Balance 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.
A 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?
Veterans 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.
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.