Should you pay off your mortgage early? If you’ve come through the recent economic crisis in a position to be able to make additional payments on your home loan Middletown, this may sound like an attractive option. It’s a safe, conservative financial strategy that many find appealing after being put through the financial wringer the past few years.
But it still may not be the smart thing to do. True, the practice of making double payments or otherwise paying a extra on one’s mortgage each month was long considered a hallmark of sound financial planning. But that was a different era and today, what made sense in the past may no longer be your best course of action.
The reason for paying down your mortgage early, of course, is to save money. Making bigger payments now reduces the interest you’ll have to pay over the life of the loan, perhaps by tens of thousands of dollars. It also moves up the date you’ll own the home free and clear, and eliminating the monthly mortgage payment from your budget completely.
Mortgage tax benefits reduce effective savings
But how much are you actually saving? If you purchased or refinanced your home in the past few years, probably not much. Because mortgage interest is tax-deductable, it reduces the effective interest rate you’re paying by about one-quarter. So if you’re paying 6 percent interest, your effective rate is likely around 4.5 percent, perhaps lower.
What this means is that any additional money paid toward your mortgage is effectively earning you a return of 4.5 percent – money saved is money earned, literally. If you’re in a higher tax bracket, the figure could be even lower.
The fact is, there are any number of fairly conservative investment approaches where you can earn a better than 4.5 percent return. Although the stock market took a big hit in 2008, the historic rate of return since the 1950s has averaged nearly 11 percent a year, including the recent downturn. Including bonds or investing in funds that include stocks and bonds can help even out the sharp peaks. If you’re looking at an investment period of 20 years or more, investing will nearly always provide a better return.
This wasn’t necessarily the case 20 or 30 years ago, when mortgage rates Middletown were running around 10 percent or even higher. Back then, paying down your mortgage as quickly as possible made much more sense.
Retirement saving, other needs may be more important
One of the other downsides of paying off your mortgage early is that it may distract you from other financial needs, such as saving for retirement. Paying off your mortgage early won’t do you much good if you don’t have a solid income to help you enjoy your home in your golden years – and most people don’t save nearly enough.
An IRA or Roth IRA also offer tax advantages that effectively increase their earning power, just the opposite of what happens with the tax deductions on your mortgage interest, which effectively reduce the return you get on paying off your mortgage early.
Also, you shouldn’t look to accelerate your mortgage payoff Middletown at the cost of personal savings. Most people don’t have nearly enough of an emergency fund held in reserve and you can’t count on being able to tap home equity if you need to in an emergency – such as if you lose your job, which will make your lender suddenly reluctant to extend you credit.
It’s a good idea to have a savings reserve equal to six months’ expenses, or at least three months, to tide you through emergencies. The fund doesn’t even have to be in a savings account, you can have most of it tied up in mutual funds or other equities, provided that you can quickly convert them to cash if need be.
Showing posts with label first-time home buyers new jersey. Show all posts
Showing posts with label first-time home buyers new jersey. Show all posts
Wednesday, April 14, 2010
Mortgage Brokers vs Mortgage Lenders
One of the most confusing parts of the mortgage process Middletown can be figuring out all the different kinds of lenders that deal in home loans and refinancing. There are direct lenders, retail lenders, mortgage brokers, portfolio lenders, correspondent lenders, wholesale lenders and others.
Many borrowers simply head right into the process and look for what appear to be reasonable terms without worrying about what kind of lender they’re dealing with. But if you want to be sure of getting the best deal, or are looking for a jumbo loan or have other special circumstances to address, understanding the different types of lenders involved can be a big help.
Explanations of some of the main types are provided below. These are not necessarily mutually exclusive - there is a fair amount of overlap among the various categories. For example, most portfolio lenders tend to be direct lenders as well. And many lenders are involved in more than one type of lending – such as a large bank that has both wholesale and retail lending operations.
Mortgage Lenders vs. Mortgage Brokers
A good place to start is with the difference between mortgage lenders and mortgage brokers.
Mortgage lenders Middletown are exactly that, the lenders that actually make the loan and provide the money used to buy a home or refinance an existing mortgage. They have certain criteria you have to meet in terms of creditworthiness and financial resources in order to qualify for a loan, and set their mortgage interest rates and other loan terms accordingly.
