Don’t Just Churn Your Finances
Once you have closed on your mortgage, collected the keys and settled into your new home, you might start thinking about how you can get a better deal. Maybe your payments are high, compared to the market rate, or you want to change the term over which you repay the principal from thirty to fifteen years.
If you have equity that you put into the home, you can probably refinance almost immediately. But then you could be piling on the expenses unnecessarily, and it will hit your credit rating right at your weakest point.
So, you may not be able to get the best terms until your equity has grown by more than the costs of a new loan, and your credit score has bounced back from the initial hard credit check and closing on your home loan in the first place.
Do You Have The Collateral?
If housing market values increase, you will gain along with everyone else. One time when you might consider it is when it is more advantageous to refinance than to cancel your FHA or private mortgage insurance. You can eliminate mortgage insurance when you have at least the mandatory equity stake of twenty percent.
Do you risk the cost of an appraisal to find out if your equity is going up? If it is not immediately apparent from discussions with your realtor or authoritative real estate websites that post price estimates, you probably should not.
An Expensive Mistake On The Borderline
If a refinance looks great on paper and you can lock in a favorable rate but then the appraisal is lower than you expected then it was all for naught. With application fees included, you could pay more than $800 before you get a definitive answer on the value of your home.
Your equity depends on the deposit you put down, the payments of principal you have made since then and the conditions of your local real estate market and the upgrades to the property.
If you do refinance you are starting again with the loan, so your term extends, you have to cover repaying your previous financing which may include a significant portion of mortgage costs.
The mortgage discount points that you prepaid on your initial loan will evaporate; you are starting again and will have to pay to get another discount on your rate. Unless of course, you either chose zero or negative points, in which case you might get a better deal. You will pay the costs of closing all over again and perhaps have more costs tacked on to your loan.
Not All Doom And Gloom
You may be in the privileged position of first, having increased equity sufficiently. Second, confidently estimate that you can reduce the cost of finance over the full term by refinancing.
Given these two factors, you are in the position to take action and improve your financial situation as a homeowner. If you can make a re-fi work in your favor, it means you have some equity now, and you can leverage it to increase your wealth down the road.
Information Is The Key For Self-Employed Borrowers
Independent professionals and freelance workers lack the paperwork that lenders rely on to determine the financial condition of employed applicants. About six percent of the non-agricultural workforce is self-employed. When self-employed people want to purchase homes, they find that they live in a different financial world than the general home-owning public. So, as an independent worker, determined to buy a home, what do you do?
Take The Long View And Maximize Two Things
One lesson that you may have learned working for yourself is that you must be deliberate in your actions and careful in your choices. That mindset will serve you well in finding home loan funding, as with all things. Unless you just happen to meet the financial conditions lenders demand from self-employed borrowers, you will have to plan ahead and do the things that will get you to the point of qualifying for homeownership.
Line up your income and assets to show that you can handle a mortgage, and be prepared to make twice as many applications as employed loan applicants; even with higher levels of income, self-employed borrowers get turned down more often.
It’s All About Filing Your Taxes
The main feature of self-employment is that you receive all of your income directly from customers, which means you do not have an IRS W-2 from any employers. A W-2 is one of the primary ways that lenders determine the income of employed mortgage applicants.
Your tax filings are the most consistent and authoritative documents you generate as a self-employed person. Lenders will request that you can show at least two years of tax history to include Schedule C of your Federal Income Tax filings. If you own an S corporation or a partnership, you will need your Schedule K-1 to show your income.
Demands From Lenders
Higher down payment – Lenders will wish to see that you have a slightly lower loan-to-value ratio, which means a larger down payment.
A high credit score – Your FICO Score will need to be higher, anything under 700 and you will find that your offers look more like high-interest, sub-prime loans.
Low debt-to-income ratio – You need to be able to make your monthly obligations to creditors comfortably, based on your income and your repayments.
Reserves in the bank at closing – Lenders will want you to have enough liquid assets as reserves after the loan closes. You will need six months or more in reserves, or more.
