Mortgage Customization Options

Tips for making your mortgage fit into your long-term financial plan

For most people, a home mortgage represents their biggest financial commitment, in terms of both the amount of money involved and the length of time they will make payments. Therefore, home mortgages are a major component of long-term financial planning for many individuals and families.

Fortunately, there are creative options available that may enable you to customize your mortgage to match your long-term financial goals. These primarily include variations in the length of the mortgage term – or in other words, how long payments must be made before you own your home free and clear.

The traditional home mortgage is paid over a period of 30 years at a fixed rate of interest. But because it’s rare nowadays for an individual or family to actually live in a home for this long, banks have created mortgages with shorter terms to provide homeowners with more flexibility and the opportunity to build up equity in their homes faster.

With a 15-year mortgage, you can own a home in half the time it would take with a traditional 30-year mortgage. However, the monthly payment on a 15-year mortgage will be considerably higher than the monthly payment on a 30-year mortgage, though not twice as high, because the amount of interest paid over the life of a 15-year mortgage is considerably less than that paid on a 30-year mortgage.

For example, the monthly principal and interest payment on a 30-year, $250,000 mortgage with a 6 percent fixed interest rate would be $1,499. Switching to a 15-year mortgage on the same amount at the same interest rate would raise the monthly principal and interest payment to $2,110, or an additional $611. But paying off the mortgage in half the time would reduce the amount of interest paid over the life of the mortgage by $159,859. Mortgages with 10- and 20-year terms may also be available.

Whether or not it makes sense for you to choose a shorter-term mortgage as part of your long-term financial plan depends on several factors:

• If you can afford the higher monthly payment
• How long you plan to stay in the house
• Your age, when you plan to retire, and your projected retirement income and expenses

If you can afford the higher monthly payments without undue stress and strain on your budget, some experts say that choosing a shorter-term mortgage is a smart move. Doing so provides a guaranteed “return” on your money that’s equivalent to your mortgage interest rate (not factoring in potential deductions for mortgage interest).

However, other experts counter that more money could be earned over the long term by investing the difference between short- and long-term monthly mortgage payments – or in the case of our example with the 15-year mortgage, $611 per month. They point out that the stock market has historically earned higher returns over the long term than the current low mortgage interest rates.

Meanwhile, if you plan to stay in a home for the long term (at least 10-15 years), many experts advise opting for a shorter-term mortgage. This is where factors such as your age, planned retirement date, and retirement income and expenses come into the equation.

For example, suppose you’re 45 years old, plan to stay in the home for the long term and want to retire at age 65 with minimal living expenses. By opting for a 15- or 20-year mortgage, you could own your home free and clear when you retire, which would eliminate what is probably your biggest monthly expense.

Of course, every situation is unique. We can work with you to help you determine the best mortgage options and strategy for your long-term financial goals.

Getting a Loan If You Have a Low Credit Score – Tips to help you on the road to financial security

According to the San Francisco Chronicle (sfgate.com), the average U.S. household debt (excluding mortgage debt) is about $14,500. If you are among the many in debt and have a low credit score, you may think that securing a loan for a vehicle, college or emergencies is impossible. However, by following some of the tips below, you may find that you actually can secure the credit you need.

• Check your credit report for errors: The first step you should take before applying for a loan, whether you have a high or a low credit score, is to check your credit report for errors. One inaccuracy on your credit report can make a big difference in your FICO score. There are three credit reporting bureaus whose reports you need to check: TransUnion, Experian and Equifax.
• Work with your established financial institution: It is often easier for a borrower with a lower credit score to get a loan from a financial institution with which he or she already has a relationship. Talk to a loan officer to see what he or she can offer.
• Make large payments, on time: Reducing your debt always helps your credit score, but even more important is the process of making payments on time. For a few months before you plan to apply for a loan, make larger-than-normal payments on time; you’ll improve your credit score through that one simple move.
• Pay something off: If your debt-to-income ratio is high, your ability to get a loan will suffer. If your account balances are close to your account limits, your credit score is similarly impacted. Reduce your balance-to-limit ratio by paying off some of your smaller balances before you apply for a loan. Not only will this help your credit score, but it will also reduce the amount of interest you pay to creditors each month.
• Talk to your creditors: If a creditor was paid in full but paid late, that history may be negatively affecting your credit score. You can call creditors to see if they will remove negative history from your report; especially with paid-off debt, they may be amenable to this. Additionally, if a recent late payment was reported to the credit bureau and is hurting your score, but you are generally an on-time payer with that creditor, call the company to see if it will re-report the data to remove the black mark on your credit record.