Mortgage brokers Middletown, on the other hand, don’t actually make loans. What they do is work with multiple lenders to find the one that will offer you the best rate and terms. When you take out the loan, you’re borrowing from the lender, not the broker, who simply acts as an agent.
Often, these are wholesale lenders (see below) who discount the rates they offer through brokers compared to what you’d get if you approached them directly as a retail customer. However, the broker then tacks on his or her own fee, which may equal the discount – where the customer usually saves money is by getting the best deal relative to other lenders.
Many borrowers simply head right into the process and look for what appear to be reasonable terms without worrying about what kind of lender they’re dealing with. But if you want to be sure of getting the best deal, or are looking for a jumbo loan or have other special circumstances to address, understanding the different types of lenders involved can be a big help.
Explanations of some of the main types are provided below. These are not necessarily mutually exclusive - there is a fair amount of overlap among the various categories. For example, most portfolio lenders tend to be direct lenders as well. And many lenders are involved in more than one type of lending – such as a large bank that has both wholesale and retail lending operations.
Mortgage Lenders vs. Mortgage Brokers
A good place to start is with the difference between mortgage lenders and mortgage brokers.
Mortgage lenders Middletown are exactly that, the lenders that actually make the loan and provide the money used to buy a home or refinance an existing mortgage. They have certain criteria you have to meet in terms of creditworthiness and financial resources in order to qualify for a loan, and set their mortgage interest rates and other loan terms accordingly.
Mortgage brokers Middletown, on the other hand, don’t actually make loans. What they do is work with multiple lenders to find the one that will offer you the best rate and terms. When you take out the loan, you’re borrowing from the lender, not the broker, who simply acts as an agent.
Often, these are wholesale lenders (see below) who discount the rates they offer through brokers compared to what you’d get if you approached them directly as a retail customer. However, the broker then tacks on his or her own fee, which may equal the discount – where the customer usually saves money is by getting the best deal relative to other lenders.
Saturday, April 10, 2010
ARMs a Good Investment?
One of the most innovative mortgages we've seen in a very long time is a new adjustable-rate mortgage Reevytown with some very compelling features. First, it's based on an institutional rate benchmark known as Bankers Acceptance. Most of us are familiar with the rate benchmark - and we are accustomed to assessing mortgage rates based on it. The BA, on the other hand, is the rate at which banks will lend money to one another - and it's typically a lower rate (sometimes much lower) than the prime rate offered to a bank's best customers. The new BA-based mortgage - compared to the best prime-based mortgage available - could have saved a mortgage client a bundle over the last several years, primarily because the prime rate tends to be "stickier" in an environment where rates are falling. Often, the more fluid, market-based BA rates deliver the rate change more quickly. The BA rate is no trade secret, by the way; pick up a copy of your favourite financial paper and look for the published money rates to find the Bankers Acceptance Rate.
But the attractive rate structure is not the only perk. The same BA-based mortgage - so welldesigned to help clients wring the last quarter point from their mortgage rate - now also comes with a rate cap which guarantees that your rate will never climb higher than 2.15% above the starting base rate - no matter what happens to rates during your mortgage term. There's no worry about locking in too high because the rate is always adjustable down.
Only the ceiling is fixed. It's a homebuyers' dream:
A mortgage with limited upside and unlimited downside. If you're thinking about buying a home this year, or you haven't had your mortgage reviewed in the last several months, take the opportunity to get an expert assessment of your many options from a mortgage professional Reevytown. It could be the best investment you'll make this year!
But the attractive rate structure is not the only perk. The same BA-based mortgage - so welldesigned to help clients wring the last quarter point from their mortgage rate - now also comes with a rate cap which guarantees that your rate will never climb higher than 2.15% above the starting base rate - no matter what happens to rates during your mortgage term. There's no worry about locking in too high because the rate is always adjustable down.
Only the ceiling is fixed. It's a homebuyers' dream:
A mortgage with limited upside and unlimited downside. If you're thinking about buying a home this year, or you haven't had your mortgage reviewed in the last several months, take the opportunity to get an expert assessment of your many options from a mortgage professional Reevytown. It could be the best investment you'll make this year!
