Monday, March 30, 2009

No Closing Cost Second Mortgages

Second mortgages are mortgages which are in second position and can be used for a variety of things, vacation, education, remodel, car, whatever. However, I would suggest against using second mortgages for any frivolous items like cars, vacations, etc. Using the money to remodel and improve your house, or higher education would be a wise move though.

There are two kinds of second mortgages. The first one is a Home Equity Loan, or HEL. Just as the name suggests, it is just a loan with a fixed percentage rate for a fixed period of time, whatever that may be, 10, 15, 20, etc. Your payments are always fixed until the loan is paid off. Once the loan is paid off, then the lender will cancel the lien on the house and you are then again able to get another loan. This does not mean that you cannot refinance a HEL, you just have to reapply and get a new loan, which usually pays off the original HEL. Some lenders may have other requirements to allow you to refinance your Home Equity Loan.

HEL's are most useful when used for fixed items and terms because of the way they are designed. If your financial needs may fluctuate as life goes on, then a HELOC may be the best way to go to access to your home equity. Of course, the HEL also allows you to lock in a fixed interest rate. In today's interest environment, that may be the best option. There is a lender out there that is offering a HEL at 4.99% fixed for up to 20 years. Can you imagine paying 4.99% for 20 years? This does not even take into account the interest rate after you take into account the tax deduction for the interest you may pay on it. Needless to say, this is an attractive proposition because nobody can say what the interest rate will look like in 5 years or 20 years, but I doubt it will be this low. We are in uncertain times and that is why the rate is so low currently. One thing to watch out for is if you payoff the HEL too soon, in the case of the lender I mentioned above, 24 months, then you will have to pay for all of the closing costs that lender incurred. This is a pretty standard practice, so if you don't want to pay for the closing costs and make it a truly no closing cost mortgage, then make sure you keep the loan open for 24 months or whatever timeframe your lender requires of you.

The second type of second mortgage is usually called a Home Equity Line of Credit, or HELOC. This is usually a variable interest rate which adjusts as the underlying index adjusts. Many HELOC's are tied to the Prime Rate, which is currently at a very low 3.25%, with an adjustment. Some institutions have a markup, others have no markup, and yet others have a prime -1% markup. As an example, the prime is currently 3.25%, and the lender mentioned above charges prime minus 0.50%. So that institution is currently charging 2.75% for their HELOC's. That is CHEAP money, I don't care who you are, because the effective interest rate is much lower once you take into account the tax benefits for the interest deduction on your taxes. This rate will fluctuate as the prime rate adjusts in this example. With the adjustment of the rate, the payment will also adjust.

Because the HELOC's are variable, they usually let the consumer pull money out of the Line of Credit as required for a fixed period of time. Once that time has expired, then the loan becomes a fixed rate and term loan like a HEL. So your payments will then include both the interest portion as well as the principal portion, therefore, paying down the loan amount. Your payments however will not adjust because the intent is to pay off your loan in the timeframe called for in the loan. Excluding the fixed portion, a HELOC operates much like a credit card. Some lenders actually issue a VISA or Mastercard branded card so that you can access your HELOC.

HELOC's usually also come with an annual fee. This is so ridonkulous in my opinion. The beauty of competition and a capitalist society is there are many different lenders out there who also in the name of competition do not charge an annual fee. I would suggest you go and find one of those lenders and get your loan through them. The lender I referenced above does not charge an annual fee.

In today's current credit environment, many people have been finding that their HELOC's have been cut because of a number of reasons given by the lenders. The home values in the neighborhood you live in could be decreasing and so the lender deems that your LTV has gotten too high and therefore decreases your available credit. The other thing is your credit profile has changed for the worst and therefore the bank wants to limit their exposure to you because of your changed economic situation. They will attempt to close or limit your HELOC availability because of this also.

The other thing that they have been doing is just plain outright closing the line of credit. Needless to say, these actions could not be coming at the worst possible time for you and other consumers I'm sure. The only way I know to prevent this from happening is to take out all the available cash in your Line of Credit. That way you have the cash in your pocket and the lender has no choice but to keep the loan open until you make payments or pay off the loan.

