Helping You Avoid Life's Financial Mistakes

What Is a Cash Out Refinance Mortgage And Is It Worth It

November 7, 2011 By 1 Comment

Back a few years ago I was in a tight position with money.  I had credit card debt, a car loan, and mortgage to boot.  Around this time I received a call from my lender telling me that I could lower my mortgage rate.  In fact, the lender even mentioned that I could do a cash out refinance and consolidate any debt since I had such a great credit rating and plenty of equity in my home.

As a result I ended up consolidating my credit card debt into my mortgage and was eventually able to free myself of all the heavy debt I was paying.  However in my situation a cash out refinance loan worked great but you might be wondering would it work in yours?  In this article I’m going to cover what is a cash out refinance, the rules behind them, and when you should and should not get one.

What Is A Cash Out Refinance Mortgage

To start a cash out refinance mortgage is a loan that will allow you to pull extra cash out of your mortgage provided you have enough equity in your home.  For example, if you owe $65,000 on your loan and your home was appraised at $120,000 it would mean that you would have a total of  $55,000 of equity in your home.

This means if you needed to take $10,000 out to pay some bills, debts, or even buy a new car you could do it.  Now this doesn’t mean you would be able to pull all $55,000 of your home equity out in cash.  In fact in most cases you would only be able to pull around 80% of your homes equity, which would only be $96,000.  Look at the chart below.

In the chart above the difference between 80% of your homes value, which is $96,000, and what you owe, $65,000, is only $31,000 in available cash out equity.  Now I should mention some lenders may get you to take more than this out but my strongest suggestion is that you don’t.

The reason for this is because once you cut the value of your equity down to less than 20% the loan could end up costing you more.  First off, you will have to pay private mortgage insurance. Also known as PMI, this is an insurance that protects lenders in the event that you default on your home mortgage since you are at a higher risk to them.  Secondly, with less than 20% equity you will likely have to pay a higher interest rate on your loan as well.

Should I Do A Cash Out Refinance

Now that we know how a cash out refinance works and the basic rules behind them let’s look at a few reasons why getting one would be in your favor and why they would not be.

  • Cut Interest Rates. This option works great as it did in my situation were I was able to pay off my credit cards and eliminate those high interest rates.
  • Debts All In One Place. This option would also allow you to keep all of your debts in one place and not have to pay several debts each month.
  • Better Than A Home Equity Line Of Credit.  If your thinking of going with a home equity line of credit over the cash out option you will want to consider the fact that a home equity loan will typically have a much higher interest rate.
  • Gives Tax Benefits.  Finally, when you take a cash out refinance all interest paid is tax deductible.
Now that we know a few reasons why doing a cash out refinance would be a good idea lets cover a few reason why it wouldn’t be.
  • Less Than 20% Equity.  As I mentioned earlier if you have less than 20% equity in your home this may not be a good idea.
  • Buying Things You Don’t Need.  If you’re using a cash out refinance just to buy that flat screen think again.  Racking up debt like this can be expensive and put you in bind especially if you already have a lot of debt.
  • If Your Going To Sell Your Home.  Finally, the last reason you should not get a cash out refinance mortgage is if you are planning to sell your home in the near future.  When you do a cash out mortgage refinance you will have to pay closing cost which could be as high as $3500.  So before you consider this option know that you will have to tact those extra fees on the bill as well.

Final Thoughts…

In the end before you consider doing a cash out refinance take time to weigh all the pros and cons carefully.  In my case it worked out great and saved me a ton in high interest payments from my credit cards, but I also know this isn’t the case with everyone.

So are you considering the idea of doing a cash out refinance any time soon?  Feel free to share your thoughts, comments, ans questions below.

 This article was recently featured in the Carnival of Personal Finance by Retire By 40.

Filed Under: Mortgages & Loans

Is It Better To Pay Off Your Mortgage Early Or Invest Your Money

October 18, 2011 By 1 Comment

In yesterdays article we talked about whether you should pay off your mortgage early or not, and in that article I gave valid reasons why this may or may not be a good idea.  So in this article I’m going to take this idea one step further and see if it is better to pay off your mortgage early or invest money towards retirement.

Some Assumptions

Before I start I know that everybody’s situation is different. So in the examples below I’m going to use the same variables, however feel free to add your own variables to see how things could work for you.  Below are the variables I will be using.

  • Loan Amount – $100,000.
  • Loan Payment – $507
  • Extra Available Cash – $250
  • Interest Rate – 4.5%
  • Loan Term – 30 year fixed
  • Investment Return – 8%

Pay Off Your Mortgage First Then Invest

In the first pay off mortgage or invest example I’m going to show you what would happen if you decided to pay off your mortgage first and invest what’s left over.  Below is chart of how things would end up.

First off, in the picture above if I were to pay an extra $250 a month towards this mortgage the loan paid off in roughly 17 years, and I would have saved over $38,000 in interest payments as well.

However we’re not done yet.

Since we are only 17 years into the 30 year term period we are now going to invest the extra payment of $250 along with the mortgage payment of $507 for a total annual investment of $9084 for the next 13 years.

As you can see by investing the remaining amount of money of $9084 for the next 13 years I would end up with an extra $135,981.   That’s not a bad deal for paying considering that we paid off the mortgage first.

Don’t Pay Any Thing Extra Towards The Mortgage

Now let’s consider what would happen if we would not pay any extra money toward the mortgage and invest the extra $250.  Obviously,  it would take 30 years to pay off the mortgage still but by lets see if investing the money fairs better than paying off the mortgage first.

