Archive for September, 2008

Buying your first home

Buying a home is not an investment to jump into without research and planning. A home is a major purchase and should be treated as a life changing event. Most first time home buyers plan on financing their home for 30 years on a conventional loan, 30 years is a large portion of ones life. This is a guide with many helpful suggestions to consider before purchasing your first home.

The first step to buying your first home is thinking about what you want in your home. Make a comprehensive list of things you would like to have in your home and things you don’t want in your home. A great way to do this is visit open houses and take good notes about thing you see. Do you want large bathrooms and closets? Do you want a big kitchen or do you plan on eating out a lot? Is a home office or formal living room necessary? Do you need a two car garage or will one be enough? There are hundreds of other questions to ask when considering your first home.

The second thing to consider is resell value of your home. More than likely your first home will be what’s called a starter home. You will purchase this home with hopes of upgrading or buying a bigger home in the future. Will you be able to make improvements to this home and make a profit from the sell of this home? Is this in a neighborhood that will be desirable when you decide to move? You want to make sure you will have money to pay down on your next home from the sell of your first home.

The next thing to consider is financing options for your first home. If you know you are only going to live in this home for 3 to 5 years you may want to consider using an ARM loan to finance the purchase of your first home. An ARM loan will give you a better interest rate with a fixed rate for a short period of time. When the rate starts to rise you will be ready to sell and move to another home. Getting the best rate possible is very important because you will build equity faster with a lower interest rate.

Finally, make sure you have done a detailed budget for the next few years. If you won’t be able to afford the payment on the home without sacrifice then don’t buy the home. Putting yourself in a financial bind to purchase a home is never a good idea. A home is probably your most important asset so treat it like one.

Using your home for debt consolidation

Ever wonder how debt consolidation works? Should you use your home as collateral to consolidate debt? With the rising costs of everyday life many Americans are looking for ways to lower debt and reduce their monthly expenditures. Many people are turning to professional help such as debt consolidation loans. One of the most popular ways to consolidate debt is using your home as collateral for the loan, but is this a good idea?

With the growing number of television, Internet and newspaper advertisements for debt consolidation loans it may seem very tempting. Debt consolidation companies promise to lower your monthly payments or even eliminate your debt all together. Again it sounds very tempting, but you should be aware of exactly what is going on behind the scenes.

When you contact a debt consolidation company the will usually ask you a series of questions concerning your home. The will want to know how much your home is worth and how much you owe on your home in order to find out how much equity you have in your home. The reason they want to know this is because they are planning on turning all your unsecured debt into secured debt by using your home as collateral.

Using your home as collateral will usually lower your interest rates considerably and in turn lower your monthly payment, but there are some serious concerns to consider. First, if you find yourself in more financial trouble in the future and can’t make the new consolidated payment you will be at risk of losing your home to foreclosure, in turn making your credit and life much worse.

The second thing to consider is that most of us spend as much money as we have every month. Freeing up extra dollars per month after debt consolidation means we have more money every month to spend on other things, things we don’t really need. This in turn causes the debt process to start all over again and you will be in much worse shape than you were before you started the debt consolidation process.

There are some instances where debt consolidation can be very helpful, but you must be a disciplined person willing to make financial sacrifices in order to better your situation. Also make sure the debt consolidation company has your best interests in mind and not their own financial gain. Do some research on any company before you give them any personal information.

Information about a bridge loan

A bridge loan is basically a short-term loan pending another loan in the near future. They are often used to close on a property in a short period of time, stop the process of forclosure on a property, or to fill an immediate need for financing to plan for long term financing.

A common use of a bridge loan among consumers is borrowing enough money to pay down on a new home before closing the sell on their current home. The profit from the sell of their old home will be used to pay off the bridge loan balance.

There are many cons of using a bridge loan because of the high risk to the lenders. Cons include much higher interest rates usually between 12% – 15%. There will also probably be more fees associated with a brige loan as well as points paid to close the loan. Typical term lengths on bridge loans are ususally less than 3 years.

Interest Only Mortgage Loan Information

Interest only mortgage loans usually have an interest only period of 5 to 10 years. During this time period the borrower only has to pay the interest on the loan. After the initial interest only time period the remaining balance is amortized for the remaining term of the loan. For example if the initial loan was a 30 year interest only loan with a 10 year term of interest only payments the remaining balance would be amortized over 20 years.

An interest only loan allows for lower payments at the front part of the loan, freeing up cash for other purposes. Many times borrowers take out this type of loan because they are expecting a raise in the near future and will be able to afford higher payment later.

The pros of interest only home mortgage loans:

• Lower monthly payments during the interest only period
• Free up cash to save for retirement
• Still get the benefit of tax savings

The cons of interest only home mortgage loans:

• Risk of declining value of real estate and being upside down at the end of the interest only period
• Higher payments after the interest only period
• Little or no equity in your home during the initial interest only period
• Higher interest rates because they are riskier loans for the lender

If used properly you can find some advantages in interest only loans; however with the poor money management skills of most Americans it’s not the best idea. If you are planning on using an interest only loan to purchase a home you can’t really afford now, it’s not a good idea. Even though you may expect more income later in life it’s not a guarantee. Research and plan very carefully before taking out an interest only loan.

Piggyback Mortgage Loan Information

A piggyback loan is a mortgage loan in which the financing is handled by two different lenders. The first lender finances a large portion of the loan, usually 80% and another seperate lender finances the remaining balance of the loan. There are three common options of piggyback loans, 80-10-10 loan, the 80-20 loan (also known as the 80-20-0 loan) and the 80-15-5 loan.

An 80-10-10 loan is when the first mortgage finance company finances 80% of the loan amount, the second finance mortgage company finances 10% of the loan balance and 10% of the balance is paid down by the purchaser. The 10% financed by the second lender is basically a second mortgage on the home.

An 80-20 loan is when the first mortgage finance company finances 80% of the loan amount and the second lender finances the remaining 20% of the loan as a second mortgage. No down payment is paid by the borrower or there is already some equity in the home.

The final typical type of piggyback loan is the 80-15-5. The first lender finances 80% of the mortgage balance. The second lender finances a second mortgage for 5% of the loan amount and 5% of the balance is paid down by the buyer.

The biggest pro of a piggyback loan is that 20% of the home value is paid for through a down payment or by the second lender. This means that the first mortgage lender doesn’t charge PMI or private mortgage insurance. Private mortgage insurance is a third party insurance required by lenders if you do not have 20% equity in your home. It protects lenders from borrowers in case they file bankrupsy. A piggyback loan reduces the loan risk of the lender because they aren’t financing the entire amount. Avoiding PMI can save you hundreds of dollars per month depending on the equity and financing terms.

There are three major cons of a piggyback loan. First, you already have a second mortgage on your home. If you ever have an emergency where you need to use your home as equity it will be very difficult since you already have a second mortgage on your home. The second major con is that the second mortgage will haev a higher interest rate than a normal loan with PMI. Sometimes the interest rate can be 2% or 3% higher. Even though your monthly payment may be lower you will end up paying more for the loan in the end. The third major con is that PMI drops off after you have 20% equity in your home. This could happen quick if you overpay your minimum monthly payments. If you don’t have a piggyback loan your payment will decrease once PMI drops off, with a piggyback loan you are stuck with the second mortgage payment until it’s completely paid off.

In my oppinion in most cases you are better off to avoid a piggyback loan. Even though you will have a smaller monthly payment up front you will pay more in the end. Do the math for you own individual situation before you close the loan!