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When Should You Use Financing With A Balloon Payment?

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Balloon Mortgage BasicsBalance Due At Maturity

The conventional residential real estate mortgage has a structure, which includes monthly repayments of principal and interest, where the payments over the term of the loan pay off the principal entirely, and nothing is due at maturity. In other lending instruments, such as corporate bonds, the borrower has to make payments of interest, called coupons semi-annually, and the full balance becomes due when they reach maturity.

Balloon payment mortgages have features that make them intermediate between conventional amortizing home loans and bonds. The balloon is the balance that becomes due at maturity. The advantage that you get from this type of mortgage is that your payments will be lower, in the same way that an adjustable rate mortgage. The difference is the risk of not being able to make the balloon payment when it comes due.

Loans That Grow Up Too Soon

Lenders calculate the payments based on a long-term amortization, but the mortgage come due at a date considerably earlier than it would take to pay it off. That means that at the end of the term, you will have to pay the outstanding balance. The balloon is the large final repayment of principal.

If you have a seven-year term with a thirty-year amortization and a balloon payment it will be less expensive the same a loan with a seven-year amortization, but then so will an adjustable rate mortgage. ARMs tend to have much less painful adjustments than the balance due at the end of a balloon loan.

Emulating Commercial Real Estate Lending Practices

You make a few assumptions if you agree to a balloon payment. You assume that you will have the payment, one way or another. Perhaps you have the capital, but you don’t want to tie up in something as illiquid as real estate. Or you are very confident that you will be able to sell at a profit when the loan comes due.

This type of funding is more popular in commercial real estate; making a balloon payment is less of a concern if the property is merely one in a much larger portfolio of investments. As with most financial obligations, you will benefit most if you are in a position of strength; things cost less in the long run if you have the capital assets to back your choices.

Selling Balloon Property Tricks

Lenders also benefit from the balloon payment; they always prefer to receive payments sooner rather than later. The risk of investing extends along with the period of the loan so that on average, loans that pay back capital faster represent a smaller risk. To encourage consumers to take on balloon mortgages lenders will sometimes offer a version that gives the option of a reset at maturity.

Choosing a balloon mortgage is one option to finance your home. However, it is a less appealing option arguably than an ARM if you need the low payments. A 5/1 ARM will reset but rather than a struggle to cover a balance due at the risk of foreclosure; you might just have to scramble to find a larger but manageable monthly payment. If you can make larger payments and wish to pay less over the long-term, you will get greater benefit from a fifteen-year repayment loan.

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Assuming The Loan When You Purchase A Home

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Home Purchase ProcessAssuming a fixed rate mortgage loan is possible if you can meet some very stringent requirements. Loan assumption is a more compelling prospect if interest rates are rising and it would be harder to get equivalent terms any other way. An assumable mortgage just means that you can transfer the responsibility to repay the loan to a third party.

Any home loan is assumable in theory, but the lender will try every possible trick to resist it. Since the process of assumption is effectively a party process (buyer, seller, and lender) this can make it much more complicated. One of the central requirements to assume a home loan is that you meet all the lender’s requirements as the new borrower. However, the property most likely will not need to have a new appraisal.

The Due On Sale Clause

The way that lenders prevent you from assuming a loan is to include a due-on-sale clause in the terms of the loan; this means that if you sell the property, the loan becomes due at closing. Such clauses are valid for conventional loans, but FHA and USDA loans are assumable if they were created after March 1, 1988, and the buyer meets the acceptance of the lender.

VA loans were fully assumable if they closed before March 1, 1988, they did not require that the lender approved the transfer, since that date they have been assumable under the same terms as FHA and USDA.

Agreement Between Three Parties

It is rare that you will find a situation where you can take over a loan and not add cash at closing. In most cases, the property will have appreciated since the start of the loan, and you will have to bring cash to closing or take out a second loan to satisfy the seller.

An exception would be if the seller has negative equity, the reasons to not get involved with this are so numerous it would take several more posts to detail them all; that would be a bad investment even if the lender would agree to it.

Checking For Other Options

The note that describes the terms of the mortgage defines whether or not a loan is assumable, and lenders usually choose to include a due-on-sale clause. If there was seller financing involved in the property in question and it is not assumable, there might be another way. Instead of buying the property an alternative might be an option; the seller might consider giving you a lease option to buy.

Also, at the time of writing, interest rates on all home lending are low and new mortgages are likely to be relatively easy to obtain compared to gaining ascent from a lender to assume a loan. It might serve you well to investigate whether there are more appealing alternatives based on starting a new loan at closing.