By looking at the picture above we can see that if we were to invest the extra $250 over the full 30 year period that it would have earned us $870,170, the mortgage would be totally paid off as well.  Now let’s see how things compared.

The Results

When we compare the results we find that in example 1 the mortgage will be paid off nearly 13 years faster and that when we invest the extra funds at after 13 years that we end up over $135,000.  On the other hand in the second example when we don’t apply any extra payments towards the mortgage and invest it we end up earning or $870,000 as a result.

Why is this?

The reason the second example in the invest or pay off mortgage early option worked was because it had more time to compound the money versus the first example where we only had 13 years to invest and save money.  To prove my point look at the investment chart in example 2 and notice how the compound interest gets bigger and bigger, especially in the later years.  This because as the money grows it becomes easier and easier to grow the amount of money you have.

Final Thoughts…

So what are your thoughts?  Is it better pay off your mortgage early or invest the money towards retirement?  Feel free to share your thoughts, comments, and questions below.

This article was recently featured in the Carnival of Personal Finance by Beating Broke.

 

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Should I Pay Off My Mortgage Early

October 17, 2011 By 4 Comments

Do you you have a dream to pay off our mortgage someday.  I know this is one my dreams, to be free and rid of a monthly mortgage payment that does noting but eat up your income.  However before you consider, should I pay off my mortgage early, you may want to think about some of the reason you should and should not do this.

When You Should NOT Pay Off Your Mortgage Early

High Interest Debt.  First off, you should not consider pay off your mortgage when you have other high interest debts such as credit cards, personal loans, or even car loans.  These debts will typically carry some extremely high interest rates.

On top of that high interest debt doesn’t carry any benefits it.  For example, with your mortgage you are able to tax deduct the interest you pay, while with credit cards and other debts you cannot.  So before you consider paying down your mortgage pay off your credit cards and other high interest debt first.

At The End Of Your Loan.  The reason you may not want to pay off your mortgage is if you are in the last 10 years of a 30 year mortgage.  The reason for this is because in the last 10 years of a 30 year fixed mortgage you will pay hardly any interest.  Take a look at the picture below.

In the chart above you can see that in the last 8 to 10 years you are paying mostly just principle payments.  This means that any extra payments you pay aren’t going to have a major effect when it comes to cutting interest down. On the other hand any payments that are made will mostly go towards the principle portion of the loan.

Job Loss. Finally, the last reason you may not want to apply extra payments to your mortgage to pay it off early is because of the possibility of losing your job, and in today’s economy their is a very good chance that this could happen.

That last thing you want to do when your paying off your mortgage early is to tie up all of your hard earned money in your mortgage and then lose your job as a result.  Even worse you could end up on the unemployment lines for months and not be able to pay your mortgage payments, and even though you made extra payments lenders are not going to be as forgiving.

Instead of paying that money towards your lender consider saving it for rainy days such as this.  You will stand a much better chance of surviving a major catastrophic event such as losing your job a lot easier.

When You Should Pay Your Mortgage Off Early

Now that we’ve covered the reasons not to pay off your mortgage early let’s consider a few reasons why we should pay are mortgage off early.

At The Beginning Of Your Loan.  If you just refinanced or started a 30 year fixed mortgage making extra payments right now is the best time, simply because it will allow you to cut down the interest you owe over time.  To prove my point look at the chart below.

If you look at the chart above consider how much in interest payments you are making each year versus principle payments.  In fact with a 30 year fixed mortgage it isn’t until year 15 when at least 50% of your mortgage payment goes towards the principle portion of the loan.

However, if you were to pay extra each month you would pay down principle portion much faster and avoid paying all the extra interest in the end.

Older Age.  Secondly, when you are in your older years say 60 and higher you will defiantly want to consider paying more towards your mortgage.   The reason for this has to do with income.  Older people, especially those who are retired, may tend not to have as much income, and when you factor in the issues with social security it’s a good idea to have your mortgage payed off sooner rather than later.

However, their is another issue seniors need to consider also, and that is taxes.  As seniors get older they are pron to lose some of their tax privileges.  For example, a few tax issues to consider are things such as the deductions you may have received from contributing to your works retirement plan, or the tax deductions you use to get if you had dependent children at home.  Without these deductions your taxes could go up.

When You Have The Cash.  Finally, last thing you should consider when your thinking, should I pay my house off is if you have the cash to do so.   If you have the available cash to pay off your mortgage right now, do it.  The option to live without a mortgage payment is the best way to go especially when you have the money.

However, I again offer a few restrictions.  One being only if you again have your high interest debts all paid off first.  The second reason is if you are pulling it out of some sort of retirement fund.  It’s great that you have the money to pay it off but if you need that money for retirement don’t do it.

Final Thoughts…

As a final thought before you consider should I pay my mortgage off early, consider the thoughts I’ve published in this article first and you will be likely to avoid and mistakes.  Also feel free to share your thoughts, comments, and questions about paying your mortgage off early below.

 

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How To Lower Your Monthly Mortgage Payment Even Without Refinancing

October 4, 2011 By 2 Comments


If you’re like me and dread making that monthly mortgage payment I know exactly how you feel.  It’s that one payment that comes and goes each and every month with no sign of going away anytime soon. So in this article I’m going to show you how to get a lower mortgage payment and on top of that I am also going to show how to lower your mortgage payment without refinancing.

