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Use A Second Mortgage To Avoid The PMI Trap

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Private Mortgage Insurance BasicsWhen you finance the purchase of a home, in most cases, you will either have to make a sizable down payment or take out a private mortgage insurance policy (PMI). The choice is cut and dried for most borrowers.

But in some cases, if you want to have the most refined control over your costs, you may be able to find another alternative to PMI. If the numbers add up, you may be able to take out a piggyback loan to top up your deposit and save money over the life of the loan.

The Piggyback Loan

A second or junior loan is that because it takes a subordinate position in its claim on your assets, should you default on the payments. Your primary or first lender can claim your assets in foreclosure and sell them. Any amount that remains, after the recovered first loan, goes to repaying subordinated obligations, which means more risk and higher interest rates for junior loans.

In practice, a second often means a home equity line of credit (HELOC). PMI does not contribute to repayment, and you can potentially pay a second back more quickly, reducing the interest when otherwise you would still lack the equity to escape the need for a policy. A small second with a term of five years may be the right ticket. If your first loan is for thirty years, you may still have a high enough balance outstanding that you require PMI for more than five years.

Finding The Right Tools For Any Situation

Another instance that this strategy might be useful is when using a second mortgage will enable you to avoid a high-priced jumbo loan. If your loan would take you over the conforming limit, a jumbo loan will have a higher rate of interest and put additional requirements on your loan. One remedy would be to use a second loan to keep within conforming loan limits, saving money for you in the long-term.

The question is how to make up the equity in your home and having an adequate down payment rather than a loan that requires private mortgage insurance and the added cost. There are other options, for example, if you are a qualifying veteran, VA home loans have no requirements for insurance, regardless of the size of the deposit.

Weigh Your Options

Using second mortgages to save costs is just one of the many options you have in home finance. Connect with your lending professional to work out the numbers. Using a piggyback loan to circumvent the requirement for PMI is creative and proactive, it gives you an advantage as long as you first set it up in a viable plan and then you discipline yourself to stick to the plan.

Deciding to use a loan to avoid the obligation for PMI is a matter of determining the value of the trade-off regarding the risk. You might be able to reduce your payment obligation regarding the total payments. However, it is important to remember that you can always cancel your PMI but a second loan is an enduring commitment; you have to pay until the debt has been satisfied.

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Why Mortgage Back Securities Are A Good Thing For Home Buyers

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Mortgage Backed SecuritiesBonds are just loans that are so big that the institutions that create them divide them into standardized securities and slice them up into affordable units. That is what Fannie Mae and Freddie Mac do with residential mortgages; they bundle home loans together so that many small streams of income become giant securitized cash flows, this is the mortgage-backed securities (MBS) market.

For government debt and corporate bonds, the units usually are $1,000 each. For more technical bonds like MBSs, the units usually sell for $25,000 each initially. Once on the market, they can trade at a discount or premium to face value, depending on market sentiment.

The Market For Mortgage Backed Securities

Mortgage-backed securities give investors income from a small share in a wide range of borrowers. The MBS market helps you buy your home because they bring institutional money into the residential lending market and create a cycle of lending and investing that helps everyone. For most conforming loans, Fannie Mae and Freddie Mac do the work of putting MBSs together.

You take out a home loan, and the bank or mortgage company that sold it to you goes to the market and sells your loan for cash; the money they gave to you they recuperate from the MBS markets. The market makers then collect these loans and add them to new MBSs, which they sell to investors. The lender still services your loan, but they pass on most of your payment to the market, which distributes it to the investors who hold the bonds.

There has been a lot of talk in the financial press in the last decade about the MBS market; most of the chatter has put these bonds in a very negative light. However, there was a good philosophical concept behind MBSs, one that reflects the values of this country and its market-based culture of self-help. It is true that as the lending market overheated that financial markets made the situation worse and then suffered a collapse in 2008. Sub-prime loans were misidentified as triple-A rated debt and collapsed overnight, taking the markets down with them.

3 Reasons Mortgage Backed Securities Mean Easier Lending

They keep the funds liquid – Real estate is an investment that makes it difficult to withdraw funds; you cannot just cash out part of the value the way that you might sell off stocks or withdraw funds from a savings account. By taking loans and bundling them into securities the cash comes from the size of the market makes the best use of cash.

They replenish your local lender – More people can own homes because of the liquidity mentioned above. The cycles of cash that flow from institutional investors replace the funds for finance companies and banks, which can then create more loans.

They help to preserve standards in lending – As long as the agencies create the bonds correctly, and the ratings represent the actual quality of the underlying home loans, MBSs are stable assets that deliver income to investors. Although lenders do not have to follow the FHA rules for conforming loans, access to the secondary markets makes the terms appealing as part of successful lending business models, giving  lenders a stake in maintaining high standards.

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Ginnie Mae Fannie Mae And Freddie Mac – Is There A Difference?

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mortgage-loan-basicsWhat Are These Bonds And Why Should Home Buyers Care?

When you borrow from a bank or finance company to buy your home, the loan itself becomes a valuable asset for the holder. The value comes from your promise to pay the amount due each month, on time, every month. Given the time and effort that it took to approve you and the solid reputations of the institutions involved, it is very likely that your promise to repay your conforming loan will be a sound investment for the holders of such bonds.

Consumers want to purchase homes, but they seldom have the cash to do so without some assistance. Real estate ownership requires capital, which has to come from somewhere. It is also difficult to buy and sell homes, compared to other investments like stocks and bonds. These agency bonds make buying your home affordable by providing the liquidity that allows investors to inject capital into the market.

Liquidity For Mortgage Lending

If there were nothing like the real estate bond market investors would be in short supply, and lenders would charge much higher interest rates. Since it is the equity in the land and buildings that secure the lending, it is a relatively safe investment, and that was the attraction to pool loans together and sells them as agency bonds.

Bonds are high-value loans in which brokers sell shares. In return for holding a bond, you get a coupon, which is a periodic payment, usually semi-annually, and the repayment of the face value of the loan when it matures. However, no law says that this is the only structure; it is a matter of the market makers finding the bond structures that are most popular with investors and exploiting them for profit.

Agency Bonds From Fannie Mae Freddie Mac And Ginnie Mae

Entities such as FNMA (Fannie Mae), FHLMC (Freddie Mac), and GNMA (Ginnie Mae), are not part of the government, but they do receive sponsorship for the agency bonds they create. These instruments pool together home loans and sell the bonds to investors. These organizations were set up to purchase home loans and bundle them as investments, to sell to institutional investors such as investment banks, pension funds, insurance companies, sovereign wealth funds, and wealthy private investors.

Agency bonds generate the capital that funds your home loan. It is this form of institutional investing that enables you as a homeowner to purchase a home with financing at a low rate of interest and a low down payment. Ginnie only invests in loans that are backed by government guarantees. Fannie Mae and Freddie Mac will buy notes that conform to their standards but which do not have the same government backing. The government backing makes the Ginnie Mae bonds even safer investments than the others.

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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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