Financial documents – You will have to include your Schedule C or Schedule K-1 for the previous two years as well as Profit and Loss statements that detail your income and expenses. If you have other sources of earnings such as rental properties, expect to produce the relevant documents that support your case.
A Symbol Of Successful Self-Employment
Time your application to coincide with two good years, preferably showing an upward trend in your income. Save up for a deposit and closing costs, and for ample reserves after closing as well. Finally, start shopping for lenders that appreciate the value of entrepreneurs, freelancers, and independents; you may get turned down more than the wage-earning public, but you will find the right one soon enough.
Private investors often act as lenders to finance deals that provide reliable security on which to earn income and asset growth. This sector of real estate lending and investment is the least regulated, which is a good thing because you can get creative to add value in the deal; it also means that you need to have professional advice on hand at every stage of the process.
The Local Hard Money Lender
A private investor can help you get ownership of real property; you can then install a tenant and refinance at a lower interest rate. These hard money loans secured by real estate are an excellent way for investors to negotiate favorable terms on the right properties.
The investors who make hard money loans have the experience to judge the issues of asset value and risk to make intelligent choices about the loans they write. These lenders make quick decisions, so you get the leverage of a quick close, which gives you leverage in negotiation with owners who are motivated to sell.
Hard money loans are relatively expensive, and short-term solutions but they allow you to gain the title, make all the necessary repairs and improvements, and then rent out to a new tenant at the market rate. Once you have a cash flow from your investment, banks will view it as suitable for lending on favorable terms; you will be able to refinance for the long-term, at a market rate of interest.
Hybrid Debt And Equity investments
A more elaborate variation on this strategy is to find a private lender who will consider becoming an equity partner as well as a creditor. Your offer to this investor is to borrow half the buying price from them and to exchange half of your equity in return for the remainder of the price. If they agree, they earn interest on the loan plus they are entitled to an equal share of the gain as the asset grows value.
The ownership ratio does not have to be a half; it can be any split that you can agree with your lender, who will also be your partner. For example, instead of lending a half, they may consider two-thirds of the value and a half stake in the equity. It is a matter of the market, the property in question, and your negotiating skills.
Banks Love Portfolios
Once you have established a strong track record and a reputation in your business community as a smart developer, you will find doors opening more readily. Banks will consider funding your projects earlier in the process. They will also consider offering portfolio loans secured against some or all of your investments, which will be less expensive and simpler than first borrowing from hard-money lenders and refinancing it later.
Hit The Syndicate Circuit
Create a syndicate of several investors as partners who each take a smaller share in your project; this is more widely used to finance multi-unit properties that are beyond the reach of these investors individually. You become the general partner, responsible for every aspect of the project, and the others become limited partners who provide capital but remain in the background awaiting their shares.
Investing Requires Sound Legal Guidance
Forming a syndicate or any of these you are the general partner and your investors take a passive role demands the sharp eye of a competent real estate attorney. You can be sure that your hard-money lenders get and limited partners get sound legal advice and if you want a chance to succeed you should too.
Talk to hard money investors in your community; it is not hard to find them in any metropolitan area. Build a network of contacts and start looking for that potential first investments. Once you have cash flow coming in from that first rental unit, you will be at the starting point of a career as a real estate investor.
The Adjustment Depends On The Index
When you take out an adjustable rate mortgage (ARM), you agree to allow your lender to make periodic adjustments to the interest rate that you pay on the balance of your home loan. The mechanics of the adjustments come from the terms that you agreed to at the beginning of the loan. The most critical factor that influences the rate hike is the index. When it is time to adjust the new rate is determined by the sum of the index and a margin, also defined in your loan.
Your lender will select the index and margin that suits their purposes from one of many that are in everyday use as references for mortgage lending. The index will itself be influenced by external factors, many of which are interconnected. Lenders select their indices based on a concern to keep lending rates competitive and profitable; therefore they choose an index that they believe will reflect the state of the home loan market at the time your rate adjusts.