Refinance To A Lower Rate

The first and most obvious option is to refinance your home mortgage to a lower rate.  In fact this is one option I’ve been looking into but since I’m buying a new how I’m going to hold off.

However if I were to do this I would be able to drop my rate from a 6% interest rate which is costing me around $550 a month to a 4.25% interest rate which would drop my payment to $408, saving me nearly a $150 a month in payments.

Buy Points

how-to-lower-your-monthly-mortgage-payment

The next thing you could is to combine a refinance and buy points at the same time.  Points help lower your interest rate and can save you a ton of money overtime.

For example, if you have a $100,000 mortgage it would cost you 1% of the total loan amount to buy one point which would lower your loans interest rate by .125%.  So in the example above if you would buy 2 points it would cost you $2000 and you would drop your interest rate by a quarter of  percent.

What this means to you is if the rate on a 30 year fixed mortgage was 4.25% your rate would drop by 0.25% to 4.00% and lowering your payment as a result.  I should also mention buying points isn’t always a good idea especially if you don’t plan to live in the house long because you won’t get to see the full benefit from this in the long term.

Go With An Adjustable Rate Mortgage

The next option is to switch loan programs altogether and go with an adjustable rate mortgage.  Adjustable Rate Mortgages short for ARM allow you to get a lower fixed rate for a short period of time and once this specific time period is up the mortgage will be allowed to adjust once per year.

For example a 5/1 ARM will stay fixed for 5 years and after that period is up will adjust annually.  However if you currently have a $100,000 mortgage at 5% you would have a payment of $537, however if you would go with a 5/1 ARM your rate would fall to something around 3.75% which is today’s current rate and your payment would drop to $463, saving your around $74 a month.

Apply Extra Cash

The next option to consider on how to lower mortgage payment is to pay a portion of the principle down when you refinance.  For example, a $100,000 loan payment at 5% would be around $537 but if you would apply an extra $5000 to the principle  lowering it to $95,000 and getting a lower rate of 4.25% you would drop your payment to $467 saving you $70 a month.  Again, this option is very similar to buying points and if you don’t plan to live in the house for the long term you may not want to consider this idea.

Now in the first four options I’ve covered they all required that you to refinance your mortgage so in these last few options I’m going to show you a few different ways to get a lower mortgage payment without refinancing.

Cut Your PMI

The next option to consider when thinking about how to lower my mortgage payment  is to cut your private mortgage insurance also known as PMI.  PMI is a fee charged to your loan if you have less than 20% equity in your home.  For example if your home is worth $100,000 you would need the balance of the loan to be less than $80,000 to discontinue PMI.

However what happens a lot of times as you are paying down your mortgage lenders and banks won’t typically take PMI off of your loan right away.  Now over time they will cut it but if you want to speed up the process contact your lender once you are below the PMI threshold and they will cut this out of your mortgage payment.

Cut Your Escrow Account

The next thing you can do to get a lower payment mortgage is to cut out your escrow account. Your escrow account is used to pay your home owners insurance and real estate taxes however by cutting it you could lower your mortgage payment a ton.  In fact in my case my payment would drop by $100 or more.

Now you will still have to pay your real estate taxes and homeowners insurance separately, this won’t change.  However in my research I’ve found lenders to over charge for the money to process these payments.  In fact I added up all the taxes and home owners payments and found that I was paying my lender a few hundred dollars extra each year as a result.

I should also mention that most lenders will require you to have an escrow account if you don’t have at least a 20% loan to value, but if you can find a way to increase the equity in your home it could be worth while since it will help lower your payment.

Create A New Income

Finally, the last way on how to lower monthly mortgage payment is to create a new income.  This has been one of my favorite ways to pay my mortgage payment.  This can be done in so many different ways from getting a part time job to recycling aluminium cans, but my favorite way to do this is by starting an online business.

The online world is full of money making opportunities but one of the best ways to do this is by building a content based website.  This is a website that is built around a specific topic that earns money from advertising ads on the site.  The reason I like this opportunity so much is because it’s almost completely passive income.  Now I know this can seem a bit overwhelming for some people but if you could earn just enough money online to make your mortgage payments for your house what would that be worth to you?

In fact you may think it’s impossible to do, but my web properties have been making my mortgage payment for the last 2 years now.  If fact they have been paying for more than that recently and that can be very good feeling to have especially in an economy that may not be as forgiving.   To learn more about this idea check out my post on passive income opportunities.

Final Thoughts…

So, have you still been considering how can lower my monthly mortgage payment?  Look over the options I’ve presented and consider working a few of these ideas in to get a lower mortgage payment.  Also feel free to ask a question or if you know of a better way on how to lower your mortgage payment feel free to share it with everyone in the comments below.

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15 Year Mortgage Vs 30 Year Mortgage – Which Is Better

October 1, 2011 By 1 Comment

15-year-mortgage-vs-30-year-mortgageEarlier this week I talked about how I plan to pay off my mortgage in 5 to 10 years, however one of the big controversy’s I’ve been facing lately as I plan to buy my new house is whether I should go with a 15 year mortgage vs 30 year mortgage.

So in this article I’m going to cover these two types of mortgages on 3 levels, the first being how they do on interest, the second on what the payments are like, and finally how the loan term effects the end result.

The Variables

Before I dive into the details of the 30 year vs 15 year mortgage I want to establish a few of the variables I’m working with.  So below are few of the variables.

