Understanding Prepayment Penalties on Home Loans
Mortgage lenders prefer certainty to chaos. Some lenders take this concept to its logical conclusion in mortgages by inserting prepayment penalty clauses.
Understanding Prepayment Penalties on Home Loans
When a mortgage lender evaluates a loan application, it performs a number of analyses to determine risk and profit scenarios. For many lenders, the analysis is based upon a certain period where they are absolutely sure you will be paying back the loan. To make sure this happens, they put prepayment penalties into the loan documents. While you can still refinance, the penalties usually make it a dubious financial decision.
Prepayment penalties are simply arbitrary provisions that require you to pay a fee if you pay off a home loan before a certain point in time. The penalties can be the equivalent of points, a number of payments or a set fee. There are a wide variety of penalties because the law governing them is set by the states, not the federal government. Since states rarely pass the same law, each has its own set of rules on what lenders can and cannot due. You will need to check the laws of your state or speak with a mortgage broker to figure out where you stand.
Prepayment penalties can be staggering. Regardless of the formula used to determine them, you can expect a penalty equivalent to the maximum allowed under the laws of your state. The lender wants you to continue to meet the obligations of the original loan. If you try to refinance, they will want their piece of flesh. This is true even if you must sell the property because of an emergency, divorce, lost job or other unfortunate things that can occur in life.
Whenever possible, you should avoid mortgages that have prepayment penalty clauses included in them. They simply are not worth the aggravation. If you must accept penalty clauses, try to shop for a loan that has the shortest penalty duration. Some lenders will want the prepayment penalty to apply for the full length of the loan while others may require only a year or two. It is strongly advised that you avoid any loan that contains a prepayment penalty for the life of the loan. You will regret agreeing to such a loan in the long term.
Fortunately, the home loan industry is a competitive one. To compete for your business, most mortgage lenders have moved away from prepayment penalty clauses or at least limited their bite. Still, make absolutely sure you avoid these brutes if at all possible.
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Understanding Points in Home Mortgages
If you are in the market for a mortgage to buy a house you’ve no doubt heard the term “points” being thrown about. No, they aren’t talking about the score from last night’s NFL game; they are actually talking about a fee that is paid to the lender of the mortgage you are taking out to buy your home. Points can have impact on your mortgage, both positive and negative, so being informed about how they can help and hurt you is crucial when determining if a mortgage loan is the right fit for you.
In the simplest form, points are a onetime fee that is paid to a lender and are used to secure a loan below the current market interest rate. Each point represents 1% of the mortgage amount. So if you have a mortgage for $150,000 then one point would be equal to $1,500. A seller would pay points on a loan to reduce the interest rate of the loan which could potentially save them much more than the points cost up front over the life of the loan.
Points are not always paid for by the buyer; they can sometimes be paid by the seller as well. A seller would typically pay for points when they are in a rush to sell the property or have been having a hard time finding buyers for the property. In this case it is used as an incentive to get the buyer to move on the property.
There are times when it may not be in your best interest to purchase points. A rather simple way of doing this is to determine the payback period, or length of time it takes you to pay back the points you purchased up front. First, determine your monthly payment amount without points, and then with points. If you are paying $900 without points and $800 with points, your monthly savings is $100. Now take the total cost of the points, say 2 points on a $150,000 mortgage which would be $3,000, and divide the cost by the monthly savings. $3000/100 = 30 months. It will take you 30 months to realize your savings of $100 per month. For a 30 year loan, it would make a lot of financial sense to purchase the 2 points up front if you can afford them.
Where you have to be careful with points is when you don’t plan to be in your current home long enough to reach the payoff. You also have to keep in mind that the cost for points is above and beyond your down payment on the house you want to purchase as well. It can add significant up-front costs, which is why it is a wise move only if you plan on occupying the house for a long period of time and have significant cash up front to be able to afford it.
One final note about points – they are tax deductible as they are considered prepaid interest. They are deductible by the buyer, even if the seller pays for them. Points are deductible fully in the year they are paid for a new purchase, and over the life of a loan for a refinance.
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How to Pay off Your Mortgage Early?