The Factors Behind The Index
Common indices are six-month Treasuries rate, one-year constant maturity Treasuries, Certificate of Deposit Index, and the six-month London Inter-Bank Offered Rate. In turn, these published rates come under the influence of the state of the economy and the actions of the Federal Reserve.
The Federal Reserve funds the lending industry by providing cash to the banks; these funds are the lifeblood of the economy, the banks borrow at a discount lending rate and then loan the funds to their customers at a retail rate, profiting on the difference. The Fed changes the discount rate to influence the economy, to forestall recessions, and to control inflation.
The economy influences the indices through the behavior of investors and the state of businesses. If businesses prosper, employment increases, and the economy expands, it creates demand for goods and services; this increases borrowing and banks increase their rates, which tends to push indices upward. If the economy contracts and businesses experience a downturn, they will cut costs and lay off workers, resulting in decreased demand for loans, influencing indices to drop.
Initial Rates And Following Adjustment Fluctuations
One of the most annoying hazards of having an ARM is rate watching whereby you fixate on the index before the adjustment date. If you have a mortgage that resets periodically based on a published market index the current level of that index becomes a focal point that grabs your attention and holds it.
You might assume that the interest rate on you ARM will adjust upward, but that is not necessarily the case. If the conditions are right, it may remain unchanged or reduce slightly. If you had an exceptionally low introductory rate, a drop is unlikely, but subsequent adjustments will track the changes in the index rate, which will fluctuate with the condition of the economy and the sentiment of the Federal Reserve Board.
Adjustable rate mortgages are an excellent way to get a competitive initial rate. Once the adjustments start they become something of an adventure; the fluctuations in the economy and the index that determines your adjustment set the extremes of the ride.
The question of the cost of refinancing your mortgage is simple enough on the surface, but the details and the fees add up and appear before you begin and then over the lifetime of the new loan. You need to look carefully at the costs of a refi before you commit to even formally applying for it.
Paying To Qualify
You will have to pay to initiate a mortgage application fee that could be as much as $500. Your refi is for a new loan contract, and the lender will demand a fee for the privilege of starting a new loan. As with any lending, the bank is interested in the qualities of both you and the property.
Credit reports – You will have to show that you are still in good standing with your creditors. Obtaining copies of your credit reports will cost anything up to $100.
Appraisal report – The property that provides the security for your loan also has to prove that it is creditworthy. The appraisal will also have to confirm that there is sufficient equity to repay the previous loan and cover the new lending, which may cost around $400, and you still do not know for certain that you will get approval for the new mortgage. If there is something wrong with the condition of the property or it just does not have the value that you assumed, it could turn out that you spend $1,000 or more only for the lender to decline your application, ouch.
Cost At Closing
Once everything meets the approval of the lender, there is another round of fees to pay at the time that the loan closes. In fact, this is quite a list if you break it down. You will have an origination fee, document preparation fee, title search and insurance fees, recording fee and a host of lesser fees that add up quickly to around 1.5 percent of your initial loan value or more.
Is it worth additional costs? The answer depends on your objectives: If you want to save money in the long-term, and you have found a new loan package that gives you a lower interest rate the savings of interest payments will cover the extra costs to refinance.
It does not take much of a rate reduction to create savings over the life of a thirty-year loan. Likewise, if you reduce the term from thirty to fifteen years, you will save thousands in interest payments. If you plan to sell long before the end of the new amortization period, it will probably be more expensive to pay the up-front cost of refinancing.
How much can you save? Over the life of a thirty-year mortgage, you can save tens of thousands by shaving just a quarter percent from your current rate. If you experiment with an online repayment calculator, you will find that the amount you can save over the life of a loan is on the order of the original balance of the loan, depending on your choices for interest rate and amortization it may be more, or less. If you compare that to the costs detailed above you can see that the key is that re-fi saves in the long term, but it is expensive in the near-term.