Jan 26
adminCheap Mortgages
More than 25% of homeowners are paying for their homes with an interest-only mortgage say the Abbey. The reason is obvious their monthly payments are much less. For example, a 125,000 interest only mortgage at an interest rate of 5% and repayable in 25 years time, costs 525 per month – but on a repayment basis the monthly cost rises by 210 to 735 per month.
Understandably, this level of cash saving has proved highly popular with first time buyers struggling to get the feet on the property ladder and others working on a tight monthly budget. But there’s a time bomb lurking. 37% of homeowners with interest only mortgages are failing to save any money for repaying the mortgage when the mortgage capital eventually becomes repayable at the end of the term.
The Financial Services Authority (FSA) is concerned about this problem so last year they ushered in new rules requiring lenders to seek evidence from new borrowers about the steps they’re taking to repay the capital. And it won’t be sufficient for the borrower to say that they intend to repay the mortgage by selling the property. From now on, the FSA is likely to judge any new mortgage that is granted as being miss-sold unless the application includes details of a verifiable repayment vehicle which is likely to generate sufficient to repay the mortgage. And, if the figures don’t stack up, the lender will be in hot water with the FSA.
The ideal type of repayment vehicle they will be looking for will be an existing personal equity plan (PEP) or an Individual Savings Account (ISA). Even the 25% tax-free cash from a personal pension plan (PPP) will be acceptable. But borrowers will have to provide evidence to the lender that these financial arrangements are in position just saying you intend to do it won’t wash!
From reactions so far, we can see that individual lenders are interpreting the FSA’s rules in different ways. For example, take the Nationwide Building Society: their new rules say that you won’t qualify for an interest only mortgage if you plan to repay using an inheritance or are relying on future pay rises. Even if you intend to fund your repayment investment from bonuses rather than from regular income, you’ll still be required to show that the bonus scheme exists and that the expected level of savings from bonuses are realistic.
However, the Nationwide Building Society will agree an interest only mortgage if you aren’t a first time buyer, the mortgage you want is less than two thirds of the new property’s value and you have at least 150,000 of net equity in your existing property.
Lots of mortgage advisers seem to agree that interest only mortgages should only be used as a last resort when income is tight. That’s because whichever investment vehicle the borrower uses to repay the mortgage, the investment returns are never guaranteed and it could fail to deliver sufficient capital at the end of the term to fully repay the mortgage. This means there’s an element of risk involved. Therefore, many advisers prefer to be sure and recommend a repayment mortgage where there is absolutely no risk of a shortfall.(They may have in mind the desirability of avoiding any risk exposure within the advice they provide although this is covered by their professional indemnity insurance!)
Having said that, some advisers will acknowledge that an interest only mortgage can be useful if the borrower plans to simply shelter under the mortgage’s lower repayments as a temporary stop gap of say four or five years, and then switch to a repayment mortgage. Of course, the FSA will still expect the borrower to provide evidence to the lender that a suitable investment or savings plan is in place prior to the borrower releasing the interest only mortgage.
However, in our view, if advisers do recommend an interest only mortgage, they should recommend a scheme where the borrower can make penalty free overpayments. With such mortgages, the borrower is only committed to paying the monthly interest, but as and when spare capital becomes available, money can be paid in to reduce the outstanding mortgage. There are plenty of mortgages available like this. Most allow the borrower to repay at least 10% of capital each year, penalty free, but please check the details before you sign up for the mortgage.
Jan 19
adminCheap Mortgages
When you are dealing with mortgages, it is important to check twice the calculation as well as the English when the lenders specify the word No cost Mortgages.
The fact is that no cost mortgage means it will cost something, now the question arises in your mind how much it cost the answer is the cost depends on what kind of mortgage you plan to go. There are two types of basic cost involved while getting mortgage, In one type of cost the lender cannot control that includes the appraisal cost, filing fees, title search, attorney fees etc, and the next type of cost is the lenders cost that is loan application fees, credit check, admin fees and processing fees etc, with out which nothing is possible.
To few lenders no cost means they do not want any cost from their pockets, all the cost will be added in the loam amount, for instance the loan cost is 5,000 and you plan to borrow 150,000 in this case the 3,000 gets added up with the loan, and ultimately you will be borrowing 1,53,000 that is with interest for the entire amount. In this case when you take 30 years loan at 6.25% rate interest the monthly interest with principal is 942.05 and the interest is 18.47, which is 18.47 per month more than 923.58 you would make on 153,000. You may not realize you are paying interest for 3,000 every month until you clear the entire amount, in addition to that this 3,000 wont be paid off till the 20th month of mortgage well into the subsequent year its only after 19th payment that the principal you owe will reduce below 150,000 to be exact 149,948.25.