A mortgage is generally one of the biggest debts that a person faces in life, and a large part of that expense is due to the interest that is added on as time goes by. Most homeowners would gladly reduce that debt if the opportunity presented itself, though they do not realize that the key to reducing their mortgage debt lies in reducing the amount of interest that they pay on their mortgage.
By paying off their mortgage months or even years in advance, all of the interest that they would have had to pay during that time obviously will not have to be paid. Also, the interest that will be paid will be at a reduced rate because they are reducing the total amount that the interest is applied to at a much faster rate.
The trick, of course, comes in figuring out a way to pay off the mortgage early. For individuals who live on a tight budget as it is, the thought of paying even more toward their mortgage may seem almost laughable.
There are a number of ways that homeowners can pay down their overall mortgage in order to pay it off early without having to cause a strain on their finances, as well as services which can assist them in doing so if they aren’t able to accomplish it on their own.
Here are just a few examples of how a mortgage can be paid off early without causing undue financial strain.
Setting Aside Partial Payments
One easy way to pay off your mortgage early and possibly even make your finances easier to handle is to simply put aside a portion of your mortgage payment from each paycheck (or even from every other paycheck, if you get paid weekly.)
If you put aside approximately half of your mortgage payment every other week, you’ll end up saving the equivalent of an extra payment every year.
Setting aside slightly more than half will cause an even greater savings, causing you to pay down your mortgage at an even faster rate.
Depending upon the length of your mortgage term and when you start this savings plan, you can cut months or even years off of your mortgage. All that you have to do is pay whatever you have put aside each time your mortgage comes due (which should cause you to end up with a few payments that are significantly more than the minimum payment.)
Additional Payments at Tax Season
If you don’t like the idea of having to keep track of savings over the course of the year, you might use income tax returns to help you to make up the difference. For many people, the amount that they receive in their tax returns is significantly more than their mortgage payment.
While you may have at least some of your tax money earmarked for specific purchases or to pay off other debts, using part of that money to make the equivalent of an extra mortgage payment once per year can significantly reduce how much you owe.
If you can afford to contribute more than just the amount of one payment or if you use this in conjunction with the savings plan mentioned above you can pay off your mortgage even faster.
Using Interest to Fight Interest
If you have a high-interest savings account, you can use that interest to help you pay off your mortgage ahead of time. Once or twice per year, pull out money from your savings that’s equivalent to part of the interest that you’ve accrued and add it in with your mortgage payment.
Provided that you have a high enough savings balance you should be able to make a significant impact on your mortgage debt by doing this. Over the course of the year the amount that you add to your mortgage payments could potentially equal an entire extra payment or more.
Bi-Weekly Mortgage Services
Should you worry that you can’t keep yourself motivated to keep making these extra payments, you might consider using a bi-weekly mortgage service. These services automatically withdraw one half of your mortgage payment from your checking account every two weeks, and then make your payment for you when it comes due.
The system works similar to the paycheck savings plan mentioned above, but since you have an outside company doing the work for you all that you have to do is make sure that you have the money in your account to cover the withdrawals.
Though the services do charge fees to cover their costs, the amount that you save in interest payments will be significantly more than what you pay to the service.
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How To Manage Your Mortgage Payment?
Title:
How To Manage Your Mortgage Payment
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482
Summary:
Normally, banks and financial consultant will advice you to pay extra money into your mortgage. With this method, it will help you cut down the huge interest amount and reduce the period over which you pay back the loan.
For example, if you borrow $200 000 over 30 years at a rate of 5%, your monthly repayments would be around $1074. Over 30 years, you would actually pay $1074 x 360 (months), which is $386 640. That’s $186 640 in interest! What you have to do is to find an…
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small business loan,loan,loans,student loan,consolidation
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Normally, banks and financial consultant will advice you to pay extra money into your mortgage. With this method, it will help you cut down the huge interest amount and reduce the period over which you pay back the loan.
For example, if you borrow $200 000 over 30 years at a rate of 5%, your monthly repayments would be around $1074. Over 30 years, you would actually pay $1074 x 360 (months), which is $386 640. That’s $186 640 in interest! What you have to do is to find an extra $246 a month, and pay $1320 a month into the mortgage, you’d cut 10 years off the repayment period – the loan would be fully paid in only 20 years. Moreover, your total payments would be $316 664, saving $69 756!