  • Loan Amount. The loan amount in all the examples will be $120,000.
  • 30 Year Fixed Rate. The 30 year rate in all examples will be 4.25% which is current rate for today.
  • 15 Year Fixed Rate. The 15 year rate in all examples will be 3.75% which is the current rate determined by Quicken loans.
  • Points. None of these example will include points.

So now that we have the variables established let’s get started.

The Interest

First off, let’s compare each mortgage based on the total amount of interest we pay.  To start let’s look at the 30 year fixed mortgage.  With a $120,000 mortgage I would pay $92,518 in interest.  In essence I could pay for two thirds of my home with just the interest I paid in this option, consider the picture below.

30_year_interest1In the picture above notice how much interest you pay in the early years of a 30 year mortgage.  Nearly 85% of all the  payments in the first 5 to 7 years you make on your mortgage are interest.  On top of that it typically isn’t until year 21 of a 30 year mortgage till half of the home is paid for.  That means the last 9 years of your 30 year fixed loan is nearly all principle and hardly any interest.

Now that we know how a 30 year loan stacks up on interest let’s consider a 15 year fixed loan.

15_year_interestWith a 15 year mortgage you will only pay $37,080.  That’s a savings of  $55,438 in interest by just going with a 15 year versus 30 year mortgage.

So in the end when we compare a 15 year vs 30 year mortgage, the 15 year wins by a land slide.   I should also mention the 15 year mortgage gets higher marks because lower term mortgages will get lower interest rates as well.

The Payment

Now lets move onto the payment and see how things stack up.  To start lets look at the 30 year mortgage first.

payment_30_years1With the 30 year mortgage you will have a payment of $590 a month, and in the first 5 years you will pay anywhere from $400 to $450 of that payment towards interest and the remaining balance will go to pay off the balance of the loan.  It isn’t until year 15 of this loan that half of the payments you make will go towards the principle portion of the loan.

Now lets look at a  15 year vs 30 year mortgage.

payment_15_yearsWith a 15 year mortgage you would have a payment of $873 a month.  That’s $283 more than the 30 year mortgage.  However when we compare how much interest vs principle you are paying each month we find that only $400 a month or less is going towards interest and that a majority of the payment is going towards the principle.

In the end a 15 year mortgage will have a higher payment and the 30 year will have a lower payment.  However when comparing the 30 vs 15 year mortgage it will pay a lot more interest than the 15 year mortgage.

The Loan Term

The final thing we need to consider when look at a 15 or 30 year mortgage is the length of the loan.  Now obviously we know that a 30 year mortgage last 30 years and a 15 year mortgage last 15 years but let’s see what would happen if we would apply extra payments that are exactly the same.

In the first example we will consider the 30 year mortgage and make a total payment of $1000 since this is all I have available to spend on a given month towards my mortgage. This means $590 will be the original payment and $410 will be added on extra each month.

30_year_pay_extra In the results above by going with a 30 year mortgage and applying the extra money we have available we would be able to cut 16 years and 11 months off the length of the loan and pay the loan off in nearly 13 years and save a total of roughly $56,000 in interest, not bad.

Now lets consider a 15 year mortgage making the same $1000 payment towards the loan.  However with the 15 year loan we will have an initial payment of $873 and only an extra payment of  $127 since this is all we have in extra cash to put towards the loan.

15_year_extra_paymentIn the chart above by going with a 15 year mortgage and making a full $1000 payment we would pay off the mortgage 2 years and 4 months earlier saving around $6429 in interest.  When compared to the 30 year mortgage you would pay off your loan off 6 months faster with a 15 year mortgage.

So Which Is Better: The 15 Year Or 30 Year Mortgage

So in the end let’s see how things stacked up on each level.

Interest: The 15 year mortgage paid far less in interest, while the 30 year mortgage paid far more.

Payments: The 30 year mortgage has a lower payment but pays more towards interest each month, while the 15 year mortgage has a higher payment but pays far less interest towards the loan each month.

Loan Term: Finally when we compared paying the same payment toward both types of loans we found that the 15 year loan will actually pay off your loan a lot faster even if you can’t pay as much in an extra payments towards the loan.

Final Thoughts…

Now as a final thought when you compare a 30 year mortgage vs 15 year mortgage the 15 year mortgage is defiantly the best way to go.  However even though the 15 year mortgage is better you also need to consider one final factor, your financial situation.  If you can’t make the 15 year payment every month or think it might be a stretch to make this payment it may be better to stick with the 30 year mortgage.

So what are your thoughts?  Do you prefer the 15 year mortgage vs 30 year mortgage or do you prefer the 30 year vs 15 year mortgage?  Feel free to share your thoughts, comments, and questions below.

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How Pay Off A 30 Year Fixed Mortgage In 5 To10 Years

September 27, 2011 By 4 Comments

Lately, I’ve been talking about the process of selling my house and gearing up to buy a new house and as a result I’ve been covering topics such as fixing a bad credit score to improve my loan rates to setting up a budget to watch my finances a bit closer and now I’m going to be covering how to pay off a 30 year fixed mortgage in 5 to 10 years, which is one of my goals once I buy my new home.

So in this article I’m going to show you 3 different options I’ve been considering on how to pay off my mortgage in 5 years.  These options will consider traditional ideas all the way up to the extreme on how to pay off a mortgage early.

