The Annual Percentage Rate (APR) was created with good intentions to make complicated things if not simple, then at least simpler. It even works in many cases! Unfortunately, it also fails in just as many other cases, which sort of devaluates it as a universally reliable tool.

The APR looks a lot like an interest rate, because it is also a percentage. However, it is quite a different parameter. The APR is the sum of the interest rate and a theoretical percentage rate derived from other then the interest, fees associated with a mortgage: points, pre-paid interest, origination fees, attorney and notary fees, closing agent’s document preparation fees, PMI. Third party services, such as appraisals or credit reports, are not included. The purpose of this rate is to summarize all the costs of a mortgage into one number and help a potential borrower make a more informed choice. The borrower should be able to compare mortgages by comparing their APRs. Ideally, a mortgage with the APR of, say, 6.25% should be a better deal than a mortgage with a 7% APR, implying that the latter’s closing costs are higher. The APR is usually higher than the quoted interest rate, but it does not influence your real monthly payments. The monthly payments are dependent on the interest rate; the APR is a purely technical theoretical parameter developed to assist the choice of a potential borrower. It immediately gives one the overall idea of the costs involved. Read the rest of this article »

• Second Mortgage vs. Cash-out Refinancing
• HEL & HELOC

A second mortgage is another (secondary and subordinate to the existing first mortgage) loan that you take out using your home’s equity as collateral. It provides you with cash, but it deprives you of the owned by the time part of your home, partially or completely. You have to start buying out your home practically all over again, this time on different terms - the terms of the second mortgage. What’s in the terms?

The crucial distinction of a loan secured by home equity is that the cash acquired can be used for anything - a new car, college tuition, or a bagful of groceries. It is not limited to one purpose only, as most other loans.

A second mortgage can be practically of any type. Some are easier to shop for, some are harder to find, but it’s all in your hands, backed up with your credit score. The complication factor is that a second mortgage is literally second in the queue for refund in case you default on your mortgage payments. The lender of the second mortgage will not have a cent of his money back until the lender of the first mortgage gets all that’s his first. Sometimes it is all that there is and there is nothing, or way too little, left to pay back to the second lender. This unavoidable risk of a second mortgage usually makes it more expensive through a higher interest rate in the lender’s attempt to compensate for a potential financial loss.

The first lender may also take notice of your second mortgage activity and extend the period of your PMI payments on the first mortgage, if you had any.

A second mortgage imposes certain risks on the borrower, too. Read the rest of this article »

 Why do people refinance? All for different reasons, of course, but the most common ones are:

• To obtain a lower interest rate,
• To build the equity of their property faster,
• To change the type of their loan,
• To take advantage of an improved credit rating,
• To get some cash out of the equity already built in the home.

How does it work?

Obtaining a lower interest rate is probably the most popular reason to refinance. One may have an adjustable rate mortgage with a rate gone too high, or a high-rate mortgage resulting from negative points, or an above-the-average rate caused by the poor credit score at the time of the loan origination, or it may have been a very sensible loan all the way until mortgage market interest rates dropped. Refinancing in such and such like situations can save you quite some money, but you have to be very thorough in estimating the benefit. The main question is whether the amount saved will be worth the amount paid. The procedure of refinancing is not cheap, so you have to make sure, that the money you pay for it will not only return to you, but also gain you some profit as savings on the interest, as compared with your current loan.

One of the decisive factors is Read the rest of this article »