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Fixed Mortgage Basics: Fundamentals of Fixed Interest Rates

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Fixed Rate Mortgage BasicsA fixed mortgage is one whose interest rate remains the same over the full term of the mortgage loan. This contrasts with an adjustable rate mortgage, where the interest rate can fluctuate with market conditions after a specified period of time. A fixed interest rate is easier to understand, and many prefer the predictability of repayments, and the way they have more disposable income as their income increases but mortgage repayments do not.

Benefits of a Fixed Mortgage

If you are seeking stability, and the safety of knowing exactly what you will be paying every month, then this is for you. This type of mortgage enables you plan ahead with confidence, without the possibility of facing a sudden hike in your monthly repayments because interest rates suddenly increase.

When you decide on a fixed mortgage, your choice of lender or building society will make little difference to your monthly payments because all offer very similar fixed interest rates. However, where interest rates do vary between lenders, you have the advantage of knowing that when you select the lowest rate, it will not change over the period of the mortgage.

While the rate for a fixed mortgage will be higher than the initial rate for an adjustable rate mortgage, if you take your mortgage on at a period when interest rates in general are low, then you could get a good deal for the entire life of the mortgage.

Disadvantages of Fixed Interest Mortgages

One of the disadvantages of fixed interest loans in general is that you are limited in how much you can borrow. This is particularly true when interest rates are generally high: the amount of your mortgage depends on your ability to repay, and you are liable to be restricted in the size of home you can purchase, even with a 30-year loan.

Also, if interest rates fall back to lower levels, your mortgage rate will not fall with them. You are locked into a fixed interest mortgage, and might face penalty charges if you attempt to repay it early (prepayment penalty). This is a something you should establish prior to signing for the mortgage loan.

The term of the loan could make a difference, and here are the pros and cons of 15-year and 30-year mortgages with fixed interest rates.

15 Year Fixed Rate Mortgages

Benefits:

  • Because the amortization is over a shorter period, you can increase equity over a shorter period of time. This enables you to purchase upwards at a faster rate than if you were paying a 30 year mortgage, or to repay your mortgage sooner.
  • The interest rate will be lower than that for a corresponding 30 year fixed rate mortgage.
  • The total amount you pay the lender in interest will be lower and so more of your cash will be going to repay the capital.

Disadvantages:

  • The monthly payments will be significantly greater for a 15-year fixed rate mortgage than if you repaid the loan over 30 years. That is because you are repaying more of the capital sum, which has to be paid up in half the time.
  • Because your monthly repayments are higher, you might not be able to afford as large a house as you could purchase with a 30-year fixed interest mortgage.

30 Year Fixed Mortgage

Benefits:

  • You can take a mortgage over the longer term, knowing that your repayments will remain the same over 30 years, irrespective of the financial situation.
  • Interest is amortized over double the time period than a 15 year loan, so the monthly repayments will be smaller.
  • You will be paying more in interest overall with a 30-year fixed rate mortgage, so can claim more on your federal income tax returns.

Disadvantages:

  • The fixed interest rate will be set at a higher level than that for a 15 year mortgage.
  • Equity will build up very slowly in comparison to that of a 15 year fixed rate mortgage.
  • You will end up paying more in interest to the lender.

Even if they can easily afford a 15 year mortgage, many people choose to pay over 30 years, and invest what they save in monthly payments. This can give them a yield greater than the difference in the monthly payments. This will be particularly true for those that take the mortgage at a fixed rate when rates are generally low.

If it is necessary to take a mortgage at a time when rates are particularly high, many will choose the 15-year fixed mortgage or choose an adjustable rate mortgage instead. If you had arranged an adjustable rate mortgage when rates were high, you may consider trading it for a fixed-rate loan when mortgage interest rates have dropped. You will then benefit from the lower rate for the remainder of the mortgage term.