Can You Get Perks Out of an ARM?
These are heavy days for homeowners. If you've been in your home even a few years, you've probably already enjoyed a modest climb in the value of your home. Even if you don't intend to sell, it's good to know that your real estate investment is doing well. But we're also enjoying an environment in which mortgage rates Reevytown have reached historic lows.
That combination -- strong valuations and low mortgage rates -- has an unprecedented number of homeowners looking for ways to capitalize on the great opportunities available to them.
Whether it's to buy their first home, trade up, or take equity back out of their homes, homeowners are jumping at the opportunity to borrow at today's rock-bottom rates.
While many homebuyers are reconsidering the value of fixed-rate mortgages to lock in those low rates, you should keep in mind that adjustable-rate mortgages Reevytown - the darling of the dropping rate trend - can still offer real value to homeowners. It's a matter of finding the right combination of mortgage features and options.
As banks have been joined by other lending institutions, we have seen our menu of New Jersey mortgage options grow accordingly - with some innovative new mortgage types now available to help homeowners take advantage of today's unusual opportunities.
That combination -- strong valuations and low mortgage rates -- has an unprecedented number of homeowners looking for ways to capitalize on the great opportunities available to them.
Whether it's to buy their first home, trade up, or take equity back out of their homes, homeowners are jumping at the opportunity to borrow at today's rock-bottom rates.
While many homebuyers are reconsidering the value of fixed-rate mortgages to lock in those low rates, you should keep in mind that adjustable-rate mortgages Reevytown - the darling of the dropping rate trend - can still offer real value to homeowners. It's a matter of finding the right combination of mortgage features and options.
As banks have been joined by other lending institutions, we have seen our menu of New Jersey mortgage options grow accordingly - with some innovative new mortgage types now available to help homeowners take advantage of today's unusual opportunities.
Wednesday, February 10, 2010
ARMs Still Have Some Merits
Looking to get the best possible interest rate on a home mortgage or mortgage refinance? You might consider an adjustable rate mortgage (ARM). Although ARMs are somewhat out of favor these days, for many borrowers they can still be a sensible, and even the best, choice for their particular circumstances.
ARMs acquired a bad reputation in the collapse of the subprime mortgage market, when they were a major share of the mortgages that defaulted and led to the crisis. As a result, many borrowers now regard them as risky, exotic-type loans full of potential pitfalls to snag the unwary.
The truth is, ARMs are a fairly standard and well-established type of mortgage loan. Unfortunately, many lenders used them as a way to offer credit to marginally qualified borrowers, often coupled with “exotic” variations like interest-only payments, resulting in loans that could not be sustained unless housing prices continued to rise. When prices fell, the loans began to default.
But for well-qualified borrowers with a realistic view of their finances, an adjustable rate mortgage can be a sound decision. Initial rates on ARMs often run about half a percentage point less than comparable 30-year fixed-rate loans – a savings of roughly $75 a month on a $250,000 loan – so the savings can be significant.
You’re not likely to qualify for an ARM or any other mortgage these days if you’re a bad credit risk, and exotic wrinkles such as interest-only or negative amortization payments have all but disappeared. Instead, if you get an adjustable rate mortgage these days it’s likely to be a standard ARM that starts out at a fixed interest rate for a number of years (often 3, 5 or 7 years), then periodically resets to a different rate based on predetermined index, such as Treasury securities or the Cost of Funds Index (COFI).
A sensible choice for some borrowers
For certain groups of borrowers, a standard-type ARM can actually be a better option than a “plain vanilla” fixed-rate mortgage. For example, suppose you only plan to remain in the home for 5-7 years. A 7-year ARM (which is fixed at the initial rate for seven years before resetting) locks you into a lower interest rate for at least seven years, and you can sell the house and pay off the rest before it ever resets.
Another candidate for an ARM is a new home buyer who’s just beginning to establish their credit or suffered a credit setback recently. Such a buyer will have to pay a higher interest rate than a borrower with pristine credit; getting an ARM allows them to minimize their rate for several years while building or rebuilding their credit. Then, when they’re built up their credit, they can refinance at the low rates that are available to prime borrowers.
