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Monthly Archives: August 2015

FHA vs Conventional Loan

While many people deciding on a loan product rely exclusively on their lenders recommendation, you should understand the basic difference between an FHA loan and a Conventional Loan. The term Conventional Loan includes all loans under the current FNMA and FHLMC lending limits. Some of these may be called Conforming, A paper, subprime, Alt A, A Minus, BC (bad credit) and other industry names.

Most people that have heard of FHA loans tend to associate them with purchase money transactions. While purchases are the most common use, FHA loans are also available for rate and term refinance loans as well as Cash Out refinances.

The main advantage of a FHA vs conventional loan is that the credit qualifying criteria for a borrower are not as strict as conventional loan financing and the down payment or Equity requirements are less. In comparing a purchase money FHA loan against a Conforming or A paper loan, the FHA loan will generally have the least amount of money required to close and the lower payment, see FHA vs Conventional loan comparison(pdf file).  FHA loans will allow the borrower who has had a few “credit problems” or those without a credit history to buy a home. An FHA Underwriter will require a reasonable explanation of these derogatories, but will approach a person’s credit history with common sense credit underwriting. Most notably, borrowers with extenuating circumstances surrounding a bankruptcy that was discharged 2 years ago can be approved for maximum financing. Conventional A Paper financing, on the other hand, would require 4 years to have passed to be eligible for consideration and relies heavily upon credit scoring. If your score is below the minimum standard, you will not qualify or you will be placed in a higher rate Subprime, Alt A or A minus loan product.

If a borrower does have past credit issues an FHA loan may be significantly cheaper than an alternative loan such as subprime, ALT A, or A minus. These other programs generally have higher interested rate of require a larger down payment or Equity position. Many of these alternative loan products have Pre Payment penalties where as FHA loan do not have such penalties. In fact, FHA loans can be easily refinanced under theStreamline program.

Another advantage of a FHA vs conventional loan is that FHA is one of the few home mortgage programs that allow a borrower to have their down payment gifted from a family member, a governmental agency, or non-profit organization. This allows home buyers without the necessary money to buy a home today.

Even though FHA charges an annual renewal mortgage insurance premium of 0.5% to .55% of the loan amount, this fee is generally half that charged by low down payment Conforming A Paper conventional mortgages (which range from 0.55% up to .96% per year). Subprime, Alt A and A minus rates range from 0.55% to 4.18%. For a $100,000 mortgage, FHA would charge approximately $41.67 per month and a typical low down (3%) conventional mortgage with a renewal premium of 0.78% would charge $65.00 per month. That’s a $280 savings per year.

However, conventional financing does not require an upfront mortgage insurance premium when a borrower closes on the loan. With FHA financing, that fee for a 30 year loan is 1.75% of the loan amount that the borrower can wrap into the mortgage. On a $100,000 for 30 years at 8%, that’s an additional $11.51 that the borrower must pay each month. That’s almost an additional $132 the borrower must pay each year (fortunately the interest a borrower pays on his or her mortgage on a primary residence is tax deductible).

One drawback to FHA loans is that the loan limits set for FHA loans are typically less than the loan limits for conventional financing in most parts of the country. If a borrower is looking for a mortgage that exceeds the FHA loan limits for the area, the borrower would have to put additional money down on the property or finance under a conventional mortgage, Subprime, Alt A or A Minus product. Under the 2008 stimulus package FHA loan limits have been raised in many areas and FHA offer FHA Jumbo Loans.

 
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Posted by on August 24, 2015 in General

 

When (And When Not) To Refinance Your Mortgage

When (And When Not) To Refinance Your Mortgage

By Investopedia Staff

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many common reasons why homeowners refinance: The opportunity to obtain a lower interest rate; the chance to shorten the term of their mortgage; the desire to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; the opportunity to tap a home’s equity in order to finance a large purchase; and the desire to consolidate debt. Some of these motivations have benefits and pitfalls. And because refinancing can cost between 3% and 6% of the loan’s principal and – like taking out the original mortgage – requires appraisal, title search and application fees, it’s important for a homeowner to determine whether his or her reason for refinancing offers true benefit.

TUTORIAL: Mortgage Basics

Securing a Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb was that it was worth the money to refinance if you could reduce your interest rate by at least 2%. Today, many lenders say 1% savings is enough of an incentive to refinance.

Reducing your interest rate not only helps you save money, but it increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 9% on a $100,000 home has a principal and interest payment of $804.62. That same loan at 6% reduces your payment to $599.55. (To learn more about the home costs, see Mortgages: How Much Can You Afford?, Home-Equity Loans: The Costs and The Home-Equity Loan: What It Is And How It Works.)