In general, then, a fixed mortgage offers the advantage of knowing exactly what your payments will be, irrespective of interest rate fluctuations. The major disadvantages are being unable to take advantage of interest rate drops, and a limitation in the mortgage amount, particularly when rates are high. If you have questions about fixed rate loans, we can help, simply contact us directly or request a rate request using the FREE rate request form above!

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Mortgage Prepayment Penalty Basics: Early Settlement Costs

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Prepayment Penalty BasicsFundamentally, a mortgage prepayment penalty is applied by lenders to recover some of the profit they would have made were the loan to have run its full term. Interest rates and other aspects of loans, including mortgages, are set on the basis of loans running for the agreed period, and should a borrower repay the loan sooner than that agreed period lenders will lose the interest they would have earned on the period still to run.

From the borrower’s perspective, it is best to repay the loan as soon as possible and so save on interest. However, were all borrowers to do this, lenders might lose much of the money they would have earned for the work they had carried out to arrange the loan. Income that would normally have been paid by the interest accrued over a period of time.

If not lose exactly, they would not make the expected income, and hence their own livelihood could be compromised. Lenders need some form of protection against early repayment if their income is dependent on interest payments. The alternative would be higher interest rates.

It should be made clear that such penalties are not allowed with Federal Housing Administration (FHA) loans, Rural Development (USDA) Loans and VA (Veteran Affairs) loans.

Variation Between States and Lenders

Mortgage prepayment penalties vary between states and lenders. There is no agreed national policy, although some states have laws in place whereby a prepayment penalty can only be applied to second mortgages on residential properties and on liens on properties purchased for investment.

They cannot be applied to early settlement of first mortgages on the primary home of the borrower. You should check up on what the law is in your state regarding early or prepayment penalties.

In simple terms, where this rule is applied, you can make early settlement of a mortgage used to purchase the home you live in without penalty, but, if you have borrowed money with your home as security, early payment penalties can be applied. The same is true if you have put property up as security (i.e. a lien) for a loan – if you pay the loan early you can face a penalty.

Some penalties relate to prepayment within a specific time frame, most commonly years, while others relate to specific circumstances. For example, some contracts absolve the need to pay a penalty if you sell your home and then pay off the mortgage with a cash sum from the proceeds. However, if you negotiate a mortgage with another lender at a lower interest rate, for example, you may have to pay a prepayment penalty.

Benefits of Prepayment Penalties

In many cases you might find that your mortgage is offered with the option of a lower interest rate with a prepayment penalty clause, or at a higher rate without such a clause. In effect, what the situation is likely to be is that you are paying more interest than normal if you refuse the clause, but you nevertheless have the option. You might also be offered lower closing costs in addition to or in place of the lower interest rate.

If you intend to live in your house for at least the term of the mortgage, you could gain by agreeing to the prepayment penalty clause. However, if you purchase your home with a view to upsizing within a few years, and selling to pay off your mortgage and negotiate a new home loan, then check out the fine print in your mortgage loan contract.

Check the Fine Print

If you check the Truth in Lending (TIL) statement that you are provided with when you are closing on your mortgage, you will find reference to payment penalties towards the end. If it states that your mortgage “may” be subject to a prepayment penalty, then you can be assured that means that it “will” be!

How Much is the Penalty?

The penalty for early mortgage settlement varies between lenders, and this policy should also be stated in your mortgage agreement. A common method of calculating this is to use a proportion of the total mortgage still due at the time of settlement. For example, if you paid off your mortgage when you still had $80,000 principal to pay, a 2% penalty would cost you $1,600.

Alternatively, the lender might apply a sliding scale based upon how much interest they would lose between the date of settlement and the original term date. A common calculation is to base the prepayment penalty on a proportion of the interest lost to the lender over a specific period of time such as six months.

When you arrange your mortgage, make sure you fully understand the terms of any mortgage prepayment penalty. If you already have a mortgage, check the fine print for details of any such penalty. Keep in mind that prepayment penalties are not necessarily to your disadvantage because you might be offered a lower interest rate in exchange for such penalties. You want to pay less, and the lender wants to protect their income. There are ways to achieve both.

