Nov 24
adminCheap Mortgages
Buying a home, like any other big purchase, ought to be done only after one has taken all measures to ensure that they are educated, informed, and prepared. There is nothing more gut wrenching and heart breaking, not to mention just downright depressing, than committing yourself to a six-figure debt only to find out that you didnt actually pick the best kind of debt for yourself. Now, I know that some of you, like me, were taught that debt was a bad thing. Well, that is half true. There are too kinds of debt, responsible and irresponsible. Irresponsible debt will be a topic for a future article but I think it, well, responsible, to talk about responsible debt as it pertains to the purchase of a house. The house purchase is generally considered an all around good idea. The debt is usually considered responsible across the board. There are, however, varying degrees of responsible debt even within the boundaries of the house purchase. Having said that, I would like to take a look at what an interest only mortgage is, whom it is designed for, what the rewards are, and what the long-term implications are.
What is an Interest Only Mortgage?
An interest only mortgage is almost exactly what it sounds like. There is indeed a principle amount that goes along with it and you will indeed be held responsible for the reimbursement of that principle loan. As the layman would say, if you borrow 100 and you only pay the interest for a while, you still eventually have to pay the 100 back. What an interest only mortgage does is allow you to, for a certain period of time, only pay towards the interest of the your loan. It doesnt cut down the principle at all, at least not until the designated period is up (usually 5 years).
Who is the Interest Only Mortgage Designed For?
The interest only mortgage is designed for the homebuyer that is on a tight budget, or the homebuyer that wants to buy something that is out of their price range. I suppose that in both situations the homebuyer cannot afford the house but in one case they dont earn enough to buy anything and in the other, they just want to be able to live outside of their means. But, nonetheless, the interest only mortgage is for both of them. This loan is also designed for people who are fairly certain that their income will be increasing within the next few years because, unlike a fixed rate loan, the payments on an interest only loan do rise.
What Are The Rewards?
There are some really great rewards to an interest only loan. Because you only are paying the interest and none of the principle, the amount of your monthly payment decreases. On an average size of, lets say 200,000, it will save you around 175-200 per month in payments. For someone on a tight budget, that is a big difference. On a 1 million pound loan the savings will approach 1,000 per month. The downside to it is that after the first 5 years (or whatever the term is that you have worked out for the interest only part) your payments will jump up and be higher than they constant payments on a fixed rate loan. It is definitely a nice way to get into something that you cannot afford now but are sure you will be able to afford later. It is also nice for someone who is interested in buying a house and reselling it in a few years for a profit as the money paid into it, the all around total investment, will be less.
What Are The Long Term Implications?
Speaking of the long term is where the interest only loan begins to get scary. Imagine that you take an interest only loan for 100,000 and begin making payments. Because you are paying only the interest the payment would drop from the average fixed rate payment of around 600 per month to 500 or so for the interest only loan. You continue in this manner for five years and then the remaining balance is converted into a fixed rate loan. You still have an outstanding balance of 100,000 but now you only have 25 years to pay it off instead of 30. In the end you will wind up paying 8000 to 10,000 more over a 30-year period. If, however, you do not plan on actually staying in that house for 30 years, the long term implications is not that important.
Conclusion
As I see it, if you are trying to get a house that you want to stay in until you are old enough to leave it to your grandchildren, perhaps the interest only mortgage is not the best option for you. It would be better in the long run to go with something else, something that will not cost so much in interest. But, if you are young, nomadic, or on your way up the corporate ladder, this is definitely something to consider. This type of mortgage will allow you to get into a pricier house, have a little extra money for upgrades, and then sell it in a few years for a large profit when that job promotion forces you to move to another city. It is a great way to save money in the beginning but can be a real gamble if you stick it out for the long haul. And, as always, sit down with a trained professional who knows your situation, your needs, and your desires. They will be the best assets you have when it comes to your assets!
Nov 17
adminCheap Mortgages
Interest Only Mortgages FSA Makes Move To Protect Homeowners
Abbey recently stated that over 25% of homeowners decide to take out an interest-only mortgage. It’s not hard to see why the monthly payments are significantly less, just look at this example based on a 25 year 125,000 mortgage at 5%. The interest only mortgage will cost 525 per month – but the repayment mortgage is 735 per month an additional 210 a month that’s a lot of money!
At the root of the issue are the first time buyers they simply can’t afford the repayment mortgage, so take the interest only option as an easier way out. However, the interest only mortgage must be accompanied by a suitable savings vehicle to cover the outstanding capital at the end of the mortgage term, and it is this that many are failing to do as many as 37% in fact.
Now the Financial Services Authority (FSA) has stepped in, concerned that many homeowners will face a shortfall at the end of their mortgage term. It is now necessary for lenders to see firm evidence from new borrowers that they have set up a savings vehicle to cover the capital. Previously, borrowers just had to state their intention, for example, they would sell the property to raise the capital. However, that will no longer be good enough. The lender will need to see a proper plan set up they are not allowed to set you up on an interest only mortgage without that proof. If they did, they would be going against regulations and would be penalised by the FSA.