How does this sounds to you, this is the way no cost mortgage works, you pay accumulated interest on unpaid balance of the loan every month and to pay off the 3,000
You would be paying 18.47 besides the interest you pay for 1,50,000. So if you have paid that 3,000 from your pocket you would be paying the interest with principal for the actual amount you are borrowing, just by the word no cost mortgage you dont start paying the loan until your loan reached 20 months.
In some cases you may not pay any cost in the beginning but you will end up paying with closing cost and sometimes the lender will take in charge of paying all the cost like application fees, commission, attorney fees and then in turn charge the borrower with high interest rate.
By this time you could get a clear idea how much it will cost you for no cost mortgage
No cost loans are very expensive, just because its convenient that you dont spend a penny from your pocket it is better, in a long run it cost you more than to spend from your pocket, so it is important to remember that you are not really saving money by opting for no cost mortgage.
Jan 12
adminCheap Mortgages
Interest rates can affect the type of mortgage you choose and dictate when its wise to make a change. Here are a few of the factors that can be affected by a swing in interest rates:
Choosing a mortgage
When interest rates are rising, a fixed-rate mortgage is usually a good choice, since it locks in the current rate and protects you from the higher rates to come. When rates are falling, an adjustable-rate mortgage (ARM) becomes more attractive, as its interest rate changes periodically (usually every one, three, or five years), allowing you to benefit from the new, lower rates.
Some people choose an ARM even when rates are rising. This is because the interest rate on an ARM is substantially lower — as much as two percentage points lower than that of a 30-year fixed-rate mortgage. That means youll pay less until mortgage rates have increased a full two percentage points. After that, youll pay more than a fixed rate.
There are also hybrid ARMs, which have a fixed rate for a certain time period — typically three to 10 years — and then become adjustable. (A 51 ARM, for example, has a fixed rate for five years, after which the interest rate is adjusted annually.) Hybrid ARMs can be the right choice if rates are likely to rise in the short-term but then flatten or fall. However, these long-term trends can be difficult to predict.
Refinancing
A change in the interest rate trend can make it worthwhile to switch to a different type of mortgage. When rates are falling, you can save money by moving from a fixed-rate to an adjustable-rate mortgage, so you can benefit from the lower rates. If interest rates appear set for a sustained rise, switching from an ARM to a fixed-rate mortgage can lock in a lower rate and protect you from higher payments. However, you should make sure that any closing costs dont offset the benefits of refinancing.
For more information on mortgages and interest rates, visit http:www.lendingtree.comcecyourhomeyourmortgageinterest-rate-trends.asp?
Jan 05
adminCheap Mortgages
Many people make a major mistake when applying for a mortgage. They are so relieved to get the loan that they fail to pay attention to prepayment penalties in the loan documents.
Prepayment Penalties
With the refinance craze of the last few years, many borrowers have been surprised to find they are locked into their loan with prepayment penalties. Boiled down, these penalties require borrowers to pay fees if they pay off the loan prior to a certain point in time. By including such language in the loan documents, some lenders are trying to ensure they will recover a certain amount in interest on a loan as well as reach a certain maturity date on the loan. Lucky you.
Prepayment penalties come in a variety of forms. First and foremost, state law controls the amount and types of penalties that can be charged by a lender. Of course, this means each state has different laws and you should make sure you understand what can be done in yours.
As to the payments themselves, they typically come in two forms. The first is a percentage of the overall loan For instance, assume you have a 400,000 mortgage and the prepayment penalty is 3 percent. Your prepayment penalty will be 12,000. This is typically true even if you are selling your home because of financial difficulties.
In some states, prepayment penalties can come in the amount of interest to be charged over a period. Assume you are paying 2,000 a month in interest on your loan. The prepayment penalty may be something equal to 10 months of interest from the date of prepayment. Put another way, you are looking at a 20,000 prepayment penalty. Obviously, such a payment is going to be a dent in any profit you would pull from the home.
Lenders are not required to identify prepayment penalty language in loan documents. You absolutely must read your loan documents to make sure penalties arent included.
Prepayment penalties are not mandatory in loan documents. If a lender refuses to waive the penalties, make sure to shop around for a better deal. Dont get pounded on the back end of the loan.
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