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Adjustable Rate vs Fixed Rate Mortgage Basics

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Adjustable vs Fixed Rate MortgagesAdjustable Rate Mortgage Basics: ARM or Fixed Rate?

With an adjustable rate mortgage (ARM) you pay a fixed rate of interest on your mortgage for a specified period, after which the rate adjusts until the term of the loan is complete. The initial monthly payments will generally be lower than those with a fixed interest rate, but this type of mortgage is not suitable for everybody.

The initial rate period can be anything from one month to 10 years, although the general standard today is regarded as 5 years.  Other common arrangements are over 3, 7 and 10 years. Initially, the rate will be set at a level below than that of a fixed rate mortgage. At the end of the agreed term, the interest rate will be adjusted annually according to an index stated in the closing documents of the mortgage arrangement.

Fixed Rate Calculation

The fixed rate of an adjustable rate mortgage, known as the ‘Start Rate,’ is the minimum interest rate that applies to the sum borrowed. This ‘floor rate’ as it is known will not be reduced, even if general lending rates drop below this figure at a later date.

At the end of the ARM fixed rate period, the lender will check the ‘index rate’ and apply an interest rate to the balance of your mortgage that slightly exceeds this.  Your monthly repayments will then be increased accordingly. This is repeated each time an adjustment is required – usually annually, but this will be detailed in your initial AMR mortgage agreement.

Benefits of an Adjustable Rate Mortgage

There are several reasons for you deciding to take an ARM. They are not suitable for everybody, but if you prefer the security of knowing exactly how much your monthly repayments will be until your mortgage is paid off, then go for a fixed rate mortgage.

Some benefits of an ARM are:

a)   You may be purchasing your home with a view to selling it within the fixed rate period. For example, if you have reached the first rung of the housing ladder, you might intend to sell your home after 3-4 years for a better one. Your repayments will be less with an adjustable rate mortgage than with a fixed rate.

b)   You intend purchasing a new home within a few years of buying your first home.  Just like a) above, but perhaps you have purchased a small apartment or condo after marrying, and intend to upsize once a family comes along and you need more bedrooms.

c)    If you intend making extra payments, over and above your regular payment, then an adjustable rate mortgage will be ideal for you. Even by paying the same as you would had you taken a fixed rate mortgage, the extra payment will go towards reducing the principal rather than interest. Check on penalties for early repayment!

d)   You might intend to refinance sometime over the next 5 years or so. In this case, you enjoy the lower interest rate until you take that step. Some people do this when their credit is not as good as it might be. After two years or so your credit score might have improved enough through you maintaining your repayments on time to enable you to get a longer term fixed rate mortgage. Your home is your security for the initial fixed rate period.

Disadvantages of an ARM (Adjustable Rate Mortgage)

Obviously, lenders do not give money away, and would not offer an agreement enabling you to pay them less without them ultimately benefiting. Here are some of the aspects of this type of mortgage you should consider:  what happens after the honeymoon and your interest rate is ‘reviewed?’  Here are three problems you might have to face:

1)   During your fixed rate period the interest applied to your balance cannot drop below the agreed initial figure – even if general interest rates drop. You are tied into that fixed rate just like those that took a fixed rate mortgage (though your fixed rate will be lower than theirs).

2)   Also, once the agreed fixed period is over, that rate will be lowest and will not drop below it. If you take a mortgage during highly inflationary periods, where interest rates can be as high as 15% or more, you might be offered a fixed rate of 9% with your ARM. You are stuck with this, even if times improve and new borrowers are being offered 4%-5%.

3)   At the end of the fixed rate period, your repayments could increase significantly, putting you in financial distress.

Is An Adjustable Rate Mortgage or Fixed Rate Mortgage Right For Me?

If you are prepared to meet the significantly higher repayments you might face once the fixed rate period is over, want to repay your mortgage quickly or intend selling your home within a few years of buying it, then an AMR is likely your best choice.