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All Cash Or Small Home Loan, Pros And Cons Of Each

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Home Mortgage BasicsWhen you have the funds to pay cash for your home, do you apply for a mortgage a loan or do you pay cash? It is a luxurious dilemma. If you are considering a home purchase and you have the financial resources to pay cash, without the expense and stress of borrowing from a bank or mortgage finance company, why would you ever want to use financing? It turns out that there is some benefit to having a home loan, even if you do not need the help.

If you have the capital for the full amount why not use part of the cash and get some of the benefits of working with a lender on favorable terms? Depending on your state, loans include impound or escrow accounts for miscellaneous items like property tax. Deducting these expenses automatically saves the worry of dealing with issues like insurance and property taxes.

Waving Cash At The Sellers

Offering cash at closing to seal the exchange is a powerful incentive to induce sellers to agree to terms that are favorable for you. Closing with cash is a faster process because of the time and cost savings that come from not having an appraisal or inspections required for a loan; if it is advantageous for you to pay cash at closing, you can still recover your money by financing after the fact.

The next question is how much do you want to take out of the property when you finance? The logical upper limit is the maximum you can borrow against the property without requiring private mortgage insurance, eighty percent. However, if buying for cash secured an exceptionally rewarding discount on the purchase price you may wish to extract all that you can; for a conventional mortgage, it is up to 95 percent of the appraised value, as long as you take out PMI for the loan.

Get The Best Of Both With A Large Down Payment

An alternative might be to put down half the value of the home. Offering a large down payment of forty to fifty percent will have the same impact on negotiating your purchase price and make loan funding easier also. Large down payment will get you in and out of closing nearly as quickly as cash and on similar terms.

A large deposit is like an investment at the rate that you would be paying on the loan for that amount and with less risk than if you invest it stocks or mutual funds. Big deposits avoid the extra cost of non-conforming jumbo loans. Loans have costs, and the capital will be trapped in the asset until you sell, refinance or use a home equity loan on top of your existing mortgage.

You will pay interest, which you can use to offset your tax bill, but that is not going to save taxes for everyone. You will need to talk to your accountant or financial advisor to establish the best tax strategy for your personal finances.

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Put Funds In The Bank With A Cash-Out Refinance

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Cash Out RefinanceA cash-out refinance mortgage repays your current balance with a larger loan and gives you the difference as a lump sum of cash at closing. You can use this money for anything that you wish, but some choices are wiser than others. There are few proper uses to cash out in this way and plenty of options for other sources of funding. However, you can use a cash-out refi to consolidate higher rate liabilities and save some money on payments for the long-term.

The Uses For A Cash-Out Refinance Mortgage

A cash-out refinance mortgage is one of the options for extracting equity from your property; it is most suitable where you need a large lump sum to dispense with some other, more expensive liability. For example, if you have balances on high-interest credit cards, using a cash-out refi to pay them off will save the cost of interest payments and contribute to additional savings in tax deductions.

Another appropriate use for receiving cash at closing would be to pay for home improvements and refurbishments that will add at least as much value to the home as the cash that comes out of the loan. However, you might find that a home equity line of credit (HELOC) is a more suitable option for refurbishment, as costs tend to accrue gradually and the cash sitting in your account will incur interest whereas a line of credit only charges interest on the funds you use.

The Low Down On Cash Outs

Closing costs for a cash-out mortgage are comparable to other refinancing packages; the fees will quickly climb to more than a thousand dollars any time you restart your mortgage. You will also have to undergo the approval process for your credit and, as you are asking or more money, the condition of the property too.

Lenders may balk at approving a cash-out refi in some circumstances, such as if your credit score has dropped. They may require a higher credit score than regular re-fi loans, a minimum time in occupation of the property, and a loan-to-value ratio of not-more-than 85 percent.

There Is Probably An Alternative

Other options include junior loans such as home equity loans and home equity lines of credit. A home equity loan achieves the same ends and pays off more quickly; An HELOC is suitable when you will be making home improvements and need to draw on a revolving line of credit. You will not have to pay interest on any more of the HELOC than you use.

Refinancing any home loan is a matter of timing; you need to be confident that you can handle the payments and the interest rate. On the positive side, a cash-out refi gives you money in the bank to spend as you wish. The question is: What is it that you can do with such a lump sum that will improve your personal wealth?

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Veterans Can Double Down On Their VA Home Loans

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va-loan-basicsVeterans of the United States Military who wish to own a home have a resource that in second to none in supporting home purchase through the U.S. Department of Veterans Affairs (VA), which offers a home loan guaranty benefit that is second to none. Not only is there an excellent facility to buy a home with a first mortgage on favorable terms, but veterans can also take advantage of the IRRRL program that enables them to refinance their VA home loan if and when better conditions become available.

VA Home Loan Program

Past and present service members in the United States Army, Air Force, Navy, Marine Corp, or Coast Guard, you may be eligible for financing with a Veterans Administration-backed home loan. If you are active duty military or a qualifying veteran you can take out home loans that have the best, most generous terms available on the market.