Option 1 – Make Two Payments A Month

The first option to consider is a more traditional way most people pay down their mortgage, and that is to make two payments a month.  So in my case after I put my down payment on my new house I will have a $120,000 balance left on my mortgage and below is a chart of what would happen if I paid my home off this way.

two_mortgage_payments_a_month

In the example above I would have a payment around $573 and I would also make an extra payment of $600 every month and by doing this I would would have my home paid off in 10 years and 6 months.  This isn’t a bad way to pay off your home but their is a risk to doing this.

The risk with paying off a mortgage in 5 years this way is that you are giving your lender all the power when you give them your extra payments each and every month.  For example, if you were to follow this plan for 7 years and suddenly lose your job and couldn’t afford to make your payment anymore you could risk falling into foreclosure and lose your your home and all the extra money you were paying towards it.

However on the positive side by paying down your mortgage this way you’ll save on interest payments and you won’t risk spending the money on something else.

So what are your thoughts on this method to pay off a mortgage in 5 years?

Option 2 – Invest It

The next option that I considered is to invest my hard earned money instead of paying it directly to the lender.  To do this though you’ll want to invest it in a place where you can’t access it so easily.  Some places to consider are bank CD’s, and money market funds however one place I like a lot is the ING DIRECT Savings Account, simply because their saving program earns a 1.00% interest rate.

invest_1_

If you follow this plan you will invest the $600 a month in the ING DIRECT Saving Plan and it will pay your home off in around 11 and a half years.  If you compare this to option 1 it will actually take a year longer to pay down your home since your are not paying down the interest. ING DIRECT USA makes saving money simple! Open your account online today. No fees and no minimums!

However, one way to beat this is to increase the interest rate.  However what I am about to suggest is a much riskier option but can help you pay off your home much faster, and one way to do this is to invest with Lending Club.  Lending Club is a peer to peer lending company that allows to lend out your money to others who need it.  To learn more check out my review on Lending Club.

In the chart below it shows a typical 9% interest rate that an average investor with Lending Club might see.

invest_at_9

If you would invest your money with Lending Club you would have your home paid off in 8 and a half years which is 2 years faster than option 1.  I also should mention that by following this plan you would not invest anymore money than in option 1 as well.

So what are your thoughts is this a method to pay off your mortgage in 5 years?

Option 3 – Create A New Income

The final option to consider on how to pay off a mortgage fast  is to create a new income.  You could do this by starting a part time job or starting your own part time business like I have.  The great thing about this option is that it doesn’t take any money from your existing budget which allows you to put more towards paying off your home.

To prove my point I’ve been running this website for a few year now and have been earning a pretty decent profit from it, and the best part about it is anybody can do it.  In fact below is a snapshot of my current income.

adense_earningsNow I should mention this option does take some time and hard work to make happen but I assure you that anybody can do it.  In fact in the earning table above it show that I’ve earned nearly $45 today and over $800 this month and the best part is that the income is passive which means I don’t have to work for ever single dollar.

In my current position with my web business I am creating enough income to pay off my home within the next 5 years however not everyone will see the same results that I have.  To learn more about this option check The Keyword Academy, their they will show you everything you need to know about how to set up your own online business.

So what are your thoughts on this a method on how to pay a mortgage off early?

A Final Thought…

As a final thought on how to pay off your mortgage in 5 years consider these ideas carefully.  Also feel free to share your ideas on how to pay off a mortgage in 5 years.  Is their anything you would do differently, or do you have a specific question concerning your situation?

Share your thoughts below.

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How To Find The Best Mortgage Deals

May 22, 2011 By 2 Comments

best-mortgage-dealsAre you looking for the best mortgage deals around but don’t know where to start?  I know exactly what you are going through and I can honestly admit I’ve made my fair share of mistakes as well trying to find a suitable home loan.  So in this article I going to walk you through a simple process of how to find the best mortgage deal and what you should be looking for.

Choosing Your Lender

The first thing you want to do is find a suitable lender but the trick is not everyone of them are the same.  I can agree with this.  The first home loan I ever got charged me only $500 in closing cost.  The second loan I switched to cost me nearly $3500 in closing cost.

However most people tend not pay attention to fee much because it usually gets tact on the end of most peoples loans.  On top of that most people don’t even understand all the fees they are even being charged for.  This doesn’t mean you have to know all the fees, but knowing how much you will have to pay at closing is a must. So before you go with any lender be sure to consider the closing cost they are charging.

Choosing A Loan Program And Rates

Next, to find the best mortgage deal you need to choose a loan program.  For most people they tend to stick to a 30 year fixed or a 15 year fixed loan but did you know that lenders will offer several different types of fixed programs?  In fact lenders also offer a 25 year fixed, a 20 year fixed,  and 10 year fixed loans.

Why is all of this so important?

Because with lower term loans comes lower rates, and this is especially good if your refinancing.  For example, if you currently have a 30 year fixed mortgage that you’ve had for the last 5 years you could refinance to a 25 year fixed or a 20 year fixed loan to cut down on extra interest payments and best of all get an even lower rate.

However fixed loans are not the only loans available.  One of the most often over looked loans is adjustable rate mortgages.  These loans offer a fixed period that can last as long as 10 years to as short as 3 years and once this fixed period is up the loan can adjust once a year for a total of  30 years. For example if you have a 5 year adjustable rate mortgage it will stay fixed for 5 years with no interest rate adjustments but after this period is up your rate could adjust for the next 25 years, totaling 30 years.

