a mortgage loan before you are eligible to receive funding so that other factors, like the property appraisal and title search, can be taken into consideration.

A preapproval is very beneficial to have when you are looking to buy a home. Sellers are more likely to accept offers from you if you can show them you are preapproved for financing. Having a preapproval will give you the advantage over other potential buyers who don’t.

Obtaining a preapproval does not bind you to that lender. You will still have the freedom to borrow from whomever you please. However, if you do decide to stick with the lender that preapproved you, the process of applying for a mortgage loan will go much faster.

If you are seriously considering buying a home, you should obtain a prequalification or preapproval beforehand so that you are aware of the price range you can afford.

Photo by: richkidsunite // CC BY 2.0
Source: Mortgage 101. www.mortgage101.com

Rates are going up. Rates are going down. It feels like a roller coaster! How are these peaks and valleys of interest rates determined? And what can you do to make sure that you get the best rate possible? Knowing the factors involved in their calculation can give you more control over landing low rates, and possibly even allow you to predict which way they’re headed.

Here are the factors that you can control:

Credit Score.
Sure, you know that maintaining good credit is important for many reasons, but it is especially crucial when you want to take out a home loan. Every delinquency you have ever had will be visible to a lender after you submit your application, and they will take these into consideration when calculating your interest rates. The worse your credit history, the higher risk you pose to them as a borrower. Check your score before you even apply, and work to improve it if you need to.

Length of Mortgage.
The longer you take to pay off your loan, the higher your rates will be. Paying off a loan in 30 years as opposed to 5 years means that the lender will be depending on your repayment for longer. Because you have more time to produce the money, you pay at a higher interest rate.

Size of Mortgage.
Plain and simple, if you are asking to borrow a very large amount of money, there is higher possibility that you will default on your loan. After all, you are asking for money that you do not currently have. Lenders accept this risk with the provision of higher interest rates.

Down Payment.
The higher the down payment you make, the less you will need to borrow. As mentioned above, borrowing a smaller amount will decrease your risk as a borrower, making for lower interest rates. Also, a large down payment shows lenders that you have the ability to budget for large expenses, and will be a more reliable borrower.

Here are the factors that you can NOT control:

Supply and Demand.
This principle is very relevant to the mortgage industry. When more people are taking out home loans, rates will go up, and when less people are taking out home loans, rates will go down. Also, if the demand for a particular lender is down, that lender may offer lower rates just to get borrowers in the door.

The Economy.
Unfortunately (or sometimes fortunately), the economy has a heavy weight on interest rates. When inflation rates increase, the Federal Reserve ups their funds rate (the amount of money Federal Reserve Banks charge each other for overnight transfers) in order to lower inflation by making borrowing less enticing. Rates are assessed every six weeks or so, based on how the Federal Reserve perceives the state of the economy.

To get your best rate possible, use these factors to your advantage. Keep your finances in order and make an educated decision on the size and length of your loan. Also, be aware of market trends and how they will affect your rates.

Do you have other tips for getting great rates? How has the economy changed your outlook?

Photo by: LuxTonnerre // CC BY 2.0
Sources: iReference. www.ireference.com. Home Loan Basics. www.homeloanbasics.com.

Great news! On August 20th, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit CARD Act) began effect. This establishes new regulations to protect people like you from the implementation of unfair and deceptive practices by large credit companies. As of now, only the first phase is in place, but the second, more significant phase will become effective February 22, 2010.

Here are the rules that have recently been enforced:

• Changes in terms. Providers are obligated to give at least 45 days notice of any major changes in credit card terms. This has been increased from the previous requirement of 15 days.

• Billing. Billing statements must be issued at least 21 days before payments are due, either by electronically or by mail. This has been increased from the previous requirement of 14 days.

• Balance payment. Borrowers have the option to pay off any outstanding balance within five years at current rates. With this option, the borrower may not make additional charges until the balance is paid.

Here are the changes you can expect to see in February:

• Interest rates. For payments that are less than 60 days late, no increase in interest rates may take place, unless the consumer has signed up for a variable indexed interest rate account.

• Due dates. Payments must be due no earlier than 5 p.m and on the same day each month. If the due date falls on a holiday or weekend, the credit card providers may not count payments received the next day as being late.

