What do you know about loans?

A big part of Home-ownership is your home loan. If you’re like everyone else – that’s probably NOT your favorite component. However, it’s probably the one element you really need to be knowledgeable about.

 According to a recent article on CNNMoney.com, more than 3 out of 10 Consumers do not know the terms of their home loan. Do you know what type of loan you have? If you’re looking to buy – how familiar are you with the different types of mortgages available to you? Do you have, or are looking for a conventional loan, fixed for 15, 20 or 30 years? Or an adjustable rate loan, where the interest rate is fixed for 2, 3 or 5 years and then adjusts?  A VA loan or FHA loan?   

If you’re thinking about an Adjustable Rate loan, to keep the initial payments lower, consider this: According to a recent survey, 34% of homeowners who currently hold an adjustable rate mortgage do not know how to make the payments, once their loan adjusts to a higher interest rate. If you are unsure about your current or planned home loan, talk to a professional and have them explain your mortgage type to you, to see what your best option might be – to keep your current loan or to refinance, or what to choose when getting ready to purchase. (Be sure to discuss things like: Length of time you expect to live in this home, any expected future pay raises, a monthly payment amount that would be acceptable to you etc. And if you’re choosing an ARM – adjustable rate mortgage – ask for what your worst case scenario/highest payment might be.)

 Regardless of the type of loan you end up choosing – either for a new purchase or to refinance your current home – beware of predatory lending.  What does that mean? There really is no single definition – but more a combination of a variety of factors; a “group” of warning signs. 

Basically, the same thing your parents told you growing up still holds true:   

If it sounds too good to be true, it probably is.

For example: If you have heard from a number of people that the rate is currently at 6%, yet someone offers you a 2.5% rate (*), if several lenders/banks have told you that you have to “clean up” your credit first or pay off a credit card/car/etc, and yet someone tells you it’s no  problem, or if, once you receive a Good Faith Estimate, the closing costs and fees are much higher than on any other Good Faith estimate you received, if hard pre-payment penalties are part of the loan (**) and/or closing gets delayed several times, making the initial low quoted interest rate expire and thereby increase your costs and monthly payments.  All of those could be warning signs of predatory lending.

Your best option is to work with a professional, ask questions, do your research, check out your lender with the Better Business Bureau,  find out how long your lender has been in business and compare a couple of lenders/banks and their loan products.

With all the recent news about problems in the sub-prime lending market and changing interest rates, your best option is to be educated about the possibilities available to you (either to refinance a current property or purchase a new home), BEFORE making a decision.

(*) – If the offered rate is below the current market rate – you might be incurring negative amortization. Meaning: You pay less than the loan is actually costing you, and anything you do not pay in any given month (both principal AND interest) will be added on to the total loan amount, which leaves you owing more at the end of the period than when you started.

(**) – Pre-payment penalties come in two forms: hard and soft pre-payment penalty. A hard pre-payment penalty means that whether you sell your home or refinance your home, you will have to pay the penalty, often a percentage of the interest due for several months. A soft pre-payment penalty usually means that you only incur the penalty if you refinance within a certain period of time, not when you sell your property. It’s important to know which type of penalty, if any, applies to you, to plan accordingly.

Your Credit Rating and the latest Changes in Lending

If you have followed the News over the last couple of weeks, you noticed that the Lending Industry has been making headlines. Mainly due to the fact, that subprime lending market seems to be on its way out.

What does that mean for Buyer’s and Homeowners?

When you decide to purchase a home, you will not only work with a Realtor, but also with a lender.  Your chosen Lender will require you to provide Information on your current income, assets, liabilities and debt. Your Lender will also ‘pull’ your credit – meaning he/she will submit your information to the credit bureaus to get your credit rating from them. Usually your Lender will receive a report from all three bureaus, each with a different credit score, and then combine the scores for an average rating.

If your rating is above a certain number – depending on the lender (most consider ratings between 620 and 650 to be a good rating) you are considered to have good credit, and do not fall into the subprime market.