The benefit behind these loans is that they carry much lower rates than even a 15 year fixed and can save you some big money.  Below is a picture of some current rates I’ve found on the Internet.

best_mortgage_dealsNotice how low the interest from a 30 year fixed loan to a 5 year adjustable rate loan is.  The payment for a 30 year fixed loan with a $250,000 loan amount would run around $1300, but if you would go with a 5 year adjustable rate mortgage your payment would be knocked down to $1068, for a total savings of $232 each month.

Now I know this loan doesn’t benefit everyone but an adjustable rate mortgage works great for those who are not planning to live in a permanent home and plan to move or build some day.  In the mean time you might as well save some extra cash, in fact if you would keep the 5 year ARM for the full 5 years you would save nearly $14,000 versus going with the 30 year fixed mortgage.

Should You Buy Points

Finally, the last thing you need to decide in order to find the best mortgage deals available is if you should buy points.  Buying points allows you to basically buy a lower rate for your mortgage.  Each point you buy will cost 1% of the total loan amount.  For example, if you have a $100,000 loan at 5% and you buy 1 point on your loan it will cost you $1000.

On top of that each point will typically lower your rate by 0.125%.  In the example above it will lower you from a 5% rate to 4.875%.  The benefit behind this is that it will lower your payment and in end cut down the total amount of interest owed.

So when should you buy points?

I only recommend buying points only if you plan to keep the home permanently.  Otherwise you could put a lot of extra cost into a loan that you just don’t need to.

Where To Find The Best Mortgage Deals

In end if you want to find the best mortgage deals I recommend checking in 3 different places.

  • Online Lenders.  The great thing about online lenders such as Quicken Loans is that they can have some really good deals, and offer some really good loan programs you just can’t find anywhere else.  For example they even have an 8 year fixed home loan program.
  • Local Banks. Next check out some of your local banks. I’ve found home town local banks to carry some really competitive rates versus bigger lenders.
  • Credit Unions. The last place to look is credit unions.  The great thing about credit unions is that they usually carry some very low closing cost and interest rates.

Questions or Comments?  You know what to do.

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How Does a Reverse Mortgage Work?

March 28, 2011 By 1 Comment

how-does-a-reverse-mortgage-workFor those over the age of 62, a reverse mortgage may be just what is needed to supplement income. Having part of the equity in their home available to pay bills and buy groceries can take away some of the worry about supporting themselves after retirement. But what is a reverse mortgage and how does it work? Following are some insights into a reverse mortgage.

What Is a Reverse Mortgage?

Basically, a reverse mortgage is a type of loan where a homeowner is eligible to receive a portion of the value of their property over and above what is owed on it. A reverse mortgage is also available if you own your home outright, but still plan to live there. There are a couple of stipulations involved. First the person must be aged 62 or older to qualify. Second, the value of the property must exceed the amount owed.

How a Reverse Mortgage Works

If the property is worth more than the outstanding debt the owner can essentially borrow against the worth of the property. It is a bit different than a traditional home equity loan in that with a reverse mortgage the homeowner won’t have to repay the loan for as long as they’re alive, providing the property remains theirs and it is their principal dwelling place, or they are not away from it for more than 364 consecutive days. If these criteria are met, the loan isn’t collectible until after the homeowner passes away or if they sell the property.

No Monthly Payments

Part of the beauty of a reverse mortgage is that there are no monthly payments involved. Instead, the homeowner receives money. They can accept an amount agreed upon by a lending institution that is equal to a portion of the equity in their home. This can be in the form of either a lump sum, or they can receive monthly installments. That’s how reverse mortgages work – instead of making payments, the property owner receives money that can be used at their discretion.

Peace of Mind

Frequently, a reverse mortgage is used as supplemental income after a person retires. Instead of having to live on their Social Security check alone they can take advantage of the equity in their home that’s been built up over years of making monthly mortgage payments. It offers the property owner the peace of mind knowing they’ll have adequate funds available for their everyday needs.

Advantages of a Reverse Mortgage

One of the principal advantages of a reverse mortgage is that a property owner’s credit isn’t taken into consideration when getting the reverse mortgage. How does a reverse mortgage work in that respect? Because the person that is borrowing the money is not going to be required to make payments, there is no need for a credit check. In fact, in a lot of cases the lending institution doesn’t even bother doing a credit check, because there’s no reason to go to the added expense and trouble of doing so. They know they’ll be getting their money back if the property is sold or if the homeowner passes away. Because they have a lien on the property, they’re assured they’ll be paid back.

Disadvantages of a Reverse Mortgage

Among the reasons some people don’t like a reverse mortgage is the fact that the equity in a home decreases as the reverse mortgage money is received. There are certain qualifications concerning upkeep that must be met by the home owner, such as making sure the property is properly maintained, and that it is adequately insured.

Do Your Homework

Over all the decision on whether or not to take out a reverse mortgage should be studied ahead of time. There are valid arguments on both sides of the fence. Do your homework. Weigh the pros and cons and then make an informed decision on whether a reverse mortgage is in your best interest. Consulting a tax attorney or an accountant may help you make up your mind.

Guest post from Bailey Harris. Bailey writes for www.insurancequotes.org.

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I Need A Loan: A Guide For Beginners

February 22, 2011 By 3 Comments

apIf your looking to purchase a home, car, or something of high cost in the near future you may have been asking yourself, I need a loan, but you may not know if you can get one.  So in this article I’ve put together a simple guide for beginners to help you get started down the right path, and in the end of this article you will be able to get a simple checklist to help you get started.

