Types Of Mortgages

The details surrounding a home equity loan relies on what is going on in your particular situation. The details are also dependent upon the standards of the bank. This is why it is good for you to know the basics so that you can make the right decision regarding your home equity loan and find the best deal possible.

Home equity loans are acquired based on the equity you have in your home. This equity is used as collateral. But it is not enough to just have “some equity” in your home. This is because you have to have what is called a Loan to Value, or LTV. This needs to be at 80% or 90% below and this is determined by taking the money that you still owe on your home and dividing it by its total value. Some lenders require that you are 80% below and others do go as high as 90%.

What does this mean?

This may seem confusing because you would think that the amount of equity you have is enough to serve as collateral. Well, let’s say you still owe $100,000 on your home and its appraised value is $200,000. This means that you have an LTV of 50%, which also means you have more than enough to do what you need to do. As long as you have the required amount of equity built up in your home, you should have nothing to worry about.

Many individuals take their home equity loans and they will do certain home improvements such as remodeling the kitchen. Another individual may decide that they want to consolidate their debt in order to reduce their monthly obligations. Another way that people use a home equity loan is to create a home equity line of credit (HELOC).

A HELOC is credit given based on the equity in the home. This money is placed in an account and is available for the homeowner to withdraw money from as they wish. This is very similar to having a credit card account. However, the interest is usually rather low. If the loan is paid off in the right amount of time there may be no interest at all.

Advantages

There are many advantages to the home equity loan. For instance, it is rather inexpensive, making it an inexpensive way to borrow money. Even with this said, it is important to choose the loan with the right amount of interest in order to save even more money. There is nothing wrong with shopping around for the best rate. It is also important to make sure the rate is fixed if you want it to be fixed. You can choose adjustable rate if you want your rate to fluctuate over time as the base rate changes.

Most importantly, you are safe from temptation because you receive the money in one lump sum and that is it. It will be a long time before you can borrow again because you will once again have to gain enough equity in your home to do it.

A mortgage buydown is basically a way for you to lower the interest rate that a loan officer has quoted to you. However, it does involve paying an extra fee. It seems rather simple, but there is a process that is involved in mortgage buydowns that you may want to know about so that you can save yourself thousands of dollars on your mortgage.

How mortgage buydowns work

Let’s say that you are speaking with a mortgage company and they have offered you an interest rate of 6%. However, you feel that you can get a lower rate than that and save yourself some money. Although 6% is a very good rate, it is possible to go lower. So what you do is tell the loan officer that you want to pay a point on the loan in order to “buy down” the interest. Perhaps you want to buy it down to 5%.

When you do this, your closing costs will be higher, but you don’t have to pay the 6% interest rate through the life of the loan. Even if 6% is the lowest rate that the mortgage company offers, paying that one point on the loan gives them the financial ability to give you that 5% rate. In many cases when a financial institution can only offer a certain minimum, the only way they can offer you a lower rate is through a mortgage buydown.

Technically, what you are doing here is trading your money for one point on the loan and that will also lower your monthly payment. What you do is entirely up to you. Think of it this way: It is like you putting $1200 in the bank and then taking out $100 per month to help you make your mortgage payment for the year. So if your payment is $850 with the 6% interest, you can get by with paying $750 on the 5% interest. You are just trading one thing for another based on what you feel is important to you at the moment.

In the long run a buydown can be a very smart move due to the fact that you don’t know what the future holds and having that lower payment can be the difference between keeping your home and losing it when hard times come about.

The term

You also need to take a look at the mortgage term because this is going to influence the amount of your monthly payment as well. When you opt for a shorter term, your interest rate may be lower because of that. When the term is shorter, you are viewed as not being very high risk. Your monthly payment will be higher, but you will have the home paid off much faster than if you were to opt for a 30-year mortgage. However, not everyone can afford the higher payments, so they opt for the longer term.

And at any point you can refinance the mortgage in order to receive a shorter term or a lower monthly payment. Then again, you may opt to cash in your equity for home improvement projects, a vacation, or something else you have in mind. You have many options you can take advantage of.

The combination mortgage loan is turning into a very attractive loan option. This is because there are a number of key advantages that are placing these loans in a more favorable spot than the 30-year fixed mortgage. This is because there are a number of combinations within the loan that can fit virtually any financial situation.

Options

As it stands, the most popular combination loan is one called the 80/20 loan. This is actually two loans. The first is for 80% of the value of the home and the second is for the remaining 20% of the loan. With this type of loan there is no down payment, which makes this a great option for those who have no or limited money to put down as a down payment.

Another advantage of the 80/20 loan is that the borrower is able to avoid having to have private mortgage insurance. This is because private mortgage insurance is required on loans that are greater than 80% of the value of the home. With this loan, nothing is over 80%.

A third advantage is that both of the loans are tax deductable. By not having to pay private mortgage insurance and also getting the tax deduction, there are some significant savings for the homebuyer.

There are also other loan ratios available as well. For instance, you can get a 70/30 if the home is more expensive. This type of ratio is used when the price of the home may classify the 80% as a jumbo loan. Knocking it down to 70% can keep it out of that status.

There is also the 80/15/5, which means the homebuyer puts down a 5% down payment and then the two loans are 80% and 15%. Other options include the 80/10/10 and the 75/15/10. Usually the more expensive the home, the lower the loans and the higher the down payment in order to keep the mortgage premiums as low as possible.

The term

The usual term on combination loans is 30 years on the primary loan. The secondary loan can have a 15 or 30 year term. The interest rate for the second loan is usually around 2% more than the primary loan. A homebuyer also has the option to make the loans fixed or opt for an adjustable rate mortgage (ARM) on one or both of the loans. The monthly premium for the ARM may be lower if the rates are low, but you may want to refinance if the rates start to become too high.

You may be able to see why combination loans are becoming so popular. The options that are available as well as savings make them favorable. However, you will need to meet credit requirements and the debt to income ratio requirements of the financial institution you are borrowing from. You may wish to shop around in order to find the best rates and the best terms for a combination loan. That way you can save yourself as much money as possible.