The lender will now need to see proof of a personal equity plan (PEP), an Individual Savings Account (ISA), or evidence that 25% tax-free cash from a personal pension plan (PPP) will ultimately cover the outstanding capital. It will no longer be good enough to say that you will set it up you must show that you have already sorted it out!
In the short time that the new regulations have been in force, individual lenders are already making their own interpretations of the rules. The Nationwide Building Society is not allowing borrowers to use a future inheritance, or future pay rises as a basis on which to set up an interest only mortgage. Similarly, expected bonuses will not be good enough either, not unless you can prove that you will definitely be receiving them. Bonuses based on performance can’t be guaranteed, so would not count.
People that already have their own home will not be subjected to the same rigorous checks however. As long as you are borrowing less than two thirds of the new property’s value, and you have 150,000 of net equity in your current home, then Nationwide will accept you as a customer.
On the whole, mortgage advisers will not recommend interest only mortgages, agreeing that they represent too much risk. Repayment mortgages guarantee that all monies owed are paid at the end of the term, but a separate savings vehicle could fail to live up to expectations, and you could end up with a shortfall. Most mortgage advisers will recommend a repayment mortgage to bypass that risk.
On the other hand, the interest only mortgage is a useful short term solution, and if you can assure your mortgage adviser that you intend to switch over to a repayment mortgage as soon as you can afford to, they may well support your decision. Even in this case however, you will still need to provide the same details as if you were intending to stick with it for the full term. You simply won’t be able to get an interest only mortgage without providing the right paperwork.
The best all round solution is to get an interest only mortgage that allows you to overpay. So if you find that you have some extra capital, you can put it onto your mortgage, and reduce the capital. These types of mortgage are widely available, and many allow you to repay 10% or more in a single year. Of course, if you can’t afford it, then you don’t have to at least you have the choice. Just make sure, before signing up, that you can overpay without penalty.
Nov 10
adminCheap Mortgages
Planning for a new home, new property and other finances for the first time is not only a question of gathering money– it is a building a dream to create heaven for you and your loved ones. Though it is a hard fact that getting a mortgage loan is always a question of liability.
Houston based first time home mortgage companies offer easy solutions for those who are mortgaging for the first time.
They welcome first time homebuyers by offering programs to help you first-time homeowners by the home of their dreams. With their help you may qualify for low interest rates and reduced tax rates through the Housing Finance Agency (HFA) and the Mortgage Credit Certificate (MCC) program can help with reduced taxes. There are also low down payment loans available to qualified first time buyers and many more options.
Most Houston mortgage lenders offer first time buyers many loan options and assist the buyer in finding the best loan for them. For The Federal government has developed two loan programs to assist homebuyers that have a little or no down payment. These programs are called the Federal Housing Administration (FHA) and the Veteran’s Administration (VA). These programs are not solely intended for first time buyers, and your loan advisor will be able to determine if you qualify for either program. FHA and VA loans can be especially advantageous when combined with a HFA or MCC first time buyer program.
First time buyer programs are designed to help borrowers who may not have enough money to pay the full cost of the down payment or the closing costs on a mortgage. These programs make obtaining a mortgage more cost effective.
Nov 03
adminCheap Mortgages
Home Improvement Advice: Home Equity Credit Lines Versus Fixed Rate Second Mortgages
Are you thinking about mining the equity for a home improvement loan, but are wondering if you have missed the boat not doing a refinance and cashing out? There are still many home equity loans available that may suit your needs without breaking the bank with payments. “Home-equity loans have been growing at a large clip for years,” notes Wells Fargo spokeswoman Mary Berg. “It’s definitely slowed, but people are still borrowing. They’re finding other products that are more flexible in this rate environment.” Its true that there are many options for consumers these days and home equity loans are available as a credit line with variable interest, as a fixed rate mortgage, and you can even find a second mortgage with interest only payments for a set period.
A home equity line of credit generally has a variable interest rate tied to the prime index, which is published daily in the Wall Street Journal. The rate is dictated by the Federal Reserve. This loan works differently from a standard second mortgage. The HELOC is a revolving line of credit that works like a credit card, but is secured by your home. You are able use the line for as long as the draw period lasts. Although the rates are better than credit cards, there is still a variable interest rate and variable payments. This can be a good loan for home improvements if you plan on paying it off in a short period of time. Some HELOCs have interest-only payments for the first few years as incentive to utilize the product.
If you would rather have a fixed payment to hedge against inflation and the fact that all your bills will continue to increase, a standard second mortgage with a fixed interest rate may work best for you. The payments may be higher than a loan with an interest only payment period, but you can be certain of how much you are paying monthly down the road as well. An adjustable rate mortgage in a market with rising interest rates can be daunting.
Keep in mind with all second mortgages you are borrowing against your house, which means if the payments become too much for you to handle, you will lose your home. If you are smart about utilizing your equity, however, it can be used to your advantage.
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