Why Do You Need A Loan

The first thing you need to do is question the reason you need the loan.  Often times we get a loan even when we really may not need it.  The first thing you must do is consider if you really need a loan now or if you can wait.

If you want to get the best rate and deal a little preperation can go a long way.  For example, currently I’m in the process of planning to build my own house, but before I considered buying some land I decided it would be much easier to save money first.  This way I will have more cash to put down when I buy, giving me a lower interest rate in the end.

The reality is saving money doesn’t cost you anything, but once you buy something using a loan it will cost you a monthly payment.  For example I recently had a conversation with a friend of mine who said he saved an extra $50 a week back into a car fund over a 5 year period.  By the end of five years he had around $13,000 to by a new car.  Doing this allowed him to buy a car with cash and avoid getting a car loan.

So before you say you need a loan now consider the option of saving first.

What Is Your Financial Situation

The next thing you need to consider is what your current financial situation is like.  This means reviewing you financial situation and looking at things like how much debt you have and what your current credit standing is.

First off when considering your debt situation, if you’re looking to get a loan you will not want to have any more than a 36% debt to income ratio.  This means when you divide the total amount of debt over the total amount of income you have you will not exceed 36%.

Next you need to consider what your credit report and score are.  Your  credit score will give you an idea of how good your credit really is.  Scores usually range from 400 to as high as 850,  however to get a loan you will need at least a 650 or higher to qualify.  The big benefit to having a high credit score is that it can get you a lower interest rate.

If your interested in checking out your credit read my article on how to get  a cheap credit report with Credit Karma.

Where You Should Not Get A Loan

Third, once you’ve saved up some money, checked your debt to income ratio, and looked up your credit report it’s time to start searching for a place that will give you a loan.  Howver before I cover the best places to get a loan I want to cover one place you should definalty stay away from, the monster mega banks.

The monster mega banks are the biggest banks in are country like County Wide, Bank Of Amercia, Fannie Mae, and Freddie Mac.  The reason I suggest you stay away from these banks is because they charge high fees for the little service they give.

For example back several years ago I refinanced with Country Wide and learned after the fact that the closing cost fees would run me around $3500.  This is a complete rip off.  My suggestion is to avoid them all together.

Where You Should Get A Loan

Now that know where we should not get a loan at, let’s look at a few places that would be the best place to get a loan at.

  • Local Banks. First, check out your local bank.  Local banks tend to have little more leeway when it comes to getting a loan.  For example, when I was getting a loan with my local bank they wanted  me to put 20% down on my home, however I did not have the full amount so they worked out a deal with me to cover it with a secondary loan in order to pay down the full 20%.  A bigger bank would have never done this.
  • Credit Unions. Second, check out your local credit union.  The great benefit about credit unions that they usually have very competitive rates and their closing cost can be extremely low.  On top of that as a credit union member you are also part owner as well giving you more authority and control.
  • Social Lending. Third and finally, a new option to consider is social lending such as Lending Club.  The great thing about social lending is that the laws are a bit more relaxed.  However their is one downside to this option though, and that is you can only barrow up to $25,000 to $35,000 in most cases. However if your looking for a car loan, doing a little remodeling or even a small business loan this option can be very promising even if you have bad credit.  To learn more about this option read my article on Lending Club to learn more.

The Checklist

Use this simple checklist to help you get started on the road to getting your first loan.

  • Do you need the loan?  Decide whether it’s better to save before you buy.
  • Check your debt ratio.  Divide your debt over your total income.
  • Check your credit score.  Check out Credit Karma for your free credit score.
  • Contact several lenders.  Contact your local bank, credit union, or even a social lender like Lending Club to see what you can qualify for.

Questions or comments?  Let me know below.

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What to Look for in Home Loan Modification Services

January 22, 2011 By 2 Comments

homeOver the last several years, the number of lenders offering loan modifications has risen dramatically. Part of the reason for this, is because of the large number of property owners, who are delinquent on their mortgages and various efforts to promote different home loan modification programs.  Despite these endeavors, a number of consumers have faced considerable challenges when attempting to conduct various home loan modifications.

As a result, is it imperative that you consider a variety of factors, to avoid working with unscrupulous lenders? Not everyone is accepted for Home Loan Modification Programs The process of qualifying for a home loan modification is not quite easy or simple. To qualify for any kind of loan modification services, you must show that you have the right amount of income and assets. As the bank is focused on how your debt and income ratios will fit in line with their risk portfolio as well as objectives. This will vary from one financial institution to the next, as these standards will be based on company policies that may be more or less stringent.

Therefore, a reputable lender will turn down at least 40% of their home loan modification applications. Where, these different homeowners will not qualify for loan modifications services, based upon the bank’s predetermined income and debt ratios.  There are a variety of lenders that will offer a number of different programs that should make you nervous. This is because many of them are too good to be true. Loan modification scams are on a rise dramatically. Homeowners are offered a great new loan that will “solve all their problems.” They think they’re signing documents for the new mortgage, but end up giving the scammer ownership of the home.

Homeowners offered these types of scams  the most common includes money back guarantees. A reputable loan mod company will pre-qualify you before they take you on as a client. They know what the lenders require and will only take on clients they can help. They can guide you in the right direction if a loan modification is right for you or not.

Money Back Guarantee:  A money back guarantee is when the lender will offer some sort of rebate for advanced fees. This is problematic, because a number of financial institutions have been using this as a way to lure unsuspecting homeowners into their programs. At which point, they charge higher fees than what was advertised. Only do business with the company if they offer reasonable fees.  A good service will be one that discloses all of its information and offers references. This is used as a means of allowing a person to see what a loan modification specialist or attorney can do for one’s needs.

