N.I. Mortgage

Home Equity 101. Most people who buy a home will, at some point, refinance. Refinancing is a service that is typically paid for by the customer, and it basically gives you a loan for a newly appraised amount instead of the original amount. The old loan is then swallowed by the new one, and the difference is…PROFIT for you.

When I bought my first home a year ago, I thought I was getting in at just the right time. Real estate prices had fallen sharply, and the home I got had appraised for $60k more than I bought it for. The mortgage was a little bit more than I had planned on, but I thought, “Hey, it’s an investment. This housing slump can’t last much longer, can it? My home won’t really lose any more value, will it?

It did, and it is. The value of my home has depreciated drastically since I bought it, despite my best attempts to improve the home and add worth. Right after I moved in, my mortgage broker told me he would give me a low cost refinance of my mortgage a few months after I’d moved in, but six months later I was already upside-down, and he couldn’t do anything for me.

So here’s the lowdown: If you need to refinance and you’re upside down, DON’T go through a mortgage broker. They will not be able to do anything for you. Cut out the middleman and go straight to the lender. It will be a lot cheaper, and you’ll thank me for it.

There are many varying types of mortgages on the market today, the latest spike in interest in super jumbo mortgages (especially in Minnesota) is proof of this. Today we’ll be talking about interest only mortgages.

An interest-only mortgage is similar to a balloon mortgage in that it allows the borrower to make small monthly payments and then pay more at a later date.  For 5-10 years, the borrower pays nothing but the interest on the loan, so payments are kept very low.    At the end of the loan terms, the interest-only perk goes away, and the loan balance is the same as when you initially got the loan.  You haven’t been paying on the principle during that time, so it’s almost like spinning your wheels.

This benefits the lender because they make pure profits on the interest-only loan for the length of time you’re not paying on the principle.  But it can also be a boon to borrowers who need the time to become financially stable.

During an interest-only loan, you do have the right to pay more on the loan if you want to, so that your principle does decline during the course of the loan, but it won’t be required.

If you were to take out an interest-only 30-year loan for $150,000 at a 7% interest rate, then your monthly payments would be $875. If you had a traditional loan, your monthly payments would be $997.95.

When is an interest-only mortgage right for you?  If you’re self-employed and your income is up and down, then an interest-only loan can help you stave off the financial insecurity.

If you’re currently dealing with a lot of other debt, then an interest-only loan buys you time to pay off the debt and get back on your feet before you begin having to make full mortgage payments that include the principle.

If you know you can pay a little extra toward the principle, but aren’t 100% sure of just how much you’ll be able to fork over, then you might succeed with an interest-only mortgage.

Some investors take the money that would have been spent on paying the principle and invest it in lucrative opportunities, giving them more of a return on their money than the equity they would have built in their house during that time.
Since your monthly payments will be lower, you might be able to get a larger loan, because your income will handle the interest-only payment in the beginning.  This is perfect if you want to buy a larger house and expect your income to rise over the course of the loan.

Buying a home isn’t something most people do on a regular basis. You may be new to the entire process so it’s no wonder many first time homebuyers are terrified they’ll mess up the biggest purchase they’ll ever make in life. The golden rule of super jumbo purchases (and mortgages are a commodity purchase just like a car) is to never rush into them without spending significant time studying the pitfalls and the advantages.

Once you know the ropes, the mortgage process isn’t very intimidating at all.  You have rights as a homebuyer – fair lending rights that protect you from any crucial mistakes.

But you do want to get the most for your investment, so educating yourself about what occurs during the mortgage process can alleviate any undue costs that you might incur.

First, start looking at homes.  While you’re looking on the market for the physical house you plan to buy, you also want to be shopping around for the perfect mortgage.  Like the house you’ll choose, there will be pros and cons to the mortgage you pick as well.

Most importantly, you want payment terms that fit within your budget.  Some people go straight to the bank where they have all of their accounts and sign up for a mortgage without ever looking further.
This can be a costly mistake!  You want to shop around and look at lending institutions that include banks, mortgage companies, and online lenders who compete fiercely for your business.

You want to ask questions about what types of loans are available (jumbo, super jumbo mortgage, etc) and make sure you don’t get pushed into something you know you won’t be able to handle at a later date. When you find a lender and type of loan that looks attractive, you’ll begin the mortgage paperwork process.  You have to fill out the main application, provide documentation about your finances, and wait for your credit to be examined.Expect a very thorough investigation of your current job (and your spouse’s) and your job history. An appraiser will come out to appraise the value of the property.

The lender usually sends out someone on their own (you don’t hire them) but they sometimes charge the fee back to you in the total amount of the loan.You’ll be able to borrow about 80-90% of the value of the property and you’ll usually need to provide a down payment to make up the rest.
If the lender approves you, they’ll fund the loan.  If not, they have to explain why you were turned down and at that point, you have the option to look for another type of mortgage that better suits your financial situation.This is being written in the Spring of 2008. This may be the most difficult period of time in US history to obtain a mortgage because so many bankruptcies are occurring because people bought into a mortgage that was not right for them.