Our loan officers are here to discuss your borrowing options. No matter what your credit score, stop by to learn about the ways that we can make our lending programs work for you.

The Basics of Mortgage Insurance. Why you may be required to, or should opt to, have this kind of insurance.

A recent study commissioned by the California Reinvestment Coalition and the Alliance of Californians for Community Empowerment states that foreclosures have cost the city of Los Angeles $80 billion since 2008 due to lost tax revenues and increased expenses for safety and maintenance issues. And while California may be high on the list of states most affected by the housing crisis, this doesn’t mean that other states and cities aren’t feeling the same pinch from higher-than-normal foreclosure rates.

In recent years, mortgage lenders have placed an increasing emphasis on ways of mitigating risk. When you buy a home and put 20 percent or more down on the purchase price, you reduce the financial institution’s risk substantially because you borrow less to buy the home and you create equity. In the event of a default, the financial institution suffers less in losses.

If you do not have 20 percent to put down on a home, then your  financial institution will require you to have private mortgage insurance. Unlike mortgage life insurance, which can be designed to pay a benefit to your lender upon your death, private mortgage insurance protects  financial institutions against default by paying benefits when the borrower stops making mortgage payments.

Private mortgage insurance (or PMI) premiums are generally rolled into the overall mortgage payment, although borrowers can opt to make annual payments beginning at closing or make a single premium payment. Some borrowers may choose to get PMI even though they have enough money to make a down payment of 20 percent, simply because the cost of the insurance is less than the return they can get on the down payment when it remains invested.

Over the life of the loan, you’ll eventually reach the point where you’ve reduced your principal enough to have 20 percent or more equity in your home. At that point, you don’t need PMI. To cancel PMI, you typically need to make the request in writing for cancellation and then pay for an updated appraisal of your property.

After evaluating all your options, you may find that private mortgage insurance is a great way to give the financial institution the protection it needs without creating a mortgage payment that is beyond your budget.

A Guide to FHA Loans: Information about benefits, disadvantages and more.

Since 1934, the Federal Housing Administration (FHA) has been helping Americans achieve their dream of home ownership through the FHA home mortgage program. Through this program, the FHA insures loans made by financial institutions to borrowers who don’t have enough money to make a minimum down payment on a home.

There are currently about 7.2 million FHA-insured mortgages on the books. This amounts to just over $1 billion in loan volume, which is up more than 11 percent over the past year, according to the FHA. Seventy-five percent of these FHA mortgages were obtained by first-time homebuyers.

“With FHA loans, people with low credit scores, and even people with no credit at all, can often still get a mortgage,” notes Steve Beecham, president of Home Town Mortgage in Alpharetta, Georgia.

It’s important to understand the distinction between making and insuring home loans, because the FHA doesn’t actually loan money itself. Rather, it provides guarantees to lenders that they won’t have to write off loans if borrowers default on them. This enables lenders to approve mortgages for borrowers who otherwise might not qualify, and/or approve larger mortgage amounts than they might without the FHA guarantee.

FHA Mortgage Limits

Unlike many first-time homebuyer programs, there are no income limits with FHA loans, so more people tend to qualify for them than for many other types of government mortgage assistance programs. Instead, the FHA places limits on how much money homebuyers can borrow via an FHA loan. These limits vary based on the cost of housing in a borrower’s particular metro area.

As of October 1, 2011, the FHA mortgage loan limit is $271,050 for one-unit properties in markets where housing costs are what the FHA considers to be “relatively low.” In higher-cost areas, the limit is $625,500 for one-unit properties. FHA loan limits will fall between these amounts in all U.S. metropolitan areas based on each area’s median home price. Visit http://www.fha.com/lending_limits.cfm to find out the FHA loan limit in your area.