ARMs are also a good strategy during times when market interest rates are running relatively high and the borrower expects they will fall back down in a few years, when the loan can be refinanced at a lower rate. However, given that rates are relatively low currently, that is not likely to be a strategy one would pursue at this time.
Take the long view
The key thing when taking out an ARM, either for a home purchase or refinance, is to be confident you’ll be able to refinance the loan a few years down the road when it’s time for the rate to reset. Because rates can gradually drift much higher once the initial fixed-rate period is over, you don’t want to stay in the same loan for 30 years or however long the full term is. You want to be confident that both your income and housing prices will remain relatively stable, so that you’ll have equity in the home and be able to qualify for a new loan when the time comes.
ARMs acquired a bad reputation in the collapse of the subprime mortgage market, when they were a major share of the mortgages that defaulted and led to the crisis. As a result, many borrowers now regard them as risky, exotic-type loans full of potential pitfalls to snag the unwary.
The truth is, ARMs are a fairly standard and well-established type of mortgage loan. Unfortunately, many lenders used them as a way to offer credit to marginally qualified borrowers, often coupled with “exotic” variations like interest-only payments, resulting in loans that could not be sustained unless housing prices continued to rise. When prices fell, the loans began to default.
But for well-qualified borrowers with a realistic view of their finances, an adjustable rate mortgage can be a sound decision. Initial rates on ARMs often run about half a percentage point less than comparable 30-year fixed-rate loans – a savings of roughly $75 a month on a $250,000 loan – so the savings can be significant.
You’re not likely to qualify for an ARM or any other mortgage these days if you’re a bad credit risk, and exotic wrinkles such as interest-only or negative amortization payments have all but disappeared. Instead, if you get an adjustable rate mortgage these days it’s likely to be a standard ARM that starts out at a fixed interest rate for a number of years (often 3, 5 or 7 years), then periodically resets to a different rate based on predetermined index, such as Treasury securities or the Cost of Funds Index (COFI).
A sensible choice for some borrowers
For certain groups of borrowers, a standard-type ARM can actually be a better option than a “plain vanilla” fixed-rate mortgage. For example, suppose you only plan to remain in the home for 5-7 years. A 7-year ARM (which is fixed at the initial rate for seven years before resetting) locks you into a lower interest rate for at least seven years, and you can sell the house and pay off the rest before it ever resets.
Another candidate for an ARM is a new home buyer who’s just beginning to establish their credit or suffered a credit setback recently. Such a buyer will have to pay a higher interest rate than a borrower with pristine credit; getting an ARM allows them to minimize their rate for several years while building or rebuilding their credit. Then, when they’re built up their credit, they can refinance at the low rates that are available to prime borrowers.
ARMs are also a good strategy during times when market interest rates are running relatively high and the borrower expects they will fall back down in a few years, when the loan can be refinanced at a lower rate. However, given that rates are relatively low currently, that is not likely to be a strategy one would pursue at this time.
Take the long view
The key thing when taking out an ARM, either for a home purchase or refinance, is to be confident you’ll be able to refinance the loan a few years down the road when it’s time for the rate to reset. Because rates can gradually drift much higher once the initial fixed-rate period is over, you don’t want to stay in the same loan for 30 years or however long the full term is. You want to be confident that both your income and housing prices will remain relatively stable, so that you’ll have equity in the home and be able to qualify for a new loan when the time comes.
Window of Opportunity Closing Soon for Home Buyers
Is time running out to get a great deal on a home? To listen to some accounts, you would think so.
One the one hand, it’s true that several things will happen this April that will add to the cost of buying a home. First, the income tax credits for first-time and repeat homebuyers will expire; the Federal Reserve will cease its purchases of mortgage-backed securities, which have kept interest rates down; and the FHA will increase the insurance premium it charges on mortgages it insures.
At the same time, several other factors still urge caution. It’s never a good idea to rush into a home purchase, regardless of the financial incentives. Also, there are indications that housing prices in many areas may continue to weaken through 2010, potentially cancelling out the effects mentioned above. Finally, persons with less-than-perfect credit or limited finances may actually be better off waiting a year or two, rather than try to jam a purchase through right now and pay a premium to do so.