However, should your rating be below that number, maybe due to a previous bankruptcy, foreclosure, health issues, job layoffs etc., you might be considered to need the services of subprime lending, also called B-papers. Interest rates are usually different (higher) than loans made for A-papers (high credit scores), because a person with a lower credit score is considered a higher risk by lenders.

If you are not certain about your credit rating, you can apply to receive a free credit report from the credit bureaus. That way, you can review your report, prior to purchasing a home, and make sure that all the information is correct. If it is not – which can happen easily – you will have time to correct it. (These can include items like duplicate accounts, completely wrong information due to similar names and/or Social Security Numbers, Stores/Companies not updating paid off accounts etc.) The same applies if you are considering refinancing your current mortgage. Make sure your credit report is correct, prior to applying for a new loan.

Real Estate Insider – Your home is not an ATM

If you own a home, you are probably inundated with offers to refinance or to add a home equity line of credit  – to lower your rate or to cash out. What does that mean to you? And is that a good idea?

Let’s step back a little – and look at the beginning. At the time you purchased your home, you were asked to choose a type of financing for your new home.  There are a variety of options available, and usually the loan type is tailored to your needs. The down payment you made and the price you paid, determined, if you had any initial equity in your home. (Equity is considered the difference between the amount you owe and the price the market would be willing to pay.)

Regardless of how you financed your home at the time of purchase, eventually you will start receiving mailings or phone calls, offering you to refinance or to add a home equity line. Sometimes it will be advertised as a way to reduce your Interest Rate, sometimes as a way to “cash out” your property.

Either way, you will be asked to choose a different loan type/program and often you will be offered cash at the time you close on that refinance, but specially if you add a home equity line of credit (the assumption being, that your home is now worth more than you originally owed, and that the “available cash” should be yours to use). If you have been in the home for an extended period of time, purchased the home at a lower than market price, or if you made a large down payment at the time of purchase, you might have Equity in your home, plus the possible appreciation of your home over time (this might not be true if homes in your market are depreciating). This equity is the money that will be available for you to cash out.

The question is – should you take it?

There are a few scenarios you need to consider.

1.       How long will you stay in your current home? Are you going to refinance or add a Home Equity line of credit and then move within a year or two? Or are you planning on staying in that home for several more years? And can you guarantee that?

2.       If you are not going to stay in the home for more than a couple of years, will the cost of refinancing and/or adding a line of credit be lower than the cost of changing loan types/programs? (For a breakdown of fees involved, please see your Lender.)

3.       If you are looking to “cash out” some of the accumulated equity in your home – have you thought about how much of that equity you’re planning on taking out? What if you take out 100% of Equity and then you have to sell? Will you have the money to pay for the sale of your home? (Even if you choose to sell your home yourself, as an unrepresented Seller, there are still fees and costs involved.)

4.       What if the housing market in your area depreciates and your home looses value? What if you would have to sell during a down market? Can you bring enough money to the table to clear your loans?

All those points need to be taken into consideration before deciding to “cash out” the equity in your home. Make sure you’re not just looking at the available cash and/or rate, but to consider the cost and long term effects as well. Regardless of initial Equity or Appreciation accumulated over time, keep in mind, your home is not meant to be your personal ATM Machine.

Get your current "house" in order first…

The short version…

You can do much to improve your chances for a smooth home purchase, if you do a couple of things up front.

1. Get a copy of your credit report and verify it.
Are all the items listed your accounts? Credit Bureaus are not infallible, they do make mistakes. If you discovered a mistake, contact them, in writing, to have it corrected. (This does take time!)

2. Don’t make any changes to your “financial picture” – that includes no major purchases that involve your credit (i.e. buying a car), no major changes in jobs etc. Anything can affect your credit rating and make the loan underwriter question your “risk” in regards to loan approval.

Good Luck. If you have questions – ask away. Or email me at Info@ColoradoHighlandsGroup.com , if that’s more to your liking.

Colorado Springs Real Estate Information brought to you by the Colorado Highlands Group