However, an adjustable rate mortgage can come with complex terms and conditions, and it is critical that you fully understand what you are agreeing to.  We can help answer any questions you might have about fixed rate or adjustable rate mortgages. We can also give you an up to the minute mortgage rate quote if you call us directly or use the fast rate quote form above.

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Should I Lock My Mortgage Rate Now?

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A very common question for any consumer that might be considering refinancing an existing home loan or purchasing a new home is “Should I lock my mortgage rate?”.

This is a very important question and the answer can seemingly change from day to day, depending on what is going on in the markets.

Your specific scenario in terms of your time-frame and specific needs can also play a role in answering this question. Sometimes the answer is rooted in the likelihood of rates going up vs the likelihood of mortgage rates going down. To answer the question, let’s take a look at the bigger picture.

Pros: Locking Your Mortgage Rate Now

For many weeks and months mortgage rates have been near or at all time historical lows. We’ve also had many new lows set as is the case in the past couple of weeks. These new lows have been all time historic lows, but by a small margin until the last few weeks, where we have seen some significant downward movement.

Since we traditionally see mortgage rates move up faster than they move down, we’ve got a whole lot of upside potential available right now should the right news come out regarding the health the US or World Economy, specifically Europe. This means that we some would argue that there is a lot more upside potential if mortgage rates move as opposed to downside potential.

Locking in your mortgage rate now may be a save move, but by the time you’ve read this, it is likely that the market has changed. To get an up to the minute answer on locking your mortgage rate, simply give us a call and we can give you the most current market summary and advice on whether locking your rate makes sense right now.

Cons: Locking Your Mortgage Rate Now

If you choose to lock your rate near all time historic lows, you risk the chance of possibly missing out on yet lower rates that might come in the future. Ultimately the question is one of risk vs reward. In the current environment, you will likely find many more mortgage professionals advising that holding out on locking your rate presents a very low risk to reward ratio.

The best way to know if the current market has changed to favor holding out on your lock is to call us directly. In addition to giving you a clear idea on whether or not holding off on your lock makes the most sense, we can answer any questions you might have about which programs make the most sense for your needs and a current mortgage rate quote.

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Before You Buy: Home Hunting Tips

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Buying a home can be an exciting and somewhat stressful experience. When shopping for your new home, keep in mind that one of the most important aspects of home ownership is often neglected, finding the right mortgage.

Your mortgage is the backbone of the entire purchase, but without doing proper research, you might not be getting the best deal you can. Before you begin the home search process, consider the following ways to increase your chances of a speedy, stress-free home buying experience.

1. Get Pre-qualified Before You Start Home Hunting

Getting pre-qualified means you will better understand how much home you can afford and which mortgage program(s) best fits your needs. By giving yourself options, you’ll be able to find a lender you’re comfortable working with and a mortgage you’ll be able to afford. Once you’ve done this, you can begin your home search without worry. You will also save yourself time as shopping for homes that you can’t afford only takes up time you could be spending finding the right home you can afford.

2. Know Your Personal Finances

Knowing your financial situation prior to speaking with a lender can help speed up the process when you do seek financing to buy a home. Budgeting for your current expenses and using a mortgage calculator can help predict what you’d pay with a mortgage. From there you can make a choice about how much you feel comfortable borrowing. A secure, steady working situation will also help make you more appealing to lenders since you’ll be able to prove stable income.

With a little bit of preparation before you speak with a lender, your lender can help you make an informed decision about how much house can afford to purchase and which loan program is the best fit for your needs.

 3. Understand All the Costs Involved With A New Mortgage

When you pick a financial institution to work with, you will submitting your information, checking your credit, and being given a mortgage quote.  While your monthly payment is a vital part of your mortgage, you’ll also be responsible for paying interest, insurance and lender fees, which your lender will help you understand. Many borrowers forget about these extra fees and instead of consulting with a mortgage professional, use a mortgage calculator as their guide in how much they will have to pay for a given loan size without taking these extras fees into consideration.

