August 16, 2010
Mortgage Advice: Home Equity Loans Can Finance an Investment Properties and Second Homes
The idea of owning investment real estate seems to be gaining popularity as investors are getting tired of the unreliable stock market. Many investors feel confident with real estate as a place to secure their future, believing that overall it will outperform cash, fixed interest deposits and other investments, particularly for the medium to long term. Second homes account for a full 40% of all homes sold in America. According to a recent annual report by the National Association of Realtors (NAR), 27.7% of all homes purchased in 2005 were investment properties and 12.2% were vacation homes.
If you are considering either an investment in income producing real estate or a vacation home, it is generally better to cash out the equity in your home rather than to move cash from other investments which are doing well for you. If you’ve been paying on your mortgage for more than five years and the interest rate is below market rate, a home equity loan would probably work better for you than a mortgage refinance. And, a home equity line of credit (HELOC) could be your best answer for your second home purchase or other real estate investment.
There are generally no closing costs with HELOCs, as opposed to home equity installment loans (HEILs). HELOCs typically have a lower interest rate than credit cards or installment loans, and they offer a lot of flexibility in features and payback options, including:
Interest-only loan payment option (based on prime rate1 + a fixed margin).
Choose to pay only the minimum, or pay down your balance and have it available for you to use again and again for on-going maintenance of the property.
10, 15, or 25-year terms available with the option to extend the equity line of credit, rather than having to apply for a new loan, if there is still an account balance at the end of the loan term.
Borrow up to 100% of property value and pay interest on only the amount you use.
Lines of credit from 20,000 up to 250,000.
A property portfolio can provide healthy long-term capital gains, appreciating assets and cash flow from rent to add to your retirement income. In addition, the interest paid on a home equity line of credit is generally fully deductible (up to a maximum of 100,000), provided the loan does not exceed the fair market value less the outstanding mortgage.
1 Prime rate is the rate published each day in The Wall Street Journal (but not the Weekend Edition of The Wall Street Journal).
July 5, 2010
Home Mortgage Loans For People With Bad Credit – Pro’s And Con’s Of Interest-Only Loans
Buying a home with poor credit is just as easy as buying a home with perfect credit. Years ago, many people with a low credit rating believed homeownership was unattainable. Fortunately,
there are various loan programs designed to help people with low income, bad credit, and no down payment purchase a house. Included among these programs are interest-only loans.
What are Interest-Only Mortgage Loans?
Interest-only mortgage loans became popular in the early 2000’s. The concept of interest-only loans is very unique. Ordinarily, monthly mortgage payments consist of a portion of the payment being applied to the principal balance, and a portion applied to the interest. In order to payoff a mortgage in 15 or 30 years, a specific amount of money must be paid each month.
On the other hand, if you obtain an interest-only mortgage loan, you pay only the interest for the first few years. Interest-only periods vary. Homeowners may opt for a three, five, seven, or ten year interest-only loan. After the interest-only period ends, the homeowner must begin making payments toward the principal and interest.
Why is an Interest-Only Loan Beneficial?
If you live in a booming housing market, an interest-only loan may be your only option for buying a home. Many are attracted to these loans because the initial mortgage payments are low. For example, a 200,000 conventional loan has a monthly payment of about 1200. With an interest-only loan, the mortgage would be about 800 a month. Hence, if you are buying in an overpriced market, affordable living is within reach.
Pitfall of an Interest-Only Loan
Once the interest-only period ends, you still owe the original loan amount. When homeowners begin making payments towards the interest and principal balance, mortgage payments may increase 40%. Most homeowners are unable to afford a mortgage increase. If you plan on living in your home for several years, an interest-only loan may not be a good option. On the other hand, if you earn a sizeable income and can afford a higher mortgage, you may benefit from this type of loan.
Another option involves selling your home before the interest-only period ends. If home values in your area have increased significantly, you may capitalize from the equity. However, if the housing market takes a nosedive and home values decline, you may be unable to sell your home.
February 15, 2010
1.25% Neg Am Loans: How Deferred Interest Mortgages is Good Home Financing
Do 1.25% interest rates really exist? Neg am mortgages calculate several mortgagerates. One is called the payment rate the other is the actual interest rate. Fortunately, the payment rate is capped at 7.5% of the previous payment. The true interest rate is calculated as simply the index plus the margin without periodic caps. When the interest rate resets to a higher rate with a negative amortization Adjustable Rate Mortgage (ARM), the mortgage payment doesn’t change. Instead, the additional interest expense is added to the loan balance.
Homeowners are given a choice of which rate to pay, which is why negative amortization loans are also referred to as “payment option” loans and option ARMs. Cost of Funds Index (COFI), Cost of Savings Index (COSI), and Monthly Treasury Average (MTA or MAT) are all examples of Alt-A negative amortization loans. The Mortgage Bankers Association of America (MBA) says alt-A loans’ share rose from 8% to 11%. Why? Because of the flexibility these loans offer, not to mention affordability for a home purchase loan or if you want to cash out on your home equity with a mortgage refinance.
Another affordable loan option is the interest only loan. With an interest-only loan, you pay only the interest on the mortgage in monthly payments for a fixed term. After the end of that term, usually five to seven years, you must refinance, pay the balance in a lump sum, or start paying off the principal, which increases your monthly payments substantially. Like neg am loans, interest-only loans are option ARMs because borrowers have the option of paying only the interest or paying principal and interest.
Negative amortization and interest-only loans can be useful if you are primarily concerned with cash flow instead of building equity. If you only pay the payment rate, the overall monthly mortgage payment might be lower than a typical 30-year, amortization loan. If you’re a short-term borrower who plans to refinance or sell the home within a period of a few years or if you have unsteady sources of income or too little documented income to qualify for a traditional loan, you may want to consider a neg am loan or an interest only home loan.
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