Knowing Where You are at Financially When Dealing with Home Loans
Everyone has heard and seen the advertisements for loans with the lowest rates possible, or with no closing costs. Sure, those sound like great deals, but those deals do not apply to everyone. The low rates you see on television everyday only apply to the people with great credit ratings. There are alternatives for those with not-so-good credit histories.
Here are some tips from a former mortgage loan professional regarding proper planning in mortgage loans, so that customers of all credit histories can get good rates on loans, make payments affordable, and pay off loans faster, while improving you credit rating.
Shop around- Every Tom, Dick, and Harry is offering the lowest rates possible with no closing costs, but beware of the fine print on these deals. Most apply to the top credit profiles, have loan to value restrictions, or are only rate and term refinances. If you are a good credit customer only looking to lower your rate and reduce your term while getting no cash out for other bills, this is the program type for you. However, if you want to take out cash for bills, home improvements, or a big purchase, you are not going to get that advertised rate, because the loan style is a higher risk loan to the lender, and therefore, investors will not buy that loan bulked into a security unless the rate of return is higher.
Only take what you can afford- The rule of thumb for excellent credit customers when refinancing is to have the mortgage payment be no more than 33-36% of the customer’s monthly household income before taxes. If you are looking to refinance, make sure your new payment is not higher than 36% of your income, or you may have difficulty with that new payment. Customers with other-than-stellar credit histories most often get mortgage loans through sub-prime (non-conforming) lenders. These lenders often allow a debt-to-income ration of up to 50%, which get these customers into financial trouble, explaining why the customers are sub-prime in the first place. It is also important for all customers looking for a mortgage loan to only refinance if there is excessive equity in your home. A guide is less than 80% of your home’s appraised value. For example, if your home is worth $200,000, it is wise to not refinance if the new loan amount is over $160,000. A high loan-to-value loan increases the chance of default in a situation where home values drop, and all of a sudden you owe more on your house than it is worth. High loan-to-value sub-prime loans are the main reason for the current mortgage crisis in the United States today.
Pay it off early- Paying your mortgage off early is an option most customers do not realize, but this option will save you tens of thousands of dollars in interest over the life of the loans. When you decide on a mortgage loan, ask about setting up bi-weekly payments. On a 30-year mortgage, bi-weekly payments will allow you to pay off the balance of the mortgage about 6 years faster than monthly payments. Since the two bi-weekly payments are the same as one monthly payment, you would only be saving yourself money. Most people do not realize that the interest on mortgage loans is front-loaded in accordance to the length of the loan, so on a 30-year mortgage payment of $1,500 per month, that first payment only takes about $100 off the principal balance. A 25-year mortgage is only about 3-5% higher than a 30-year payment, so that is a good way to knock 5 years off the loan right at the start. The shorter the loan term, the less you pay in interest and the more money you save.
Remembering the main keys to mortgage loan practicality is important to maintain a healthy financial future. Save yourself a lot of money by shopping for the best rate you can get, pay the loan off sooner, and do not get a loan for more than you can handle. Following these guidelines will get you on the right path towards financial stability.