Many people shy away from HELOC's for whatever reason and I understand your debt shy or don't want the temptation or whatever. However, the best time to get your HELOC is when you are fully employed and can show that you can repay the loan. If you apply for a HELOC when you've lost your job, well, that's too late. Would you loan money to a consumer who had no employment and therefore no way to pay you back. Just smart decisions on the part of the bank in my opinion. So go and get that HELOC on your house assuming you have available equity and let it sit at $0.00 balance.

I mentioned that HELOC's were primarily tied to the Prime Rate set by the Federal Reserve board. While a majority of HELOC's I've seen are indeed tied to the Prime Rate, they are not all set to that index. There are many different index's available. There is the LIBOR index and even more rare, the 1 Year Treasury Bond HELOC. The Treasury Bond rates change weekly and are therefore very administratively intensive and cost more money to maintain, and therefore not very many lenders provide this index. The LIBOR rate is not very popular only because many people are not familiar with the LIBOR index. The LIBOR is an interest rate set by banks in Europe and is charged to banks that borrow money from other banks. The LIBOR is set in the morning, and can change throughout the day though. I'm sure there are lenders out there that can and do set their index's to other more exotic terms; I would suggest staying away from them as they are not readily advertised and may be difficult to track and understand. I like the easy stuff, and the Prime Rate is easy for me.

On top of the index, I mentioned earlier, different lenders will then have an adjustment on their index. That adjustment could be a subtraction on the interest rate, no change, or an addition to the prime rate. Regardless, the margin as it is referred too is also set depending on your credit score. If you have a high credit score, you are likely to get favorable terms. If you score is not that great, you may not get the most favorable margin setup. Regardless, your credit as always, determines how much in interest your going to pay on this money. To save money overall and not only in this transaction, keep your credit score as high as possible.

Second mortgages, or 2nd mortgages, depending on how you 'say' it, are a useful tool and they should be considered when you require access to cash locked up in your home equity. Beware however, that if you are looking at going the variable rate, or HELOC, route, get the line of credit when you don't need it, because no sane lender would or should lend you the line when you have no means of paying it back. The costs to acquire a second mortgage is pretty low to free because most lenders will pay for the costs to extend the loan to you, although some may charge a yearly maintenance fee which you should stay away from.

Sunday, March 29, 2009

Investment Property Mortgages

Investment properties are a good way to increase your networth, however, unless you have cash sitting around, you're going to have to take out a mortgage to purchase the investment property. The type of mortgage you will have to take out are called investment property mortgages. These mortgages are usually more difficult to acquire because from the banks perspective, they are more risky because the owner of the investment property could just stop paying on the mortgage because they don't have the incentive to maintain a roof over their own head.

In the past, investment property loans normally would require the investor to put down at least 20% to purchase the property. In the recent past however, due to the overwhelming availability of credit, some investment property mortgages required no down payment and allowed individuals to purchase property with no cash out of their pockets. Due to the current credit crisis that the nation is experiencing, investment property mortgages have started going back to the normal 20% down requirements if not more. You also would require excellent credit.

The whole $0 down payment for even owner occupied housing now a days require down payment and usually closing costs to be paid to get the mortgage. This is all because in a normal environment, the purchaser of property should have their own skin in the purchase of their own houses. In the past, those with minimal investment in the property would be quick to stop paying on the investment property mortgages if they fell into economic difficulty. To help protect the banks position, they require real estate investors to put down 20% to help reduce the risk and make the investor more likely to keep paying on the investor mortgage. They are after all, hopefully collecting rental income which should then apply to the mortgage and allow the investor to make money and the bank to receive their monthly payments. Of course, economic situations can change for the worse and make it difficult for the investor to continue to make those payments. If you had to decided on making the mortgage payment for your own house versus making the payment on your investment, which decision would you make. That is why investment property mortgages are riskier for makes to make.

Needless to say, because of the need for down payments on the part of the investors, there is no available no closing cost mortgages available for those of us who want to purchase investment properties. Needless to say, this does not bode well for those of us who are cash poor but credit rich to be able to acquire investments. This is probably for the best because there are many individuals out there who are out to make the quick buck, but are also quick to walk away if the investment does not pan out. These are rational thought processes in my opinion, however, they do not bode well for the different parties involved.