The flaw in this technique is that it ignores the time value of money. Everyone knows that money is worth less now than it was when they were younger. If you take that $1074 mortgage repayment, for instance, in 30 years time, when the last payment is due, it would only be worth $437 in today’s money.
A dollar now is always better than a dollar in a year’s time, or in 10 year’s time. You cannot simply subtract the mortgage interest amount for a 20 year mortgage from the interest on a 30 year mortgage. What you need to do is calculate the Present Value of each mortgage.
First method of repayment:
The Present Value of a 30 year mortgage with repayments of $1074 at a 5% interest rate is $200 066.
Second method of repayment:
The Present Value of a 20 year mortgage with repayments of $1320 at a 5% interest rate is $200 066.
The two repayment schemes are exactly equal. The $69 756 ‘saving’ in the interest rate is really just the effect of adding the extra $246 a month into the repayments – in fact, that $246 a month adds up to $59 040 over 20 years.
Let’s think this way. What if you took that $246 a month and invested it in, for example, mutual funds? If you could get a return of 10% p.a., after 20 years you would have $186 804. With inflation at 3%, that would be worth $102 597 in today’s money.
Why would the banks recommend that you pay off your mortgage quickly? Surely the longer the income stream lasts, the better? The banks love being able to prove that their recommendations will ‘save you money’. But in reality, the banks do understand the time value of money. They know the true value of that extra $246 a month that you’re giving them now, not in the future. And the shorter the time you take to repay the mortgage, the lower their risk, and the sooner their money comes back to them to be loaned out again.
There are some arguments for paying your mortgage back quickly – for one thing, the quicker you pay, the quicker your equity grows. But you should understand that every dollar you give the bank now is a dollar that you can’t invest. You then miss opportunity to invest and a return 10 percent or even 15 percent!
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Understanding the Credit Score and Mortgage Relationship
If you are considering buying a home or refinancing, the subject of credit scores has undoubtedly come up. So, what is a credit score and how does it impact you?
Understanding the Credit Score and Mortgage Relationship
In the 1960s, the concept of credit scores came to fruition. A company by the name of Fair Isaac Corp developed a system whereby credit reports could be summarized as a score. This score, known as a FICO score, could be used by lenders to determine the credit worthiness of a potential borrower. The highest FICO score you can have is 850 while the lowest is 350. Where you fall on the scale determines the type of loan you will get.
Cutting the chase, a credit score is a factual summary of your credibility. What it tells a lender is how you have behaved from a financial perspective over a period of years. If you have regularly missed credit card payments, the lender is going to consider it an indication you will be likely to miss mortgage payments as well. Obviously, that is going to result in a denial of your loan application or vicious terms in the lender’s favor.
As you might image, your credit score impacts both the approval and terms of your home loan. The higher your score, the better position you will be in. While a score above 800 is considered perfect credit, almost nobody has such a FICO score. In fact, most lenders wouldn’t believe such a score and would probably take extra steps to investigate it.
Most people seem to fall in the 500 to 600 range. While this may suggest problems in dealing with a lender, it doesn’t. Lenders rarely expect to see perfect credit scores for borrowers. Instead, they expect to see flaws. The approval and terms of your loan all come down to the shades of grey in your score and how lenders interpret them.
When evaluating these shades of grey, lenders do so on a risk basis. Generally, a score of 720 to 850 is considered excellent, while a score of 500 to 560 is considered high risk. 560 to 620 is not great, but 675 to 720 is fair to good. 620 to 675 is considered average. Importantly, there are lenders that will provide loans for each of these ranges. Your particular score is really only an indication of how good or bad a deal you will receive.
If you have a high credit score, you should negotiate hard for the best possible deal on your mortgage. If your credit score falls in the 500 range, you are pretty much going to have to accept whatever you can get.
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When Should I Refinance My Mortgage?
January 8, 2010 by admin
Filed under Mortgage Articles
When Should I Refinance My Mortgage if I’m the wrong way up on My Home Mortgage? Perhaps the right question isn’t, When should I refinance my mortgage? But Should I refinance my mortgage while the other way up on my home mortgage? What are my real options and am I able to refinance with negative equity? To make it simple, all we are attempting to do is gain some finance advantage and most likely at the same time resolve some money difficulty. It may be that all you actually need is a small the other way up mortgage relief for five to ten years till the home market reverts. So How Do I am getting Help With Mortgage Payments If My Mortgage Is Upside Down? Presuming your mortgage is underwater you are potentially better off to change your house loan into a lower monthly home loan payment without refinancing.