• Minimum payments. Monthly statements must exhibit additional information, including the projected period of time to pay off a balance making only minimum payments, the monthly amount required to pay off a balance over 36 months, and a toll-free number to call for credit counseling and debt management.

• Over-limit fees. Providers may not enforce fees for transactions that exceed the borrower’s credit limit where previous consent from the borrower was not given. Without this consent, all transactions that would go beyond the set limit must be denied at the time of purchase.

• Borrower age. Applicants under 21 years of age must demonstrate their ability to make payments or have a parent cosign before being approved for a credit card.

• Calculating interest. Credit card issuers may not calculate interest based on the information from more than one billing cycle.

Photo by: Ebu Cehil // CC BY 2.0
Source: CreditCards.com. www.creditcards.com.

If you went to get a mortgage four years ago, you would have been bombarded with options. Do you want zero down? An 80/20? Perhaps a Low Doc, or No Doc, or negative amortization loan? Whatever your fancy, it was there.

Today times have changed and your options are limited. There are three basic loan programs left: Conventional, FHA, and VA. The VA loan is great, but you must be a veteran in order to get one. So, if you don’t fit that bill, then you’re left with only two choices. How do you know what is best? Which provides you, the borrower, with the most security and affordability? And which will still lend to you in today’s climate? The answer is easy; look no further than the Federal Government!

The FHA has been lending money since 1934, and is still the largest insurer of government mortgages in the world, making it your number one source of financing for a home loan.  Here are my top 10 reasons why:

10. FHA loans have more competitive interest rates than the competition.

9. Your debt-to-income (DTI) ratios are more flexible on an FHA loan.  Conventionally, you are required to keep your housing expense at or near 28%, however, the FHA will allow 31%. Your total expense ratio (your housing expense and all other debts) on a conventional loan must be around 36%, whereas FHA will allow 43%.

8. There is no financial reserve requirement on FHA loans.

7. You can make a 3.5% down payment in comparison to 5% or 10% down, depending on the market, with conventional loans.

6. Your entire down payment can come as a gift from a relative, employer, or even an organization.  Conventional loans require that your minimum down payment comes from your own funds and is sourced for 2 months.

5. There are greater protection requirements against foreclosures, and lower penalties and late fees, should you be late on your payment.

4. FHA is federally insured and allows for an assumption of your mortgage by an interested party.

3. FHA consists of a variety of programs offering both fixed and adjustable rate mortgages.  The ARMS available from the FHA offer more security for the borrower and less fluctuation in rates during the adjustment periods. An ARM can also be rolled into a fixed rate mortgage without having to re-qualify or have a new appraisal.

2. A non-occupant co-borrower is allowed to cosign on the loan to help buyers who may not qualify on their own. No other loan program today allows this option.

1. The streamline refinance option. When you get an FHA mortgage, you automatically receive an entitlement for a streamline refinance, which allows you to refinance without having to re-qualify or even have an appraisal completed.  This is especially beneficial in times like these, where appraised values are low and you may not have the required equity to refinance.  More consumers today are able to take advantage of current low rates because they originally took out an FHA mortgage.

The only yard your kids know is the patch of grass between the sidewalk and the street. It would be much more convenient if you didn’t have to drive all the way to the park every time the kids want to play outside. A house of your own would give you the space you need, plus a yard to enjoy.

You get withdrawal symptoms just going on vacation. This is where your life is. It’s where you want to live. You really don’t see yourself moving out of the area any time soon.

You despise empty white walls. Fearing that your landlord might deduct from your security deposit for every nail hole or coat of paint is no way to live at all. A place of your own would give you the freedom to paint your walls and hang pictures without guilt.

The last time you got something in the mail with the word ‘outstanding’ on it was your fifth grade report card. You have never failed to pay a bill, you have no debt, and you make your payments on time. Your credit is excellent, and you would easily qualify for a prime mortgage.

You have so much stability in your job, you are pretty sure they’ll bury you there. You are comfortable in your job, and the salary is not bad either. Each month you have enough of a surplus from your income to cover a home loan.

Government incentives make you drool. There are a lot of attractive perks for home buyers right now. From the $8,000 tax credit, to low down payments, to $500,000 tax advantages for couples, you are just aching for some of this action.

‘Do-it-yourself’ is your middle name. You know your way around a toolbox and aren’t afraid to tackle a leaky faucet. Maintaining your own place would be no problem for someone like you.