Shortening the Loan’s Term
When interest rates fall, homeowners often have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a shorter term. For that 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to $5.5% cuts the term in half to 15 years, with only a slight change in the monthly payment from $804.62 to $817.08.

Converting Between Adjustable-Rate and Fixed-Rate Mortgages
While ARMs start out offering lower rates than fixed-rate mortgages, periodic adjustments often result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate as well as eliminates concern over future interest rate hikes.

Conversely, converting from a fixed-rate loan to an ARM can also be a sound financial strategy, particularly in a falling interest rate environment. If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments, eliminating the need to refinance every time rates drop. Converting to an ARM may be a good idea especially for homeowners who don’t plan to stay in their home for more than a few years. If interest rates are falling, these homeowners can reduce their loan’s interest rate and monthly payment, but they won’t have to worry about interest rates rising in the future.

Tapping Equity and Consolidating Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt. It’s important to keep this in mind when considering refinancing for the purpose of tapping into home equity or consolidating debt.

Homeowners often access the equity in their homes to cover big expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify such refinancing by pointing out that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source. Another justification is that the interest on mortgages is tax deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision, nor is spending a dollar on interest to get a 30-cent tax deduction.

Many homeowners refinance in order to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring with it an automatic dose of financial prudence. In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again – the possible result is an endless perpetuation of the debt cycle and eventual bankruptcy.

The Bottom Line
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in getting your debt under control. Before you refinance take a careful look at your financial situation, and ask yourself: How long do I plan to continue living in the house? And how much money will I save by refinancing? 

 
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Posted by on August 23, 2015 in General

 

House Cleaning Tips to Sell Your Home

House Cleaning Tips to Sell Your Home

Because we have moved so often, I have collected some house cleaning tips that will really help for those of youtrying to sell your home. I counted the other day, just for fun, and realized that we have moved houses 8 times in our married life (not counting moving between apartments in the early years!). In that time I have learned a thing or two about cleaning your home to sell, and most importantly – keeping it clean until it sells.

If you are looking for some tips on the selling process itself, I recommend checking out Insider Real Estate Source for some excellent tips from Jeraldine Wooldridge, who has 30 years experience in the U.S.’ real estate market.

Why Do I Have to Clean my House?

This is a very common question. Based on houses for sale that I have visited, there are lots of people who feel that house buyers are coming to look at the layout and condition of the house, not to inspect its cleanliness. That thinking is both right and wrong – that’s why I wrote this section on house cleaning tips.

It’s true that the reason home shoppers look at houses is to inspect the layout and condition. However, there are several reasons why cleaning it and keeping it clean are to your advantage:

Showing a Messy or Dirty House

1. If potential buyers get distracted by too much disorder, they may

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walk away from the house with a sense that it has not been well- maintained, even if it is actually in great condition.

2. If the house is dirty/messy it gives people the feeling that they will have a lot of work to clean it before they can move in.

3. Some people won’t be able to see past the mess/dirt. They will get a sense that the house is hard to maintain and doesn’t have enough storage – neither if which are good selling features.

4. Buyers will have visited more than one house. They will be comparing houses and prices, and you will not get the offers you want if your home compares poorly in the buyers minds to similar homes.

5. Buyers try to picture their furnishings in your space. If there is too much clutter, most people are not able to see past it, and the picture in their mind will look very ‘crowded’.

I know that it’s an inconvenience, especially if you have small children and/or pets, run a business from your home, or have a house that really is too small. However, as with any major life change – you need to keep your eye on the prize, grit your teeth, and do what needs to be done. Cleaning your house to prepare for selling is essential. (You might even find that you like the new ‘uncluttered’ feel.)

What do I Need to Do?

Before you tackle anything, you need to sit down with the family. Help them to understand that there are going to be some new rules for a while, and that you understand that this is going to be a tough time for everyone. Explain that having a clean and neat house is one of the things that will help sell it quickly (short-term pain for long term gain). Once the house is sold, you can go back to your regular cleaning schedule.

After that there are only three simple-sounding things. The first is the most difficult, but once it is completed, the remaining two become possible.

You should complete steps one and two before the first agents’ open house. These are the men and women who will be bringing potential buyers, and you want them to remember your house in a positive way.

1. Major Declutter

2. Cleaning Tips

3. Maintenance

 
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Posted by on August 23, 2015 in General

 
 
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