It is an exciting time when you move in with a partner, one that should be the epitome of happiness. However, organizing cohabitation is more complicated in practice, especially if either one of you already owns the home and makes payments on a home loan. The question of whether you should refinance is a part of the bigger question about how you will share ownership and financial responsibilities in general.
The Hazards Of Taking Turns
Taking turns in paying for life’s necessities in cohabitation leads to two parts of one problem: One or both partners soon start to keep a tally of who has paid for what. The solution for this is creating one shared bank account from which all costs of living and shared expenses come with both partners making a predetermined monthly contribution based on a budget that you work out and review together. Like your bank account, you will find that sharing the home you occupy is a tricky proposition, dependent on your circumstances and your state’s real estate laws on shared ownership.
Cohabiting As Homeowners
When you commit to co-ownership, you need to have a clear understanding of each other’s financial position going into the relationship. Do you know your partner’s current credit situation? Deciding whether you should refinance your home with your partner comes as part of the process of deciding how you should share everything. It is something to settle before you start making final choices.
So, what do you do when one partner owns the home already? If the other can afford to match assets and equity and borrowing ability, then the simplest solution might be to refinance as equal partners, both bringing cash and financial clout to the shared home.
If there is an imbalance in assets, then it becomes more complicated and yet in the eyes of the law, both partners might be entitled to an equal share of the property. The solution could be a cohabitation agreement, very much like a wedding prenuptial agreement, a contract that declares the assets brought to the partnership by each side and which return to each partner, should the relationship end.
Getting On With Your Lives Together
Real estate is a concept that is defined very clearly in the laws of the land, and each state has its particular histories legal precedents and legislation. The more closely you study the subject, the more complicated it becomes and it has become a specialization in the law that captures entire careers and specialized law firms.
As unromantic as it might seem, getting legal advice before you commit to moving in together is a prudent course of action. However, homeownership is a part of life, and domestic partnerships are a reflection of legal ones. If you can get past the legal formalities and settle in, as many couples do, you can have the domestic bliss you are seeking with all the comforts of owning your home.
Americans who have actively served their country in all branches of the military and having left the service with anything other than a dishonorable discharge have access to a wide range of benefits from the Department of Veterans Affairs. Under the Veterans Administration (VA) this includes assistance in purchasing a home.
Great Terms On Home Loans For Veterans
The VA does not lend money for home purchase but instead provides a loan guaranty to qualifying veterans to buy homes on very affordable terms. The VA loan guaranty program was instituted as the end of WWII approached, and the agency was very aware of the coming waves of men and women returning to civilian life. The concept was to enable returning veterans to settle and have a home and a part in the American Dream, in recognition of the fact that they had risked sacrificing their lives on behalf of the nation.
What has evolved over the years is an excellent program that allows qualifying vets to buy homes without down payments. This program is a generous benefit but in practice, it suffers from a touch of bureaucracy and being poorly understood by some real estate professionals.
VA Loans Sometimes Cause Confusion
Lenders and realtors sometimes shy away from VA because they do not have enough information or experience with it in practice. In unsubsidized conventional lending, the borrower contributes a down payment of twenty percent or more. The VA entitlement subsidizes insurance on the portion the financing that would be covered by the down payment; this can be confusing to inexperienced lenders and agents.
The VA Loan Guaranty program sets no limit on lending, but it caps the deposit liability. VA Loans do not have a conforming loan limit per se, but for a no-down-payment VA loan the de facto lending limit is the same as Fannie Mae and Freddie Mac limits by county, but by adding cash as down payment you can increase the size of the loan. In all cases, you still have to qualify based on your credit and income just like conventional and FHA loans.
Appraisals for VA have a reputation for being rigorous, slow and conservative (meaning it might come in low). A low appraisal might prevent the sale unless the buyer pays the difference, which undermines the whole point of “no down payment.”
VA financing requires that an eligible property is within U.S. territories and is a completed structure, either new built or existing, not undeveloped land. If the home is a condominium, the complex also has to be approved for VA lending, which is not a given.
Something For Your Service
The potential roadblocks you might encounter are professionals reluctant to work with a VA loan, harsh appraisals and the need for condo approval. But these are not insurmountable challenges; a little persistence will go a long way when you are attempting to buy a home with a VA loan and no down payment. Approach the process as if you are hunting for a bargain and when you have your new home, you will find it is a bargain that you earned with your service.
If The Finance Deal Sounds Too Good, It Probably Is
Buying a home is a big undertaking and one that has implications for the decisions that you make today that could impact your wealth and lifestyle for years to come. You need to be extremely careful to get the financing right so that you can reap the benefits of a smart choice.
The financial services industry is gigantic and diverse; it accounted for $1.26 trillion worth of sales in 2014. While the majority of companies provide excellent service, there are a few that are unscrupulous, and in between there are those companies that maybe just push the hard-sell tactics too far. So let’s point out some of the selling tactics to look out for and take as signals to avoid particular real estate lending offers.
Watch Out For Deceptive Wording
“Low Fixed Rates” that are just ARM introductory periods – If the blurb says something along the lines of, “low fixed rate for the first five years,” that is a sure sign that the loan is an adjustable rate mortgage or ARM. While an adjustable rates are not necessarily bad, they can be worded deceptively and potentially leave the borrowers open to the risks associated with the terms and uncertainties at the time that the adjustment takes place.
“A great deal because it’s government backed!” – Really? Government programs, for example, Freddie Mac and Fannie Mae, “back” most loans that meet the conforming criteria by purchasing them as investments; such claims are misleading because they overstate the significance of that backing.