The $8,000 first-time homebuyer and $6,500 repeat homebuyer tax credits can only be taken on homes for which sales contracts are signed by April 30, though buyers have until June 30 to actually close the sale. Congress already extended and expanded the credit after it was originally due to expire last November; there doesn’t seem to be much support for extending it again, so if you miss the April 30 deadline, you’re probably out a luck on this one.
A potentially bigger impact will occur on when the Fed buys the last of $1.25 trillion in mortgage securities it has been purchasing over the past year. Also scheduled to conclude on April 30, the program has been credited for driving mortgage interest rates to record lows in the spring and again in the fall of 2009, and keeping them at or below 5 percent for most of the year.
Though 30-year fixed rates held steady around 5 percent through Jan. 2010, most observers expect them to rise sharply once the Fed purchase program concludes. Many observers expect rates to almost immediately shoot up to 6 percent and hold there, an increase of a full percent. On a $250,000 30-year loan, that 1 percent translates to an additional $150 a month, or $1,800 a year.
Finally, in early April the FHA is increasing the mortgage insurance premium it charges on all loans by half a percent, from 1.75 percent to 2.25 percent. A onetime fee charged upfront at the time of closing, it means that the premium on a $150,000 FHA loan would increase by $750, to $3,375. However, this only applies only to borrowers seeking an FHA-backed loan, although those are making up a larger share of the market.
Reasons to wait
Clearly, if you’re in a position to buy now, go ahead and do so. But that doesn’t mean you’re out of luck if you miss the April deadlines. As mentioned above, even though housing prices appear to be bottoming out nationally, many areas still remain soft. With another glut of foreclosures due to come on the market, some areas could see prices decline another 5-10 percent in 2010, which would help make up for missing out on the current low rates and tax credits.
It also might make sense to wait if you don’t have a great credit score or if you can’t come up with 20 percent down payment. Many lenders these days want to see a credit score of at least 720 to approve a mortgage. Lower scores can still be approved, but will pay a premium to do so. The combination of a low credit score and small down payment could end up adding 1-1 ½ percent onto your interest rate. Also, if you can’t come up with at least a 20 percent down payment, you’ll need to pay for private mortgage insurance, the cost of which is roughly equal to another half a percent in interest. So even if average rates go up, you might be better off waiting a year or two to improve your credit and save up a down payment, so that you can qualify for a prime rate.
Finally, a home is a huge investment – for most people, the biggest they’ll ever make. It’s not something you want to rush into unprepared, regardless of the financial incentives. If you can’t find the home you want in a neighborhood you like, or if buying a home right now is going to put you under a heavy financial strain, you might be better waiting. Saving a few thousand dollars isn’t worth it if you end up in a home that isn’t right for you.
One the one hand, it’s true that several things will happen this April that will add to the cost of buying a home. First, the income tax credits for first-time and repeat homebuyers will expire; the Federal Reserve will cease its purchases of mortgage-backed securities, which have kept interest rates down; and the FHA will increase the insurance premium it charges on mortgages it insures.
At the same time, several other factors still urge caution. It’s never a good idea to rush into a home purchase, regardless of the financial incentives. Also, there are indications that housing prices in many areas may continue to weaken through 2010, potentially cancelling out the effects mentioned above. Finally, persons with less-than-perfect credit or limited finances may actually be better off waiting a year or two, rather than try to jam a purchase through right now and pay a premium to do so.
The $8,000 first-time homebuyer and $6,500 repeat homebuyer tax credits can only be taken on homes for which sales contracts are signed by April 30, though buyers have until June 30 to actually close the sale. Congress already extended and expanded the credit after it was originally due to expire last November; there doesn’t seem to be much support for extending it again, so if you miss the April 30 deadline, you’re probably out a luck on this one.
A potentially bigger impact will occur on when the Fed buys the last of $1.25 trillion in mortgage securities it has been purchasing over the past year. Also scheduled to conclude on April 30, the program has been credited for driving mortgage interest rates to record lows in the spring and again in the fall of 2009, and keeping them at or below 5 percent for most of the year.