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Top Mistakes of Home Buyers

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Home Buyer Mistakes to AvoidThe process of buying a home is one that you need to engage in with your head as well as your heart. You can’t make impulsive decisions when buying a home or you may find that you make a poor investment that will cost you time, money and frustration down the road.

Insure that you are a smart first-time home buyer by avoiding some common mistakes:

Mistakes to Avoid as a First-Time Home Buyer

  • You Can’t Get Over the Decor – Don’t allow the paint colors or the furniture in a home to sway you either way. The current home owners will take their furniture with them, and paint can be easily changed. Try to picture yourself in the home to determine if it’s the right fit.
  • Skip an inspection – It doesn’t matter how the home looks on the surface; you need a home inspection when purchasing ANY home. You don’t want to be surprised by issues down the road that may have been deal breakers.
  • Rely on Verbal Promises – The only agreements in a real estate transaction are those put in writing. Just because there is an unwritten agreement that you ‘may’ be able to occupy the home before your official closing date, does not mean anyone is obligated to abide by that. Put the important details in your offer and subsequent contracts and you will have better guarantees.
  • Get Approved For a Mortgage After You Make an Offer – It is important that you get pre-approved for a mortgage before you actually start shopping for a home. We can help you get pre-approved in minutes.
  • You See the Home Only One Time – Make sure you schedule a walk-through of the home before you take possession. You never know what condition it will be in when time has elapsed between the initial viewing and the closing date.
  • You Jump on the First House You Like – Seeing a number of houses will help you get your priorities in order. Visiting multiple homes even when you find one you like will help you to think with your head as well as your heart.

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Using Gift Money for Your Down Payment

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Gift Money BasicsWith minimum down payment requirements for the purchase of your first home, coming up with the funds can be a challenge. Many new home buyers find themselves in a position to afford the carrying costs of their home, but can’t seem to come up with the cash to put the required money down.

The specific amount required can vary from one lender to the next. It can also vary by state but the general range is between 5% and 20% at a minimum. What first-time home buyers may not know when they are struggling to come up with the money, is that it is possible to use ‘gift’ money if they have a family member with sufficient financial resources.

Gift Down Payment Guidelines

The specific regulations for the use of gift money do vary by state. However, the basic guidelines are as follows:

  • Money can be provided to buyers by family or friends. However, it must truly be a gift and not simply money loaned. Often, mortgage lenders will require the person giving the gift to sign a notice guaranteeing the money is a gift. Sometimes, the source of those funds must be proven as well.
  • The individual providing the gift does not have to pay taxes on the gifted amount, provided it is under the state mandated maximum.
  • Often, the mortgage lender will require that the gift money be available to the buyer 30 days before closing.

Taking some or all of your down payment as a gift can help you get to the first rung on the property ladder. However, it is very important that you only use gift money when it is legitimately that – a gift. If you try to take advantage of this system and claim a loan as a gift, you are not only engaging in fraud, but you may find that you are in over your head financially even if you do obtain the loan.

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What to Look For When Searching For a Quality House to Buy

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Home Inspection 101Houses, like people, can be all shapes and sizes. What you choose to buy might not be what someone else chooses, but the thing nearly all home buyers look for is a well-made house. Home inspectors, builders, and previous owners can all help by informing you of the condition of a potential purchase, but knowing what to look for with your own eyes is important since you are the ultimate decision maker.

Not every house is perfect and you can sometimes use this to your advantage. Cosmetic issues like paint and finishes are often some of the most glaring, but are also typically the easiest to fix. A house that has serious issues, however, is not. Insure that you evaluate the following:

Look Structural and Foundation Issues

When you’re touring a home, look for significant cracks in the walls or the ceiling or possible areas where such cracks may have been repaired. These can be signs of settling, structural, or foundation issues, and may be costly to repair if they’re deemed serious. Also be vigilant to the presence of bugs, especially termites, because they can cause significant structural damage.

