Today’s article explains the equity way to close the financial gap between the new and the old homes’ mortgages.

A lot of people count on the money they are going to get from selling their current home to make a proper down payment on their new home and start a new mortgage. Unfortunately, many properties get stubborn at the point and refuse to sell while their owners are gradually getting frustrated at somebody else snatching the perfect home right from in front of their nose.

The frustration can be avoided in several ways, including financial aid from friends and relatives, or retirement accounts. If those fail, a bridge loan can certainly be of help.

A bridge loan is usually provided by the lender of the new home’s mortgage, but its collateral is the old home. Most bridge loans are Read the rest of this article »

Actually, there is no limit to the size of a down payment. It can even be 0% with certain kinds of mortgages, but you have to be able to qualify for it.  Another tricky part here is the Mortgage Insurance. If your down payment is lower than 20% of the purchase price (or the appraised value, whichever the lowest on the day of purchase) of the property, you will be obliged to pay private mortgage insurance (PMI) premiums until the outstanding balance of your mortgage hits the 80% of the purchase price margin. PMI is usually not cheap, so a lot of people prefer alternatives, such as a conventional second mortgage, a piggyback mortgage (80/20) or LPMI. The size of a second mortgage or a piggyback mortgage is determined by how much cash you are ready to put down, the rest can be borrowed.

If, for example, you are planning to put only 5% of the purchase price down, you can either go for a large 95% first mortgage with PMI, or borrow 80% with a first mortgage without PMI and another 15% with either a conventional second mortgage or a piggyback mortgage. The interest rate on the second mortgage will be higher than that on the first one, but still it will very likely result in lower monthly payments than PMI premiums.

There is also a slight issue of tax deductibility involved. While mortgage interest payments are unquestionably tax deductible, PMI premiums are deductible only for mortgage insurance contracts issued from Jan. 1, 2007, through Dec. 31, 2009.

Normally, your monthly payments do not include anything to be paid towards the principal during the interest-only period of your mortgage. On the one hand, it makes these payments lower; on the other hand, when the interest-only period is over you have to face the debt you borrowed years ago in its full size again, only now you have a shorter period of time to repay it. That is why it is strongly recommended to make voluntary extra payments towards the principal during the interest-only period, if your lender allows you to. If he does, make sure the outstanding balance gets adjusted immediately after an extra payment is made. Sometimes a special arrangement for extra payments during the interest-only period is included into the mortgage contract. If you are only planning to take out an interest-only mortgage and intend to make extra payments, pay special attention to these details in your contract. The problem is that many lenders do not adjust the balance during the interest-only period at all, with or without extra payments, unless stated explicitly otherwise in the contract. If the balance gets adjusted (becomes smaller), the amount paid as interest (percentage of the outstanding balance) becomes smaller, too. This way your monthly interest-only payments become even lower (provided the rate is unchanged or drops). If the first adjustment will take place only after the interest-only period is over, all the monthly payments during the interest-only period remain unaltered. It does not mean that you will eventually pay more as interest, though. Everything will be recalculated, your extra payments, as well as the overpaid interest, will be subtracted from the balance, when the time comes. The tricky part here lies in the investment opportunities available to you at the time of your extra payments. It may so happen that an alternative investment would have brought you a better return, if you had invested into it, rather than the mortgage, whose return you will see only in a few years.

For more on Interest-Only Mortgages read here.