Useful Tools, Loan Programs & Mortgage Articles

There are numerous loan programs available for the purchase of vacant land – otherwise referred to as “lot loans.” These loans are underwritten in the same manner as a loan for developed land and you will need standard income and credit documentation that is required in any real estate transaction. Most lenders will also require a minimum down payment of 10% since lending upon vacant land is considered a slightly higher risk.If you decide to buy a piece of vacant land with the intentions of building your own home you can typically find a lender that will do a “construction to permanent” loan. What this means quite simply is they will lend you the money necessary to purchase the land and then they will finance the construction of your project until it is completed. This has several advantages: you sign only one set of loan documents and do not have to worry about re-qualifying, re-appraisals, additional closing costs or signing additional loan documents. In addition, you will likely have the opportunity to lock in an interest rate based on today’s market rather than waiting until the project is complete.

If you decide to apply for a construction loan, you will be required to provide some addition information in order to assist the appraiser and the lender in determining the value of the home after it is built:
· What is going to be built or constructed?
· What materials are going to be used?
· How much will the material cost?
· How much is the actual work going to cost?
· How much did the land cost, what is it worth today?
· How much will be spent on plans and permits? The lender will also want to know about your choice of general contractor who will be awarded the contract and the actual text of the construction contract. They will likely want a copy of the contractor’s resume and a copy of their credit report in order to ensure that he/she is experienced, has a proven tract record, and will be able to perform under the terms of the contract. Some lenders have a copy of a construction contract that they want you to use and others just require a copy of the one of your choice.If you are looking to buy vacant land or would like to obtain a construction loan, please fill out the PickYourOwnRate.com form and an experienced mortgage professional in your area will contact you promptly.

Commercial properties come in all sizes and are intended for a wide-range of uses, but they can be mortgaged just like a residential structure. This type of loan can range from the tens of thousands to the hundreds of millions depending on the structure and the location. They can be for purchase or refinance and sometimes they require a personal guarantor. Similar to residential loans, commercial loan programs include short term adjustable rate mortgages as well as fully amortizing fixed rate loans usually for up to thirty years. Here are some of the more common types of commercial property: Commercial properties come in all sizes and are intended for a wide-range of uses, but they can be mortgaged just like a residential structure. This type of loan can range from the tens of thousands to the hundreds of millions depending on the structure and the location. They can be for purchase or refinance and sometimes they require a personal guarantor. Similar to residential loans, commercial loan programs include short term adjustable rate mortgages as well as fully amortizing fixed rate loans usually for up to thirty years.If you are looking to buy a commercial property for your own personal business use or even as an investment or if you would like to refinance a commercial property you currently own please fill out the PickYourOwnRate.com form and an experienced mortgage professional in your area will contact you promptly.

If you have never owned a home before – or have not had ownership interest in the last three years according to some lenders – you are considered a first-time homebuyer. Buying your first home can be a daunting task, but it does not have to be. Most lenders have special programs available for first-time buyers that allow for 100% financing. In fact, depending on your credit score you may qualify for over 100% financing so that you can finance your closing costs as well.

The most important thing when buying a home (particularly your first home) is your credit. Almost every lender has some sort of “no doc” program available; which means you do not have to document your income, assets, or employment. However, you always have to document your credit history. If you previously owned a home then you would have a mortgage history on your credit report – and if you made your payments on time this would help offset other areas of concern on your credit report. Since you are a first-time buyer you will not have a mortgage history to show the lender that you have been responsible in paying a mortgage previously. As a result, the better your credit is the better off you will be.

There are many things you will want to consider when buying your first home. The first thing you need to think about is how much can you afford each month. In addition to the cost of repaying the mortgage, you will also need consider the property taxes, the homeowner’s insurance premium, flood insurance premium (if applicable), and property or condo association dues (if applicable). These additional costs can add up quickly and take a serious bite out of the budget you set for yourself.

You should also consider the location of the property – is it somewhere that you would be happy living long-term if the market slows down and you are unable to sell? Is it large enough in case the size of your family increases? Is it close to things that are most important to you such as: your workplace, schools, shopping, entertainment, etc.?

In mortgage lending terms, a Foreign National is a citizen of another country who visits on vacations or relocates to the U.S. for business, educational, or employment opportunities.

For years, 30%-35% down was the industry standard and Foreign Nationals were only offered variable rate mortgages often with stiff prepayment penalties, high rates, and expensive closing costs. Today the industry standard is a 20% down payment, although 10% down is available. Most mortgages no longer have prepayment or early redemption penalties, and 30 year fixed and 15 year fixed mortgages are available to all borrowers.

Additionally, Foreign Nationals are now characterized as borrowers with ITINs (individual taxpayer identification numbers), or those borrowers who have a legal right to live, work, or study in the U.S. (visa holders). Most lenders require no down payment or small down payments such as 3%, 5%, or 10% down for borrowers with visas or ITINs, depending on immigration status, length of residency, work and credit history in the U.S.