In making mortgage loans, the FHA works through approved lenders – primarily commercial banks, which receive and process mortgage applications from borrowers and then underwrite and close the loans. The best way to obtain an FHA loan is to simply ask your financial institution if it is an approved FHA lender and, if so, to work with your representative to begin the application process.

Pros and Cons of FHA Loans

FHA loans have several key benefits and a couple of potential drawbacks. Benefits include:

Lower down payment. Homebuyers who qualify may be able to buy a home with an FHA mortgage and a down payment as low as 3.5 percent.

Less-stringent credit requirements. The FICO score required to qualify for an FHA loan may be lower than the score required for a conventional loan. Borrowers may also qualify for FHA loans two to three years after filing for bankruptcy or going through a foreclosure.

Higher debt-to-income ratios. A borrower’s debt-to-income ratio is a key factor financial institutions look at when considering mortgage applications, and the debt ratio limit for an FHA loan may be higher than the limit for a conventional loan.

However, keep in mind these potential disadvantages of FHA loans:

Lower loan amounts. As noted above, there are limits on how much money can be borrowed when using an FHA loan.

Mortgage insurance is required. To fund its mortgage guarantee obligations, the FHA charges an up-front mortgage insurance premium and an ongoing annual fee for the first five years of the mortgage.

Fewer mortgage options. FHA loans are conservative in nature and designed to meet the basic mortgage needs of as many people as possible, so there aren’t as many creative FHA mortgage options as there are conventional mortgage options.

To learn more about FHA loans, visit http://www.hud.gov/buying/loans.cfm or contact us today for assistance with all of our loan options.

The Tax Benefits of Home Equity Loans – Using the value in your home to strengthen your financial position.

Home equity loans remain one of the most powerful financing vehicles used by American consumers. According to the U.S. Federal Reserve, the total dollar amount of outstanding home equity loans was $925 billion in the first quarter of 2011 and home equity constituted 11 percent of the average U.S. household’s net worth.

Home equity or second-mortgage loans provide homeowners with a fixed amount of money, repayable over a predetermined period of time via equal monthly payments until the loan is paid in full.

Thoughtful, responsible use of home equity can provide a tremendous amount of financial flexibility for families in need of funds. Many homeowners use the credit for major costs such as high-interest debt consolidation, home improvement financing, vehicle purchases and new business ventures.

One of the most common uses of home equity loans is debt consolidation, or borrowing money secured by a home’s equity in order to pay off other high-interest, revolving debt.

The most attractive benefit of a home equity loan versus other consumer credit vehicles is the ability to deduct the amount of money you pay in interest on your income tax return. If you’re a married couple filing jointly, you may be able to deduct the interest paid on up to $100,000 of home equity debt, or if you file separately, the deduction may be the interest paid on up to $50,000 of home equity debt. This makes the effective interest rate you pay on a home equity loan less than the actual rate on the loan itself.

It’s important to note that in order to deduct your home equity loan interest you must itemize deductions on your federal income tax return. The interest should be reported on either line 10 or 11 of Form 1040, Schedule A (Itemized Deductions), depending on whether or not the interest was reported to you on Form 1098. Also be aware that if you borrow more than the current value of your home, the interest paid on the portion of the loan that is above your home’s value is not deductible.

Your home’s equity represents a powerful financial tool when used wisely, but home equity borrowing should not be taken lightly—it requires a high degree of financial discipline. Before taking out a home equity loan, make sure you’re comfortable pledging your home as collateral. If you are unable to repay the loan at some time in the future, it’s possible that you could lose your home.

As you think about this financial commitment, consider both your current and future ability to make the loan payments. For example, how secure is your job and the job of your spouse? Do you have plans to go back to school at some point in the future, which could lower your income and increase your expenses, thus limiting the cash available to repay the loan? Or are you hoping to retire in the near future, which could also reduce your monthly cash flow and make it harder to pay off the loan?

Be sure to consult with a tax advisor or accountant about the tax implications of a home equity loan in your specific situation, and be sure to contact us today if you have any questions about home equity loans or any other product that could help you meet your financial goals.