If you have sufficient credit, veterans and service members can get a low cost, no-money-down VA loan. These terms apply to veterans, active service, reserves, and National Guard, as well as some surviving spouses.

Like FHA and other government-backed loan programs, VA home loans have conforming limits. However, these limits are slightly more flexible when it comes to geography. The ceiling on a conventional VA home loan depends on the county in which the property is situated, with the maximum being $417,000 in most counties, but this increases significantly depending on the value of real estate in that county.

Interest Rate Reduction Refinance Loans For Veterans

Veterans who already have a home loan through the VA program can refinance at a low cost using the VA Interest Rate Reduction Refinance Loans (IRRRL) program. Unlike your original VA financing, you do not need to have a certificate of eligibility to qualify. The cost to refinance for qualifying veterans is very low because there is no requirement for appraisal or loan underwriting fees; there are no costs out of pocket because the interest payments include the expenses.

Lenders are under no obligation to make an offer on your IRRRL application. So, you will have to shop around if your preferred lender is not interested in responding. Other, less scrupulous, finance companies have been known to claim they are the only source of an IRRRL refinance, so again, shop around before you commit to any lender with which you are unfamiliar.

Getting The Most Out Of VA Loans

Considering the sacrifices and hard work undertaken by the members of our military it is only right that the country should honor our veterans with the chance to own homes on easy to meet terms. Financing your home purchase with the help of the VA is one of the most successful entitlements that we provide for our veterans. If you fit the criteria, you have an outstanding opportunity to own a home. With the VA IRRRL program, you might just be able to improve on the VA backed home that you already have.

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Avoid These Things To Prevent Home Loan Approval Delays

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Pre-Approval BasicsNo Sudden Financial Moves

Once your lender preapproves you for a mortgage, and you have paid to start the application process, you need to make sure not to do anything that will cause the bank to think twice. Otherwise, you will have to deal with the consequences of delays or contract termination.

The risky behaviors that you must avoid are in three categories: Do not do anything that adds a new entry into your credit report; do not change your employment basis; do not make any unusual activities on your bank account. Anything that changes your debt-to-income ratio will cause alarms to sound in your lender’s office.

The critical period in applying for new home loan financing, whether you intend to buy or refi, is between the initial application and closing. This period can be long enough without complications, anything that alerts your lender of a change in your status will cause a delay until it resolves to their satisfaction, or it will just terminate the contract.

3 Groups Of Behaviors That Will Delay Your Approval

Keep your bank account steady – Any large deposits or transfers into, out of, or between your bank accounts could look like suspicious activities, and that will certainly provoke delays. Also ensure that you report any gifts, such as help from family members as well-intended offerings are common causes of delay.

Do not cause any credit report changes – No new borrowing; it does not matter if you get the best rate in the world just do not do it. The prohibition on new credit means no new store cards, credit cards, or auto finance loans or leases.

No changes in the workplace – Do not alter your basis of income, for example, do not give up your salary for a commission-based job, even if it promises to pay you much more. And do not become self-employed. Your lender is not going to look at your potential, or how much you earn, all they care about is that you changed.

What Happens When The Alarms Go Off?

Delays in closing are annoying; real estate transactions bring stress, and frayed nerves; even the relatively small upset of a refi can escalate if any delays add to the uncertainty of closing. If you are buying a new home, the stress and uncertainty rise to another level.

The fear of losing the home that you have set your heart on is not a pleasant experience. If a lender decides there are grounds to terminate your contract, you will have to start the process all over again with another lender, at additional cost, or it could jeopardize the transaction entirely.

Avoid these sorts of upsets by being very careful during the process to prevent any changes in your finances, applications for credit or changes in your career. There will be temptations that pop up right at the critical times, at those times it will be a matter of self-discipline that keeps your mortgage on track for closing.

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Don’t Take The First Mortgage Package On Offer, Get What Works For You

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making-an-offerHome lending is a gigantic industry in the United States; in 2014 lenders originated $1.24 trillion in new home lending and there are more than 7,100 lenders. There are plenty of different mortgage plans available for you to choose. So, as a consumer considering taking on a new mortgage, you can afford to be picky.

The most standard element of home lending is, arguably, the process of qualifying to borrow against real estate in the first place. The funding offer that you get first from a lender is likely to be the offer that fits their portfolio or earns the highest profit margin in the secondary mortgage market. You should look carefully at the terms of the offer and decide if it is what will be the best for you.

The Obvious Terms

There are a few features to watch in the loan that they offer you, some of which will be fairly obvious and relate to your general needs and then some more things that you should look into closely. The obvious things are the term, whether it is a government-backed loan and if it is a fixed or adjustable interest rate.