Banks and other lending institutions have greatly tightened the noose on people. The requirements are much more stringent than they were just one year ago.

In a way, you can consider this a blessing even though you may not be able to obtain your mortgage. First, you are less likely to go into bankruptcy. Second, you will learn much about the mortgage process when you apply again in the future.

For a number of reasons, it is possible that the total owed on your home may be more than what the home is worth. Most of the time, this isn’t a problem because time is the solution. Depending on how much you owe, just be patient and the value of your home will increase.

Problem fixed. Unfortunately, this might take years. And since you can’t do a no cost refinancing of your home when you’re upside down in your loan, you’re stuck in a situation where you absolutely have to sell your house.

This can happen for many reasons, some good and some not so good: relocation, financial hardship, divorce, death, illness, or anything at all. The end is that you may have to move, but you can’t sell your house and make enough on the sale to pay the closing costs.

So what is there to do?

Option #1: Do Nothing

One choice is sit and do nothing and not make the payment. That is a worst-case situation because it affects your credit rating worse than anything else possibly could.

Option #2: The Short Sell

It sounds like selling a home quickly, but it’s really selling the lender short. This is when you open up to the lender, let them know about your difficult situation and ask them to accept less than you actually owe.

The lender obviously won’t want to do that, but they also won’t want to shell out the costs of foreclosing a home, making repairs, and putting it back on the market, and getting the best they can into a market that’s already oversaturated with homes.

Lenders hate, Hate, HATE to foreclose, so a short sale might be a good option.

Don’t get your hopes up, though. A short sale involves a LOT of paper work, and you will invest a LOT of time and effort. It is preferable to have a real estate agent or someone knowledgeable guide you through the endeavor and lend support. It is a very stressful exercise, and you’ll need a lot of assistance.

Step #1 in a short sell is to get in touch with your lender’s Loan Service Department. That telephone number will be in the paperwork you receive about making your mortgage payment. Call them and write them, and keep copies of what you send them. Be persistent.

The lender will ask you to send them a statement of your finances. They just want to know that you in fact DO NOT have the financial assets to re-pay the loan the home has sold.

That’s just for starters, though, assuming they’ll even give you a tentative agreement.

Your RE agent still has to put the house back on the market, find a buyer, and get a concrete offer. Once that’s done, you submit your contracts and paperwork to the lender for a decision. This can take a while as there are a few decision makers in the mix

Your lender won’t always be YOUR lender; it’s just an entity that0 services the loan for your actual lender, also called the investor. The paperwork is submitted to the investor for them to review and decide.

Let’s assume you have insurance on the mortgage, well, there’s another decision maker in the procedure Mortgage insurance covers lenders in the case of someone defaulting on their loan. With mortgage insurance, lenders can justify making high loan-to-value (or LTV) loans.

Assuming the investor and the insurer are in agreement and your short sale gets approved, you can sell you home.

When it comes down to it, a short sale is just a “forgiveness of debt” that counts as income and that you must declare it to the IRS.

At any point in time, you might find that the deal you once got on a loan would better serve you if it were refinanced with new loan obligations.  Second mortgages are a way to refinance your debt to help you achieve the financial security you strive for.

Many homeowners often secure a second mortgage on their property.  A second mortgage is a loan using the home as collateral.  If the house is sold, or the homeowner defaults on the loans and the lender sells it, the payments are made to the second mortgage after the first mortgage is paid off. Refinancing your second mortgage is necessary when the time comes to restructure your debt.

You might find that you’re in need of home repairs or other costly expenses and a second mortgage met those financial needs.

But you want to ensure your loan terms are beneficial to you as a homeowner, so refinancing when you’re able to get a better deal is a wise investment of your money. If you can find a broker who’ll do a low cost refinance of your home mortgage, even better.

Never refinance your second mortgage so that it puts a strain on you financially.  Your home is the collateral, so you don’t want to risk losing it because you bit off more than you could chew.

Second mortgages generally have a higher interest rate than first mortgages, but you still want to negotiate the best deal you can find.  Watch the market to see when interest rates are in a decline – that’s a good time to refinance your second mortgage.

You won’t have the strict underwriting criteria to meet like you did with an original loan on your home, since second mortgage loans are more lax.  You’ll find that refinancing your second mortgage is a faster process and generates lower fees you have to pay, even though the interest rate may be slightly higher.

When you refinance your second mortgage, you’ll be able to choose from a traditional second mortgage, a home equity loan or a line of credit.  You can determine if you’d prefer a monthly payment option or just be required to pay back the loan during a certain timeframe on your own schedule.

You may find that refinancing your second mortgage helps lower your monthly payments, and gives you additional cash when needed.  Make sure your mortgage isn’t above current interest rates, and if you have to, go to a sub-prime lender who can help you even if your credit is a mess in its current state.

Approval moves along at a quick pace, often giving you an answer in 24 hours as to whether or not you have the option to refinance your second mortgage.  Make sure you shop around and let lenders compete for your business, and don’t just go with the first offer you see.