This presents a problem for those of us who seek investment properties. Well, another tactic you can take is to get a Home Equity Loan, HEL, or a Home Equity Line of Credit, HELOC, to come up with your down payment to purchase the property that you are looking at purchasing. This assumes that you will be able to pay your monthly payments and the payments do not present a burden on your daily living expenses. Currently, you can acquire a no closing cost second mortgage from various institutions, not everyone can or will qualify for these loans however because of the tightened restrictions.

If you currently own your own house and are still sitting on a pile of equity in your house though, you could potentially refinance your house and pull some equity out to make that down payment on that investment property. You could also just do a no closing cost refinance mortgage, get your cash out of the house, and then apply the cash to the purchase of one or more investment properties which fit your investment profile.

There are mortgages out there that are well suited for you, but there are also mortgages out there that would not be well suited for your needs. If you are looking for increased cash flow, refinancing your mortgage to a lower rate and extending the loan term works, but you could potentially pay more in interest over the life of the loan. One thing brokers do to make a no closing cost mortgage is roll all of the costs into the loan. For instance, if you were going to refinance a $100,000 mortgage, and closing costs were $2,000, the new loan amount with the closing costs rolled into the loan would be $102,000. The negative aspect to that is that now you could potentially be paying interest on the closing costs for up to 30 years. So that $2,000 actually ends up turning into $6,000 or there about because you’ve paid interest on it for 30 years. In the end, that figure is a rip off, but that is my opinion.

The best thing to do for investment property mortgages is to save your money or pull it out the equity in your own house through a low interest rate HEL or HELOC. I would lean towards a HEL because that is a fixed interest rate for a fixed period of time versus the HELOC interest rate is subject to move based on the underlying interest rate the HELOC is based off of, usually prime rate. At this time, the prime rate is at an all time low and who knows how long it will stay there. One thing that I am fairly certain of is that the rate has a better likely hood of going up because it cannot go down much further.

Investment property mortgages also carry a higher rate of interest to compensate the lender for the higher risk as well. For instance, the rate difference can be as high as 1%-2% higher than an owner occupied home mortgage to include the higher closing costs. Investment property loans are usually defined as property that is four units or less. If you go over the four unit threshold, that moves you up to the commercial property loans which are a whole another beast that this blog is not going to discuss. Needless to say, these loans are like business loans and you have many more hoops and costs to go through to acquire a commercial loan. Doesn’t mean it cannot be done, it’s just that much more difficult.

Another restriction is imposed by Fannie Mae and Freddie Mac. They are government sponsored agencies and because they purchase a majority of the mortgage loans made to individuals out there, they can dictate which loans they will purchase and indirectly, dictate mortgages that individuals can take out. Per Fannie Mae and Freddie Mac guidelines, they will only allow four outstanding mortgages to be taken out by an individual at any one time. The only way to get around this restriction as far as I know is to either pay off the mortgages so that you can get another property. If you don’t have the cash available, one way of doing that is getting the HEL second mortgage like I mentioned earlier and transfer the debt onto your own personal residence. You may also be able to potentially get an investment property HEL on the investment property and get around the four property restriction.

Regardless of the many restrictions out there, there are options to get around restrictions and different ways of doing things. Like they say, there is many ways to skin a cat, and this would be one of those situations in which the saying applies. Regardless, if your looking for an investment property mortgages, the best place would be to try locally with banks in the area you live in, then try elsewhere. In the current credit environment however, investment property mortgages are difficult to come by, but they are not impossible.

Saturday, March 28, 2009

What is a no closing cost mortgage?

No closing cost mortgages are mortgages in which you do not have to show up at the closing table with any cash of your own. Usually, this is accomplished during a refinance, purchase mortgages can be setup to also be done as a no closing cost mortgage, it is just not as easily available for a purchase mortgage.

When I say no closing cost mortgage, that’s exactly what I mean. No origination points, no discount points, no fees what’s so ever. While the money the broker makes will still be the same, you are agreeing to take a higher interest rate to help pay those costs you normally would pay with a normal mortgage transaction. You will have to cover prepaid items however, like your prepaid interest to cover the interest cost until you make your first mortgage payment as well as the tax and insurance payment requirements if needed. These are not fees or costs, but they are normally covered when you make your monthly mortgage payment.