Though 30-year fixed rates held steady around 5 percent through Jan. 2010, most observers expect them to rise sharply once the Fed purchase program concludes. Many observers expect rates to almost immediately shoot up to 6 percent and hold there, an increase of a full percent. On a $250,000 30-year loan, that 1 percent translates to an additional $150 a month, or $1,800 a year.
Finally, in early April the FHA is increasing the mortgage insurance premium it charges on all loans by half a percent, from 1.75 percent to 2.25 percent. A onetime fee charged upfront at the time of closing, it means that the premium on a $150,000 FHA loan would increase by $750, to $3,375. However, this only applies only to borrowers seeking an FHA-backed loan, although those are making up a larger share of the market.
Reasons to wait
Clearly, if you’re in a position to buy now, go ahead and do so. But that doesn’t mean you’re out of luck if you miss the April deadlines. As mentioned above, even though housing prices appear to be bottoming out nationally, many areas still remain soft. With another glut of foreclosures due to come on the market, some areas could see prices decline another 5-10 percent in 2010, which would help make up for missing out on the current low rates and tax credits.
It also might make sense to wait if you don’t have a great credit score or if you can’t come up with 20 percent down payment. Many lenders these days want to see a credit score of at least 720 to approve a mortgage. Lower scores can still be approved, but will pay a premium to do so. The combination of a low credit score and small down payment could end up adding 1-1 ½ percent onto your interest rate. Also, if you can’t come up with at least a 20 percent down payment, you’ll need to pay for private mortgage insurance, the cost of which is roughly equal to another half a percent in interest. So even if average rates go up, you might be better off waiting a year or two to improve your credit and save up a down payment, so that you can qualify for a prime rate.
Finally, a home is a huge investment – for most people, the biggest they’ll ever make. It’s not something you want to rush into unprepared, regardless of the financial incentives. If you can’t find the home you want in a neighborhood you like, or if buying a home right now is going to put you under a heavy financial strain, you might be better waiting. Saving a few thousand dollars isn’t worth it if you end up in a home that isn’t right for you.
Monday, February 1, 2010
Avoiding Prepayment Penalties
Prepayment penalties, also known as cancellation fees, are one of the classic pitfalls that await the unwary borrower. All too often, a homeowner selling or refinancing their home has been stunned to discover that they first have to pay a penalty of several thousand dollars to get out of their current mortgage.
A prepayment penalty is a fee assessed for paying off part or all of your mortgage ahead of schedule. Often, borrowers aren’t even aware their mortgage has one until they trigger its provisions – although required to be disclosed by law, they often get lost in the stacks of papers that need to be signed at closing.
Fortunately, prepayment penalties are going to be a lot easier to spot on new mortgages from now on. The new Truth in Lending form, which takes effect Feb. 1, 2010, specifically requires lenders to declare whether a mortgage includes a prepayment penalty or not. Of course, that won’t do much good for unwary homeowners who already have prepayment penalties on their current mortgages and don’t realize it.
Prepayment penalties are often portrayed as a bad thing to be avoided at all costs. In reality, they’re just one more thing to be negotiated when obtaining a mortgage. Accepting a prepayment penalty may enable you to get a lower mortgage rate or obtain a “cost-free” mortgage where you pay nothing up front and the closing costs are rolled into the loan itself. They really only become a negative when they’re sprung upon unwary borrowers by hiding them among the boilerplate of the mortgage agreement – which the new Truth in Lending form is supposed to make much harder to do.
A prepayment penalty, just like it sounds, is a penalty for paying off your mortgage ahead of schedule. Typically, the penalty is 2-4 percent of the loan balance, which can be a pretty hefty bite – 2 percent of a $200,000 loan is $4,000. If you’re looking to refinance your loan, a prepayment penalty can pretty much wipe out any savings you hoped to realize.
Banks like to require prepayment penalties to ensure they earn a minimum return off a loan – if you pay your mortgage off after one year, they don’t earn much money from it. The good news is, most prepayment penalties expire after five years – and they often shrink over time, so the penalty for paying your loan off after four years is less than it would be if you paid it off after two.