Making monthly rent payments leaves you with a feeling of emptiness.
There is nothing about the concept of renting that makes sense to you. Why do you keep paying for something that you will never really have? If you’re going to be making monthly payments, you might as well be building equity.

Is buying right for you? Crunch the numbers here!

Appearances matter. Whether you are buying a car, interviewing for a job, or just picking your kids up from school, the way that you present yourself will influence how you are perceived. You may want to give your appearance extra consideration during important occasions, like asking for the biggest loan of your life: a mortgage.

Now, you may be thinking, Isn’t that what the Fair Housing Act is for? Well, not really. The Fair Housing Act will protect you from lender discrimination based on race, color, national origin, sex, familial status, or handicap. This does not prevent lenders from withholding a loan based on their perceptions of whether you will be a serious and responsible borrower.

A home loan is really a business transaction and should be treated as such. You should treat your first appointment with a loan officer much like a first interview. Make a point to dress in a formal business outfit. Professionalism at the appointment will show that you are a borrower who has given serious consideration to this meeting as well as the loan which you are applying for. Also, be sure to arrive on time and with all of your application materials in order.

While your appearance alone may not get you a mortgage, a study conducted by Rice University in Houston, Texas demonstrated that people who are perceived to be trustworthy are more likely to have a higher credit score and pay lower interest rates on loans, and are less likely to default. Your loan officer may spend hours away from you scrutinizing your credit history and finances, but during your appointments, he or she is really getting a feel for how seriously you are taking this transaction. Financial lenders are very careful about who they will give money to, and by showing that you are ready for this huge commitment, you give your lender a sense of comfort and security.

Can you show up in swim trunks and still get a loan? Maybe, but you you will get much more respect if you present yourself as a professional and conscientious borrower.

Photo by misserion // CC BY 2.0

Zillow. “Mortgages Unzipped” www.zillow.com. US Department of Housing and Development. www.hud.gov.

Deciding which type of home loan is right for you can be a difficult and confusing process. There are many options when it comes to choosing a home loan. Here are the basics of a few more popular types to give you a better idea of which direction you may want to take.

Government Loans (FHA/ VA/ RHS)

There are very appealing government loans available. A popular one is the FHA Loan. Insured by the Federal Housing Administration, this type of loan is open to all qualifying homebuyers. The FHA loan offers relatively low down payments and usually covers most moderately-priced homes. This type of home loan is ideal for first-time homebuyers. You may want to consider this if you cannot afford a conventional down payment and are looking for a very reasonable home loan.

The VA Loan, guaranteed by the Department of Veteran Affairs, is available for qualifying United States Veterans who have obtained a certificate of eligibility. A highlight of this loan is that it usually comes with no down payment and is assumable with release of liability to the original owner. The amount of a VA loan is generally limited to around $200,000. You may want to consider this type of home loan if you qualify.

The Rural Housing Service supports the RHS Loan, offering low interest rates with no down payment and minimal closing costs. You may be eligible for this type of loan if you are a low to moderate income household located in a rural area.

Fixed-Rate Mortgage

The Fixed-Rate Mortgage is popular because the interest rate remains constant throughout the lifetime of the loan, so you do not have to worry about your rate unexpectedly skyrocketing. Plus, when rates are low this option can be very affordable.

These loans are offered in a variety of lengths, though the most popular have been the 15-year and the 30-year. A benefit of the 15-year plan is that the interest rates will be lower than those of the 30-year plan, though monthly payments for a 15-year loan will be higher.
Fixed-rate mortgages are a good choice if you are looking for a mortgage that is predictable and steady, or if you are planning on living in the home for a longer period of time.

Adjustable-Rate Mortgage

Another popular type of home loan is the Adjustable-Rate Mortgage, or ARM. Unlike fixed-rate mortgages, the interest rates of adjustable-rate mortgages will fluctuate as the market changes. This type of loan is better for you if you plan to stay in the home for a shorter period of time before selling because then you can take advantage of low interest rates without the period of uncertainty.

Most adjustable-rate mortgages have a fixed period in which interest rates are set at a very low rate that does not change. Once this period has expired, the interest rates will be adjusted based on the market interest rates. Sometimes ARMs are referred to by names like ‘5/1’ or ‘3/3.’ These numbers represent the set periods for the loan. For example, in a 5/1 loan, the 5 represents the five-year period where you will pay the initial set interest rate, and the 1 represent one-year intervals at which the interest rate will be adjusted depending on the market interest rates.