Do not be discouraged just because you do not have any money for a down payment since most lenders have 100% financing programs available and they are not as hard to qualify for as you might think.

Remember, banks are in the business to make money – if they don’t lend it, they can’t make it – so they have countless financing options available to ensure that just about everyone can get financing. The main caveat, as always, is that you have good credit. However, many lenders will still lend 100% of the purchase price to borrowers with less than perfect credit. The risk involved in doing this will be reflected in a slightly higher rate than someone who has excellent credit, but you are likely still better off then you would be renting.

When you apply for 100% financing you should decide whether you would like to get one mortgage or two. If you get one loan for the full amount you will likely have to pay for private mortgage insurance (PMI) which is charged anytime the loan amount is greater than 80% of the purchase price. Some lenders will pay the PMI for you and simply charge you a slightly higher interest rate for the use of the money.

The alternative is to simply apply for two loans – a first and a second mortgage simultaneously in order to accomplish the same goal (100% financing). This is typically done with an 80% first mortgage and a 20% second mortgage and can be done through the same lender or through separate lenders.

If you are unsure which route is better for you then ask your mortgage professional for the “blended” rate of a first and second mortgage and compare that to the rate being offered for just one loan. When you fill out the form on this website you will only need to pick your rate for the first mortgage and once your mortgage professional analyzes your particular situation they will let you know whether you are better off with one loan or two.

The difference between what you currently owe and the current market value is what is referred to as equity.  For example, if you could sell your home today for $400,000 and you owe $250,000 to the bank, then you have $150,000 of equity in your home.  Equity can be built as soon as you close on your home if you have obtained less than 100% financing or it can accumulate over time through property appreciation. Typically, homeowners just allow the equity in their homes to continue to build and treat it as a hidden savings account that will be tapped the day they sell their home.  However, some business savvy homeowners have realized that the money can be put to good use today by obtaining a home equity loan or line of credit. Common uses for equity loans and lines of credit include:

• Paying off high interest credit card debt
• Making home improvements
• Paying for college tuition
• Starting a new business
• Going on a vacation
• Investing in a 2^nd home or rental property
• Buying a new car or boat

 Here is a quick comparison of home equity loans and home equity lines of credit:

Home Equity Loans

• You borrow a set amount of money from the beginning in a lump sum.
• You pay principal and interest on the entire loan amount.
• You get a fixed rate and fixed payments.
• The closing costs are often paid for by the lender.
• The rate will likely be higher than your first mortgage.
• The interest is often tax deductible.
• Loan terms up to 30 years.

Home Equity Lines of Credit

• You are approved for a set amount of money and you only use what you need.
• There is no limit on the number of times you borrow against the line as long as you stay below your credit limit.
• You typically get an adjustable rate.
• You typically make interest only payments for the use of the money that you borrow.
• The closing costs are often paid for by the lender.
• The adjustable rate will likely be higher than your first mortgage.
• The interest is often tax deductible.
• Loan terms up to 30 years.
• A good source for an emergency fund, if set up in advance.

 Home equity loans and lines of credit are also commonly used as a second mortgage when purchasing a new home.  In order to avoid private mortgage insurance (PMI) which is charged anytime the loan amount is greater than 80% of the purchase price, it is often wise to get a first and a second mortgage simultaneously.  The second mortgage is commonly a home equity loan or line of credit.

An interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period of time after your closing.

Most lenders offer a variety of interest-only home loan options, including 30-year fixed-rate mortgages and adjustable-rate mortgages. Typically interest-only home loan programs are offered as interest-only periods of three, five, seven or ten years.

One of the most appealing features of an interest-only loan is that you control your payment amount and your cash flow in any given month during the interest-only period, and your monthly mortgage payment will be lower than it would be with an interest plus principal payment. Your interest rate may or may not be lower than a traditional fully amortizing loan depending on your specific situation, but you will have the option of flexible payments.

There are a number of good reasons to consider an interest only loan. For instance, on a traditional 30-year fixed-rate mortgage, roughly 70% of the payment goes toward interest during the first seven years of the loan. If your interest rate is low, then you’ve borrowed money at a good rate. Instead of paying down that low rate loan, you could take the extra money you’d have each month from making interest-only payments, and invest it in something that would bring you a higher rate of return.

An interest-only home loan may also be a good option for people who expect to be in their homes for less than ten years. The average homeowner stays in their home between five and seven years. As mentioned before, home mortgage payments go mostly towards interest for the first several years of the loan. Many homeowners like the option of making interest-only payments and using the extra money as they please - save for college tuition, make home improvements, or buy a much-needed new car.

While an interest-only loan may be an appealing option to many, there are a number of common misconceptions that you should be aware of prior to making any final decisions. One common myth is that if you’re not paying down your loan’s principal, you’re not building equity in your home. This is not necessarily true. Homes in the U.S. have been appreciating between 5 and 6% a year. Chances are that even if you’re not paying down your principal, you’re building equity in your home through appreciation.