The Details In The Fine Print

Some of the more subtle things are the interest rate, the cost of mortgage insurance that facilitated a low deposit and the mortgage discount points that you will pay at closing.

The interest rate – The interest rate your prospective lender offers will likely be near the market but never assume anything. If you have focused on other features such as the down payment or discount points the interest rate that they quote might be higher than you would like. Keep in mind that a quarter of a percent increase in your rate can add thousands in costs over the lifetime of a loan.

FHA mortgage insurance – If you go for a government-backed mortgage, make sure that you understand how much to pay for FHA insurance cost and when you pay it. You will have to pay a lump sum at closing and a monthly amount that tacks on to your repayments.

Discount points – The points that you prepay matter; if you have not negotiated on this they may be higher than you want to pay up front or not enough to get the rate you want. There is a direct link between the interest in the repayments and the points that you prepay. When you change the discount points it may give you a way to get terms that suit your agenda better.

The Power To Change The Terms

The loan officer will present all of these terms to you with a written offer, and that is the point at which you can either accept it without question or go through it line by line and decide what works best for you. There might be terms in the fine print that specify paying some of the fees in the closing cost that you may wish to have in the repayments. Alternatively, it might be that you want to pay some of the expenses buried in the repayments at closing instead.

Your loan officer or independent agent will put together a first offer based on what they think you need, what suits them, or maybe the plan they can push through their company bureaucracy most quickly. The question to ask is whether what they present to you is the loan that the loan officer wants to sell because of it is a natural choice, the one they sell most often, or the one that earns the highest commission for the originator.

The originator might be highly experienced and in tune with what you need. Do not hesitate to question anything that is expensive or does not make sense to you. Remember, there are plenty more lenders out there, you are in a strong position to negotiate, or to walk away if you feel you could do better.

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Get Ready For The Bump When Your ARM Adjusts!

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ARM BasicsThe Day Has Arrived

That day that you thought was far off in the future when you signed for your adjustable rate mortgage has come. Yes, it’s time for your interest rate to adjust and you don’t know what to expect. Perhaps you secured a low initial rate by going with the ARM or you planned to sell before the first adjustment. If you have a 5/1 ARM, a common type of adjustable conforming loan, you have had five short years, and now your rate will adjust annually for the rest of the term of the loan.

How Does Your Adjustment Grow?

Do you get a jolt once a year or do you get a roller coaster ride? The way your mortgage adjusts either annually or continuously once the initial fixed rate period is complete. The designations for ARMs are less organized than you might expect from the apparent format, a 5/1 adjusts annually, 5/5 adjusts every five years, but 5/6 adjusts semi-annually. A 3/27 ARM has a floating rate that changes with each payment for the 27 remaining years of the loan.

With this impending adjustment, you are transitioning from one stage of your mortgage to another. You have had a few good years at a low introductory rate, and now you will have to pay the current market rate. You have had the benefit of the bank or mortgage underwriter knowing that they have less risk of losing money on the loan over the long-term.

What Changes When An ARM Adjusts?

The interest rate formula for your adjustment comes from some published financial index, for example, the LIBOR or London Interbank Offered Rate, which is about as obscure as anyone outside the banking industry can imagine. However, this is a reliable indicator of the condition of the market and banks throughout the world use it to set rates on a variety of financial instruments.

Your ARM will also have a margin above the index that you agreed to when you applied for the loan. Regardless of the change in the index, the margin remains a constant percentage. In the initial terms of your loan, the lender defines the fixed margin and the adjustable index. When you want to get an idea of the new rate you will be paying after an adjustment, the index will be published in the financial press or on the major financial websites.

Does Your Rate Have A Cap?

Your adjustable rate mortgage most likely has at least one type of rate cap that establishes limits on interest rate changes. A lifetime cap limits the total changes in interest allowed on the loan; a periodic cap sets the limit on how much your rate can change at any one time. Some ARMs have initial caps that restrict the first adjustment more than the periodic cap. Check your loan documents to find out what the caps are on your adjustable rate.

There is always the chance that your payments reduce when they adjust; this could potentially happen every time an adjustment is due. But it is human nature that a higher payment of one or two hundred dollars is more distressing than a reduction by the same amount is pleasing.

You will likely pay less than for taking out a new fixed rate mortgage at the time your rate adjusts. If you can console yourself with that and a clear understanding of how your ARM adjustments work, you can rest a little more comfortably and enjoy the payments you are likely to make.

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As Prices Go Up How Soon Can I Refinance My Mortgage?

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Mortgage Refinance BasicsDon’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.

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What Are The Rules For Self-Employed Borrowers?

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Self Employed Mortgage BasicsInformation 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.

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