In order to give slightly more stability to an adjustable-rate mortgage, different types of caps may be applied to the plan. It is important to know what each cap is for and how it will affect your payment. These caps may include the Periodic Rate Cap, the Lifetime Cap, and the Payment Cap.

If played right, adjustable-rate mortgages can work in your favor, though there is a degree of risk involved in this type of loan because of the unpredictability of interest rates.

Two-Step Mortgage

Two-Step Mortgages, aka Hybrids, offer a combination of elements from both fixed-rate mortgages and adjustable-rate mortgages. With this type of loan, you will pay a fixed-rate for an initial period, then the rate will be adjusted once, and resume a fixed-rate based on that adjustment. This type of loan can be good for you if you have damaged credit because it will allow you to establish better credit. Though, if your credit does not improve, you may be stuck in a higher-rate loan for a considerable period of time.

Balloon Mortgage

Another option is the Balloon Mortgage. In this type of loan, you make payments for a specific amount of time (usually 10 years), then, at the end of that period, you will have to pay off the balance in full. Many people with this type of mortgage will either sell their homes or convert to a fixed-rate or adjustable-rate mortgage before the end of the initial period. It is also possible to have a buyer assume the mortgage if this is an option stated in your agreement. You may want to consider this type of loan if you want to pay off your mortgage quickly and you like having a stable monthly payment.

Interest-Only Mortgage

Interest-only mortgages allow you to buy a larger house with a lower monthly payment. This type of home loan has an initial period with a lower fixed rate where only interest is paid. During this time, you are given the option to pay more than just interest, though you are not required to. After the initial period has passed you will begin to pay off the principal. This type of mortgage is a good choice if you have a fluctuating income or would like to buy a larger home than you could with other mortgage plans.

Subprime Mortgage

Subprime Mortgages are loans offered mostly for borrowers with credit problems. This type of loan may also be referred to as ‘non-prime’ or given other, more flattering names. The rates for these loans are often much higher than equivalent prime loans because of the risk taken on by the lender.

Unlike many other types of home loans, the rates for a subprime mortgage will vary by a lot from lender to lender based on how each lender weighs the risks that you hold. This practice is called ‘risk-based pricing.’ Subprime mortgages are also more likely to have a prepayment penalty or a balloon payment.

In most cases, you will only need to consider a subprime mortgage if you have limited options in home loans. If you are a candidate for this type of mortgage you should be careful to avoid predatory lenders who seek to take advantage of damaged-credit borrowers.

Now that you have a better idea of the different type of home loans available to you, you should feel well on your way in to choosing your ideal home loan. Remember to explore all of your options and to make an educated decision based upon your financial needs and personal preferences. Good luck!

References: Home Buying Institute. www.homebuyinginstitute.com, Bank Rate. www.bankrate.com

Since I have written typically of the current financial position of the economy, I think it’s best to add the mortgage industry in this.

Whether your looking to lower your payment consolidate debt or purchase a new home the interest rate is a primary factor in your ability to accomplish your goals.

On purchase transactions lower interest rates mean you are able to afford more of a home. You may be looking for a larger home and trying to upgrade your current situation without to much increase in your current payment.

On refinancing transactions the interest rate affects many parts of this type of transaction. For example:

If there is equity in your home and you have accrued some debt. Many times you are able to roll the debt into your home and keep your payment close to the same monthly payment you have now. What better way to avoid higher credit card rates and additional late fees for your payment posting one day late.

Many times if you are able to change your rate at least 1 percentage point your payment (depending on loan size) can save you significantly impact your monthly savings. If you are able to lower your rate and still pay the old payment amount, that savings literally can be additional savings account that you build every month without ever doing anything different.

Looking to do home improvements? Depending on the equity in your home you are able to take cash out to do home improvements and also increase the value of your home at the same time. Again, lower rates have a big impact on keeping your payment close to the same payment your making more of your money work for you.

Just lowering your rate? This option is always available and depending on programs current equity is not a factor. The savings may be minimal sometimes but even the littlest savings saves you over the life of the loan. Be carful for excessive closing costs that may effect your overall savings on the loan.