There are no closing costs, you keep your same bank, if there is an interest adjustment or balloon coming up it is put off during the five to ten years of mortgage reduction and you can be in a position to permanently scale back your IR or change it to a non-variable rate ( if adjustable ). Don’t stop breathing Waiting For Your Bank to offer you This Option, he will not in truth if you’re current on your payments and you requested a tiny the other way up mortgage relief he most likely asserted you don’t qualify.
This isn’t true but it’s the most typical reply when you ask your bank for help. They may even state you’ve got to be two or 3 months behind before they’ll “help you”. Not a choice if you’re attempting to maintain good credit. Then when you’re behind on payments, less than 1/2 the time will your bank offer you more than a ten percent payment reduction and more frequently will change your mortgage into a higher payment as you are behind. What type of help is that? You have got to know what to ask for, what you can negotiate, what you qualify for and what your bank is permitted to confirm. Only then make a written submission with the correct paperwork to support your request but only the info and documents you have got to supply to be approved. You can disqualify yourself by supplying too much info that’s not needed or not supplying enough. This is where you may need to get some pro help, but I’m going to offer you a little free help here which will get you started. See what You Qualify for less than The TARP Mortgage Reduction Program Oct 2008 while the banks were getting bail out money, US Secretary of the Treasury, Timothy Geithner commented that under the new guide lines seventy percent of US home owners qualified for help with mortgage payments. We have assembled a database of the mortgage reductions we have successfully bartered since Oct 2008 under the TARP Mortgage Reduction Program. Under these guide lines having a mortgage the other way up while remaining current on payments basically increases your odds of qualifying.
With the info we have complied we all know what alterations banks are approving, the factors needed to qualify, what banks are sanctioned to confirm and what’s negotiable.
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Where Can You Find Principal Mortgage Reduction These Days?
January 6, 2010 by admin
Filed under Mortgage Services
Not Loan Modifications! Where can one find principal reduction these days? Loan modification? No. Don’t expect banks to agree to principal reductions with loan alterations, banks negotiate interest rates when making an application for loan modification. They would scale back your regular payment or perhaps not. As an example, if you were making payments based on an interest-only loan before, then you won’t see a change in monthly payment as you move into a set rate. It is better terms mirrored in lower payments that you should be attempting to find otherwise the negotiators can consider themselves successful however if you could not make your payments before because they were too high, you will not be ready to after the negotiation either. That’s the reason why 60% of loan modification go into default inside six months. On the other hand, short sales are a famous solution for borrowers to stop repossession.
They do so by selling their home for slightly less than what’s owed. But the majority of people wish to stay in their houses, so what else can they do? The secret’s to get a principal reduction so that your payments are an expression of the present valuation of your house. Since banks aren’t negotiating principal reductions in a loan modification then it is sensible to keep looking. Since you are in need to remain in your house, a short sale will not work either. There are firms out there promoting principal reduction but be exceedingly wary if the guarantee is inside a loan modification because those just aren’t taking place. With a real principal reduction program, you’ll have to refinance out of your present mortgage. Some firms use the term short pay refinance and others just use the term principal reduction.
Most firms are negotiating you out of your present mortgage at a reduction and then need you to discover a way to refinance the new, lower amount. As an example, if you’ve got a home with a mortgage of $400,000 but the price has fallen to $250,000, the negotiating company will get your mortgage down to the valuation of $250,000 but your present bank must be paid off for the deal to be consummated. What does this mean for you? You have got to be in a position to qualify for a new loan. Either you want to qualify or perhaps a relation will help you keep your home by signing for you on the new loan. These programs are particularly fitted to people who have stayed current in their home loan payments, not suffering hits to their credit from missed payments. Who else can this system benefit? These programs are superb for families who are attempting to sell their place in a short sale.
Perhaps you do need to move out. When you use a principal reduction program, you do not have to be the one that gets a new loan.
Your new customer can get you out of your loan.