Don’t go with tv and radio ads for loan modification services. Most probably they just ads run by lead generation companies. Who pays them for leads, they pass your calls to them. So there are many chances of fraud.

Clearly, obtaining any kind of loan modification services can be challenging. The above tactics will help to find reputable lenders that can provide you with the modifications that you are looking for, at a reasonable fee

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Online Loans: How To Get A Loan On Lending Club

October 25, 2010 By 2 Comments

If you read my recent article on how to get high return investments through a peer lending website called Lending Club you would have learned about how you could earn some impressive returns by investing your money to others through personal online loans.

So in this article I’m going to cover why an online loan is so great with Lending Club and show you how easy it is to set one up.

Why Lending Club

First off, with Lending Club they allow you to borrow up to $25,000 from other peers within the Lending Club investors network.  These loans can run on either a 36 month loan schedule or a 60 month loan schedule.

Secondly, with Lending Club the rates are much better than other investments. To give a good example back several years ago I got a home equity line of credit from my mortgage company to do some home improvements around my house.  The rate I got on my loan was 12%, and that was with excellent credit too.  If I would have used Lending Club I could have gotten a rate for much less.

On top of that Lending Club loans have fixed rate which means the loan rate can’t change if you miss a payment or your credit gets worse.  Unlike a credit card which can change rates at any point and time.

Reason To Get A Loan

Next, Lending Club will let you get a loan for many different reasons, in fact I thought about using them to get a loan to help put a down payment on a house.  I also thought getting a business loan to help me purchase more materials  for my business, and the best part is Lending Club will help do this.

So if your not sure what kind of personal online loans you can get here is an extensive list of what they offer.

  • Debt Consolidation. Combine credit card debt into one simple fixed payment.
  • Vehicle Loans. Need a car but can’t financing the traditional route, this is the perfect option, you can also use it to finance those extra toys you need as well like ATV’s, and Motorcycles as well.
  • Home Improvement. Get home improvements done for less than you think.
  • Business Loans. Need money to start a business or keep your current business running, Lending Club can do it.
  • Special Events. Whether your getting married or need money for a special event in your life this could be a great option.
  • Green Loans. If you want to turn your home into a green home and add some solar panels and make it more environmentally friendly this is the way to go.
  • Cover medical expenses. If you need to pay for a hospital stay, a trip to the dentist, or even a surgery this can be the way to go.
  • R&R Loans. Need to take that long awaited vacation, with Lending Club they can help you do that.

Obviously, it’s easy to see if you need a loan for almost any reason you can get it and if you need a loan for something I didn’t mention you can contact Lending Club and they will work with you to see if it will qualify.

What Are The Fee’s

Now that we know what’s so great about Lending Club and what they can all do you might wondering what kind of fee’s are involved in doing something like this.  The truth is the fee’s are incredibly cheap.  To start look at the rate chart below.

interest_rate_table

Loan rates are broken down into different grades.  A grades are the best and G is the worst.  The best part about this you can also see what kind of rate you could expect.  For example, if you have a credit score higher than a 720 you could qualify for a grade A loan somewhere between 6.26% to 8.28%. However if you have a score less than 600 you could expect a loan in grade G at high as 25%.

On top of that they also show you what kind of borrower fees they will add on depending on the loan grade you qualify for.  For example they add a 2% borrowers fee for A grade loans while E, F, and G grade loans will add 5%.  Finally I should also mention that their is no closing cost fee unlike traditional loans.

barrower_feesFinally, their are a few miscellaneous fees you should know about.  The first is a missed payment fee, this fee is assessed every time miss a scheduled payment, which will be $15 for each missed payment.

Second, their is also a late payment fee if you go 15 days over your missed payment.  This will also result in another $15 penalty fee.  So if you miss the payment once, make sure you make it before 15 days passes or you will be charged again.

Third and finally, their is a check processing fee.  If you prefer to pay with a check every time you make a scheduled loan payment you will also be charged a $15 fee as well.  So the best option in this case is to set up an automatic bank draft to debit the funds automatically and you will be able to avoid this fee completely.

That’s it, their are no other fee’s such as closing cost, and processing fee’s that most traditional lenders include in their financing.  So now that we know what the rates and fees are you might be wondering how easy is it to get started.

How To Get A Loan

Getting a loan is simple, if you look at the picture below  you can see how easy and fast the process really is.

how_the_process_worksrate_quoteThe first thing you need to do is apply for a loan.  You will see a box that looks similar to the one at the right.  First, it will ask you for how much you need for a loan, second pick the reason you need the loan, and third choose what your credit score is.

If you don’t know what your current credit score is check out my article were I show you how to find the cheapest credit score through a company called Credit Karma.  This site will give you a free copy of your credit score and report in a matter of minutes.

Next once you’ve applied for the loan the funding process will start.  This may take anywhere from a few hours to a few days depending on the amount of money you need.  Finally once you’ve been completely funded you will begin paying back your loan through either a 3 year loan process or a 5 year loan process, however you can payoff the loan whenever you want with no penalty.

Call To Action

So are peer to peer loans online for you?  To learn more and get a free rate quote  check out Lending Club today .  Letting money stand in the way of your dreams will ensure it stays that way but  with Lending Club it can become a reality.

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