There has been a lot of change in probably the most liberal until recently mortgage offer - the FHA-insured mortgage. Are you confused by the middle word in the title? Well, it is there rather to clarify any possible confusion or misunderstanding that FHA mortgages (that’s how they are called a lot more often) usually carry around themselves. First of all, FHA mortgages are not mortgages where the FHA performs as a lender, they are mortgages where the FHA performs as an insurer who actually protects the lender; and second - the borrower is the one to pay the insurance premiums! I don’t know if this explanation really clears the confusion or makes it even worse, for now regular mortgage insurance sounds pretty much the same, if you come to think of it…
In my post today I will try to explain the difference and draw your attention to the details that may help you decide whether an FHA mortgage loan is the one for you.
The Federal Housing Administration (FHA) has insured over 35 million home mortgages and 47,205 multifamily project mortgages since its foundation in 1934. Early decades of popularity during and soon after the Great Depression declined as new favorites - the recent interest-only loans and option ARMs among them - came on the scene, but reclaimed its position later as these “favorites” failed to deliver. Currently, FHA has 4.8 million insured single-family mortgages and 13,000 insured multifamily projects in its portfolio. Experts expect a sharp increase in these numbers in the coming years. What makes FHA mortgages attractive? Read the rest of this article »
The system of mortgage escrow accounts was created with good intentions. On the one hand it was to make the lender happy, because the lender got some guarantee that no lien prior to his own will be put on the mortgaged property through taxes or insurance, on the other hand, it was to save the borrower the pain of large lump sum insurance and tax payments. Everybody was expected to be happy, and that’s how it has worked for many people since, but sometimes even the best-laid plans fail.
Ideally, the system works as follows: when you sign your mortgage contract, among other things you agree to trust the property taxes and insurance to be paid by the lender with the money from your special set up for this particular purpose escrow account. Thus, in the course of your mortgage’s life, every period mortgage payment will need to contain a certain extra amount that is deposited into your escrow account. When the time comes, the lender takes the initiative and pays the taxes and insurance premiums in a lump sum using the money accumulated in the account. In other words, you, as a borrower, don’t have to pay the bulk money yourself, you save it gradually, thus making the big payment less painful. Just fine, you’d say, but why do I need the lender to do it for me, if I feel quite capable myself? Read the rest of this article »
Points are quite a useful tool helping a borrower to lower the interest rate on his mortgage loan. The price of one point equals to 1% of the amount you borrow. If you pay this 1% amount in cash at the loan origination, the interest rate of your loan will drop by usually 0.25 percentage points. Each new discount point bought lowers the loan interest rate by another 0.25 percentage points. Thus, a 7% original rate can be reduced to 6.5% by buying 2 points. Sometimes the 0.25 percentage points off the rate become pricier if you go for more than 2 discount points. The lender may require that you buy, say, 3.5 discount points to reduce a 7% rate to 6.25%.
You cannot buy your interest rate totally out, though. Usually lenders offer several combinations of the rate and points for you to choose from. If you see a 7% and 2 points offer in an ad, it is not very likely to be the only option available. All you have to do is ask.
Even though the idea of discount points looks rather attractive, I find it important to draw your attention to a number of subtle matters involved, and help you avoid any financial losses that may occur if the points get to be applied inappropriately.
Read the rest of this article »
It’s amazing how surprised people usually are to find out how much an extra $20 payment may save them on their loan in the long run. For example, a $100,000 30-year mortgage bearing 9 percent annual interest calls for monthly payments of $804.62. Suppose a borrower could afford to increase the payment amount by $20 to $824.62, and the lender does not charge prepayment penalties. By making the larger payment each month, the borrower would save $24,135.56. No, you didn’t misread the amount. An extra $20 a month results in roughly $24,000 of interest savings!
Here is our little manual on how to work your own miracle.
First of all, the topic you absolutely must discuss with your mortgage lender is the treatment of extra payments towards principal, because some lenders tend to include a penalty clause regarding extra principal payments in the mortgage. If your credit score is not particularly high, you will very likely have a mortgage loan with a higher-than-average interest rate, and you may be penalized if you try to make extra or early principal payments on the loan.
If your lender allows you to make extra payments - it is action time! Read the rest of this article »
A Biweekly Mortgage, unlike its name may suggest, is not a regular mortgage with a payment period of two weeks. In most cases, a product offered to you as a Biweekly Mortgage is, in fact, a Biweekly Accelerated Mortgage. Its main advantage is the accelerated repayment mechanism it is based on. A conventional 30 year fixed rate mortgage implies 12 months * 30 years = 360 monthly payments. Depending on your contract, you can pay the monthly amount either once a month in a lump sum (12 payments a year), or half the amount twice within a month - say, on the 1st and on the 15th day of each month (24 payments a year), or you can pay half the monthly amount every other week and end up with 26 payments a year. The latter case represents the biweekly mortgage and is formally a special type of mortgage, different from simply two payments within a month; it requires a contract that defines it as a Biweekly with all the properties attached.
Basically, the main distinction is the number of payments that fit within a loan year. The trick plays itself. You pay half the monthly amount every two weeks: 52 weeks in a year /2 = 26 payments, which equals to 26/2 = 13 months, i.e. your loan year happens to consist of 13 months! The big deal is that it accelerates the process of loan amortization a lot. A biweekly mortgage based on a 7% 30 year conventional Fixed Rate Mortgage plan pays off in 23 years 11 months instead! The acceleration appears only due to the 13th “month” every year. Read the rest of this article »