What this implies is that you can sell your house in standard way and maybe get some money back from the sale rather than doing a short sale and getting nothing. Additionally, you can save your credit. Maybe you do a short sale to forestall a foreclosure but you wish to stay in your house. By getting a principal reduction you can stay in your house, if that is what you need. Qualifying for a new loan will be your sole hindrance. Maybe you can enroll the aid of a family member if you cannot qualify.
Folks who are the wrong way up in their mortgage but are required to move due to job transfer can also benefit from this technique.
With a current market worth loan rather than being the other way up, there is a chance you may make some cash on the exchange. At the extremely minimum, you’ll save your credit. If your company is prepared to buy you out and take the hit themselves then you may be the hero by informing them about principal reduction programs. Or if you’ve a nice new loan then maybe you would like to keep the property as a rental when you move to your new location. Just some thoughts….
What about the people who truly have too much mortgage to handle at any price? The wrong way and actually cannot afford your place? These programs are for you. It’s the best way to buy yourself out of debt and keep your credit intact, saving you thousands of bucks in debt settlement, credit fixing costs, increased rates in the future due to blemished credit, and so on. Accept it or not, many people have found out the difficult way that they actually can not afford to pay half their income towards housing even after the principal reduction. They’d have an avenue for fast recovery and a principal reduction program too. This should be true if you’re looking at foreclosure. Get rid of those back taxes, those mortgage arrearages, that unaffordable burden. Walk with a cleaner slate with a principal reduction program. What other benefits are there? With some principal reduction corporations your back taxes are rolled into the deal and wiped out. So are your behind payments-wiped out. Likewise , your credit report can be turned around because if you’re working with a good company, they’ll arrange a fair write off on your credit score and have the bank drop outstanding defaults. Thus your credit report won’t drop as deep as if you had done a short sale or a worse, a foreclosure. When you refinance out of your old loan, all credit problems are wiped out, if you’re working with the correct company.
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How to request a Mortgage Rate Reduction
January 2, 2010 by admin
Filed under Mortgage Rates
Demanding a mortgage rate reduction can be arduous business concern. What bank in their right mind would give you more beneficial conditions on a contract that you already agreed to? The kind of bank that Is not confident that they have their “i’s” dotted and their “t’s” crossed, that is what kind! Asking for a loan rate reduction is still not an easy process.
It, on a regular basis, takes a long time as much as six months for the whole process to become in effect and i n the meantime you could anticipate to be called to pay the first rate you agreed to pay. Many times, banks will not even work with borrowers till they’re behind on payments and nearly in default. It’s only then the bank realizes the borrower may indeed be losing their home and in reality calls for a mortgage rate reduction. There’s a better way, though .
Attorney based loan modification companies are the power-house of the loan modification industry. Rather than asking for a mortgage rate reduction, attorneys flex their muscles a little and demand a rate reduction for their clientele. This is far more effective. Some techniques this is accomplished are : * An solicitor sends out a QWR to the bank. A QWR is a written legal document that in effect subpoena the file for reexamination. This lets the bank know that we are serious about this matter. It connotes that the bank must send the attorney the originally signed documents for this property from the date of closing the escrow for forensic substantiating.
Also, a solicitor will send out a letter of representation to the borrower’s bank letting them know that they have got counsel. This in turn eliminates the capability of the bank to use high pressure techniques to pressure the borrower into paying their inflated home loan payments. It also causes a denial of the legal right to report to the credit reporting agencies while the case is under review.
And, usually, this will also stop, or at least delay, a foreclosure sale or trustee sale. At that point, any and all correspondence with the bank must be done through the borrower’s representative ( the attorney ). In the paper filing stage, a solicitor typically uses a forensic accountant to go first through the paperwork and look for mistakes and indications of preditory lending.
Once the forensic accountant is done finding mistakes, the attorney can return to the bank, only this time they will have a tiny leverage so their only option is to agree with the attorney’s terms. You see, each mistake on a file could cause the bank a fine of almost $2000 per occurrence. So, you can see how much leverage this brings to the table. At that point, there’s a seriously greater probability that the bank will grant a mortgage rate reduction, and occasionally, typically on 2nd mortgages, even a principal reduction for the borrower.
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