Balloon loans are short-term mortgages that have some of the same features as a fixed rate mortgage. These loans provide a level payment feature during the term of the loan, which is typically 5, 7, or 10 years.

In contrast to the 30 year fixed rate mortgage, payments on balloon loans are typically interest only. As a result, the principal balance remains unchanged at the end of the loan term and the mortgage company generally requires that the loan be paid in full. This can be accomplished by refinancing the balloon mortgage.

However, many mortgage companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the current thirty-year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.

Other balloon loans are fixed for a longer period of time and require the borrower to pay down principal every month. For example, a 40/30 balloon would be a loan that has payments amortized over 40 years, but the loan balance comes due in 30 years. The rate is fixed on this type of loan for the full 30 years, but since the payments are amortizing over 40 years they a lower than a standard 30 year fixed rate mortgage.

Balloon mortgages are often a good choice for someone who is looking to keeping the subject property short-term and want their payments to be as low as possible.

These types of mortgages can be divided into two main categories: (1) Standard Payment ARMs and (2) Multiple Payment Option ARMs (”Option ARMs”). 

Standard Payment ARMs

 These mortgages have a rate for a set period of time which could be anywhere from one month to ten years. Typically, the lower the start rate is the shorter the period of time before the first adjustment takes place. After an initial term, the interest rate on an adjustable-rate mortgage is re-set periodically at specified intervals (i.e. every year). For example, a 3/1 ARM offers a fixed rate for the first three years, adjusting once a year thereafter. A 5/1 ARM offers a fixed rate for the first five years, adjusting yearly thereafter.

The changing market conditions during the adjustment period will dictate whether the interest rate will increase or decrease. If interest rates go up, your monthly mortgage payment will go up. However, if interest rates go down, your mortgage payment will go down. Some things you will need to consider in determining which ARM is the right choice for you are the index, the margin, and the adjustment caps. When it is time for the ARM to adjust, the lender sets the new interest rate by adding an adjustable index to a fixed margin. Adjustment caps control how much the rate can adjust (up or down) during each adjustment period and over the life of the loan.

Index - The index of an ARM is the financial instrument that the loan is “tied” to, or adjusted to. The most common indices are LIBOR (London Interbank Offered Rate), 11th District Cost of Funds (COFI), 1 Year Constant Maturity Treasury Rate (CMT), 12 Month Treasury Average (12 MTA), and Prime. Each of these indices moves up or down based on conditions of the financial markets. ***For more information about indices click here.

Margin - The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. For example, if the current index value is 4.50% and your loan has a margin of 2.75%, your fully indexed rate is 7.25%. Over the life of the loan, the interest rate can never be lower than the margin; this is sometimes referred to as the “floor rate.”

Adjustment Caps – These usually comes in the form of initial adjustment, subsequent adjustment, and lifetime adjustment. For example, an ARM with a 5/2/5 rate cap means the initial rate adjustment cannot be increased or decreased above or below the loan’s initial interest rate more than 5%. At each subsequent adjustment, the interest rate cannot be increased or decreased above or below the loan’s interest rate for the preceding adjustment period by more than 2%. The maximum rate payable over the life of the loan is the loan’s initial interest rate plus 5%. This is an illustration of a 5/2/5 rate cap, but there are different variations depending on the other terms of the ARM.

Multiple Payment Option Mortgages (“Option ARMs”)

These loans offer the borrower the flexibility of choosing among multiple payment options every single month. The start rate is typically extremely low – sometimes as low as 1.00%.

The borrower is given the option every month to make a payment based on this low “payment rate.” The payment rate, which is often referred to as the “minimum payment,” will remain constant for the first twelve months. Then it will adjust slightly and be fixed for an additional twelve months before it adjusts slightly once again and so on - typically for the first five years.

At the same time, the actual interest rate on the loan is adjusting on a monthly basis. As a result, the borrower will be given the option each month of making either the minimum payment or an interest only payment based on note rate in a given month unless the note rate results in a payment that is lower than the minimum payment. In these cases, the excess payment will be applied to reduce the outstanding principal balance.

In the event the minimum payment is not sufficient to cover the interest only payment, the difference will be applied to increase the outstanding principal balance (i.e. deferred interest or negative amortization). These loans usually have a third option of making a fully amortized payment based on the fully indexed rate for that given month. These loans are an extremely popular choice among investors who intend to keep a property for a very short period of time and do not care about the potential for negative amortization since they are counting on the property appreciating at an even faster rate.

The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “bi-weekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.)

To pay off a fixed-rate loan sooner, check with your lender to make sure you do not have a prepayment penalty that would prevent you from making additional payments towards the principal. You should be allowed to make these anytime and for any amount, and at no penalty.