Accelerated payments can trigger penalty
Prepayment penalties can hit you in several ways. First, you could get hit by a prepayment penalty if you try to refinance your mortgage after less than five years – since refinancing means taking out a new mortgage to pay off your old one. You can also get hit if you sell your house within a few years of buying or refinancing it. A prepayment penalty can also affect you if you try to pay your loan off faster by making additional payments – although most prepayment penalties aren’t triggered unless you pay off at least 20 percent of the balance in a single year, a few may penalize you for any accelerated payments.
Accepting a loan with a prepayment penalty included may not always be a bad deal, though. If you plan to stay in the home at least five years, you may be able to get a slightly lower rate with a prepayment penalty. A “no-cost” mortgage or refinance, in which the closing costs are rolled into the loan in the form of a higher interest rate, will nearly always require a prepayment penalty, to ensure the bank earns its money back.
"Hard" vs. "soft" penalties
There are different types of prepayment penalties as well. A “soft” prepayment penalty is not imposed if you sell the home or make accelerated payments, only if you refinance into a new mortgage within the first few years. A “hard” prepayment penalty, on the other hand, is imposed regardless of the reason for paying early.
The key thing is to be sure you understand the terms of your mortgage and understand what you’re giving up and gaining in return for accepting one. If you think it’s highly unlikely you’ll refinance or pay the loan off early, you might be able to shave a bit off your interest rate by accepting a prepayment penalty. But if you may be moving or refinancing within a few years, you may be better off paying a higher rate with no potential penalty attached for paying off early.
A prepayment penalty is a fee assessed for paying off part or all of your mortgage ahead of schedule. Often, borrowers aren’t even aware their mortgage has one until they trigger its provisions – although required to be disclosed by law, they often get lost in the stacks of papers that need to be signed at closing.
Fortunately, prepayment penalties are going to be a lot easier to spot on new mortgages from now on. The new Truth in Lending form, which takes effect Feb. 1, 2010, specifically requires lenders to declare whether a mortgage includes a prepayment penalty or not. Of course, that won’t do much good for unwary homeowners who already have prepayment penalties on their current mortgages and don’t realize it.
Prepayment penalties are often portrayed as a bad thing to be avoided at all costs. In reality, they’re just one more thing to be negotiated when obtaining a mortgage. Accepting a prepayment penalty may enable you to get a lower mortgage rate or obtain a “cost-free” mortgage where you pay nothing up front and the closing costs are rolled into the loan itself. They really only become a negative when they’re sprung upon unwary borrowers by hiding them among the boilerplate of the mortgage agreement – which the new Truth in Lending form is supposed to make much harder to do.
A prepayment penalty, just like it sounds, is a penalty for paying off your mortgage ahead of schedule. Typically, the penalty is 2-4 percent of the loan balance, which can be a pretty hefty bite – 2 percent of a $200,000 loan is $4,000. If you’re looking to refinance your loan, a prepayment penalty can pretty much wipe out any savings you hoped to realize.
Banks like to require prepayment penalties to ensure they earn a minimum return off a loan – if you pay your mortgage off after one year, they don’t earn much money from it. The good news is, most prepayment penalties expire after five years – and they often shrink over time, so the penalty for paying your loan off after four years is less than it would be if you paid it off after two.
Accelerated payments can trigger penalty
Prepayment penalties can hit you in several ways. First, you could get hit by a prepayment penalty if you try to refinance your mortgage after less than five years – since refinancing means taking out a new mortgage to pay off your old one. You can also get hit if you sell your house within a few years of buying or refinancing it. A prepayment penalty can also affect you if you try to pay your loan off faster by making additional payments – although most prepayment penalties aren’t triggered unless you pay off at least 20 percent of the balance in a single year, a few may penalize you for any accelerated payments.
Accepting a loan with a prepayment penalty included may not always be a bad deal, though. If you plan to stay in the home at least five years, you may be able to get a slightly lower rate with a prepayment penalty. A “no-cost” mortgage or refinance, in which the closing costs are rolled into the loan in the form of a higher interest rate, will nearly always require a prepayment penalty, to ensure the bank earns its money back.