Refinancing Offers To Avoid
Unsolicited offers in return for information – In refinancing a home loan, it is always a safer policy to take the initiative. Do not respond to unsolicited offers that promise to find a great deal if you “just fill out a form.” The risk of getting scammed is just too high. The information that they ask you to give is exactly the type of information that identity thieves crave; you are better off just assuming that unsolicited refinance offers are scams.
Never pay fees up front – There is no good reason to pay a lender anything before closing. If they ask for payments up front, it is a sign that you need to go elsewhere for your refinance. Don’t do it, and don’t walk out, RUN!
Avoid prepayment penalties – How about your interest if you pay off the loan early? Who knows what will happen in the next five years? The pace of technological changes and politics are so volatile these days that you don’t want to be tied into some financial commitment, with a cash penalty as the only alternative. But this is what can happen with a home loan that has a prepayment penalty tying you in as part of the contract. Regardless of your present plans, always insist that your home loan has no prepayment penalties.
Information on what to avoid in real estate finance is not hard to find. A search of the Internet will return a list of the latest scams and scoundrels and how to avoid them. Researching the reviews of services on social sites, the Better Business Bureau and getting advice from trusted and disinterested parties is all part of the process of finding the right provider for your home loan.
Adjustable rate mortgages or ARMs are home loans where your payments change with the state of the economy, to reflect changing interest rates. A typical ARM has a period fixed for five years and then adjusting annually after that. The hazard for ARMs is that, if the economic conditions are right, they can become very expensive down the road.
Breaking Down The Payments
Home loans pay interest as rent to the lender for the amount outstanding and gradually repay the principal. In the case of fixed rates, the interest rate is set when the loan company or bank creates the loan, and you have a predetermined schedule that pays a fixed rate of interest on the outstanding balance, and the rest of the payment goes to returning the principal.
A fully adjustable would allow the lender to charge you whatever interest they felt like each month, this is not the case with ARMs. The interest rate adjustments occur on a schedule, they tie to some independent factor, commonly the prime lending rate plus a predetermined percentage.
As the principal you have paid increases, the less interest and the more rapidly you pay down the balance of the loan; this is also true of ARMs but when they adjust you continue to repay the principal according to schedule but the updated interest rate changes your overall payment.
Give And Take For An Enticing Initial Lower Rate
The market for ARMs is not a free-for-all, but this type of loan does present a risk in the future if the prime rates should change dramatically right as your rate is due to adjust. If the prime rate were to climb rapidly to the double-digit levels seen last in the 1980s, your home loan could become extremely expensive as soon as the ARM updates.
The advantage of ARMs is that you can get a better initial rate; ARMs cost less to start, and you might pay less over the life of the loan, assuming economic conditions remain favorable for the next fifteen to thirty years.
However, even if the average prime rate stays flat, there is the risk that, for reasons yet unknown, the prime rate spikes for a short time, just as your rate resets and you have to pay higher interest for a year or more. Additionally, it may not be possible to refinance on favorable terms because, if the prime rate goes up, all new lending will tend to incur a higher rate of interest.
Betting On Good Times Ahead
Just because double digit resets are not likely, that is not the same as impossible. If you borrow on an ARM, you take the risk that the unexpected will occur. The other side of that risk is that introductory rates on ARMs are often lower than the equivalent fixed rate loan.
If it works out that rates do not change, or they improve, over the lifetime of the loan it could save you a lot of money. When you choose an ARM, you are making a bet that interest rates will not move against you.
Of Shorter Terms And Greater Equity
Your signed up for your first home loan, it was probably over thirty years because that was the cheapest way to finance or it gave you the most home for your monthly payment. When you were shopping for funding, did you happen to notice that fifteen-year loans did cost more but not double what you ended up paying each month?
Now that you have a history of making payments on time perhaps you can refinance your home to pay off your loans faster, or you can refinance to make your payments smaller. You can even refinance to take cash out of your home, although, unless you intend to invest it in real estate it is probably not a good thing to do; hold on to your equity and growing your wealth will be the much more rewarding path in the long-term. If this sounds like a smart move, start to make inquiries about it, but keep these potential traps in mind.
The Loan Term Reset Trap
The first trap to avoid in refinancing is rolling from from one thirty-year term to another because you will just reset the clock back to the beginning. It is like you are adding the payments up front where they are mostly interest and little principal. In addition to the closing costs, you will end up paying more interest over a longer period.
Leaving Mortgage Insurance Behind
If you financed your present loan through FHA, with a small down payment and mortgage insurance or on a conventional loan with PMI, it was a great way to get started. However, once you have accrued some equity, you can move on to save costs and expand your equity share more quickly. FHA rules require you to have mortgage insurance for the life of the loan, hence the necessity to refinance to get those savings. For conventional loans, PMI payments can be stopped after the loan balance is paid down sufficiently.
The Cost Of Closing Trap
There are always costs in refinancing; these closing costs must be weighed against the monthly savings to determine if it is worth refinancing. The cost added to your loan should be less than the savings you gain over three years. Also, try to avoid the temptation to take cash out at closing because this is essentially a hidden closing cost. Even a relatively small cash advance will cost you several times the amount over the life of your loan.
Traps That Steal Long-Term Value
Are you certain enough of your income to justify a higher monthly payment to clear your loan sooner? If you find yourself forced to sell, you will not get the benefits down the road. Don’t get trapped into refinancing and then having to sell with all the additional closing cost hanging over you.
Refinancing is only really beneficial if you intend to stay put for a significant length of time. If you are in your home long-term, you want to cut your term from thirty years to fifteen, and have enough equity to forego mortgage insurance then you can save some money by refinancing. If you replace your previously government-backed home loan with one that has no need of mortgage insurance, a lower interest rate and half the term you will pay much less over the life of your loan.