On a refinance, if your previous mortgage was holding your tax and insurance payments in escrow, while you would pay the escrow during your closing transaction, after the prior loan gets paid off and they process the payment, the old mortgage note holder will then usually issue a check to you with your escrow balance. So in the end, you only make a payment for the interest that would be owed between closing and your first mortgage payment.

As an example, if you close on your mortgage on the 15th of the month. The mortgage company is not going to let you have that money for free. So for the prepaid interest, you are actually making the interest payment from the 15th until the end of the month so that when you make your first mortgage payment, the interest has been covered with your prepaid interest. Needless to say, your going to pay for it one way or another, you just prepay it at the closing table.

When figuring out the interest rate for your mortgage, the bank or broker will have a rate sheet. What that sheet shows is the different interest rates the bank offers and how many points the different interest rates costs to get all the way to 0 points. On the other side of that 0 points however, are the points that a bank will give a broker to get the customer, that is you, to take a higher rate. So for instance, if 5.0% is zero points, well, then 4.75% may cost you 0.875% in points to lower your rate. On the flip side, if the broker can get you to take a 5.25% at 0 points, then the bank may pay the broker 0.25% of your mortgage.

For illustration purposes, this is what I mean.

Interest Rate Points
4.75% 0.875%
4.875% 0.25%
5.0% 0%
5.125% -0.125%
5.25% -0.25%

So using the table above, you can see that for the higher interest rates, the bank will rebate money back to the broker for the higher interest rate. If you wanted a lower interest rate, you can see how much it would cost you as a percentage of your loan amount to get that lower interest rate. If you are dealing with a broker, the broker may change the figures above to allow them to make more money off of your mortgage.

Note: These numbers are just examples and therefore should not be taken as gospel, not to mention the fact that rates can and do adjust throughout a business day as well.

Now, how you can potentially get that no closing cost mortgage or refinance is, instead of taking the 5.0% 0 point interest rate, you could potentially take a 5.5% mortgage interest rate and the rebate is shared between you and the broker to lower you closing costs or give you that no closing cost mortgage your looking for. There are of course drawbacks to this option, you are paying a higher interest rate and therefore more in interest each month. If you are not going to hold the mortgage for a long period of time however, a no closing cost mortgage could potentially make sense. It limits your closing costs and it allows you to get a lower interest rate than what you may have been paying earlier.

The no closing cost mortgage also gives you the flexibility in a falling interest rate environment to refinance as much as you want because ultimately, you do not have to worry about closing costs and you don't have to concern yourself with payback periods because as soon as you make your first payment, you are saving money, unlike others who may have had closing costs. There are many different ways of acquiring a no closing cost mortgage as well. The statements I made above reference a typical mortgage that most everyone is aware of.

The other potential option is to get a Home Equity Loan, or HEL in industry parlance, offered by an institution with no closing costs. You use the proceeds of the HEL to pay off your traditional mortgage and the HEL then jumps into first position and you only pay the HEL as your monthly mortgage payment. As an example, Pen Fed currently is offering a no cost HEL for 4.99% on a 20 year payback period. This would allow you to get that potential lower interest rate for no cost.

You could also use the higher interest rate to get a lower closing cost with a shorter payback period instead of going with a true no closing cost mortgage. This still provides flexibility, but not as much flexibility as a true no closing cost mortgage would. So instead of paying 2-3 thousand in closing costs, you could choose the rate which allows you to pay for instance, only 1k in closing costs, in addition to your prepaid items.

The drawback to a no closing cost mortgage is you give up the ability to get the lowest interest rate and therefore pay less in interest and lower payments. For most people however, this should not be a problem seeing as how the average homeowner moves every six years per the National Association of Realtors. If you cannot break even prior to two years however, it would probably be best to limit your closing costs as much as possible. If you plan on staying in your house longer than two years, then it may make sense to pay closing costs and get that lower interest rate. If your not sure as I currently am, then stick with the no closing cost mortgage because it helps keep money in your pocket until you figure out what your going to do.

With a no closing cost mortgage, this allows you to keep money in your pocket and get a relatively good rate. Not necessarily the BEST mortgage rate out there, but it allows you to lower your rate for very little cost if you are looking at refinancing and lowering your payments. While a no closing cost mortgage will give you the lowest interest rate, the option does have it’s positive aspects and has a place when financing or refinancing your house.

Friday, March 27, 2009

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