"Hard" vs. "soft" penalties
There are different types of prepayment penalties as well. A “soft” prepayment penalty is not imposed if you sell the home or make accelerated payments, only if you refinance into a new mortgage within the first few years. A “hard” prepayment penalty, on the other hand, is imposed regardless of the reason for paying early.
The key thing is to be sure you understand the terms of your mortgage and understand what you’re giving up and gaining in return for accepting one. If you think it’s highly unlikely you’ll refinance or pay the loan off early, you might be able to shave a bit off your interest rate by accepting a prepayment penalty. But if you may be moving or refinancing within a few years, you may be better off paying a higher rate with no potential penalty attached for paying off early.
Sunday, January 17, 2010
What Not to Do for First-Time Homebuyers
The hardest part of home buying is saying "no." The job of realtors and loan officers is to get you to say "yes," and they tend to be very good at it. The pressure only intensifies when you fall in love with a house. But saying "yes" too hastily can lead to some big mistakes, such as overlooking these five mortgage no-nos.
When you apply for a loan, the first thing a lender looks at is your credit report. A poor credit score may cause your application to be denied, or the loan's interest rate to be increased. Beat your lender to the punch-check your credit report before applying. If you find errors, they can be removed and your score will increase. If your score is low because of bad credit, you may want to delay your application. After six months to a year of making payments on time, your score will likely improve.
Lenders and government agencies offer numerous programs for first-time homebuyers. They're designed to help a wide range of borrowers, including people with poor credit or little savings. Research the various programs. Call lenders, check with local government housing offices, and scour the Internet. You'll be amazed at how many programs you'll find.
First-time homebuyers are often approved for more of a mortgage than they can afford. Before you accept a super-sized loan, figure out a realistic monthly payment. Factor in everything from retirement savings to grocery bills. A little budgeting now will prevent trouble down the road.
First-time homebuyers tend to be naïve. They choose the first lender who approves their loan application, afraid that they won't be accepted elsewhere. The truth is that many lenders will bend over backwards for your loan. Instead of cowering before a loan officer, do some comparison shopping and find yourself the best rate in town.
Unscrupulous lenders may fail to disclose fees during the application process. Instead, they wait until the closing, and inform the borrower that, in order to drop the fees, the loan will need to be rewritten. Avoid the problem by scrutinizing your Good Faith Estimate, which includes all the fees and costs, before signing a loan application.
It's not easy being a first-time homebuyer. There's much to learn, and when you find the house you really want, you feel pressured to make quick decisions. Just remember that a hasty "yes" means a mortgage no-no could be overlooked. It's an error no homebuyer-rookie or otherwise-can afford to make.
When you apply for a loan, the first thing a lender looks at is your credit report. A poor credit score may cause your application to be denied, or the loan's interest rate to be increased. Beat your lender to the punch-check your credit report before applying. If you find errors, they can be removed and your score will increase. If your score is low because of bad credit, you may want to delay your application. After six months to a year of making payments on time, your score will likely improve.
Lenders and government agencies offer numerous programs for first-time homebuyers. They're designed to help a wide range of borrowers, including people with poor credit or little savings. Research the various programs. Call lenders, check with local government housing offices, and scour the Internet. You'll be amazed at how many programs you'll find.
First-time homebuyers are often approved for more of a mortgage than they can afford. Before you accept a super-sized loan, figure out a realistic monthly payment. Factor in everything from retirement savings to grocery bills. A little budgeting now will prevent trouble down the road.
First-time homebuyers tend to be naïve. They choose the first lender who approves their loan application, afraid that they won't be accepted elsewhere. The truth is that many lenders will bend over backwards for your loan. Instead of cowering before a loan officer, do some comparison shopping and find yourself the best rate in town.
Unscrupulous lenders may fail to disclose fees during the application process. Instead, they wait until the closing, and inform the borrower that, in order to drop the fees, the loan will need to be rewritten. Avoid the problem by scrutinizing your Good Faith Estimate, which includes all the fees and costs, before signing a loan application.
It's not easy being a first-time homebuyer. There's much to learn, and when you find the house you really want, you feel pressured to make quick decisions. Just remember that a hasty "yes" means a mortgage no-no could be overlooked. It's an error no homebuyer-rookie or otherwise-can afford to make.
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