Look For Water Damage

Be sure to look for signs of water damage that might imply a leak in the roof, windows, or plumbing. If there are cracks in the foundation of the home, water can come in that way as well, causing wood to rot, mold to grow, and general damage to flooring or drywall. Depending on the extent of the damage, these repairs can be cosmetic or costly. Mold can also have serious health implications, which means it is important to check for, especially if you have children.

Other Issues To Watch Out For

While the basic structure of the house is the most important thing, home buyers should also take note that a builder or previous owner’s cost-cutting measure can result in more money spent in the end. Some of these things are a matter of comfort, and some can be a distinct issue, including:

  • The quantity and quality of insulation used.
  • Proper installation of rain gutters, shutters, and accent details.
  • Any drafts coming from windows and doors.
  • How water drains outside.

Just remember, your new home doesn’t have to be perfect, you may save money if there is work that needs to be done, just be sure that you know about existing issues before purchasing. Always do your due diligence!

 

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Remodeling Your Home the Right Way

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Remodeling TipsWhen you approach remodeling in the right way, you can bring value to your home, both in the monetary and enjoyment categories. There are mistakes, however, that you can make when renovating your home for the first time that can significantly increase the costs involved. Keep these in mind when you are ready to take on your first big remodel!

Tips for Successful Home Remodeling

  1. Hire the Right People – You need trustworthy, reputable contractors to work on your home. After all, remodeling a house for the first time and leaving it in the hands of contractors means that there is a significant amount of trust required. Ask friends and family who they have used for their projects and do your research online before hiring. Remember, the cheapest option for a contractor is not usually the best one. The costs involved in fixing work that was done incorrectly will usually be higher than those of paying a reputable contractor to do the work correctly the first time.
  2. Make Versatile Choices – There are always trends in home remodeling. Things like tile size and color, for example, change in popularity on a regular basis. Although a certain option may be in today, in 5 years from now, too trendy a selection will just appear more dated. You’re likely to tire of a trendy option quickly, as a result, or struggle to sell your home. Select classic designs when making more expensive changes. Reserve the trends for disposable decor and paint color.
  3. Maintain Flow – Your home’s structure and overall style should mesh well together. If you have a century home and over-modernize it, the home may lose some of its appeal to buyers, and decline in value.

Your home is a big investment, and it can work well for you provided you make careful choices before relying on impulse to renovate it.

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Remaining in Control While Selling Your Home

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Be in Control When Selling Your HomeWhen selling your home, there are many things that can cause stress that are out of your control. As a seller, you cannot control the market, the number of offers placed on your home, or how many other houses are for sale in your area. With so much out of your control, it becomes of utmost importance that you tip the scale in your favor by taking control of the things you can.

Controlling Your Home Sale

To control your sale, approach the following with care:

  • Selecting Your Agent – When choosing your agent, don’t make a hasty decision. After all, this is the person that can truly dictate the success of your sale. They will have an influence upon foot traffic, marketing, and the pricing of your home. You need a qualified professional to advice you throughout the process so it leads to a positive outcome.
  • Preparing Your Home for Sale – Insure that your home present itself well by cleaning up your yard, and decluttering your home in the very least. If there are obvious home repair jobs needed, complete the inexpensive ones that act as red flags. You do not want these things to tell buyers you take no pride in your home, or they may expect even bigger problems they can’t see. Your agent can also give you feedback on what areas of your home need attention.
  • Your Expectations on Price – The market controls what your house will realistically sell for. You can control how open-minded you will be about the process. Be willing to bend (but not break) as having a random figure in mind will not be beneficial if it is not realistic to the market you are in. What you purchased your home for or what homes sold for a year ago play no role in what your home may be worth today. If you’ve chosen a qualified agent, they can give you up to date market data on what your home is worth and what you should ask for it.

There are a number of factors in a home sale that are left up to chance – don’t be a passive observer as you work to sell your home – take control over the things you can control!

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